Communication et grands projets: Les nouveaux défis

9. The Governance Paradox in Megaprojects

9 CHAPTER THEGOVERNANCEPARADOX INMEGAPROJECTS LISE ARENA AND EAMONN MOLLOY The Governance Paradox in Megaprojects 153 This chapter explores a theoretical and practical paradox in megaprojects. According to transaction cost economics (Williamson, 1975) high uncertainty, high asset specificity, situated knowledge and the high frequency of transactions associated with megaprojects should drive managers to internalise resources and to rely on relational communication and informal contracts. However, in the context of megaprojects this presents the following paradox: managerial incentives to invest in internal resources through vertical integration are limited because of fixed time horizons and obdurate delivery deadlines ; yet, the alternative of outsourcing and contract management through the market mechanism based on formal communication implies the escalation of transaction costs. This research therefore seeks to identify how practitioners might resolve this issue through enhanced communication as well as more efficient collaboration practices in order to overcome the technical, psychological and political barriers that impact on effective delivery of megaprojects (Flyvbjerg, 2006). This chapter also analyses the extent to which the transaction costs approach can be used to explain the economic organisation of temporary governance structures such as megaprojects. Thus, the aim of the chapter is to provide a new conceptual framework for the understanding of megaprojects, as governance structures that rely to a large extent on communication practices for effective coordination. Following a brief overview of the different forms of governance associated with different kinds of organisations (section 1), this chapter shows that the hybrid form is, to a certain degree, the most suited to megaprojects (section 2). Yet, the temporary nature of megaprojects as organisations introduces a distinctive and additional dimension to this hybrid form of governance, that is not typically considered by the transaction cost approach to organizations (section 3). The notions of “swift trust” (Meyerson et al., 1996) and of mutual knowledge in a context of communities of practice are proposed as concepts to address this lacuna. 1 TRANSACTION COST APPROACH AND THE GOVERNANCE PARADOX IN MEGAPROJECTS Organisational theories of comparative corporate governance are not new and were, to a large extent, initiated with the publication of Ronald Coase’s classic article on the “Nature of the Firm” published in Economica in 1937. Coase raised fundamental questions about the concept of the firm in economic theory and, more importantly, suggested that the comparative Communication et grands projets 154 costs of organising transactions through markets rather than within firms were the main determinants of the scope and size of firms. In 1975, Oliver Williamson significantly elaborated Coase’s theory of the firm into a transaction cost framework which gave rise to a series of publications and to the modern transaction costs approach. In particular, Williamson deepened the discussions of why firms might perform better than markets and argued that markets are coordinated by the price mechanism and rely on formal contracts (enforceable by a court and incomplete), whereas firms are coordinated by hierarchy and rely on “relational contracts” (informal agreements not adjudicated by courts which overcome the difficulties of incomplete contracts). Over the last two decades, a series of criticisms have been addressed to Williamson’s development on several grounds. While some argued that transaction costs economics (TCE) will remain “bad for practice” (Ghoshal and Moran, 1996), others questioned Williamson’s dichotomous view of markets and hierarchies (Powell, 1990). As a result of the latter critique, Williamson reconsidered his polarised view of governance structures and introduced the notion of a hybrid form of organization as an intermediate structure sharing characteristics of both firms and markets. In Williamson’s own words, the hybrid mode is characterized by: semi-strong incentives, an intermediate degree of administrative apparatus , displays semi-strong adaptations of both kinds, and works out of a semi-legalistic contract law regime. As compared with market and hierarchy, which are polar opposites, the hybrid mode is located between the two of these in all five attribute respects (Williamson, 1991, p. 281). Yet, Williamson was also careful to note that “the abstract attributes that characterize alternative modes of governance have remained obscure” (ibid., p. 269). In this paper, we explore the question of where megaprojects, as a distinctive organisational phenomena, can be positioned along this scale of governance structures. By doing so, we aim to establish a theoretical basis for explaining the extremely poor performance track record of megaprojects that has been thoroughly documented by authors such as Flyvbjerg (2005a, 2005b; Flyvbjerg et al., 2002, 2004, 2005, 2009). This literature...