Innovation’s Role in Mobilizing Private Financing

How Fintech can change everything

Javier Mozó

From Billions to Trillions to Action?

“We estimate that the world needs an additional US$1 to 1.5 trillion dollars every year to be invested in infrastructure” Source

“We need to radically rethink how we unlock resources and connect the billions of dollars in official development assistance (ODA) to trillions in investment of all kinds, public and private, national and global.” Source

“The largest potential sources of finance for development come from countries themselves and private investors.” Source

“Drawing in private sector business and investment will be key to reaching the trillions needed to achieve the SDGs.” Source

“Given the scarcity of bank lending for infrastructure, the development of non-bank financing for infrastructure is now emerging as the new imperative.” Source

Some quotes to help us set some context and perspective on the problem:

The problem is BIG, and the Private Sector has a vital role in its solution. The Public Sector plays an important role to catalyze additional private investments into development, but there are alternative ways to help which involve innovation directly from the Private Sector, and Startups could be the key.

Importance of the Private SectorFinancing for development normally has come from the Public Sector, but considering the size of the gap, the real challenge today is to mobilize more private investments into development.

“The private sector will play a pivotal role in financing the post-2015 development agenda. As recognized in the Monterrey Consensus, private investment underpins economic growth, know-how and technology transfer, job creation, and productivity gains.” Source

“But public money can be only part of the solution... The greater opportunity lies in tapping private capital. The potential pot of gold is elsewhere, in the $50 trillion of capital managed by pension funds, sovereign-wealth funds, insurance companies and other institutional investors. Only 0.8% of this is currently allocated to infrastructure.” Source

This is the one and true challenge to achieve the SDGs, as the private sector (especially institutional investors) is not used to invest in development. In order to change this, structural and innovative changes need to be implemented to modify the ways of incentivizing, thinking and doing sustainable business.

For the current analysis, I will focus on measures that the private sector can take without the help of the public sector in order provide better and faster solutions to this financial problem.

What does Private Investment looks for?

“ A supportive business environment and a sound macroeconomic framework are critical to attract private capital flows, including foreign direct investment. Private finance flows more readily to markets when policymakers establish a predictable, transparent, and conducive investment climate that provides opportunities and incentives for firms to invest productively.” Source

High Returns + Risk Diversification “ For areas where private investments are in the lead, firms will seek opportunities based on the reasonable

expectation of profit, which is driven by two fundamental variables: risk and return.” Source

“Investor exposure to alternative assets has been growing, reflecting an appetite for diversification, a search for yield, and the attraction of valuation methods for unlisted assets.” Source

Favorable Investment Climate

Considering that Investment Climate depends mainly on measures regarding public policies and regulations, I will focus my analysis on private only solutions to improve Risk and Return.

What is stopping Private Investment?

“The reluctance of the private sector is often due to market failures, such as problems arising from asymmetric information or lack of investor experience with particular types of investments, economic activities, or countries.” Source

“Impediments to tapping these sources include a dearth of well prepared, bankable projects with suitable risk/return profiles, … , and a lack of capacity among institutional investors to evaluate and monitor individual project risk.” Source

“Moreover, market inefficiencies—such as unnecessary transaction costs, misaligned incentives, and lack of performance measures—often prevent the financial assistance that is available from achieving desired results.” Source

“a lack of suitable investment vehicles structured to provide institutional investors with the risk-return profile they require.” Source

Here I’ve listed some of the main reasons described in the course that negatively affect the provision of private investment in infrastructure in the developing world:

Solutions and Innovation?Many solutions have been described in the course, attacking different problems and taking various courses of action. As before I will exemplify a few to get some context.

“Improving the quality of project pipelines with sufficient project preparation, including economic, financial, technical and environmental feasibility studies, is critical to clearing the way for private sector participation.” Source

“working together to find ways to mobilize private sector activity and investment in a more systematic fashion than on a project-by-project basis through: (i) exploring effective ways to address risk, setting up individual or joint mechanisms to provide guarantees, risk insurance, blended finance, and other risk mitigation measures (e.g., structured finance); (ii) exploring the possibilities of structuring pooled vehicles or co-investment platforms at national, regional or multilateral levels to reduce individual investor costs for project preparation and execution; and (iii) providing credit enhancement, allowing risks to be shared with official entities.” Source

The solutions presented on the course mainly involve participation of the Public Sector and MDBs. Innovation follows the same pattern, as it's difficult to find innovative solutions that do not include them on the equation.

For me the most promising and interesting innovation of all is the GIF developed by the WB.

Global Infrastructure Facility“The Global Infrastructure Facility (GIF) is a global open platform that facilitates the preparation and structuring of complex infrastructure public-private partnerships (PPPs) to enable mobilization of private sector and institutional investor capital.”

“To help bridge that financing gap, private commercial lenders and institutional investors have joined with multilateral development banks (MDBs) and donor countries to create the Global Infrastructure Facility, the GIF.” Source

This is a great example of innovation that takes advantage of the digital era and leverages technology to connect networks and resources to provide better solutions to old fashioned industries. It takes into consideration all the key actors that are involved in Financing for Development and connects them online to facilitate the overall efficiency of the process.

This is a perfect example to show how technology can impact the financing process of such complex assets as infrastructure projects, and it's the perfect prelude to the explanation of how Fintech can do the same.

What is Fintech?

“Financial technology, also known as FinTech, is a line of business based on using software to provide financial services. Financial technology companies are generally startups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software”

Wiki

Basically it involves leveraging technology to improve the current financial services and products by providing more efficient and effective solutions.

Knowing of its importance, I’ve put it into action. I’m Cofounder of a Startup that is using Fintech to improve Financing for Development.

The Platform for Infrastructure Project FinancingWe optimize the financing process by efficiently connecting

qualified projects with investors, advisors & banks online

Our Innovation: Private version of the Global Infrastructure Facility

Different approach but the same goal, provide financing for development

Our view of the ProblemConsidering the problems described on the course and our experience in the industry, we have identified the problems that affect the three main areas involved in Infrastructure Project Financing.

Project Developers: Frequently lack the technical expertise and the resources needed for the appropriate professional preparation of their projects, especially in the financing area. They also lack the local and international contacts that can provide them with financing solutions for their projects, both in debt and equity.

Investors: They have trouble finding a pipeline of quality bankable/investable projects outside their markets of expertise, where they don’t have reliable contacts and information. They also often lack the capacity/experience to evaluate these opportunities properly, therefore incurring in a negative bias in risk/return assessment.

Transaction: The whole financing/investment/acquisition transaction process is extremely complicated considering the high risks associated to it, normally spanning well over 8 months. The process needs constant communication between the parts, extensive review of documentation, provision of third party services (technical, legal, financial, etc.) and the execution of various legal agreements, among others aspects which considerable increase the transactions costs, therefore further discouraging investment.

Our SolutionWe’ve created a platform that connects the related industry actors and provides the tools and features required to provide the interactions needed by them to achieve successful financing of their projects.

The main actors in Infrastructure Financing for Development now have the following solutions:

Project Developers: Now have an organized and structured interface to upload their project information into a standardized but customizable profile. Project development guidelines are provisioned along with relevant analytics and benchmarking tools, and good practices are rewarded.

Investors: Have an online platform in which to easily evaluate infrastructure investments opportunities. All industry contacts and project information are in the same place and can be reviewed in an organized and secure manner. They can access local and international professional services to help them assess opportunities and move forward in the investment process.

Transaction: All the processes, communications and services needed to complete the transaction are centralized and provisioned directly in the platform. Documentation is managed in an organized and secure way, and investment management tools help streamline the fundraising process making it more effective and efficient.

CAAAPITAL: We connect Counterparts and Assist the Transaction

Projects Investors

Uploads Project InfoAccess Financing

Uploads Investment CriteriaReview Investment

Opportunities

Offer ServicesDeal Advisors Offer Debt

Banks

Qualifies & connects

Current Platform BenefitsFind Qualified Counterparts

Evaluate Projects

Connect & Share Docs

Today?We are happy to let you know that our Startup is growing fast and strong. We are currently in process of expansion, and we hope to be a relevant actor in Financing for Development in the near future.

This course has helped my team and me to better understand the enormous problem we are facing and has given us new ideas on how to tackle these great challenges. It’s been an eye opening experience, and it has actually given us a much stronger motivation to move forward in this difficult but rewarding path.

If you believe in our project and want to collaborate or support us, please feel free to contact us at contact@caaapital.com

THANKS FOR EVERYTHING