The Due Diligence Blind Spot Costing Investors Millions

Technical assessments are pristine. Financial models are validated by three independent firms. Legal documentation is comprehensive. Yet infrastructure and energy projects still hit unexpected resistance that threatens the entire investment. Here's what traditional due diligence processes consistently miss—and how to avoid costly surprises.

THE PATTERN

Across emerging and frontier markets, we repeatedly see well-structured project financing deals encounter resistance from stakeholders who weren't even on the due diligence radar. The technical work was flawless. The financial structuring was sophisticated. Yet projects stall, costs escalate, and timelines collapse because of risks that never appeared in any report.

When Perfect Due Diligence Isn't Enough

Traditional due diligence for project financing follows a well-established playbook:

• Technical Due Diligence: Resource assessments by leading consultants. Equipment suppliers with proven track records. Validated construction methodologies.

• Financial Due Diligence: Multiple financial model reviews. Comprehensive sensitivity analysis. Stress-tested debt service coverage ratios.

• Legal Due Diligence: All permits secured. Land rights verified. Off-take agreements reviewed and deemed bankable.

• Environmental & Social Impact: ESIA reports completed. Environmental permits obtained. Compensation frameworks established.

  
  

This process can generate thousands of pages of reports. It can take 12-18 months to complete. Every conventional risk is identified, quantified, and mitigated.

Yet across renewable energy, mining, infrastructure, and other capital-intensive sectors, we observe projects encountering obstacles that this comprehensive process somehow missed entirely.

The Missing Risk: Social License to Operate

The critical blind spot is what development professionals call "social license to operate"—and it's not found in permit registries or legal databases. It exists in community relationships, local political dynamics, and informal power structures.

Consider common scenarios we encounter in our transaction advisory work:

Renewable Energy Projects

Wind and solar developments with perfect wind or solar resources can face opposition from communities that have no formal land claims but whose livelihoods depend on the project area. Fishing communities concerned about offshore cables. Pastoralist groups worried about solar panel fields disrupting grazing patterns. These stakeholders often aren't classified as "affected parties" in formal ESIA processes—yet they have the practical power to shut down site access.

Infrastructure Development

Toll roads backed by traffic studies and government guarantees can be undermined by competing political factions planning parallel free routes. The competing infrastructure isn't in any government plan. It emerges from political rivalries that technical consultants aren't equipped to map.

Mining Operations

Mines with comprehensive community development agreements signed by traditional leaders can face sustained opposition when those leaders no longer represent community sentiment—particularly among younger generations with different priorities and grievances.

Power Generation

Biomass or agricultural feedstock projects with seemingly secure supply contracts can be derailed when commodity price shifts make it more profitable for suppliers to breach contracts than to honor them. The contracts are legally enforceable, but enforcement in emerging markets is slow and expensive—and doesn't keep the plant running.

The Core Issue:

Traditional due diligence is optimized to verify formal documentation. But in many markets—particularly emerging and frontier markets—informal power structures matter more than formal ones. If a risk isn't documented, it often isn't assessed. If it can't be quantified, it doesn't make it into the risk matrix.

Why Sophisticated Teams Miss This

The issue isn't competence or effort. Due diligence teams are typically highly skilled professionals using established best practices. The problem is structural—three specific design flaws in how project financing due diligence is typically conducted:

1. Formalization Bias

Due diligence processes are built around verifying formal documentation: permits, contracts, certifications, registered land titles. But in emerging markets, informal power structures—who actually influences decisions, who holds practical authority—often matter more than formal structures. Traditional processes systematically underweight or completely miss these dynamics because they're not documented.

2. Specialist Silos

Technical consultants assess engineering feasibility. Legal advisors review contracts and regulatory compliance. Environmental specialists handle ESIA. Each specialist knows their domain deeply. But political economy risks—who really has power, how decisions actually get made, what incentives drive behavior—fall between these specialist silos. Everyone assumes someone else is covering it. Often, no one is.

3. Historical Data Dependency

Financial models and risk assessments rely on historical precedent and comparable transactions. But in rapidly evolving markets, historical patterns are unreliable guides. Last year's stable political environment is this year's regulatory uncertainty. Yesterday's community support is today's opposition movement. Traditional due diligence processes struggle to capture dynamic, forward-looking political and social risks.

A Different Approach to Due Diligence

At FT Advisory and Consulting, we've developed an approach that complements traditional technical, financial, and legal due diligence with what we call "political economy due diligence"—systematically identifying the informal structures, stakeholder dynamics, and adaptive risks that conventional processes miss.

Map Real Decision Makers, Not Just Official Stakeholders

We go beyond interviewing permit authorities and contract counterparties. We identify who actually influences outcomes on the ground: local business associations, religious leaders, youth groups, informal community structures, competing political factions. In many projects, understanding these informal power dynamics is more valuable than another sensitivity analysis.

Political Economy Scenario Planning

Standard sensitivity analysis varies cost and revenue assumptions. We add political economy scenarios: What if the opposition party wins the next election? What if commodity prices shift local employment patterns? What if climate impacts change community priorities? What if a new mining discovery shifts local economic incentives? These scenarios are difficult to quantify precisely, but they're often more material than the risks that make it into traditional models.

Embedded Local Intelligence

We've found that spending time with local journalists, business owners, and community organizers often reveals more about real risks than months of formal stakeholder interviews. These sources understand the informal rules, the historical grievances, the likely flashpoints. They know which community leaders actually have influence and which are merely ceremonial. This local knowledge is invaluable—and it's rarely captured in standard due diligence.

Design for Adaptation, Not Just Mitigation

The best risk management in dynamic environments isn't eliminating uncertainty—it's building the flexibility to adapt. We help clients structure deals with adaptation mechanisms: contract flexibility, staged commitments, local partnership options, alternative routing or siting plans. When social license issues emerge, projects with built-in flexibility can adjust. Rigid structures often cannot.

THE CRITICAL QUESTION

The most valuable due diligence question isn't "What could go wrong with this project?" It's "Who has the power to stop this project, and what are their incentives?"

If your due diligence process can't answer that question with confidence, your technical and financial analysis—however sophisticated—may be built on unstable ground.

What This Means for Lenders and Investors

Project financing in emerging and frontier markets requires a fundamentally different due diligence mindset. The risks that matter most aren't always in the dataroom. They're in political dynamics, community relationships, and informal power structures that traditional processes aren't designed to capture.

This doesn't mean abandoning technical, financial, and legal due diligence—those disciplines remain essential. It means recognizing their limitations and supplementing them with approaches that can identify the social and political risks that formal processes systematically miss.

The sophistication of your financial model doesn't matter if you haven't mapped the real stakeholders. The quality of your technical assessment is irrelevant if you've misunderstood the political economy. The thoroughness of your legal review is meaningless if you've overlooked who actually holds power on the ground.

Due diligence isn't just about validating assumptions. It's about discovering what you don't know you don't know. And in project financing—particularly in complex, evolving markets—what you don't know can cost far more than what you do.

How FTAC Can Help

Our Transaction Advisory team has extensive experience identifying the risks that traditional due diligence processes miss. We work with lenders, investors, and project sponsors to:

• Conduct Political Economy Due Diligence: Map informal power structures, identify real decision makers, and assess social license risks that aren't captured in standard ESIA processes.

• Develop Stakeholder Strategies: Design engagement approaches that address the incentives and concerns of stakeholders who hold practical power, even if they lack formal authority.

• Build Adaptive Deal Structures: Structure transactions with the flexibility to respond to evolving social and political dynamics without fundamentally compromising project economics.

• Provide On-the-Ground Intelligence: Leverage our network of local partners and experts who understand the informal rules, relationships, and risks in specific markets.

We don't replace your technical, financial, or legal advisors. We complement them by filling the gap that conventional due diligence processes leave—helping you see the risks that could derail your investment before they become expensive problems.

Assessing a Complex Project Investment?

FTAC's Transaction Advisory team helps lenders and investors identify the social, political, and stakeholder risks that traditional due diligence processes miss. Let's discuss how we can strengthen your due diligence approach.

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