From Rita Martins

Roads, power plants, schools and hospitals are all essential infrastructure and facilities for a country. The government’s ability to continuously build and reconstruct such infrastructure directly impacts everyone's living standards.

When walking around London, I am always amazed at the extent of ongoing construction. But, I am equally perplexed by the amount of work that still needs to be done. The problem is that much of this infrastructure is funded by governments, which, as we know, often faces constraints in allocating funds across a number of sectors. This funding challenge has been exacerbated in recent years with government budgets stretched to mitigate the global pandemic and financial crisis.

The Global Infrastructure Hub estimates a staggering cumulative infrastructure investment gap of $15 trillion between 2018 and 2040!

To address this gap, governments have begun exploring alternative sources of finance, including private investment. However, public infrastructure projects typically require substantial upfront investments, often with minimum investment sizes of $1 million, which restricts the source of finance to only institutions or ultra-high-net-worth individuals.  

Against this backdrop, the World Bank published a report exploring the potential of using blockchain to tokenise infrastructure.  

Why does this matter?

So often discussions about tokenisation and blockchain are focused on use cases unfamiliar to many, unless they have a finance background. This example is significant because it is relatable and understandable to all. Investment in infrastructure is a pressing issue across both developed and emerging markets, impacting everyone on a daily basis.

Infrastructure Tokenisation

Tokenising infrastructure can offer several benefits, including closing the funding gap and provide better project management.

The high minimum investment threshold of $1 million restricts infrastructure investment to a select group of private investors, many of whom may be hesitant due to the long-term nature and inherent risks of such projects. Note that infrastructure projects can take years to complete and sometimes may not even be completed.

By tokenising and fractionalising infrastructure projects, governments could open up the market to more investors, attracting a broader base of investors with smaller contributions. In simple terms, tokenisation involves the representation of the asset and all its associated information (rights, history, etc.) on blockchain, and fractionalisation the creation of small fractions of that asset.

In an infrastructure tokenisation marketplace, investors could buy smaller parts of the project by providing smaller checks than the one required today ($1 million). This would mean that governments would be able to access more funding, quicker and anyone could participate. Consider the opportunities it could open up! For example, in remote small cities, the locals could provide small tickets to infrastructure projects, to built their local school and roads, while also financially benefiting from it. They can sell their part of the project for more money, or they can get revenue in perpetuity while also benefiting from the roads themselves. There are no better investors than the ones that use the infrastructure.

As with any big project, managing infrastructure projects is highly complex due to the number of contractors and subcontractors involved in the process. Manual processes and reconciliation is often required to verify and rectify deliveries, invoices and other aspects of project execution

Blockchain technology and smart contracts can improve transparency, reduce disputes, and enhance coordination among stakeholders. For instance, project milestones, material deliveries, and contractor payments can be encoded and automated on a blockchain, streamlining processes and reducing costs. This will not only speed up the process and create harmony but reduce the costs of the end-to-end process.

Challenges

While the opportunities have been clearly defined, there are still a number of challenges that need to be addressed.

The lack of regulation has been for many years a real obstacle. But, this is changing across the globe with more regulation frameworks being defined. Such frameworks will provide clarity for projects and startups developing tokenisation solutions.

In many countries, only accredited investors have access to certain investment opportunities. To qualify, investors need to meet certain wealth or annual income thresholds, or holds relevant professional certifications. Applying similar criteria to infrastructure tokenisation could limit access and hinder the democratisation of finance.

In the UK, for example, the rules to qualify as an angel investment have recently changed. Those changes have further reduced the number of individuals who can now qualify as angel investors and provide investment for early-stage startups. This reduces the ability of individuals to access and benefit from high-risk investments and lowers the funding available for startups. If the same approach is adopted for tokenised assets, the promise of democratisation will not be achieved.

For tokenisation processes to work, the full end-to-end process needs to be considered and improved. As detailed above, from the selection of material to invoice payment, the full end-to-end process would have to be included in the final solution.

However, off-chain components are often necessary for regulatory compliance, such as reconciling shareholder registries.

Final Thoughts

Does this all sound far-fetched?

You will be surprised to hear that is not actually that blue sky thinking. There are already a number of live tokenisation marketplaces that target Real Estate – the tokenisation and fractionalisation of house ownership. For example, individuals can buy and own a fraction of a house or an apartment and earn revenue from the rent.

It would not be such a leap to see similar solutions that would target infrastructure projects. But for that to happen, regulation needs to be clearly defined and the ecosystem built.