Global infrastructure need is huge across all regions, giving rise to massive infrastructure investment deficit. However, targeting private capital for infrastructure projects has its own challenges and idiosyncrasies: private sector capital is preoccupied with counterparty risk assessment and cash flow; requires extensive due diligence, multi-party negotiation, and documentation; and tends to go toward big-ticket projects due to economies of scale—just to name a few. These characteristics of private capital may not necessarily bode well for the majority of municipal infrastructure projects: these projects are smaller and many are non-revenue generating. There are capacity constraints as well—many municipalities lack the capacity to develop bankable infrastructure projects and documentation to attract private capital.
The mismatch between municipal infrastructure projects’ characteristics and private capital providers’ requirements calls for exploring innovative ways to bridge the gap, and project aggregation can address this issue.
Project aggregation is an effective and tested way to raise private capital for smaller infrastructure projects. It brings in the benefit of reduced transaction costs and blended risks, and facilitates access to large-scale capital providers. Project aggregation could be an ideal way for many municipalities to raise financing for infrastructure projects that could otherwise be difficult to raise due to size and/or capacity issues.
Overall, the benefits of project aggregation are:
- Access to private capital players who prefer a large ticket size. This can give municipalities the capacity to “shop around,” and thus access better credit terms.
- Reduces transaction costs, including project preparation costs.
- Brings in uniformity in bankable project documentation over time.
- Benefits from “blended risks,” by way of spreading credit risks among a number of projects, hence a lower level of credit risk for the capital providers.
*Original article is available here. Reprinted with permission.