A New Approach To Infrastructure Financing

<p style="text-align: justify;">According to the Sustainable Development Goals (SDGs) adopted by the international community, the achievement of most of the goals involves a significant volume of investment in infrastructure. This is the case for energy, mobility, the city, water, and the fight against climate change.&nbsp;</p><p style="text-align: justify;">According to a <a href="https://unctad.org/topic/investment/world-investment-report">UNCTAD report</a>, the needed funds are estimated at 4.5 trillion USD/year by 2030. These infrastructures will be of a new type: they will be connected, relatively small and probably financed differently.&nbsp;</p><p style="text-align: justify;">For us manufacturers, this constitutes a challenge: seizing these opportunities by finding new business models. In the field of energy, this is evident. For example, electricity systems were traditionally designed based on large centralised production units which injected electricity into transmission networks, then distribution networks, to finally reach the points of consumption.&nbsp;</p><p style="text-align: justify;">The current energy revolution has generated irreversible, profound, and rapid changes. Two characteristics clearly illustrate the nature of this "revolution": the rise of renewable energies and digitisation.&nbsp;</p><p style="text-align: justify;"><strong>Renewable Energy Production Units</strong></p><p style="text-align: justify;">Renewable electricity production, particularly solar, is now better distributed across the territory; the production unit's size no longer has any real economic interest since it can be on the scale of a house or even a mobile phone. Primary energy is available everywhere, its production does not involve very high technology, and its consumption is local. The electron has become commonplace and, above all, incredibly cheap.&nbsp;</p><p style="text-align: justify;"><strong>Digitalisation</strong></p><p style="text-align: justify;">As for digitalisation, it makes it possible to create sources of value thanks to real-time management of individual and aggregated consumption, accelerated by big data. The economic space opened by a very inexpensive electron suggests a proliferation of technical solutions, economic models and intelligence to provide a quality energy service worldwide.&nbsp;</p><p style="text-align: justify;">In parallel with these technological advances, a societal evolution is underway: the consumer is connected and highlights, through their uses and consumption choices, their relationship to the environment, climate change and energy.&nbsp;</p><p style="text-align: justify;">This energy revolution is a global phenomenon that manifests differently in different countries, territories, and cultures. The companies that will thrive in this energy transition will be those that invent tomorrow's energy systems by reinventing themselves.&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Infrastructure Breach</span>&nbsp;</h2><p style="text-align: justify;">The infrastructure breach continues to be a top topic in the work of the B20. According to estimates, its amount is between 12 and 22 TUSD for 2016-2030, i.e., 800 to 1,470 GUSD/year. This figure will be reassessed by aligning the SDGs and the resulting infrastructure needs. However, several studies show that the financial system harbours ample liquidity to fill the infrastructure gap.&nbsp;</p><p style="text-align: justify;">At least at the G20 level, there is enough political will to tackle the problem. Several initiatives have been launched or strengthened.&nbsp;</p><p style="text-align: justify;">Governments, international multilateral institutions, civil society, and businesses have mobilised. In 2014, the G20 decided to create the Global Infrastructure Hub, which collects best practices in infrastructure projects. More recently, the Sustainable Development Investment Partnership and the Sustainable Infrastructure Foundation have emerged.&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Blended Finance</span>&nbsp;</h2><p style="text-align: justify;">Insufficient project preparation is one of the main reasons for the infrastructure breach. Governments, even assisted by development institutions and agencies and sometimes benefiting from philanthropic funds, cannot produce a pipeline of projects ready to move into the implementation phase.&nbsp;</p><p style="text-align: justify;">This situation is more critical in developing countries. Blended finance is an approach that combines capital from development finance and philanthropic funds to increase the leverage effect. If the project cycle remains the same, the modes of intervention of the actors are called upon to change, to act more jointly than successively, from the design and development phase to the operation of the project. This process accelerates the generation of projects according to a systemic methodology.&nbsp;</p><p style="text-align: justify;">By including companies from the start of the process, the blended finance approach adds an additional accelerator. Governance remains essential in this type of system, specifying the methods of entry and exit of partners, conflicts of interest, questions of intellectual property and local share, and the management of resources devoted to its operation. The <a href="https://www3.weforum.org/docs/WEF_AFSII_Project_Overview_Accelerating_Infrastructure_Development_in_Africa.pdf">African Strategic Infrastructure initiative</a> is a good example of this approach.&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">From a Logic of Projects to a Logic of "Process"</span>&nbsp;</h2><p style="text-align: justify;">Given the urgency of accelerating the completion of infrastructure projects, the convergence of regulations, which is accompanied by largely standardised contractual documentation, becomes necessary.&nbsp;</p><p style="text-align: justify;">This observation, valid for infrastructure projects in general, is even more so for smaller projects, such as renewable energy projects and microgrids. The goal is to reduce lead times, due diligence and project development costs.&nbsp;</p><p style="text-align: justify;">Several IFIs have developed more systemic approaches. Thus, the World Bank promotes the multiplication of solar projects through its "Scaling Solar" program, which offers a one-stop shop for the benefit of States wishing to attract investors to develop solar projects. Scaling Solar includes a package of technical assistance, standard contracts, pre-approved financing, and guarantee and insurance services enabling the viability and financing of projects.&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Terrawatt Initiative&nbsp;</span></h2><p style="text-align: justify;">On the occasion of COP21, ENGIE announced the launch of the Terrawatt initiative, the symbol of a stronger commitment to the energy revolution that is beginning.&nbsp;</p><p style="text-align: justify;">This global non-profit organisation aims to mobilise public and private stakeholders to design together the most effective framework that allows the very rapid deployment of solar capacities and the structuring of private financing processes to reduce the cost of producing the electron as quickly as possible to the lowest possible level.&nbsp;</p><p style="text-align: justify;">In particular, it aims to install one TW of additional solar capacity by 2025 and supports the efforts of the International Solar Alliance in applying this objective in countries with high solar potential. Its action focuses on establishing efficient and common regulatory frameworks and developing innovative financing and risk mitigation instruments to release massive private financing in solar electricity production assets and thus reduce mass production costs.&nbsp;</p><p style="text-align: justify;">As part of its development, the Terrawatt initiative partnered with the International Renewable Energy Agency (IRENA) at the World Future Energy Forum in Abu Dhabi in January 2016. The two organisations jointly launched a group of international work on the standardisation of contracts negotiated during the development and financing of solar projects to reduce transaction costs, make markets more fluid and create standard practices at the global level.&nbsp;</p><p style="text-align: justify;">It also organised an event in New York on the sidelines of the signing of the Paris Agreement, which allowed its members to reaffirm their cooperation in implementing a new global energy paradigm. The organisation is chaired by Isabelle Kocher, Managing Director of ENGIE, and its secretariat is provided by Solairedirect, a Group subsidiary dedicated to producing competitive solar energy. Total, Schneider Electric and Iberdrola are also founding members.&nbsp;</p><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;"><span style="font-size: 10pt;"><em>This article was contributed by our expert <a href="https://www.linkedin.com/in/cortizsotelo/">C&eacute;sar Ortiz Sotelo</a></em></span></p><p>&nbsp;</p>
KR Expert - César Ortiz Sotelo

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