Page 32 - A U4SSC deliverable - Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects

Strategic investors and financial investors

Investors can also be divided into two types depending on the objective of the investment: strategic
investors and financial investors.

Strategic investors usually have a relationship with the project or company where they make the
investment, such as the project’s geographical location in an area where they and their competitors,
suppliers and customers are already active or the project’s position in a location or sector that
they intend to enter in the near future. These companies aim to increase the added value from
the project to their businesses in the form of management skills, capital and innovation, therefore
usually making long-term investments. 7

Financial investors usually have the objective of generating a financial return on the investment
made. They look for sectors and projects where there is potential for strong growth, and establish
a medium-term exit strategy without much regard to the responsibilities or risks associated with
the long-term consequences of the project.

Local vs foreign financial investors

Local investors are those with local and/or national resources that are already active in the country
where the project will take place. Foreign investors are those with foreign and/or international
resources that may or may not have a local practice, but usually have the capacity to set it up in
the country where the project is developed.

The main advantage of turning to local investors is their ready-to-go set-up in the phase of
construction and knowledge of the local frameworks and regulations. Foreign investors, on the other
hand, can be helpful when designing larger projects that involve international IGO sponsorships
or are designed at an international level. Their experience in dealing with international “red tape”
bureaucracy, accessing international capital, as well as their broader outlook, provides an additional
guarantee for the completion of projects.

There are also cases when it could be beneficial to combine the local and foreign investors for a
project. For instance, combining the access to international capital and strength of the international
investor during the design and tendering phase with the local investor’s access to resources and
framework knowledge would encourage the successful and timely completion of the project.

In any case, foreign capital needs a local workforce and contacts to accelerate procedures
and construction to ensure that capital can transfer to local contractors under the umbrella of
international players, and these contractors can profit from their efficiency to gain contracts in
foreign projects as both: investors and/or contractors.

14 U4SSC: Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects