Private Sector Engagement “How to engage actors from the private sector in climate change financing?”

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Where does private sector engagement matter?

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Objective of this session

What you can expect to learn from this session:

• Get an overview on the relevance of private sector engagement for Climate Finance

• Understand the interests and risks of actors in the private sector with regards to Climate Finance

• Learn options for the engagement of actors in the private sector in Climate Finance

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• Objective of this session

• 1. Definition of ‘private sector’

• 2. Opportunities and risks from private sector engagement – public sector perspective

• 3. Opportunities and risks from private sector engagement – private sector perspective

• 4. Instruments for private sector engagement

• Examples (energy efficiency, renewable energies, adaptation)

Content

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1. Definitions ‘private sector’

• Private sector• The sector of the economy that is not controlled by the state. • It is formed by a wide range of actors such as small, medium, and large

private companies, but it also encompasses individuals.• Groups such as non-profit organisations and foundations are not included in

the private sector here for the purpose of clarity - they are sometimes also referred to as a third sector.

• In the context of Climate Finance, private sector actors can act as capital providers, project developers, and market facilitators.

• Private sector engagement• Involvement of the private sector by investing in, executing, or maintaining a

project.

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1. Definitions - Classification of actors within the private sector

• By size:• Households• Micro-, small- and medium enterprises • Large-scale companies• Financial sector

– Banks (development banks, commercial banks, cooperatives)– Insurance companies– Investors & funds

• By role in climate investment value chain:• Capital providers / investors• Market facilitators / financial intermediaries • Project developers / implementers / operators• Investees

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2. Public sector perspective: Why engage the private sector?

Opportunities vs. risks from a public sector perspectiveRenewable energies

Energy efficiency

Adaptation (Transport sector)

Opportunities The anticipated demand for finance to reduce emissions of developing countries exceeds the commitments of industrialised countries; Adaptation costs are currently uncertain, but with a failure to invest sufficiently in mitigation, they are likely to rise The private sector engagement is necessary for low carbon transition Ultimately ALL flows of public and private finance must be redirected towards low carbon and resilient investmentsThere are business opportunities from climate finance, and the market is growingPrivate sector expertise and experience can improve the current investments being made- Leveraging- Development of adaptation or mitigation products or services

Risks What are risks from your perspective? – collect on flipchart

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3. Private sector perspective: Why should the the private sector engage?

Opportunities vs. risks from a private sector perspective

Renewable energies

Energy efficiency

Adaptation (Transport sector)

Opportunities Good financial return on investment (short, medium, long term)Technological leadershipNew successful cooperation public-private cooperation modelsMarket share increaseImproved image

Risks Country and financial risks (country risks, economic risks, financial risks, currency risks, political risks, security risks)Policy and regulatory risksTechnical and project specific risks (construction risks, technological risks, environmental risks, operational and managerial risks)Market risks

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• Private households • Financial or tax incentives• Legal compliance

• SMEs• Secure investments (e.g. guaranteed returns)• Financial or tax incentives• Legal compliance

• Large-scale companies• Commercial rates of return on invested capital• Reduce operational risk• Marketing, image• Attractive payback period• Legal compliance

• Financial sector (Banks / insurance companies / investment funds)• Commercial rates of return on invested capital• “Secure” investments (e.g. reduce operational or financial risk)• Marketing, image

3. Private sector perspective: Expectations of different actors

Existing challenges / barriers:• Collect on flipchart

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3. To cut it short

Private actors base their investment decisions on an individual set of criteria. Based on these, the returns have to outweigh the costs:

invest not invest

cost

long payback period

changing legal framework

lack of incentives

high potential profit

guaranteed returns

good image

increased market share

The role of public policy is to create an enabling environment for positive investment decisions, to develop and provide information about market opportunities and how to access them with public support

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4. Support for private sector engagement

Renewable energies

Energy efficiency

Adaptation (Transport sector)

Incentivising policies

Which supporting policies exist? How reliable are these?Which financial incentives are present?How likely are policy risks to arise?...?

Enabling framework for private sector investments

General investment climate for private sector investments?Which country specific risks exist (e.g. currency, country, economic)?Can specific assets (e.g. power plants) be privately owned?How are the market conditions?

Financing/ cooperation models

Which financing options are available and feasible (e.g. venture capital, infrastructure funds, pension funds, bank debt, ...)?Are assets publicly or privately owned?Supporting innovative climate business models: green start-ups and SMEs?

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4. The role of public policy

Public policy will play a crucial role in removing barriers and mobilizing private investment

Current economy

Green economy

Increasing immediate and long-term private investment + public finance

exit strategy

Enabling policy framework

Public budget support

Government financial incentives

Source: Green Growth in Practice. Lessons from Country Experiences, E3G 2014

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Conditions for attracting private investment (I)

Policy and institutional conditions

Plans and targets for low-carbon development Institutional organization and capacity to implement policies effectively

Regulatory instruments Economic instruments

• Legally binding• With inclusive participatory process• Providing investors with certainty and low

term vision

• Strong technical, managerial and administrative capacities

• Engaging civil society and expert community• Based on GFG principles

Establishing a rule and / or objective that must be fulfilled by the polluters who would face a penalty in case of non-compliance with the norm, e.g efficiency standards, building codes, vehicle efficiency standards, biofuel standards

Incentivizing policies to increase attractiveness of green investment options as compared to conventional technologies / projects , e.g. taxes, (removal of) subsidies, low-cost debt, emissions trading etc.

Source: WRI, 2013. Mobilizing Climate Investment The Role of International Climate Finance in Creating Readiness for Scaled-up Low-carbon Energy.IPCC 2007 and 2014

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Conditions for attracting private investment (II)

Industry and financial conditions

Project developers’ capacity to develop and implement bankable projects

Presence of a support industry and enabling infrastructure

Knowledge of resource availability

Stable financial sector with capacity to support green investment

• Financial and technical capacity to develop projects that are capable to attract finance

• Engineering knowledge, technical and management skills to implement and operate projects developing local expertise

Presence of industry, infrastructure and services necessary for project implementation, e.g. manufacturers, construction companies, availability of technical service providers

Information on domestic and international financing resources potentially available allows estimating options for investment requirements and expected rate of return

• Access to short- and long term finance indicates maturity of financial sector

• Lack of liquidity, maturity and transparency of financial sector increase project cost

• Financial institutions lack understanding and technical capacity to assess mitigation or adaptation projects capacity building needed to remove inflated risk perceptions and develop appropriate financial instruments

Source: WRI, 2013. Mobilizing Climate Investment The Role of International Climate Finance in Creating Readiness for Scaled-up Low-carbon Energy.

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4. Instruments available to the public sector to engage the private sector

Renewable energies

Energy efficiency

Adaptation (Transport sector)

Incentivising policies

Low-carbon support policies (e.g. monetary/technical support)Fixed revenue support (e.g. feed-in tariffs, feed-in premiums, power purchase agreements)Market based revenue support (e.g. green tradable certificates, carbon offsets etc.)

Enabling framework for private sector investments

Legal possibility to own infrastructure, power generation assestsTax cost support (e.g. real estate, income/revenue tax breaks etc.)Non-tax support (e.g. permitting procedures; reduced fossil fuel subsidies); Favourable investment climate; Stable legal and fiscal policies; Technical infrastructure (e.g. option to connect to grid)

Financing/cooperation models

Project level direct supportPublic financing instruments (Lending/debt, equity investments, de-risking instruments)Legal options for public private partnershipsTechnical assistance

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Examples for private sector engagement in different sectors

• Energy Efficiency (sector specific barriers; case study Thailand)• Renewable Energy (sector specific barriers; case study Tunisia)• Adaptation (sector specific barriers; case study Nepal)

Private sector engagement in climate finance

Renewable energies

Energy efficiency

Adaptation (Transport sector)

Incentivising policies Tunisia

Enabling framework Nepal

Financing/cooperation models Tunisia Thailand Nepal

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Barriers to the scale-up of private sector investment in energy efficiency in developing countries include:

• Price distortions due to inadequate regulation and subsidized energy tariffs;• Lack of awareness and technical capacity to take advantage of energy efficiency

measures; • Misaligned incentives between asset owners and energy users• Inaccurate risk perceptions from asset owners, users, and lenders• Lack of favourable financing

Energy Efficiency

Source: WRI, 2012

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Relevant public support to leverage private sector participation include: • Technical support for third party energy efficiency service providers (ESCOs) to

correct market distortions; • Support for technology demonstration and diffusion of energy efficiency

technologies. • Public Financing Instruments• Direct finance to ESCOs and/or companies to execute projects; • On-lending through private sector financial intermediaries to improve financing

comfort and awareness.

In addition, public sector encourages private sector engagement as part of a broad energy policy reform in order to correct price distortions by establishing regulatory standards to improve baseline energy efficiency

Example – Energy Efficiency (contd.)

Source: WRI, 2012

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Setting up of the Energy Efficiency Revolving Fund:• Fund provides a line of credit to banks, which in turn provide low interest loans for energy

efficiency in industry and buildings• For every USD 1 of public money, USD 1 was committed additionally by private sector up till 2010

(total USD 450 million). • By 2012 this ratio had increased to USD 2 from private sources for every USD 1 from public

sources.

Lessons learnt:• Strong and capable government leadership has enabled international support to respond to the

needs of the country, and facilitated a constructive partnership between domestic and international actors.

• Strategic approach to technical assistance. Engaging long-term expert advisors rather than relying on consultants, enabled to reduce costs, strengthen the quality of support, and enable increased knowledge transfer to local staff

• Close coordination with the private sector, and emphasis on education and public awareness, resulted in strong cooperation and buy-in from industry and strong public support.

• Importance of financial institutions: by providing low-interest credit lines to banks, the Revolving Fund was instrumental in strengthening commercial banks’ awareness of, and capacity to lend to, energy efficiency projects.

Case – Energy Efficiency Thailand

Source: WRI, 2013 – Mobilising Climate Investment-The Role of International Climate Finance in Creating Readiness for Scaled-up Low-carbon Energy

Financing/cooperation model

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Renewable energy projects are - from an investor’s perspective – sometimes less attractive compared to ‘traditional’ projects, due to their high upfront capital costs and long-term financing requirements.

Other market barriers include: • Domestic regulations, subsidies and financing are geared toward fossil fuel-

based sectors;• Lack of connecting grid infrastructure;• Limited technical/labour capacity to execute and maintain projects cost-

effectively; • High transaction costs associated with smaller renewable energy projects; • Intermittent nature of renewable energy

Example – Renewable energy: on-grid solar and wind

Source: WRI, 2012

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Example – Renewable energy: on-grid solar and wind (contd.)

Public support mechanisms and financing instruments to address these barriers include: • Support Mechanisms

• Feed-in tariff policies that improve the relative profitability of renewable power over an appropriate timeframe

• Reduction of subsidies and incentives for the fossil fuel driven sector• Technical assistance to help create standardized PPAs for smaller projects• Technical assistance to improve siting, and thus, capacity utilization of installed

capacity

• Public Financing Instruments• Longer duration loans to improve debt service coverage ratios—a key ratio used by

financiers to determine whether a project is financeable• Guarantees and regulatory risk insurance • On-lending through private financial intermediaries in order to improve financing

comfort and awareness

Source: WRI, 2012

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“Programme Solaire” (Prosol) • Support for solar water heaters (SWH) in residential buildings• Provision of 20% subsidy for the capital cost and temporary interest rate subsidy for loans

taken to purchase solar water heaters• Total investment of USD 134 million between 2005 – 2010, of which 18% came from public

and 82% from private sources.Lessons learnt• Financial incentives alone are not sufficient: readiness activities, incl. awareness and

communication campaigns, interest rate incentives and capacity-building activities to familiarize banks with technology, were fundamental to ensuring Prosol’s success

• Careful allocation of risks among key actors: Tunisian Company of Electricity and Gas (STEG) involvement was critical to engaging local financial institutions. It enabled consumers to make loan repayments through the electricity bill, reduced the risk of default and allowed banks to offer loans to households with softer credit conditions and longer repayment terms

• Commitment from the government: support policies to promote SWHs were important in allowing the sector to be competitive in a market distorted by fossil fuel subsidies.

Case – Renewable Energy Tunisia

Source: WRI, 2013 – Mobilising Climate Investment-The Role of International Climate Finance in Creating Readiness for Scaled-up Low-carbon Energy

Incentivising policyFinancing/cooperation model

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Example – Adaptation

Options for private sector engagement in adaptation:

• Climate proofing of private sector entities• Co-financing of infrastructure development• Adaptation products and services:

• e.g. designing, manufacturing and distributing goods and services that can help reduce the vulnerability of individuals and communities to climate change

• Providing risk management tools, including insurance

Levels of private sector financing for adaptation activities are currently very low

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Pilot Program for Climate Resilience: Engaging the Private Sector in Nepal

• Improve local private actors’ awareness of risks and opportunities associated with climate change in agriculture

• Encourage local commercial banks to provide loans for activities relevant to adaptation• Involve agribusiness companies

Impacts of the programme in the engagement of private actors in adaptation activities are not yet clear.

Case – Adaptation

Enabling framework

Financing/cooperation

model

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Key Questions

• Who are relevant actors within the private sector in your country?

• How can these actors be part of climate financing in your country?

• What incentives can be set or which instruments can be used by the government or your institution to engage these actors?

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Private Sector Engagement - Reflections

Checklist to get CLIF Ready

According to what you learnt from this exercise you could …

Check who the relevant actors in the private sector are Analyse what the drivers for the different actors in the

private sector are Identify measures to activate private sector engagement in

climate finance

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Private Sector Engagement

Thank you for your attention!!!