Page 55 - A U4SSC deliverable - Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects

Chapter IV: How to attract investors to enter into SSC projects

Checklist for investors: the preliminary “go/no-go” decision

Numerous conditions must be met early on for a private investor to become interested in investing
in a project. In order to ensure that investors can tick these boxes, projects must undertake certain
actions and create pre-existing resources. These are needed in order to define the financing (and
funding) possibilities of a project, and to attract investors to provide capital beyond public funding.

Private developers and investors usually make preliminary decisions on investments based on their
estimation of market opportunities and gaps. In SSC projects, these gaps and opportunities are
problems or needs which exist within a community. Sometimes the information used by investors
for analysis before deciding to go ahead with the project comes from governments. This can come
in various forms and through various channels, such as: investment forums, calls for tenders, or
direct contact. Sometimes information comes from third parties, such as IGOs or NGOs, as they
look for agents to help bridge gaps in basic infrastructure. Sometimes information can come from
financial partners and sponsors, such as pension funds, development funds and other institutions
where large pools of capital are available to invest. Commercial banks could also trigger the interest
of a private company to enter a project and invest its resources in it. These organizations, when
providing information to potential investors, act as inviting sponsors.

When an invitation to invest is made, it usually includes the offer of potential “extraordinary” gains.
These could be in the form of higher or guaranteed returns, lower cost of capital, tax incentives,
new market niches, and others. However, the potential for extraordinary gains is not sufficient. A
pre-existing level of legal security and fiscal stability is also necessary to minimize risk and ensure
returns for investors. If this does not exist, the inviting sponsors will have to provide security for
investors by other means. The offer of extraordinary gains is an important way of doing this. In these
cases, the “extraordinary” element, which in the developed markets would be perceived as a fraud
to the free market rules, is essential to trigger a decision to invest in places with greater instability. 1

Also, investors may be interested in the extraordinary gains or the ESG impacts, but may only
possess a limited preliminary knowledge of the environment where the investment is to take place.
Developers and investors, in this case, need a practical approach to check the quality and capacity
of the resources available, before deciding whether to invest in the project. Every company, be it
public or private, large or small, should ask some basic questions and complete a due diligence
check before any further consideration of the project.

Conducting due diligence in the form of a preliminary checklist is a good way to start acquiring
information on the resources available, as well as the expertise at hand to manage these resources
in the developmental and operational phases. Eventually, this exercise leads to further questions
regarding quantifying the risks of committing to the project. If the results are negative, the level of
bearable risk should be established before addressing the question of financial resources.

U4SSC: Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects 37