Can a Chinese-led multilateral initiative help unlock more sustainable infrastructure in the Global South?

By Liu Shuang, Wang Ye and Hayden Higgins

When it comes to sustainable development projects in the Global South, such as renewable energy, a persistent problem is that developers and financiers don’t agree on the pipeline of bankable projects. Financiers say it’s empty, and developers think it’s full.

One major reason for the gap comes from how projects are prepared and presented to investors. Bigger and better support for this part of the project development process can help more projects see funding, increasing progress on our sustainable development and climate goals.

In February 2023, Multilateral Cooperation Center for Development Finance (MCDF) made a $2.8 million grant to support project preparation for an Egypt-Sudan power connectivity project, demonstrating the role public finance can play in project preparation.

The MCDF is a multilateral financial mechanism jointly launched in 2020 by China’s Ministry of Finance, Asian Development Bank, Asian Infrastructure Investment Bank and other multilateral development institutions. Project preparation is one of MCDF’s three finance facility buckets, which accounts for 75% of its total technical assistance resources (the other two buckets are information sharing and capacity building). So far, MCDF has funded six project preparation grants (table below), with a total amount of over $7 million.

Table 1 Project preparation grants approved by MCDF, Source: The MCDF website, assessed on May 16.

Why project preparation?

When appealing to investors, a well-prepared project must be able to demonstrate its financial, technical, legal and environmental feasibility as they evaluate risks and their mitigations.

But project preparation is complex, costly, and risky. It will typically contribute 5-10% of the total cost of an infrastructure project in a developing country. It takes specialized capacity to conduct concepting and feasibility analysis.  What’s more, the projects may still fail to reach tender or financial close – meaning these costs can turn out to be for naught. Without sufficient funding, project preparation becomes a missing link hampering many projects from getting off the ground.

Figure 1 Project preparation in project lifecycle

As a result, there is large demand for funds that could help project developers with project preparation. Better early-stage preparation would also bring down risks for the investors by enhancing a project at an earlier stage.

What is MCDF and how it operates

The MCDF was set up to address this missing link. Like similar project preparation facilities (PPF) set up by other multilateral and development financial institutions, MCDF’s grant-based support will be used to cover early- or main-stage preparation of projects.

More specifically, in early-stage project preparation, it can support activities related to pre-concept papers, including project identification and concept development, and pre-feasibility studies. While in mid/late-stage project preparation, it can support the efforts to complete feasibility studies, due diligence, safeguards policy and other requirements to achieve higher level of project readiness.

By covering early-stage project preparation activities, the MCDF provides much needed funding complementary to other PPFs, which “focus more heavily on the later stages of the project development process”. Take the example of Asian Infrastructure Investment Bank (AIIB)’s Project Preparation Special Fund, with contributions from Mainland China ($50 million), the United Kingdom ($50 million), Korea ($18 million), and Hong Kong ($10 million), which does not cover “upstream work” or “project pre-feasibility studies”. China Overseas Infrastructure Development & Investment Corporation (COIDIC), an “incubator for infrastructure projects”, only supports engineering, legal and financing preparation. 

Figure 2 Application Process of MCDF’s Finance Facility funding, Source: Authors based on MCDF Operations Manual (2021)

How is MCDF different from other types of China’s financing abroad?

The MCDF is not the first time China has contributed to project preparation funding through multilateral development financial institutions (see the table below). However, it is the first independent funding facility that China (Ministry of Finance) has taken the lead in establishing.

World Bank GroupGlobal Infrastructure Facility through the China-World Bank Group Facility2015$25 million
Asian Infrastructure Investment BankProject Preparation Special Fund2016$50 million
New Development BankProject Preparation Fund2017$4 million
Source: Authors

It is also the first major Chinese-led attempt to engage in upstream project development. From 2013 to 2018, China provided foreign aid of RMB127.8 billion ($18.36 billion) in grants, and it mostly focused on direct support in small and medium size social welfare projects, equipment and commodities, education and training. Beyond this bilateral development finance, other Chinese investors have even fewer incentives in financing early-stage project preparation activities. For example, the China-Africa Development Fund, an equity investment fund established by China Development Bank, will only consider projects that have already completed feasibility studies. Chinese banks also do not engage in project preparedness, instead relying on others to bring bankable projects to them.

What next?

The World Bank estimates that it will cost up to $4.5 trillion to prepare sustainable infrastructure investments to close a global infrastructure investment gap of $93 trillion by 2030. Closing this gap requires optimizing how current sources of finance are applied, expanding the pool from new sources, and making funding options accessible earlier in the project cycle.

By the end of 2021, the MCDF had secured a total of $73 million contribution from donor countries. With its design of 75% spending on project preparation, it can provide more than $50 million in funding to help build bankable projects.

And MCDF can have benefits beyond its own operations too. There are no existing standards used to evaluate PPF’s performance. The size of MCDF’s operation provides an opportunity to create a benchmark, along with peers and contributors, that would help evaluate the contributions of PPFs towards closing the sustainable infrastructure gap.

Going beyond the MCDF, China could allocate more resources to building out project pipelines in developing countries. While the MCDF can only build bankable projects for AIIB, the Ministry of Finance and China’s DFIs can provide more targeted support to develop sustainable infrastructure projects, which can be considered by China and overseas investors. Allocating significant amounts of China’s foreign aid, which mostly went to direct investment in the past, funding to invest more in project preparation – as well as other financing mechanisms – that can mobilize other funding sources, would enable even greater impacts.

LIU Shuang is the World Resources Institute (WRI)’s China Finance Director, with a focus on China’s overseas investment. With policy makers, financial institutions, NGOs and other partners, she works to enhance the regulatory framework and provide enabling conditions, to shift China’s investment to sustainable finance. Her team also looks at China’s contribution to global financial governance and system, including debt restructuring.

WANG Ye is the Research Associate in the Finance Center and the Sustainable Investment Program of WRI China. She manages green finance and China’s overseas investment related projects and research. 

Hayden Higgins is the Communications Manager for WRI’s Finance Center. At WRI, Hayden brings together experiences from media and environmental advocacy, including work with National Journal, U.S. Climate Plan, and Sierra Club. He has backgrounds in carbon pricing, sustainable development, and water rights.

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