INNOVATIVE MECHANISMS AND INSTRUMENTS TO UNLOCK PRIVATE FINANCE TO MEET AFRICA NDC TARGETS Prof. Joseph Adelegan School of

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1 INNOVATIVE MECHANISMS AND INSTRUMENTS TO UNLOCK PRIVATE FINANCE TO MEET AFRICA NDC TARGETS Prf. Jseph Adelegan Schl f Envirnmental Sciences University f Venda Limpp Prvince Suth Africa j.adelegan@univen.ac.za

2 INTRODUCTION IFC evaluated critical investment pprtunities in infrastructure and climatesmart slutins assciated with NDC targets in emerging market ecnmies in line with natinal climate cmmitments made in Paris. They cmprise f: renewable energy lw-carbn cities energy efficiency sustainable frest management climate-smart agriculture Distinct slutins laid ut in their NDC cmmitments include scaling up slar and wind energy, increase green buildings, clean transprt implement waste slutins. The NDCs present a straightfrward guide fr cmpanies and investrs in search f lking fr sund investment pprtunities in climate-resilient infrastructure and assets.

3 INTRODUCTION In Nigeria, Kenya, Cte d Ivire and Suth Africa, the verall pssible investment fr just clean energy amunts t abut $783 billin. IFC estimates say $123 billin will g t renewable energy generatin while climate smart buildings and transprtatin will take $652 billin. Private and public investment needs are amng the $783 billin estimate. Mst f the capital fr climate-smart infrastructure will have t be prvided by the private sectr. Public funds are limited and have t be spread ut ver the wide range f subjects the gvernment has t deal with. It is therefre imprtant that new and imprved financial mechanisms and instruments are explred t stimulate private sectr investments s gvernments can reach their NDC targets.

4 KEY PILLARS TO UNLOCK PRIVATE INVESTMENTS All ther sectr plicies shuld have within them sme frm f climate awareness and NDC cmmitments shuld be included in natinal budgets and develpment plans. Private sectr financing shuld be imprved s funds can be directed twards climate- friendly investments Public funds shuld be used fr: de-risking and aggregate investments strengthen capital markets address bttlenecks supprt prject develpment t mbilize private capital Blended, cncessinal public financing thrugh a variety f prducts and structures such as risk- sharing facilities and lwer interest rates.

5 PUBLIC FINANCING INSTRUMENTS IN REDUCING FINANCING COST DERISKING A number f different factrs can affect whether risks are priced int investr s financing csts - Crprate finance vs. prject structures, Cre vs. nn-cre investments and Unsphisticated vs. sphisticated investrs. A lw carbn develpment that is cnsidered nnbankable culd becme bankable by shifting the riskreward prfile f renewable energy investment. Public de-risking measures can bradly be divided int tw grups: plicy de-risking instruments and financial de-risking instruments: (1) Plicy de-risking instruments address and attempt t remve the underlying barriers that are the rt causes f risks. These instruments utilise plicy and prgrammatic interventins t mitigate risk.

6 PUBLIC FINANCING INSTRUMENTS IN REDUCING FINANCING COST DERISKING Financial de-risking instruments d nt seek t directly address the underlying barrier but, instead, functin by transferring the risks that investrs face t public actrs, such as develpment banks - develpment banks lans and guarantees, plitical risk insurance and public equity c-investments. Fr example, in cuntries with immature and under-capitalised financial sectrs, lcal banks may be cncerned abut lending their limited capital t brrwers in an unprven sectr such as renewable energy. Partial lan guarantees frm a develpment bank can prvide these lcal banks with the security they need t issue lans, whereby a prtin f the risk f default is transferred t a public actr. Third grup f public instruments, direct financial incentives, t cmpensate fr any residual risks and csts - price premiums, tax breaks, such as prductin tax credits, and prceeds frm carbn ffsets.

7 EFFECTIVE USE OF LIMITED PUBLIC SECTOR FINANCING It is difficult t get funds frm public and cncessinal surces because they are scarce. Therefre, an majr investments in lw-carbn develpment technlgies will be needed frm the private sectr. Mbilizing private investments shuld be what public and cncessinal funds shuld be used fr nt paying fr lw carbn develpment technlgies. This reduces the chances f the private sectr being crwded ut and is a lt mre sustainable. Financial instruments funded by the gvernment shuld be mre fcused n finding ut and addressing the issues curtailing private investment and nt just funding lw carbn develpment prjects.

8 INNOVATIVE MECHANISMS TO UNLOCK PRIVATE FINANCE IN AFRICA Cntinuus innvatin is needed t finance lw carbn develpment in Africa. It is crucial that new and innvative financial mechanisms and instruments are fund. Adaptatin Levy: In Africa primary industries, play a massive rle in aiding ecnmic grwth. Innvative climate funding pprtunities are presented thrugh their crprate scial respnsibility agendas. The large number f raw materials exprted frm Africa shuld have adaptatin fees paid fr them nt as ryalties, but as part a cmmn bjective t address climate change n the African cntinent.

9 INNOVATIVE MECHANISMS TO UNLOCK PRIVATE FINANCE IN AFRICA Greening svereign wealth funds: The recent advent and increase in the amunt f gvernment investment funds perating n a wrldwide scale is new, hwever its impact cannt be dwnplayed. The mve t carbn develpment can be financed with these funds. SFWs shuld be aided s climate risk cnsideratins can be included amng their existent stck chsing and prtfli building peratins. LSWFs nrmally have a lng- term view. As a result f this, SWFs have a vested interest in imprving the envirnmental perfrmance f the industries and ther investment bdies

10 INNOVATIVE MECHANISMS TO UNLOCK PRIVATE FINANCE IN AFRICA Greening Pensin Funds: Pensin funds are capable f having a psitive impact in mving mre funds twards lw carbn, energy efficient assets. Pensin funds are a large part f the financial industry and cmmand nt less than US$22 trillin wrth f glbal. They exist all ver the glbe and are cmprised f retirees and savers. Fr years, sme f them have given lw carbn, energy efficient assets mre pririty, and have set targets fr themselves with regarding their ttal prtfli. Sme pensin funds are able t lcate suitable investment pprtunities aid the transitin t lw carbn and als satisfy the risk/return aspects.

11 INNOVATIVE MECHANISMS TO UNLOCK PRIVATE FINANCE IN AFRICA Green Bnds: These are instruments whse prfits are directed t be used n ther pre-existing r new green prjects thrugh Securitizatin, Direct Prject Expsure r specifying Use f Prceeds. Climate bnds are funds cmpletely designed t fund envirnmentally friendly prjects and activities invlved in lw carbn develpment as well as thse helping t further develp climate resilient ecnmies. Prjects can be financed thrugh climate funds s lng as they are cmbatting r invlved in climate change in sme way. Examples f pssible prjects include waste management technlgies, renewable energy plants, frest and watershed management, energy efficiency prjects, agriculture, greenhuse gas emissin reductin and infrastructure t prevent climate-related fld damage.

12 FINANCING INSTRUMENTS FOR LOW CARBON DEVELOPMENT (LCD) IN AFRICA There are a large number f financing instruments that can be utilized s as t encurage the scaling up f LCD technlgies. They can be rganized int three grups namely thse fr: vercming financing barriers addressing the specific risks f LCD investments addressing bth cncurrently Each instrument can then be distinguished by hw much risk the public sectr funding the instrument assumes and by the level f leverage, i.e. hw much private finance the public funding is able t mbilize. It is imprtant that instruments that prvide the largest pssible amunt f private funding fr the smallest pssible amunt f public financing is utilized (this indicates that maximum leverage is achieved).

13 FINANCING INSTRUMENTS FOR LOW CARBON DEVELOPMENT (LCD) IN AFRICA Grants and lng-term equity Venture Capital Equity Debt Financing (Senir Debt r Subrdinated Debt (Mezzanine Finance). Asset-backed Securities Guarantees and Insurance Resurce Insurance Results-based financing Cntingent Prject Develpment Grants Small-Scale Prject Financing Micr financing Prtfli Guarantees and Lss Reserves Aggregatin

14 CONCLUSION AND RECOMMENDATIONS Public financing is very imprtant in initiating and directing a lw carbn develpment transitin but can be significantly less than private funds. Financial Institutins (FIs) need t becme mre invlved and deepen their cmmitment t a mve t lw carbn develpment bth in Africa. Green develpment can be supprted by financial institutins and they can hld back funds specifically fr green ecnmy transitin prjects. They can als jin their prjects t specific gals such as trying t lessen greenhuse gas (GHG) emissins.

15 CONCLUSION AND RECOMMENDATIONS New gvernment plicies with mre certainty, lngevity and transparency will need t be enacted as they are essential t the shift t lw carbn develpment. Lcal climate funding needs t be seriusly pushed in rder t secure the African climate respnse. Such funding includes: pensin funds natinal budgetary prcesses bnds and levies Internatinal funding is gradually getting mre vlatile, unreliable and incnsistent with Africa s develpment agenda. Crprate scial respnsibility culd be cnsidered as an intricate aspect f securing lcal funds.