Aligning Institutions with Technologies Critical transactions in infrastructures John Groenewegen Rolf Künneke Claude Menard

Overview Background and problem statement Technical criticality in infrastructures Critical transactions Modes of governance to support critical transactions Conclusions

Background (1) Liberalization of infrastructures seems to be focused on reforming institutions Technology is not considered as an important factor enabling or frustrating institutional reforms The same ‘recipe’ of liberalization is followed in all infrastructures However, infrastructures are complex technical systems with very peculiar economic features => Technological status quo influences opportunities for restructuring

Background (2) Technical system complementarities need to be supported by suitable institutional arrangements in order to safeguard the technical functioning of infrastructures Examples of critical technical functions Load balancing in electricity Traffic management in railway sector We expect different opportunities for liberalization in different sectors, depending on the technical status quo.

Problem statement What are critical technical functions? What is the nature of ‘critical transactions’ supporting critical technical functions? What are effective an efficient modes of governance guaranteeing the coordination of critical transactions?

Technical criticality in infrastructures Operationalisation of technical criticality depends on: Expectations with respect to technical functioning of infrastructures -> focus on reliability Identification of aspects of O&M of infrastructures that are considered as critical -> focus on essential technical functions supporting technical system complementarities

Control engineering Open systems assume stable relation between system input and performance Closed systems: feedback between actual and desired performance Most infrastructures are perceived as closed control systems Technical control mechanisms to allocate scarce network capacity

Elements in a technical control system

Criticality of control systems defined Significant technical scope of control: Essential for technical functioning Unique: no alternatives => System wide consequences in case of technical failure Restrictive timeliness: To be performed in a specific period of time

Technical effectiveness of control mechanisms Technical effectiveness depends on the performance of control mechanisms with respect to: Speed of control Scope of control Accuracy Reliability

Critical transactions Transaction: transfer of ‘rights to use’ goods or services across technologically separable interfaces (Williamson (1985) Critical transaction: transactions essential to accommodate critical control mechanisms Critical technical functions require some institutional coordination that might impose certain characteristics to the transactions => critical transactions provide the institutional background to critical technical activities

Institutional arrangements to support critical transactions Modes of governance to coordinate critical transactions under the following conditions: Effectiveness: critical technical control mechanisms need to be accommodated to meet the desired technical performance Efficiency: Production- and transaction costs should be as low as possible

Effective modes of governance to support critical transactions

Different modes of governance for different critical technical functions Taking the technical features as given: what are appropriate modes of governance to support critical technical functions? Next to the technical needs of infrastructures (i.e. effectiveness), we need to take the organization of the economic allocation process into account => efficiency (production- and transaction costs) => ‘institutional logic’ between embeddedness, formal rules, and governance.

Different technological regimes for different modes of governance Dynamic perspective: Technological features can be adapted to changing modes of governance Identification of technological conditions that allow for different degrees of restructuring. => To what degree are these technological conditions realistic in different infrastructures? => How to support the technological changes by regulation? => Determination of technological and regulatory boundaries for restructuring.

Conclusions Identification of critical transactions in infrastructures allows for a more differentiated approach to institutional restructuring Important dimensions of critical transactions include Scope of control Time to react. Institutional design of liberalized infrastructures needs to take the technical status quo into account Technology might be adjusted to the newly evolving modes of governance under specific conditions (i.e. technical feasibility and regulatory support)