Government-DFI Cashflow Growth Delay
Akhil D -
Hi all! Today, I want to talk about a concept I’ve come across in my research, which is called the Government-DFI Cashflow Growth Delay. I made a meta-analysis of all the case studies projected cash flow growth in the 40 case studies. All investment time periods were “expanded out” to a 2000-2030 period and the average growth in financial and economic cash flows was found.
The findings of this data indicate that DFI investment typically fluctuates cash flow growth rates within the first 5-10 years of a project/investment. Afterwards, the growth flatlines to similar levels regardless of DFI investment. This flatline period is called the maturity/terminal period.
There are a couple of major implications.
- Governmental Maturity: Over time, the governments spearheading and regulating these DFI-funded projects become self-sufficient, and don’t necessitate the need for DFI investment. This may be a sign that DFI investment is working to stabilize governmental projects so that they can reach financial and regulatory maturity.
- Diminishing Marginal Returns: DFIs get lesser margins once their investments reach its terminal period. This can lead to either constant cash disbursements to get guaranteed returns, or divestment into more riskier projects for the higher potential upside.
- Early-year Volatility: The data shows that returns before the terminal period are highly volatile, with DFI returns exceeding non-DFI returns at some points, and vice- versa. This concept is the reason why many DFI investments are long-term investments; they are waiting for the terminal period to get constant returns, rather than hoping for quick gains during its early volatility.
We see these implications play out in some specific case studies. In the Ethiopia-Djibouti Railway, the terminal period was reached in 2020 as commercial use began in 2018. The African Development Bank kept constant cash disbursements from 2020-2022. Then, it significantly dropped off investment as its targeted ROI was reached.
Until next time!