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 2

What drives international capital flows? Push and pull 1: Private sector policies and strategies 2:Home country 3: Host country Measures: Conditions and Information, political risk policies guarantees, reducing economic risk 4. International rules and policies: on investment/climate change

Development Finance Institutions  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. 4

Comparing bilateral DFIs instruments, sectors, countries and size Portfolio share CDC in equity 100% DEG 90% FMO 80% 70% Proparco 60% 50% 40% 30% 20% Portfolio share 10% Portfolio as in 0% ratio of DEG infrastructure Portfolio share in Africa 5

New investments for private sector (US$ mn, 2009) – US$ 33 bn in total IFC EBRD EIB IF&NIF AfDB Proparco DEG FMO Iadb CDC AsDB Simest Cofides finnfund Norfund BIO IFU Oeub Swedfund Sifem Sofid SBI 0 2000 4000 6000 8000 10000 12000 Source: EDFI, DFI annual report 6

DFIs and subsidies  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? 7

Leverage ratios  Other capital is invested alongside DFIs: e.g. 3 units for one 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. 8

Challenges  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 obs countries EIB/GDP +(***) -(***) 724 94 EBRD/GDP +(***) - 478 30 IFC/GDP + - 764 135 9

Conclusions  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. 10

Thank you 11