The Strategic Abilities of Sponsors


The strategic abilities of sponsors are revealed as they shape projects and steer them through to ramp-up. We have identified eight trajectories each with different probabilities of success. A trajectory is a sequence of moves by the sponsor and co-specialized organizations to shape a project through many episodes, often in response to turbulence, opportunities, or challenges.

Shaping efforts, over time, will roll the concept configuration forward, correct positive-feedback loops, and help a project move along the track desired by the sponsor. In this case, the trajectory is likely to lead to success. In contrast, sponsors may not be able to prevent and correct positive-feedback loops. Many moves may be right, but the inability to cope with a few unexpected events can create degenerative processes. Success requires most issues to be solved—adequately.

Why do sponsors enter into trajectories that lead to failure? The answer is that they lack the strategic knowledge and the abilities to identify what will be needed for the journey. The choice of a trajectory is determined by the interactions of three factors: the degree of development of institutional structures, the technical and social complexity of the projects, and the managerial competencies of the sponsors. We have structured the presentation around trajectories pursued by network operators, concessionaire/developers, and ad-hoc alliances.

Projects Sponsored by Network Operators

Projects sponsored by network operators have a high probability of success. Their sponsors usually have the resources and creditworthiness to carry the market, institutional, and completion risks. With a coherent and stable institutional structure, projects can be developed at the appropriate scale. Network operators have the expertise to shape projects, integrate them into their systems, and develop capabilities to interact with the community. In other words, technical, economic, social, and political issues can be integrated in a coherent manner. Financing is done through bond issues, with guarantees provided either by the government or by balance sheets. Unless the country has a bad credit rating, network operators backed by a government can get low-cost financing.

The negative side of sponsorship by network operators stems from the dominance of technical experts and the prevalence of organizational failures. Managers are often technical specialists who view projects as engineering challenges, fail to engage in relational interactions with communities, regulators, or suppliers, and build in technical features that add to costs. Organizational failures include adversarial relations, refusal to collaborate with suppliers, bureaucratic rigidities, and preference for known solutions.

Projects sponsored by network operators tend to be successful, as were nineteen out of twenty-five of these projects in the IMEC sample. Three trajectories in projects sponsored by large network operators were identified: 1) push to meet demand, 2) network sponsorship and rational management, and 3) partners in technology.

  1. 1. Push to meet demand. Six projects in the IMEC sample were designed as engineering solutions to meet growing demand in developing countries. These projects, sponsored by public utilities, were planned to be orderly and rational, but crises emerged, and projects were held up. Meeting demand rapidly, honoring contractual obligations, and respecting development plans were all good reasons for forging ahead without concerns about social integration. Because institutional structures did not force consideration of external effects and legitimacy, issues such as social acceptability, respect for the environment, and social disturbance were brushed aside.

    The probability of success of projects following this trajectory turned out to below, although most projects were eventually redesigned and restarted. Following a period of crisis, these projects were often redefined by teams that included engineers, social workers, and communications experts adopting systemic perspectives. The costs of making these projects socially acceptable could easily have been internalized in the first trial, because the opportunities they pursued were intrinsically rich. Most projects eventually rebounded.

  2. Network sponsorship and rational management. Fourteen projects were shaped by network operators that worked under rational-system arrangements. Large sponsors, whether public or regulated private firms, undertook to make long-term forecasts, scrupulously meet environmental regulations, borrow on financial markets by providing guarantees, and honestly attempt to meet project opponents' objections in advance. Network sponsors engaged in productive relationships with regulators. The execution of the projects followed traditional patterns: internal design, detailed work packages, bidding, and owner control.

    The traditional mode leads to both high and low performance, but a large majority of projects of this type in the IMEC sample were successful. Good risk analysis, adaptation to social and environmental needs, and an ability to face challenges by lenders, regulators, and constituents characterize high-performance projects.

  3. Partners in technology. Five projects in the IMEC sample focused on the development of complex, technology-based solutions such as nuclear power plants and air-traffic-control systems. These projects were led by strong sponsors aiming to develop needed and highly complex technical solutions. Suppliers had the specialized expertise that the strong sponsors needed. A majority of these projects were successful. The development of long-term, collaborative relationships between owners and contractors and coherent institutional arrangements stressing the leadership role of the sponsors were determining factors. Two projects were failures because rigid contracting was used. In these cases, the sponsors insisted on using detailed specifications instead of relying on the suppliers' abilities to develop highly innovative technical solutions.

Whatever the trajectory, the competencies displayed by large network operators as they sponsor projects are creditworthiness, technical knowledge, and relational capabilities. Successful network operators put in place decision systems to ensure that technical, social, regulatory, and political aspects are embodied in selection processes. They also build a small, multidisciplinary core team that interacts with suppliers and contractors to innovate and build social expertise.

Projects Sponsored by International Concessionaire/Developers

Projects sponsored by concessionaire/developers usually take place in governance arrangements that favor foreign investments, deregulation, partnerships, and participatory engineering. Concessionaire/developers are domain specialists that promote risk allocation, build coalitions to help structure projects to face turbulence, and engage in discussions with regulators and government officials. The building of generative relationships with co-specialized firms such as investment banks and contractors is viewed as useful for developing innovative solutions, confronting viewpoints, and tapping otherwise dormant knowledge. Sharing the fruits of innovative ideas with these partners is seen as a wise move.

However, sponsorship of projects under governance arrangements is difficult because of the present incompleteness of institutional structures and the associated opportunistic behaviors of governments. Loopholes exist in laws, regulations, and responsibilities. Governments cause the downfall of projects by failing to honor agreements, creating legislative and regulatory risks, and shifting too much public infrastructure risk to private firms. Sponsors also put a great deal of faith in rigid power purchase agreements (PPA) and concessions. Undue optimism and assumptions about the superiority of private-sector management have often characterized such projects.

As governance arrangements are being adopted around the world, project concessionaire/developers have pursued three distinct trajectories: 1) scrutiny-based projects, 2) institution breakers, and 3) engulfing illusions.

  1. Scrutiny-based projects. Scrutiny-based projects tend to be uncomplicated. Few negative external effects and little environmental opposition are involved. The sponsor builds strong partnerships with owners, and the institutional structures within which they are built are well developed. Examples of such projects include thermal-power plants with PPAs, short toll roads near large cities, and bridges that relieve traffic congestion. Such projects use standard technologies to meet real needs. Financial returns may be high for early sponsors, but as competitive entries arise, yields fall. As a result of their attractiveness, these projects are rapidly transformed into commoditized solutions.

    Investment bankers, rating agencies, and regulators scrutinize these projects in detail. Rating agencies evaluate the sponsor's abilities to face risks. Bankers accept only the projects that meet the stringent criteria of non-recourse project financing. Project ratings are often necessary for the public issue of bonds. Most scrutiny-based projects are successful. Why are sponsors not confining themselves to such projects? Because the supply of such projects is limited and opportunities dwindle rapidly.

  2. Institution breakers. Projects in this trajectory involve complicated technical tasks in incomplete or inadequate institutional arrangements. Project configurations need to be adjusted many times to meet the shifting expectations of bankers, regional groups, and clients. Sponsors, however, are committed to shaping these projects well. They invest the resources necessary to ensure their survival and even their restructuring.

    Shaping efforts focus first on correcting the shortcomings of the institutional framework. For this, sponsors seek the collaboration of governments, legal advisers, and international agencies. New laws need to be enacted to protect property rights, foster social acceptability, and promote environmental standards. In other words, such projects challenge the existing legal and regulatory structures. Concessionaire/developers invest resources to build sponsoring coalitions and make projects socially acceptable. The process of shaping is long, turbulent, and costly. Shaping costs for these projects are very high, ranging from 15 percent to 35 percent of total capital investment. Sponsors need to be able to keep their eye on the project's value in the face of difficulties. A majority of these projects in the IMEC sample were successful.

  3. Engulfing illusions. Several urban infrastructure projects within the IMEC sample were projects promoted by private and public sponsors that naively accepted heroically optimistic assumptions concerning technical feasibility, market demand, and social acceptability. Engineering firms wishing to become international concessionaire/developers often sponsored these projects. Firms hungry for business opportunities created several of these projects, often in governance arrangements that were effervescent and shifting. Projects were sometimes promoted on the basis of the obvious superiority of the private sector. This superiority was so obvious that it precluded serious questioning of the project's viability.

When these heroic assumptions turn out to be false, crises emerge. On several projects, governments played opportunistic games, triggering processes of degradation. Incomplete institutional frameworks were unable to act as a bulwark. Problems were pushed toward private sponsors. As one government legal advisor put it, "The sovereign state is never a partner." Engulfing illusions often end in costly retreats or white elephants. In the IMEC sample, sponsors and bankers that engaged in such projects ended up losing a large part of their investment, even though the projects still had high social utility.

Sponsors of these projects failed to build long-lasting coalitions and agreements with regulators, government authorities, and clients. Key decisions were left uncovered because the sponsors had preferences for particular options. Furthermore, they did not allocate all of the effort needed to secure solid commitments from parties whose contributions are important. The physical project often survived, but only after painful restructuring. These projects highlight the primary dilemma of sponsorship: without non-recoverable, front-end expenditures, opportunities do not really exist. Without adequate investment in strategically positioning the project, the sponsor may get involved in costly illusions.

The competencies displayed by concessionaire/developers are 1) the ability to attract partners because of credibility and reputation, 2) the financial capacity to bear the cost of front-end strategic decisions, and 3) the knowledge of public policy issues and positive relationships with governments. Concessionaire/developers rapidly identify the value potential of projects that are worth shaping and reject others. They understand that projects are not selected in grand rational meetings but are shaped, negotiated, and redesigned over many episodes of risk analysis and strategy making. Sponsors know that front-end shaping costs can be high, as projects must pass many tests; accepting a bad project is viewed as worse than rejecting a good opportunity.

Projects Sponsored by Ad-Hoc Alliances

A dozen projects in the IMEC sample were sponsored by entrepreneurs or firms that formed ad-hoc alliances. The advantages of entrepreneurial sponsorship are many. First, many projects, even socially valuable ones, would never get completed without heroic entrepreneurs overlooking the inadequacies of institutional arrangements and substituting their strengths for institutional weaknesses. Second, entrepreneurs capture novel practices abroad, diffuse ideas, and shape daring projects. Third, entrepreneurs pursue opportunities that large sponsors would reject, such as power from coal piles or garbage dumps and impossible deadlines.

The negative side of entrepreneurial sponsorship is that socially suboptimal solutions are often pursued and deals are made without the benefit of public debate. Sponsors tend to reduce front-end shaping expenditures to the minimum and thus fail to build coalitions and governance structures to face future shocks. As a consequence, projects often end up in failure. Two trajectories were identified: 1) entrepreneurial pioneers and 2) urgency-based projects.

  1. Entrepreneurial pioneers. Such projects consist of fitting standard technical solutions to viable opportunities in countries where demand is growing but the institutional arrangements are woefully underdeveloped. Eight projects in the IMEC sample fell into this category, but only four were successful. International and domestic firms that have advanced knowledge of the evolution of institutional structures seek these kinds of projects. Sponsors take high risks by supporting most front-end costs and even construction costs to move in rapidly. Solutions are developed rapidly to fit urgent needs. Entrepreneurs understand the dynamics of shaping and influencing institutional structures.

    The danger is that weak institutional frameworks often allow unscrutinized and inefficient choices to be made. Institutions based on the rule of law and sector regulations are not well developed, and project anchoring is thus difficult. Political power is fractured into many simultaneously competing public agencies and concentrated at the political level. Pioneers have difficulty getting approval and must deal with ambiguity. They adopt innovations, such as concessions, turnkey contracts, and design-build-operate contracts, to appease bankers and international agencies.

  2. Urgency-based projects. These projects are designed to meet real and urgent needs. Sponsors, domestic or international, agree to select socially inappropriate solutions because of the pressure for fast delivery and the absence of challenges by regulatory authorities. All parties, including regulators, sponsors, and clients, who sign purchase agreements, push for fast action. Early choices lock projects on paths that cannot be modified. Such projects are inadequately shaped because political actors or institutional structures do not require extensive debates.

Most urgency-based projects in the IMEC sample did not perform well. One project, for example, concerned the building of a thermal-power plant in a South Asian country. The client, a publicly owned utility, was asked by political decision-makers to sign a PPA. In order to build fast, an international developer agreed to take on completion and operation risks by rapidly assembling components, erecting the plant in record time, and operating it at full capacity. The government assumed supply and currency risks by delivering fuel at guaranteed prices and using the United States (US) dollar as the currency for offshore accounting. The client assumed all market risks. The solution that was selected was outside the least-cost path, which would have taken more time to build. The client, the developer, and the bankers were all aware that a high-cost solution was being adopted.

The competencies to succeed in entrepreneurial projects, as we observed, are, first, persistent leadership, and second, political connections. Entrepreneurs make bold commitments, but they need to ensure that public decision-makers will eventually support them. The entrepreneurial sponsors in the IMEC sample were fearless. They made bold moves, and personal fortunes were at stake. To ensure that projects would eventually gain approval and permits, political connections were necessary.




The Frontiers of Project Management Research
The Frontiers of Project Management Research
ISBN: 1880410745
EAN: 2147483647
Year: 2002
Pages: 207

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