Mathematical Models and Methods for Infrastructure Investments: A Critical Analysis of the Models and Methodologies for Infrastructure Investments, Proposed by EDHEC Business School and Moody’s

The work of seeking more appropriate models for infrastructure finance is critical due to the fact that there is a gap between the amount of infrastructure the world will need in order to support expected rates of economic growth ($3.3 trillion spent annually) and what they are currently investing ($2.5 trillion spent annually). The G20 hope the private sector can fill this gap. One of the problems with the mostly private market for infrastructure project finance is that there is currently no standard, or particularly appropriate financial model in use. The EDHEC Infrastructure Institute (EDHEC) has published over twenty reports on the subject of debt and equity infrastructure investments, which contain mathematical models that were created to develop benchmarks for these kinds of investments. Moody’s have also published research that discusses the methodology they use for rating infrastructure project finance. This paper is a critical analysis of the research published by EDHEC and Moody’s on the subject of valuing and rating infrastructure project finance. Through their work EDHEC have taken a big step towards standardising valuation methods in a hitherto opaque market. Their model is significantly more robust than Moody’s static rating system, which does not take into account the dynamic and path-dependent nature of risk and returns in infrastructure projects.