EMERGING APPROACHES TO CLIMATE FINANCE - E3G · design/develop LEDS (and NAMAs) acting as advisors to sectoral ministries ... Bridging the NAMA financing challenges Economic analysis

EMERGING APPROACHES TO CLIMATE FINANCE: Developing National Financing Pathways for

implementation of LEDS and climate resilient plans

LEDS Asia Forum

Climate Finance Training

4 October 2013

Manila, Philippines

Presenter: Chantal Naidoo

E3G – Third Generation Environmentalism

International Climate Finance Programme

State of Play of LEDS in Latin America

• Bigger scale: from isolated climate projects (CDM) to integrated national or sectoral strategies

• Broader scope: from REDD-centric focus to urban agenda

• Expanding know-how: Increased capacity in Ministries of Environment to design/develop LEDS (and NAMAs) acting as advisors to sectoral ministries who are responsible for implementation

• Competence: Ministries of Finance tend to be effective institutions in advising and allocating budget through engagement with other ministries

– Often they are influential

• Momentum: a variety of initiatives are on the ground (MAPS, GIZ, UNEP, UNDP, IADB)

– Strong focus on “readiness”

• Aspirations: Mexico and Chile joined OECD, Colombia, Costa Rica and Peru have applied as well

– This has implications for approach to “aid” and for governance

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LEDS GP in 2012 & 2013 confirmed the importance of finance issues

• Specific and urgent action necessary to advance implementation of the LEDS in the area of finance, including: – Ensuring public funds (both domestic and international) are used to catalyse private investment – Developing approaches that are country specific and that help integrate LEDS within national

budget processes – Financing strategies that support national development objectives – Sectoral specific interventions recognising different roles for public and private finance – Need for learning in order to move to scale and potential for developing investable pipelines of

projects to enable this

• MAPS partners in Chile, Peru and Colombia have expressed interest to develop financing strategies for their MAPS

• Financing from CDKN enabled an initial scoping mission to these countries to determine – Current status of LEDS planning process & implementation – Views and work related to financing LEDS priorities – Identify and engage the champions at country level – Interpret the results and develop common themes that can be considered by others

Prior work which recognises the importance of climate finance in climate & green economy plans

The project draws on prior work by E3G team members on the following:

• South Africa: Research and policy recommendations on mobilising resources (including climate finance) to implement programmes associated with National Climate Change response, including design of a National Green Fund to catalyse investment

• United Kingdom: Technical advice on the design and implementation of the UK Green Investment Bank, which aims to offer innovative instruments to catalyse large scale investment

Reference materials are available on request

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Presentation outline

1. High level findings of Scoping Mission

2. Developing National Financing Pathways

3. Emerging tools and diagnostics

4. Ongoing work

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1. High Level Findings of the Scoping Mission

Emerging findings prior to scoping mission

1. Strong momentum LEDS in LAC in MAPS countries and beyond

2. Growing awareness in the LAC region of the linkages between LEDS implementation and need for a strategic approach to financing

3. Countries want to lead financing processes – important to strengthen capacity, understanding and institutional arrangements

4. Important to avoid creating distractions – umbrella concept can advance LEDS in concrete and demonstrable ways to accelerate implementation

5. Lessons from MAPS countries relevant beyond these countries Learning-by-Doing can be rapidly shared to countries within the region through the LEDS LAC Platform and to other regions through the LEDS GP

6. Important to build linkages to wider finance community through outreach

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Common themes emerging from scoping mission

LEDS Finance related discussions at country level varied in depth and focus:

• Recognition that framing LEDS within context of national development priorities (jobs, economic growth, competitiveness, poverty reduction, energy security) will attract requisite support across stakeholders

• LEDS governance and institutionalisation varied across countries

– creation of government decrees (Colombia) based on sequential approach to

– technical advisors with strong convening abilities to ensure relevant stakeholder discussions

– LEDS Government team engaging directly with Ministry of Finance

• Majority have in principle agreement on LEDS priorities – however need to actively engage more broadly particularly with private and finance sectors

• Need for enabling environment for investment in LEDS priorities is crucial – including framing “finance” and “programme development” to ensure an investable pipeline emerges that delivers transformation effect

• Need to utilise international climate finance more creatively in addressing market gaps to catalyse domestic investment and build capacity

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Country findings towards financing for LEDS COLOMBIA PERU CHILE

Facilitation arrangements

In progress (i.e. SISCLIMA)

In progress (i.e. Plan CC, Progrenacc, Interclima)

Deep inter sectoral involvement through MAPS

Pilots & other activities

NAMAs, Sectoral Mitigation Action Plans

NAMAs, projects initiated by national govt

NAMAs, extensive work on energy (renewables & efficiency)

Finance related activities

Sub-Committee of SISCLIMA established Bridging the NAMA financing challenges Economic analysis + market readiness activities + high level assessments

Work streams related to finance for LEDS, National Development Banks & capacity building in private sector Market readiness activities + high level assessments

Hacienda (Finance) - analysis of specific finance options for sectors Economic analysis + market readiness activities + high level assessments

Fact finding NAMA workshops on financing

Energy sector experts meetings

Current questions

Private sector engagement

Private sector engagement

Sector specific financial innovations

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Colombia – Emerging landscape of activities

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3. Developing National Financing Pathways

Hypothesis: Ability to mobilise & leverage different sources of finance will be key to a steady transition to low emissions & climate resilient development paradigm

Assumptions underpinning this hypothesis:

1. Governments are responsible for introducing appropriate enabling planning, policy and regulatory signals and where necessary, the financial mechanisms to trigger transition

2. Many different sources of funding are necessary for the shift to low emission and climate resilient development

3. Private investors are attracted to investments that are well packaged and risks have been reduced to acceptable level

4. Each stakeholder in the financial system has a specific role to play in promoting investments that are beneficial to the climate and development of economy

5. Effective use of international climate finance can bridge the financing gaps in the domestic finance system

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Building Block 1: Integration of LECR with National Development Priorities

13 Source: DBSA, 2010

Objective is to create alignment of national & sub-national priorities and implementation path over foreseeable future which builds investor confidence

Building Block 2: Financial System is designed to unlock investment opportunities

Financial intermediaries & institutions

+ Commercial and investment banks

+ microfinance institutions

+ Community organisations

+ National development banks

+ Private equity & venture capital firms

+ International banks

+ International development agencies

+ Pension funds

+ Other ....

Source: http:// commons.wikimedia.org (adapted for use)

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Public finance & fiscal frameworks

Taxes, incentives, market mechanisms, ODA and international co-operation, trade agreements

Domestic & Int’l Regulators + Central banks + Banking Associations

Building Block 3: Using standard investment risks to unlock private capital for LEDS plans

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Risk management is a core part of how investors make decisions, and the ability to extract an attractive “return on investment. Some of the issues taken into account include:

1. Technology – Maturity and the cost of “new” technology

2. Policy – Large investment programme vs. smaller programmes would have different cost of capital

3. Legal and Regulatory – Clear frameworks with avenues for protection in event of default

4. Counterparty – Strong parties able to implement

5. Financial – Predictability of revenue generated by project

6. Ability to exit the investment – “Distribution strategy” (i.e. who can they sell to?)

In making these decisions, investors also conduct sensitivity analysis to determine the factors that affect revenue generation the most.

Negotiations take place between borrowers and lenders to ensure such factors are eliminated (where possible) and/or additional “security for the loan” is added.

Building Block 4: International Climate Finance System can bridge resource gaps if used effectively

UNFCCC Support package =

Finance + Technical support + Technology transfer

International climate finance system

• Supply driven (donor focused)

• Direct access is difficult

• Lacking in coherence

•Replicating and scaling up examples

• Emerging financial innovations from traditional sources

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Key Outcome: Developing different pathways to blend public & private capital for scaled up finance for LECR transition

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

The Relationship between Private Sector Investment and Development Finance

Development Finance Cost (bn) Private Sector Investment

Priorities to 2015

Priorities to 2021

Desired outcomes by 2030

1.Renewable energy 2.Energy efficiency 3.Transport 4. Water infrastructure 5. Waste systems

Source: DBSA, 2010 (adapted)

Development finance

Private sector investment

Possible stages involved in developing NFP which may commence concurrently, but are strategically focused on different stages of the transition process

Short (0-2 year)

Medium (1-5 years)

Long (+5 years)

Goals Building a sustainable support base to finance implementation

Piloting & building benchmarks to facilitate investment decisions

Create sustainable finance framework to promote steady transition over long term

Focusing on Facilitation by Environment Ministry Sectoral ministries Private sector Planning & Finance

Learn by doing (e.g. NAMAs) M&E Iterative design & engagements

Finance regulations Ongoing dialogue Resource allocation Testing innovations from earlier processes

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3. Emerging diagnostics to develop NFP

Key questions in developing NFP: Addressing the who, what and how questions ....

• Who are the key domestic financial players that will need to take action?

• What is the role of existing or new domestic and international public finance mechanisms?

• How should existing mechanisms be deployed most effectively?

• What is the interaction with public policy and regulatory frameworks in catalysing scale and setting pace of investment?

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Emerging diagnostic tools to develop NFP

1. Iterative enquiries on LEDS plan & financing needs

2. Analysing different financing scenarios based on LEDS ambitions and priorities (over a time scale)

3. Evolving diagnostic on strategic decisions by public policy financiers

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Diagnostic 1: Iterative decisions & reflections on programme and policy priorities

• Ongoing structured and unstructured dialogue with different stakeholders can refine implementation plans and ensure flexibility throughout transition

• Finance sector dialogue can deepen understanding of investment barriers and role of public policy and international co-operation in reducing these

• Iterations may also reveal responses to the policy and regulatory support mechanisms, institutional strengthening and risk mitigation challenges emerging

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Diagnostic 2: Scenario analysis can assist in developing different pathways based on LECR ambitions and priorities

These scenarios depend on certain key variables, some of these may be:

• Role of public finance

• Role of private finance

• Use of climate finance

• Extent of integration with national priorities

• Ability of programmes to self-finance over time

• External factors (e.g. global crisis, national agendas)

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Diagnostic 3: Evolving aid for strategic decisions for public policy financiers

• What are the constituent elements of the LECR plans and their financing needs?

• What resources are required and available for the different stages of implementation?

• What specific resources are needed to finance these sectors, i.e. where are financing gaps?

• Which national and international development partners are best suited for implementation?

• What is the desired role of the financial intermediaries?

• How should risk be allocated between these intermediaries to catalyse investment?

• What are the support structures and institutional mechanisms available and required?

• How do existing international climate finance mechanisms such as NAMAs, GCF Readiness programme and similar initiatives bridge existing gaps within national finance landscape?

• How are these resources accessed by those that require them most?

• What monitoring mechanisms would be best suited to track country’s progress?

• What are the key variables that may influence different financing scenarios for LECR implementation relative to competing national priorities?

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4. Ongoing work

Current project status ...

• E3G Working paper released on 3 Oct 2013 on National Financing Pathways as means of scaling up finance for LEDS and climate resilience. Available online at:

http://www.e3g.org/docs/E3G_Working_Paper_on_National_Financing_Pathways_021013.pdf

• Continue engagement with Peru, Chile and Colombia based on their identified needs and adaptation of NFP concept based on the emerging developments at country level

• Workshops at LEDS LAC Platform (Dec 2013)

• Preparation of final report (due for completion early 2014)

• Continue to refine the NFP concept and share with other countries

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Contact details for further information

For further information and explanations, please feel free to contact our International Climate Finance Team:

Amal-lee Amin ([email protected])

Chantal Naidoo ([email protected])

Marcela Jaramillo ([email protected])

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