De-Risking Infrastructure Finance through Flexibility in Engineering Design

This paper proposes a new, highly collaborative approach to reduce the financial risks that infrastructure development faces and thus to expand the pipeline of feasible projects. The approach innovatively combines advanced engineering methods with financial analysis to de-risk project outcomes. It relies on the concept of flexibility in engineering to navigate uncertainty and improve the risk profile of projects to sustainably bridge the gap between supply and demand for infrastructure services. The approach has four main elements: (1) explicit recognition of relevant design uncertainties; (2) proactive analysis of attendant financial risks; (3) development of real options that confer protection against these risks; and (4) definition of a strategic plan for a derisked design that improves financial results across different futures and priorities. This paper illustrates the process with an example dealing with LNG infrastructure, but conceptually generalizable to a broad range of infrastructure projects and types.