How could shares in a megaproject return value to shareholders?

byryan_b1mo18th Jan 201912 comments

18


In my previous post on buying shares in a megaproject, several people asked the most reasonable of questions: how would the shares return value?

A simple description of shareholder value:

Assets - Liabilities = Equity

Basic project outcome:

Budget - Costs = Surplus

So the concept is fundamentally to treat the budget as the assets column, put the costs in the liability column, and treat every dollar you are under the budget as an increase in shareholder equity. At the conclusion of the project, the shares will be bought back for that surplus in cash.

This means the price the share sells for is a direct bet on how well the project will do against the budget.

This is analogous to how investors buy in to start-ups; the investment becomes the assets and in exchange they get a share of the equity. But in the case of megaprojects, the initial investor is getting the project outcome as compensation; the equity should instead go to management as their compensation. Now this gives management the incentive to be as efficient as possible, while also giving them the flexibility to raise more capital in exchange for equity.

For comparison with some of the ways this is currently done, consider the fixed-price contract and the cost-plus contract. The former gives the contractor an incentive to be efficient by forcing them to hold all the risk; the latter shifts the risk back to the contractee. Fixed-price is common for things that are predictable, like services; cost-plus is common for things that are risky or require R&D to complete, like defense procurement. Megaprojects are usually of the latter sort.

Tangential but worth also addressing: why a financial asset instead of a prediction market?

  • Financial assets provide direct incentives, whereas prediction markets provide information.
  • Financial assets are a built-in reference class; a megaproject asset would naturally be compared against all other megaproject assets.
  • Financial assets have a huge market, and there are established methods for making bets for/against/on/with them. There are no large prediction markets, so an entire market would have to be built. The problem of incentivizing the new market seems more difficult than the one of incentivizing a new type of asset.