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This article was downloaded by: [University of Chicago Library] On: 14 November 2014, At: 06:47 Publisher: Routledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK Development Southern Africa Publication details, including instructions for authors and subscription information: http://www.tandfonline.com/loi/cdsa20 Entrepreneurship and innovation in development finance institutions for promoting the clean development mechanism in Africa Mandla Sv Gantsho & Patrick Karani Published online: 21 Jun 2007. To cite this article: Mandla Sv Gantsho & Patrick Karani (2007) Entrepreneurship and innovation in development finance institutions for promoting the clean development mechanism in Africa, Development Southern Africa, 24:2, 335-344, DOI: 10.1080/03768350701327269 To link to this article: http://dx.doi.org/10.1080/03768350701327269 PLEASE SCROLL DOWN FOR ARTICLE Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) contained in the publications on our platform. However, Taylor & Francis, our agents, and our licensors make no representations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of the Content. Any opinions and views expressed in this publication are the opinions and views of the authors, and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon and should be independently verified with primary sources of information. Taylor and Francis shall not be liable for any losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoever or howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the use of the Content. This article may be used for research, teaching, and private study purposes. Any substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in any form to anyone is expressly forbidden. Terms & Conditions of access and use can be found at http://www.tandfonline.com/page/terms- and-conditions

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Page 1: Entrepreneurship and innovation in development finance institutions for promoting the clean development mechanism in Africa

This article was downloaded by: [University of Chicago Library]On: 14 November 2014, At: 06:47Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954 Registeredoffice: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK

Development Southern AfricaPublication details, including instructions for authors andsubscription information:http://www.tandfonline.com/loi/cdsa20

Entrepreneurship and innovation indevelopment finance institutions forpromoting the clean developmentmechanism in AfricaMandla Sv Gantsho & Patrick KaraniPublished online: 21 Jun 2007.

To cite this article: Mandla Sv Gantsho & Patrick Karani (2007) Entrepreneurship and innovationin development finance institutions for promoting the clean development mechanism in Africa,Development Southern Africa, 24:2, 335-344, DOI: 10.1080/03768350701327269

To link to this article: http://dx.doi.org/10.1080/03768350701327269

PLEASE SCROLL DOWN FOR ARTICLE

Taylor & Francis makes every effort to ensure the accuracy of all the information (the“Content”) contained in the publications on our platform. However, Taylor & Francis,our agents, and our licensors make no representations or warranties whatsoever as tothe accuracy, completeness, or suitability for any purpose of the Content. Any opinionsand views expressed in this publication are the opinions and views of the authors,and are not the views of or endorsed by Taylor & Francis. The accuracy of the Contentshould not be relied upon and should be independently verified with primary sourcesof information. Taylor and Francis shall not be liable for any losses, actions, claims,proceedings, demands, costs, expenses, damages, and other liabilities whatsoeveror howsoever caused arising directly or indirectly in connection with, in relation to orarising out of the use of the Content.

This article may be used for research, teaching, and private study purposes. Anysubstantial or systematic reproduction, redistribution, reselling, loan, sub-licensing,systematic supply, or distribution in any form to anyone is expressly forbidden. Terms &Conditions of access and use can be found at http://www.tandfonline.com/page/terms-and-conditions

Page 2: Entrepreneurship and innovation in development finance institutions for promoting the clean development mechanism in Africa

Entrepreneurship and innovation indevelopment finance institutions forpromoting the clean developmentmechanism in Africa

Mandla SV Gantsho & Patrick Karani1

This article demonstrates how entrepreneurship and innovation can help promote the clean devel-

opment mechanism in Africa through development finance institutions. If DFIs do not have suffi-

cient knowledge of how to enhance entrepreneurship and innovation they will have only a

limited impact in promoting innovative financial instruments for achieving environmental benefits.

Supporting innovation and entrepreneurship will enable DFIs to create opportunities for adaptive

learning and creativity, to adjust to emerging CDM innovative financial instruments and to play a

key role in promoting CDM in Africa. It will make DFIs more knowledge based and enhance their

ability to provide monetary incentives through their project financing activities, to encourage and

facilitate partnerships to support the CDM, and to provide technical advice and support to clients

for project design, planning and implementation.

1. INTRODUCTION

Development finance institutions (DFIs) can play a key role in promoting the implemen-

tation of the clean development mechanism (CDM) in Africa. This article describes

entrepreneurship and innovation by a DFI in this regard. CDM is perceived as a new,

market-oriented, innovative and flexible financing instrument articulated by the 1997

Kyoto Protocol that came into force in February 2005 (UNFCCC, 1997). The entrepre-

neurship and innovation required by CDM is embedded in DFIs as institutions with the

ability to codify the ideas necessary for change. Drucker (1985) describes and analyses

such entrepreneurship and innovativeness as the basis for modern development instru-

ments. CDM, as one of these, aims to enhance the implementation of investment strat-

egies that have capabilities for adapting to or mitigating the adverse effects of climate

change and promoting sustainable development.

CDM is one of the flexible mechanisms established by the Kyoto Protocol to promote the

reduction of greenhouse gas emissions in a cost-effective manner. In addition to the other

flexible mechanisms, Emissions Trading and Joint Implementation, rules and modalities

for the CDM have been discussed at a variety of meetings, including the 1997 Kyoto Pro-

tocol, the 1998 Buenos Aires Plan of Action and the 2001 Marrakesh Accord in Morocco

(UNFCCC, 2005). At these meetings, participants agreed to promote the CDM in the

context of sustainable development that would include small-scale project activities

and land use, land use change and forestry (LULUCF) projects in addition to energy,

1Respectively, Vice-President, Infrastructure, Private Sector and Regional Integration, AfricanDevelopment Bank (AfDB), former Chief Executive Officer (CEO) and Managing Director ofthe Development Bank of Southern Africa (DBSA); and Environmental Strategist, DBSA,Advisor, BEA International, CBNet representative in Africa, and co-editor, CDM InvestmentNewsletter.

Development Southern Africa Vol. 24, No. 2, June 2007

ISSN 0376-835X print/ISSN 1470-3637 online/07/020335-10# 2007 Development Bank of Southern AfricaDOI: 10.1080/03768350701327269

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waste management and industrial projects. These projects will contribute towards

mitigating climate change.

Climate changes that result in temperature increases with possibilities for global

warming may cause drought, thus affecting agricultural productivity and constraining

development (UNFCCC, 1992, 1997). These climate changes are thought to be the

result of emissions of greenhouse gases (GHG), in particular carbon dioxide (CO2),

which has an average life span of 100 years in the atmosphere as compared to

methane (CH4), which has a high warming potential but a life span of 24 years (IPCC,

1992). The measurement of greenhouse gases has been standardised against the CO2

equivalent.

The process of valuing the CO2 equivalent into monetary units is complex for both DFIs

and policy makers (Gowdy & O’Hara, 1995). If DFIs are innovative and entrepreneurial,

particularly in promoting the CDM, which will finance projects with the potential to gen-

erate opportunities for reducing greenhouse gases, this creates an enabling environment.

As a market based innovative instrument CDM requires entrepreneurship to deal with

market forces of supply and demand. According to Drucker (1985), entrepreneurship

and innovation are the best proof of institutional abilities and capabilities to cope with

market forces that address development challenges and adapt to emerging innovative

financial instruments such as CDM.

2. ENTREPRENEURSHIP AND THE CDM

Drucker’s view of entrepreneurship and innovation can be seen as a challenge to put

knowledge to work through DFIs – to apply entrepreneurship and innovation as knowl-

edge based approaches that can promote CDM in Africa. This perspective allows for

institutional flexibility in accordance with the basic characteristics of a project’s life

cycle or time span, the preparation for the project, the predictability of risks, and the

anticipated market challenges. If well articulated, as knowledge products entrepreneur-

ship and innovation can enhance institutional abilities to effectively manage projects

necessary for addressing development.

Despite the complex process, Africa has become the region of focus for CDM projects

through DFIs. Africa’s industrial growth requires the consumption of more energy at

an affordable cost (World Bank, 2006). On the basis of the economic cost effectiveness

principle, the cost of doing a CDM project in Africa is much lower than that of doing a

similar project in a developed region, which provides an opportunity for investment in

clean energy sources by using CDM investments to offset emissions from high carbon

based energy sources (Karani, 2002). Other potential projects would be from land-use

initiatives that contribute to sequestration of carbon by forestry, soil conservation and

better agricultural practices (Seo et al., 2005). In emerging mega-cities, other projects

could be sourced from waste management to reduce emissions from methane.

However, current opportunities for CDM in Africa indicate very small volumes of

carbon offsets. Thus far, only a few CDM initiatives are associated with development

projects in Africa (Lecocq & Capoor, 2003). For example, in a Moroccan CDM

energy efficiency project portfolio of 25 projects, only seven projects can generate 85

000 tons of Certified Emission Reductions (CERs) per year (Senhaji, 2004). In contrast,

the first South African CDM project on Low-Income Housing Energy Upgrade to be

registered by the CDM Executive Board on 29 August 2005 can generate only 2.85

336 MSV Gantsho & P Karani

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CO2 equivalent tons per household per year over 21 years (UNFCCC, 2005). Similarly,

the CDM projects identified by UNIDO (United Nations Industrial Development Organ-

ization) in Senegal, Nigeria, Zimbabwe, Kenya and Zambia can generate only 1.17

million tons of CO2 equivalent (Pembleton, 2002). These total emission reductions

from Africa are just barely the equivalent of one CDM project in Brazil, Mexico,

India or China.

Clearly, although emission reduction opportunities in South Africa, Nigeria and Egypt

are seemingly higher, Africa is still behind the rest of the world in participating effec-

tively in the CDM market (Knudsen, 2005). This is unfortunate, considering that

CDM has potential opportunities for fuelling Africa’s economy. Africa needs additional

resources to attract investments in clean energy, better agricultural practices, forestry and

soil conservation techniques, all of which would enhance productivity (World Bank,

2006).

However, the CDM process has not in itself made it possible for Africa to move fast

enough in attracting foreign investment. This is partly because the process itself has

been extremely slow and constrained by institutional bureaucratic obstacles (Karani,

2002). Thus far, by March 2006 only 16 CDM projects have been registered globally

by the CDM Executive Board, of which one is located in Africa – at Kuyasa,

Khayelitsha, on the south-eastern side of Cape Town, South Africa. Since the project

objectives include development impacts through the installation of solar water heaters,

insulated ceilings and compact fluorescent lighting bulbs in 2300 poor low-income com-

munity households, the project has strong social and environmental components that will

add value to socio-economic development.

The project’s components will eliminate indoor burning of coal and hence reduce indoor

air pollution, thus improving human health. Reducing respiratory health problems will in

the long run reduce social costs as a result of lower medical bills. In addition, the lifestyle

of the local communities will be improved by spillover effects from the provision of jobs

for the vendors needed to maintain a continuous supply of such necessary equipment as

solar heaters and fluorescent bulbs. This entrepreneurial and innovative process calls for

additional support from DFIs, and a passionate approach. The effect of this support will

be long term: in the long run, the CDM project will generate environmental and climate

change benefits by reducing dependence on high pollutant fossil based energy consump-

tion, leading to the reduction of 2.85 CO2 equivalent tons per household per year

(UNFCCC, 2005).

3. ENTREPRENEURSHIP AND INNOVATION IN CDM

Entrepreneurship and innovation are emerging as key factors of institutional excellence

in confronting development challenges and promoting sustainability. Drucker (1999)

emphasises that the success of a core business is based on entrepreneurship and inno-

vation that engage management in confronting challenges and addressing market

needs. The DFI market is complex and driven by forces of theories and practices. This

calls for putting knowledge to work; knowledge that will analyse development chal-

lenges, interpret statistical data, contextualise field surveys and draw the best-informed

conclusions in support of sustainable development.

The global institutional transformations and policy changes between 1980 and 1990 are

largely referred to as the outcomes of entrepreneurship and innovation. During this

Entrepreneurship and innovation in DFIs 337

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period a number of global institutions cut down on their production costs as part of the

structuring process while others innovatively created numerous job opportunities,

especially in ‘Silicon Valley’, and others undertook ‘merger and acquisition’ processes

in order to remain in business. The question remains why some institutions perform

better than others at creating new products and services. DFI products and services

tend to be generic, with development as the core objective. Similarities create challenges

and competition among DFIs through products and market segmentation. Peters and

Waterman (1982), in an attempt to differentiate products and market segmentation,

argue that institutions can create ‘intrapreneurship’ through renewal of corporate strat-

egy, innovation and entrepreneurship that will make the institution distinct from

others in developing unique products and services.

DFIs’ products and services broadly include development banking and development

assistance (Musasike et al., 2004). They include lending and investment, guarantees,

grants and technical assistance, advisory services, and research and policy. This classi-

fication does not detail the new and innovative products based on carbon measured in

CO2 equivalent units as articulated in the CDM (Karani, 2002).

Within the CDM framework an example of a DFI project with CDM potential is the

Bethlehem Hydroelectric Power Project. This project has been prepared with

the support of the DBSA (Development Bank of Southern Africa) in partnership with

the World Bank and is considered suitable for carbon financing. With an installation

capacity of four megawatts, the project is in the process of being registered by the

CDM Executive Board, after which it will be officially recognised for carbon monetary

exchange (personal communication, Project Manager, DBSA Agencies Unit, February

2006). DFI products associated with this project are investments worth US$5 million,

technical assistance and advisory services. The project will generate 200 000 CERs

over a period of five years and will be purchased by the World Bank at a price

ranging between US$4 and US$5 per CER, generating additional monetary returns of

US$800 000 to US$1 000 000.

Since 2000, the evolving CDM with carbon financing has been seen as a product that can

be offered within the framework of development banking and development assistance.

The World Bank Prototype Carbon Fund (2005) has generated lessons and good prac-

tices on the application of the CDM within the development framework. However, the

World Bank continually faces criticism – from outside, saying that this Fund is crowding

out the private sector, and from inside, saying it is insufficiently integrated with the rest

of the Bank’s development efforts and operations that aim at promoting development

effectiveness. Other DFIs therefore need to extrapolate from these lessons and practices

and develop replication strategies in line with their particular strategic thrusts towards

sustainable development.

DBSA has made good progress towards realising its strategic development vision for

South Africa. This has resulted in strong partnerships with municipalities, provincial

government and regional institutions, such as the New Partnerships for African Develop-

ment (NEPAD), as well as the private sector. It has extended basic services to millions of

un-served and under-served people, and continually builds further momentum towards

achieving the millennium development and NEPAD goals – and fundamentally

towards meeting goals for poverty reduction (DBSA, 2005).

As part of its achievement, DBSA has increased the number of households with access to

safe water from 7.2 million to 10 million – that is, from 79.8 per cent of the total in 2001

338 MSV Gantsho & P Karani

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to 85.0 per cent in 2004. The number of households with access to electricity has

increased from 5.2 million to 8.3 million – equivalent to a percentage increase from

57.5 per cent to 70.4 per cent (DBSA, 2004–2005). DBSA provided the financial

support and technical assistance necessary for preparing and implementing the projects.

It aspires to reach the remainder of the households in partnership with the government of

South Africa and other development institutions.

This is necessary because the overwhelming majority of the remaining service backlogs

are in rural areas where settlement densities are low and the costs of electricity and water

connections are high. To offset some of these costs, it is necessary to mobilise additional

resources to complement development initiatives. The CDM provides an opportunity to

offset these high costs and promote cost effective sustainable development. But political

instability, civil unrest, conflict, immigration and high levels of corruption have emerged

as major obstacles to better economic performance in Africa and constraints on entre-

preneurship and innovation.

The institutional challenges to economic growth in African countries contribute to the

slow pace of capital formation or investment that is a major reason for Africa’s tardy

economic growth. The current rate of capital formation, about 16 per cent of GDP, is

low compared to that of fast-growing developing countries. Since the mid-1970s, the

rate of capital formation in rapidly emerging economies such as those of the Asian

Tigers has been consistently above 25 per cent of GDP. Clearly, to achieve the Millen-

nium Development Goals by 2014 African countries must target capital formation of 25

per cent. This target creates room for entrepreneurial and innovative financing that

blends CDM flexibility with investment opportunities. DFIs’ efforts in bridging finan-

cing gaps can use CDM opportunities to enhance investment flows, technology transfer

and additional financing and thus boost development in Africa.

The task of DBSA is to identify risks and maximise opportunities for development

through a high quality portfolio of investments. With the emergence of the CDM,

DBSA has the potential to mitigate adverse effects (on human health, water quality,

soil fertility, climate change, and so on), to enhance efficiency and cost-effectiveness

in both the mobilisation and use of resources and to protect the environment, hence

adding value to sustainable socio-economic development.

DBSA’s products and services give some indication of how the CDM could be leveraged

and promoted through lending and investment products. Investors in infrastructure in

Africa recognise their environmental and social responsibilities and obligations. This

recognition creates room for promoting the CDM through DFIs’ market based products

and services. For a long time DFIs’ financing and project design were not market based in

approach and thus suffered from market exploitation.

The lending and investment activities offer a challenge to DFIs such as DBSA to

ensure the efficient delivery of products and services. One way of meeting this chal-

lenge is to combine CDM projects with normal DBSA operations. The comparative

advantage of doing so is to integrate all project preparation costs and all the work

being done on environmental impact assessment, social impact assessments and safe-

guards that are included in a market based approach. This approach will reduce trans-

actions costs and diversify risks that are likely to affect the CDM projects and limit

development in Africa. In this context CDM resources will leverage normal DFIs’

funds for investment.

Entrepreneurship and innovation in DFIs 339

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Environmentally sound infrastructure is strategic for the DBSA’s involvement in socio-

economic development through investment, advisory services and partnership. As

DBSA’s primary focus is on financing infrastructure and sustainable development (its

mandate), its basic point of departure is that the environment is the source of develop-

ment and that its protection and conservation require full support. The market for

clean design, clean production, sustainable and appropriate packaging, community

based resource recovery, and adding value to existing safe water streams, survives

numerous challenges. Valuing CO2 and measuring development impacts at household

levels are not only monetary in approach but challenged by emerging environmental

markets and policy responses.

Environmentally friendly infrastructure requires investment in products, processes and

services that are not polluting or harmful to human health. Investment by DBSA in pol-

lution prevention technologies through CDM initiatives will result in minimising costs

that, in the long run, would be greater than the initial investment. Clearly, DBSA

must help clients and partners to plan, design and construct environmentally friendly

infrastructure that is cost-effective, efficient and sustainable. What is important for

environmentally friendly infrastructure is the quality of services and products offered

by DBSA. Consequently, it is important to identify and assess potential natural and

human induced environmental hazards and risks within the context of CDM investments

(Meyer, 2004).

4. DFIS AND THE CDM

The development of carbon credits can be complex and requires exchanging information

and sharing knowledge and experiences. Based on DFIs’ long history and experience of

providing finance and technical assistance for effective development, practical opportu-

nities and solutions to promote the CDM through DFIs cannot take place without entre-

preneurship. Whether in process or product innovation, entrepreneurship must be viewed

in the context of:

. factors that promote the CDM through mitigating technology, innovation, deployment

and diffusion, including national, regional and international cooperative efforts and the

removal of barriers to sustainable development; and

. the socio-economic aspects of mitigating climate change, such as costs and benefits,

co-benefits, poverty reduction and economic impacts, including spillover effects.

Entrepreneurship is a key factor in promoting the CDM through DFIs and will facilitate

positive thinking about the mechanism in the context of sustainable development in

Africa. Entrepreneurship and innovation enacted through economic sectors with DFIs

can generate carbon credits. The carbon credits calculated in CO2 equivalents can be

generated by sectors through accelerated technologies and efficient and cost effective

practices that are entrepreneurial in nature. Key economic sectors with potential for gen-

erating carbon credits in South Africa are presented in Table 1, which contains infor-

mation from the government on the types and quantities of greenhouse gases

produced by various sectors in the period between 1990 and 1994.

These figures may not be accurate, as the economic growth in South Africa was unstable

in the years before 1994 and experienced substantial transformations after the 1994 pol-

itical change (AfricaPractice, 2006).

340 MSV Gantsho & P Karani

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The total emissions from the economic sectors indicated in the table above are the foun-

dations for generating carbon credits when the emissions are reduced effectively through

appropriate measures and clean technologies. To date, South Africa emits about 8.5 per

cent of the total global emissions. As the economy of the country continues to expand,

emissions increase on a progressive path. In the context of the CDM initiative, the

expanding economy needs to integrate a CDM framework that will contribute to the gen-

eration of carbon credits.

Thinking about the CDM from a DFI point of view requires a strategic approach aimed at

promoting sustainable development as mandated by CDM criteria. Development in most

emerging economies is driven by low-cost options unattractive to investment as they are

often linked to the consumption of low quality fuels deemed polluting. To mitigate such

pollutants requires the rationalisation of development financing. This is in accordance

with emerging environmental markets, particularly the carbon market that innovatively

promotes additional financing for environmentally friendly initiatives aimed at reducing

emissions of greenhouse gases such as CO2 and CH4.

Table 1: Greenhouse gas emissions in million tons of CO2, CH4 and N2O in South

Africa in 1990 and 1994

Greenhouse gasesCarbon dioxide (CO2) Methane (CH4)

Nitrous oxide

(N2O)

Year 1990 1994 1990 1994 1990 1994

Energy 252 019.05 287 850.96 346.96 375.70 5.10 5.88

Energy industries 159 114.62 167 816.64 0.52 0.47 2.76 2.61

Industry 47 026.25 53 186.34 5.64 6.15 0.74 0.78

Transport 30 941.18 42 716.69 8.63 10.58 1.36 1.88

Commercial 5 043.78 780.26 0.54 0.07 0.08 0.01

Residential 6 683.79 7 397.49 7.35 0.60 0.08 0.08

Agricultural/forestry/fishing 3 209.42 15 953.54 0.48 30.70 0.09 0.53

Fugitive emissions 323.81 327.12

Industrial processes 28 912.74 28 106.26 3.27 1.25 5.84 7.27

Mineral products 5 478.19 5 330.91

Chemical industry 1 658.81 1 952.10 3.27 1.25 5.84 7.27

Metal production 21 775.73 20 823.26

Agriculture 1014.45 937.41 61.84 50.89

Enteric fermentation 916.55 844.01

Manure management 83.42 78.47 1.40 0.07

Agricultural soils 59.71 50.05

Savanna burning 12.63 12.63 0.61 0.61

Agricultural residues 1.85 2.31 0.12 0.14

Land use change and forestry 2 16 982.37 18 615.97

Changes in biomass stocks 213 640.99 210 885.81

Soil removals 23 341.38 27 730.15

Waste 688.40 743.07 2.38 2.66

Solid waste on land 669.27 721.74

Wastewater handling 19.13 21.33 2.38 2.66

Source: Department of Minerals and Energy, 2000.

Entrepreneurship and innovation in DFIs 341

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The acceleration of environmental technologies such as solar panels or wind turbines or

scrubbers that reduce carbon emissions from energy projects promoted through

additional investments can generate carbon credits. At the time of writing, DBSA is oper-

ating in a high-risk market where investment for poverty reduction is driven by policy

and business continues as usual. In this type of situation clients prefer low-cost

options – hence the tendency towards using polluting technologies because of a per-

ceived short-term cost advantage. At this level of operation, very small volumes of

carbon credits can be generated. Since environmentally sound technologies are some-

times high-cost initially and carbon credits are market driven, the CDM and environ-

mental financing provide additional resources to supplement investment for carbon

credits. This approach encourages investment in low carbon economies – for

example, investment in renewable energies that are non-polluting and enhancement of

carbon sinks and sequestration projects. This level of operation has the potential to gen-

erate carbon credits at an additional cost that is outsourced above DBSA’s investment

baseline.

A number of environmental standards have been emphasised and legitimised by the

Equator Principles. These Principles establish benchmarks for funding large projects

with minimum level of investments of about US$50 million. The Principles subscribed

to by some financial institutions, including ABN Amro, Standard Bank and Nedbank and

led by the International Finance Corporation (IFC), are aimed at enhancing the environ-

mental responsibilities of both the financier and borrower. To some extent the Principles

enhance targets aimed at the institutional environmental performance standards of the

World Bank and IFC. This includes the application of well-established environmental

guidelines and safeguard measures and policies in development financing. DFIs

needing to internalise the Equator Principles and safeguard measures on environmental

and social issues to provide a potential opportunity for promoting the CDM. For instance,

the Principles seek to ensure that projects are developed in a manner that is socially

responsible and reflects sound environmental management practices. DFIs need to main-

stream environmental matters if they are to comply with the Principles and the World

Bank Group’s environmental guidelines and safeguards.

The most obvious benefit of the Equator Principles to DFIs is that they will become more

committed and responsible and ensure that projects are subject to greater scrutiny, which

should result in their being more environmentally and socially sound. Beyond that, the

Principles offer the consistency necessary for compliance and minimising institutional

risk. They also provide for commonality in approach and terminology among all sub-

scribing DFIs, which should provide certainty for both the DFIs in respect of project

risk and the customers or borrowers who have a prescribed framework with which

they must comply if they are to obtain funding.

In the context of emerging CDM markets that are environmentally based, Sterner (1999)

argues that it is necessary to promote market based policy instruments for institutional

transformation and the reform of the environmental agenda that will promote CDM

initiatives. Policy reform and institutional transformation are critical to the effectiveness

of the DFIs that will be competent to promote CDM in Africa with strategic targets for

financing environmental infrastructure. The 2002 World Summit on Sustainable Devel-

opment characterised the sectors associated with institutional arrangements in the South

African context and identified specific areas of policy reforms in governance, economic

growth, development and environment that are critical to sustainable development and

which fully require the role of DFIs in mobilising resources and providing resources

342 MSV Gantsho & P Karani

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that will achieve sustainable development. It is within this framework that DFIs can

promote CDM projects as implementation targets focusing on poverty reduction,

capacity building and partnerships, economic growth, environmental management and

adding value to socio-economic development.

5. CONCLUSIONS

Over the years, DFIs have gone through institutional transformations and policy changes

with a view to enhancing sustainable development. One of the key criteria of the CDM is

promoting sustainable development through additional financing and innovative market

oriented processes and products. The complexity of integrating the CDM with sustain-

able development requires innovation and entrepreneurship. This can be done by DFIs

which have a strong commitment to entrepreneurship and accept high risks as part of pro-

moting sustainable development through a CDM which is favourable to poor economies.

A majority of African countries have poor economies and desperately need investment

flows, technology transfer, additional financing, and knowledge and information

resources to boost sustainable development. It is evident from the emerging CDM

market that DFIs can play a role in promoting CDM activities towards achieving sustain-

able African development.

Financial risks are prevalent in African countries where savings are low and hence

raising capital from domestic markets is difficult. To some extent, poor infrastructure

and weak investment flows lead to high transaction costs and in general this limits the

potential for reduction of emissions. But DFIs’ ability to leverage financial and techno-

logical resources has the capability to integrate CDM project and transaction costs into

normal bank operations and provide an opportunity for promoting CDM activities in

Africa at low cost with the potential for high returns on investments and social benefits.

However, the return on investments may take much longer and is not guaranteed, owing

to political sensitivities and institutional instabilities. Some of these risks can be

managed or leveraged through partnerships developed by DFIs for the purpose of pro-

moting CDM in Africa.

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