Description
Project preparation financing is a de-risking mechanism which consists in financing project preparation activities. Project preparation activities take place prior to financial close and cover a wide range of activities (e.g. establishing the enabling environment, project definition, project feasibility assessment, financial structuring).
Project preparation activities can be financed through a number of different facilities. Project Preparation Facilities (PPFs) are dedicated structures, oftentimes dependent on MDBs, that finance project preparation activities mainly through grants. Other entities may also finance project preparation activities through grants (e.g. trust funds, donor programs) or through risk capital or loans (e.g. DFIs, governments).
Certain characteristics are regarded as key for PPFs to fulfil their de-risking role successfully: a focused mandate (e.g. specific technologies, project size) in line with their funding capacity; flexible procedures, eligibility criteria and application processes to reflect market developments; and a long lifetime to build on lessons learned and develop expertise. The duration of the PPF can be extended with a self-sustaining funding model, such as repayable grants or convertible instruments.
Benefits
By laying the necessary technical, financial, legal, and governance foundations, project preparation funding helps to reduce the risks typically occurring during the preparation cycle. It increases the likelihood of attracting both public and private sector investment in the subsequent construction cycle. It helps ensure that projects meet necessary conditions such as technical feasibility, regulatory approvals, financial viability, and community acceptance.
Figure 1: Sources of financial resources for project preparation
Source: ICA, Assessment of Project Preparation Facilities for Africa, 2012, https://www.icafrica.org/fileadmin/documents/Knowledge/ICA_publications/ICA-PPF-Study%20Report-ENGLISH-VOL%20A.pdf
Case Study
AfDB infrastructure Project Preparation Facility
The New Partnership for Africa's Development - Infrastructure Project Preparation Facility (NEPAD-IPPF) is a special multi-donor fund established in 2005 and hosted by the African Development Bank (AfDB).
The NEPAD-IPPF supported regional integration and sustainable infrastructure development in Africa (e.g. power transmission). The facility provided grants for various project preparation activities (i.e. pre-feasibility studies, feasibility studies, project structuring, capacity building) therefore supporting the creation of an enabling environment for regional infrastructure development. These grants helped de-risk projects by ensuring that they were investment-ready, thereby attracting financing from the public and private sectors.
NEPAD-IPPF targeted projects in the energy, transport, information and communication technologies, as well as water resources management sectors. The initiative played a crucial role in improving regional connectivity for intra-African trade, in line with the African Continental Free Trade Area (AfCFTA) and the African Union's Agenda 2063. Between 2004 and 2022, the Facility approved 106 grants totaling USD 115 million, leveraging USD 11 billion in investment financing.
Additional Sources
- ICA, Assessment of Project Preparation Facilities for Africa, 2012, https://www.icafrica.org/fileadmin/documents/Knowledge/ICA_publications/ICA-PPF-Study%20Report-ENGLISH-VOL%20A.pdf
- City Climate Finance Leadership Alliance, Summary of Good Practice of Successful Project Preparation Facilities, 2018, https://gib-foundation.org/wp-content/uploads/2021/08/20180201_PPF_Report_final.pdf
- USAID, Assessment of project preparation facilities, 2016, https://pdf.usaid.gov/pdf_docs/PA00M24X.pdf
- https://www.afdb.org/en/topics-and-sectors/initiatives-partnerships/nepad-infrastructure-project-preparation-facility-nepad-ippf