New financing logic improves industrial and infrastructure investment outcomes
Industrial and infrastructure investments are constantly becoming more complicated and sizable. At the same time there are alarmingly high cost overruns, delays and underperformance. A key reason for this is that the investments are poorly organized, and sometimes by the wrong actors. Several studies claim that one reason for the poor outcome of investments relates to involving the wrong types of financing instruments and organizations that mainly provide financing that is short-term and unreasonable.
New technologies demand new ways of financing investments and new kinds of governance structures. In this blog post, I propose a new systematic approach to financing schemes where the right actors and interests are tied together to ensure investment success in the long term.
Find all actors for whom the investment brings value
The main aim should be to align the financing scheme and the actor interests closer to the actual way the investment evolves over its life-cycle. It also needs to be considered how risks and rewards are shared and how long-term commitment is secured, especially from the financing parties.
PBI has developed a new way for identifying the optimal way to finance a specific industrial or infrastructural investment. The starting point is the ecosystem within which the investment will reside and impact on; How can the ecosystem benefit from the planned investment and which are the most relevant actors within the ecosystem that should be involved? In this way we ensure that the focus is on the systemic benefit rather than isolating our focus merely on the investment itself.
In a study from Oxford University on the shipping industry it was argued that for each additional 1 euro an investment yields internally, the overall ecosystem can benefit another 1.5 euros. In other words, we need to find all actual beneficiaries, both direct and systemic, and involve the most impacted ones in the financing schemes. We must also strive to involve lenders who are more long-term focused than traditional banks, i.e. sovereign funds, pension funds, and family offices.
Financial engineering – a novel process for creating financing schemes
PBI’s approach to identifying an optimal financing structure can be summarized in four major steps:
- Map the ecosystem within which the investment is planned. This is based on our long-term scientific work on how to create sustainable ecosystems. The essential part is to identify dependencies between the impacted ecosystem actors and show how the investment can improve and/or change the logic in the ecosystem. Changes in both technology, ICT and governance are considered.
- Define the collaboration mechanism and the most relevant actors’ business models as well as how responsibilities, rewards, and risks are shared.
- Create a baseline for a financing scheme based on step 1 and 2 where the shares of financing and risk are defined, as well as each financier’s earning logic.
- Involve and negotiate with the specific actors.
Through these steps, we are able to create more sustainable financing schemes for future industrial and infrastructure investments.