Scaling Up

Is blended finance the answer to scale-up green infrastructure?

John Tidmarsh | Updated on December 01, 2018 Published on December 03, 2018

With the Paris Climate Change Agreement and the Sustainable Development Goals, the global community has been calling for more action and efforts to combat climate change. While this is both inspiring and encouraging, not enough is happening. Sceptics will say nothing has changed but the reality is much more nuanced. There are still barriers to scaling-up the implementation of green projects and the question many are working to answer is: what can be done to break these barriers?

We know that to keep pace with population growth, migration and urbanization trends in a way that ensures effective economic and social development, an increase in low-emission, energy-efficient and climate resilient infrastructure projects is needed. This need is particularly high at the city, state and regional levels, where mid-size projects, typically of between USD 5-50 million in construction costs, offer an unprecedented opportunity to maximize development impact. When appropriately prepared, infrastructure projects that deliver both energy and public services can, indeed, have significant impacts on local populations by reducing greenhouse gas emissions and air pollution, creating employment opportunities and improving overall health. In addition, mid-size projects represent a potentially huge investment market in terms of number and capital required for implementation, and a growing number of investors are showing appetite for them.

Given the political will, the availability of clean technologies and investors’ growing interest for “green projects”, why are so few of them being implemented? One of two reasons behind this “market failure” is the lack of bankable projects. Simply put, not enough projects are meeting the expectations of potential investors. This problem comes from the limited degree of collaboration, understanding and interconnection between the actors involved the length of the project development and financing value chain. Policy-makers, clean technology providers and public-private investors tend to work in silos and do not understand each other’s interests nor how their decisions can negatively impact each other and the bankability of projects. The lack of understanding of the wider project development value chain by those influencing project identification and development is also at the root of the second barrier to scaling-up project implementation: access to finance.

It is often assumed that matching projects with investors, regardless of the stage of maturity, is sufficient to result in implementation. What is too often ignored is that for a project to have a chance at accessing finance, it must meet an investor interested in taking on the “risk-return” profile that is specific to the project’s maturity – or development stage – and provide the investor with the information necessary to assess this profile. But the challenge of accessing finance goes beyond matching the right opportunity with the capital that has an appetite for it. Not only must this matching be available to finance each stage of project development and implementation, but it must also be coordinated to assure that projects successfully reach maturity in a timely manner, each successive financing stage following on from the other.

Building the capacity, understanding and trust that is necessary to deliver and replicate shared objectives is key to fostering project implementation. If we are to address the issue of bankability, all stakeholders in the project development and financing value chain must be involved and their work coordinated to represent the community, public and private sector, as well as investor interests. Coordination is also key to ensure access to finance. Both the challenge and the solution lie in creating innovative approaches and financing tools that allow different types of donors and investors to work together in a coordinated manner that industrializes and scales-up the matching process. In this way, the unique characteristics of each capital type can be leveraged towards the shared objective of scaling-up private investment, and with it SDG and climate impact. This coordinated approach is increasingly referred to as “blended finance.”

These principles are at the core of the integrated value chain approach R20 – Regions of Climate Action is setting up. The “value chain” helps connect the dots between multiple stakeholders in policy, technology and finance sectors and provides a workable framework to identify, support development and secure the financing of high-impact, low-carbon and climate resilient infrastructure projects. Among its key elements, the value chain deploys thematic, donor-funded, Pre-Investment Facilities – also known as Project Preparation Platforms – as well as a dedicated investment fund. The Pre-Investment Facilities (PIFs), namely the Waste Project Facilitator and the Energy Project Facilitator, have been created in partnership with leading engineering firms to finance and bring the expertise for the technical, legal and economic feasibility studies, as well as the social and environmental impact assessments required by investors. In so doing, they provide the necessary technical assistance to convert potential projects into bankable investment opportunities. The Sub national Climate Fund Africa (SnCF Africa), the first of such dedicated funds developed with a leading impact fund manager, “blends” finance from philanthropists, foundations, governments, development finance institutions and private investors to invest in a portfolio of projects. The fund expects to invest in up to 30 projects, that will provide clean energy, waste valorization and energy efficient municipal lighting services to cities and regions in up to 15 African countries.

By fast tracking the development of projects and “blending” donor, public and private capital, this Value Chain approach has the potential to accelerate investment in sub-national infrastructure and to foster project implementation on the ground.

John Tidmarsh is Chief Investment Officer, Regions 20

Published on December 03, 2018
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