Buy shares in a megaproject

post by ryan_b · 2019-01-16T16:18:50.177Z · score: 15 (6 votes) · LW · GW · 10 comments

I think we should create a separate legal construct for megaprojects.

I recently wrote about megaproject management here [LW · GW]. In the outline for Oxford's Major Programme Management program, the first module is described in this way:

Develop your understanding of major programmes as a governance structure and distinctive organisational form. In the context of programme performance, consider and reflect on organisational theory and design.

The basic concept is that instead of a normal corporation, it would operate like a corporation with an expiration date and the project goals baked into the governance. We want "on-time and on-budget" to take the place of "growth and revenue" in the new organization's decision making.

Consider the Boring Company. If one of those projects is a terrible idea, we are stuck with adjusting our position on the company as a whole, which means the terrible project puts the others in jeopardy.

By contrast, if the megaprojects were all separate entities and the Boring Company was hired to manage all of them, we could then bet on Boring Company and all of the projects independently of each other.

It seems to me that this would do a pretty good job resolving a lot of the problems that plague megaprojects currently.

10 comments

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comment by G Gordon Worley III (gworley) · 2019-01-16T22:04:14.722Z · score: 7 (4 votes) · LW · GW

mr-hire already mentioned movies, but the other thing this reminds me of is the way people used to fund ocean voyages.

I don't recall all the specifics, but it's something like this. Sending a bunch of stuff across the ocean used to be risky, and in particular that the risk is high enough (if we take risk here to be the product of probability of failure times capital outlays) that generally a individual investor is not willing to take it on. The straightforward way to handle this was with partnerships, and it's the method that was in use for thousands of years for all sorts of endeavors with this risk profile from ocean voyages to trans-Saharan caravans, so much so that some religions actually codify rules about how to manage these partnerships.

Then we get the innovation of the joint-stock company and one of the first things it's used for is not creating long-lived corporations (although this follows after a few decades of experience with them) but creating time-limited corporations to finance ocean trade. It then becomes possible for a person to invest in projects, specifically ocean voyages, and also create a diversified portfolio of investing partially in many ocean voyages so that even if n% fail the 1-n% that succeed are enough to turn a profit.

Again, as mr-hire says, movies are something where a model something like this is still alive today. We have something like this alive for megaprojects in the form of municipal bonds sold to cover specific projects, but this is obviously not a complete solution. It's interesting to me to ask why we don't use time or project limited corporations that start with clear end states where everyone gets paid back at the end and the corporation wraps up more often; it's a thing we did in the past more often (relative to total corporations created) and do now in some domains or through alternative mechanisms, so I wonder why it seems to have dropped as so frequent a finance mechanism.

comment by Dagon · 2019-01-16T19:46:40.460Z · score: 4 (2 votes) · LW · GW

It's not obvious what you'd actually be buying in a "share" of a non-profit-motivated project. What's your reward for being right (that the project is undervalued and you can buy a share for less than you should) or punishment for being wrong (that the project is overvalued and you should have bought a share in something else)?

You may simply be talking about prediction markets on the outcome of megaprojects. I'd support that, but you should be clear that it's not a share in the project, it's a wager on a predicted conditional outcome.

comment by ryan_b · 2019-01-16T20:41:24.596Z · score: 3 (2 votes) · LW · GW

Lots of megaprojects are profit motivated. Movies, oil & gas investments, mining, etc.

But even so, you are right that it is not obvious, and that is a problem I haven't solved. I had assumed that the same suite of project types would be called for as we currently have for corporations (for profit, not for profit, benefit). I assumed the incentives would shift between them.

There are a bunch of special types of contracts that the government uses for defense which might be useful for inspiration. Both for what to do and what not to do.

I considered prediction markets, but expect them to have approximately zero impact on the outcomes of projects. This is because almost all megaprojects are bad, everyone knows almost all of them are bad, and few people involved with them are trying to behave differently. Another source of information wouldn't change that because they aren't looking for more information; we need to shift the incentives of decision-makers and stakeholders directly.

comment by Dagon · 2019-01-16T22:58:05.777Z · score: 5 (3 votes) · LW · GW
I considered prediction markets, but expect them to have approximately zero impact on the outcomes of projects.

On this, I disagree. A working prediction market makes it much harder to lie to the backers (and harder for proponents to lie to themselves) about probability of success and magnitude of impact.

This is because almost all megaprojects are bad, everyone knows almost all of them are bad, and few people involved with them are trying to behave differently.

On this, I somewhat agree. Which then brings the question "why would anyone buy shares in them"?

comment by ryan_b · 2019-01-17T19:48:25.136Z · score: 2 (1 votes) · LW · GW
A working prediction market makes it much harder to lie to the backers (and harder for proponents to lie to themselves) about probability of success and magnitude of impact.

I agree with this. The reason I do not find it persuasive in the case of megaprojects is that in the current environment backers and proponents are motivated to lie, and the only people who are motivated to find the truth (private creditors) already do the best job of seeking it. As a result, the only group that would listen to the prediction market is also the group which experiences the lowest marginal gain from it. That being said it would still be a good idea to have a prediction market, because even a tiny improvement to the sector would be large in absolute terms.

The prediction market changes the information available to the participants, but does nothing to change their incentives. By contrast, a legal construct you can sell shares of is a restructuring of the incentives at the same time that it changes the information available.

comment by ChristianKl · 2019-01-17T20:09:53.264Z · score: 6 (3 votes) · LW · GW

One way the stock price matters for executives is that their bonuses are linked to the stock price.

If you start a megaproject you could link executive bonuses on the project to the probability on the Augur market.

Linking it to bonuses would also automatically push some liquidity into the market.

comment by uncomputable · 2019-01-16T17:41:49.891Z · score: 3 (3 votes) · LW · GW

i don't think anything prevents corporations from being created with a limited lifespan, it just doesn't come up.

how are the shares supposed to return value to the share holders?

comment by mr-hire · 2019-01-16T18:35:47.879Z · score: 9 (6 votes) · LW · GW

It actually does come up frequently with companies that do lots of high liability projects. Movie studios for instance will create companies for each production to limit their risk profile if something goes wrong.

comment by Chris_Leong · 2019-01-16T23:19:35.264Z · score: 2 (1 votes) · LW · GW

It isn't clear to me how this resolves the problem of Megaprojects. If the shares fall, then perhaps we can tell that the project is likely to fall behind and be assessed a penalty and knowing that will allow some mitigation, but that's a pretty minor fix.

comment by mr-hire · 2019-01-16T16:42:51.760Z · score: 2 (2 votes) · LW · GW

This is a cool idea. A fun test of this might be to create a few markets for existing mega-projects on an open prediction market like Augur, and see if you can drum up any interest for people actually investing in their outcomes.