The challenge for project financing is securing the required capital. Typically, four significant evergreen sources are available to explore – public, private, partnerships, and project financing. Now there is a 5th model, Infrafintech.
The global infrastructure needs exceed traditional funding requirements, and the conventional sources of financing are expected to 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).
“Corporate financing requires the project sponsor to demonstrate to investors that it has sufficient cash flows to meet the debt obligation.”
Traditional Financing Models
The major challenge for any capital project financing is securing the capital required to develop and complete the project. Typically, four significant sources of financing are available to explore: public funding, private funding, partnerships, and project financing. Irrespective of the sources, the funding or financing source would evaluate the project based on corporate or project financing approach.
Corporate Financing
Corporate financing requires the project sponsor to demonstrate to investors that it has sufficient cash flows to meet the debt obligation and assets on its balance sheets for use as collateral in the case of loan default. The lender can foreclose on the sponsoring company’s assets and use the proceeds to recover its investment in the project in case of financial default. It is not so for project finance.
Structured Financing
Structured finance, for which project finance is a subset, deal with simple transactions that lower corporations’ funding costs to more complicated financial engineering involving unique purpose entities (SPEs); leveraged products such as constant proportion debt obligations (CDOs); collateralized debt obligations of collateralized debt obligations (CDO).
“A Project’s creditworthiness depends on the project’s anticipated cash flow, collateral value, and other collateral support provided by third parties.”
Project Financing
A Special Purpose Vehicles (SPVs) project that requires financing has no operating history at the initial equity and debt financing. Therefore, the project’s creditworthiness depends on the project’s anticipated cash flow, collateral value, and other collateral support provided by third parties through various contractual arrangements. The availability of funds to a project will depend on the sponsor’s ability to convince investors that the project has raw materials, capable management, is technically feasible, and is economically viable.
Some advantages of project finance techniques are the possibility to enable projects to be built and refinanced using private capital to achieve private ownership of even public services such as energy, transportation, and other infrastructure development initiatives. It alleviates investment risk and relatively low cost to the benefit of sponsor and investor alike. (Ahmed, 1999) Build Operate and Transfer (BOT), Public-Private Partnership (PPP), and Asset-backed Securitization (ABS) are the three most popular project financing models, which are being used for development and construction in the infrastructure sector.
Project financing techniques enable projects to be built and refinanced using private capital to achieve private ownership of even public services such as energy, transportation, and other infrastructure development initiatives.”
Infrafintech Innovation
InfraFintech is a briefcase of “Infrastructure Financial Technology,” a derivative of Fintech. Fintech is an ancient technology that operates at the crosswalk of financial service and technology. The global financial crisis, portability of communication devices, and availability of the internet place an old technology on steroids.
Infrafintech harnessing emerging digital technologies, 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.
Conclusion
The traditional and innovative Project financing models are keys 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. Innovation in Project Financing will be the most critical enabler for meeting the funding requirements for our infrastructure projects. Policymakers, project finance practitioners and financial engineers collaborating with digital scientists and fintech entrepreneurs can drum up innovative solutions to address infrastructure financing demands.
