Cross Border Credit Reporting
The geographical boundaries drawn by nation states are blurring in the 21st century. In many parts of the world, free movement of goods, services, and even personnel have become a norm. However, strangely, the concept of credit and loans is still dependent upon national boundaries. The H1B visa system of America is a testimony to […]
Venture Debt in Startup Funding
Whenever the subject of startup funding is mentioned, the audience automatically assumes that equity investments are being discussed. This is because it is the big equity deals that are mentioned in the newspapers which catch the attention of the world. However, equity funding is not the only way in which startup founders can raise capital. […]
Regret Aversion Bias
In order to be successful at investing, an investor not only needs to have mastery over their numbers, but they also need to have mastery over their emotions as well. In the past few articles, we have already discussed how emotional biases can lead to suboptimal performance in investing. In this article, we will try […]
Concept of Profit Booking and How It Affects Stock Markets
If you have regularly observed the stock market, you may have noticed that a lot of time when the market falls, experts attribute this fall to profit booking. The concept of profit booking is known to a lot of people. However, the knowledge is merely superficial. In this article, we will have a closer look […]
Investment Banking and Special Purpose Acquisition Companies (SPACs)
Special Purpose Acquisition Companies (SPAC) have become all the rage in the investment banking industry. They are not a new concept. They have been around for quite some time. However, they have become quite popular in the recent past. For instance, in the first half of 2020, $13.5 billion dollars were raised by Special Purpose […]
Infrastructure projects are most needed in developing nations. These are the countries where infrastructure projects are able to create the most growth. This is because the spillover effects of infrastructure projects are felt significantly in emerging markets.
Ideally, emerging markets should create policies that attract more and more foreign investment on to their shores. However, in reality, this is not the case. Emerging markets have a lot of shortcomings. These shortcomings are accentuated during infrastructure projects because of the large scale and size of the investment. This is the reason why institutional investors tend to stay away from infrastructure projects in emerging markets.
In this article, we will list down some of the risks faced by investors when they invest their money in emerging economies.
The problem is that foreign investors generally prefer to invest in an international currency such as the dollar or the Euro. However, in most emerging markets, the cash flows are in local currencies. This mismatch often signifies a huge risk for the investors. Since the projects are long term in nature, hedging is also not a viable option. One way to deal with the situation is to involve export credit guarantee institutions of other nations.
For instance, countries like China do invest in projects and accept the local currency for payment. However, they insist that the contracts for the project be given to Chinese firms. In many cases, this raises costs and hence, may not be the best option.
There are many corrupt governments in developing countries that know that once the infrastructure project is started, the stakes become very high. The projects cannot simply be uprooted and moved to another location. Hence, such governments try to take advantage of taking maximum money out of infrastructure companies in the form of higher taxes or even bribes! Mechanisms such as investment treaties have been created to mitigate political risk. However, they too seem to have limited applicability.
Companies may not be able to return the profits earned to their parent company. This means that the investment opportunities for the cash flow generated are also limited. Limited options translate into lower returns and end up scaring away international investors.
Also, the problem is that in most cases, capital controls are only put up just before the situation is about to get out of hand. For instance, in Greece, capital controls were stipulated days before the country saw a severe economic downturn.
The aggrieved parties do not have too many legal options. This is because the legal options may be complicated, time-consuming as well as expensive. Hence, the odds may be stacked against the infrastructure company. This obviously is a huge challenge since no investor wants to end up in a scenario where they have agreed to deliver a project with stringent deadlines but are not able to enforce their partners to hold up their end of the bargain.
Legal issues can cause severe cash flow problems as it is not common for the payments to be held up because of quality issues or because a certain milestone was not met on time.
The bottom line is that executing infrastructure projects in emerging markets is full of risks. As a result, investors demand a higher return, which raises the cost of the project. It would, therefore, be better to reduce the risks so that the costs can also be reduced and the nation can benefit.
Your email address will not be published. Required fields are marked *
Usage of Collateralized Debt Obligations (CDO) in Infrastructure Finance
February 12, 2025
