2. Meeting the needs of the poor

Project development refers to the administrative, financial, and technical considerations necessary to develop a comprehensive and feasible project idea. In essence, project development is about turning planning exercises – such as those undertaken during the Poverty Reduction Strategy Paper (PRSP) and Sector Investment Plan (SIP) processes – into tangible projects that can attract finance.

A financing facility is dedicated to specific projects, or sector investment programmes as identified through national planning processes. It is generally created through grant or loan funding from donors, as with a trust fund, but is managed autonomously and has more flexible operating procedures and guidelines. It often supports the development of commercially-based funding for infrastructure, as many countries are unable to support more traditional commercial or project finance.

Project development and financing facilities support a range of public and private development actors to develop viable projects and identify and work through constraints. Project development can cultivate ideas by bearing the bulk of the risks during the start-up stage, or by providing bridge finance so that a good idea can be tested until commercial finance becomes interested.

They work in different ways in different stages of the project cycle. Project development includes working with communities to identify potential projects, feasibility studies, legal and financial services and training, and technical assistance over the course of the project.

Financing activities support ideas for financial structuring, and help potential investors to raise awareness about benefits and to reduce risk. For example, there are inherent risks if loans are provided in foreign currency while tariffs are paid in local currency, since exchange rate changes may make debt repayment impossible. A financing facility can offset this risk by pooling several projects within a country, and offering finance to water projects in local currency.

Most project development and financing facilities are designed to promote varied forms of PSP in infrastructure – including energy, roads, and telecom, as well as water supply and sanitation. They can be country-specific or operate at regional or global levels. They can be structured to support large scale as well as small and medium-sized projects.

Municipal finance, whereby a municipality borrows funds or issues bonds to raise funds for water or sewerage infrastructure, is another area that project development and financing facilities aim to support. However, municipal capital markets require an advanced state of municipal governance to operate effectively. It is therefore unlikely that they will be able to service the water sector in countries with the most need and greatest financial constraint, at least until stronger controls and accountability have been developed.

Recent experience has shown that project development and financing facilities can support a new class of business people – slum dwellers, water user associations, independent service providers, entrepreneurs, and so forth – and help create and support an environment in which such businesses can thrive.

Their role in poverty reduction

Project development and financing facilities can impact directly on water and sanitation access for the poor by funding projects that provide access to services. They go beyond finding money for infrastructure. Project development is often highly demand-led, with considerable attention paid to administration and management functions, appropriate technology, and financial feasibility. Ideally, projects are planned within a broader framework of policy and governance reform, and by providing incentives for local initiative. For example, the Community Water and Sanitation Facility (CWSF) aims for community-led development of water services in slum areas, by matching local funds.

Project development and financing facilities also have an indirect impact on poverty reduction because they encourage schemes where urban facilities are able to cover their costs, and so free up traditional finance for the most deprived areas. They also strengthen water sector reform, helping to create a virtuous feedback cycle in which successful project development leads to sustainable delivery as well as to beneficial outcomes.

The use of more flexible financial mechanisms that match demand from communities can also help to reduce the transaction and administrative costs of ODA, making every aid dollar go further.