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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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