Project Preparation - Financing Project Preparation: how can governments effectively utilise project preparation financing sources?
Inadequate financing for project preparation can result in projects being taken to procurement without the requisite readiness, which can lead to cost and time overruns during implementation, or a project that is not well-suited to the needs of the public.
Chapter 3 of the GI Hub’s Reference Tool on Governmental Processes Facilitating Infrastructure Project Preparation discusses three main sources of financing for project preparation:
- Dedicated Project Development Funds (PDFs);
- External Project Preparation Facilities (PPFs); and
- Governmental budgetary allocations.
The GI Hub has collaborated on this blog topic with Matthew Jordan-Tank, Director of Infrastructure Policy and Project Preparation at the European Bank for Reconstruction and Development (EBRD), which has an Infrastructure Project Preparation Facility that provides project preparation, policy support and institutional strengthening to support the development of bankable infrastructure projects. The EBRD is also an integral member of the Multilateral Development Bank (MDB) Infrastructure Cooperation Platform and led the work on the Project Preparation Workstream Guidance Note on PPF Structure and Operations.
Infrastructure project preparation costs in developing countries typically range from 5-10% of the total project investment, and about 3-5% of project costs in developed countries.
As project preparation costs can vary widely, these cost figures are only indicative and are based on the following factors:
- project size and complexity;
- geographic location(s);
- degree of technical detailing required;
- social and environmental impacts; and
- the extent of upstream preparation required.
While the majority of funding for project preparation is through government budgets, national and sub-national PDFs and PPFs developed by MDBs and other multilateral entities are also being used.
PDFs and PPFs: what are they?
Many countries have set up central PDFs to provide dedicated financing for conducting feasibility studies, transaction advisory support for projects and to help counter capacity gaps amongst Government Contracting Authorities (GCAs). Often, these PDFs are set up under public-private partnership (PPP) units and focus mostly on developing PPP projects, where the costs of project preparation are higher due to the level of rigour private investors need to decide to commit capital to a long-term and complex project financing structure. PDFs should be backed by effective governance, institutional capacity and sustainable financing.
Clarity of PDF objectives, scope of operation and interface with GCAs is critical. In Indonesia, for example, the Ministry of Finance has established its own Project Development Facility to assist GCAs in hiring transaction advisors, undertaking feasibility studies and PPP procurement. Earlier stage preparation activities, such as outline business case preparation and pre-feasibility studies, are financed by GCAs or other institutions in Indonesia, such as BAPPENAS, the Indonesia Ministry of National Development Planning.
Externally funded PPFs have also been created by MDBs, and other development partners, as a source of funding for governments to help in preparing infrastructure projects.
There are concrete lessons learned from these MDB-funded PPFs, which should help shape new PPFs now in the planning stages:
- Seek the right mix of international and local advisors: PPFs provide their support largely through experienced advisors and technical experts that help developing and emerging country governments prepare PPPs and other commercially viable infrastructure investments. In this context, engaging experienced and well-known government advisors can also lift investor-comfort levels in the face of comparably higher perceived risk profiles for developing and emerging country investment markets. These perceived risks can stem from factors such as unproven PPP programs and perceived weakness in government institutional capacity.
- Procure for both quality and cost: Particularly for developing and emerging countries, one of the greatest concerns is the quality of the services that are to be provided. Procedures for procurement and contracting for advisory services must be flexible and transparent to ensure that assignments can be efficiently executed with high standards of performance, while providing the necessary accountability.
- Consider the use of panel or framework consultancy contracts: The use of well-designed framework or panel consultancy approaches can achieve both a flexible and timely mobilisation of consultants. For example, EBRD’s use of PPP framework consultants, selected by international tender in 2015, has allowed its PPF to ‘call off’ and mobilise consultants from among the eight pre-selected framework consultant candidates on average within eight weeks from the beginning of the selection process. The in-house PPF team has performed this service for the benefit of public sector governments for over 50 projects (PPPs and public sector projects) since late 2015, reducing the overall project preparation timeline by six months versus the traditional approach to consultant selection using MDB technical assistance.
- Above all, these PPFs efforts funded by MDBs and other DFIs should strive to create significant and lasting local capacity improvements – as at the end of the day, the projects are owned, managed and supervised by national and local governments in the developing and emerging countries.
Budgetary allocations still dominate
Notwithstanding these dedicated funding avenues through PDFs and PPFs, project preparation financing for infrastructure is dominated by government budgetary allocations to the GCAs.
Even in Africa, where many PPFs are active, 70-80% of project preparation funding still comes from government budgets.
Given the scale of spending on project preparation that occurs using this route, governments should pay attention to improve the efficacy and impact of budgetary spending by line departments on project preparation. Incorporating clear traceable budgetary line items can help create the foundation for consolidating, reporting and establishing a baseline on expenditure incurred on project preparation.
In South Africa, the Budget Facility for Infrastructure (BFI) was established to address weaknesses in project preparation and with the delivery of large infrastructure projects. The BFI serves as a financing facility that is fully integrated into the national budget system. It provides specific information on the funds utilised towards project preparation and financing and ensures that fiscal resources are committed in a transparent manner.
More detailed guidance for governments on utilising each of the above financing sources for project preparation can be found in Chapter 3 of the Reference Tool.
Our next blog in the series will examine medium and long-term infrastructure planning and the importance of translating these plans into a prioritised projects pipeline.
Read our previous blog in the series on the importance of an effective enabling environment for project preparation here.
See ‘Unleashing private capital for sustainable infrastructure greenfield projects’ (Global Infrastructure Basel 2014), and ‘Infrastructure Finance in the Developing World’ (Global Green Growth Institute 2015).