International Climate Finance Architecture Challenges, Approaches and Sources

Transcription

1 International Climate Finance Architecture Challenges, Approaches and Sources ADB Workshop Catalyzing Investment in Climate Friendly Infrastructure 19 January 2015 Manila, Philippines Dr. Amal-Lee Amin Third Generation Environmentalism

2 Outline 1. Challenge of climate friendly infrastructure investment Managing risks 2. Role of public finance Financial instruments for risk mitigation 3. International climate finance sources and evolution towards direct access GEF, CIFs, AF and GCF 4. Summary of bridging and catalytic role of DFIs

3 1. Infrastructure and climate change From BAU to Green Growth Challenge of timing and scale Source: WEF 2013: The Green Investment Report Source: Green Growth in Practice, Lessons from Country Experiences 2014

4 1. Climate friendly infrastructure investment Managing Risks Conditions required for mobilising climate friendly investment: 1 Existence of market 2 Reasonable return 3 opportunities on investment Limited or acceptable level of risk Need for understanding of the specific challenges and risks to climate technology investments Technology risks Policy and regulatory risks Market risks Financial challenges Capacity constraints Scale of Investment Challenges Specific financial challenges within developing country context Scarce availability of capital for public investment August 2014 Poor credit-worthiness and lack of guarantees Lack of access to appropriate forms of credit 4

5 1. Investment challenge requires range of public sector responses The public sector can offer incentives in order to mitigate risks for private sector investors. Understanding technology specific barriers and real and perceived risks of investors will help to determine the appropriate mix of policy, regulatory and financing incentives. Policy incentives and regulations - Renewable energy support mechanisms - Tax credits - Energy efficiency standards - Low-carbon transport pricing schemes Public sector financial instruments - Loans (concessional) - Guarantees - Grants - Equity There is no single way of designing a successful incentive scheme or financial instrument, the use of public resources should be designed to ensure the most appropriate allocation of risk between actors August

6 2. Financial instruments to mitigate risk Financial instrument Grants Concessional loans Equity Loan guarantees Description Resources aimed at funding investments without money being repaid. Conditions more favourable than market terms, low/no interest rates, longer repayment/grace periods. Capital to grow operation of project / firm to leverage resources. Commitments to fulfil the obligations of a borrower in the event of nonperformance or default. Advantage / Disadvantage Advantage: Provides technical assistance and capacity building. Gives viability to a project and eliminates risk. Disadvantage: There are no reflows and hence is expensive for public budgets. Additionality difficult to prove. Advantage: Reduces the overall cost of capital and can improve risk: return ratio for other investors and lenders, encouraging local banks to enter the lending market. Disadvantage: Risk of market distortion. Advantage: Support for innovation of start-ups. Leverages resources. Disadvantage: difficult to quantify risks. Advantage: Attracts capital through debt on terms that could ensure the feasibility of a project. Disadvantage: hard to quantify risks and accounts for the same amount of financing quota as loan (on balance sheet) Source: GGBP 2014

7 2. Designing financing instruments and incentives Good practice Prototyping innovative public-private risk-sharing instruments across a range of country, sector and technology contexts Transparency and predictability Integration with policy Effective Stakeholders Engagement Additionality Ensuring limited expertise and financial resources are pooled to maximise synergies Targeted concessionality Accelerating learning and capturing lesson

8 3. International Public Climate Finance Flows 2014 UNFCCC biennial assessment of climate finance: $ bn/year flows developed to developing countries ( ) Multilateral climate funds = $2.9bn in 2014 Need for increasing transparency of climate finance

9 3. International Public Climate Finance Architecture Source: climatefundsupdate.org

10 3. International Public Climate Finance Architecture There are now more than 10 multilateral climate funds Some of which approve less than 50 million a year Source: ODI 2014

11 3. Implementing agencies of climate funds Increasing focus on partnering with developing country institutions now around 40 implementing agencies Adaptation Fund pioneered this shift by offering direct access, now has 21 national and regional institutions accredited Source: ODI 2014

12 3. Global Environmental Facility The financial mechanism of the three Rio Conventions, including the UNFCCC 183 member countries, with projects in 144 Partner implementing agencies: initially only 3 multilateral, now 14 including 1 NDB Principally provides grants 6 th Replenishment in April 2014 GEF-6 Four Strategic Priorities 1. Address Drivers of Environmental Degradation 2. Deliver Integrated Solutions e.g. Cities, ecosystems 3. Enhance resilience including special funds LDCF and SCCF (support in 124 countries, US$1.2 billion) 4. Ensure Complementarity, especially in Climate Finance

13 3. Global Environmental Facility Access and accreditation Access: Agencies eligible for accreditation are: National institutions; Regional organizations; Civil society organizations/non-governmental organizations; United Nations specialized agencies and programs and; Other international organizations Development Bank of Southern Africa is the first and so far only national development finance institution accredited to the GEF (+ a Brazilian Biodiversity Fund) Asian DFIs can access GEF through the ADB

14 3. Direct access for DBSA: represents evolution within the GEF approach From 2002 executing agency for GEF projects South Africa Wind Energy Programme and Renewable Energy Market Transformation May 2014, DBSA became accredited GEF Project Agency ( direct access ) => Significant potential for synergies From DBSA s view point: GEF contributes scope for innovation and risk-sharing approaches and opportunity to expand DBSA s focus to thematic areas aligned with GEF (e.g. ecosystem services); GEF Accreditation provides opportunity to benchmark DBSA s fiduciary, environmental & social safeguards against international standards. From GEF s point of view: DBSA has strong investment track record and ability to leverage private sector investments, and a track record in Southern Africa

15 CLIMATE INVESTMENT FUNDS (CIF) $7.6 BILLION (as of August 2014) $5.3 billion $1.2 billion $602.1 million $523.6 million Scaled-up demonstration, deployment, and transfer of low-carbon technologies in renewable energy, energy efficiency, and clean transport Mainstream resilience in development planning and investments Reduce emissions from deforestation and forest degradation, sustainably manage forests, and enhance forest carbon stocks Demonstrate economic, social, and environmental viability of renewable energy in low income countries Chile 1 Colombia 1 Egypt India Indonesia 2 Kazakhstan Mexico 1 Morocco Nigeria Philippines South Africa Thailand Turkey 1 Ukraine Vietnam Middle East and North Africa Region (Algeria, Egypt, Jordan, Libya, Morocco, Tunisia) Bangladesh Bolivia 2 Cambodia 2 Mozambique 1 Nepal Niger Tajikistan 1 Yemen Zambia Caribbean Region (Dominica, Grenada, Haiti 1, Jamaica 1, St. Lucia 1, St. Vincent and the Grenadines) Pacific Region (Papua New Guinea, Samoa, Tonga) Brazil 1 Burkina Faso Democratic Republic of Congo Ghana 1 Indonesia Lao People s Democratic Republic Mexico 1 Peru Armenia Bangladesh Benin Cambodia Ethiopia Ghana Haiti Honduras 1 & 2 Kenya 1 & 2 Kiribati Liberia Lesotho Madagascar Malawi Maldives Mali 1 Mongolia Nepal 1 Nicaragua Rwanda Sierra Leone Tanzania Uganda Yemen Zambia Pacific Region (Solomon Islands, Vanuatu) DEDICATED PRIVATE SECTOR PROGRAMS (DPSP) PRIVATE SECTOR SET ASIDE PRIVATE SECTOR SET ASIDE PRIVATE SECTOR SET ASIDE STRATEGIC CLIMATE FUND (SCF) $2.3 BILLION

16 3. Impact of CIF s CTF Program - national DFI programmes e.g. Mexico s Wind Power Capacity and knowledge to develop market 2 Tackling Environmental and Social Risks 3 4 Mobilising Finance 1 Policy and regulatory barriers Estimated Leveraging Effect of CTF REFF and NAFINSA NAFIN uses the $210 million to catalyze private capital at the project level. Leverage is maximized (no project can receive more than $10 million in CTF financing and no more than 50% of its total investment needs from the REFF)

17 3. Adaptation Fund

18 3. Adaptation Fund pioneer of direct access 17 National Implementing Entities accredited under the AF One national DFI: National Bank for Agriculture and Rural Development (NABARD) of India

19 3. The Green Climate Fund Structure and Operating Modalities Investment Framework Allocation Framework Chosen by the NDA/ focal point Developed country parties Public & Private sources Alternate sources Green Climate Fund Mitigation Adaptation Cross cutting (Integrated) Country readiness & preparation Country programmes & projects Private sector facility Implementing Entities (regional, national and/or multilateral) Safeguards & Standards (environmental, social, fiduciary) Monitoring And Evaluation Frameworks (Independent Unit) Information Disclosure Policies (Independent Integrity Unit) Government to appoint National Designated Authority (NDA) for lead responsibility National Implementing Entities (NIEs) to be put forward for accreditation

20 Bridging and catalytic role of national development finance institutions Enhancing the national investment framework -Close to policy & can lead financial innovation to support this -Engage public & private stakeholders Managing risks & market facilitation -Syndication role -Provide risk-sharing instruments and lines of credit - Aggregation of smaller projects Bridge to international climate finance -Increase country ownership -Ensure alignment to domestic finance -Creating deal flow: pipelines of projects -Measurement, reporting and verification

21 International Public Climate Finance Funds and channels Climate Funds Update, monitoring of climate change funds from the stage when donors pledge funding, through to the actual disbursement of financing for projects. List of funds, with links to fund profile pages. Each fund page offers an overview of key details on each of the fund, including: 1) A general fund description; 2) Fund governance; 3) Accessing the Fund. Climate Finance Options, UNDP/World Bank platform with information on potential sources of climate finance for policy makers and project planners in developing countries at national and city levels. Funding sources, including information on: 1) types of finance mechanisms; 2) eligibility criteria; 3) volume; 4) governance and administrative structures; 5) flows, etc. ODI 2014: Climate Finance Regional Briefing: Asia and Pacific UNDP 2013: Making Sense of Climate Finance, LEDS Asia

22 publications: Designing smart green finance incentive schemes More material of finance work can be found at: I can be contacted at Amal-Lee.Amin@e3g.org 22

23 ANNEX I EXAMPLES OF APPLYING FINANCIAL INSTRUMENTS

24 Advantages Challenges Financial instruments Direct concessional loans Can leverage significant investment. Requires a long-term coherent policy and regulatory framework underpinned by legislation. Uses local expertise and allows capacity building. Can be integrated with other development focused investments. Determining the right level of concessionality to avoid undesired market distortions and maximize leverage could be complex. M&E challenges to improved transparency and execution of programs to evidence that Case Example : The CTF Investment Programme for RE concessional in Mexico finance is crowding in new players. Indirect mobilization of public and private Direct use sector of concessional The Mexico loan Renewable to mobilize private sector: IDB provided a concessional loan Energy for the project Financing developers Facility of Eurus, a (REFF), 250 MW wind farm in Oaxaca, Mexico. implemented by the IDB with financial resources Estimated channelled IDB Co-financing: to end users US$50 by NAFIN million Total Cost of Eurus - Historic : US$525 million 24

25 Advantages Challenges Financial instruments Green lines of credit to banks Builds local capacity and mobilizes local capital into new markets. Draws in local expertise for development of a robust pipeline of projects. Can allow blending with other (more expensive) funds to provide well-structured, reasonably-priced loans. Marketing efforts of involved commercial banks can help to increase awareness and reach a larger number of customers. Lack of transparency: M&E challenges to provide evidence that concessional finance is crowding in new players. Leverage potential is relatively low. Usually requires technical assistance Concerns over market distortion effects if used in well functioning commercial financial sectors. Case Tackling Example the transparence : Turkey Private challenge: Sector Renewable KfW financial Energy incentives and Energy for household Efficiency Project. EE in Germany Supported This programme by CTF, direct the IBRD, funding EBRD to the and housing the IFC; and implemented the SME Sector through by the providing privately promotional owned Industrial loans Development distributed to intermediary Bank of Turkey, investing the banks Government-owned via a branch network Development of German Bank commercial of Turkey banks. and To five ensure local commercial that the commercial banks. bank passes on the low interest rate to the investor, the KfW establish and publish a maximum interest rate, including the commercial bank s margin that can be applied. As of August 2012 the project financed 969 megawatts (MW) of RE and EE investments. And had a positive impact in Increasing the Capacity of Financial Sector. 25

26 Advantages Challenges Financial instruments Grants for technical assistance Supports institutional strengthening. Local capacity building and increase of awareness. Allows for combining local knowledge and international expertise. Government leadership and extensive interagency collaboration within the government is critical for the success of this type of initiative. High transaction costs can reduce use of this instrument (time/ resource intensive). Risk of lack of customized approach and flexibility to country specific Can help to establish an enabling characteristics/needs. Case Example environment : China s to attract Green private Credit Policy sector investment Risk of lack of continuity. Lead by the Ministry of Environmental Protection with technical support from the IFC on: policy advice, capacity building, and development of technical resources and tool for financial institutions. Between all major Chinese banks reduced their credit for high energy consumption and pollution industries by more than 50%, while investments related to energy efficiency and emissions Extensive inter-agency collaboration reductions increased. Green Credit loans represented a 9% of the total bank lending in China for that Provides strong regulatory signal to the market year. Driving financial sector investments switch and increase of awareness. 26

27 Advantages Challenges Financial instruments Grants for investment Flexible and relatively simply to use. Low leverage effect. Useful in countries such as LDCs where financial markets are often underdeveloped. High level of Transparency. Can have a market distorting impact if not designed carefully, particularly in well developed financial markets. Risk of lack of continuity. Builds local capacity. Increases awareness. Case Example : IDCOL for micro-finance institutions Might need to be coupled with technical assistance. In 2002, the Government of Bangladesh launched a market-based off-grid electrification programme and with Wide Infrastructure coverage Development : The wide network Company of the Limited participating (IDCOL) organizations as the implementing covers the agency. entire country. This program By December has received 2011, 1.25 grants million to provide SHS have the been subsidies installed from (65 a wide MW). number of donors, including: GEF, Market the growth UK Department and development: for International SHS costs Development in Bangladesh, the Swedish are now International among the lowest Development in the world (US$8 Cooperation 9/Wp); 70,000 Agency, new ADB, job KfW, associated GOB, the to the Deutsche project and Gesellschaft local supply für Internationale chain/technical Zusammenarbeit skills development. and the Netherlands Development Organisation. 27

28 Advantages Challenges Financial instruments Guarantees Potentially high leverage effect. M&R procedures can be onerous and insurance products can have restrictive legal clauses. Can help to build diversified and risk-mitigated portfolios of loans by financial intermediaries. Allow for easier access to private sources of finance by loans tailored to specific market needs. Overreliance on this type of subsidy could undermine the sustainability of the investments after the completion of the program making an exit plan critical. May be challenging to structure in the absence of extensive data on market conditions and credit profiles. Case Example : The Utility-based Energy Efficiency Finance (CHUEE) Program in China In Leverage CHUEE a loan effect: loss estimated reserve fund leverage (LLRF) of US$1.18 set up by billion, IFC and with GEF emission used savings to share of 2.3mtCO the financial 2 /year risks Chinese commercial banks face by guaranteeing loans they make to energy management companies who Capacity finance upgrades building for of their Financial customers. sector The Government fund has been policies set up and with market US$50 opportunities million contributed were by identified the GEF as and top two IFC drivers which for the banks programme to aims engage to mobilize in energy US$ efficiency billion lending for energy efficiency project financing from the private sector. 28