Bridging the Gap: Making Sustainable Infrastructure Projects Bankable

Bridging the Gap: Making Sustainable Infrastructure Projects Bankable

The issue of bankability is a common barrier to scaling-up investment for sustainable infrastructure. Capitals are globally available, but private investments remain limited because there are simply not enough identifiable, investment-ready and bankable projects[1]. Essentially, too few projects are meeting the “risk-return” profile that traditional investors are interested in. Although the answer given to bridging this gap – “just create better project pipelines” – seems obvious, it often fails to mention the many challenges that come with project preparation.

Project preparation is an essential step in achieving project bankability and meeting market risk-adjusted return requirements. Early stage feasibility studies, for instance, lay the groundwork for sustainable, environmentally and socially responsible, and financially sound investments. They contribute to transforming uncertain projects into practicable investments. But, while they are necessary for securing private investment, finding financing and other support for their undertaking, especially in developing and emerging countries, remains a challenge. Indeed, as this is the highest-risk phase of the project life cycle, traditional investors – Development Finance Institutions, Multilateral Development Banks, Private Banks, Pension Funds and Equity Funds – usually do not get involved. Instead, local authorities and project developers are left to deal with developing bankable projects, and often lack the resources or relevant technical, legal and financial know-how to do so successfully. In that context, many equipment providers see a market opportunity and “offer” feasibility studies with technology recommendations that usually best serve their interests but are not appropriate to local needs.

Project Preparation Facilities: the missing link?

If we are to increase the bankability of project pipelines, and in turn attract more private investment, support for early-stage project development must be scaled-up. Since this recommendation from the High-Level Panel on Infrastructure Investment to the G20 in 2011, there has been an increasing emphasis from public actors (Multilateral Development Banks in particular) on Project Preparation Facilities (PPFs). PPFs are important tools to help convert projects into bankable opportunities. They typically provide technical and financial support to project holders – local authorities or project developers – for the undertaking of the technical, environmental, legal, social and economic feasibility studies. However, PPFs tend to be structured as an independent entity, separated from investors’ core activities and often have very different rules and procedures, as well as strong procurement processes that hinders their efficiency. Moreover, the wider aspects of what constitute a bankable project – the context in which it is developed, its compatibility with plans and policies and the vested interests of key stakeholders – are still given very little consideration by most PPFs.

For a Project Preparation Facility to be truly beneficial, not only do projects need to be designed and developed taking these factors into account, but all stakeholders must be involved, and their work coordinated to represent the community, public and private sectors, as well as investor interests. This is where R20’s Pre-Investment Facilities (our own version of PPFs) really stand out. Whether it is for waste or energy projects, PIFs follow a “funnel” process with criteria defined and agreed upon by policy-makers, engineers and investors to ensure a best use of resources. Not only that, but regular screenings from a dedicated Board that includes all key stakeholders in the decision process also help mitigate the risks of non-completion at every stage of the feasibility study and ensure a best selection of projects. Finally, PIFs are technology agnostic, which means that all recommendations are based on studies of the geography and local needs rather than a specific technology or equipment.

Ultimately, opening-up the pipeline of investment-ready projects comes down to two key factors: 1) Increase technical and financial support for feasibility studies and other project preparation work, and 2) ensure this work is coordinated and facilitates understanding between all key stakeholders involved.

By David Albertani, R20 Program Director & Dino De Francesco, R20 Communications Manager

[1] OECD, 2018, Developing Robust Project Pipelines for Low-Carbon Infrastructure, OECD Publishing, Paris, https://doi.org/10.1787/9789264307827-en.