Another area in which the public sector can encourage the financial sector
to become involved in the transfer of environmentally sound technology is through
partnering and sponsoring new financial initiatives. This can reduce the costs
and risks for private financial institutions in developing new products and
instruments, and can help them give such initiatives a higher priority.
Support for such initiatives could come from a number of areas within the public sector: domestic industry or environment departments, bilateral assistance agencies, bilateral development banks, multilateral development agencies, and multilateral development banks. While some other examples do exist, it is the multilateral development banks that have been by far the most prominent in this sort of activity.
In particular, the World Bank's IFC, through its environmental projects unit, is now aiming to find ways to develop and support innovative mechanisms which help address environmental challenges and also encourage private financial sector participation, thereby using limited concessional finance efficiently. While in many cases it is proving more challenging and time consuming than originally expected to pull together and develop such initiatives, the IFC has started to accumulate a portfolio of activities (Asad, 1997). These include:
Finance for SME environment business. IFC's Environmental Projects Unit delivers a GEF-funded Small and Medium Enterprises (SME) programme which is designed to channel concessional funds through intermediaries to SMEs for renewable energy, eco-tourism, energy efficiency, sustainable forestry and agriculture. The SME activity needs to address the objectives of GEF programmes involving climate change and conservation of biodiversity. Intermediaries have included private companies, NGOs, financial institutions and a venture capital fund. These intermediaries can benefit from low interest rate loans and incentives, along with limited amounts of technical assistance to assume the business risk and invest in SME enterprises. The use of intermediaries by the GEF/IFC SME Programme helps overcome the obstacles of scale and of transaction costs identified above when dealing with the SME sector. The EBRD has developed similar programmes to encourage finance through intermediaries.
Emerging sector and market funds. The IFC is helping to create Sector and Market Investment Funds to assist professional and institutional investors to look at biodiversity, renewable energy and energy efficiency. Of greatest relevance is a major fund, co-financed with the Global Environment Facility (see Box 5.2), which will invest in renewable energy and energy efficiency projects, namely the proposed Renewable Energy and Energy Efficiency Fund for Emerging Markets (REEF). In addition, the IFC is also encouraging the development of environmental funds for a particular region or country, such as the proposed MENA Environmental Fund - while such funds invest in a variety of environmental projects, energy and climate-change-related investments are a significant proportion of the total. With these funds, the IFC contributes some of the capital but the aim is to attract funds from outside, particularly from mainstream financial investors. Here the IFC, as a supporter of the fund, can play a valuable role in reassuring investors about new markets. In addition, the IFC can help reduce the costs and risks of developing such funds.
Transforming inefficient or non-existent environmental markets. IFC's Market Transforming Initiatives recognise that while new environmental markets may offer potential, there are significant barriers to their development which other market players cannot address on their own. Examples relevant to climate change technologies include the Photovoltaic Market Transformation Initiative (PVMTI), and the Poland Efficient Lighting Project (PELP, see Case Study 2). The Initiatives aim to minimise the risks of developing them by providing concessional funds for innovative solutions to market development, with the objective of taking the markets to the point where fully commercial operations are viable, or to accelerate the penetration of commercial technology. Although concessional, the funds are intended to operate in many ways like private sector funds, and projects will be judged on the basis of current and future ability to leverage additional private sector finance, trigger market growth potential and promote longer term sustainability and replicability. The World Bank is also actively developing new market transformation approaches
These initiatives are to be welcomed. However, it should be noted that the close cooperation between the public and private sectors that these initiatives are based on can often entail tension in areas such as cost-sharing, timescales and objectives. For example, REEF has taken several years longer to develop than originally anticipated. There is a need to learn from experience, for increased education of the private sectors and possibility some more flexibility and pragmatism from the sponsors of such initiatives to encourage private sector participation.
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