Applying Relational Governance to Private Investment in Public Infrastructure

Abstract

Private participation in public infrastructure is expected to bring operational efficiency gains and diversified access to large pools of financial capital. However, due to the heterogeneous and politically salient nature of infrastructure, the financial performance of infrastructure is often hindered by misaligned stakeholder interests and frequent governmental interventions. This study takes a new approach in examining the challenges of private investment in infrastructure by applying relational governance analysis to the infrastructure firm or asset. Although relational governance can encompass economic, legal, sociological and psychological governance perspectives, we borrow MacNeil (2000)’s two distinct definitions of “relational”; firstly, one that refers to the socio-political influences on the exchange and the other that refers to the continuing nature of contracts. These two aspects are correlated to each other in an inverse relationship; when socio-political understanding breaks down, the need of contract enforcement rises, and vice versa. This inverse relationship is illustrated in two contrasting airport infrastructure cases – British Airport Authority (BAA) and Auckland International Airport Ltd. (AIAL). For instance, the regulatory backlash that followed the acquisition of BAA reveals the need for socio-political understanding to manage interpersonal and inter-organizational dynamics among investors, management bodies, airport users, and the local community. In contrast, the AIAL case shows how the government can play – and did play – a central role in building strategic and national consensus, leading to favorable outcomes. This paper thus suggests that a deep understanding of socio-political interactions and wider political economic contexts can help overcome the shortfalls of the governance structure created by formal contracts.