Across Africa, companies and project developers frequently say the same thing:
“We have a good project. We need financing.”
The project may respond to a genuine market need. It may involve expanding a factory, developing renewable energy, building logistics infrastructure, increasing agricultural processing capacity or introducing a new service.
Yet having a good investment idea and having a project that a bank, development finance institution or investor can finance are not the same thing.
Between the two lies project preparation.
And that gap can determine whether capital is mobilised at all.
From opportunity to investment
Consider a company planning to expand its production capacity.
Management may know that demand is increasing and that additional equipment is required. It may even have identified the supplier and estimated the investment cost.
From the company’s perspective, the opportunity may appear relatively clear.
A financier sees a different set of questions.
How large is the addressable market? What assumptions support projected revenues? How sensitive are cash flows to changes in prices, demand, exchange rates or operating costs? How much equity will the sponsor contribute? Can the project service its debt? What permits are required? What environmental and social risks exist? What happens if construction is delayed? Who carries each major risk?
These questions do not necessarily challenge whether the underlying idea is good.
They test whether the idea has been sufficiently developed to become an investment proposition.
The missing middle
The path from an idea to financing usually requires several layers of analysis:
- Investment opportunity
- Market and demand assessment
- Technical feasibility
- Business model and financial projections
- Risk assessment
- Environmental and social considerations
- Financing structure
- Investor documentation
- Bankable project
This “missing middle” is increasingly recognised by development finance institutions.
The African Development Bank operates dedicated project-preparation facilities specifically to help transform early-stage concepts into viable projects capable of attracting public and private financing. The World Bank has similarly highlighted weak project preparation as a practical barrier to mobilising private investment, particularly for infrastructure.
The underlying lesson extends well beyond large infrastructure projects.
Capital does not finance needs. It finances sufficiently developed propositions.
Bankability is more than profitability
One common mistake is to equate profitability with bankability.
A project may produce attractive projected returns and still be difficult to finance.
Why?
Because financiers are not assessing expected return alone. They are also assessing the probability that those returns will materialise and the risks that could prevent repayment.
A financial model based on ambitious sales assumptions but without credible market evidence is weak.
A technically sound project without the necessary licences may not be ready.
A highly profitable investment exposed to unmanaged foreign-exchange risk may require a different financing structure.
A project with significant environmental or social impacts may require additional studies, mitigation measures or safeguards before a development financier can participate.
Bankability therefore emerges from the interaction between commercial viability, technical feasibility, financial sustainability and manageable risk.
Preparation has economic value
Project preparation is sometimes viewed as an additional cost before the “real” financing begins.
Economically, the opposite may be true.
Good preparation reduces information asymmetry between the company and the financier.
It allows assumptions to be tested before large amounts of capital are committed. It exposes risks early enough for them to be mitigated or allocated. And it helps identify what type of financing is actually appropriate.
The African Development Bank’s project-preparation facilities finance activities such as technical studies and early-stage design precisely because stronger preparation can improve readiness for implementation and financing.
Better-prepared projects can also create more credible conversations with lenders and investors.
Instead of saying: “We need USD 10 million to expand.”
a company can explain: “We require USD 10 million for a defined investment programme, supported by demonstrated demand, projected cash flows, identified risks, a specified sponsor contribution and a financing structure consistent with the project’s repayment capacity.”
Those are very different propositions.
Financing should influence preparation from the beginning
Perhaps the most important implication is that financing should not be considered only after a project has been designed.
The likely requirements of lenders, investors and development finance institutions should influence project preparation from an early stage.
This does not mean designing projects around financiers.
It means recognising that how a project will ultimately be financed is part of the project’s economics.
At DSI Analytics, we are working with businesses and institutions to help bridge this gap — from assessing markets and investment opportunities to developing business cases, financial analysis, risk assessments, sustainability considerations and financing strategies.
The objective is simple:
To help move projects from “we have a good idea” to “we have an investment proposition that capital can evaluate.”
Because Africa’s financing challenge is not only about finding more capital.
It is also about preparing more opportunities that capital can confidently finance.