Senior Partner & Managing Director
A Principled Approach to Infrastructure Project Preparation Facilities
Many vital infrastructure projects struggle to progress beyond the concept stage because project preparation is such a costly, complex, and risky undertaking. The difficulty is particularly acute in Africa, where projects encounter frequent challenges related to capabilities, the regulatory environment, project governance, and financial resources.
In the past, much of the preparation funding has come from multilateral institutions and donors, but they cannot meet the requirements on their own. Paradoxically, the private sector, which has been keen to invest in later phases of the project, has been reluctant to finance the preparation phase. So all too few projects reach a bankable state, and the pipeline of well-prepared projects in Africa remains sluggish.
In an effort to bridge the early-stage financing gap, development banks and donors have been creating Infrastructure Project Preparation Facilities (IPPFs). So far, however, many of them have managed only limited success. Very few IPPFs have achieved sufficient scale to make the necessary impact. A new approach is needed to align and optimize each IPPF’s objectives, strategy, and portfolio management and to enable it to operate effectively and sustainably. The new approach would also leverage early financing beyond the usual public sources to include private and impact investors. Furthermore, the approach would involve the private sector in another way, tapping into its expertise through closer public-private collaboration.
On the basis of best practices observed globally, the World Economic Forum, in partnership with industry experts, has identified the following five critical principles of success for IPPFs:
By incorporating these five principles in its design, an IPPF should achieve the requisite efficiency, sustainability, and perhaps even scale to have positive impact on the pipeline of bankable projects. Not that there is a standard design formula: IPPFs vary in their underlying circumstances and strategic objectives, and their design should vary accordingly. Design will also determine the type of investors interested and can help attract them by means of certain instruments and structuring aspects, such as tiered participation rights and earmarking of funds.
For governments, the challenge of project preparation financing remains the priority, but there are also other concerns—such as institutional coordination and the capacity of the agencies involved—beyond IPPFs that require continued attention. The better-prepared project pipeline that would result from enhanced IPPFs and other policy measures will produce benefits for many stakeholders: better value for users, reduced project risks for investors, and increased opportunities for private-sector businesses through contracts for constructing and operating the new assets. The overall boost to the region’s infrastructure will have abundant positive implications for social and economic development.
The original version of the report was published by the World Economic Forum.