The Problem of Discount Rate in Infrastructure Project: Exploring The Idea of Financial Twins (Working Paper)

Investment in infrastructure assets represents allocation of financial resources to long-lived, physical assets. Managing risk to maximize returns and minimize unforeseen negative outcomes is key to increasing investor confidence and the attractiveness of investing in infrastructure. The nature of risk represents unknown future outcomes throughout the asset lifecycle. Though static at a point in time, risk profiles vary temporally, updated constantly by a variety of factors; some factors are controllable by management decisions, while others are subject to broader market forces. The paper examines the alignment of financial modelling practice and the variable-temporal nature of risk, and proposes a digital architecture to improve its monitoring, coined the ‘financial twin’. By improving risk monitoring of assets throughout their lifecycle, infrastructure owners and managers are able increase the asset performance and financial returns through targeted management interventions, increasing asset value and minimizing the impacts of emergent risks, in-line with the practice of asset management.