Private Sector Engagement
“How to engage actors from the private sector in climate
change financing?”
Where does private sector engagement matter?
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Objective of this session
What you can expect to learn from this session:
• Get an overview on the relevance of private sector engagement for
Climate Finance
• Understand the interests and risks of actors in the private sector with
regards to Climate Finance
• Learn options for the engagement of actors in the private sector in
Climate Finance
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Content
• Objective of this session
• 1. Definition of ‘private sector’
• 2. Opportunities and risks from private sector engagement
– public sector perspective
• 3. Opportunities and risks from private sector engagement
– private sector perspective
• 4. Instruments for private sector engagement
• Examples (energy efficiency, renewable energies, adaptation)
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1. Definitions ‘private sector’
• Private sector
• The sector of the economy that is not controlled by the state.
• It is formed by a wide range of actors such as small, medium, and large
private companies, but it also encompasses individuals.
• Groups such as non-profit organisations and foundations are not included in
the private sector here for the purpose of clarity - they are sometimes also
referred to as a third sector.
• In the context of Climate Finance, private sector actors can act as capital
providers, project developers, and market facilitators.
• Private sector engagement
• Involvement of the private sector by investing in, executing, or maintaining a
project.
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1. Definitions - Classification of actors within the private sector
• By size:
•
•
•
•
Households
Micro-, small- and medium enterprises
Large-scale companies
Financial sector
– Banks (development banks, commercial banks, cooperatives)
– Insurance companies
– Investors & funds
• By role in climate investment value chain:
•
•
•
•
Capital providers / investors
Market facilitators / financial intermediaries
Project developers / implementers / operators
Investees
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2. Public sector perspective: Why engage the private sector?
Opportunities vs. risks from a public sector perspective
Renewable
energies
Energy
efficiency
Adaptation
(Transport
sector)
Opportunities The anticipated demand for finance to reduce emissions of developing
countries exceeds the commitments of industrialised countries; Adaptation
costs are currently uncertain, but with a failure to invest sufficiently in
mitigation, they are likely to rise
 The private sector engagement is necessary for low carbon transition
 Ultimately ALL flows of public and private finance must be redirected
towards low carbon and resilient investments
There are business opportunities from climate finance, and the market is
growing
Private sector expertise and experience can improve the current
investments being made
- Leveraging
- Development of adaptation or mitigation products or services
Risks
What are risks from your perspective? – collect on flipchart
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3. Private sector perspective: Why should the the private sector engage?
Opportunities vs. risks from a private sector perspective
Renewable
energies
Energy
efficiency
Adaptation
(Transport
sector)
Opportunities
Good financial return on investment (short, medium, long term)
Technological leadership
New successful cooperation public-private cooperation models
Market share increase
Improved image
Risks
Country and financial risks (country risks, economic risks, financial
risks, currency risks, political risks, security risks)
Policy and regulatory risks
Technical and project specific risks (construction risks, technological
risks, environmental risks, operational and managerial risks)
Market risks
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3. Private sector perspective: Expectations of different actors
• Private households
• Financial or tax incentives
• Legal compliance
• SMEs
• Secure investments (e.g. guaranteed returns)
• Financial or tax incentives
• Legal compliance
• Large-scale companies
•
•
•
•
•
Commercial rates of return on invested capital
Reduce operational risk
Marketing, image
Attractive payback period
Legal compliance
• Financial sector (Banks / insurance companies / investment funds)
• Commercial rates of return on invested capital
• “Secure” investments (e.g. reduce operational or financial risk)
• Marketing, image
Existing challenges / barriers:
• Collect on flipchart
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3. To cut it short
Private actors base their investment decisions on an individual set of criteria. Based
on these, the returns have to outweigh the costs:
invest
not invest
increased market
share
lack of incentives
good image
changing legal
framework
guaranteed returns
long payback period
high potential profit
cost
The role of public policy is to create
an enabling environment for positive
investment decisions, to develop
and provide information about
market opportunities and how to
access them with public support
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4. Support for private sector engagement
Renewable
energies
Energy
efficiency
Adaptation
(Transport
sector)
Incentivising
policies
Which supporting policies exist?
How reliable are these?
Which financial incentives are present?
How likely are policy risks to arise?
...?
Enabling
framework for
private sector
investments
General investment climate for private sector investments?
Which country specific risks exist (e.g. currency, country, economic)?
Can specific assets (e.g. power plants) be privately owned?
How are the market conditions?
Financing/
cooperation
models
Which financing options are available and feasible (e.g. venture
capital, infrastructure funds, pension funds, bank debt, ...)?
Are assets publicly or privately owned?
Supporting innovative climate business models: green start-ups and
SMEs?
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4. The role of public policy
Public policy will play a crucial role in removing barriers and mobilizing private investment
Current economy
Enabling policy
framework
Public budget
support
Government
financial incentives
Increasing immediate and long-term
private investment + public finance
exit strategy
Green economy
Source: Green Growth in Practice. Lessons from Country Experiences, E3G 2014
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Conditions for attracting private investment (I)
Policy and institutional conditions
Plans and targets for low-carbon development
• Legally binding
• With inclusive participatory process
• Providing investors with certainty and low
term vision
Regulatory instruments
Establishing a rule and / or objective that must
be fulfilled by the polluters who would face a
penalty in case of non-compliance with the
norm, e.g efficiency standards, building codes,
vehicle efficiency standards, biofuel standards
Institutional organization and capacity to
implement policies effectively
• Strong technical, managerial and
administrative capacities
• Engaging civil society and expert community
• Based on GFG principles
Economic instruments
Incentivizing policies to increase attractiveness
of green investment options as compared to
conventional technologies / projects , e.g. taxes,
(removal of) subsidies, low-cost debt, emissions
trading etc.
Source: WRI, 2013. Mobilizing Climate Investment The Role of International Climate Finance in Creating Readiness for Scaledup Low-carbon Energy.
IPCC 2007 and 2014
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Conditions for attracting private investment (II)
Industry and financial conditions
Project developers’ capacity to develop and
implement bankable projects
• Financial and technical capacity to develop
projects that are capable to attract finance
• Engineering knowledge, technical and
management skills to implement and operate
projects  developing local expertise
Presence of a support industry and enabling
infrastructure
Presence of industry, infrastructure and services
necessary for project implementation, e.g.
manufacturers, construction companies,
availability of technical service providers
Knowledge of resource availability
• Access to short- and long term finance
indicates maturity of financial sector
• Lack of liquidity, maturity and transparency of
financial sector increase project cost
• Financial institutions lack understanding and
technical capacity to assess mitigation or
adaptation projects  capacity building
needed to remove inflated risk perceptions
and develop appropriate financial instruments
Information on domestic and international
financing resources potentially available allows
estimating options for investment requirements
and expected rate of return
Stable financial sector with capacity to support
green investment
Source: WRI, 2013. Mobilizing Climate Investment The Role of International Climate Finance in Creating Readiness for Scaledup Low-carbon Energy.
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4. Instruments available to the public sector to engage the
private sector
Renewable
energies
Energy
efficiency
Adaptation
(Transport
sector)
Incentivising
policies
Low-carbon support policies (e.g. monetary/technical support)
Fixed revenue support (e.g. feed-in tariffs, feed-in premiums, power
purchase agreements)
Market based revenue support (e.g. green tradable certificates, carbon
offsets etc.)
Enabling
framework for
private sector
investments
Legal possibility to own infrastructure, power generation assests
Tax cost support (e.g. real estate, income/revenue tax breaks etc.)
Non-tax support (e.g. permitting procedures; reduced fossil fuel
subsidies); Favourable investment climate; Stable legal and fiscal
policies; Technical infrastructure (e.g. option to connect to grid)
Financing/coope Project level direct support
ration models
Public financing instruments (Lending/debt, equity investments, derisking instruments)
Legal options for public private partnerships
Technical assistance
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Examples for private sector engagement in different sectors
• Energy Efficiency (sector specific barriers; case study Thailand)
• Renewable Energy (sector specific barriers; case study Tunisia)
• Adaptation (sector specific barriers; case study Nepal)
Private sector engagement in
climate finance
Incentivising policies
Renewable
energies
Energy
efficiency
(Transport
sector)
Tunisia
Enabling framework
Financing/cooperation models
Adaptation
Nepal
Tunisia
Thailand
Nepal
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Energy Efficiency
Barriers to the scale-up of private sector investment in energy efficiency in
developing countries include:
• Price distortions due to inadequate regulation and subsidized energy tariffs;
• Lack of awareness and technical capacity to take advantage of energy efficiency
measures;
• Misaligned incentives between asset owners and energy users
• Inaccurate risk perceptions from asset owners, users, and lenders
• Lack of favourable financing
Source: WRI, 2012
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Example – Energy Efficiency (contd.)
Relevant public support to leverage private sector participation include:
• Technical support for third party energy efficiency service providers (ESCOs) to
correct market distortions;
• Support for technology demonstration and diffusion of energy efficiency
technologies.
• Public Financing Instruments
• Direct finance to ESCOs and/or companies to execute projects;
• On-lending through private sector financial intermediaries to improve financing
comfort and awareness.
In addition, public sector encourages private sector engagement as part of a broad
energy policy reform in order to correct price distortions by establishing regulatory
standards to improve baseline energy efficiency
Source: WRI, 2012
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Case – Energy Efficiency Thailand
Setting up of the Energy Efficiency Revolving Fund:
• Fund provides a line of credit to banks, which in turn provide low interest loans for energy
efficiency in industry and buildings
• For every USD 1 of public money, USD 1 was committed additionally by private sector up till 2010
(total USD 450 million).
• By 2012 this ratio had increased to USD 2 from private sources for every USD 1 from public
sources.
Lessons learnt:
Financing/cooperation model
• Strong and capable government leadership has enabled international support to respond to the
needs of the country, and facilitated a constructive partnership between domestic and
international actors.
• Strategic approach to technical assistance. Engaging long-term expert advisors rather than relying
on consultants, enabled to reduce costs, strengthen the quality of support, and enable increased
knowledge transfer to local staff
• Close coordination with the private sector, and emphasis on education and public awareness,
resulted in strong cooperation and buy-in from industry and strong public support.
• Importance of financial institutions: by providing low-interest credit lines to banks, the Revolving
Fund was instrumental in strengthening commercial banks’ awareness of, and capacity to lend to,
energy efficiency projects.
Source: WRI, 2013 – Mobilising Climate Investment-The Role of International Climate Finance in Creating
Readiness for Scaled-up Low-carbon Energy
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Example – Renewable energy: on-grid solar and wind
Renewable energy projects are - from an investor’s perspective – sometimes less
attractive compared to ‘traditional’ projects, due to their high upfront capital costs
and long-term financing requirements.
Other market barriers include:
• Domestic regulations, subsidies and financing are geared toward fossil fuelbased sectors;
• Lack of connecting grid infrastructure;
• Limited technical/labour capacity to execute and maintain projects costeffectively;
• High transaction costs associated with smaller renewable energy projects;
• Intermittent nature of renewable energy
Source: WRI, 2012
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Example – Renewable energy: on-grid solar and wind (contd.)
Public support mechanisms and financing instruments to address these barriers include:
• Support Mechanisms
• Feed-in tariff policies that improve the relative profitability of renewable power
over an appropriate timeframe
• Reduction of subsidies and incentives for the fossil fuel driven sector
• Technical assistance to help create standardized PPAs for smaller projects
• Technical assistance to improve siting, and thus, capacity utilization of installed
capacity
• Public Financing Instruments
• Longer duration loans to improve debt service coverage ratios—a key ratio used by
financiers to determine whether a project is financeable
• Guarantees and regulatory risk insurance
• On-lending through private financial intermediaries in order to improve financing
comfort and awareness
Source: WRI, 2012
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Case – Renewable Energy Tunisia
“Programme Solaire” (Prosol)
• Support for solar water heaters (SWH) in residential buildings
• Provision of 20% subsidy for the capital cost and temporary interest rate subsidy for loans
taken to purchase solar water heaters
• Total investment of USD 134 million between 2005 – 2010, of which 18% came from public
and 82% from private sources.
Incentivising policy
Lessons learnt
Financing/cooperation model
• Financial incentives alone are not sufficient: readiness activities, incl. awareness and
communication campaigns, interest rate incentives and capacity-building activities to
familiarize banks with technology, were fundamental to ensuring Prosol’s success
• Careful allocation of risks among key actors: Tunisian Company of Electricity and Gas
(STEG) involvement was critical to engaging local financial institutions. It enabled
consumers to make loan repayments through the electricity bill, reduced the risk of default
and allowed banks to offer loans to households with softer credit conditions and longer
repayment terms
• Commitment from the government: support policies to promote SWHs were important in
allowing the sector to be competitive in a market distorted by fossil fuel subsidies.
Source: WRI, 2013 – Mobilising Climate Investment-The Role of International Climate Finance in
Creating Readiness for Scaled-up Low-carbon Energy
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Example – Adaptation
Options for private sector engagement in adaptation:
• Climate proofing of private sector entities
• Co-financing of infrastructure development
• Adaptation products and services:
• e.g. designing, manufacturing and distributing goods and services that can help
reduce the vulnerability of individuals and communities to climate change
• Providing risk management tools, including insurance
 Levels of private sector financing for adaptation activities are currently very low
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Case – Adaptation
Pilot Program for Climate Resilience: Engaging the Private Sector in Nepal
• Improve local private actors’ awareness of risks and opportunities associated with
climate change in agriculture
• Encourage local commercial banks to provide loans for activities relevant to adaptation
• Involve agribusiness companies
 Impacts of the programme in the engagement of private actors in adaptation activities
are not yet clear.
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Key Questions
• Who are relevant actors within the private sector in your country?
• How can these actors be part of climate financing in your country?
• What incentives can be set or which instruments can be used by the
government or your institution to engage these actors?
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Private Sector Engagement - Reflections
Checklist to get CLIF Ready
According to what you learnt from this exercise you could …
 Check who the relevant actors in the private sector are
 Analyse what the drivers for the different actors in the
private sector are
 Identify measures to activate private sector engagement in
climate finance
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Private Sector Engagement
Thank you for your attention!!!
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