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CAPÍTULO 4

Networks’ Financing: which Perspectives?

PAOLA IAMICELI

1. INTRODUCTION

The latest economic crises pose significant challenges to enterprises, in particular small and medium-sized ones. Investments are needed to face the recession: such as investments in technological innovation, operational innovation (e.g. logistics), organizational innovation (e.g. management, alliances, etc.) and the like¹⁷⁴.

Difficulties in getting access to finance are among obstacles to enact such investments¹⁷⁵. Both internal and external financing encounter major difficulties. Inside the firm, lack of liquidity and clients’ late payments increase¹⁷⁶. Meanwhile external financing becomes more and more critical, as regards public funds and bank lending. The convergence between banks’ and clients’ incentives within the financial transaction is even harder to achieve than before, given the higher level of default risk and the reduced ability of borrowers to provide guaranties or to diversify lending transactions within the market¹⁷⁷.

Moreover, lending regulations, namely the Basel II and Basel III Accords, force banks to apply stricter standards to credit assessment. Although the issue is debated, this could result into a reduction of bank offer towards small and medium enterprises in particular¹⁷⁸.

Economic and regulatory obstacles to small and medium-sized enterprises’ access to finance are not specifically examined in the present paper. The analysis instead focuses upon the role of inter-firm networks in financial transactions and the impact of firms’ participation in networks on their capability to access finance.

More specifically, two sets of questions will be addressed.

The first issue is whether networks are able to provide enterprises with better opportunities for investment financing or, on the contrary, they constitute an additional obstacle¹⁷⁹. This issue will be analyzed without regard to types of networks whose specific function consists in providing credit services or financial guaranties to members, as it is the case for credit cooperatives or mutual guarantee consortia, for instance¹⁸⁰.

Secondly, the paper will consider different types of network, mainly distinguishing between contractual and organizational networks. Are there types of networks that, more than others, increase enterprises’ financial opportunities? Which elements of the network structure are particularly important?

While making some concluding remarks, a regulatory issue will be raised in questioning whether a specific legal framework on inter-firm networks is needed in order to enable their role of innovation drivers within a financially constrained environment.

Within these perspectives some preliminary issues deserve consideration in order to develop the analysis.

See Regulation (EU) No 575/2013, 26 June 2013, on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, art. 4 (Definition): “(38) ‘close links’ means a situation in which two or more natural or legal persons are linked in any of the following ways:

2. DO INTER-FIRM NETWORKS MAKE ENTERPRISES’ ACCESS TO FINANCE HARDER?

Rejecting the assumption that single-handed and stand-alone firms represent the sole reference model for corporate finance and lending decisions, economic literature shows different views on the impact of firms’ conglomerates, grouping and networks on access to finance.

Mostly referring to multi-divisional firms and business groups rather than to infer-firm networks, as strictly intended, this literature shows the advantages and drawbacks of financing mechanisms taking place within the group or network (internal financing) as well as the impact determined by the formation of groups/networks on external financing, particularly bank financing¹⁸¹.

With respect to internal financing the concept of an “internal capital market” is considered in order to describe cross-financing, changes in resource allocation and similar practices occurring among the different units of an integrated firm or affiliates within a business group or, in a different and less common perspective, among distinct entities that are members of an alliance¹⁸². The potential of an “internal capital market” is shown as having regard to the informational advantages of members (if compared with potential external financiers), lower monitoring costs, higher monitoring incentives, higher flexibility in structuring the financial relation and taking measures against poor or lack of performance¹⁸³.

Therefore, at least to some extent, the “internal capital market approach” could help to identify some of the advantages of internal financing practices among members of a given network. Indeed, once the network setting is specifically taken into account, then the financial impact of collaborative practices could be considered with regard to, for example, free services allowances or co-sharing of costs and investments. These practices could determine a reduction in the demand for external finance for participating firms and could provide more adequate incentives to engage in specific projects that are more difficult to support within a stand-alone firm¹⁸⁴.

Moving from a different perspective, law and Economics scholars also explain that switching capital allocation among affiliate corporations is significantly more costly than switching such allocation within a firm¹⁸⁵. It is possible that not only transaction costs may increase if different managers or board of directors should agree on a given switch, but also that legislation tends to impose restrictions on these decisions through corporate, securities, secured transaction, bankruptcy, and tax law. Managerial discretion is therefore limited. For these reasons the practice of asset partitioning of an integrated firm into a business group with separate affiliates may be seen as a way to reduce agency costs linked with switching resource allocation by managers. A trade-off between flexibility advantages and agency costs arises, shedding light on the relation between resource allocation and corporate governance¹⁸⁶.

Having specific regard to business networks, the previous analysis could help to predict that the collaborative setting developed by networks may reduce the transaction costs and information asymmetries normally characterizing “external capital market” transactions, so enabling some level of flexibility in partial accordance with the “internal capital market” hypothesis. Depending on the material structure of the network, agency costs and/ or free riding practices, respectively, may well reduce the efficiency of internal financing strategies. Again, network design and governance seems pivotal in both scenarios, so adding value to the choice of legal form and contractual/organizational models¹⁸⁷. As is demonstrated below, the distinction between contractual and organizational networks may be relevant under this perspective, also (though not only) with reference to the different impact of contract v. organizational law on flexibility of capital allocation practices¹⁸⁸.

Consequently, the potential of networks with respect to internal financing should not be valued in absolute terms but rather in having regard to a network’s contractual or organizational design¹⁸⁹.

The issue concerning the impact of networks on external financing (mainly bank financing) is even more controversial than the one just discussed. Indeed, part of the economic literature shows the advantages of networks in producing and signaling useful information for potential external financiers, or in providing explicit or implicit guaranty. Networks could also endow members with bargaining power in their relation with potential lenders on the basis of a reputation effect linked with the network’s functioning¹⁹⁰. However, counter-effects should be taken into account: network’s reputation may be negative and could in principle increase, rather than decrease, the level of opaqueness as regards relevant information for its members’ credit assessment¹⁹¹. Following the predictions of some scholars, this complexity might call for a preference of bank credit over different types of credit (e.g. non-professional financiers, non-qualified investors and the like) being banks more skilled in screening and monitoring¹⁹².

A further element that should be considered concerns the external financiers’ monitoring over networks and the risk of “contagion effects” within the network¹⁹³. Indeed, the increase in monitoring costs is particularly linked with the interdependence that networks incorporate into collaborative practices¹⁹⁴. Network cooperation is often based on the coordinated use of complementary resources, mainly immaterial ones, often individually possessed by single participants and open to pooled use¹⁹⁵. Investments made by one of the members are relevant for connected transactions put into force by other participants and common interest projects do have success if (and often only if) all participants duly perform. Though being the means for a network’s success, such interdependence also contributes to creating vulnerability in cases in which an individual breach is not adequately monitored or external factors negatively affecting a single participant create a burden for the whole project and network. For example severe distress for a participant’s major client can in fact cause distress for the participant himself, in addition to having an impact upon the network¹⁹⁶.

Under these circumstances, a bank’s monitoring of a client’s ability to perform (return capital and pay interests) becomes quite costly and might require a greater need for more collateral and guaranties.

The regulatory framework reinforces this expectation.

Pursuant to the European Regulation n. 575/2013, which implements the Basel II/III Accords into European legislation, banks are due to take measures against risk concentration within their credit portfolio¹⁹⁷. The concept of risk concentration is linked with that of “connected clients”, which, under some circumstances, could describe the type of relations typical of network participants¹⁹⁸. More particularly, Article 108 of the Directive provides thresholds for risk concentration (including the one generated by groups of connected clients), defining large exposures and prohibited ones¹⁹⁹. In the perspective of the Basel III Accords, the more recent Proposal for a new Directive on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms would prescribe a very similar approach²⁰⁰.

Among others, the aforementioned economic and legislative factors would make finance (and especially bank finance) more difficult for inter-firm networks²⁰¹.

What is puzzling about this regulatory approach is that financiers would be requested to take interdependence into consideration merely on the side of credit risk concentration, while apparently ignoring the possibly positive influence of interdependence on the debtor’s ability to accomplish his/her project. A defensive rather than pro-active approach towards networks would then be favored by the current bank legislation.

A different approach would require a higher attention to characteristics of network collaboration that could increase the efficiency and effectiveness of financed investments, possibly counter-balancing the negative impact of interdependence on risk concentration. This hypothesis will be examined infra in this paper.

3. DO CONTRACTUAL NETWORKS MAKE ENTERPRISES’ ACCESS TO FINANCE HARDER?

The previous analysis has shown that the impact of networks on an enterprise’s access to finance is not only sparsely examined by the current debate (more focused on group finance than on networks) but also hardly observable without taking into account the organizational and functional characteristics of networks. Indeed these elements could significantly influence a network’s capability to provide members with adequate incentives to (also financially) collaborate and to correctly signal a network or network member’s trustworthiness to potential external financiers.

In this perspective attention should be paid to a network’s structure and design, more drastically distinguishing the case of networks from the one of integrated firms and business groups.

Sociologists, economists and lawyers involved in the interdisciplinary debate on inter-firm networks have paid increasing attention to the hybrid connotation of these cooperative structures. In this perspective networks would stand in the middle between markets and integrated firms, between contracts (more precisely, bilateral exchange spot contracts) and organizations (more precisely, organizations qualifying as legal entities or legal persons)²⁰².

In legal terms the hybrid connotation of networks raises an issue concerning the identification of applicable legislation. Indeed, legal systems often lack specific dispositions on hybrid forms. Moreover, legislation on contracts and organizations does not always reflect the intrinsic nature of networks²⁰³.

A parallel issue concerns the choice of legal instruments that govern network-type relations. Although, in practice, enterprises do use contracts and organizations to establish and develop network relations, these types of contracts and organizations do not totally reflect the concept of contracts and organizations as intended by traditional legal theory²⁰⁴. This consideration does not prevent the referral to contracts and organizations as a means for a network’s establishment and governance.

Here stems the distinction between contractual and organizational networks. According to a relatively recent perspective, contractual networks are those based on either a multilateral inter-firm collaboration contract (a contractual joint venture, a network contract, an enterprises grouping, etc.) or a set of (mainly bilateral) exchange contracts that are linked within a consistent collaborative setting, often under the coordination of a leading enterprise (e.g. subcontracting networks, franchising, distribution networks, intellectual property rights’ licensing networks, etc.). In comparison, organizational networks are based on the creation of an entity whose mission is to govern an inter-firm collaboration program among its participants. Their legal form may include non-profit organizations (e.g.: associations, foundations), “mutual interest” entities (e.g.: cooperative companies, corporate consortia), for-profit corporations (e.g.: corporate joint ventures, network companies, etc.)²⁰⁵.

The distinction between contractual and organizational models of network plays an important role from several angles²⁰⁶. One of these concerns network’s financing, both with regards to internal and external financing on the basis of the analysis developed above.

As regards internal financing, one major concern is related to the definition of rules concerning acquisition of resources through its member’s contributions, use of available assets within the networks, the possible shift in resource allocation from one project to another. As seen before with reference to the “internal capital market” debate, these processes face a trade-off between flexibility and agency costs, as generated by the delegation of powers concerning asset allocation to managers. Depending on the level of asset partitioning and legal autonomy among participant units (and their managers, consequently), transaction costs and collective actions problem may arise as well²⁰⁷.

Bearing this in mind, the distinction between contractual and organizational networks is important to consider. Indeed, both agency costs and collective action problems may be partially reduced by multilateral contracting among a network’s members. Of course, this type of contract will be incomplete and effective enforcement will depend on the observability of the conduct of network managers and participants²⁰⁸. However, incentives to cooperate will be higher given a mutual commitment and a form of explicit delegation for decision-making²⁰⁹.

Mutual commitment among participants and explicit delegation of decision-making powers are typical features of multilateral contracts and membership-based organizations (companies, associations and the like). By contrast, they are generally lacking in contractual networks based on the mere links among bilateral contracts, where de facto authority rather than consensus often forms the basis of control²¹⁰. Among these forms, the analysis presented above would suggest that, as a single entity, organizational networks enable higher flexibility in asset allocation without entailing significant “tunneling” among participants’ assets²¹¹.

This setting is very different from the one of contractual networks based on the mere link between bilateral contracts (e.g. franchising), as is normally the case for contractual networks. Here, the multilateral commitment on asset allocation is more costly to achieve and in practice rarely existent. Indeed, and more commonly, bilateral negotiations are kept separated from interference by other linked contracts and negotiations²¹².

In contractual networks this approach facilitates the emergence of the unilateral imposition of financial conditions more than a multilateral and coordinated agreement among members participants. For example, franchise contracts often require financial contributions by franchisees for common interest investments and expenses (i.e. marketing and commercial expenses). A final producer often requires subcontractors to put industrial property rights, know-how, patents at network’s disposal without specific consideration or obtains payment term extensions without paying interests for the delay. Not only are bilateral relations often unbalanced, leaving space for opportunistic behavior, but horizontal communication among a network’s participants (franchisees, subcontractors, etc.) is also discouraged or prevented; furthermore, the extension of more favorable clauses is generally not allowed from one bilateral relation to another²¹³.

Under such conditions internal financing within networks may take place. However, in the absence of a common financial plan as agreed among all involved parties, this easily entails re-distribution of financial burdens (for example, the subcontractor or the franchisee is forced to seek for bank credit) more than attaining a co-sharing of financial resources which would reduce the need for external credit in the interest of the whole network. Then, the inefficiencies described by the law and economics literature on internal capital markets and “tunneling practices” are more likely to emerge.

Other characteristics of organizational networks favor internal financing when compared to a contractual network setting. For example, given the contribution by single participants, the network is interested in “locking” such contribution within the network rather than allowing restitution to participants in case of individual withdrawal or exclusion²¹⁴. Legal systems often enable parties to include “asset lock clauses” in both contractual and organizational settings. However, asset locks as default rules are more common within the law of organizations²¹⁵ than within the law of contracts, where restitution upon contract termination is the general rule²¹⁶. Following the theoretical approach presented above, the enforcement techniques of asset locks can be seen as an additional response to possible inefficiencies of the internal capital market.

When it comes to external financing, the reservation against contractual networks is even stronger.

Indeed, depending on the applicable law of obligations, contracts and organizations, the network’s legal form significantly determines the allocation of liability for loan repayment, defining: (i) the person(s) in charge of repayment (whether one or more network’s participants, together or without the organization, or the organization only); (ii) whether, in case of multiple responsibility holders, this is joint or several; (iii) whether, in the case of pooling and partitioning of assets and resources as destined to the network program, the liability is limited to them or unlimited.

As regards these aspects, and keeping the analysis at a very general level, contractual and organizational networks may be distinguished because, in the latter more than in the former, liability tends to be concentrated and charged upon the network’s assets, as partitioned from the participants’ assets; while contractual settings more than organizational ones tend to rely on joint and unlimited liability²¹⁷. It should be acknowledged that, under these conditions, different approaches and solutions characterize domestic legislation allowing only limited harmonization among countries.

Looking at the financial structure of single firms, law and economics theory distinguishes between defensive and affirmative asset partitioning²¹⁸. In a networks’ context such a distinction could be (re-)phrased as follows. Under a “defensive assets partitioning regime” a network’s creditors may not claim any right on its participants’ personal assets out of due contributions to the network fund. This regime would encourage network participants’ investments and induce financiers to strictly monitor the efficient and effective use of network assets²¹⁹. Under an “affirmative asset partitioning regime”, the participants’ personal creditors may not claim any right on the network’s fund. This regime would release the network’s financiers from monitoring the use of the participants’ personal assets and the existence of concurring personal creditors, reducing the overall transaction costs of the financial transaction²²⁰. From the perspective of potential lenders, asset partitioning is also valued for its capacity to limit a borrower’s ability to increase the risk of default by shifting resources from one venture to another²²¹.

Other research contributions specifically concerning networks’ financing have added that, conversely, unlimited liability provides for more collateral, though increasing monitoring costs, and that joint liability creates some space for internal, “peer to peer” control, though within a “collective action” setting and with a risk of free-riding²²².

The following analysis will examine whether and to what extent an adequate contractual design could reduce some of the aforementioned limitations regarding contractual networks’ financing.

4. NETWORKS’ FINANCING IN PRACTICE: RECENT EXAMPLES FROM THE ITALIAN LANDSCAPE

The observation of recent practices in Italy suggests that the formation of contractual networks is one of the tentative responses of enterprises to the challenges imposed by the current crises and the difficulties to access the credit market.

Also (but not only) due to a recent reform adding tax advantages to previous legislation on a so called “network contract” (contratto di rete), from March 2010 to December 2013, 1290 network contracts have been concluded by Italian enterprises.

Pursuant to the legislative framework provided by law no. 33/2009 (as modified by law no. 99/2009 and, more significantly, by law no. 122/2010 and law no. 221/2012), these networks are mainly established as contractual agreements in the form of multilateral contracts whereas a minority is formed as a new legal entity²²³.

The objectives pursued by the parties may be quite diverse but the general function of the contract may be described as a function of collaboration²²⁴. Indeed the current law establishes that a “network contract” is a bilateral or multilateral contract in which enterprises aim to, individually and collectively, enhance their innovative and competitive capability in the market, and for this purpose, on the basis of a common network program, commit themselves to cooperate in certain areas linked with their own activity, or to exchange information or (to provide) industrial, commercial, technological supply, or to jointly carry on activities that are included within their own entrepreneurial activity²²⁵.

The underlying policy objective consists of promoting the formation or the development of strategic coalitions in areas in which investments for innovation and access to new markets could be fostered by the means of collective synergies and inter-firm cooperation.

As a consequence, network contracts are being signed in sectors that are more prone than others to technological innovation (like electronics, informatics, pharmaceutical production, bio-medical appliances, innovative materials, and the like). Meanwhile sectors that are particularly affected by the current crises (like automotive, constructions and textile industries) are also quite significantly represented in recent statistics on network contracts²²⁶.

Focusing on this second observation, the issue is to what extent, and why, the network contract could be a sound response to economic crisis and, in particular, which impact could be determined on the financial perspectives of the participating firms.

4.1. The legal framework and the asset structure of the Italian “network contract”

A brief description of the asset structure of a network contract could help to define the legal terms of the above-mentioned issue.

As regards asset allocation, three models emerge.

The first could be called a “fund free” network contract. In this case no fund is specifically set up. Of course, parties may always agree to share costs, revenues and property as they would do outside a network contract (e.g. firm A buys machinery on behalf of all participants, who will then refund A for price payment). For some reasons this model has a very limited use in practice: (i) because parties tend to use models which are similar to pre-existing practices (namely the one of consortia with a separate common fund); (ii) because contributions into network funds are today subject to favorable tax treatment.

In the second model parties establish a “common fund”, inheriting the practice of inter-firm consortia. This is the most used scheme for the same reasons that have just been recalled to justify the limited use of the first model. Then, parties are requested to contribute, originally and/or periodically, into a network fund (common fund). They commit to use the network fund for the network program implementation only. To reinforce this commitment, parties very often deny any restitution right in favor of participants who are excluded or voluntarily withdraw from the contract. The law also provides that management rules are stated by the contract²²⁷.

Pursuant to the 2012 reform, within this model, network participants enjoy limited liability whenever they establish a governing body (“organo comune”) who Is entitled to act and carry on commercial activity with third parties on behalf of the participants. This is a case in which defensive asset partitioning occurs regardless the existence of a separate entity. Indeed, participants do not need to establish the network as a separate entity in order to enjoy limited liability.

As regards defensive partitioning within this model, the law is still unclear. Indeed, it refers to the legislation on consortia (preventing member’s creditors from any claim over consortium’s assets) upon the condition of legal compatibility between the two schemes. Furthermore, interpreters disagree when discussing whether this condition is met²²⁸.

A third model can be presented as a “multiple asset partitioning” network contract. Here, no common fund, as traditionally intended, is set up. Yet each participant is requested to contribute by partitioning specific assets within her/his own patrimony pursuant to the special legislation on asset partitioning in the law of companies limited by shares (art. 2247-bis, let. a, Italian Civil Code). As a consequence, scholars tend to interpret this scheme as restricted to network contracts signed only by companies limited by shares²²⁹.

Unlike under ordinary company law, partitioned assets are destined to the collective interest activity and not merely to the individual interests of the originating company. Pursuant to company law, partitioned assets enjoy both affirmative and (if not specifically opted out of) defensive partitioning (art. 2447-quinques, Italian Civil Code).

As regards this third model it should be acknowledged that, once introduced in Italy in 2003, this type of asset partitioning has been perceived as costly to administer and subsequently rarely used in ordinary company law, especially by small and medium-sized enterprises. For analogous reasons the prospective use in networks (and in networks of small and medium enterprises, particularly) seems quite limited.

In general terms, it is somewhat questionable whether this legislation on “network contract” has paid sufficient attention to a network’s finance and “asset governance”²³⁰. More recent reforms have not only clarified the effects of defensive asset partitioning when a common fund is established but they have also introduced some accounting requirements making reference to the legislation on companies limited by shares. In practice such reference is not sufficient. Indeed, accounting rules need to be tailored on the specific nature of the network activity and economic interaction among its participants. Parties may, at least partially, compensate these weaknesses by the means of self-restraints. They could contractually provide for duties to provide information, accounting procedures, reserve funds, the verifiability of value assessment as regards non-pecuniary contributions, etc. In fact, current practice is only limitedly opting for these solutions, as shown below.

By contrast, both legislation and contractual practice show relatively greater attention to contractual design in terms of the governance of decision-making processes, internal monitoring schemes, penalty measures, etc. It should be considered whether these practices might have an impact on asset management and financial opportunities for networks’ participants, also in terms of credit assessment.

Having considered some of the limits of the Italian legislation, attention should now be paid to current practices.

4.2. A case in the construction sector

The construction sector has been seriously impacted by the current crisis²³¹. In this sector some network contracts have been concluded in order to cope with the present challenges, as illustrated by the following example.

A network contract has been signed by twelve Italian enterprises (mainly construction enterprises, project and engineering service providers, social cooperatives operating as social service suppliers) in order to set up a real estate fund whose financial instruments are offered to qualified investors. The project is mainly focused on investments in the sector of Social Housing. More specifically, the contract is aimed to govern the collaboration among the parties for the accomplishment of the Social Housing project. Particular attention is paid to the real estate management once (and if) assigned to the networks’ participants by the Fund Management Company (FMC).

In the network contract the parties agree to transfer some listed real estate property or building permits into the Real Estate Fund and to provide monetary contribution into the network contract common fund.

The envisaged opportunity consists of creating sound conditions for a prospective job assignment and for the access to a market in which the (former individually) owned assets and constructions can be sold²³².

Such conditions would include not only a collaboration plan coordinating complex activities and defining procedures for costs, risks and revenue allocation, but also a governance structure aimed at reinforcing peer and hierarchical monitoring within the network. This could result in greater reliability of the network’s participants as perceived by the market.

From this perspective, attention can be paid to the contractual design including: the allocation of tasks among network’s participants; specific forms of monitoring over performance; control over compliance and sanctioning powers as assigned to a so called network governing body²³³; the provision of exit penalties; a contractual liability regime which, on the one side, assigns to the sole party in breach the liability for non-performance vis-à-vis clients and third parties in general and, on the other hand, imposes to all the parties a cooperation duty in the interest of the network. This cooperation duty would explain why, in the case of substantial breach by one enterprise, the other participants are enabled to intervene and take adequate measures to mitigate damages at the expense of the party in breach. Parties also commit to provide special guaranties to the FMC if requested.

In terms of asset structure, the contract provides for the establishment of a common fund due to be conferred into a New co. in one year’s time. The participation of financing enterprises is also foreseen: to these participants, if existing, a seat in the governing body is reserved.

Compared with other network contracts, the individual contribution into the fund is quite substantial and the exit penalty amounts to a sum that is five times greater than this initial contribution. This rule is more rigid than any other contractual “asset lock” preventing the return of individual contributions from the common fund in case of exit.

It is important to highlight that such a fund is not conceived as a means to finance individual activity that participants commit to perform within the network program. Indeed, the contract stipulates that each participant will provide these means separately from his/her contribution into the common fund. Rather, these resources will enable the New co., once created, to bear the risk of unsold assets, as established by the contract also in view of the prospective relation with the FMC.

In the landscape of the network contracts that have been concluded over the past years, the one described here above cannot be considered as representing the main current practice. Rather, in its complexity, it is quite unique. However, while looking at other examples of network contracts, some of the above-mentioned relevant aspects could be confirmed, particularly:

— Parties do rely on the common fund as a contributory means to accomplish the network project; however, the common fund is rarely considered as a sufficient financial resource for network-related investments; in many cases it is very limited and this choice is not always made for reasons concerning the low financial needs generated by the network program²³⁴;

— The contractual design of the network is also conceived as a way to ensure the greater reliability of the network with regard to the successful accomplishment of the program²³⁵;

— Allocation of risk is often very important (particularly the risk of default in the relation with third parties and sometimes, like in the described case, the risk of unsold assets/merchandise or the like): duties of collective insurance purchase may be provided as an alternative or a complementary solution; the use of the common fund as collateral for credit relations with third parties is sometimes enabled by the contract;

— A direct participation of banks and other financial institutions in the network contract is an emerging trend and increasing in the latest experiences.

These practices show some of the possible applications of the network contract as a means for defining, on the basis of a mutual commitment among participants, asset allocation and management governance. Both internal and external financing find some support in contract design: so, for example, as regards contribution duties, accounting duties, asset locks, internal screening and monitoring mechanisms to reduce the risk of individual and collective default. Minor attention is paid to inefficiencies concerning asset allocation and management in particular cases. For example, when the network programme includes a multi-projects plan, managers and directors are often vested with a discretionary power whose limits are rarely defined as regards possible tunneling from one project to another. Neither are risks and liabilities always easy to define. These seem to represent some of the challenges for the future, both for practitioners and for policy makers.

Though limited, the observation of the former practices allows to draw some conclusions on the virtues and drawbacks of contractual networks’ financing, as presented below.

5. INTERNAL FINANCING IN CONTRACTUAL AND ORGANIZATIONAL NETWORKS: WHICH PERSPECTIVES?

Law & Economics studies show that the way enterprises define a firm’s boundaries influences, among other aspects, their financial structure and financial choices, e.g. debt leverage²³⁶. Considering the “new boundaries of the firm”, well beyond the model of the vertically integrated structure towards outsourcing, collaboration contracts and strategic alliances²³⁷, the same type of analysis could be extended from the reality of stand-alone firms to the one of inter-firm networks. Then the question can be raised as to whether the existence of a network and its legal structure enable or prevent determined financial strategies.

The previous analysis shows that the potential for self-financing in networks does exist, although its material importance should be more carefully observed in practice and confronted with the analysis concerning networks’ structure and governance.

At the very least, based on the previous analysis, participation in networks could allow some pooling of financial resources or some inter-firm financing as a cooperative strategy based on trust and, sometimes, reciprocity enabling forms of cross financing. Co-financing among a network’s participants can allow for the accomplishment of projects that would not otherwise be affordable by each enterprise separately without a significant amount of debt leverage.

The described case in the construction sector (see par. 4.2) also shows that self-financing inside networks may be improved through an adequate network design both at the governance and asset levels. This can be observed in different ways in both contractual and organizational networks, provided that an explicit agreement and commitment to cooperate for the accomplishment of the common project is achieved among participants. In order to be more effectively enforceable by anyone, such agreement should take the form of a multi-party contract (due to regulate a merely contractual network or to establish a collective entity as an organizational network) rather than the form of a mere link between bilateral exchange contracts. Indeed, the multi-party contract allows parties to share objectives and modes of action and to commit to abide to common rules, enabling single participants or appointed bodies to stand for the collective interest.

From this perspective not only the first assumption (against network financing) but also the second (against contractual network financing) should be revisited. The advantages of a contractual setting for self-financing in networks could be valued.

As seen above, the multi-party contract could also oblige participants to financially contribute to the common project through the formation of “special purpose funds”. “Peer to peer” forms of internal monitoring could help to enforce such a commitment. Enforcement of contribution duties could be ensured through a more formalized assignment of monitoring powers to internal bodies in charge of controlling payments and sanctioning any possible breach. Indeed, the use of internal governance and monitoring mechanisms is compatible with mere contractual schemes and is becoming more and more common in collaboration contracts²³⁸. The Italian experience of network contracts shows that a participant’s exclusion from the network for lack of financial contribution is a very common sanction as provided by the contracts²³⁹.

The role of the network contract as a means to improve the efficiency of asset allocation among different projects should also be emphasized, though the practice is still quite poor in this respect: internal auctions or other comparative procedures as well as pre-defined processes for possible renegotiation and reallocation of resources among the projects at stake could be provided by the contract design, so limiting discretion of network managers and directors under these respects.

In the specific perspective of contribution duties, mere contractual networks could even show higher flexibility than organizational networks, especially if the law of corporations is taken into account. Indeed, once the corporate capital legislation is considered, limitations might be provided by the law as to individual financial contributions to the company²⁴⁰.

Conversely, the law of organizations (and corporate law in particular) shows higher potential with regard to a different type of rule that has been mentioned above, concerning the asset lock over special purpose funds²⁴¹. Once financial contributions are pooled together, the effective use of these resources for the accomplishment of the common interest project depends on the level of fund partitioning, as allowed by the applicable law. As seen above, although differences exist among domestic legal systems, organizational law normally ensures both affirmative and defensive asset partitioning to a larger extent than contract law: preventing participants from diverting the pooled resources from their destination; preventing their individual creditors from seizing these goods; assigning seizing powers only to the creditors whose rights are connected with the fund’s purpose²⁴². The possibility of attaining similar effects when the network is merely contractual depends on domestic legislation but is generally limited.

In a different way other types of “lock” on the network assets could be established on a contractual basis. Depending on applicable law, these measures might be enforceable among parties only, without being opposable against third parties. For example, parties could limit for a certain time the dissolution of joint property or could limit the participant’s right to recover his/her contribution in case of a withdrawal or exclusion, as is the case in many network contracts in the recent Italian experience.

6. CONTRACTUAL NETWORKS AND ACCESS TO BANK FINANCING

The previous analysis demonstrates a critical view on bank financing of inter-firm network projects. In fact, moving from the European legislation on credit institutions, the interdependence among network participants’ assets and activities represents a source of concern and higher risk of credit more than an element enhancing the economic perspectives of the financed project. The banks’ persistent focus on the applicant’s assets and guaranties more than on the characteristics of the project due to be financed, seems to currently reduce, rather than increase, opportunities for networks’ financing, especially in case of mere contractual networks.

Some banks interested in network projects financing are currently exploring a different view. This interest is being significantly stimulated by the new legislation on network contracts in Italy, as presented above.

More particularly, these banks are considering the possibility of adopting specific standards for a network’s rating within the “Internal Ratings Based Approach”²⁴³. Such an approach would imply a higher focus on the qualitative aspects of the project due to be financed, though in addition to ordinary quantitative measures normally used to assess credit merit. In this perspective banks would start to consider that “high quality networks” may improve participants’ financial rating and, consequently, credit conditions.

What could a “high quality network” be, however? Could a mere contractual network ever qualify as “high standard”?

Pursuant to one of the schemes proposed by a European bank to evaluate the credit merit of networks’ participants, the following elements, as provided by the network contract, would positively influence this evaluation: (i) the medium-long term of the project, consistently with the business plan; (ii) the general definition of the objectives; (iii) the general determination of the operational program; (iv) the specific determination of rules concerning relations among participants, consistently with the operational program; (v) the governance rules, including internal and external control; (vi) the accounting rules; (vii) the asset/contributions pooling, common fund, if consistent with the operational program; (viii) the asset safeguard and protection measures²⁴⁴.

This evaluation scheme would subscribe to the hypothesis according to which contractual design and internal governance of a partnership can reinforce trust in the relation between partners and third parties, including financiers. The quality of collaboration can indeed influence the parties’ capabilities to effectively accomplish the envisioned project, eventually increasing the common assets’ value and/or raising sufficient revenues to return capital and pay interests. For example, another very significant aspect is represented by the rules concerning entry and exit in the network contract, themselves influencing the stability of the business collaboration together with the feasibility of the network programme²⁴⁵. An adequate contractual network design could then help to align the financier’s and borrowers’ incentives to “invest” in the network project. Which type of contractual design and which governance rules would better pursue this scope is an issue that deserves further analysis and investigation, also at a practical level.

Additionally, law and economic literature also suggests that affirmative and defensive asset partitioning is due to enhance a firm’s ability to access (bank) credit²⁴⁶. Under this perspective, although the conventional tool to attain such partitioning is still the incorporation of the (firm or) network into an entity that is distinct from the one of each person participating into the (firm or) network, legal systems are evolving towards more flexible schemes of asset partitioning that do not require any establishment as an entity. After the latest development the case of the Italian network contract has followed this path. To what extent this model may be replicated in other contexts and legal systems depends on legal traditions and applicable domestic law²⁴⁷.

7. CONCLUDING REMARKS

Within the current economic crisis, networks may not represent a panacea, nor a sheet-anchor for enterprises in distress. They may however provide opportunities for enterprises willing to collaborate for the accomplishment of strategic programs direct to improve their innovation capability and competitiveness.

Among other obstacles, the difficulties in financing collaboration programs risk to undermine such opportunities, inducing enterprises to persist in their monadic approach to market.

A shift from personal financing to project financing is envisioned, so that the plurality of actors involved in the accomplishment of a project becomes a source of value rather than a mere lever for transaction costs in financial contracts.

Of course, this change cannot take place at the financial and credit market’s expenses through a shift of risk towards financiers. Such a change would be unrealistic at the present conditions.

Not only could networks develop internal financing strategies taking advantages of economy of scale and sharing already available resources within the network, but also external financing could be promoted through an adequate contractual design able to reinforce potential financiers’ trust through the establishment of internal monitoring structures, auditing procedures, accountancy rules, cross-guaranty mechanisms, reserve funds and the like.

The mere contractual form of a network would not represent an obstacle as such under these approaches, provided that the legislation was clear in defining the general legal framework in which inter-firm collaboration contracts could be drafted and, particularly, as far as financing is concerned, liability regimes should be determined in terms of both contractual liability and asset liability (responsabilità patrimoniale) as specifically regards asset partitioning effects.

The recent Italian experience of legislation on network contracts shows some potential in terms of contractual design and, at least partially and at a former level, in terms of a bank’s availability to engage in a process of experimental evaluation of credit merit within a network. More can be done in terms of development of planning and accounting rules to be applied to network activities and economic interaction among participants.

The European echo of this debate is still hard to perceive. European industrial policies are paying increasing attention to inter-firm networks²⁴⁸. By contrast, the present debate on European Contract Law is not yet adequately considering the importance of longterm, collaboration and network contracts²⁴⁹. As a result, some scholars are envisioning a path towards the definition of general principles on inter-firm networks as well as the study of model contracts²⁵⁰. What role, rights and duties should be reserved to financiers within these models? Should general principles state requirements and conditions under which networks can enjoy some level of asset partitioning and limited liability? To what extent would European intervention with regard to inter-firm networks induce any change in the Basel Accords approach towards risk concentration? Is there any room for a pro-active (rather than defensive) approach to networks in the international debate on merit credit standards? These are among the questions to which networks’ financing theory would still need to provide answers.