Redefining responsible financing in the digitally-informed city

In an increasingly ESG and sustainability-driven world, how do we ensure that the financing of infrastructure projects is transparent, efficient and accountable? And what governance tools can be used to facilitate this?

The infrastructure funding gap continues to widen in Asia, as the demand for infrastructure outpaces the deployment of public sector resources. Ultimately, infrastructure will become more and more unaffordable throughout the region unless we transform financing models and ensure a greater outcome-based focus on the social, economic and environmental impacts delivered by these projects.

Innovation in infrastructure finance is not new, and financing mechanisms that have been widely deployed in the past are enjoying a resurgence as helpful tools to meet rapidly evolving needs, driven by social and environmental change and the increasing scarcity of social infrastructure. An example is that of Blended Finance, where multilaterals are increasingly leveraging their balance sheets to de-risk projects, and in doing so, facilitate access to wider sources of private capital that are badly needed to deliver the required infrastructure.

But there is also a new and emerging dynamic driven by technological change. Advancements in technology, specifically digital tools, are transforming the application of infrastructure financing mechanisms, bringing greater visibility into project risks and enabling enhanced mitigation strategies.

Outputs and impacts of projects can be monitored, measured, analyzed and enhanced, bringing greater accountability on the use to which funds are deployed — and ensuring projects bring the benefits that lenders intended, and demand. This in turn, is catalyzing the growth of new green, ESG and sustainability- linked infrastructure financing mechanisms, driven by the improved clarity that lenders and investors now have into the credentials of projects themselves.

How can digital tools enable more responsible financing for our cities?

Digital technology is enhancing the responsible financing of city infrastructure by facilitating greater transparency, efficiency and accountability. The availability of new digital tools enables:

1. Data-driven decision-making and tracking of impacts: By facilitating the collection, analysis and visualization of data related to infrastructure projects, decision-makers can make more informed decisions regarding investment priorities based upon needs and ensure that projects deliver the benefits
   that were intended. Public needs on city infrastructure can also be assessed through crowdsourcing arrangements — enabled by digital tools. For example, CrowdTaskSG is a platform that facilitates the Singapore Government in tapping the collective intelligence and insights of Singaporeans through crowdsourced resources such as surveys, opinion polls and choice questions.

2. Risk assessment and predictive analytics: Digital technology can enable more risk assessment models and predictive analytics, helping identify potential risks and challenges associated with infrastructure projects. This allows for better evaluation of investment risks and ensures greater infrastructure resilience to climate risks.

3. Transparency and capital efficiency: Digital technology offers opportunities for more responsible financing of city infrastructure by promoting transparency in decision-making — providing clear data-driven solutions that enable citizen engagement. This acts to promote investor confidence in projects, which in turn, is key to unlocking wider, and more efficient sources of sustainable capital. An example is the role played by digital tools to facilitate ‘green’ and ‘sustainable’ certification and verification of city projects. These provide access to more efficient sources of green finance compared to conventional alternatives — certified projects can attract a 40-50 basis point saving in financing costs compared to non-certified projects.

4. Crowdfunding and greater citizen participation in infrastructure funding: Digital platforms are increasingly being used to fractionalize infrastructure and real estate projects — effectively breaking down the funding requirement into affordable units though which citizens can invest. Commonly referred to
   as ‘tokenization’, which uses blockchain technology, an increasing number of projects are being funded in this way, allowing wider sections of the community to benefit from rising asset prices generated by new infrastructure investment. Throughout the Asia-Pacific region, governments are increasingly looking closely at fractionalizing infrastructure projects to promote social inclusion and equity. In Thailand, for example, rail projects in the Eastern Economic Corridor have already included community-funded participation.

5. Accountability: Data solutions are transforming the accountability of projects to lenders, by facilitating a more accurate tracking of asset performance and ensuring that the terms of sustainable finance are met by the project. This is spurring the development of new sustainable finance solutions, as lenders are able to ensure the alignment of project outcomes with the conditions of finance. Examples include sustainability-linked loans, which are configured to performance indicators that can be transparently tracked and enforced through digital tools. Similarly, projects funded on the grounds of energy efficiency and decarbonization are now readily tracked by lenders using data solutions which interface with Building Management Systems, to ensure that efficiency gains are realized.

6. Digital platforms for project financing: Online platforms can connect investors, financial institutions and infrastructure developers, facilitating the matching of funds with specific projects. These platforms can streamline the financing process, reduce barriers to entry, and attract a wider range of investors.

7. Digital tools for monitoring of project performance: Robust performance management systems can track and monitor benefits associated with responsible financing for city infrastructure on a continuous basis. The system enables investors, governments, operators and stakeholders to have a clear and common understanding of infrastructure performance and the extent to which benefits anticipated in the original business case have been realized. The system can be built on technologies such as digital twins and Internet of Things (IoT). For example, the Hong Kong SAR Government has already adopted these technologies in optimizing the energy performance of its premises in order to strike a balance between comfort and energy efficiency. A well-designed performance management system can also serve as a feedback mechanism that helps improve the financing mechanism for future projects.

Governance ensures digital tools for city financing are effective for all

In isolation, the application of digital tools is unlikely to deliver optimal city financing solutions that are effective and efficient for all. They are simply an enabler. Governance ecosystems must also be developed to shape the application of these tools — to ensure that the outcomes of projects deliver tangible and inclusive benefits.

There are several components to this governance framework:

1. Broad policy formulation: Policies and guidelines must govern the use of digital tools for infrastructure financing. These policies should outline the objectives, principles and standards that must be followed to ensure responsible and effective use of technology. Data security, privacy and financial and regulatory compliance will be key policy considerations. Ultimately, robust policy frameworks will reduce risk and in doing so, will promote access to more efficient sources of infrastructure finance.

2. Risk management: Governance frameworks facilitate risk management practices related to digital tools in infrastructure financing. These include identifying and assessing risks associated with cybersecurity, data breaches, technology failures, or improper use of funds. Governance establishes procedures, controls and monitoring mechanisms to identify and mitigate risks, and ensure the reliability
   and security of digital platforms used for financing.

3. Transparency and accountability: Governance promotes transparency and accountability in the use of digital tools. It ensures that information about infrastructure financing projects and transactions is accessible to stakeholders. This transparency fosters trust by allowing stakeholders to evaluate the efficiency, effectiveness and impact of projects.

4. Stakeholder engagement: Governance frameworks encourage stakeholder participation in decision-making processes. Frameworks should bring together lenders and investors, government bodies
   and the wider community. In doing so, issues associated with the digital divide and exclusion should be considered. Many stakeholders develop community outreach centers to showcase projects using digital tools such as Augmented Reality (AR) and Virtual Reality (VR). The objective, of course, is to ensure that infrastructure financing is directed to projects that are aligned with societal needs, promote inclusivity, sustainability and, importantly, deliver climate resilient infrastructure.

5. Interoperability standards: There are a plethora of digital tools that we now use in our cities to plan and deliver infrastructure. More and more of these tools are now being referenced by lenders and investors in the financing of projects. This raises significant challenges of inter- operability — not only between operating systems but also in terms of the exchange of data between parties. A key focus of decision-makers should therefore be on standardization, which in turn will broaden access to new providers of capital.

In summary, digital tools are playing an increasingly important role in the planning, development, financing and monitoring of our city infrastructure. By promoting transparency in planning, risk management and in project delivery and operation, lenders are able to optimize risk and provide deeper finance on more efficient
terms. Investors demand transparency, and data solutions are playing an important role in providing rigorous information that is enabling growth in green, ESG and sustainability-linked funding products — all made possible because lenders now have greater data-driven insight into the development and operational stages of projects.

Equally, governance plays a key role in shaping both the application of digital tools in infrastructure finance, and the extent to which sustainable finance itself will play an increasing role in financing our city infrastructure. By formulating policies, ensuring regulatory compliance, managing risks, promoting transparency, engaging stakeholders, developing standards, enhancing capacity, and addressing ethical aspects, governance ensures that efficient capital will continue to flow.