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

2 Where does private sector engagement matter?

3 Imprint Published by: Contact adelphi Caspar-Theyss-Strasse 14a Berlin / Germany T F E I Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH CF Ready Program Godesberger Allee Bonn/Germany T F E I Dennis Tänzler E T Dorit Lehr E T tise/html/3041.html Any content written by named authors do not necessarily reflect the views of adelphi nor GIZ nor of the German Federal Ministry for Economic Cooperation and Development. Although the authors take all possible care to ensure the correctness of published information, no warranty can be accepted regarding the correctness, accuracy, reliability and completeness of the content of this information. August 2014

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5 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

6 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

7 Overall picture of private sector engagement in climate finance Private sector engagement in climate finance Renewable energies Energy efficiency Adaptation(Transport sector) Opportunities - public sector perspective???? - private sector perspective???? Risks - public sector perspective???? - private sector perspective???? Opportunities can be amplified and risks reduced by public sector action in the following areas: Incentivising policies???? Enabling framework???? Financing/cooperation models???? 1. Definition 2. Public sector perspective 3. Private sector perspective 4. Instruments for private sector engagement

8 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.

9 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

10 2. Public sector perspective: Why engage the private sector? Opportunities vs. risks from a public sector perspective Renewable energies Energy efficiency Adaptation(Transport sector) OpportunitiesThe 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 investments  There are business opportunities from climate finance, and the market is growing Private sector expertise and experience can improve the current investments being made - Leveraging - Development of adaptation or mitigation products or services RisksWhat are risks from your perspective? – collect on flipchart

11 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) OpportunitiesGood financial return on investment (short, medium, long term) Technological leadership New successful cooperation public-private cooperation models Market share increase Improved image RisksCountry and financial risks (country risks, economic risks, financial risks, currency risks, political risks, security risks) Policy and regulatory risks Technical and project specific risks (construction risks, technological risks, environmental risks, operational and managerial risks) Market risks

12 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

13 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: investnot invest costlong payback period changing legal framework lack of incentiveshigh potential profitguaranteed returnsgood 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

14 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?

15 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

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

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

18 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 assests Tax 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/coope ration models Project level direct support Public financing instruments (Lending/debt, equity investments, de- risking instruments) Legal options for public private partnerships Technical assistance

19 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 policiesTunisia Enabling frameworkNepal Financing/cooperation modelsTunisiaThailandNepal

20 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

21 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

22 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

23 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

24 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

25 “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 policy Financing/cooperation model

26 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

27 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

28 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?

29 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

30 Private Sector Engagement Thank you for your attention!!!

31 Back-up slides

32 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 4. Example – Renewable energy: on-grid solar and wind Source: WRI, 2012

33 4. 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

34 “Programme Solaire” (Prosol) Support for solar water heaters 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. 4. 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

35 4. 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

36 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. 4. Case – Adaptation