Institutional Arrangements

The presence of coherent and well-developed institutional arrangements is, without a doubt, the most important determinant of project performance. Institutional arrangements are sets of laws, regulations, and established roles that form symbiotic relationships and provide effective practices for developing projects. Institutional arrangements provide the structure for contracts, binding agreements, and legal actions. They also provide legitimacy. Large capital projects require deals and agreements that will stand the test of time. By contrast, projects shaped in incomplete and shifting arrangements are at risk.

The main function of institutional arrangements is to help anchor projects in their social and economic contexts and ensure that investments will be repaid and social utility provided. Unless they are solidly legitimized, projects will be at the mercy of shifting interests, caprices, and opportunistic moves. The concept of project anchoring outlines three generic conditions to buttress large capital projects.

1. Stabilization of the long-term future to enable investments: Legal and regulatory frameworks, such as private monopoly regulation and concession frameworks, help to reduce risks by minimizing opportunities for clients, communities, or governments to attempt to capture revenues after the investment is sunk. The goal is to create the prospect of secure streams of funds in the long term.

2. Flexibility to face turbulence: During the front-end development of projects, when agreements are negotiated and commitments made, managers develop specific strategies to cope with foreseeable risks. They cannot, however, develop specific ways to cope with surprise events. Turbulence is likely to arise given the long time span required for development. Flexibility provided by elements of the institutional arrangements help many projects survive unforeseen events.

3. Enhancing the legitimacy of projects: Many projects face opposition from interest groups. Laws, regulations, and practices that create well-structured assessment frameworks enable sponsors and interest groups to air their views through public hearings and even to oppose decisions through legal appeal procedures. Public-bidding frameworks structure orderly selection and provide legitimacy. Practices such as inviting representatives of the public into planning and design meetings and proactively consulting conservationist groups and environmental regulators help to find credible solutions and reduce the likelihood of protest.