The provision of basic infrastructure in emerging markets poses significant governance challenges. About 1 billion new inhabitants will be born on the planet in the next decade and will need several trillion dollars of basic infrastructure. However, a large proportion of these people will be born in weak or failing states that lack formal economies and that cannot develop the tax revenues to provide even clean drinking water -- and, as any medical doctor knows, water-born disease is the biggest killer of children and the elderly in emerging economies.

Private-Public Partnerships (PPP) are being viewed as an attractive alternative means to provide infrastructure all round. However, the potential private investors in these projects must have confidence that the private-public partnerships will endure and function smoothly to collect user fees (which might be subsidized by governments, or not) for 30 years or more across multiple changes of host country governments to provide acceptable returns to the investors. If the performance of the governance structures set up to deliver these projects do not provide the basis for such confidence, the "electronic herd" of private investors whose funds are needed to finance these projects will stampede away from financing emerging markets infrastructure (as they did after the Asian financial crisis of the 80s and 90s) and invest their funds elsewhere.

These PPPs are new organizational forms that combine aspects of market, sovereign and civil society governance to create long-lived, devolved, quasi-governmental administrative and regulatory structures. Moreover, the global teams of investors, developers, equipment vendors and professional services firms who assemble to deliver each project, and the local political organizations and NGOs who can mobilize to oppose them, create significant national and sectoral differences in values, norms, work practices and laws between team members that can potentially result in high levels of unforeseen transaction costs for all players.

This is the daunting -- but fascinating -- governance challenge that some of us in CEE, Sociology, Law, Business, Economics and Hoover are beginning to tackle together in an ongoing seed project in CRGP with initial seed funding from FSI.

To fully address the scope of the governance challenges for these new organizational forms, we will require input from political scientists, anthropologists, urban planners, and others in the future. We would welcome discussions with any faculty members interested in working on these governance problems. If desired and appropriate, I would be happy to make a presentation to a future meeting of the governance task force on this subject.

[This posting reproduces the text of an email that was sent to the FSIIS governance group on July 17.]

Posted by levitt at July 17, 2006 9:13 PM