Project Finance in Emerging Markets: Examining the Role of Risk Mitigation Instruments in Attracting Foreign Direct Investment

This paper examines the role of risk hedging instruments in mobilizing foreign direct investment (FDI) for infrastructure development in emerging economies, focusing on Francophone West Africa over the period 2018–2025. Persistent infrastructure deficits in the region are exacerbated by heightened political, regulatory, institutional, and macroeconomic risks, which continue to deter long-term private capital. Within this context, the study assesses how structured risk mitigation mechanisms—particularly political risk insurance, credit guarantees, and blended finance arrangements—influence investor behaviour, project bankability, and infrastructure delivery in fragile settings.
Using a review-based methodology, the paper integrates insights from Transaction Cost Economics, Institutional Theory, and the Risk–Return Trade-Off Framework to explain investment decision-making under uncertainty. These theoretical perspectives are complemented by illustrative case studies from Côte d’Ivoire (Azito Power Expansion Project), Senegal (Taiba Ndiaye Wind Farm), and Burkina Faso (Zagtouli Solar Project), highlighting diverse applications of de-risking instruments across varying institutional environments.
The findings indicate that risk hedging instruments significantly enhance investor confidence and project viability when embedded within supportive regulatory frameworks, strong institutional capacity, and effective supranational coordination. However, their effectiveness is highly context-specific, with superior outcomes observed where risk mitigation is aligned with robust public–private partnerships and coherent state–market collaboration. The study contributes policy-relevant insights for strengthening risk mitigation frameworks and advancing sustainable, FDI-led infrastructure development in fragile economies.

Project Finance; Risk Mitigation Instruments

1. AdesojiAfrican Development Bank. (2021). Mobilizing private investment in African infrastructure: Findings from the Africa Infrastructure Development Index. AfDB. [Google Scholar] [Crossref]

2. African Development Bank. (2023). West Africa economic outlook 2023: Mobilizing private sector financing for infrastructure. AfDB. [Google Scholar] [Crossref]

3. African Development Bank Group. (2023). African economic outlook 2023: Mobilizing private sector financing for climate and green growth. AfDB. [Google Scholar] [Crossref]

4. Akitoby, B., & Stratmann, T. (2020). Financing infrastructure investment in sub-Saharan Africa: Challenges and opportunities. International Monetary Fund Staff Discussion Note. [Google Scholar] [Crossref]

5. Asian Development Bank. (2025). Innovative project finance models for sustainable infrastructure. ADB. [Google Scholar] [Crossref]

6. Blanchard, O., & Acalin, J. (2019). FDI flows and macroeconomic volatility. Journal of International Economics, 122, 103–119. https://doi.org/10.1016/j.jinteco.2019.01.002 [Google Scholar] [Crossref]

7. Coase, R. H. (1937). The nature of the firm. Economica, 4(16), 386–405. https://doi.org/10.1111/j.1468-0335.1937.tb00002.x [Google Scholar] [Crossref]

8. Emerging Africa Infrastructure Fund. (2022). Project portfolio: Taiba Ndiaye Wind Power Plant. EAIF. [Google Scholar] [Crossref]

9. Estache, A., & Wren-Lewis, L. (2021). Toward a theory of regulation for developing countries: Following Jean-Jacques Laffont’s lead. World Bank Economic Review, 35(1), 1–21. https://doi.org/10.1093/wber/lhz023 [Google Scholar] [Crossref]

10. Humphrey, C., & Prizzon, A. (2022a). Guarantees for development: Uses, impacts, and challenges. Overseas Development Institute. [Google Scholar] [Crossref]

11. Humphrey, C., & Prizzon, A. (2022b). Risk mitigation and private investment in infrastructure: Evaluating development finance solutions. Development Policy Review, 40(5), e12583. https://doi.org/10.1111/dpr.12583 [Google Scholar] [Crossref]

12. International Finance Corporation. (2022a). Mitigating risks to unlock FDI in fragile states. World Bank Group. [Google Scholar] [Crossref]

13. International Finance Corporation. (2022b). Private participation in infrastructure (PPI): Risk mitigation instruments and investment trends. World Bank Group. [Google Scholar] [Crossref]

14. Kaul, I., & Conceição, P. (2018). The new public finance: Responding to global challenges. Oxford University Press. [Google Scholar] [Crossref]

15. Khan, H., Diop, A., & Sagna, M. (2024). Institutional quality and infrastructure finance in UEMOA countries: A governance perspective. Journal of Infrastructure and Development Economics, 12(1), 24–41. https://doi.org/10.1016/j.jide.2024.01.003 [Google Scholar] [Crossref]

16. Khan, M., Andreoni, A., & Roy, S. (2024). Institutions, governance, and infrastructure-led development in emerging economies. Cambridge Journal of Economics, 48(1), 1–23. https://doi.org/10.1093/cje/bead058 [Google Scholar] [Crossref]

17. Multilateral Investment Guarantee Agency. (2023). Annual report 2023: Guaranteeing against risk, enabling investment. World Bank Group. [Google Scholar] [Crossref]

18. North, D. C. (1990). Institutions, institutional change, and economic performance. Cambridge University Press. [Google Scholar] [Crossref]

19. Organisation for Economic Co-operation and Development. (2020). Blended finance in the least developed countries 2020: Supporting a resilient COVID-19 recovery. OECD Publishing. [Google Scholar] [Crossref]

20. Organisation for Economic Co-operation and Development. (2023a). Innovative finance for development: Enhancing risk mitigation in fragile economies. OECD Publishing. [Google Scholar] [Crossref]

21. Organisation for Economic Co-operation and Development. (2023b). Mobilising private finance for sustainable infrastructure: Risk mitigation and blended finance. OECD Publishing. https://doi.org/10.1787/9a3e5c3a-en [Google Scholar] [Crossref]

22. Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance, 19(3), 425–442. https://doi.org/10.2307/2977928 [Google Scholar] [Crossref]

23. United Nations Conference on Trade and Development. (2023). World investment report 2023: Investing in sustainable energy for all. United Nations. [Google Scholar] [Crossref]

24. Williamson, O. E. (1985). The economic institutions of capitalism. Free Press. [Google Scholar] [Crossref]

25. World Bank. (2023). Scaling up solar energy in the Sahel: Lessons from Burkina Faso. World Bank Publications. [Google Scholar] [Crossref]

26. Yescombe, E. R. (2018a). Principles of project finance (2nd ed.). Academic Press. [Google Scholar] [Crossref]

27. Yescombe, E. R. (2018b). Public–private partnerships and project finance (2nd ed.). Butterworth-Heinemann. [Google Scholar] [Crossref]

• Financial Technology (Fintech): Current Research at The Cutting Edge
• Reforming Corporate Governance in Malaysia to Address Fraudulent Financial Reporting Cases
• Stock Market Efficiency and Economic Diversification in Nigeria and South Africa
• Financial Stability and Financial Performance of Small and Medium Tiered Deposit Taking Savings and Credit Cooperatives in Kenya.
• Regulator Sandboxes for DeFi: A Comparative Analysis of Policy Effectiveness in the EU, US, and Asia Pacific