Infrastructure finance and the new economy: A case for tokenising

A LARGE funding gap exists in the infrastructure space. Available funding covers only 10 per cent of sanctioned projects (about US$730 billion per annum), while 90 per cent of financing for Asian infrastructure projects comes from the public sector. To that end, private sector participation has been prescribed as a remedy for the funding shortfall - but this solution still, admittedly, also requires a supportive ecosystem to render the infrastructure assets more palatable and tradable. We believe that asset tokenisation via blockchain technology can play an important role in developing this ecosystem.

Blockchain is essentially a ledger, a copy of which is owned by every participant in a network, and into which new entries are entered only through majority consensus. This ensures transparency, security, and immutability - three crucial characteristics for investor confidence.

These characteristics - inherent to blockchain - reduce, or even completely remove, the need for intermediaries, leading to significant time and cost savings. Putting securities onto the blockchain would turn them into "tokens": digital representations of the security that exist only on the blockchain, and in this article's case, they would be backed by the full faith and collateral of the infrastructure assets underlying them. Tokens are the modern-day Digital Asset-Backed Security.

FINANCIAL INCLUSION

The digital nature of these tokens allows for securities to be fractionalised into as small a unit as needed (for example, Bitcoin prices are to 18 decimal places). Once offered on the borderless Internet or via a smartphone, the pool of potential investors in these tokens - be it institutional, high net worth or retail - is opened up by orders of magnitude. Since tokens are globally tradable at the speed of information, they become a super-liquid investment for raising infrastructure capital across client segments, and for promoting financial inclusion. Things that have eluded traditional infrastructure financing models for a while.

Our view is that the divisibility, blockchain technology, tradability and financial inclusion aspects will make digital tokens vast, global, inclusive and liquid, as opposed to unit trusts, or other such commingled funds, which are clunky, heavily intermediated and expensive.

For these reasons, blockchain and tokenisation are increasingly seen as potentially one of the most disruptive technologies in decades. This has been especially true for venture capital fundraising. According to Business Insider, Token Generation Events (TGEs) or Initial Coin Offerings (ICOs), raised upwards of US$4 billion in 2017, an exponential jump from the US$265 million raised in 2014-16. This growth is not slowing; 2018's figures already show year-to-date funding of US$3.4 billion.

Venture capital insiders like Venrock's David Pakman acknowledge that a monumental shift is occurring within his own industry, particularly with respect to the democratisation of everything that technology can lay its hands on.

The same phenomenon could potentially revolutionise infrastructure funding as well.

Digitising infrastructure projects through the blockchain would enable the recording of data in great detail and with full transparency; everything from valuation and risk management mechanisms, to the various parties involved, key construction milestones, records of maintenance works, mitigation of corruption, reduction of deadweight losses and, most importantly, clarity of ownership rights.

With this, tokenisation enables the fractionalisation of ownership. Trustless and immutable blockchains track individual ownership rights and allow them to be publicly verified. Those rights become extremely transferable. Moreover, smart contracts, or self-executing contracts that run on blockchains, will reduce the time, complexity, and paperwork required for deal execution and settlement, decreasing the need for extraneous legal services and other intermediaries.

Tokens can also be used to incentivise independent parties, such as Singapore-based infrastructure consultancy company, Surbana Jurong, to rank and rate - or perhaps even validate - infrastructure asset structures in a decentralised, crowd-sourced manner. That is, instead of having rating agencies, a token-curated registry of infrastructure assets and characteristics could be validated and deployed. A token-curated registry could also be used to rank and rate infrastructure assets by having the parties who rate or vet the assets stake tokens that are bound to their own rating assessment.

In a related context, Surbana Jurong - by using its vast operating knowledge and independence, along with its validation of project time, cost and quality - has already teamed up with the ADB's Credit Guarantee & Investment Facility to support the de-risking of traditional forms of infrastructure project financing.

These factors would exponentially increase the investor base for infrastructure projects the same way it did for venture funding. It is a win-win situation; tokenisation would provide access to infrastructure projects for large segments of the private sector that are constantly hungry for quality investments but were previously unable to participate.

PARADIGM SHIFT

The case for the tokenising infrastructure is a good one; there is clear utility towards resolving issues of instrumentation, exchanges, and liquidity for infrastructure projects. But blockchain is not, in itself, some technological panacea. There remain questions about governance, and how an overall ecosystem will manage valuation and risks well. Attempting such a paradigm shift in infrastructure financing would probably also benefit from governmental involvement in the early stages; if only to reassure about regulatory compliance, and the legal enforceability of smart-contract-based securities. This favours places with good governance, and adherence to the rule of law.

In that respect, Singapore can indeed take its global blockchain and global infrastructure financing hub aspirations a bit further by conjoining the two, especially given recent policy announcements that public bodies can now issue infrastructure project bonds.

We are ideally placed to develop this new model of financing, and it is exciting that the Centre for Asset Management Research & Investments (CAMRI) at the National University of Singapore is working with asset managers like ours to explore the securitisation of infrastructure assets on the blockchain. The success of such early moves in Singapore would be a significant first step, and would stand to benefit a wider public: democratising and opening up potentially lucrative infrastructure assets to a host of new investors, including retail, while creating new opportunities for more infrastructure capital fundraising and investment in developing nations.