From Bilateral to Trilateral Governance in Local Government Contracting in France

Public Administration Vol. 83, No. 2, 2005 (473–492)© Blackwell Publishing Ltd. 2005, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street,Malden, MA 02148, USA.

FROM BILATERAL TO TRILATERAL GOVERNANCE IN LOCAL GOVERNMENT CONTRACTING IN FRANCE

KAREN WEST

In France, the tradition of contracting out local public services has been predominantlyone of partnership and co-operation rather than competition and antagonism. How-ever, in recent years the traditional approach has come under intense criticism,something which has far-reaching implications for public-private governance.Adopting the socio-legal approach to the study of contract governance set out byPeter Vincent-Jones, this paper explores the discrepancy between descriptions of atraditional French approach to local public services governance, in which the bilat-eral values of trust and co-operation are emphasized, and a new discourse of localpublic services governance, which argues for detailed contract planning and closecontract monitoring. It is argued that this discrepancy reveals the beginning of a shiftin the governance of public service exchange relationships from relatively non-contractual and bilateral to relatively contractual and trilateral. The French casehighlights the importance of regulatory and accountability frameworks to the man-ner in which contracting parties perceive exchange governance.

INTRODUCTION

In an age of ever-increasing contractualization of public services onceprovided under bureaucratic organization (particularly in the OECD coun-tries (Lane 2001)), it has become important to understand the relative costsand benefits of the institutional arrangements that underpin and enable themarket provision of complex public goods and services. A growing concernin the literature is that of gaining a more complete understanding of thedifference between competitive and partnership approaches (Parker andHartley 1997; Erridge and Greer 2002). This paper is an attempt to elucidatethese questions with reference to recent experience in local government con-tracting in a country – France – that has an extremely long history of provid-ing public services via contract, and where a partnership approach hastraditionally been favoured over a competitive approach.

The long history of public-private interaction and the traditional regular-ity in the governance of local economic relationships has led many observersto talk of ‘a French model ‘(Lorrain 1992, 2002; Raymundie 1994; Rachline1997) or ‘French way’ (Brault 2000, quoting the World Bank and Interna-tional Monetary Fund). (The term French model has also recently beensuperceded by the term ‘delegated management’.) In recent years, however,

Karen West is in the Public Management Group, Aston Business School, Aston University.

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© Blackwell Publishing Ltd. 2005

the model, which is predicated on an oligopolistic market structure, incompletecontracts and long-term exchange relationships, has come under attack,both from within France itself (Jaglin 2002) and from the European Union(Bauby 2002). This has given rise to a paradox: at the same time as the pre-servation of the French model as a successful example of flexible andselfregulating bilateral governance is argued for (Lorrain 1997, 2000), thevirtues of contract planning, detailed performance monitoring and adher-ence to contractual terms are also emphasized and promoted (van de Vyver1995; Institut de la Gestion Déléguée 1999; Brault 2000). The argument pre-sented in this paper is that this paradox in fact marks the beginning of a shiftin the governance of exchange relationships from bilateral and non-contrac-tual to trilateral and contractual.

The argument is developed in four stages. First, the conceptual frame-work guiding the argument is outlined. Second, the traditional Frenchapproach to relational contractual governance is discussed. While the exist-ence of a French model is not in dispute, this article seeks to place the modelmore explicitly within a transaction cost and socio-legal framework. Third,the crises of the French model, and more particularly in the institutions thathave enabled co-operative and non-contractual governance, are discussed.Fourth, the impact of institutional transition on the governance of individ-ual business relationships is discussed. Specifically, it is argued that in add-ition to certain transactions being compulsorily pushed from a relationalframework into a competitive framework, greater regulatory uncertainty,together with growing public scrutiny of public/private interaction, havecreated a more risky context for bilateral exchange. It is argued that a shift totrilateral governance is taking place, resulting in greater recourse to contrac-tual planning and contract monitoring (and thereby an increase in ex-anteand ex-post transaction costs) than has traditionally been the case. The grow-ing discourse of ‘good contract management’, emphasizing the virtues ofcontract planning, is both constitutive and indicative of this shift.

CONCEPTUALIZING TRANSACTION GOVERNANCE

Much flows from Coase’s (1960) fundamental observation that ‘when it iscostly to transact, institutions matter’ (North 1990). It has given rise to awealth of academic research on the institutions that enable economicexchange in modern societies, but with little consensus as to precisely how.Two different theoretical approaches to the question of institutions and con-tract have been dominant in the literature – new institutional economics (seeWilliamson 1998 for an extensive literature review) and, more particularly, thetransaction cost branch and socio-legal studies. (An emerging third approachwhich draws on the social capital literature (Steane and Walker 2000; Erridgeand Greer 2002) also offers interesting possibilities, but is not discussed here.)There are, however, important differences in these approaches.

The new institutional economist approach emphasizes the importance ofinstitutions in securing credible commitments from parties to an exchange.

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As North (1990, p. 34) states: ‘ . . . the greater the specialization and thenumber and variability of valuable attributes, the more weight must be puton reliable institutions that allow individuals to engage in complex contract-ing with a minimum of uncertainty about whether the terms of the contractcan be realised’. Williamson (1975, 1985), working within a transaction costeconomizing framework, argues that the characteristics of a transaction –the degree of asset specificity or idiosyncracy, uncertainty and frequency –are the most important determinants of governance structure in abehavioural context of bounded rationality and opportunism. This gives riseto the classic market, trilateral, bilateral, hierarchy governance typology.Market governance at one extreme, being most suited to frequent or infre-quent, non-idiosyncratic transactions and hierarchy at the other extreme,being suited to recurrent highly idiosyncratic transactions. Intermediateforms of governance are trilateral and bilateral governance. The formerinvolves third-party arbitration to verify performance or settle disputes andis most suited to occasional idiosyncratic transactions. The latter depends onthe willingness of parties to continue the relationship and is most suited torecurrent and fairly idiosyncratic transactions.

The central argument of the transaction cost approach is that the most effi-cient form of governance occurs where transaction characteristics and gov-ernance structure are matched. For example, the costs of transacting underpure market governance – ‘sharp in by clear agreement; sharp out by clearperformance (Macneil 1974, p. 738) – where idiosyncratic assets are con-cerned would be extremely ‘hazardous’ (Williamson 1985). Conversely, thecosts of establishing special bilateral governance arrangements for theexchange of non-idiosyncratic goods or services would be prohibitive, andmarket governance would suffice.

Central to Williamson’s model is the capacity of agents to discriminatebetween alternative governance structures and to design governance struc-tures capable of responding to potential problems that may arise in the courseof exchange. ‘Attenuating the ex post hazards of opportunism through theexante choice of governance is central to the transaction cost economics exer-cise’ (Williamson 1998, p. 31). Thus, although the condition of boundedrationality is one of the primary reasons that institutional (governance) struc-tures are needed, the presumption of long-run efficiency of outcome meansthat the question of the limits to individual cognition in the selection of suchstructures does not arise. Yet as North (1990) reminds us, institutions are theproduct of highly subjective cognition, and ‘ . . . may be very inadequate orvery far from optimal in any sense of the term’ (ibid., p. 23). In the French case,what appears to be currently at issue is the indiscrimate selection of a deeplyculturally embedded relational governance framework to a range of exchangesituations, where it is perhaps not merited. This implies a need to pay greaterheed to the processes by which actors select or design governance structures.Wlliamson (1985, 1998) himself acknowledges that more attention should begiven to the process of institutional selection.

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Socio-legal scholars such as Macaulay (1963), Beale and Dugdale (1975),and Blegvad (1990), for their part, offer valuable insights into the behaviourof individuals in the deployment of contract or other extra-legal devices forthe governance of exchange relationships. These works have drawn atten-tion to the decision processes of actors in commercial relations in settlingdisputes. Blegvad introduced the concept of ‘thematization’ – ‘the creationof interaction systems (actor-actor dealings over time) as a process of select-ing mutual responses from among possible alternatives’ – into the study ofcommercial relations. In his analysis of Danish commercial relations, Bleg-vad finds evidence that the characteristics of a transaction determine themost efficient form of governance (as Williamson contends), but that there isalso ‘room for elements of the internal structure of the firm to have theireffect’ (ibid., p. 406). Business relations can be thematized legally, thus therelationships is ‘formed in light of applicable contract law’ (ibid., p. 399), orthey may be thematized in economic terms, which ‘leads to structuring therelationship through such means as ongoing adjustment of performance toachieve economic goals’ (ibid., p. 399).

The approach of Peter Vincent-Jones (1994), which may be seen as a syn-thesis of new institutional, legal and socio-legal approaches, is a particularlyuseful framework for analysing subtle shifts in the governance of public-private exchange and their causality. He too draws on the notion of the the-matization of exchange governance in a spectrum of possibilities runningfrom contractual to non-contractual governance. Like Williamson, his start-ing point is that for every transaction there is an ideal governance structure,but that the availability of legal and extra-legal guarantees and enforcementprocesses is an important determinant of how actors thematize exchangerelationships.

At the contractual end of the spectrum, according to Vincent-Jones, arerelations, which ‘involve planning (as to description, contingency, defectiveperformance, and legal enforceability), adjustment of the relationship withreference to planned obligations, and the threat or use of legal sanctions toinduce performance, or compensate for non-performance in the event of dis-pute’ (ibid., pp. 365–6). At the other end of the spectrum are non-contractualrelations, which are not contractually planned, but instead are governedthrough pure economic interdependence and ‘market rationality’. This endof the spectrum is where transactions costs are at a minimum, andexchanges, therefore, most efficient. In between the two poles are a numberof variants. At the contractual end, are relations, which involve infrequenttransactions for which complete planning, or presentation, is problematic orcostly because of a high degree of uncertainty and asset specificity. These,therefore, require ‘the adaptive techniques of neo-classical contract law,involving trilateral governance, increased flexibility, greater use of contin-gent planning and third-party participation in standard setting and arbitra-tion’ (ibid., p. 371, author’s italics). At the non-contractual end, are relations,which are not contractually planned, but which may nevertheless be



supported by extra-legal norms such as customs and conventions andvalues of co-operation and trust.

For Vincent-Jones, then (ibid.), the degree of risk in a given transaction isthe determinant of the ideal type of governance. For high-risk transactions(idiosyncratic and occasional), a high degree of contractual planning isrequired. Where such a degree of contractual planning is prohibitivelycostly or problematic, however, trilateral adaptation can be deployed. Forlow-risk transactions (frequent and non-idiosyncratic), non-contractual (eco-nomic) governance is most appropriate. Contractual planning is unneces-sary since parties can easily switch to alternative suppliers at minimal cost.For higher risk transactions (frequent and idiosyncratic), non-contractualexchange is hazardous, and tends, therefore, to be supported ‘by customaryand conventional expectations, and by a wide range of relational non-promissory projections…’ (ibid., p. 372). Although the implicit presumptionis that movement along the contractual/non-contractual continuum is uni-directional – the risk to contracting parties diminishes as trust is gainedthrough repeated interaction – there is no a priori reason why governancecannot be thematized contractually where it was once thematized co-operativelyshould perceptions of risk alter.

In summary, Vincent-Jones’s approach emphasizes the importance of theavailability of ‘normative guarantees and enforcement processes’ as a deter-minant of governance structure – rather than merely transaction characteris-tics. Second, it emphasizes human agency in the selection or ‘thematization’of governance mechanisms according to the economic, political and regula-tory context in which transactions take place. In a context of public-privateinteraction, this point is critical, since parties to an exchange are not gener-ally free to thematize governance as they wish. The rules of contracting maycompel detailed contractual planning and contract enforcement, as mightalso other indirect rules regarding financial accountability and performancemeasurement (Vincent-Jones 1994). Vincent-Jones argues that transactionsare likely to be thematized contractually where: ‘co-operative structures areweak or non-existent, and risk is consequently high’ (ibid., p. 378). Further,he argues that co-operative structures are likely to be absent in fiercely com-petitive situations. (This view is supported by more recent research carriedout in the United Kingdom – see Erridge and Greer 2002.) In such circum-stances, the utility of market provision becomes questionable since the trans-action costs of maintaining a contractual relationship in an inherentlyrelational transaction context become prohibitive. In this way public sectorrequirements for competition and transparency in all exchange situationsmay be at odds with optimal exchange governance.

Applying the Vincent-Jones framework to the French local governmentcontracting context enables us to understand the apparent shift in the the-matization of governance that is currently taking place. The essence of theargument advanced in this paper is as follows. Whereas traditionally theregulatory and political context of contractual relationships created the

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co-operative structures which enabled the relatively non-contractual,bilateral thematization of transactions, the context is now one in which co-operative mechanisms are breaking down and actors are beginning to the-matize relationships contractually and trilaterally.

THE ‘TRADITIONAL’ THEMATIZATION OF TRANSACTIONS

In order to advance the central argument of this paper that a transition istaking place in the thematization of transactions, it is first necessary to setout the traditional approach to the governance of transactions in the localgovernment services domain. The point of transition to a new thematizationbegan to take place around the mid-1980s. Reference to the traditionalapproach, therefore, concerns the period prior to this. Reference to the litera-ture used in support of this analysis, however, spans both the period prior toand after this point of transition for two reasons. First, some observers stillinsist on the salience of the traditional thematization (for example, Defeuilley1999; Lorrain 2003). Second, recent references, which advance new contractmanagement practices, usefully illuminate past contracting practice (Institutde la Gestion Déléguée 1999; Joncour and Raymundie 2001).

This section that follows is divided into two parts. The first discusses theformal administrative law framework for local government contracting,which recognizes the inherent relationality of certain transactions. Thesecond discusses the role of informal institutions – custom, convention,shared values and trust as supplements to contract.

The administrative law framework and the inherent relationality of public service contractsThere is no regulatory compulsion in France to contract out local govern-ment services. Nevertheless, since the middle of the nineteenth century, themarket provision of goods and services has been a key feature of local govern-ment. In French administrative law, a distinction is made which regulates allpublic sector action, between two different types of marketization.

In France, there are two administrative law frameworks governing theprocedural aspects of public sector contracting – the public markets codeand public services – but as a result of progressive reforms of administrativelegislation since the 1990s, the two frameworks have become more distinct.Superficially, the first of these legal frameworks refers to contracts for theprovision of goods and services; these enable public service (public procure-ment contracts); the second refers to more substantial elements of, or indeedentire, public services. The notion of concessions, however, from which alldelegated management contracts are derived, has a far deeper cultural ori-gin and is bound up with the French notion of ‘service public’ and ‘intérêtgénéral’. The key principles here are that public services are non-exclusive,that they are continuous, that there is financial solidarity between users andthat contractors retain a direct relationship with service users. Given thetime required to amortize the substantial investments made in the necessary



infrastructure, and given the inherent difficulty of complete presentation incontracts of such long duration, there is considerable scope for both partiesto adapt to unforeseen contingencies. Three notions – of ‘fait du prince’,‘théorie de l’imprévision’ and ‘force majeure’ – underpin the adaptability ofcontract (see ‘Bilan et limites de l’analyse juridique de la gestion déléguéedu service public’ (‘A Critical Appraisal of the Limits of Legal Analysis inthe Study of Delegated Management in the Public Services’) Auby 1997 forfurther details). While the legal regime for public procurement contracts hasto a greater or lesser extent rested on the principles of transparency andcompetition, the principle that enshrines public services contracts (nowcommonly referred to as delegated management contracts) is that of intuituspersonae, or liberty of selection. Although it is true to say that to some degreerecent legislation has injected transparency into the contractor selection pro-cedure, it in no way compromises this principle. Delegated managementcontracts are freely negotiated between public authorities and their chosenpartners, and the selection criteria are left entirely to the contracting publicauthority to determine. In addition, until 1993 and the introduction of the loiSAPIN, there were no formal rules regarding contract re-negotiation andextension for delegated management contracts, and extremely long-termcontractual relationships have been the norm. Prior to 1993, it was commonfor short duration contracts to be continuously extended without competi-tion, and in some cases over periods of more than 50 years. For example, thecity of Caen first signed a contract with a subsidiary of Générale des Eauxfor the collection and disposal of municipal waste in the 1930s; this was onlyre-tendered competitively in 1998. Likewise, municipal car parking in thetown of Fontainebleau was managed by means of a contract which, until theLOI SAPIN, had been continuously extended without competition for 60years. These examples are perhaps excessive, but nevertheless indicative ofa general preference for long-term relationships over competition.

On the face of it, the two legal regimes represent the two poles of transac-tion governance: market and bilateral. The considerable contractual libertygranted to local contracting authorities is within a relational contractinglogic (Macneil 1978) whereas the more heavily regulated rules for the lettingand execution of public markets contracts maintains the fiction of a moreclassical (ibid.), arm’s-length model of contracting. However, this is some-thing of an oversimplification for three reasons.

First, until 1993, there was, in practice, no clear-cut distinction betweenthe regimes, so that contracts which have been strictly defined as public pro-curement contracts could in fact pass as public service contracts. Contractsfor waste management, for example, tended to fall into the grey territorybetween public service and public markets, and only recently has thisbecome problematic. Second, up until the reform of the public markets codein 2001, there was considerable scope for public authorities to obviate com-petition, if they wished, through the use of alternative contract lettingregimes – restricted calls to tender and negotiated calls to tender. Many

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municipalities availed themselves of this facility, particularly for morecomplex contracts such as public works and substantial elements of publicservice. Third, short-term contracts, over time, became embedded in longer-term business relationships (Collins 1996) through the unregulated practiceof varying and extending contracts without re-letting them competitively(Lorrain 1987). The permissive legal regime for local government contract-ing thus enabled contracting parties to thematize governance relationally ina very broad range of service domains. The effect of recent direct regulatoryreform has been to draw a clearer distinction between the two regimes.

The non-contractual nature of the traditional modelIt would be an exaggeration to suggest that contract has played no role at allin governing exchange relationships in French local government services.French administrative law has always required local authorities to set outformal contracts, and until the decentralization reforms of 1982 local author-ities were required to adopt model contracts (which would be variedaccording to local need) setting out the specification of works and scheduleof rates and tariffs. Although the use of model contracts is no longer arequirement, four basic contract types are still in use. They range from con-tracts which transfer risk either wholly or substantially (‘concession’ and‘affermage’ respectively) to the private contractor and to the shared risk con-tracts of ‘régie interessée’ and ‘gérance’. The contracting authority grants thecontractor a time-limited monopoly and remuneration, either directly fromuser fees or from the municipal budget and – in the latter case – either on thebasis of each unit of service delivered, or a combination of this and a fixedprice component. In exchange, the contractor agrees to deliver a specifiedtype, quality and level of service determined in the schedule of require-ments (‘cahiers des charges’) agreed upon by both parties. In the event ofirreconcilable dispute, the judgment of the administrative courts is final.However, appeal to the administrative courts has traditionally been rare(van de Vyver 1995), parties preferring instead to find a mutually satisfac-tory solution in order to maintain the relationship (ibid.).

This does of course in itself not prove the non-contractual nature of rela-tionships: the resolution of dispute might in fact have been grounded incareful contract planning. However, this has not traditionally been the case.For example, the model contracts in use prior to decentralization did notmake the insertion of contract revision clauses obligatory, and their volun-tary use was rare (van de Vyver 1995). Even when price revision formulaebegan to be introduced, usually at the behest of the contractors, these werenot the subject of the tough negotiation one might expect (Joncour andRaymundie 2001). In fact, in the majority of cases, contracting authorities,lacking the capacity to evaluate their long-term implications, would merelyaccept without question the formulae proposed by their contractors (Verrier2003). The use of contract variation orders (known as ‘avenants’) for technicalupdating, extending the geographical coverage of services, and extending



contract duration, were all commonplace. But again, these variations did notgive rise to tough and protracted negotiation. Rather than renegotiate theterms of the initial contract, contracting parties tended to negotiate a supple-mentary remuneration for the contractor. This practice made it extremelydifficult to determine the contractor’s overall remuneration and to evaluatecontractor performance relative to remuneration.

Penalty clauses for contractor’s non-compliance have traditionally beenrare in French public service contracts (van de Vyver 1995) although, cur-rently, they are more commonplace (Joncour and Raymundie 2001). Fur-thermore, detailed monitoring for contract compliance has traditionallybeen absent in the French model (Lorrain 1992; van de Vyver 1995), not leastbecause contracting authorities lacked (and often still do lack) the necessarycapacity.

Numerous other examples of extra contractual transactions indicate thetraditionally flexible, give-and-take nature of French contractual relation-ships: the delayed payment of administrative surcharges to contractingauthorities collected from users by contractors; the delayed reimbursementof recovered VAT; local authority subsidies for the renewal of equipmentstrictly the responsibility of the contractor; and, most controversially of all,the levying of entry fees, which gave rise to serious cases of corruption inthe late 1980s and early 1990s.

Recent analyses of past contracting practice have tended to emphasize thelack of municipal capacity to negotiate and manage large public service con-tracts (see, for example, Institut de la Gestion Déléguée 1999), while othersemphasize the asymmetry of power in public-private relations (Joncour andRaymundie 2001). Nevertheless, it is undeniable that for over a centurythese ‘David-and-Goliath’ relationships have functioned, adapting to newtechnical and economic realities and fulfilling their public service obliga-tions (Defeuilley 1999) – and without excessive contract planning andrecourse to the courts. This has been achieved through the use of supple-mentary normative governance mechanisms of custom, convention, sharedvalues and trust.

The role of custom, convention, shared values and trust in the regulation of relationshipsThe asymmetry of power between contracting authority and contractorsmay be something that is coming to be regarded today as the product ofyears of anti-competitive practice, but it is in fact the basis of the Frenchmodel of governance. The premise for the marketization of the provision oflocal public services in the nineteenth century was to keep the basic unit oflocal elected government small and close the electorate. The French munici-palities, although small, have traditionally occupied a powerful position inthe administrative hierarchy and consequently enjoyed a high level of legiti-macy in the eyes of their electorates (Lorrain 1992). The function of the pri-vate sector has been to lend economies of scale and scope where they were

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lacking at the organizational level (Lorrain 1990, 1992). Service provision viacontract has not traditionally been viewed as instrumental to efficiency – asit has been in Anglo-Saxon contexts for example (Walsh 1995). The culturaltendency has been for the municipalities, and their supramunicipal organi-zations, to work with large, indigenous providers. The French local indus-trial and commercial public services market is, and has always been,dominated by three (and for some services only two) indigenous providers –Vivendi Environnement (La Générale des Eaux, and now renamed Véolia,Vinci (Lyonnaise des Eaux) and Saur (Bouygues). For water distribution andtreatment, for example, these three groups share 98 per cent of the marketthat is contracted out (Cours des Comptes 2003), and the main groups havefought hard to keep foreign competitors out of the waste management mar-ket (Lorrain 2002). The predominant rationale has been that the risk to thecontracting authority of default or bankruptcy is minimized if the operatorsare well-known and financially secure (Lorrain 1992, 1993a); in addition tothis, the private companies involved are made financially secure by theirsubstantial, and virtually guaranteed, shares of the local government con-tracts market. That there is profit be made in public service is perfectly wellaccepted (Lorrain 1992; van de Vyver 1995). However, there is an implicitunderstanding between the private utilities and the contracting publicauthorities. The utilities sacrifice high short-term profits in exchange for asecure long-term income and any public service markets that are contractedout in future (Defeuilley 1999).

The principle of intuitus personae, which underpins public service con-tracts, explicitly allows contracting authorities the scope to select only thosepartners in whom they have personal confidence. Additionally, public ser-vice contracts, which are administrative contracts, commit both parties fromthe outset of a relationship to the principles of public service – universal ser-vice coverage, continuity of service, equality of access, equalization of costsand sustainable development (Bauby 2002). This public service dimension ofFrench urban services necessarily requires an oligopolistic market structure(Bauby 2002). However, there is a strong presumption in law that the sharedvalues of public service to some extent will regulate contractual relation-ships. French observers often point to the lack of distinct public-privateboundary in the traditional French case, arguing instead that values weremore shared than opposed (Dressayre et al.), and some observers continueto hold this position (Defeuilley 1999; Lorrain 2002).

The local political context has had an important bearing on the way inwhich exchange relationships are conducted. Whereas in the UK, forexample, the ‘calculative vocabulary of performance, efficiency and budget-ing’ (Seal and Vincent-Jones 1997, p. 411, quoting Miller and Power 1992)dominates local government, in France, traditionally, it has not. The domi-nant logic has been more one of stewardship than of managerialism, theprimary concern being to balance expenditure and receipts for any givenpublic service budget (Guengant 1999). The tradition of representative



democracy has meant that the only interest municipal electors/service usershave taken is when services fail to work. Electors have trusted their localpoliticians to represent their interests in contractual negotiations. Over thelast decade that trust has been diminished – for reasons which will be dis-cussed below – and local consumers have become far more vigilant overcontractual terms, the relationship between user charges and service quality,and ongoing transactions.

In summary, then, in the French model, the incompleteness of contract hastraditionally been accepted. With no imperative for competition for publicservice contracts, an oligopolistic market structure has evolved, and animplicit contract between contracting authorities and the indigenous utilitieshas emerged. The fact that all municipalities have worked with (and largelycontinue to work with) one of only three contractors – and very often withthe same contractor across a range of public services – means that the rules ofthe industry are both well defined and understood. Clear rules of conductand standards of performance have removed the need for close monitoringand control of prices and performance, such that individual relationshipsbecame self-regulating. Detailed external scrutiny of those relationships hastraditionally been absent. From a transaction costs economics perspective,the traditional French approach can be said to be efficient in the sense thatthe costs associated with ex-ante contract planning in a relational context, andex-post monitoring, adjustment and dispute settlement are minimized.

THE FRENCH MODEL IN CRISIS

The golden age of the ‘French model’ was from the middle of the nineteenthcentury to the 1980s. During this period the production and expansionof technical urban networks was greatly facilitated by co-operative public-private interaction. Up until the 1980s, the model provoked little or no pub-lic controversy or dispute, and local public services worked effectively andcoherently. During the 1980s, however, the French model began to fall intodisrepute and thus attracted much public attention. Isolated incidents ofcorruption, involving the financing of local political parties by the large util-ities in exchange for long-duration water concessions, served to place thespotlight on local public-private relations. (The most extreme case was theso-called Carrignon affair in which Alain Carrignon, mayor of Grenoble,was eventually imprisoned.) Of more significance, though, for the longterm, there has also been a more fundamental questioning of the capacity oflocal contracting authorities to manage their contracts without financiallycompromising local taxpayers and service users. Explanations within aca-demic and practitioner circles of this ‘compromise’ or ‘bastardization’ of theFrench model from the 1980s and early 1990s, draws on two related phe-nomena – the French decentralization reforms and the drafting of Europeancompetition rules for public procurement.

Taking the French decentralization reforms of the 1980s first, it has beenargued that the conferment of greater powers and responsibilities on French

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local government unleashed something of a ‘silent revolution’ towards anenabling rather than directly providing local authority (Lorrain 1993b, 1997;Joncour and Raymundie 2001). By contracting out increasing numbers andtypes of public services to the private sector, the French mayors were freedup to take on their new role as entrepreneurs in the area of urban economic,social and environmental development. Delegated management contracts,rather than public procurement contracts, became the preferred contractualvehicle, extending the French model into new areas of public service. (Tak-ing water distribution as an example, in 1954, only 31 per cent of the totalvolume of drinking water distributed was in private hands; by 1997 it hadrisen to 80 per cent – Cour des Comptes 1997.) Whereas, prior to the decen-tralization reforms, contracting local public authorities were generallyobliged to use model contracts developed by the central State for a limitedrange of well-defined public service situations, post-decentralization, con-tracting public authorities were free to fashion their own contracts. Concernwas increasingly expressed at the lack of control that local authorities hadover the contractual process. Among the concerns were that local authoritieswith only a small technical staff left too much to the private sector to deter-mine – with the result that user rates were too high and contracts far toolong in relation to the period of amortization of investments made by theprivate sector contractor ( Joncour and Raymundie 2001). Generally, then,the traditional loose monitoring of service quality that has always character-ized the French model began to be seen as a source of concern (ibid.).

The burgeoning trend towards delegated management contracts wascompounded by the drafting of European public procurement legislation.Perceiving that French delegated management contracts would be broughtwithin the ambit of European competition rules, local authorities began let-ting excessively long-term contracts in order to avoid upcoming legislation(van de Vyver 2003). In some cases, these contracts were awarded inexchange for entry fees levied on contractors, something which had theadded advantage of bringing in an additional, and badly needed, source ofmunicipal revenue. Over a relatively short period of time, then, the Frenchmodel of delegated management, which had long been an effective publicmanagement tool, increasingly fell into disrepute and came under publicscrutiny in a way that it had not before. This has given rise to the reform ofthe regulatory framework for public sector contracting.

The shrinking scope for relational contractingIn 1993, the then Minister for the Economy and Finance, Michel Sapin, intro-duced a new law for delegated management contracts, known as the loiSAPIN. This law, supplemented by further legislation (loi MAZEAUD 1995;loi BARNIER 1995), sought to mark out more clearly the terrain of relationalcontracting as well as minimally responding to European competition direc-tives for public procurement. Additionally, it sought to instil in contractingpublic authorities a more discriminatory approach to the application of



relational contracting procedures, and for the first time broached the subjectof performance monitoring. Whereas market contracts had always been cir-cumscribed by a specific administrative law code, the SAPIN law was thefirst specific piece of legislation for delegated management contracts. In fact,until 1992, the term ‘delegated management’ was not known as a distinctlegal category of contracts. A significant problem with the law, however,was that it failed to define the term, so that many definitions were drawn on,often in parallel. Whether intentionally or not, the uncertainty over thelegality of relational contracts has resulted in local contracting authoritiesadopting a far more cautious approach.

It was not until the introduction of the loi MURCEF of 2001, almost a dec-ade after the SAPIN law, that a firm legal definition was attempted. The newdefinition draws substantially on the economic notion of contractor’s risk,and stipulates that unless there is substantial risk to the contractor in notcovering all expenditure through receipts from users the contract must besubject to the public markets code. Contracting authorities are now requiredto prove the existence of substantial risk or face having contracts annulledby the administrative courts. The contracts most at risk of being reclassifiedas public procurement contracts are the shared risk contracts of ‘régie inter-essée’ and ‘gérance’. The latter – largely used in urban transport – in particu-lar risk being forced into the classical, competitive, public markets sphere ofcontracting.

In summary, the thrust of the SAPIN law and subsequent legislation hasbeen to rein in and preserve the distinctiveness of the French delegatedmanagement approach in the face of threat from Europe and from withinFrance itself. The public markets code has become far more strictly orien-tated towards transparency and competition, and as a result the two poles ofcontract governance – market and relational – have become far more dis-tinct. The legislation has – by both accident and design – engendered a moreresponsible and discriminatory approach to the selection of governancestructures, on the basis of economic justification rather than habit, thuspotentially reducing the traditionally very broad sphere of relational con-tracting.

A new regulatory context and mounting consumerist pressureIn recent years, new regulatory demands have placed considerable strain onlocal government. The ‘Europeanization’ (Olsen 2002) of environmental reg-ulation has particularly affected the public service domains of water andwaste management, where the pace of regulatory change has been unprece-dented. The question of water rate increases resulting from strengthenedenvironmental regulation has been a preoccupation for municipalities andconsumers since the beginning of the 1990s (Pflieger 2002). Likewise, thecosts of compliance with a new waste law introduced in 1992 have been amajor concern for local governments (Le Monde 21 November 1997 and 6October 1998). Whereas in the past the pace of technical change in both

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sectors was slow and largely manageable, now the pace of change is rapid.This regulatory tightening has had a clear impact on the relationshipbetween consumers, contracting authorities and the private utilities. In aregulatory context where the primary concern was to expand the productionof services, consumers may well have been rather passive. However, in acontext of demanding environmental regulation entailing rapid rateincreases, users have become far more conscious of the relationship betweencosts and service quality.

A new context of participatory democracyThe issue of active citizen surveillance of delegated public services has beenmost evident in the water domain, to the extent that the possibility of anAnglo-Saxon style of third-party regulation has been mooted (Martinand2000). In addition, some are apt to downplay the significance of the new citi-zen engagement as ‘consumer hysteria’ (van de Vyver 1995) which, it hasbeen argued, can be abated simply through more effective communicationto consumers about the financial implications of regulatory compliance(Guirkinger 2000; van de Vyver 2003). Others, however, argue that,although undoubtedly provoked by the issue of water tariff hikes, it is alsopart of a more mimetic process of transition to a European regulatory modelof active consumerism (Pflieger 2002). The transition to consumerist regula-tion has to a large extent been aided and abetted by the French State throughthe implantation of consumer associations (Pflieger 2002), and it accordswith the general mantra of both Left and Right politicians that the Stateshould pay more heed to consumers (Elgie 2003). For example, consumergroups were widely consulted on the 1992 law on territorial administrationand in the preparation of the 1992 water law (Pflieger 2002). Throughout the1990s consumers have been active in calling on the administrative courts incases of suspected procedural irregularity in the letting of contracts (Joncourand Raymundie 2001) and have been successful in eliminating certain watercharges deemed to be against their interests (Pflieger 2002).

The new consumer movement can be taken to be symbolic of a loss oftrust in public authorities to represent consumers in contractual negotiationand adjustment. The relationships between contracting local authorities arenow very much in the spotlight. As Jaglin (2002, p. 5) comments:

For a long time network services were not part of the demands for greaterparticipatory democracy. Now increasingly they are the target of calls forgreater democratic control: at the heart of the mechanisms now deployedto this end and elsewhere, the user/citizen is demonstrating a growingscepticism of the supposed impartial regulation of services carried out bylocal authorities in the name of the public interest.

In line with this growing scepticism, a new discourse of the French modelhas been emerging in recent years. What were, in the old institutional con-text, considered by some to be virtues (loose control and self-regulation;



mutual adjustment; give and take) are now considered as vices. Joncour andRaymundie (2001), for example, talk of ‘historically shared irresponsibility’between local authorities and their private partners.

This new discourse of the French model in turn is having an impact on thethematization of contract. The role of contract as a means of responsibilizingcontracting authorities, re-asserting the interests of the consumer and ofredressing the perceived imbalance in power between local contractingauthorities and the private utilities giants, is increasingly promoted to localauthorities.

THE NEW THEMATIZATION OF CONTRACT

As has already been said, contract has always played a role in establishingbusiness relationships in the local public services domain. Its role in main-taining those relationships, some of which have been of extremely longduration following extension by mutual agreement, has been far less promi-nent. The evolved reality of these contractual relationships had borne littleresemblance to the original contractual terms which constituted them. Now,however, a new thematization of contract is evolving; this involves a subtleshift from the relational value of maintaining the relationship (Macneil 1983)to that of maintaining a balanced contract and fair contractor remunerationover the life of an exchange relationship. This shift essentially consists oftwo elements: calls for more detailed contract planning; and continuousmonitoring and audit. This new thematization of contract is taking place notjust through regulation and jurisprudence in the local public servicesdomain, but also through isomorphic processes (DiMaggio and Powell 1983)of diffusion of good contracting practice. In the shadow of these two proc-esses lurks the threat of more stringent regulation of the entire local publicservices domain, the European threat, and the threat of consumer interven-tion. The new thematization of contract appears, therefore, in the semanticform not only of ‘must’, but also of ‘should’ and ‘ought’.

The SAPIN law requires contracting public authorities to make anannouncement of their intention to delegate a public service in a recognizedEuropean and French trade journal. It in no way, however, removes the lib-erty of selection which French authorities have traditionally enjoyed. Add-itionally, the law requires contracting authorities to establish a tendercommission to oversee the contracting-out process. This panel is, however,merely advisory. Thus, although the objective of the law was to address cor-rupt practice, it has at the same time skilfully preserved the traditionalFrench partnership approach. However, the SAPIN law, in conjunction withthe MAZEAUD and BARNIER laws, has, for the first time, begun also toaddress the question of contract management.

The thrust of legislation has been to ensure that modifications to contractdo not greatly alter the contract’s original terms in relation to the balancebetween contract duration and objectives and in relation to tariffs andcharges. Contract duration must be proven to correspond with the period of

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amortization of investments. The loi BARNIER specifies a firm maximumduration of 20 years for waste and water contracts since it is in thesedomains that the worst cases of corruption and irresponsibility haveoccurred. The Court of Accounts notes a reduction in the average durationof water contracts from 16 to 11 years during the period 1998 to 2001 (Coursdes Comptes 2003). In general, contracts may be extended in certain circum-stances, but the underlying principle is that the purpose of any extensionmust be proven not to change the objectives of the contract such that it infact becomes a new contract and thereby subject to competitive re-tender.This in effect stamps out the hitherto common practice of tacit contractrenewal by variation. Extensions to contract must not result in excessiveincreases in user charges. Similarly for contract variations, the underlyingprinciple is that variations beyond 5 per cent of the value of contract are per-missible provided that they do not create a new contract or substantiallyalter the financial conditions and tariffs set out in the original contract. Foruser tariffs and charges, contracts must set out in an indexation formula forthe calculation of future price increases. Although no standard indexationformula is given by the law, the point is that price changes are planned for inthe original contract, and transparency is given to the re-negotiation of priceterms such that any deviation from the chosen formula can be contested byconsumers. For contracts in the waste and water domains, the law prohibitsthe levying of entry fees.

The Institut de la gestion déléguée, a body established to defend and pro-mote the French concept of delegated management, and comprising the pri-vate utilities and local authorities, advises local authorities to calculatevarious scenarios of a contractor’s profit by applying a coefficient of riskbased on a full risk evaluation in relation to procedural regulation, technicalregulation, demand, labour, future technological advances, and future pricemovements and accidents (Institut de la gestion déléguée 1999). These sce-narios then provide the benchmarks for monitoring movements in the con-tractor’s profit margin. Given the complexity of such an undertaking, itfurther recommends that independent financial experts be employed.

A supplementary piece of legislation to the SAPIN law requires contrac-tors to submit an annual report on the accounts pertaining to the service inquestion and which contains an analysis of the quality of the service pro-vided. In addition, that same law gives the regional courts of accounts theright to inspect a contractor’s accounts, which if necessary can provide theconfirmation to contracting authorities that a contractor’s accounts are cor-rect. The law, however, does not stipulate exactly what should be containedin the annual reports. The Institut de la gestion déléguée thus states that thecontents of annual reports and the manner in which data are presentedshould be clearly specified in the contract.

Joncour and Raymundie (2001) report that some local authorities are mov-ing towards systematic and permanent audit of service costs and servicequality via tables of indicators rather than relying on the annual inspection



of contractors’ reports. An assessment from the perspective of the regionalcourts of accounts of the effects of the first ten years of the SAPIN law, con-cludes that contract management in general has ‘much improved’ – shortercontract duration, more frequent controls, more frequent renegotiation ofcontract, and so on. However, it points also to widespread negligence on thepart of local public authorities in the exercise of their contract managementfunction (Cours des Comptes 2003). Others (for example, Martinand 2000)argue for the greater exchange of information in relation to service costs andquality between local authorities of similar types, and for the promotion ofbenchmarking as a means of reviving consumer confidence in the delegatedmanagement system.

Within this new thematization of contract is the idea that contract can actas a safeguard against consumer activism and against any European accusa-tions of anti-competitive practice. The function of contract is thereby nolonger one of foundation of bilateral exchange, as has traditionally been thecase, but one which establishes and maintains a trilateral relationshipbetween public authority, private utility and consumer and/or Europeancompetition watchdog.

CONCLUSIONS

The global shift towards the marketization of public services make it imper-ative to deepen our understanding of the limitations and costs of the gover-nance of exchange relationships. It is particularly insightful in this regard todraw on the experience of France with its long history of contracting in pub-lic services, where traditionally contract has played only a minor role inordering complex, long-term exchange relationships. In the sense that thetransaction costs associated with detailed contract planning, monitoring andenforcement are minimized, the traditional French model has arguably beenan example of good contract governance. However, it is far from clear thatthis somewhat idealized model still obtains in today’s France. A number offactors, including decentralization, corruption scandals, a shift towardsgreater participatory democracy, European competition rules, the escalationof environmental standards, and the re-regulation of contracting, appear tohave converged to create a new, and more risky, context for contract govern-ance. The role of contract, not only in establishing exchange relationshipsbut also in ordering their subsequent adjustment, is being re-asserted. Thuslocal government is exhorted to establish continuous contract monitoringand performance measurement regimes; the establishment of common ser-vice standards and benchmarking of performance is advocated; and the tacitextension of contract and the use of public funds for purposes not strictlydefined by contract is outlawed. While the benefits of the French model interms of its flexibility and self-regulating nature, then, are still vaunted, thenew public discourse of contract governance suggests the emergence of anew thematization, lying nearer to the contractual end of Vincent-Jones’sgovernance continuum and distinctly more trilateral than bilateral.

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This is perhaps at odds with received wisdom. Much of the literature ontrust and co-operation in exchange relationships assumes that strangersbecome friends, but not that friends become enemies. (See for example thevolume edited by Campbell and Vincent-Jones 1996.) However, as North(1990, p. 56) observes, ‘if there is an end of the game, or if people believe thatthe game might end, then indeed the discount rate may enter into determin-ing whether it is worthwhile to continue to co-operate’. The assertion of therole of contract in the French case may simply be symbolic – a means ofdemonstrating socially appropriate behaviour – or it may indicate the begin-ning of the separation of the municipalities and their long-standing contrac-tual partners. There are of course limits to the extent that the thematizationof governance can be gleaned by reference to models: the hypothesis of ashift in governance remains to be tested on individual exchange relation-ships. There are a number of variables to consider: for example, the extent ofconsumer disaffection and active participation in individual municipalities,the extent to which administrative law is actually enforced, and the extent ofsustained European attention on French public services markets. The factthat there is a contradiction between the way in which the French model ispromoted as efficient governance and the prescriptions of good contractingpractice, indicates a certain institutional persistence and path dependence(for a fuller discussion of this point, see West 2004). It may be that the oldmodus operandi reasserts itself once public attention has been diverted.Nevertheless, if the traditional French model was an example of the mostthat could be wrung out of contract before hierarchy became the more ‘effi-cient’ mode of governance, its survival in the more risky context of activecitizenship, strict accountability, competition and transparency looks uncer-tain.

In the final analysis, the French story highlights the need to consider morecarefully the processes by which actors select and design the institutions ofeconomic interaction. It was, after all, the unconscious and indiscriminaterelational thematization of exchange relationships that provoked public sus-picion of the French modus operandi in the first place. While it may oncehave been selected for its transaction cost economizing properties, thecharge now is that it is inefficient and uncompetitive. On the other hand, theindiscriminate contractual thematization of exchange relationships, whileundoubtedly satisfying public expectations as to the appropriate conduct ofpublic organizations, as well as offering contracting partners a means ofcoping with a more risky environment, may not turn out to be efficientacross the board either.

ACKNOWLEDGEMENT

The author acknowledges the Economic and Social Research Council (ESRC)award no. T026 27 1473. Grateful thanks to Pierre-Eric Verrier, Richard Perkinsand Yvonne Rydin and anonymous reviewers for comments on earlier drafts ofthis paper. Any mistakes that remain are the responsibility of the author.



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From Bilateral to Trilateral Governance in Local Government Contracting in France

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