• caziegbemhin

Taming the Challenges Facing Infrastructure Investments

Banks, insurance companies and private pensions hold over $77 trillion in assets under management seeking bankable projects and over $43 trillion with other Institutional investors globally, not counting hedge funds.



It is abundantly clear that “everyone around the world is having the same nightmare” because the infrastructure needs exceed traditional funding sources. The conventional sources of financing may even contract further due to reduced fiscal resources, mismanagement, and tighter government regulations. The international development communities have acknowledged the increasing need for enhanced private sector participation, especially as a long-term financier in infrastructure projects (The World Bank, 2019).


“The potential pool of long-term financing is sufficient to meet infrastructure financing needs.”

Funds Seeking projects

Institutional investors globally, excluding hedge funds, hold over $120 trillion in total assets under management, with banks at the forefront with $40 trillion in assets; investment companies, including investment banks, asset managers, wealth managers, family, and multifamily offices, investment trusts, and investment companies hold $29 trillion; insurance companies and private pensions holding $26 trillion; public pensions and superannuation plans holding $11 trillion; sovereign wealth funds at $6 trillion; infrastructure operators, developers and private equity funds holding $6 trillion, while endowments and foundations bring up the rear at $1 trillion.


“Creating a pipeline of bankable projects requires a coherent legal, regulatory, and governance (project and ESG) framework for infrastructure projects.”

Project Bankability

The scarcity of financing is not the cause of the unavailability of more significant infrastructure investments, considering the abundance of funds in the world markets at meagre long-term interest rates. The challenge is matching the supply of available finance from the private sector with bankable projects. The potential pool of long-term financing is sufficient to meet infrastructure financing needs. Pension funds, insurance companies, and other long-term institutional investors have large and growing long-term liabilities, but little of their financial resources are allocated to infrastructure. Creating a pipeline of bankable projects requires a coherent legal, regulatory, and governance (project and ESG) framework for infrastructure projects. These frameworks do not exist in some countries. Political risk is among the most significant concerns of private investors (OECD 2014).

"Institutional investors globally, excluding hedge funds, hold over $120 trillion in total assets under management."

The Nature of Infrastructure Business

The nature and characteristics of the infrastructure markets make it more challenging to match investment demand and financing supply.


Reliance on Externalities

The reliance on indirect externalities of the project as the main payoff of the project, such as services the project provides to a wide range of other sectors that benefit directly or indirectly from the deployed infrastructure investment. Such benefits are fundamentally challenging to measure.

“Project financing transactions require complex legal arrangements to ensure proper distribution of payments and risk-sharing to align all parties’ incentives.”

Risk and Illiquidity

Cash flow and profit generation from infrastructure investments are only after many years, and the initial phase of an infrastructure project is subject to high risks. These characteristics of infrastructure projects, the time profile of cash flows, high initial risks, and illiquidity make purely private investment difficult and costly.



Complex Legalities

Infrastructure projects are often complex and involve many parties. Infrastructure usually comprises natural monopolies such as highways, electricity, or water supply, and hence governments want to retain the ultimate control to prevent abuse of monopoly power. Such infrastructure transactions would require complex legal arrangements to ensure proper distribution of payments and risk-sharing to align all parties’ incentives.


“Infrastructure projects typically have several distinct phases, with each phase exhibiting different risk and return characteristics."


Currency Risk

In most emerging economies, long-term investment entities such as banks, pensions funds, and insurance companies are still at the early stages of development. They do not have the financial capacity to supply the funds required for infrastructure projects. Also, Infrastructure projects typically have several distinct phases. Each phase exhibits different risk and return characteristics, faces various incentive problems, requires other financial instruments to cover additional risk and return profiles, and targets distinct types of investors. Additional currency risks also exist for international investors because infrastructure project cash flows are primarily in lo currency. The resulting currency mismatches represent significant risks, both for the viability of a project and potentially for the financial system.


Poor Product Delivery

Another challenge is the prevalence of poor-quality infrastructure projects, especially in emerging economies. This is primarily because of the complicated political economy of infrastructure investment, flawed design and process decisions, difficulties in managing private sector participation, fragmented regulatory frameworks and standards, weak accountability mechanisms, and shortage of capable local workforce. In addition to the problem of poor-quality infrastructure, there may be a risk that infrastructure will not be built at all even when the funds are provided (United Nations, 2018).

"Project finance companies and other stakeholders working together in teams on policies, regulations, and financial market reforms that support supporting infrastructure financing can attract these investors."

Need for Efficient Models

More efficient and effective innovative financing structures are critical for closing these infrastructure gaps. Considering the magnitude of this global opportunity to deliver infrastructure projects to our global population, increased mobilization of innovative financing models is required to reduce the reliance on public funds for project financing or loan repayment. To leverage international infrastructure opportunities and overcome these challenges, Project Finance Experts, Financial Engineers, governments, industry captains, entrepreneurs, and digital innovators are encouraged to work closely to develop innovative and sustainable funding models for the enormous capital required to meet the global infrastructure goal.


"Project Finance Experts, Financial Engineers, governments, industry captains, entrepreneurs, and digital innovators are encouraged to work closely to develop innovative and sustainable funding models."

Team Work

Project finance companies and other stakeholders must work in teams on policies, regulations, and financial market reforms supporting infrastructure financing to attract these investors. Implement methods for bankable project pipelines; creating partnerships with development banks and infrastructure agencies to strengthen institutional capacity, develop innovative financing models, investment in local construction expertise and raw materials; investment in regional development trades, credit enhancement instruments; and mobilization of both advisory and financing services across different infrastructure sectors to build more robust markets for infrastructure assets, is essential to taking advantage of this infrastructure challenge.


"Project finance practitioners and financial engineers can A collaborate between finance practitioners and digital entrepreneurs have the potential to drum up Infrafintech innovation to address infrastructure demands globally."

Infrafintech Innovations

Innovation in Project Financing will be the most critical enabler for meeting the funding requirements for our infrastructure projects. By harnessing emerging digital technologies in artificial intelligence, machine learning language, blockchain, crowdfunding, and tokenization technologies integrated with existing financing models to deliver innovative project funding, risk management models, project monitoring, and execution, from ideation to cash flow guarantee. Project finance practitioners and financial engineers can collaborate with digital entrepreneurs to drum up Infrafintech solutions for financing innovation to address infrastructure demands globally.

Conclusion

Project financing is key to achieving the global sustainable development goal. It will continue redesigning project landscapes by enabling new projects, products, business processes, operations, speed, and delivery efficiency. As the world faces these enormous financing challenges because of our progress technology and population growth, the centrality of project financing technologies and technology entrepreneurs cannot be overstated. They are the central piece for government, commerce, and industry, to overcome the challenges faced by the project finance ecosystem that involves project sponsors, investors, project delivery professionals, and all stakeholders.



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We can help answer more specific questions related to sustainable investments in private equity, credit, project financing, real estate, energy, hospitality, infrafintech, and infrastructure worldwide. Please contact one of our experts below who can answer any queries you may have.

 

Charles A. Aziegbemhin

Managing General Partner


+1 416 548 7678 Ext 221

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