Innovative financial instruments for development The EU blending facilities. Informal CODEV meeting Limassol, 12 November 2012

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1 Innovative financial instruments for development The EU blending facilities Informal CODEV meeting Limassol, 12 November 2012

2 Mentioned by many policy initiatives: - climate change action Innovative financing A much talked about but fuzzy concept - G8 Deauville partnership - sustainable energy for all, etc.. In light of massive developmental challenges and constrained public funds, additional (nongrant) resources are needed To reach the needed financing to achieve developmental goals, the private sector is often supposed to step in and fill the gap. 2

3 Innovative financing A much talked about but fuzzy concept In reality, very few concrete actions have been taken that catalysed additional financing on a large scale. Two reasons for that: "innovative financing" is a slippery concept that can mean many different things The devil is in the detail and the design of instruments is often complex and out of the comfort zone of donors Useful to differentiate between income side (innovative financing) and the expenditure side (innovative financial instruments) 3

4 Innovative financial instruments Using grants strategically to unlock additional financing for development The targeted use of grants can address market inefficiencies and can make projects with a high economic and social return but insufficient financial return possible. Grants can set incentives, address factors that hold back investment and send out positive signals to market actors Some examples: Loan portfolio guarantees can open up the financial sector to micro and small enterprises Equity funds with donors taking the first losses can attract private investors and set a precedent in the market A grant contribution can help to reach financial closing of PPPs in the infrastructure sector 4

5 EU regional blending facilities The EC approach Blending as one of the Commission's instruments to deliver EU grants to partner countries With MS, the European Commission has set up 7 EU regional blending facilities covering all countries in the EU's area of external cooperation Combine grants from the EU Budget, EDF and MS contributions with additional nongrant resources At the project level, grant and non-grant resources are blended to create the right financing-mix for that specific project. 5

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7 EU regional blending facilities DG DEVCO's approach FINANCIAL Leverage additional public and private resources for stronger development impact. NON-FINANCIAL Improve project sustainability & speed. More financial discipline & ownership. POLICY Support to reforms in line with EU policies. 7

8 EU regional blending facilities DG DEVCO's approach PROMOTE COOPERATION & COORDINATION between European and Non-European aid actors (donors and finance institutions). 8

9 Financial sources Vary from project to project

10 910 MILLION Leveraged resources Figures since 2007 in ITF, NIF, LAIF, IFCA 30 At least 10 billion are provided by eligible public finance institutions

11 Sectors covered Figures since 2007 in ITF, NIF, LAIF, IFCA

12 CLIMATE CHANGE WINDOWS were announced in November 2010 by Commissioners Piebalgs, Hedegaard and Füle. Climate change Cross cutting sector in the blending facilities They provide new, additional resources for climate change adaptation and mitigation, as well as transparent tracking of all climate change related projects in the EU regional blending facilities. More than 500 million EU grants committed to green projects. (60% of all commitments)

13 Types of grant support Figures since 2007 in ITF, NIF, LAIF, IFCA

14 Grants used as direct investment and interest rate subsidy decrease the investment cost for the beneficiary. Types of grant support Grants as different "financial tools" Technical assistance can accelerate projects and improve the quality, efficiency as well as sustainability. Risk capital (i.e. equity & quasi-equity) aims at crowding in additional market financing for development. Currently this is exclusively used to support MSMEs. Guarantee mechanisms aim at unlocking market financing for development that is held back by high risk perception.

15 Currently the blending facilities mainly support public investment projects. (92%) Unlocking private investment With the facilities the needed tools are in place They also provide the means to catalyse private investments. The regulatory framework of the blending facilities allows using grants as innovative financial tools such as risk capital and investment guarantees. Two examples: Support to MSMEs Infrastructure PPPs 15

16 Micro, small and medium enterprises (SMEs) have an important role to play in developing economies Support to MSMEs Improving access to finance and unlocking private investment MSME demand for credit is not met by the banking sector and that leaves many without a chance to increase productivity and growth Main deterrent is a skewed risk perception of banks. Banks cannot easily assess the default risk of MSMEs and therefore prefer to provide services to less risky clients. Banks that tried MSME lending tend to stick with it, as there are less losses than expected Innovative financial tools can incentivise banks to move into this market 16

17 Funds that provide partial guarantees to local banks enable more lending to MSMEs. Support to MSMEs Improving access to finance and unlock private investment In addition using the EU grant element as a first-loss tranche in a structured fund attracts private investment into these funds. That leads to additional funding to improve access to finance to MSME. Such funds have been established in the Neighbourhood region, Central Asia, Asia and Latin America. They have already attracted additional financing and extended several thousand loans to local MSMEs. Such instruments are often accompanied by technical assistance to banks and MSMEs 17

18 Infrastructure PPPs The example of a Renewable Energy investment project Investment needs are huge, but high costs and uncertainty hold back public and private investments Upfront costs are high, but cash flows limited The high price often requires public subsidies to protect consumers Public financing can only cover a fraction of the needed investments Political risk scares off private investors The economic crisis lead to additional supply side constraints (liquidity, risk-aversion) 18

19 Using the grant element strategically to cover a financing gap or providing an investment guarantee can make such projects possible. Infrastructure PPPs The example of a Renewable Energy investment project PPPs are supported in Neighbourhood and Latin America, but financing is so far public. NIF supports an important part of a Moroccan solar power plant reducing energy import dependence and avoiding CO². Could become largest solar plant in North Africa. For a next phase of the project grant support in the form of a guarantee is under discussion With European public finance institutions the EC is working to identify further pilot projects like this using the EU grant to address investment risk 19

20 EU Platform for blending in external cooperation Forum to further extend blending as an innovative financial instrument The European Commission has recently sent to the Council and EP its report on setting up a EU Platform to optimise the functioning of the blending mechanisms. We hope that the Policy Group of the Platform will still hold a first meeting before the end of the year In the Policy Group, the Commission, EEAS, MS and EP (as observer) are to provide guidance to the blending mechanisms The work of the Policy Group will be informed by a Technical Group discussing key technical issues such as the various innovative financial tools. 20

21 Thank you Jose Baiges Planas DG DEVCO, Unit C3