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The GCF and Private Sector Engagement the Private Sector Facility Wolfgang Mostert

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The GCF and Private Sector Engagement the Private Sector Facility Wolfgang Mostert ASIAN DEVELOPMENT BANK The GCF and Private Sector Engagement The Private Sector Facility Wolfgang Mostert April 2013 W O L F G A N G M OSTERT , D A L P A R K E N 6, 2820 G ENTOFTE , D ENMARK Acknowledgements I would like to express my appreciation to the following private individuals who allocated precious time for direct interviews, phone interviews or email exchanges during the course of my work with the report: Harry Boyd-Carpenter, EBRD; Barbara Buchner, CPI; Torben Huus, IFU; Abyd Karmali, Bank of America Merrill Lynch; Sean Kidney, Green Climate Bonds Initiative; Jane Karuko/ André Dellevoet/ Maggie Kamau-Biruri, AECF-REACT; Elizabeth Mansford, Danish Embassy Kenya; Stefan Mård, Novozymes; Anne Olhoff, UNEP-DTU-Risoe; Randall Rurcell, UNWFP; Jens-Christian Stougaard, PensionDanmark; Eva Tingkær, Dansk Energi; John Ward, Director Vivid Economics Limited. At ADB, I would like to thank the following for assisting my work with interview-responses, comments or logistical support: Preety Bhandari, Anna Cinco, Maria Amparo Dato, Esmyra Javier, Robert Lockhart, Brian Liu, Xuedu Lu, Jake Padua, Don Purka, Michael Rattinger, Casper van der Tak, Anne-Marie Verbeken. 2 Table of Content Introduction ................................................................................................................................................... 8 Executive Summary ....................................................................................................................................... 9 Abbreviations and Accronyms .................................................................................................................... 15 Glossary ....................................................................................................................................................... 16 1 Finance flows for climate investments in 2011 and the case for the GCF .............................................. 17 1.1 Global climate investment 2010/11................................................................................................ 17 1.1.1 Structure of investments by sector ........................................................................................... 17 1.1.2 Structure of investments by type of investor in 2010 .............................................................. 17 1.2 Estimates of the required increase in green finance ....................................................................... 19 1.3 Share of finance from developed countries in financing investments in developing countries ..... 21 1.4 Observations and conclusions of relevance for the GCF ............................................................... 22 1.4.1 Does the size of the shift towards green finance pose a problem? .......................................... 22 1.4.2 Is finding finance to cover the ‘viability gap’ the critical issue? ............................................. 23 1.4.3 Share of private actors in developing countries climate finance ............................................. 23 2 The investor community in green finance ............................................................................................... 25 2.1 Overview of actors in primary finance and in secondary finance .................................................. 25 2.2 Utilities, independent project developers and corporate entrepreneurs ......................................... 26 2.3 Corporate treasuries as debt finance providers .............................................................................. 32 2.4 Small end-users .............................................................................................................................. 32 2.5 Commercial banks .......................................................................................................................... 32 2.6 Private funds .................................................................................................................................. 34 2.6.1 Venture capital funds and private equity funds ....................................................................... 34 2.6.2 Infrastructure funds .................................................................................................................. 37 2.6.3 Development banks ................................................................................................................. 39 2.7 The secondary market for finance: who invests in green bonds? ................................................... 42 2.8 Implications for the GCF ............................................................................................................... 44 2.8.1 Observations drawn from the review of actors in the finance chain........................................ 44 2.8.2 Workshop recommendations for the PCF’s private sector engagement .................................. 44 3 Borderline between ‘GCF-Mitigation & Adaptation’ and the PSF ......................................................... 46 4 ‘GCF Adaptation & Mitigation’ support to NAMAs and NAPAs .......................................................... 48 4.1 The importance of NAMAs and NAPAs ....................................................................................... 48 4.2 De-risking the national policy and regulatory environment ........................................................... 48 4.3 International coordination the integrating function of GCF ........................................................... 51 4.3.1 Cooperation with development banks ..................................................................................... 51 4.3.2 Cross-cutting international programs ...................................................................................... 52 3 4.3.3 Cooperation with funds and carbon markets ........................................................................... 52 4.3.4 Cooperation with Civil Society Organisations (CSOs) ........................................................... 52 4.4 Formulas for the ‘additional cost’ and for the sharing of costs between national sources and donor finance 52 4.4.1 Achievement of ‘external grant efficiency’ ............................................................................. 52 4.4.2 The GET-FIT formula ............................................................................................................. 53 4.4.3 Mechanism for additional cost payments: ‘payment by result’ ............................................... 54 4.5 ‘GCF Adaptation & Mitigation’ support to bank lending .............................................................. 54 4.5.1 On-lending and re-financing facilities for banks ..................................................................... 54 4.5.2 Syndicated loan finance with local bank participation ............................................................ 55 5 Organisation of PSF’s engagement with the private sector ..................................................................... 56 5.1 Windows for ‘green finance sector’ and for ‘green supply chain’ ................................................. 56 5.2 Providing private investors with direct access to the PSF – in what form? ................................... 57 5.2.1 Setting up funds operating according to commercial principles .............................................. 57 5.2.2 Directly investing in private equity funds ............................................................................... 58 5.2.3 Waterfall structures: ‘first loss facility’ and ‘capped return’ ................................................... 58 5.2.4 Fund of funds ........................................................................................................................... 61 5.2.5 Incentivising existing equity funds to invest in the carbon sector ........................................... 63 5.2.6 Are there enough deals for the public-private-partnership funds? .......................................... 64 5.2.7 Innovation Funds ..................................................................................................................... 64 5.3 Underwriting .................................................................................................................................. 65 5.3.1 Definition of underwriting ....................................................................................................... 65 5.3.2 PSF finance vehicle specialising in construction finance ........................................................ 65 5.3.3 Cornerstone investor in share and green bond issues .............................................................. 66 5.3.4 Credit enhancement, PSF involvement in insurance and guarantee products ......................... 66 5.3.5 Geothermal exploration and development corporation ........................................................... 66 5.4 Finding the right niche for the PSF in public climate finance........................................................ 69 6 Greening the finance industry in client countries .................................................................................... 70 6.1 What kind of transformation is called for in the finance sector? ................................................... 70 6.2 Quality demands on green finance: liquidity and risk characteristics ............................................ 70 6.2.1 A model of the basic operating modality of the finance industry ...........................................
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