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
USAID clean energy early-stage development facility
The Clean Energy Finance Facility for the Caribbean and Central America (CEFF-CCA) was a financing initiative designed to stimulate private sector investment in clean energy projects in these regions. Established in 2015 by the US Department of State, USAID, USTDA and the Overseas Private Investment Corporation (OPIC), the two-year program addressed the renewable energy potential of the Caribbean and Central America.
CEFF-CCA provided early-stage project development grants to help promising but undercapitalized projects overcome key planning and feasibility challenges, making them attractive for further investment and implementation. CEFF-CCA funding was available to multiple stakeholders (i.e. investors, project developers, public and private sector sponsors) and focused on projects using commercially proven renewable energy technologies for power generation, market-based solutions, and infrastructure catalysts. These projects had to demonstrate social and economic benefits, including improvements in energy access, security, poverty alleviation and gender inclusion.
Eligible projects included power generation facilities, small-scale clean energy systems and infrastructure initiatives that enhance the renewable energy sector. CEFF-CCA funds could be used for engineering, legal, consultancy and technical analysis costs.
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://2012-2017.usaid.gov/where-we-work/latin-american-and-caribbean/clean-energy-finance-facility-caribbean-and-central