1. FINANCING THE GREEN ECONOMY: GREEN FUND
GCIP Business Clinic
21 JULY 2015

2. Green Economy
The role the DBSA is playing in mobilising resources for the roll-out of green economy projects
Types of Investment Agreements and Financing Mechanisms
Non traditional yet flexible and responsive mechanisms in funding green economy programmes

3. Green Economy
“an economy that results in improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities” UNEP (2011)
green economy driven by investments that:
Reduce carbon emissions and pollution;
enhance energy and resource efficiency; and
prevent the loss of biodiversity and ecosystem services.
resilient, equitable and pro-employment development path that reduces carbon dependency, promotes resource and energy efficiency and lessens or prevents environmental degradation.

4. DBSA Driven green initiatives
Some of the DBSA green economy initiatives:
Implementation of SA Renewable Energy Independent Power Producer Programme (REIPPP)
Implementation of the National Green Fund
GEF and GCF accreditation

5. Green Fund
The Green Fund is resource mechanism to contribute to a wide range of goals of transitioning to a greener economy
Managed by the DBSA, established in 2012
R1.1 billion has been allocated to the fund to date through the Department of Environmental Affairs
Aimed at facilitating investment in green initiatives;
To transition SA to a greener economy
To support socio-economic development
Key Objectives
Promoting innovative and high impact green programmes and projects
Reinforcing climate policy objectives and sustainable economic development through green interventions
Building an evidence base for the expansion of the green economy
Attracting additional resources to support South Africa’s green economy development

6. Green Fund Financing Offering
Funding in the form of Non-Recoverable Grants Recoverable Grants, Loans, and Equity across the thematic windows supports project development , capacity building in green initiatives and research and development initiatives that feeds into policy and regulatory environment for the green economy
The Fund allocation for the three products is as follows:
Product Offering
Allocation
Project development
75%
Capacity building
20%
Research and development 5%

7. Financial Instrument - 1
Grant (non-recoverable)
Allocation and/or contribution (in cash or kind)
Agreed set of deliverables consistent with the mandate of the Funder
Specific conditions detailed in the Grant Agreement.
This amount is generally not recoverable from the applicant during any period.

8. Financial Instruments - 2
Grant (recoverable)
Allocation and/or contribution (in cash or kind) to an eligible recipient
Agreed set of deliverables consistent with the mandate of the Funder
Specific conditions detailed in the Grant Agreement.
This amount is generally recoverable from the applicant.
Contingent on success, possibly linked to revenues
Recovery of the initial amount invested and an appropriate portion of the returns

9. Financial Instruments - 3
Loan
An arrangement, in which the Funder lends money to an eligible borrower (or applicant)
Agreed set of deliverables consistent with the mandate of the Funder
the borrower agrees to return the money (with interest) through defined set of installments at a specified period in the future
Not contingent on success
The terms, such as interest rates, repayment period may be concessionary
Determination based on Capacity/Ability to repay: aspects such as, team, historical, current and projected operating performance.

10. Financial Instruments - 4
Equity
An arrangement, in which the Funder allocates money to an eligible investment target (or applicant) as capital contribution
in exchange for an ownership interest and
the associated economic and voting rights
Returns through capital gains and dividends
Agreed set of deliverables
Determination based on:
1) Understanding the context,
2) Understanding the business, and Industry
3) Development of business forecasts,
4) Selection of the appropriate analytical frameworks and models,
5) Conversion of forecasts into an investment model with analysis
6) Investment structuring

11. Value Chain Participation
Green Fund’s Role: Catalyst for Green Economy Transition
Investment principles:
Must fall within funding windows
Additionality
Private Sector Participation
High Impact: Environmental, Social and Economic
Sharing of Risks
Catalytic participation, unlocking barriers and investment stretching across the entire innovation value chain
Typical types of value chain participation
Project Prep (Tech & Product Development)
Research & Dev
Implementation and Launch
Expansion (Scale Up)
Grants
Technical and Business Support
Equity
Loans
Grants Recoverable
Technical and Business Support
Grants Recoverable
Technical and Business Support
Equity
Loans
Guarantees
Technical and Business Support

12. Investment Philosophy
Elements include:
Full Investment Life Cycle Opportunity Arrangement
The Fund prefers opportunities that are packaged and arranged in manner that demonstrates at least in principle support and performance based commitments of follow on funding from others
Origination
Passive – closed calls and open calls
Active – investment programmes
Investment Programmes
Very High Impact Projects
Programmatic Approach

13. Environmental & Natural Resource Management
Initial Funding Focus
Based on research and extensive consultation the following three thematic windows were identified for the initial focus of the Green Fund
The focus areas and eligibility criteria for each window is different and informed by key national policies
Three funding windows – not mutually exclusive
Green Cities and Towns
Low Carbon Economy
Environmental & Natural Resource Management

14. Green Cities and Towns
Vision: well run, compact and efficient cities and towns that deliver essential services to their residents without depleting natural resources
Greening core municipal engineering services, especially where cost savings can be realised
Waste management and recycling, water demand management, public transport, RE and EE on municipal buildings and infrastructure, urban greening e.t.c
Applicants from public and private sector, with support from relevant municipality
Strong emphasis on project preparation, with appropriate finance to take to scale

15. Low Carbon Economy
Vision: a low carbon economy that is aligned with the targets for a peak, plateau and decline trajectory for greenhouse gas emissions
Focused on climate mitigation, renewable energy, energy efficiency, cleaner production, sustainable transport and bio-fuels
Interventions include innovative structuring of EE and RE rollout, vehicle fleet conversions, clean production programmes
Typical applicants include private companies, research organisations, SMEs, NGOs
Regulatory support for development of standards, SEAs

16. Environmental and Natural Resource Management
Vision: resilient eco-system services supporting the long term development path
Focused on biodiversity and ecosystem management, sustainable agriculture, fisheries, rainwater harvesting
Demonstrate PES, convert conventional to sustainable agriculture and replicate success
Primary beneficiaries are farmer and community based organisations, research organisations, private sector, NGOs
Targeting community based enterprises as well as project preparation for PES projects, supported by appropriate finance
Regulatory support on adaptation planning, biodiversity offsets, PES, standards and eco-labelling
Payment for ecosystem services

17. Green Fund Portfolio

18. Proposed/Requested GEF Funding
DBSA’s Role in Climate Finance: GEF
Project
Summary
Proposed/Requested GEF Funding
Tentative
Co-financing
Agency Fees
Way Forward
DBSA Interface
1. Equity Fund for the Small Projects Independent Power Producer Programme (SP-IPPP)
DBSA has formulated a Facility for Investment in Renewable Small Transactions (FIRST) which will provide debt (proposed 90%) to small projects investors.
KfW through DBSA will contribute €5mil (for technical assistance) and €14mil (non-interest bearing loan) to be blended with DBSA’s contribution (about R1.8 billion) to capitalise FIRST.
The proposed GEF funded Equity Fund will provide equity (10%) to small projects.
 US$ 15million   
US$195,000
DBSA 155,000,000
KfW 20,000,000 (TA facility and debt loan)
Beneficiaries 15,000,000
 US$1,350,000
PIF endorsed by GEF CEO and included in Council Work Programme for June meeting.
SA Financing – Energy & Environment
2. Building a resilient and resource efficient Johannesburg: Increased access to urban services and improved quality of life
The proposal will foster city level resilience, resource efficiency, emission reductions and other co-benefits through area-based pilot demonstrations, systems analysis (food), and institutionalization of evidence-based decision making through integrated planning.
US$ 8,000,000
(DBSA is collaborating with UNEP to implement this project)
US$120,000,000
(City
of Johannesburg)
 US$ 365,000
SA Financing – Metros, Water Utilities
3. Unlocking biodiversity benefits through development finance in critical catchments
To develop policy and capacity incentives for mainstreaming biodiversity and ecosystems values into national, regional and local development policy and finance: application demonstrated in two water catchments
US$7,200,000
30,500,000
US$650,000
Financing Operations – Sector Specialist
Totals
US$30,200,000
US$345,000,000
US$2,365,000

19. DBSA’s Role in Climate Finance: GCF
What is Green Climate Fund (GCF)?
An operating entity of the financial mechanism of the United Nations Framework Convention on Climate Change (UNFCCC).
Objective: to promote the paradigm shift towards low-emission and climate-resilient development pathways.
Current global pledge: $10.2 billion for next 3 years
Aims for a 50:50 balance between mitigation and adaptation over time.
Aims to allocate 50% adaptation funds to vulnerable countries, least developed countries (LDCs), small island developing states (SIDS) and African states

20. DBSA’s Role in Climate Finance: GCF
Fund’s Investment Criteria:
Impact potential- potential of the programme/project to contribute to the achievement of the Fund's objectives
Paradigm shift potential- degree to which the proposed activity can catalyze impact beyond a once-off project or programme investment
Sustainable development potential: wider benefits and priorities, including environmental, social, and economic co-benefits as well as gender-sensitive development impact
Responsive to recipients needs: vulnerability and financing needs of the beneficiary country and population in the targeted group.
Promote country ownership: beneficiary country ownership of and capacity to implement a funded project or programme (policies, climate strategies and institutions)
Efficiency & effectiveness: economic and, if appropriate, financial soundness of the programme/project, and for mitigation-specific programmes/projects, cost-effectiveness and co-financing

21. SUPPLY CHAIN FINANCE: Green fund partnership with sefa and

22. About SCF Capital Solutions
SCF Capital Solutions is an SME financing company with specific focus on the green economy, agriculture and corporate supply chains involving SMEs
In Aug 2015, together with the DBSA Green Fund and SEFA, the company will be launching a fund for SMEs in the green economy

23. Why SMEs struggle to get commercial bank funding
Factors
Considerations
SMMEs (new businesses)
Established businesses
The need for an effective service model
Cost to serve
Skill level
Product tailoring
Over the counter service, lower skilled service, non-tailored solutions
Relationship managed, higher skilled, more tailored solutions
Credit assessment methods
Repayability
Subjective assessment of business plan projections
Leverage and gearing ratio assessments based on history and projections
Equity contribution
Many SMME do not have
Can cover this from retained profits
Security (Suretyship and assets as collateral )
Many SMMEs do not have
May have already created assets
Capital costs and profitability
Risk worthiness of client (probability that they can default)
High capital costs, less profitable
Lower capital requirement, more profitable

24. What is Supply Chain Financing (SCF)
Financing of commercial purchase and sale transactions, especially where supplier is an SME and buyer is a large company
The lender finances the underlying commercial transaction, instead of the business
SCF shifts lender risk from SME supplier to either the financing structure or the large corporate buyer
SCF has been used successfully in Europe, US and Asia to
Provide access to finance working capital of small suppliers
Reduce borrowing costs of small suppliers
Stabilize supply chains of large multinational companies by ensuring their suppliers have access to working capital

25. How does it work? Accelerate cash flows
Buyers issues contract to SME to provide service or do an installation etc…
SME supplier delivers on the contract
SME suppliers invoices the Corporate Buyer, but as is usually the case, payment will be made in 30, 60 or 90 days.
SME supplier submits invoices to SCF Capital Solutions to accelerate payment
SCF Capital Solutions structures the financing
SCF Capital pays SME Supplier early
SCF Capital get paid by Corporate Buyer in 30, 60 or 90 days
Supplier1
Supplier 2
Supplier 3
Supplier n
Corporate Buyer
SCF IT platform 2 1 4
SCF 5 6 3 7

26. How does it work? Purchase of equipment
Buyer issues contract to SME Supplier to provide service or do an installation etc…
SME Supplier gets purchase order from Buyer
SME Supplier applies for financing to purchase required equipment from SCF Capital Solutions
SCF Capital Solutions structured the financing
SCF Capital solutions pays the supplier of equipment
Supplier of equipment delivers equipment to SME Supplier
SME Supplier completes the project
Corporate Buyer makes payment
Supplier1
Supplier 2
Supplier 3
Supplier n
Corporate Buyer
SCF IT platform 2 1 3
SCF
Supplier 4 5 7 8 6

27. Lessons Learnt
 Managing Risk is challenging
The level of matching contribution is used to help reduce exposure. Some good projects may not meet matching thresholds.
 Private Sector Participation could be better
Some progress has been made, however there still remains significant scope for increasing participation of the private sector.
 Follow on Funding (Full life cycle opportunity arrangement is challenging)
Risk return characteristics including early stage of development and long period to payback with relatively high uncertainty reduce the scope for follow on funding and support from risk averse financial return oriented investors such as commercial banks. There is however significant scope for support from risk tolerant multiple outcome returns oriented investors in the mould of development finance institutions

28. Lessons Learnt
 Effectively discharging the role of a catalytic finance mechanism and being measured on the right performance indicators
To measure the performance of a catalytic mechanism using absolute aggregates/ indicators such as total amount of carbon emissions reduction attributable to projects supported may be inappropriate, if the scope of focus areas/funding windows supported is broad.
Asset Allocation
Can be very difficult to balance the portfolio and gain exposure to all the desired focus areas owing to market characteristics. E.g limited uptake in transport
Applying Concessionary terms
Adding concessionary terms has to been done diligently and using sound analytics in order to avoid moral hazard and the crowding out of free market participants through cheap money.

29. THANK YOU