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According to the World Economic Forum, over $2 trillion is needed every year for the following decade of global infrastructure investment in energy, water, transportation, telecommunications, mining and municipal service delivery.
This works out annually to over $400 billion for Africa, $500 billion for Asia, $500 billion for Europe, $300 billion for South/Central America, and $300 billion for North America. With such large amounts of money, two main key issues arise:
- How will this infrastructure be financed?
- How will opportunities make their way through the appropriate screening, risk assessment, and financial modeling analyses to determine financial viability?
International project finance is the launch of a new project overseas in which financial institutions provide capital in all forms—equity, mezzanine, debt and guarantees—both directly and through funds and intermediaries to fund the endeavor. International project finance investment opportunities allow for the expansion of individual industries, entire economies and other countries, through extensive projects that are dependent on the project cash flow and rely on sophisticated financial modeling and business structures to create the capital structure of the project company. These structures are not widely used yet in many countries, but will become more prevalent as investors flock to emerging markets whose economies are still developing and where financing efforts involve a great deal of risk.
Risk management in project finance
Risks in project finance might be high, and this can be especially true for international endeavors, and a meticulous analysis in ESG (Environmental, Social and Governmental) standards is more than a analysis approach. A business that turns to project finance relies on loans and equity extended by financiers. The guarantee for repayment is tied to the future cash flow expected to be generated exclusively from a project, even if a business is earning revenues in its separate operations.
When projects are being performed in other nations, particularly emerging economies, those risks become amplified because of the potential instability surrounding politics or the fear that the economy could compromise the completion of a project. Nonetheless, international project finance contributes to the expansion of economies in developing countries. The financial institutions that become involved in international project finance are taking on risk, with the only collateral being the assets used in the project itself.
Typically, the duration for international project finance is long-term in nature. The process involves forecasting what the anticipated cash flow from a project will be and extending debt and equity financing based on those projections.
Funding for international project finance might be extended by bilateral and multilateral IFIs/DFIs (international financial institutions /development finance institutions), global investment bank and development finance institutions that have an interest in sharing in the profits of a growing economy’s expansion efforts. It might also derive from a specialty-financing firm that focuses exclusively on supporting international endeavors. There are segments of project developers that might first raise money from other institutional investors, including pension funds and asset managers to fund the international project finance activities. In turn, the outside investors become entitled to the profits and risk exposure that are accepted by the developer.
As there are several strategies that can be used to develop a project, I usually propose the use of one or a combination of the following approaches for a project:
If the project financing option is selected, you have to arrange project financing, which offers increased flexibility through limited recourse loans that are collateralized by a project’s assets and cash flows. Project financing could be used to finance as much as 75% of the project’s total cost over a term of five to 15 years. You have to seek financing support consisting of guarantees, debt and equity from Overseas Private Investment Corporation (OPIC), The International Finance Corporation (IFC) and European Developmental Financial Institutions (DFIs) such as FMO in the Netherlands and CDC in the U.K., regional DFIs such as the African Development Bank (AfDB) and various government-backed investment funds. Debt financing is generally provided on a non-recourse basis. However, limited completion guarantees from the sponsors are required during the construction and startup period. Equity participation from government-backed sources is usually on a portfolio basis where an attractive return is being sought.
Another strategy would be to use trade financing. You can be provided Export Credit Agency (ECA) support financing for the importation of capital equipment needed for the projects overseas. This type of financing can be structured in a shorter period of time when compared with the project finance alternative. Import financing, however, usually requires additional enhancements (i.e. guarantees) for the life of the loan instead of during a shorter completion period.
POLITICAL RISK INSURANCE
When appropriate, you may obtain political risk insurance from OPIC, as well as private insurers to protect the Sponsors’ and other potential equity participants’ investments overseas. Political risk insurance covers the inability to convert the local currency into dollars; loss due to expropriation, nationalization or confiscation; loss due to political violence; loss of business income due to interruption by political violence; and loss due to a government breach of contract.
Raising money for emerging markets is a challenging task, with a number of strategic partners, both in the U.S. and overseas, to assist any project in obtaining equity from a number of sources specialized in overseas investment opportunities.
All of the above should give you confidence that your international project will get the funding solution needed, but more than that you will need a fully-fledged feasibility study (Market, Technical, Financial, Organizational) contains comprehensive, detailed information about your business structure, your products and services, the market, logistics of how you will actually deliver a product or service and the resources you need to make the business run efficiently.
About the author:
Thanos Niforos graduated from EU in 1994. He is a licensed investment advisor and serves as a Loan & Political Risk Insurance Originator for the Enterprise Development Network program of OPIC, the U.S. Government’s Development Finance Institution, Signatory of the UN Principles for Responsible Investment. He also collaborates with the UN Development Business for consulting, contracting and exporting opportunities worldwide. He is a frequent speaker and contributor at investment conferences and international media, and has also published several articles for contemporary macroeconomic and investment themes.