Before detailed project preparation begins, consider the distinct standards of different financing sources. In most cases, involving potential funders from the outset is advisable. MDBs/DFIs, for example, may assist with or lead the project preparation process. Private-sector projects sometimes involve investors who prefer handling project preparation steps themselves. In such cases, the analysis outlined below can inform initial discussions with private-sector financiers about investment options before they proceed with due diligence and project preparation. In other cases, RFPs will help to engage private-sector financiers (please refer to Stage 4, Component 3).

Developing a climate finance proposal for public or blended finance will often require a set of studies such as feasibility, environmental, and social-safeguard studies, risk assessments, and other analyses that are an integral part of the proposal. Countries and project proponents may face capacity constraints in developing these technical documents and may need to seek financial and technical assistance from Project Preparation Facilities (PPFs) and specialized partners. The country should identify the project proponents responsible for overall and specific components of project preparation. Additionally, it should identify how this process will be funded and whether technical assistance is needed.

Project preparation should only occur if there is a plausible strategy for funding, even though the exact funding source and structure will be determined through this step.

The project preparation cycle will generally include the following:

• Prefeasibility study: An initial assessment of the project that includes its objective, scope, alternatives, an analysis of those alternatives, and a preliminary identification of the project’s affordability (value for money).
• Technical configuration: The technical solution needs to be fully developed, including the specific technologies, standards, technical design, project location, and required resources for the project delivery. Technical experts should prepare the project design, and external review processes should be conducted.
• Feasibility study: Once the full technical design has been prepared, feasibility studies need to be conducted to review the design, consider the project’s impact, and identify any relevant risks. Feasibility studies may include financial/economic feasibility, as relevant to the project.
• Project governance and risk allocation: The project governance and ownership structure should be determined, including how fiduciary liabilities will be shared between the government and other investors. At this point, decisions about whether the government will deliver the project directly or whether a public-private partnership or private investors will be involved must be made.
• Policy and legal review: The relevant legal and policy framework in which the project will be delivered must be reviewed and the design adjusted accordingly. Key policy and legal risks should be identified, and the project structure should be adjusted if necessary.
• Costing and budget preparation: Project budgets need to be prepared by identifying and planning each activity and input required for the project and determining the cost of activities and inputs using previous comparable projects as a benchmark. Budgets should be prepared using headings matching the implementation agency’s reporting and audit requirements.
• Gender, social, and environmental impact analysis: A gender, social, and environmental impact analysis should be conducted to identify, avoid, mitigate, or minimize adverse gender, social, and environmental impacts as well as increase positive outcomes in these dimensions.

Once the project preparation is complete, the climate finance/investment proposal can be submitted for approval to the finance partner. The approval process may involve certain technical conditions or questions to be addressed by the project proponents. These may require further support or technical assistance, so it is important to incorporate a budget for this contingency.