What are the six most prevalent operational challenges in project finance? Given our expertise in the sector, CSC has seen areas such as resource allocation, regulatory compliance, and risk management come forward, with many managers looking for dedicated support to help them navigate these complexities.
Project finance, a critical tool for funding large-scale capital projects, is set for considerable growth. Research commissioned by CSC indicates that industry professionals anticipate an overwhelming upward trend to persist over the next five years. However, they also acknowledge that this growth will come with challenges, with 63% identifying the need and necessity of adapting to continually changing subsidies and tax programs.
Sectors like renewable energy, infrastructure, and real estate development are driving this expansion of real assets. However, this growth also introduces significant operational challenges, and fund managers must be prepared to navigate them efficiently.
CSC, with its extensive experience in middle and back-office services, has identified six key operational challenges that fund managers face in the project finance landscape.
1. Resource allocation
Proper resource allocation is critical in project finance. Fund managers must ensure that capital and human resources are deployed effectively across multiple elements, often across various jurisdictions.
Poor resource management can lead to project delays, costly overspends, or missed opportunities. With projects becoming more complex, balancing the right expertise and resources at each stage of the project lifecycle is essential for success.
2. Regulatory compliance across jurisdictions
Regulatory compliance poses significant challenges for fund managers, particularly for projects that span multiple jurisdictions. CSC’s recent survey revealed:
- 30% of industry professionals cite political uncertainty and inconsistent government support as critical challenges.
- Encouragingly, over 80% of respondents indicated they consider themselves well prepared to adapt to rapidly evolving regulatory requirements for project finance, with regulatory hurdles identified as the second lowest challenge to completing a project finance transaction.
Navigating different legal frameworks, changing subsidies, and evolving tax credits complicates compliance efforts. Missing regulatory updates can result in costly penalties, delays, and reputational damage. To mitigate these risks, fund managers must adopt a proactive and comprehensive approach to compliance across the various countries they are operating in.
3. Emerging asset infrastructure
Renewable energy projects, especially in solar and wind, are at the forefront of project finance activity. More than half (55%) of respondents indicated that renewables are driving their project focus, with solar energy expected to see the biggest increase in deals over the next 24 months.
However, the infrastructure supporting these emerging assets is still maturing, making execution more challenging. Fund managers need to remain agile in developing and adapting to these evolving infrastructures, which are essential to supporting long-term investment growth.
4. Financial reporting
Accurate financial reporting is the backbone of successful project finance management. Fund managers are responsible for tracking assets and liabilities, calculating net asset values (NAVs), and ensuring precise reconciliation, pricing, and valuations.
Managing these tasks across large and diverse portfolios can strain even the most sophisticated systems. Errors or delays in financial reporting can erode investor trust, negatively impact fundraising efforts, and ultimately affect the performance of the fund.
5. Operational risks and economic fluctuations
Fund managers must also navigate the broader economic landscape, including inflation, interest rate changes, and market fluctuations. These factors can severely impact project timelines and budgets. For instance, rising inflation may lead to higher project costs, while shifts in interest rates can alter financing structures, affecting profitability.
CSC’s research shows that operational risk management is crucial to project finance success. Without a strong risk management framework, projects can face delays, cost over spends, and penalties. Being proactive and adaptable in managing economic changes is key to mitigating these risks and protecting returns.
6. Insufficient risk management practices
Effective risk management is vital for avoiding significant project delays and financial losses. Inadequate risk assessment and mitigation strategies are among the top causes of these issues in project finance. From the outset of a project, fund managers need to assess potential risks and develop robust strategies to mitigate them. This includes financial, operational, and market-related risks that could impact the project’s success.
How CSC supports fund managers in project finance
CSC provides a comprehensive suite of services to help fund managers tackle operational challenges. Our integrated services, including fund administration and project finance, provide a seamless outsourcing experience that improves processes, increases transparency, and enhances investor and regulatory reporting. CSC’s commercial approach to documentation review and negotiation and extensive track record in diverse asset classes and financing structures worldwide showcase our expertise in executing project finance transactions.
In regulatory compliance, CSC adapts to evolving legal frameworks, ensuring funds remain compliant across jurisdictions. We manage regulatory changes, file reports, and ensure adherence to industry standards, allowing fund managers to focus on core investment strategies.
With a global footprint, CSC offers 24×7 support, providing fund managers with insights and assistance regardless of location. Our client-centric approach delivers bespoke solutions, enhancing operational efficiency and fostering long-term trust and transparency.
To overcome these challenges download our full report, Project Finance Report 2024: Exclusive insights on key industry trends, opportunities, and obstacles and find out more about our recent global research with project finance professionals, including views from respondents in the U.S., North America, and Europe.
