Eight Factors that Impact International Project Finance

Michael Adebisi, Director, NewTime Consulting, Ltd.

Eight Factors that Impact International Project Finance

Project finance is complex and involves many risks. That’s why it’s important to understand the context when embarking on international development initiatives. To help executives navigate opportunities and minimize risks, here are eight critical factors that will ensure better international project finance outcomes.

Eight critical factors

  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 American Society of Technical Engineers 2016 paper, “Infrastructure Project Scope Definition Using Project Definition Rating Index,” [1] the authors unveil research across 26 projects and 64 industry professionals over 30 organizations. Among the considerations in the building 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.
  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: knowing and assessing the competition; performing due diligence for selected contractors; understanding the potential dangers based on individual country dynamics; the stability of the country’s currency;  the real need and value of the project; the specific variables within each industry segment; the true availability of capital including interest rates; operating challenges; the political environment; product liability or design issues; established track records of similar projects;  knowing the key players; and any additional information about sponsor and supplier experience and management ability.
  4. Review all project documentation carefully. This risk is a language risk. All of the prevention 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 with international law as well as the nuances of engineering, political, legal and social language interpretation down to the dialect levels within countries.
  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 [2], 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. [3] 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.” [4]
  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.

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 reason, international infrastructure project initiatives are fraught with peril for both borrowers and lenders: Desperation is not anyone’s friend. That’s why it’s important to pay attention to the phrase, “Let the buyer (borrower) beware.” The same warning applies to the seller (lender).

The Public Private Partnership (PPP) model offers a solution that may help close the gap. Benefits and risks apply, but most important 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. In this way, they might find a way to transcend the type of political unrest that discourages longer-term investment possibilities. The country’s 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.

About the Author

Michael Adebisi, director of NewTime Consulting, Ltd, has 15+ years’ experience in investment banking, financial services, and consulting. He has served in a number of positions including CRM Wholesale banking, data integrity, international liaison across Europe, Middle East North Africa, and Nordic countries on FX/Money Market pricing data and financial instruments used by global banks, stock exchanges and governments. Previous employers include ING Investment Bank, Thomson Reuters, National Audit Office and HSBC (Investment Bank). With a M.Sc from Queen Mary College, University of London, Mr. Adebisi has a unique blend of executive acumen, and strong global relationship management skills. For more information, please contact mike@newtimeconsult.com.

[Image courtesy:stevepb/Pixabay]

[1] http://ascelibrary.org/doi/abs/10.1061/(ASCE)ME.1943-5479.0000483 © 2016 American Society of Civil Engineers

[4] “OVERCOMING CONSTRAINTS TO THE FINANCING OF INFRASTRUCTURE,” Prepared by the Staff of the World Bank Group for the G20 Investment and Infrastructure Working Group, February 2014