Why do certain infrastructure projects move forward and other projects stay on the drawing board or stall? How do you decide which projects to choose? What role does policy play? And, of fundamental importance — how do you pay for it?
There are several academic theories about decision-making in government. A well-recognized model was developed by John Kingdon, Emeritus Professor at the University of Michigan, in the 1980s. He reasoned that decisions result from the flow of three “streams”: the problem stream, the policy stream and the politics stream. When these streams come together, a “policy window” opens, which triggers change. Business, political and cultural leaders who promote specific solutions are policy entrepreneurs. These entrepreneurs recognize approaches that could solve problems and act to move those solutions onto the political agenda. As discussed below, to succeed and maintain credibility, policy entrepreneurs must develop a realistic sense of the market’s ability and willingness to fund the project, because even good projects will fail without adequate resources.
The problem stream activates when specific facts are recognized as a problem that need correcting. For example, a government may note that, “lack of adequate power prevents business development and lowers the standard of living for our citizens.” Another example might be: “poor port facilities hamper international trade.” Every government on earth faces a plethora of problems; the important question is: which problems should set the agenda for governmental action? Usually this is a President-level decision, with ministers, political appointees or Presidential staff providing advice and promoting one item over another. However, ideas can come from anywhere, and some problems can become more important due to circumstances such as a natural disaster, a change in technology, or new international trade relationships. Also, new political regimes within a country or even in neighboring regions can affect the need for policy change. Recently we have seen that fluctuations in the value of different currencies have affected the ability to contract loans, obtain leases, or trade with nations whose exchange rates become unpredictable or shift the financial burdens among partners in unexpected ways.
The policy stream concerns organized forces that develop and promote certain policies, defined as goal-oriented courses of action. These actors can be local interest groups, influential advisors and government staff. Shared goals may drive policy actors to form cohesive groups; for example, health care providers may benefit jointly from policies that promote any aspect of better health care. Other groups may share overarching goals but may compete for resources at the level of implementation. Transportation serves as an example of this type of group, with its subgroups of roads, rail, air and water transport sharing only some overlap. Closely knit communities act more expeditiously than those with scattered aims and unreliable members. Often these groups rely on specialists to help them frame issues.
Some policy streams compete with others for importance, or at least for priority. These can be difficult decisions to make. For example, a government may want to improve electricity delivery to current users and extend power supply to new areas. It might therefore conclude that it needs to improve the electrical grid that delivers power. However, a better grid is useless without increased power for that grid to carry. So power generation and power delivery need to be coordinated. Once this codependency is understood, there may still be precedent conditions, like adequate roads necessary for equipment to install new power distribution systems, so highway planning may have to come first. Each of these policy areas will have its own advocates and expert advisors.
The third stream, the political stream, is made up of the public mood, pressure group campaigns, election results, ideological distributions in the cabinet, and changes of administration. These dynamic elements impact agendas and determine what issues rise as priorities. Changes of important participants or alterations in national mood or interest group configurations can force revisions to policies and reconfigure an organization’s capabilities. Consensus is built through bargaining among participating groups. Groups must be willing to compromise on aspects of their agenda to keep a good policy undamaged.
When the problem stream, policy stream, and political stream come together over a certain issue, a “policy window” opens up in which new legislation may be passed, or new initiatives can be advanced. When a problem rises to the top of a government agenda, if appropriate policies are available to deal with the problem, and the political will exists to apply those policies, a project can move forward.
Where does financial evaluation enter this picture? Just because a policy may be desirable or a project sorely needed, it will collapse without adequate financing, even if the political will is there to advance the project.
The earlier in the process financial viability comes into consideration, the better is it for all parties. Large scale projects that are approved but fail to garner adequate funding either cannot proceed or need to be seriously modified to be able to fit the available budget. A good project cut in half because of financial shortfall may not be “half as good” as the whole project – it may not work at all. You can’t have half a refinery, or half a football stadium. To state the obvious, projects should be scaled to fit a pragmatic budget at the outset, with government and project developers working hand in hand.
Strong relationships with players in the international financial market enable government officials to understand and evaluate the likelihood of getting financing before presenting projects to the market. A government that presents a series of hypothetical and unrealistic projects to the market will soon lose credibility and not be taken seriously by financial sources. Finance ministers should develop good links to the international financial community so that credible and reliable financial sources can provide feedback on scope of work and possible financial underwriting. Competition for financial resources is international; policy entrepreneurs now act on a global stage.
Future articles will discuss other theoretical aspects of how government and financial institutions interact.
Hugo Barreca is President of National Standard Finance, LLC and is based in New York City. Mr. Barreca may be reached by email at HBarreca@NatStandard.com. For more information about National Standard Finance, LLC please visit www.NatStandard.com.