Resource Financed Infrastructure: A Discussion on a New Form of Infrastructure Financing

Author: Håvard Halland
co-authors: John J. Beardsworth, Bryan C. Land, James A. Schmidt

PPIAF-supported a World Bank Study  published with discussion by Paul Collier, Alan Gelb, Justin Yifu Lin and Yan Wang, Clare Short, and Louis Wells.

Developing countries are facing constraints as the global financial crisis has drastically limited traditional, long-term and private financing sources for public projects. Nations lacking in adequate infrastructure but richly endowed in natural resources, however, are not without options. When pursuing large projects, developing countries have explored a less conventional form of financing: the Resource Financed Infrastructure (RFI) model.

What is the RFI model?

The RFI model is a contractual arrangement that permits governments to link expected revenues from production rights granted to investors for the development of natural resources, to a loan for construction of unassociated infrastructure today. In the RFI model, the government pledges its future revenues from the resources to finance the development of infrastructure. The model requires three main components:

• a fiscal regime to define the revenue flows from the production of the resource by the developer to the government;
• a credit facility, in which the government can repay a lender using its share of the revenue flows; and
• a government procurement for the development of the desired infrastructure project.

By bringing the natural resource and infrastructure sectors together, RFI enables governments to take advantage of the difference in investors’ appetite for risk and financial return in the resource and infrastructure sectors, to benefit the development of the infrastructure sector. Governments can therefore access market based financing, either nonrecourse or limited recourse financing, by pledging natural resource royalties or other taxes as collateral and by borrowing against those pledged revenues. As Paul Collier and other contributors to the World Bank Study point out, RFI represents a commitment mechanism, enabling ministers to ensure that future decision makers devote a sensible proportion of resource revenues to the accumulation of assets. 

How does the RFI model differ from Public Private Partnerships?

In a typical PPP transaction, the government enters into a contract with the private sector to finance, build, and operate infrastructure assets.  The financing of PPP projects is typically done on a “project financed” basis, which requires security of cash flows from the project company that owns the infrastructure assets, perhaps with a long term offtake commitment from the government or a state-owned entity (as with a state electric utility having a power purchase agreement with an project financed electricity generation company). In an RFI model, the repayment of the financing for the infrastructure would be from the pledged government revenues from the resource development (e.g., royalties). In other words, the government can receive the infrastructure without having to support its development through revenues from the infrastructure itself (for example, from schools or roads built with an RFI infrastructure loan).
Similar to the Public Private Partnership (PPP) model, RFI can engage the investors in multiple ways in the infrastructure construction and operations phases, but the government would also have the option to use public procurement processes for the infrastructure construction and operations that do not include an equity partner.

When might the RFI model be considered?

The RFI model may be considered for countries that lack the sovereign resources to build infrastructure projects, or are unable to generate adequate revenue related to the project. It presupposes that countries have natural resources and the necessary accompanying development and production licensing regimes.

Developing countries interested in RFI may need to consider the size of their economies and the costs and timeline of the project components. RFI may work best in undeveloped or smaller economies that lack a current ability to borrow or pledge an existing revenue stream, and where the economic or social benefit of early infrastructure development would justify the likely additional cost of the RFI approach. In cases where the early infrastructure benefits to the overall economy and society will exceed the costs of borrowing against the future resource development revenues, an RFI transaction would permit the government to maximize the benefit from the resource development revenue.

Challenges to the RFI Model

Due to the complex nature of linkages between resources and infrastructure in an RFI model, there are a number of challenges to be considered. One main concern has been a perceived lack of transparency in the deal-making process. Early deals approximating an RFI structure have generally been concluded on a non-competitive basis, with little transparency or attention to structuring the transaction as a true financing model. This has brought up questions related to the valuation of the deals – how much infrastructure now for a certain amount of oil or minerals in the future?  In an RFI model, as addressed in the World Bank Study, this question is dealt with explicitly, since the committed resource revenues are used to pay off a loan, and additional taxes and royalties are then paid directly to the government once the loan has been repaid. There have also been concerns with regard to the quality of the completed infrastructure, as well as regarding capacity for operation and maintenance -- issues that in a RFI deal will be addressed through careful contracting, due diligence exercises, independent third-party construction supervision, and potentially a multi-year operations contract also financed through the RFI loan. In addition, as applications of the RFI model have not been extensively documented, the amount of documented experience available for investors and governments to draw on is very limited.

The shape of RFI deals to come?

Considering the increasing global infrastructure financing gap, the RFI model continues to be explored as an alternative financing model among developing countries rich in natural resources. So far, RFI proposals have originated in the form of unsolicited bids, from firms seeking opportunities either on the extractive or the infrastructure side, and then partnering with other firms and a financing institution to build a bankable deal to offer the host government. The opaque nature of many existing RFI type deals may be a result of a monopoly situation in the supply of such deals. If there were more providers of RFI deals, if bilateral donors teamed up with their national resource companies and construction companies, the value of RFI deals could be determined through competition. To better equip public and private decision-makers, additional discussion, pilots and data collection on the fiscal regime, credit facility, and project procurement components of the model are needed.

To submit comments or inquiries, please contact the authors at: hhalland@worldbank.org and ppiaf@ppiaf.org. 

For more information and a copy of the RFI publication, please visit the PPIAF Website.