Coping with unforeseen circumstances: the COVID-19 crisis and bus contract renegotiation in Sweden

In: Journal of industrial and business economics: Economia e politica industriale, Band 51, Heft 2, S. 325-353

Abstract

AbstractIn principle, competitively tendered contracts in Swedish public bus transport are not supposed to be renegotiated during the contract period. In practice, it happens quite frequently. The need for renegotiations became evident during the COVID-19 crisis. This external shock to the system was unusually strong. Demand for bus services dropped abruptly, affecting revenues of procuring authorities and, depending on contract type, also bus operators. To make the situation even worse, costs typically remained constant, as frequent services were supposed to be upheld to avoid the spreading of the virus in crowded buses. Contract renegotiations during the COVID-19 crisis were clearly caused by unexpected exogenous events. Contracts with passenger incentives, linking a substantial part of compensation to the number of passengers, have been more likely to be renegotiated than gross-cost contracts, which were easier to adjust to the drop in demand. Typically, renegotiations were triggered by operators. While being a pragmatically rational response to an extreme situation, the renegotiations and their outcome may not in all cases have been compliant with the legal framework for public procurements, even when taking into account the exemptions made possible by the framework. In cases where passenger incentive contracts have been transformed into gross-cost contracts it could be argued that the nature of the contract has been changed. A new tender should then probably have been performed instead, although this has not been tried in court. The COVID-19 crisis could have long-term impact on contracts and procurements in the industry, affecting how effective competition will be in future tenders. For now, gross-cost contracts seem to be the norm, and it is possible that passenger-incentive contracts will become less common overall. One way to handle unexpected events with profound impact could be to include so-called threat-points that trigger renegotiation of a contract.