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Research Challenges for Governance of Infrastructure Projects in Emerging Markets

Raymond E. LevittStanford University

2007 ACADEMY OF MANAGEMENT CONFERENCE — PHILADELPHIA, PA

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World Population Forecast

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Poor Infrastructure Slows Economic Growth

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$2-3 Trillion Investment Needed in Emerging Market Infrastructure During Next Decade

?

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Private-Public Partnerships to the Rescue?

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Privatized Infrastructure is Big Business

“PFI”/”PPP” has been widely used in UK, Europe, Turkey for many kinds of facilities Mixed results, e.g., Chunnel, London Tube…

Emerging as possible financing vehicle in US PFI/PPP is potential option for developing

infrastructure in emerging markets Lack of formal economy to tax lack of institutional capacity to build and operate Consumers already pay for water from trucks!

But political and institutional risk scares investors

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Governance of PPP Infrastructure Projects in Emerging Markets is Very Complex

Each Party’s National Corporate Governance

Host Country Laws

Bilateral Investment Treaties

Trans-national “Soft Laws”

“Civil Society” GovernanceFinancial Market

Governance

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Elements of PPP Governance Articles and bylaws of PPP “project company” PPP agreement with host government, including bilateral treaties PPP financing covenants and enforcement mechanisms

Sponsors Other Equity holders Lenders (typically about 75%) Insurers, including political risk insurer

Off-take and supply agreements Regulatory regimes

Entitlements (Host country concessions, leases, …) Procedures for setting and adjusting tariffs (tolls, fees, …) Labor laws (wages, hours, safety…), Environmental Laws, … Customs, …

Contracts with Designers, Builders, Suppliers “Soft-Law” of UN, WB, ADB, Equator Principles, … Processes for engaging with informal stakeholders (NGOs, local groups)

Proactive engagement Reactions to challenges

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Managerial and Technical Research to Boost Infrastructure Projects in Emerging Markets

1. Design enhanced governance approaches to deal with extreme complexity of PPP’s in emerging markets

Understand which global institutions and institutional differences matter the most

Develop governance mechanisms to address them

2. Develop & test distributed infrastructure systems that are not natural monopolies (no “last mile”) to finesse the governance challenges

Cellular telephony is a shining example — ~ fully privatized worldwide ; service has soared; costs have plummeted!

Distributed water treatment and sanitation is becoming cost effective

Distributed power generation likewise

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Research Frameworks for Studying Governance of Infrastructure Projects

Ethnographies Grounded theory case studies Analysis of large numbers of secondary cases

Using QCA analysis (developed by Charles Ragin)

Roundtables of informed participants Balanced mix of reflective practitioners

Agent-based computational modeling Embed institutional differences in agents (W.R. Scott)