Private financial institutions invest in businesses - or specific projects
- which can generate a financial return. However, they have no particular interest
in any individual business and can typically choose from a very wide range of
investments available to them. In selecting investments most financiers will
focus on the two criteria of risk and return - higher perceived risk results
in higher expected return, with the level being primarily set by the market.
Different financiers will have different preferences for risk and return. An
impact of the emphasis on risk, and compensation for that risk through increased
return, is that the private sector will find it most difficult to finance high
risk, longer term projects. Many environmentally sound technologies are essentially
of this nature with low operating costs and high up front expenditure.
In trying to alter the behaviour of the financial markets, governments can choose
regulation or persuasion. Regulation is unpopular with financial institutions,
particularly internationally. Persuasion is difficult to initiate, but can ultimately
be more successful, offering major benefits for relatively small outlays and
gives rise to opportunities for private-public partnerships (discussed in Section
5.6). In seeking to persuade the way the financial markets allocate capital,
governments can focus on four key aspects: the perception of risk; the calculation
of expected return; the structuring of the financial package; and the transaction
costs associated with that investment. However, to be relevant these aspects
have to be looked at in the context of an individual financing problem or type
of finance.
Understanding the role of private finance in technology transfer necessitates
some understanding of the detail of different forms of finance in technology
transfer. There is a very wide range of types of finance which are potentially
relevant in financing technology transfer. Their relevance depends on the specific
opportunity under consideration. Key factors are the scale of the investment
and whether the investment is a venture (a business intending to grow and develop)
or a project (a stand-alone specific entity - e.g., a power plant). Scale
can be roughly divided into large (roughly at least US$20 million), medium (over
$500,000), small ($10,000 to $500,000), or micro (say less than $10,000, but
mostly from $10 to $100), although the size is to some extent subjective and,
for example, will depend on the level of economic development.
It is also important to note that in many cases there may be two stages of financing
required: e.g., the financing to establish the business of manufacturing/distributing
the technology, and the financing for the end-users of the technology to enable
them to purchase the technology. For example, financing the establishment of
a PV module factory in the developing world has different challenges from providing
finance to households to enable them to purchase the solar home systems produced
by the plant. Table 5.2 summarises the applicability
of different forms of finance to different scales and types of business.
Table 5.2 Applicability of types of finance | |||||||
TYPE OF FINANCE | APPROPRIATE SCALE | APPROPRIATE TYPE | |||||
DEBT | LARGE | MEDIUM | SMALL | MICRO | VENTURE | PROJECT | COST |
Personal Loans |
-
|
-
|
++
|
++
|
+
|
|
medium
|
Bank Overdraft |
-
|
+
|
++
|
?
|
?
|
|
medium
|
Secured Loans |
++
|
++
|
+
|
-
|
+
|
++
|
low
|
Leasing |
+
|
++
|
++
|
+
|
+
|
+
|
low
|
Export Finance |
++
|
+
|
-
|
-
|
+
|
++
|
low
|
Securitised Debt |
++
|
+
|
-
|
-
|
+
|
+
|
low
|
EQUITY | |||||||
Personal |
-
|
+
|
++
|
++
|
+
|
|
N/a
|
Private Investors |
|
+
|
++
|
+
|
+
|
?
|
High?
|
Venture Capital |
+
|
++
|
+
|
|
++
|
|
V High
|
Strategic Investors |
+
|
++
|
+
|
|
+
|
++
|
High
|
Institutional |
++
|
+
|
|
|
+
|
++
|
High
|
Other reports in this collection |