Infrastructure Asset Tokenisation: Unlocking New Investment Opportunities through Public-Private Partnerships and Blockchain Solutions

Project development: use of public-private partnerships and financing model

Public-private partnerships (PPPs) have become an essential structure for promoting infrastructure development in both developed and developing countries, blending public and private sector expertise and resources. PPPs aim to attract private capital to finance public interest services, with financing options including multiple sources such as equity, loans, bonds, leasing companies, and vendor financing. Project finance techniques are suitable for PPP projects, enabling the construction and operation of infrastructure assets through special purpose vehicles (SPVs) and limiting the promoter’s liability. Although project finance has many advantages, including favourable tax treatment and risk reduction, it can also have downsides such as increased lender risk and higher transaction fees.

Nevertheless, the significant limitations of infrastructure investment and financing tools arise from low asset transparency and traceability, inadequate data, and high transaction costs – issues which blockchain technology can potentially address. Is blockchain the solution?

Blockchain and tokens as a solution: the concept, its main advantages and disadvantages

Blockchain is a distributed database that records all transactions that have ever occurred in the network, while tokenisation is the process of representing assets digitally on the blockchain, with cryptographic tokens representing programmable assets or access rights in payment, utility, or security token categories.

Blockchain and tokens offer advantages such as: (a) faster issuance and transfer of tokens; (b) lower costs: tokenisation can reduce the cost of debt issuances, settlement, clearing, and safekeeping by conducting transactions through blockchain-based systems rather than through conventional financial channels involving several intermediaries. Blockchain-based transactions reduce dependency on manual processes, facilitating intergovernmental transfers and unlocking trillions of unreconciled funds into infrastructure development without additional external capital resources; (c) greater transparency: tokenisation is a trustworthy, transparent, and sustainable system since the dissemination of information and governance rules is automatic, immediate, and immutable on the blockchain. Completed transaction history, investors’ identities, digital wallet addresses, and other financial data are recorded immutably. This ensures transparency and accountability among the various involved parties, such as project sponsors, project administrators, financial practitioners, investors, and citizens; and (d) liquidity: the tokenisation of government bonds allows for fractional tokens with a value of less than $1,000. This increases liquidity and enlarges the investor pool participating in bond sales, mainly in a low entry price scenario.

Moreover, blockchain and tokenisation also improve security (by making it possible to disclose or make public desired information and simultaneously track the wallet addresses involved in the project), data storage, investor protection, and SMEs’ access to funding. Investment in small-scale infrastructure is possible, lowering fixed costs and encouraging fractional investments, which in turn promotes and enhances inclusivity. This is a crucial point, as it allows the financing of a greater number of projects, whether big or small, while also raising funds for multiple projects simultaneously.

However, the implementation of blockchain and tokens for project financing requires compliance with legal and regulatory requirements, as it comes with risks and challenges associated with regulatory uncertainty and legal support. Careful planning, execution, and monitoring are necessary to ensure its effectiveness.

(For further references related to these paragraphs, please refer to the following links: (1) A Conceptual Study on the Role of Blockchain in Sustainable Development of Public–Private Partnership, Alessandra Tafuro, Giuseppe Dammacco, Antonio Costa, 2023; (2) Framework for a Blockchain-Based Infrastructure Project Financing System, Yuanxin Zhang et. al, 2021; (3) Financing Public-Private Partnership Infrastructure Projects through Tokenization-enabled Project Finance on Blockchain, Yifeng Tian, 2022 (4) Blockchain-enabled tokenization for sustainable and inclusive infrastructure investment, Yifeng Tian, 2022)

ESG reality incorporated through tokens

To improve environmental and social benefits coverage, this Insight could discuss how infrastructure tokenisation could increase investment in environmentally friendly and socially responsible projects or help meet sustainable development goals. For example, tokenisation can increase access to funding for renewable energy infrastructure projects, thus encouraging the transition to sustainable energy sources and reducing carbon emissions. Tokenisation can also promote investment in social infrastructure such as schools, hospitals, and affordable housing, improving the quality of life for communities.

It is therefore possible to decide what companies projects will work with, which in this case could only be ESG friendly companies.

Infrastructure tokenisation: the opportunity of the future?

The infrastructure sector is confronted with several challenges, such as inadequate governance and management practices, resulting in poorly managed infrastructure systems. Infrastructure projects typically require large amounts of capital and are not immediately profitable, posing additional challenges. To address this, innovative mechanisms must be developed to attract private financing, lower capital costs, and enhance investment returns. Ensuring information symmetry amongst stakeholders is crucial in this regard, and transparent data is necessary to enable investors to make informed investment decisions.

Infrastructure asset tokenisation seems to present an opportunity since it refers to the process of creating digital tokens that represent the value or performance of infrastructure assets, whether listed equity or private equity held by SPVs, as well as the conversion of debts such as loans and bonds into tokens. The tokenisation of infrastructure assets involves several key steps which can be grouped into 5 (five) stages.

First, a due diligence needs to be conducted, followed by the determination of the terms and conditions of the digital token backed by infrastructure assets. This includes coding the legal and regulatory requirements into smart contracts and filing the necessary documents. These smart contracts govern the digital tokens, with parties agreeing to the terms that are written in code lines within the blockchain network and ensure that tokens can be transferred to investors without intermediaries once the terms agreed upon, such as performance metrics based on value pools, have been met, while simultaneously recording relevant financial information immutably onto the blockchain. The contractual terms and historical data are visible to all participants, guaranteeing transparency, accuracy, and efficiency. Infrastructure asset tokenisation thus leads to the greater transparency, liquidity and tradability of currently illiquid infrastructure assets, lower barriers to small-scale project investments, and increased individual engagement in infrastructure project investments and execution.

The second stage involves appraising the infrastructure assets, establishing a SPV, selecting a technology platform, and programming smart contracts. It also includes transferring transactional information onto the blockchain to ensure transparency and accuracy.

The third stage involves evaluating investor compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements and regulations. Token pricing is determined and the newly created tokens are distributed to primary investors in exchange for investment capital.

The fourth stage consists of managing the whitelist and trading on a secondary market. Tokens can be traded on token exchanges or traditional capital markets, promoting liquidity and enabling peer-to-peer transfers.

The final stage involves the distribution of dividends, enabling shareholder voting, reporting, taxing, and accounting. Blockchain technology enhances transparency by providing accessible records for tax and accounting purposes.

As infrastructure transitions to more sophisticated and inclusive systems, there is a growing demand for efficient financing solutions. In this regard, tokenisation can help support alternative financing models to overcome the limitations of conventional financing systems. This solution promotes transparent and efficient transactions by eliminating intermediaries, reducing transaction costs, and boosting infrastructure project accessibility, while potentially unlocking efficient financing for marginal projects.

A successful and increasingly common example of infrastructure tokenisation

The New York City Real Estate Asset Tokenisation Project is a successful example of how tokenising infrastructure assets can enhance accessibility, liquidity, and transparency in the real estate sector. This approach breaks down barriers to investment, making it easier for individuals and institutions to participate. The use of blockchain technology makes it simpler to track ownership and allows investors to access detailed information. By making fractional ownership possible, tokenisation also creates investment opportunities for smaller investors who would not typically have the resources to participate in such projects.

The application of infrastructure tokenisation: what could prevent its implementation?

When considering the application of infrastructure tokenisation as a new model for financing and developing projects, it is crucial to keep in mind the following question: how can the implementation of tokenised solutions for infrastructure financing be guaranteed to be sustainable, inclusive, and beneficial for all stakeholders involved, including governments, private sector entities, investors, and citizens? In other words, it is vital to ensure that tokenisation initiatives are sustainable over the long term, do not adversely impact any groups or stakeholders, and provide benefits for everyone involved.  

The successful implementation of tokenised solutions for public infrastructure financing in developing countries requires investment in the necessary infrastructure, human capital, and capacity building. This includes training and incentivising government officials, providing blockchain education courses in universities and research institutions, and engaging with blockchain technology companies and start-ups to aid in the implementation of such initiatives.

Regulatory issues must also be considered when dealing with tokenised government bonds and infrastructure assets. The use of tokenised securities and digital assets demands regulatory frameworks and policies that promote investor protection, prevent money laundering, and ensure market integrity. Regulatory authorities, blockchain companies, and financial institutions need to work in collaboration to create and enforce these frameworks and policies. However, it should be borne in mind that certain digital assets considered securities, because they meet the requirements to be classified as such, are further subject to the applicable securities laws.

It is therefore essential to take a collaborative approach that engages all relevant stakeholders, including the public sector, private sector, expert communities, civil society, and international organisations. Any initiatives must be implemented with a strong emphasis on stakeholder engagement, transparency, and accountability to create a sustainable and inclusive solution. Tokenisation has the potential to revolutionise infrastructure financing and improve economic growth and development. Faced with the challenges associated with the project financing of PPPs, mainly related to infrastructure development, blockchain and tokenisation present themselves as possible structured solutions with great added value. Yet the predominant mindset will need to change to give the future a chance. Will this opportunity be taken?