0. Introduction

Finance has emerged as an important policy tool to support and stimulate water sector reform. As traditional grants and concessional loans give way to ‘innovative’ finance solutions, attention is increasingly paid to how finance mechanisms can be structured to increase funding flows. However, innovation in financing also requires attention to broader economic and governance functions as well as to financial sector capacity.

As part of this evolution, project development and financing facilities help to develop and finance projects from the ground up. Largely funded by donor agencies and hosted through multi-lateral development banks, including the World Bank, the International Finance Corporation (IFC), and the African Development Bank (ADB), these facilities aim to support domestic private finance for a range of sectors and issues, including water supply and sanitation (WSS). Because of the strong interlinkages between accessing domestic private finance and public governance, most facilities rely on collaboration with domestic-based non-governmental organisations (NGOs), local business and government.

This Thematic Overview Paper (TOP) serves as an introduction to project development and financing facilities and explores the challenges of project preparation and financial risk. It argues that current funding flows are inadequate to the Millennium Development Goals. Global and country level estimates often fail to capture the cost of institutional reform and the support required to achieve sustainable water supply and sanitation, or long-term operation and maintenance costs. At the same time, central and sub-sovereign administration often lacks the capacity to use funds to meet policy objectives.

Although studies have shown a link between water and sanitation investment and economic growth, the water sector has not emerged as a core government issue in many countries. Successful project development can lead to more sustainable delivery, and help to increase funding for the water sector through the Poverty Reduction Strategy Paper (PRSP) and other processes.

Project development and financing facilities have relevance towards achieving the Millennium Development Goal (MDG) Target 10 to halve, by 2015, the proportion of people lacking sustainable access to safe water and basic sanitation.

This TOP is primarily written for people in the water and sanitation sector, although its content is sufficiently generic that it is also relevant to other sectors. The primary audience includes:

• Individuals wanting to learn about project development and financing facilities
• Community groups, NGOs and governmental institutions developing projects to meet MDG Target 10
• Donors and institutions seeking the best way to support the water and sanitation sector.