Key lessons for good practice
A number of existing instruments and mechanisms demonstrate high mobilization of private funds through targeted public support
A review of project case studies, initiatives from members and partners of the Green Growth Action Alliance and the past performance of different mechanisms and instruments has demonstrated how different interventions can create attractive investment conditions for the private sector, and enable targeted public investment for green-growth projects. The following lessons for good practice have emerged:
Targeted government support is crucial to unlock commercial green finance
All case studies showed that initial support and backing from the public sector is an important prerequisite for mobilizing private funds. In the case of Metrobus in Mexico City, such support also included the presence of a champion/leader to advance policy and negotiate complex public-private partnerships. The lack of leadership in some projects resulted in delays. Dialogue with the private sector, stakeholder engagement and capacity building are all examples of government support that enabled the projects to develop.
Overarching policy support enabled most projects to attract private-sector involvement
Governments need to develop investment-grade national policy frameworks to create a supportive business environment that enables attractive returns for investors in green technologies. Not surprisingly, policy support via national legislation, such as for renewable energy targets and frameworks, emission-reduction targets and subsidy programmes, has created new green markets and ensured projects’ commercial viability. The largest injections of private finance – for the Walney Offshore Windfarms in the UK, for example – would not have been provided if it were not for the incentive frameworks provided by the government through green tradable energy certificates.
Public interventions can be successful when tailored to local requirements, involving end-users
The most innovative examples of public interventions, such as scrapping incentives for old bus fleets in Mexico city to remove competition to greener transport, and ‘on-lending’ through state utility companies by commercial banks to make it easier for customers to pay for energy efficiency measures in Tunisia, were tailored to local contexts to minimize risks and enable sustained private investment. With households already providing almost 10% of overall climate-finance flows,90 there appears to be significant potential to scale up private investment.
Early-stage funding and grants can mobilize private finance
In almost all cases, funding from public sources, such as the Global Environment Facility and Clean Technology Funds, to pay for initial research, feasibility studies, capacity building, policy design and technical assistance, was a core catalyst for further private-sector investment. Grant funding, when used effectively (for example, in Uruguay to develop Independent Power Producer legislation and national renewable energy targets), can pave the way to new green market creation and remove impediments that previously deterred private investors. Subsidies and grants can lead to high leverage of private funds, especially when combined with technical assistance; those given by EBRD’s lending programme for energy efficiency, for example. More needs to be done by governments to make clean investment funds such as the CTF more readily available and accessible. Carbon-offset financing (Box 5) can also play a more important role in the future, buffering risk for investors, as evidenced in projects such as Metrobus.
Investment capital can be de-risked through innovative models
The private sector will not scale up financing for green investments unless the risks of investing are no more pronounced than those for conventional investments. Case studies have shown that large private-sector investment has been successful in green projects when risks levels were reduced to acceptable, normal levels. De-risking tools, such as guarantees and insurance against policy, regulatory and macroeconomic risk, are underused and offer significant potential for mobilizing private investment. Work by the Green Growth Action Alliance in Kenya has shown promise in developing technological risk insurance for early-stage investment in geothermal technologies, while in India, partial credit guarantees have the potential to realize up to six times their investment in private-sector funding for solar power development. Innovative approaches have also emerged to promote commercial lending for green projects in developing and new markets, through support from governments and international financial institutions to underwrite loans. This is particularly beneficial in markets where a lack of familiarity exists with the technology in question and fears of debt default would otherwise make lenders less willing to release funds to scale up investment.