3. How do project development and financing facilities work?

Project development and financing facilities take a number of different forms, and use different instruments, including grants, loans, equity, seed finance, and guarantees. They can be structured over a course of several years to stimulate a project stream, or to revolve so that repayments of early loans are used to finance later loans.

The intention is that project development and financing facilities stimulate local sources of finance, from users, domestic banks, or pension funds, at commercial or near commercial terms, although the fund itself does not necessarily operate on these terms.

A finite project development fund may provide grant-based assistance to identify projects, coordinate stakeholders through project development and fund feasibility studies. Funding could be from donor agencies or central government for a set period (for example, five years). It could also become a revolving fund if successful projects pay back preparation costs over time and these repayments support further project preparation. A financing facility can also be either finite or revolving, along the same lines.

The TOP looks in detail at the function of project development and financing facilities in each of the four stages of a typical project.

The concept stage is about identifying a range of projects from a range of stakeholders to achieve sector or poverty reduction goals, or to support the domestic private sector. This should be as open as possible, allowing innovation, and supporting entrepreneurship to meet the challenges faced by communities in rural, small town, peri-urban, or urban areas.

In the feasibility stage, project development includes the process of preparing a business plan taking into account legal, regulatory, financial, technical, and socio-economic and environmental impact factors. One objective is to minimise the risk of failure by meeting both financial criteria and community demand.

In the implementation stage, specific activities may include construction, technical, financial, and management training and establishing appropriate networks to ensure communication and capacity building within different levels of government. Appropriate finance mechanisms and an appropriate finance partner should be identified, and financial transactions take place.

The maintenance stage, (which can last indefinitely) requires mechanisms to ensure that the technical and ‘soft’ (people centred) aspects of a project are maintained and work effectively.

Following implementation, the financing facility may work with the operator and/or owner or regulator to avoid default and to ensure regular repayment. The project development facility provide additional technical assistance and capacity building, and work with government officials, donors and other stakeholders to scale up or replicate successful projects.

All these processes should help to build public and private sector capacity for accountability and transparency, and build a culture of effective monitoring.