How can public climate finance most effectively leverage private - - PowerPoint PPT Presentation

How can public climate finance most effectively leverage private capital? The role of development finance institutions

Dr Dirk Willem te Velde (ODI)

Introduction

 Capital flows to developing countries  Role of development finance institutions  DFIs and subsidies  Effectiveness of DFIs in leveraging private capital

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What drives international capital flows? Push and pull

1: Private sector policies and strategies 2:Home country Measures:

Information, political risk guarantees, reducing economic risk

3: Host country Conditions and policies

• 4. International rules and policies: on investment/climate change

Development Finance Institutions

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 DFIs are government backed financing institutions (multilateral such as IFC, regional such as EIB, or bilateral such as CDC)  DFIs address capital market failures (there are additional market failures related to climate change and technological developments)  DFIs’ core business is to invest financial resources using different investment instruments (loans, equity, guarantees). They invest in different sectors and countries.  DFIs also

 Provide project-specific and general technical assistance;  Manage government programmes; and  Promote standards in the funds or companies in which they invest.

Comparing bilateral DFIs

instruments, sectors, countries and size

5 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Portfolio share in equity Portfolio share in infrastructure Portfolio share in Africa Portfolio as ratio of DEG CDC DEG FMO Proparco

New investments for private sector (US$ mn, 2009) – US$ 33 bn in total

6 2000 4000 6000 8000 10000 12000

SBI Sofid Sifem Swedfund Oeub IFU BIO Norfund finnfund Cofides Simest AsDB CDC Iadb FMO DEG Proparco AfDB EIB IF&NIF EBRD IFC

Source: EDFI, DFI annual report

DFIs and subsidies

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 Whilst DFIs (for the private sector) operate under commercial terms, DFIs are subsidised implicitly (e.g. through loan, guarantees, callable capital etc) – private sector unlikely to hold the same risky portfolio.  DFIs (not all) also use subsidies explicitly:  Interest rate subsidies,  TA (general and specific),  Output based aid.  EU-Africa infrastructure trust fund: blending platform. Grants used to finance essential TA studies, improve the quality of the project and achieve the required level of concessionality for

• funding. Loan or grant part leading? Governance?

Leverage ratios

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 Other capital is invested alongside DFIs: e.g. 3 units for

• ne unit of IFC investment, 5: 1 for CDC,1:1 for EBRD.

 EDFIs, EIB and IFC have climate related funds / initiatives.  One unit of grants leverages in between 5-6 units of loans for the EU’s ITF and NIF and a further 15 units of other finance.

Challenges

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 What is the interpretation of a high leverage ratio: additionality, catalytic effects or exactly the opposite!

• Anecdotal evidence (stamp of approval, first mover, last out)
• Case study evidence
• Econometric evidence (e.g. Massa, 2011; showing a

positive correlation between DFI exposure and growth in developing countries): new evidence

Investment to GDP ratio Energy use per GDP

• bs

countries EIB/GDP +(***)

• (***)

724 94 EBRD/GDP +(***)

• 478

30 IFC/GDP +

• 764

135

Conclusions

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 Range of push and pull factors affecting capital flows incl. private climate finance.  DFIs address market failures (push side)  Whilst implicitly subsidised, there might be greater scope for explicit subsidies to promote climate finance (addressing additional market failures).  Leverage ratios are not sufficient evidence of what works. Hard to show what is an appropriate level of subsidy in which context.

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Thank you