How could shares in a megaproject return value to shareholders?

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.