Financial Buffers in Megaprojects: A Contingent Model of Joint Value Production and Policy Implications

This study sheds light on the relationship between financial buffers and joint value production in infrastructure programs consisting of multiple projects, often referred to as “megaprojects.” We define a financial buffer as unallocated funds assigned to a megaproject during the business case phase to address unpredictable stakeholder claims, in addition to the contingency allocated for addressing quantifiable risks. Using a formal model, and assuming the institutional environment limits rent creation leading to adverse effects on society, we posit that financial buffers enhance the process of joint value production when a budget overrun carries a reputational cost and nonmarket stakeholders possess holdup power. Under these conditions, and up to a lower threshold, a financial buffer enables an increase both in the economic returns of a megaproject and in stakeholder value appropriation. Beyond an upper threshold, an additional buffer has no effect on the choice between maintaining cooperation and engaging in competition with stakeholders. We investigate the variability of these thresholds in relation to the megaproject sponsors’ organizational purpose, stakeholder bargaining power, and the subjective evaluation of the value appropriated by stakeholders. We conclude by highlighting the implications for the global policy trend of procuring megaproject suppliers through alliances and other forms of collaborative procurement.