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

Abstract

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.