The dramatic collapse of the “Morandi” highway bridge in Genoa has deeply shaken me. I was taken by a deep sense of sadness as well as by a growing rage.
How could this happen?
I started searching for information about Atlantia SpA, the private company which holds the concession to the Italian highways, which was granted in the last wave of privatizations at the end of the 90s. Atlantia is owned by institutional investors such as Blackrock, HSBC and other Italian banks (5% each) and by the holding company of the Benetton group which holds the largest stake with 30%.
The anger grows while looking at the financials of Atlantia. How it is possible that a company which runs a privileged rent-seeking monopoly, which collects a clean € 3,6 billion in toll payments per year and makes a net profit of € 1,5 billion in 2017 can let a bridge collapse? Why was this company not obliged to reinvest in maintenance a substantial part of the revenues? Which were the safety nets and controls in place? Who failed to supervise what Atlantia was doing?
Wrong incentives are a recipe for disaster
Leaving aside the technical reasons behind the collapse and the specific responsibilities which will be ascertained by the competent authorities, there is one very fundamental reason at the root of this tragedy: the wrong incentives and a wrong model for privatizations.
Just as the 2007 financial crisis was fundamentally caused by the wrong incentives — which allowed the banks to engage in predatory lending practices which then triggered the sub-prime bubble — here the incentive is for the private monopolist to maximise the profits, which comes at the inevitable expense of maintenance and of public safety. By adding controls you can try to make a wrong business model — that of public strategic assets run by private concessionaires — work for a while, until, sooner or later, the controls fail and the dramatic consequences are for everyone to see.
Therefore the best way forward would be to create a completely different model to run -economically and in the interest of the citizens — strategic public assets as an alternative to leaving them blindly into neither unscrupulous private hands nor ineffective and wasteful public hands. We have to set the incentives right, so we can have a sustainable business model functioning without the need of excessive controls.
The Blockchain and token-economics are here to help us create this new business model.
Token-economics to effectively align incentives
Although the origins of token-economics can be traced back to the early 19th century — in the field of psychiatric studies — the term is now commonly borrowed by the cryptoworld to refer broadly to a system of economic incentives used to influence stakeholders´ behaviour towards a predefined virtuous model which benefits the whole system. Token-economics is a branch of the social studies and it does not differ from traditional economics, except that it looks closely at behavioural economics and game theory in order to provide the right economic incentives to drive individual behaviour.
Building a new Blockchain based system to manage strategic public assets
Let´s take now the case of the Italian highways and how this failed concession system can be redrawn using the Blockchain and token-economics to give all the stakeholders much better aligned incentives to behave properly.
I am not aware that what follows has ever been proposed before, therefore take it as an experimental working proposal which can be subject to critics, improvements and modifications. Moreover, I trust that fellows in the crypto world would be willing to contribute to the debate and improve on that proposal with tips, comments and suggestions.
1. The concession shall be terminated and the management of the assets shall revert into public hands. The grounds for terminating the concession are purely legal. Without getting into this issue suffice here to say that the loss of 43 lives seems like a “just cause” to terminate immediately the concession.
2. The main stakeholders will be then:
- the state which owns the asset;
- the citizens who use the highways and pay the tolls;
- the maintenance and construction contractors.
3. Financial flows will be:
- tolls collected;
- payments for construction and maintenance works.
4. The whole system has to run on a public Blockchain with open access. This means that any citizen will be able to access all documentation regarding — for instance — the financials, maintenance bills, safety reports, engineering reports, public tender procedures, bills from contractors, etc. Everything will be under the light and open to public and governmental scrutiny and data cannot be changed or corrupted by any stakeholder.
5. The state assets will be transferred into an SPV/Newco whose shares are to be tokenized say 1:1 (1 share equals 1 token). Tokens will also be listed on a Blockchain. Equity Tokens will represent the economical right to a share of the profits identified as the tolls collected minus all maintenance and construction costs, all other indirect costs excluded. The reason to exclude all indirect costs is to avoid the incentive to use indirect non-business related costs to reduce the revenues and impact adversely on revenue distributions under 8 below.
7. Construction and maintenance contractors will be paid as follows, with Smart Contracts used to ensure enforceability of payment terms and recourse against contractors in case of breach of warranties on the works completed:
- a portion will be paid in instalments at the reaching of milestones.
- a portion will be paid-in-kind with equity tokens of the company holding the assets. This ensures that the contractor holds an interest in the continued functionality of the assets which generates stable cash-flows. The Smart Contract ensures that the token cannot be sold by the contractor until expiration of the warranty period for the newly constructed or maintained asset. In case of disputes, the public administration will have an additional recourse against the tokens allocated to the contractor which can be automatically repossessed or burned via Smart Contract provisions. Clearly, dispute resolution mechanisms and so called “Oracles” must be in place as well.
- contractors will be also obliged to subscribe to an interest bearing government bond in percentage to the contract value. This government bond can be also “tokenized”, thereby ensuring an additional recourse against the contractor should it be in breach of contract obligations or its guarantees/warranties or maintenance periods. This bond will be held as a collateral in a smart-escrow. While its function is similar to that of a traditional performance-bond — where a bank guarantees performance on behalf of the contractor — the difference here is that the state bond does not have a cost for the contractor and it benefits — in a virtuous cycle — both the government and the contractor which receives the interest payments, (simply put, it is a way to contribute internally to finance the governments´ debt thereby reducing reliance on institutional investors and hinder their speculation on the Italian sovereign debt).
8. The governance should also ensure that the State does not waste money and allocates all the revenues (tolls collected) to maintenance and new investments. This means that all the revenues shall be earmarked to be either (i) spent in maintenance or (ii) reinvested in new infrastructure or (iii) distributed to all the tokenholders. The percentage of redistribution of the residual profits can also be changed in order to maximise incentives by rewarding — with higher percentages — the diligent contractors and the citizens which can use the payment as a tax rebate or partial reimbursement against the tolls paid.
9. An effective governance system shall be build-in with tokenholders having — at least — both a supervisory and proposing role, even if the final decisions are then taken by the State representatives.
Clearly the practical implementation of the above mechanism will face a number of complex challenges, mainly political as well as legal and technical. Although I am reasonably confident that legal and technical issues can be effectively dealt with, politically it is a different game altogether.
What is important to note here is that this new mechanism and the combined use of the Blockchain and token-economics will align much more effectively the stakeholders´ incentives and it will disincentivize the maximization of private profits and the minimization of maintenance and investment costs, which is the real root of this tragedy. Considering the current state of public investments in vital infrastructure projects in Italy and the call for a solution to the current impasse, the above proposal is at least worth some careful consideration and a constructive and unbiased political debate.
It is also a mechanism that can be implemented anywhere there is need to manage economically and effectively public strategic assets without leaving them neither blindly into unreliable private hands nor into wasteful public hands. Italy is not alone in this.
PS: Out of blind rage, after the highway bridge collapsed in Genoa last week, I started writing the above proposal for a Blockchain based model of management of public strategic assets in which incentives and cryptoeconomics play a key role. As far as I am aware this is the first model of its kind and I look forward to your feedback to challenge it and improve it.
Many thanks to all who will want to contribute.
#tokenization #smartcontract #bianconiandrea #tokeneconomics #Blockchain #MorandiBridge