How can public climate finance most effectively leverage private capital?

7 April 2011 16:00 - 17:30 GMT+01 (BST)
Public event
Streamed live online

Speakers:

Dirk Willem te Velde, ODI

Andre Laude, IFC

Tamsin Ballard, DECC

Giedre Kaminskaite-Salters, DFID

Description

At present, the private sector faces significant barriers and perverse (carbon-intensive) opportunities, which prevent investments from flowing to low-carbon and climate-resilient investments. Mobilizing private capital will require the use of public finance and policy, as well as carbon market instruments, to shift risk-return ratios in favour of climate-friendly investments.

Attention is increasingly focused both on the barriers to investment the private sector faces and the specific interventions the public sector may use to break down these barriers.  Critical questions have arisen around the design of different public instruments and in what contexts they can be most effectively applied.

This public meeting will draw out the major lessons from current practices and proposals to leverage private finance through public sector interventions, with discussions focused around particular successes and failures.  The event focuses on the following questions:

  • What specific risks do low carbon and climate-resilient investments generate for private investors, and how can these risks be mitigated?
  • What public interventions have succeeded and in what contexts/under what circumstances? What is their replication potential?
  • What new interventions can national and multilateral public institutions (and in particular development finance institutions) make to catalyse and leverage low carbon and climate resilient investments from the private sector?

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Presentationpdf

This is the third in a series of public meetings on climate finance.  This meeting assessed how to mobilise the scale of investments needed to support low-carbon growth in developing countries, leveraging private sector funds through public sector interventions.

Dirk Wilhem te Velde discussed his experience of promoting capital flows to developing countries and the role of development finance institutions to leverage capital.  He discussed several push and pull factors in developing countries, including:

·         Host country conditions and policies

·         International rules and practices on investment and climate change

·         Rules and regulations of the development finance institution (i.e. IFC, EIB or CDC).

Most IFCs are investing in infrastructure projects in poorer countries.  For instance, the IFC are investing 15-20% of their funds in Africa.  These funds are not all necessarily covered by ODA and constitute ‘other official flows’. 

DFIs play an important role in mobilising private sector capital since they are able to take on more risk than the private sector – encouraging investment in countries that might normally deter investment.  DFIs are able to leverage significant private sector funding, depending on the institution. For instance,

·         one unit of CDC investment leverages five units of private investment

·         one unit of IFC investment leverages three units of private investment

·         one unit of EBRD leverages one unit of private investment*

*All of the above have climate-related funds

However, whether or not these private investments would have been made without DFI investment requires econometric data to prove additionality. 

Andre Laude presented how sustainable energy investment is allocated by the IFC.  The IFC has worked with over 600 clients, investing US 1.5bn through 25 primary partners [1] – investment that has leveraged US 2.5 billion from the private sector.  IFC has a responsibility to its shareholders. He highlighted the importance of the need for adequate institutional capacity to underwrite an investment (i.e. that if a loss was to be made it would hit IFC first, not the private investor), technical assistance and risk-sharing facilities for private sector investors.  If private investors see that other investors have taken on higher risk within the investment, this encourages further investment. 

Donors are keen to invest in DFIs since it maximises the impact of climate finance, scales up investment and encourages SMEs to produce clean growth.

The UK government is part of an advisory group on climate finance, supporting the development of climate finance architecture and a member of the Green Fund transitional committee. Tamsin Ballard outlined the UK government’s interest in leveraging private finance; in part because of the UK’s role to play in delivering US 100 billion a year in Cancun (even though a definition has not yet been agreed to) and due to a recognition that successful economic transition requires private investment. For instance, India alone will require US 500 billion of investment by 2020.

Ms. Ballard highlighted the following key points for leveraging private finance:

·         ensuring that policy-makers are aware of the needs of the private sector

·         not to replicate and duplicate what is already out there

·         extrapolate common factors for best practice/lessons learned and ensuring their application

·         improve policies, principles and toolkits

She concluded with the following quotation “public finance can jump-start the motor, but private investment in low-carbon infrastructure and solutions all need to keep it running” (OECD, 2011).

Giedre Kaminskaite-Salters highlighted CP3 as a new and innovative structure DFID is developing in partnership with AsDB and IFC, to be financed via the international climate fund.  During a P8 Summit in London, banks and pension funds expressed their interest in low-carbon investment.  However, this is perceived by such actors not as a means of mitigating climate change, reaching targets or capacity-building[2]but simply as investment, where projects were treated as equity with potential high returns. CP3 is a fund investment programme which enables investors to obtain these commercial returns while investing in clean infrastructure and businesses in developing countries.

DFID analysed how to unlock private investment and found:

·         private capital is difficult to unlock unless it is supported by public sector capital

·         there needs to be dialogue with the private sector, especially on the technical design of projects and the corresponding policy measures desired by the private sector

·         there are significant risks in investing in developing countries with unstable regulatory regimes, which need to be mitigated via public support and demostration

·         the leverage loop achieved by private investors co-investing with public agencies such as DFID and MDBs can bring down the cost of investments

There is also a need to consider how best to ensure that only the required level of subsidy or risk mitigation is offered to the private sector – should the public sector shoulder the first hit if an investment makes a loss?  It should also be remembered that the private sector is not a homogenous entity – some large players are able to invest directly in emerging markets while others would benefit from the diversification offered my structures such as CP3. 

In terms of supporting pro-poor low-carbon development there is a need to balance satisfactory returns with developmental outcomes. 

The following questions were raised in Q&A:

·         how much investment is being invested in adaptation by the private sector?

·         Is there a danger that the private sector is leveraging public sector funding?  Has additionality been proven?

·         How can you track the poverty reduction impact of these investments?

·         Does the leverage factor take into consideration the positive impacts upon the private sector in developing countries and its poverty-reduction potential?



[1] It should be noted that the World Bank works closely with partner countries to support low-carbon development.  There are also plans to work with the Cooperative Bank to source large-scale investment and distribute to local cooperative members.
[2] Which the private sector sees as developing the project pipeline