mr12cd tuesday 13h00 - sayed
TRANSCRIPT
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FINANCING THE GREEN ECONOMY:GREEN FUND
GCIP Business Clinic 21 JULY 2015
Green Economy
1. The role the DBSA is playing in mobilising resources for the roll-out of green economy projects
2. Types of Investment Agreements and Financing Mechanisms
3. Non traditional yet flexible and responsive mechanisms in funding green economy programmes
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.
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
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
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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:
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Product Offering Allocation
Project development 75%Capacity building 20%Research and development 5%
Financial Instrument - 1
Grant (non-recoverable)
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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.
Financial Instruments - 2
Grant (recoverable)
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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
Financial Instruments - 3
Loan
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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.
Financial Instruments - 4
Equity
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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
Value Chain Participation
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Investment principles:
Catalytic participation, unlocking barriers and investment stretching across the entire innovation value chain
Project Prep (Tech & Product
Development) Research & Dev Implementation and
Launch Expansion (Scale Up)
Typical types of value chain participation
Equity Loans Grants Recoverable Technical and
Business Support
Equity Loans Guarantees Technical and Business
Support
Grants Technical and Business
Support
Grants Recoverable Technical and Business
Support
High Impact: Environmental,
Social and Economic
Must fall within funding
windows
Additionality
Private Sector
Participation
Sharing of Risks
Green Fund’s Role: Catalyst for Green Economy Transition
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
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
Green Cities and Towns
Low Carbon Economy
Environmental & Natural
Resource Managemen
t
Three funding windows – not mutually exclusive
Green Cities and Towns
• 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
Vision: well run, compact and efficient cities and towns that deliver essential services to their residents without depleting natural resources
Low Carbon Economy
• 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
Vision: a low carbon economy that is aligned with the targets for a peak, plateau and decline trajectory for greenhouse gas emissions
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
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Green Fund Portfolio
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DBSA’s Role in Climate Finance: GEFProject Summary Proposed/
Requested GEF Funding
TentativeCo-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 PIF endorsed by GEF CEO and included in Council Work Programme for June meeting.
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 PIF endorsed by GEF CEO and included in Council Work Programme for June meeting.
Financing Operations – Sector Specialist
Totals US$30,200,000 US$345,000,000 US$2,365,000
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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
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DBSA’s Role in Climate Finance: GCF
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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
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DBSA’s Role in Climate Finance: GCF
SUPPLY CHAIN FINANCE: GREEN FUND PARTNERSHIP WITH SEFA AND
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
Why SMEs struggle to get commercial bank funding
Factors Considerations SMMEs (new businesses)
Established businesses
The need for an effective service model
Cost to serveSkill levelProduct 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
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
How does it work? Accelerate cash flows
1. Buyers issues contract to SME to provide service or do an installation etc…
2. SME supplier delivers on the contract3. SME suppliers invoices the Corporate
Buyer, but as is usually the case, payment will be made in 30, 60 or 90 days.
4. SME supplier submits invoices to SCF Capital Solutions to accelerate payment
5. SCF Capital Solutions structures the financing
6. SCF Capital pays SME Supplier early7. 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
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SCF5
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How does it work? Purchase of equipment
1. Buyer issues contract to SME Supplier to provide service or do an installation etc…
2. SME Supplier gets purchase order from Buyer
3. SME Supplier applies for financing to purchase required equipment from SCF Capital Solutions
4. SCF Capital Solutions structured the financing
5. SCF Capital solutions pays the supplier of equipment
6. Supplier of equipment delivers equipment to SME Supplier
7. SME Supplier completes the project
8. Corporate Buyer makes payment
Supplier1
Supplier 2
Supplier 3
Supplier n
Corporate Buyer
SCF IT platform
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SCF
Supplier
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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 betterSome 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
Lessons Learnt
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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.
Lessons Learnt
