Fund, Grow and Prosper:

Eight Factors that Impact International Project Finance

By Michael Adebisi

        For our world economies to grow and prosper, it is imperative that stakeholders understand the context, complexities, and risks of international project finance. Project finance is the financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure in which project debt and equity used to finance the project are [hopefully] paid back from the cash flow generated by the project.

      In spite of the demand, an alarming funding gap exists that discourages the construction of these life-giving infrastructure projects. Analysis for the G20 suggests that developing countries will need to invest an additional $1 trillion a year up to 2020 to keep pace with the demands of urbanization, and better global integration and connectivity (G20 (2013)). Developed countries need a similar amount. At the same time, institutional investors such as pension funds, insurance companies or sovereign wealth funds have a growing need for a diversified portfolio of long-term assets. One recent study puts this investor base at about $90 trillion globally. The gap: Money is available, but not accessible.

      What’s ironic? Funding for worldwide infrastructure projects has no reliable ‘infrastructure’ to comfortably match lenders to borrowers. It’s not for want of trying or passion. Acronym-shortened organizations (MDB, Multilateral Development Bank; IFCOE, Infrastructure Finance Center of Excellence; FSB, Financial Stability Board) and many more agencies, banks, insurers, and financial boards abound. China has money. The U.S. has funds. Stating the problem is simple—the answer is not.

What’s at stake?

Survival: Food. Water. Healthcare. And all the things that support those basics: education, sanitation, transportation. But also, energy and natural resources. Jobs. The projects are mostly large scale: A single project’s debt and equity capital can range from hundreds of millions to billions $US. Risk is a given on all sides. Examples include: contractor, country, customer, currency, industry, interest rate, political, project, sponsor, supplier, and more. Overlaid upon these risks is a sampling of additional challenges: Over and under regulation. Technology. Unforeseen needs. Disconnectedness. Language barriers that roll past countries’ linguistic differentiation on through to legal documents not written properly either by design or by accident.

      The stakeholders (lenders, borrowers, builders, countries, families, everyone alive) are “invested” oftentimes for humanitarian reasons that supersede the financial. Yet the choices are difficult in the extreme. Social housing or transportation? Build new or repair old? Sustainable, environmentally-friendly or ‘quick and dirty’? Should financial entities use traditional funding or instead try the trendy, cutting-edge fintech services that are disrupting the way companies and countries invest and borrow within and across country lines?

What’s the answer?

There are at least eight critical factors that will help unclog the pipeline. It might be called a blueprint for that infrastructure—the symbolic bridge, road, technology, phone line, etc.—to understand the capital flow problem. The next step is to close the funding gap for a better world. Consider these eight factors to ensure better international project finance outcomes.

1. Understand the project scope and location. Front-end planning (FEP) assists in identifying the risks that can plague infrastructure projects. In the model defined in the © 2016 technical paper “Infrastructure Project Scope Definition Using Project Definition Rating Index,” the authors unveil research across 26 projects and 64 industry professionals over 30 organizations. Among the considerations in the built environment that encompass both scope and location, the model assesses risks such as right-of-way concerns, utility adjustments, environmental hazards, logistic problems, and permitting requirements for projects under consideration. Government, political, and social implications can be assessed using different tools, but an engineering assessment is among the priorities that cannot be overlooked. 

2. Recognize the value of origination capabilities. All origination research efforts are not equal. Lending to a homeowner, lending to large corporations, and lending to small or medium sized businesses have known operational and risk analytics from which to draw. International infrastructure lending requires different skillsets. The ability of the origination firms to successfully address scope and location variables should be considered. Originators’ capabilities are paramount. Knowing who can skillfully match lenders with borrowers versus hoping that those that say they can (but maybe cannot) successfully is profoundly important.

3. Define a market entry strategy. The crux of this step is understanding the many risks inherent in international project finance in the U.S. and abroad. They include:

* Competitor. This risk is related to industry risk, however it focuses more directly on resources with which the competitor might be able to circumvent competitive barriers.

* Contractor. The principal construction risks are schedule delays and budget overruns. Mitigating these risks involves scrutinizing the contractor, specifically the contractor’s experience with similar projects, reputation in the field, backlog of other projects and cash flow.

* Country. Country risks cover the political economy. Examples of country risk include civil unrest, guerrilla sabotage of projects, work stoppages, any other form of force majeure, exchange controls, monetary policy, inflationary conditions, etc.

* Currency. There are two currency risks facing project companies: The first risk is exchange-rate fluctuation. The second risk is currency controls, i.e., the sovereign government limits the project company’s access to foreign exchange or curtails its ability to make foreign currency payments outside of the country.

* Customer. Demand for the product or throughput declines or widely fluctuates. Chief mitigant against this type of risk is an offtake agreement, i.e., a contract, which guarantees purchase of the throughput.

* Industry. Competitive forces within the industry represent significant risks to the project. For instance, two might be the influence of other existing or planned pipelines in the area; and the cost of transportation—the economics of the pipeline to the end users.

* Funding. The funding risk is that the capital necessary for the project is not available.

* Interest Rate. Interest rate fluctuations represent a significant hazard for highly leveraged project financings.

* Operating. Operating risks center around the efficient, continuous operation of the project, whether it is a mining operation, toll road, power plant or pipeline. Contracted incentive schemes are one way to allocate this risk to the operator.

* Political. These risks cover changes within the country’s political landscape, i.e., change of administration, as well as changes in national policies, laws, and regulatory frameworks.

* Product. Product risks might include product liability, design problems, etc. The underlying risk here is unperceived hazards with the product; e.g., unforeseen environmental damages.

* Project. Project risk is generally associated with the adequacy and track record of the concerned technology and the experience of the project’s management. The chief mitigant in this area is the selection of contractors, developers and operators who have proven track records.

* Risk allocation. Just as important as identifying the risks is the need to allocate the risks to the parties that are most suited to control and address the risks. Thus, risk allocation is a form of risk mitigation at the macro level.

* Sponsor. The primary risks with sponsors revolve around the sponsor’s experience, management ability, its connections both international and with the local agencies, and the sponsor’s ability to contribute equity.

* Supplier. Not securing basic supplies for a project —electricity, water, etc. —is a huge mistake. The chief instruments used to mitigate this risk might include long-term agreements that guarantee the project will have access to critical inputs for the duration of the project’s life.

4. Review all project documentation carefully. This risk is a language risk, and a truly worrisome gauge of desperation, which is dangerous as some parties in the international arena may not be honorable. All of the preventions and research done elsewhere may be undone by a contract that is not studied carefully by lawyers who are trained to read these documents. These attorneys should be familiar not only with international law but also  be vigilantly multilingual—meaning they would want more than a simple speaking and reading knowledge of the native language. They need to attend to the nuances of engineering, political, legal and social language interpretation down to the dialect levels within countries. There are seven main dialects of the Chinese language with many more sub-dialects. There are by some counts over 3,000 languages spoken natively in Africa, which are divided into six major language families. Adding engineering, manufacturing, materials and other jargon (in which words don’t always translate directly) to these variables only compounds the issue. Meanwhile, desperation risk takes over when parties are too anxious to make a deal. A country might need the infrastructure item very badly, or the investor groups need a place to park their money—and desire overtakes caution.

5. Optimize existing value chain finance tools including the US Export-Import Bank,              USAID’s Development Credit Authority and more. This step requires intimate knowledge of available financial tools including some of the newer financial vehicles offered by global fintech entrepreneurs, which are disrupting the status quo across project finance as well as many other practices worldwide. 

6. Create a system of checks and balances to manage stakeholders, access bankability of projects, review payment mechanisms, identify and monitor performance standards and establish termination clauses. Taking all of the risks into consideration from the previous steps, the players in this market must work diligently to manage all the moving parts before, during, and after the project.

7. Become an expert in PPPs (Public Private Partnerships), including knowledge of the process, benefits and legal framework. Ever since the worldwide financial crisis of 2008, governments have looked to private financing to meet their infrastructure funding needs. Benefits of private enterprise are offset by potential risks. Meanwhile, “… the PPP model has proven to be successful: they subsequently [since 2008] increased to $79 billion per year during FY07-11. PPPs have now spread across the globe: 134 developing countries implemented new PPP projects in infrastructure between 2002 and 2011.”

8. Identify, evaluate and monitor risks. Although this step looks repetitive, stressing the need for a continuing analysis of risk to investors (lenders), country decision makers  (borrowers), and analysts (market entry strategists) cannot be overstated.

Find a Way to Transcend

The stakes are high. Human lives and the economic growth to sustain those lives need infrastructure in both developing and developed nations worldwide. For that very reason, international infrastructure project initiatives are fraught with peril for both borrowers and lenders: Desperation is not anyone’s friend.

      “Caveat Emptor.” Let the buyer (borrower) beware. When the things we take for granted in most (but not all) of the established markets in the world —clean water, food, sanitation, housing—are missing, desperate countries and companies can make the wrong decisions. Result: they take loans with strings attached, unfriendly terms, ridiculous interest rates.

      “Caveat Venditor.” Let the seller (lender) beware. Lending money has its risks. An under-researched finance project with a seemingly attractive return on pensioners’ dollars may end poorly. Even the more laudable prospect of helping—doing something, anything—to fix the world’s problems may result in lost principal.

      The Public Private Partnership (PPP) model offers a solution that may help close the gap. Benefits and risks apply, but it should be noted that the most important of all is the need for people/entities in both the public and private sectors to understand the physical and figurative landscape through which they will be building the project.

      The answer involves breaking down the silos, understanding the risks, providing communication, and being open to the untried (e.g., advanced fintech services that may include cloud computing, big data, machine learning solutions) to solve the world’s problems. Countries might need their leaders to disengage their egos to repair and maintain broken infrastructure rather than plan and build glamorous, legacy projects. Someone must find a way to transcend the type of political unrest that discourages longer-term investment possibilities. In general our best minds will need to invent a functioning, single market financial infrastructure to close the traditional infrastructure’s funding gap. It might be yet one more call for tearing down to build up to a new and better way.

     Michael Adebisi is director of NewTime Consulting Ltd. For more information, contact


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