Due diligence is a key aspect of infrastructure project deals. The complexity of project finance (both in terms of technical capability and financial structures), the magnitude of the financial investment, the scale of construction effort and the number of stakeholders involved, means that most projects have multiple teams addressing various feasibility considerations.
Prior to the launch of any infrastructure projects, feasibility studies should be conducted to assess the technical and commercial viability of the project, typically conducted by a mix of engineering, legal, and finance teams. This is important given the complexity and magnitude of the financial and technical outlay involved. In developed markets, third-party companies with specialized expertise are typically contracted by the project entity to provide the due diligence required.
We need to understand why people go through the hassle of doing due diligence, pricing deals, creating covenants and negotiating rights of ways. This is because they need to quantify risk, manage their capital, and ensure efficiency. They are looking for ways to expand the velocity of capital in this sector. Eric Pascal, Partner, Oliver Wyman |
These services can typically be broken down into a number of categories:
• Environmental impact and technical assessments
• Financial assessments - which could involve financing structures, deal structures, sufficiency of risk mitigants (insurance, hedging contracts, etc.)
• Commercial aspects such as demand or revenue forecasting, ROI optimization, the political and regulatory outlook, competitor scans and pricing levels
• Legal clauses, for example, concessions, availability of financing, offtake agreements, risk mitigants
Projects in emerging markets are increasingly encouraged along this developmental path, in a bid to improve both the project success rate as well as project bankability. The Asia-Pacific Project Preparation Facility provides due diligence for projects. It encourages private sector participation in infrastructure by adopting a more consistent and higher-quality approach to PPP project preparation development and transaction advice across the region.27 In addition, it creates and oversees data rooms and other channels for dissemination of project information for investor due diligence.