75825 Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance East Asia and Pacific Region Table of Contents Introduction......................................................................................................................................................2 Why a New Framework...................................................................................................................................3 The Green Infrastructure Finance Framework: An Overview........................................................................7 Concluding Remarks......................................................................................................................................12 January 2013 Aldo Baietti abaietti@worldbank.org www.worldbank.org www.ausaid.gov.au Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance Introduction I n June 2012, the Green Infrastructure Finance role in monetizing both global and local external- Framework Report1 was published to address ity benefits. However, the added climate change the constraints in financing green infrastruc- dimension does not necessarily change how the ture and to develop a new approach to accelerate financing problem should be resolved. While there investments in low-emission technologies. This is a need for a credible assessment methodology publication followed the Leading Initiatives and that can address the unique characteristics of green Research Report2 that summarized much of the investments, this should not alter the fundamental past work and identified remaining gaps. The con- principles on which low-emission projects are eval- clusions of the Research Report formed the basis uated, structured and financed. for the principles of the financial gap analysis and green investment climate assessment methodol- Second, many green technologies require sub- ogy proposed in the Framework. sidy support, but this is not different from many other infrastructure projects that are implemented Since publication, the overall approach of the as public-private partnerships (PPPs). Such hybrid Framework has evolved by sharpening its argu- financing schemes are more common as projects ment, clarifying its benefits and adding a regula- become more complex and not viable purely on pri- tory/monitoring, reporting and verification (MRV) vate financing structures. Green technologies must component, which brings the Framework closer to develop an equitable risk allocation framework that a workable financing mechanism for green tech- can provide a compelling argument for different nologies. Moreover, the approach now includes a stakeholders to support these investments through financing and advisory interface, which clarifies subsidized financing to the extent that this financ- the principles and concepts of the shared financ- ing is justifiable from a climate change perspective. ing roles recommended by the methodology. The Framework attempts to bring clean investments Third, the principle objective of Green Finance towards a more familiar financing environment is to accelerate investment in green technologies and to distance them from the charged political by resolving their financing challenges, with car- debate that has adversely affected the progress in bon reduction as an indirect desired outcome of international climate change discussions for over a successful implementation. While the distinction decade. The task has evolved through the follow- between “accelerating investment� and “reducing ing three concepts. carbon� may be subtle, it is nonetheless important to underscore that this approach is an investment First, green technology projects are sufficiently and financing framework, which differs from other similar to other infrastructure projects and should approaches to Climate Finance. As such, the focus rely on proven project financing approaches. The is on obstacles that have impeded the financial key difference is that many green investments closing of green investments. Moreover, the suc- require financial support to mitigate externali- cessful financial closure of low-emission projects ties, which private proponents alone have no abil- will improve their contribution to climate change ity to monetize. Public finance can play a critical by locking new investments into clean technol- ogy over their lifetime, while displacing low-cost 1 Baietti, A., et al, Green Infrastructure Finance Framework Re- polluting alternatives. This is significant as carbon port, World Bank, 2012 mitigation initiatives often deal with emissions of 2 Baietti, A., Shlyakhtenko A., La Rocca, R., Patel, U., Green In- frastructure Finance: Leading Initiatives and Research, World pre-existing assets rather than introducing new Bank, 2012 clean investments. 2 The World Bank – AusAID Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance Why a New Framework M any interventions have been taken to and regulatory arrangements and procedures. CDM, increase investments in green projects. however, is perhaps the only fully contained financ- Feed-in Tariffs (FiTs) as well as other finan- ing and regulatory framework that provides finan- cial incentives for solar, hydro, biomass and wind cial support to curb the effects of climate change by energy have been introduced in many countries. funding individual investment projects. A number of international programs with signifi- cant funding have also been established to sup- CDM establishes the rules for eligibility, proce- port clean infrastructure investments. This includes, dures for analysis and carbon financing as well as most notably, the Clean Technology Fund (CTF), the regulatory, monitoring and verification over- Global Environment Facility (GEF), and the Clean sight. Despite its innovative approach and certain Development Mechanism (CDM) created by the success, a number of limitations must be over- Kyoto Protocol. come if CDM is to have a greater role in acceler- ating investment in clean technologies. Some of For example, the latter, under the principle these limitations include: of shared responsibility, channels funding from GHG emitting entities in developed countries to ■■ Nearly two thirds of the CO2 reductions from the carbon-reducing activities in less developed coun- one billion CDM CERs came from low capital-to- tries. Each eligible project earns certified emission output projects that cut HFCs, PFCs, SF and N2O. reductions (CERs), payable at a market price for However, many of these industrial gases could each ton of carbon it reduces. Governments in have been eliminated through other mechanisms many developing countries recognized the oppor- without the need for substantial subsidies. In ad- tunity to implement carbon mitigation projects dition, a number of these projects have earned fi- while minimizing their own financial burden. nancial windfall profits, making the practice con- troversial. In contrast, CDM has eliminated just A substantial number of projects have been 20 million tons of CO2 per year from clean tech- implemented in the CDM’s 11-year history. By nology investments. This CO2 reduction is under- September 2012, the CDM achieved a major mile- whelming, especially given that it is approximate- stone when the total CER units reached one billion ly equivalent to eliminating only one large coal with a total value of US$8 billion to US$10 billion. power plant per year for the entire group of 154 CTF and GEF have also made significant contribu- countries that have participated in the program. tions to investment levels and many other finan- Conversely, the same group of countries (with the cial and policy interventions at the country level exception of some of the smaller ones3) nearly dou- have spurred investment incentives. Unfortunately, bled their CO2 emissions during 2001-2010 from as the Research Report highlights, “while invest- 9.2 billion metric tons to 17.2 billion metric ton ment trends in clean technologies have improved, per year. Essentially, non-Annex 1 countries4 saw the pace of these investments is still substantially an average annual increase in energy related CO2 insufficient in order to curb the effects of climate 3 Excludes new nations like South Sudan and small countries, change.� Investments have not kept pace with the such as Andorra, Palau, Marshall Islands, Micronesia, Tuvalu, San need and the funding gap is growing. Marino, and others. 4 Annex I countries is the group of countries included in Annex I (as amended in 1998) to the United Nations Framework Convention Various levels of integration of the sources of on Climate Change (UNFCCC), including all the OECD countries concessional financing with regulatory frameworks and economies in transition. Under Articles 4.2 (a) and 4.2 (b) have been implemented. CTF and GEF are two of the Convention, Annex I countries committed themselves to returning individually or jointly to their 1990 levels of greenhouse important sources of concessional financing that gas emissions. By default, the other countries that signed the function primarily within other existing financing Kyoto Protocol are referred to as Non-Annex I countries. The World Bank – AusAID 3 Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance Figure 1. Total CO2 Emission from Energy Sources – Non-Annex I Countries million metric tons 18,000 1,478 17,245 16,000 631 976 623 14,000 671 781 1,406 12,000 818 10,000 626 9,236 8,000 6,000 2001_Tot 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010_Tot Source: US Energy Information Agency (EIA) emissions of approximately 7.18% per year. CDM is particularly constraining on renewable energy lowered this from 7.32%—a barely discernible (RE) projects that are also disadvantaged by their reduction; relatively high up-front capital costs. If a proj- ect genuinely requires a subsidy, support should ■■ Essentially, CDM has been financing primar- be provided either at the financing stage or be ily “end-of-pipe� mitigation of pre-existing guaranteed in order to make an otherwise unvi- assets instead of creating a shift by favoring able project bankable. Nevertheless, CDM does clean technologies (such as renewables) in new not address this problem directly, and while the investment decisions. Addressing the exist- cash stream of CDM benefits could conceivably ing base of investments is commendable, but be securitized as an upfront payment, such at- ultimately ameliorating the effects of climate tempts have not been successful because their change will only occur if new investments will guarantee cannot be anchored to a reliable reg- flow to low-emission projects rather than to ulatory and pricing framework; polluting alternatives. This means not only ex- panding programs for energy efficiency invest- ■■ CDM operates under an international frame- ments in pre-existing assets, but also increasing work of the United Nations Framework Con- the installed capacity of new renewable ener- vention on Climate Change (UNFCCC) and this gy (RE) technologies; presents a particular legal problem because parties must rely on commercial contracts to ■■ Another problem is how and when the carbon resolve disputes. This can be expensive in the funds are received. CDM funding to projects re- event of non-compliance, thus making the out- lies purely on the per ton carbon price which is put-based approach to payment the only prac- only paid after actual carbon benefits are pro- tical way to reduce risk. Moreover, the project duced. Moreover, the price is determined by a validation and registration process is bureau- political market that is volatile and unreliable cratic, and verification can be very costly as it for long-term contracts. Both issues create sig- utilizes highly paid international experts; nificant uncertainty in resolving the up-front financing burden for clean investments. CDM ■■ The volatility of the carbon markets has also financial support occurs only after the project is been a significant deterrent to the extent that operational, and therefore project sponsors can- an entire financial industry has evolved with not rely on it for the initial capitalization. This the aim of creating some degree of stability in 4 The World Bank – AusAID Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance the system. However, these efforts also come ■■ More importantly, financial subsidies should at a significant transaction cost, raising ques- be sufficient to make projects bankable, not tions as to whether investment financing, par- more or less. Even from an environmental ticularly payments for curbing environmental policy perspective, where subsidies represent externalities or subsidies (from project point of payments for public goods, private projects view), could be channeled more efficiently; should not be supported beyond reasonable ■■ Another key problem is the eligibility of proj- rates of return. Using the approach of com- ects. CDM works on the principle of “addition- petitive bidding for the least subsidy required ality�, which means that the project would can provide additional assurances that spon- not have happened without the aid of carbon sors receive only the necessary subsidy. In con- finance support. However, demonstrating a trast, CDM, depending on the carbon market project’s additionality has been very challeng- price, can greatly exaggerate the returns of ing. This is illustrated by the fact that the ma- jority of the projects that were denied regis- a given project or totally exclude other proj- tration (more than 70%) have been rejected ects that are justifiable from a climate change on the grounds of additionality. Yet, some perspective. The graph below illustrates this of such projects were likely justifiable from latter point, where carbon finance support at a climate change perspective. While projects any given unit price does not always reflect should not be subsidized unnecessarily, eligi- the need or justifiable benefits. bility criteria should be rigorous enough to re- flect a country’s investment conditions, which The following chart summarizes some of the can vary considerably, especially where bene- main differences between CDM and the Green fits significantly outweigh costs; Finance Framework. Figure 2. How CDM Can Exclude Justifiable Projects and Reward Others More than Needed5 Monetary Value Total Revenue Requirement Associated Value of Social Benefits C, C1,2 Total Revenue With Subsidy at Given Carbon Prices C2 C1 C Green Technologies & Mitigation Measures Source: Authors Figure 2 illustrates the total revenue requirement for various green technologies and other mitigation initiatives, such as the destruction 5 of industrial gasses (red bars). The C, C1 and C2 lines represent the levels of total revenue each of these investments would achieve. The blue bars represent corresponding value of monetizable social benefits of each activity. The case to the far right of the graph shows, as an example that at the C subsidy support, the project would already surpass its total revenue requirement thus earning a higher than re- quired risk adjusted rate of return. Assuming the price/ton increases to C1, the total value of profits would be more than double the revenue requirement and create a windfall situation. The project just to the left, on the other hand would only be viable at C1 and above that line. Therefore, at any given carbon price, there would be a group of projects that would receive more than needed subsidies (to the right of the chart), while others would be unviable (toward the left of the chart). This is of particular concern when also factoring the total value of social benefits of each project in comparison to their total financial requirements. Projects should merit investment consideration when the monetizable value of the global and local externalities is equal or exceed the financing gap. The World Bank – AusAID 5 Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance The figure below reflects the key differences between the CDM approach and the Green Finance Framework. Figure 3. Key Differences between CDM and Green Finance Features Green Finance Framework CDM Outcome Promotion of long-term investments in Promotion of greenhouse gas (GHG) reduction and low-carbon infrastructure. sustainable development. Authority Enhancement of existing country-based legal UNFCCC protocols. and regulatory PPP framework. Financing Up-front structured financing. Projects cannot Output-based financing, usually regarded as a Approach close without all financing being in place. sweetener. Subsidy Mix of concessional public financing utilized to Highly dependent on carbon price. Support close the financial viability gap can be funded from multiple sources. Additionality No additionality issues. Projects are not viable One of the ways for the projects to prove or financially attractive without gap financing additionality is to demonstrate that they are not and cannot go to closure. viable in the absence of carbon benefit. Yet they need to reach closing before any benefits are received. Double None. Only the amount of subsidy benefits Potential for double counting in the event several Counting needed to close the gap is subscribed. In many financing sources are syndicated. (Paying) cases the GHG value of the benefits can be greater than the subsidy that is needed, leav- ing a residual amount to be used for other purposes. Source: Authors 6 The World Bank – AusAID Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance The Green Infrastructure Finance Framework: An Overview T he Green Infrastructure Finance Framework alternatives. The approach is integrated into the is an attempt to re-evaluate how green proj- existing policy, regulatory, and institutional envi- ects can be assessed, structured and financed ronment and provides a way to allocate responsi- with the aim of positioning these investments as bility to respective stakeholders without creating viable and attractive opportunities to polluting additional economic distortions. Figure 4. Components of the Green Infrastructure Finance Framework Monetizing GHG Benefits (Internationally Sourced) Regional Carbon Markets Policy Environment Specialized Green Funds Assessment of Country’s Green Bilateral Donor Aid Financing & Advisory Interface Investment Climate Concessional Export Financing Modified CDM Viability Gap Financial Analysis Advisory of Green Monetizing Local Benefits & Projects Rebalancing Distortions Regulatory & Institutional (Domestically Sourced) Framework FiTs Anchored on Country’s PPP Framework and MRV Component Specialized Green Funds Direct Subsidies Fiscal and Tax Incentives Country Specific Carbon Finance Source: Authors The “Viability Gap Analysis� methodology bridges ideas and concepts between environmen- is the core of the Framework. This methodology tal economics and project finance practices to presents a simple but elegant way to structure monetize environmental economic benefits and scarce public concessional financing to leverage rebalance the distortions in order to close the market interest in “greening� infrastructure. It financial viability gap of green technologies. The World Bank – AusAID 7 Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance The methodology starts with determining community focuses on the global externalities the financial viability gap of a privately financed benefits of the given investment. The outcome is a green investment that competes against the low- hybrid public-private partnership financing struc- est cost polluting alternative. This gap is then ture that can reduce additional distortions in the compared to a series of monetizable economic economy as it justifiably allocates funding respon- benefits the project generates, including environ- sibilities and costs to those stakeholders that actu- mental benefits and avoided distortions created ally receive the benefits. Most importantly, this by a host government, for example, through fossil approach makes clean investment a profitable fuel subsidies. and attractive proposition that earns the appro- priate risk-adjusted rate of return. The environmental benefits and avoided dis- tortions are assessed to determine whether, if The methodology is illustrated conceptually in monetized, they can close the gap either indi- the chart below. A clean energy investment such vidually or in combination, with public financ- as a wind or solar project is evaluated financially ing responsibilities allocated commensurately. against its least-cost polluting alternative (e.g. The national government addresses the distor- coal) to estimate a financial viability gap in net tions and local benefits, while the international present value (NPV) terms. Figure 5. Illustration of the Financial Gap Analysis Methodology 60 Financial Costs and Benefits Monetizable Monetizable Environmental Distortions Benefits 50 40 PV US$ millions Financial 21 Viability Gap 30 21 38 44 20 12 23 10 5 0 Costs Revenue Policy Local Global Distortions Externalities Externalities Source: Authors Three different economic benefits and costs fossil fuels) and the local externalities (e.g. local are then calculated for their monetizable values pollution caused by the coal alternative) would to assess whether the three combined or individu- be the responsibility of the host government, ally can potentially close the gap. In this case, the whereas the net global externality (e.g. GHG ben- NPV values of the environmental benefits and dis- efits of the RE project against coal) would be the tortions offset the values of the viability gap. The responsibility of the international community. value to offset the distortions (e.g. a subsidy to Each party would internally monetize these values 8 The World Bank – AusAID Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance to determine a final financial structuring in com- Figure 6. Green Investment Climate Assessment bination with the private finance contribution Framework and would utilize a combination of instruments equal to the NPV value required for their respec- tive responsibility. Natural Resource The financial measures to be enacted and the Endowments actual value that each party would be able to commit can form the basis of a wide-ranging dia- logue. This can include: (i) the overall stage of eco- nomic development of a country and its budgetary Green Doing resources; (ii) the country’s current policy and Policies and Business Incentives Environment incentive framework and emphasis towards green- ing its economy as opposed to promoting fossil fuel use; and (iii) other considerations such as general donor aid strategy, export promotion strategy of clean technologies owners and their governments, Development and and bilateral agreements or exporting offsets to Competitiveness Strategy emerging regional carbon markets. In the case illustrated, the gap could be closed entirely from GHG benefits or through a lower international cli- mate finance contribution with additional sup- Source: Authors port from the national government. The overall green investment climate assess- Accelerating green investments must also ment of countries provides a general under- focus on the right policy environment in a given standing of the attractiveness, prevailing trends, country context. As such, the second part of the strengths, and other aspects affecting the ability of Framework relates to creating effective policies the country to leverage its green growth potential. and financial incentives in order to create invest- The core component of the green investment cli- ment opportunities, while reducing the related mate – Green Investment Policies and Incentives – risks. The approach calls for assessing the “green (see Figure 7) includes four main parts: (i) policies investment climate� of a given country in order and legislation; (ii) financial and economic instru- to develop country-specific recommendations for ments; (iii) programs and institutions; and (iv) the policy and incentive programs as well as other regulatory environment. measures which can be introduced to further pro- mote green growth in an economy. As indicated, the CDM regulatory framework is limited in supporting new investments to reach The assessment has to include not only the its green growth potential. Successful growth in green policy and incentives environment but also these investments requires a credible and effi- the country’s overall natural resource endowment cient regulatory framework of enforceable con- of fossil and renewable energy, the industrial tracts that will ensure that financially supported development strategy in addition to general busi- projects actually achieve their service obligations ness indicators and other considerations, such as and environmental benefits. Thus, the third ele- electricity prices, the capacity of the financial sec- ment of the Green Infrastructure Framework is a tor to mobilize long-term domestic financing, as regulatory component integrated with the exist- well as their overall regulatory and legal capacity ing country regulatory framework. The main ele- to implement PPPs (see Figure 6). ment of such a regulatory framework should be The World Bank – AusAID 9 Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance Figure 7. Components of Green Policies and Incentives Policies, specific legislation and information availability-related initiatives that have been introduced to Policies and Legislation implement policy objectives Incentives typically enacted Financial instruments, schemes Markets Financial and Economic to reduce tax liabilities of and subsidy arrangements that have been created Instruments companies engaged in green to make green investments to value and trade projects and subsidies more attractive carbon Specific programs that have been implemented in Institutions involved in a country’s Programs and Institutions order to promote green investments specific programs Institutions responsible for the Specifications, standards and verifiable indicators Regulatory Environment used for regulating green investments regulatory environment and its relative corrective measures Source: Authors a reliable and efficient system for measuring, be established by performance bonds, third party reporting and verifying (MRV) environmental guarantees and other forms of security—as with benefits of the investment that will be supported regular PPPs. An existing substantial body of work with concessional or subsidized financing, particu- can be immediately implemented to make this larly if the intention is to issue CERs for up-front approach operational. The in-country regulatory financing. Third party international contributors authority would be entrusted to implement the must be assured that remedies can be obtained approach and would have oversight and respon- if a project does not achieve such reductions in sibility to ensure transparency and compliance. GHGs, and that those CERs can be backed up by a If necessary, conflicts can be referred to interna- performance security that can be invoked in the tional arbitration to provide greater assurance event of default. and reduce third-party risk. In contrast to the UN-based approach uti- The country-based approach to regulation and lized by the CDM, the Green Finance Framework MRV offers additional benefits when compared to is anchored in a country’s existing PPP framework CDM in terms of reduced cost by using certified of legal and enforceable contracts, procurement local auditors to carry out ex-post reviews. The rules, and sanctions for non-performance. This MRV component can also be handled on an incre- Framework can be transformational in acceler- mental basis and with greater cost effectiveness. ating investment, to the extent that countries This would reduce the need to carry out extensive develop a credible, efficient and enforceable PPP baseline surveys because each project would be domestic framework. treated as an incremental contribution towards reducing GHGs. The MRV component would be an add-on to the existing PPP framework and would essentially Finally, the methodology allows for syndica- form the basis for the proponent’s legally bind- tion of multiple funding sources for each compo- ing service obligations. Performance security can nent of the gap, helping avoid double counting 10 The World Bank – AusAID Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance as each source can take up its own share of either The advisory needs of the project are similar local or global benefits that can be earned with to most PPP projects but with more broadening the implementation of the given investment. For for “market maker� functions for sourcing climate the GHG benefits, that share can be backed by finance. The financing and advisory interface can the issuance of certificates at a price acceptable be implemented at the national, regional and to the paying party. This means that the price of global level depending on the ultimate objective benefits would not be determined by a single of these funds. Governments seeking to acceler- financial market, but rather by each paying party ate investments in green technologies can set up giving its own GHG value to its corresponding a national fund purely for their own economy and share of total benefits. The Leading Initiatives solicit international support for the GHG conces- and Research report indicated that the value of sional funding. Alternatively, a regional or global GHG benefits can differ significantly depending green fund could be established to complement on who is valuing these benefits. Presently the existing efforts at the regional or national levels. carbon price in the European Union Emission Significantly, the approach provides the degree of Trading Scheme is about US$5-6 per ton of CO2. flexibility to take advantage of a wide range of The global carbon supply/demand balance mod- potential funding initiatives. els typically predict an equilibrium price for global atmospheric stabilization at “safe� carbon The gap in a typical project finance struc- concentration levels of US$20-100 per ton and ture could be closed through a number of public the marginal abatement cost in energy efficient financing sources coming from both government OECD economies such as Japan has been esti- and international parties. Governments could mated to be as high as US$500 per ton of carbon. rebalance distortions through an appropriately set FiT, increase that FiT to accommodate inter- This approach enables the syndication of the nalized local externalities and other benefits, or concessional financing needs of a given project assemble an entirely different mix of funding and for different groups to collaborate to make and financial incentive arrangements that cov- such a project bankable by reducing financial ers their commitment to the overall financing. exposure and overall risk of each party. The UN International GHG sources could consist of a blend high-level advisory panel concluded that maxi- of GEF subsidies and guarantees, CTF financing, mum effort must be taken to involve all sources carbon market offsets, and other sources such as of financing to close the financing gap. This the Green Climate Fund which is currently being approach succeeds because it relies on a private designed. Alternatively, one party may decide to finance foundation coupled with public funding fund the entire gap of a given project, depending support from multiple sources. on their strategic interests, tolerance for risk and desired financial exposure. The World Bank – AusAID 11 Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance Concluding Remarks T he detrimental effect of climate change understood framework of structured finance with is growing, yet clean investments are still public finance components, as in many hybrid PPPs. grossly insufficient making it necessary The methodology allocates financing responsibili- to rethink the approach to greening the global ties equitably. For example, governments only pay energy mix. While end-of-pipe treatment of the for the benefits that they specifically gain from a existing asset base is important and those efforts given project, not for the benefits gained globally. must continue (particularly for high emitters), an Equally important, a green project is evaluated effective and easily implementable framework against the low-cost alternative, rendering that for new investment decisions must be established, project not only profitable but also a financially particularly in less-developed countries. However, attractive investment choice for the economy. this will be challenging as green investments are invariably more risky, costly, and require more The framework of shared responsibility aims capital up-front. They also face other financing to reduce additional distortions in an economy challenges—for example, many countries subsi- by ensuring that the parties paying for the ben- dize fossil fuels for other development reasons. efits actually receive the benefits. It also reduces the financial burden on governments, which has The need for some level of concessional been a significant political obstacle in identifying financing or outright subsidy support is widely real solutions for accelerating green growth. Most understood but the approach must be equitable, importantly, although the selection of viable proj- non-political and deliver a sufficient level of sup- ect opportunities does screen for justification, it port. Current international programs have sought ultimately leaves the decision to the party valuing to address some of these constraints but lack ele- the externality benefit. Therefore, each party can ments in their framework to utilize public financ- ing to their maximum effectiveness and to help assign their own value depending on how they host governments to play a responsible and legiti- internalize the benefits. Moreover, international mate role in resolving the financing dilemma of sources for concessional finance must be flexible many green investments. The carbon market his- because low-emission investments need the cor- torically has not provided stable and predictable rect financial structuring to be bankable. financing mechanism to support new investments in clean technologies. Moreover, CDM, that oper- Finally, the concept of anchoring regulation ates within this market, is not designed to handle in a country’s existing PPP framework to focus on structured finance requirements that many clean creating the right policy environment will greatly technology projects need in order to reach finan- facilitate mainstream implementation and reduce cial closure. costs. This aspect of the Framework is widely understood by many developing country govern- The Green Infrastructure Finance Framework ments and can be easily replicated not only in East places these investments in a commonly Asia, but also in other regions. 12 The World Bank – AusAID T he detrimental effects of climate change are growing, yet investments in clean technologies are still grossly insufficient, making it necessary to re-think how these projects should be evaluated, structured and financed in order to render them viable and attractive opportunities to polluting alternatives. Existing approaches lack key features in order to adequately address the key financing challenges of these investments, and do not utilize public support to its maximum effectiveness. The international community is essential in resolving this financing challenge, and host governments need to create an environment that levels the playing field for green investments vis-à-vis their conventional alternatives. The Green Infrastructure Finance Framework places clean investments in a commonly understood framework of structured finance with public finance components, as in many hybrid PPPs. The framework includes four main elements: (i) a viability gap methodology for evaluating, structuring and equitably allocating financing responsibilities to different private and public parties; (ii) linkage to a country’s PPP’s procurement and regulatory framework along with an MRV component for ensuring the service obligations of projects; (iii) measures for addressing the adequacy of the climate for these investments; and (iv) a financing and advisory interface for allocating a wide variety of public sources of financing in a coherent fashion. www.worldbank.org www.ausaid.gov.au