Private Financing Of Low-carbon- Finance Consideration In The Context Of The Regional And Global Leadership

Global Green Growth Institute Advancing sustainable development in developing & emerging countries Public-Private Dialogue on Unlocking the Potentials of Private Finance for Low-Carbon Transition SESSION 4.2: Special Remarks on Private Financing of Low-Carbon- Finance Consideration in the Context of the Regional and Global Leadership By MAHAMADOU TOUNKARA (GGGI)

Tokyo, 21 Feb.2019

The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.

Outline ➢ GGGI Overview and link to NDC and Climate Finance ➢ ➢ ➢ ➢ ➢

Addressing Risks and Bankability Green Growth: from Plans to Green Investments Scaling up Green Investments for Infrastructures Case of REEF (Renewable Energy & Energy Efficiency Fund) Conclusions

GGGI Overview

The Ceremony for Signing of Agreement on the Establishment of GGGI was held on Wednesday, June 20 in 2012 on the occasion of Rio+20, United Nations Conference on Sustainable Development in Rio de Janeiro, Brazil.

GGGI is a treaty-based international, inter-governmental organization dedicated to supporting and promoting strong, inclusive and sustainable economic growth in developing countries and emerging economies. GGGI supports a “green growth transformation” that also promotes deep decarbonization and climate resilience.

GGGI: supports Member countries to achieve NDCs and SDGs GGGI NDC Alliance: From Planning to Investment Governance

Implementation of Targets

MRV

Sectoral Interventions

Capacity Building Knowledge Sharing

Financing

Green Growth: from Plans to Green Investments

Scaling up Green Investments for infrastructures = key to developing and emerging economies

(Source: OECD, 2017)

Out of USD 95 trillion of investment needs, transport represents 43% and energy 34%.

60-70% of it is required by emerging economies.

Addressing Risk and Bankability Capital markets risk • • •

•

Credit risk• Counterparty creditworthiness &

Currency fluctuations &Depreciation High transaction costs Immature national and local financial markets Limited market liquidity

• • •

Technology risk

Political risk • Political environment

• Security Concerns • Changes in national or local government support

expertise Non-payment Limited national/ local experience with project management End-user payment for public services

Investment Risks

• •

Inadequate supporting infrastructure Limited access to data and information Limited in-country expertise in construction, operation & maintenance of technologies

Regulatory risk • • • •

Policies that promotes business-as-usual “brown” growth Weak legal frameworks and limited enforcement Adverse or frequent regulatory changes Insufficient or contradictory policies

7

Bankability Issue: Lack of investment-grade projects • Investors typically like projects that are bankable --Risks are fairly allocated between the government and the sponsor.

• Bankability of infrastructure projects is one of the key bottlenecks in attracting private capital to meet the global infrastructure gap. • GGGI’s contribution to help close the infrastructure gap: Supporting developing country governments with planning and project structuring to develop projects that are bankable.

GGGI works to design and structure projects to the point of bankability WHAT and HOW

• Advise and plan with governments and the private sector • Turn “ideas” and “plans” into bankable investments • Design and structure projects and funds • Reduce investment risk • Mobilize and arrange investors EXAMPLE Initial assessment Policy, regulatory, statutory

V a l u e /

Assessment of viability PPA, cash flow model, sensitivity, input and outputs

Securing technology, counterparty, input resource Technology risk, payment risk, land, creditworthiness

Designing the best project/financial structure

Use of concessional capital, collaterals, etc

Reduce risk

b a n k a b i l i t y

Understanding “bankability” • Project generates enough cash to cover all project

related costs and deliver reasonable rate of return for investors. • Risks have been mitigated

• Generally understood to be the point at which a bank is willing to lend to a project • GGGI works to make projects commercially viable, to help countries access the finance needed for green

economic growth.

Case of REEF (Renewable Energy & Energy Efficiency Fund): Areas of focus Collaboration GGGI-Government-Local Banks and African Development Bank

Τhe market needs (and expects) the establishment of instruments that would enable banks, in cooperation with international institutions, to increase financing of projects, such as: • A mechanism that would reduce development risks and “loosen” the requirements of the Banks against investors • A mechanism that would allow banks to increase maturity and reduce the cost of loans, in order to improve the cash flow of projects and improve their financial performance • A mechanism which should link or combine foreign investment funds with funds available to local Banks, which could potentially allow for easement of the terms offered by local banks • Various forms of quasi-equity, that reduce the risk to senior lenders, and so encourage them to fund the projects

• Refinancing of short term loans, which would allow extension of the maturity of loans beyond the maturities currently offered by local banks • Guarantees against certain specific risks (e.g. country, exchange rate, etc.), although there are already institutions providing this service in the market.

Case of REEF (Renewable Energy & Energy Efficiency Fund): Products (1/2) Collaboration GGGI-Government-Local Banks and African Development Bank

Subordinated debt Repayment after the full senior debt repayment Return above the senior debt rate

Convertible Debt debt

shares

interest s

dividends

➢ Convertibility might avoid the project SPV default during the operational phase

Example of REEF (Renewable Energy & Energy Efficiency Fund): Products (2/2) Collaboration GGGI-Government-Local Banks and African Development Bank

Refinancing guarantee Refinancing Old debt

Garantee New debt Attractive interest rates

➢Guarantee a local commercial banks full divestment after a determinate years, if

needed

Increasing maturity

First loss compensations

➢Potential long term maturity

from local banks

Operation well Treasury shortage below the forecasts for the debt service

First loss compensations

Example of REEF (Renewable Energy & Energy Efficiency Fund): Key Takeaways In order to meet market needs, REEF offer the following products, by order of decreasing importance : - Refinancing guarantees allowing to convert senior debt with a maturity of 6-8 years in 15-18 year maturity debt ; - Offering subordinated debt with a maturity of 15-18 years in orderto reduce project risk for local senior lenders and for investors ;

- Offering convertible loans (possibly convertible subordinated loans) aiming at cushioning the impact of of unforeseen variations in the project cashflow on the capacity of the project to meet senior debt service and protect projects in case of temporary cash shortages. - Local supply from local financing institutions leaves space for instruments such as subordinated debt and other instruments aiming at reducing the borrowers’ default risk

Conclusions • The Financing Gap to achieve NDCs and SDGs is USD Trillions/yr • All ODF – including Climate Finance – is only 6-7% of total • Both government/public funding and private funding are large, depending on sector – but private sector funding for green infra in developing counties still small • Institutional investors have money to close the gap – but need bankability – private innovation can move very, very fast • Climate Finance should be used strategically to attract private investment – but be more nimble to play with private sector • GGGI is showing that development of “bankable projects” is a key bottleneck that can be overcome – helped mobilize >$1Bn in 2 years

Thank You [email protected]

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