The water and sanitation sector faces immense challenges in attracting sustainable financing, particularly in countries where infrastructure expansion is critical. A significant hurdle is the gap in project preparation—often the missing link between ambitious master plans and the actual realisation of large-scale financing. During this month’s Connect Finance Discussion Group, we discussed strategies to close this gap, using examples from IRC’s work in Rwanda and Ethiopia.
What do we mean by project preparation?
At its core, project preparation involves both project identification (i.e. defining a set of interventions to address water and sanitation-related issues, such as not having access to these services in an area, or having too many water losses, or not having the ability to empty septic tanks) and the actual preparation, i.e. bringing the intervention together into actionable, and sometimes, bankable projects.
Project preparation includes project identification and concept note development, doing feasibility studies (technical, environmental, social, economic, financial), doing designs, financial modelling, and ensuring alignment with broader national priorities. Additionally, in the water sector, a "bankable project" refers to a project that is financially viable and attractive to investors, mostly banks and financial institutions. A bankable project is one that has the potential to generate sufficient revenue or cash flow, mostly from tariffs, to cover its operating costs, repay any borrowed funds, and provide a return on investment.
Project preparation – bankable or not - is political in nature because it involves setting priorities on where to invest public resources. Moreover, project preparation is not cheap, and it requires upfront investments.
What are some of the common limitations around project preparation?
In Ethiopia, there is an earmarked annual budget allocated by Regional (subnational) Water and Energy Bureaus for study and design, which is then used to identify projects for the following years. There are also situations when outdated study and design documents need further review and updating before implementation. Feasibility studies and detailed designs of projects are usually outsourced either to private engineering companies or to government-affiliated enterprises. In addition to subnational government structures, the Ministry of Water and Energy also undertakes project feasibility studies and detailed designs, usually by outsourcing to potential service providers for multiple regions or towns. However, Ethiopia and many countries struggle to streamline these processes (selection, approvals, approaching donors/financiers), which leads to delays in financing and missed opportunities.
In Rwanda, master plans provide a structured roadmap for project identification, but there are bottlenecks in preparing feasibility studies. These are often carried out by external consultants, and there is limited capacity to provide the quality and oversight required. Similarly, Ethiopia’s decentralised structure sees districts, zones and regional governments juggling multiple priorities without the centralised coordination required for high-quality project preparation. Depending on the size and type of projects (capital investment and technology), different subnational government structures have different mandates and roles, which are also related to capacity.
What about all the financing facilities out there?
There are at least 12 project and finance facilities available in Africa alone for water supply and sanitation (see Africa Infrastructure consortium), but it was estimated that less than 20% of the proposed infrastructure project proposals actually result in a financial transaction (see Figure below). One of the reasons has to do with the few windows available for small and middle-sized projects, where there are more issues around bankability. Whenever feasibility studies are done and projects are prioritised, there needs to be a stronger focus on financial feasibility. This means identifying projects that are financially viable and attractive to investors, which tend to be very large. However, this is not always the main priority of governments who are struggling to expand services to small towns and rural areas.
The question remains: How do we strengthen project preparation functions to unlock sustainable financing?
In Rwanda, WASAC, Rwanda’s national utility, plays a central role in project preparation, leveraging its technical expertise and standard procedures. However, gaps remain in project preparation for climate resilience and sanitation. WASAC can also play this role because existing master plans serve as a foundation to help identify and prioritise investment needs.
Ethiopia presents a more fragmented sector, with multiple stakeholders at federal, regional, and district levels. While this decentralisation allows for tailored approaches, it also complicates project coordination. Smaller districts (woredas) lack the expertise needed for complex feasibility studies, which are crucial for larger infrastructure investments.
The lack of centralised project preparation functions often results in incomplete designs or delays in accessing financing. Ethiopia’s reliance on external funding brings additional scrutiny, especially on environmental, social and gender (ESG) standards.
Ultimately, there needs to be some sort of incentive for a utility or a district to have a pipeline of projects. This could involve ensuring that a percentage of projects is funded every two years, for instance, or that there are results-based mechanisms.
Here are potential strategies to overcome the lack of adequate project preparation
Identify, or set up, a department or dedicated unit within utilities or agencies that can oversee complex project preparation, particularly for rural and smaller urban areas. Sometimes these departments and units already exist, but do not include the water sector.
In more decentralised settings, the function can be executed at a provincial level. Expecting every district to execute this function is not very effective. Some technical capacity is needed, which can be found at provincial level. In Ethiopia, there are different subnational public enterprises for large-scale study and design engineering infrastructures. These public enterprises are also consultants and provide technical assistance services for WASH infrastructure studies.
One of the functions of such platforms would be to move beyond the national level, align district-level master plans with national strategies, and connect with donor platforms to ensure better resource allocation between the supply and the demand of funds.
Projects with different scales and objectives require diverse financing options, but all of them will require some sort of pre-investment window. Ideally, this would involve grant funding or government resources to transform master plans into detailed project proposals.
Another measure would be to provide targeted training for local governments and utilities to improve feasibility study oversight and alignment with donor standards, especially for emerging priorities like climate resilience and faecal sludge management. This means standardising and improving procedures to hire consultants and providing standards and quality assurance for feasibility studies, not only technical but also including business development and making market assessments.
Final thoughts
Project preparation is not just a technical challenge—it’s a systemic issue tied to governance, capacity, and coordination. But ensuring there are adequate project preparation skills and processes is a precondition to attract either domestic or concessional repayable finance, as identified in many of the national finance strategies.
The Africa Union, within its Africa Investment Initiative, is planning to launch guidelines for developing pipelines of climate-resilient projects early next year, building on already existing guidelines. We hope these will also help fill this system gap and support the mobilisation of resources to meet water security goals in the sector.