Inappropriate Risk Allocation in NESWC Contracts

Inasmuch as a business's pattern is neither completely predictable nor controllable, it should never be a random process (Kay 7). Businesses have both short and long-term strategic goals. Such strategies should guide the venture's processes by forecasting sales, earnings, expenses, and future benefits (Kay 6). With an elaborate business strategy, an organization can quickly make tactical decisions that are in accordance with its objectives.
The NESWC project contracts cost $95 per ton for waste management, which was about double the average price in 1997 and rose to $145 per ton by 2005. This contract proved expensive to the community primarily because the allocations of risk in the contracts were inappropriate because of the NESWC communities did not have control over facility costs and were not protected from potential financial risks in the public-private partnerships by the service agreements they signed. This was due to the following untenable 20-year contractual provisions.

All the risks for the venture were solely in the communities and not MRI since they paid the facility’s debt service and operational costs by the disposal fee formula calculated by MRI in the contract. This meant that the community bought the facility from MRI and further guaranteed its operations.

In 1989, a clause in the contract that required NESWC communities to compensate MRI for loss in profits in unforeseen changes in circumstances was invoked. This was because of reduced profit of electricity revenue due to a downturn in oil prices in the1980s and consequently, cost the communities $3.4 million in form of increased municipal disposal fees.

According to the contract agreement, the communities were to assume all the risk case of increases in design, construction, operational and financing costs for improvements to NEWSC facility that required them to comply with changes in the environmental law after 1979. This cost the communities $43 million as they had to comply with the state’s 1997 new air pollution control and amendments to the federal Clean Air Act of 1990.

The ‘put-or-pay’ clause in the contract required the communities to pay MRI Company for a minimum number of wastes regardless of their waste produced, this costs them $1.7 million a year for wastes they never deposited to the resource recovery facility.

Work Cited

Kay, John. Foundations of corporate success: how business strategies add value. Oxford Paperbacks, 1995.