mobilising private investment in low carbon, … private investment in lcr...mobilising private...

Mobilising Private Investment in Low Carbon,

Resilient Infrastructure

Presented by Jan CORFEE-MORLOT & Chris KENNEDY

25 September, 2012

OVERVIEW

1. The Policy Challenge, Key Barriers and Possible Opportunities

2. Concluding Thoughts: Towards a Green Investment Policy FW

The infrastructure financing gap

3

Infrastructure needs (annual, in USDtn illustration, need to be adapted to country context)

Source: OECD illustration, based on estimates from WB, WEF, OECD; drawing on analysis in Kennedy and

Corfee-Morlot 2012,”Mobilising private sector investment in low carbon, climate resilient infrastructure”

CHALLENGES

• Scale-up sources of capital, public and private

• Shift sources from brown to green

?

?

?

Low-Carbon, Climate-Resilient infrastructure investment

and the private sector

4

RETURN

RISK

Investors Expectations

Conventional

Infrastructure

LCCR

Infrastructure

Climate policies Investment policies

How to combine investment and climate policies efficiently?

Climate +

investment

framework

Source: Kennedy & Corfee-Morlot 2012

Example: pensions funds

Problems with

clean energy

investments

2

Problems with

Infrastructure

Investments

1

Lack of suitable

investment

Vehicles

(climate bonds)

3

▪ Carbon pricing and fossil fuel subsidies

▪ Unpredictable and fragmented policy support

▪ Special species of risks

▪ Lack of project pipeline

▪ Lack of investor understanding

▪ Regulatory barriers

Barriers to institutional investment in clean energy

▪ Nascent and illiquid climate bond markets

▪ Challenges with securitisation

▪ Credit issues

Problems with

clean energy

investments

2

Problems with

Infrastructure

Investments

1

Lack of suitable

investment

Vehicles

(climate bonds)

3










▪ Credit issues

Problems with

clean energy

investments

2

Problems with

Infrastructure

Investments

1

Lack of suitable

investment

Vehicles

(climate bonds)

3










▪ Credit issues

Source: OECD (2012 Forthcoming) The Role of Institutional Investors in Financing Clean Energy

Ranking of Risks in Climate Change Finance

Standard & Poors’ survey:

longevity risk is highest ranked

(i.e., concern that regulations may be short

lived compared to investors’ time horizons)

6

-See Kennedy & Corfee-Morlot (Fig 3.2)

Maturity of Financial Sector Differs by Country Context

LOW

MIDDLE

Basic Banks

Administered Interest

Rates

Full Range Banks

Limited Long

Term Funding

Weak Risk Management

Adequate Risk

Management Robust Risk

Management

Universal Banks

Gov’nt Bonds

Equity

Corporate Bonds

Private Equity

Venture Capital

HIGH INCOME

Largely Market

Based Interest

Rates

Partial Access to

Finance for SMEs

Readily Available Access

to Finance for SMEs

Fully Market

Based Interest

Rates

Full Availability of

Long Term Funding

OECD illustration based

on World Bank (2012)

Mechanisms for increasing investment in the water sector

OECD (2010) outlines

strategies required for

increased access to

financing from:

- Commercial banks

- Bond markets

- Project finance

- Equity finance

Residential GFCF & GHGs 1997-2007

9 Source: Kennedy & Corfee-Morlot 2012

10

POWER

GENERATION BUILDINGS &

VEHICLES

OIL & NAT. GAS

INFRASTRUCTURE

Low carbon

electricity enables

greening of

buildings & vehicles

Lower investment in

oil & nat. gas infra.

frees up capital for

green energy

generation

Decreased demand for

oil & natural gas, and

their infrastructure

Policies to promote energy

efficiency and low carbon

technologies for buildings

& vehicles

Infrastructure relationships in virtuous circles of low carbon growth

Source: Kennedy C. and J. Corfee Morlot, 2012 forthcoming, Mobilising private

investment in low-carbon, climate resilient infrastructure, OECD.

11

POWER


VEHICLES

OIL & NAT. GAS

INFRASTRUCTURE ROAD

RAIL

PORTS

AIRPORTS

Low carbon

electricity enables

greening of


Lower investment in



green energy

generation




Decreased

demand for

coal & oil frees

up rail and port

capacity




& vehicles




12

POWER


VEHICLES

OIL & NAT. GAS

INFRASTRUCTURE ROAD

RAIL

PORTS

AIRPORTS

Low carbon

electricity enables

greening of


Switching of freight from

road to rail to replace

transport of coal

Lower investment in



green energy

generation




Decreased

demand for

coal & oil frees

up rail and port

capacity

Growing use of port

capacity for global

trade in components of

green buildings,

vehicles and energy

supply systems

Policies to restrict

growth in air freight,

and maintain freight

transport by rail and

marine transport

Demand management &

switching of freight to

rail decreases demand

for road infra. freeing up

capital for low carbon

vehicles




& vehicles




Concluding Thoughts:

Towards a Green Investment Policy Framework

The barriers to private sector engagement

14

RETURN RISK

• Barriers linked to infrastructure • High capital upfront

• Relatively low-return

• Very long investment timelines

• Barriers linked to climate market failure • Less profitable than LCR alternatives

• Lack of familiarity

• Higher policy risk

• Contextual barriers • New financial regulations restrain the availability

for long term capital

• Project finance is drying up; local financial capacity

limited in some countries

Balancing the risk-return profile to

attract private sector investment

Role of the public sector:

1. Reform policies to improve the risk-return of green infrastructure

2. Leverage public sources of finance to mobilise the private sector

TOWARDS A GREEN INVESTMENT POLICY FRAMEWORK

The need to combine investment and climate policies

1. CLEAR GOALS Strategic goal setting, infrastructure

planning and alignment

2. ENABLING GREEN INVESTMENT Policies for competitive, open markets; market incentives for

green investment; green codes

3. MOBILISE GREEN FINANCE Financial regulations, tools and

instruments

4. RESOURCES Harness public and

private resources and build capacity

5. ENGAGEMENT Promote green business

and consumers behaviours

Two objectives:

1. Social and economic provision of infrastructure at the lowest cost

2. Improve the risk-return value proposition of green infrastructure assets

Source: Corfee-Morlot, Marchal et al. (2012)

Extra Slides

16

The climate change challenge – a big emissions gap

17

Long infrastructure lifetimes means it has a strong lock-in effect for climate –

locking in both vulnerability and emissions for decades to centuries

• Need to act now!

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2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

GtCO2e Outlook Baseline 450 ppm Core

3-6°C by 2100

2°C by 2100

Source: OECD Environment Outlook to 2050

Gross Fixed Capital Formation, OECD

18

Comparative Annual Global Infrastructure Demands

(USD Bn/yr), 2015-20

19

BAU (6 deg C) scenario

LCR (2 deg C) scenario

Incremental Cost of LCR scenario

Power Generation 320 380 60

Electricity T&D 270 260 -10

*Buildings 320 620 300

Industry 280 310 30

Transport vehicles 3,300 3,370 70

Water 772 772 0

Telecoms 646 646 0

Road 245 < 245 - ve

Rail 120 120 ? 0?

Airports 120 < 120 -ve

Ports 40 40 ? 0?

Oil & Gas distribution 155 < 155 -ve

Total 6,590 ~6500 to 7000 - 90 to +410

Sources: OECD (2006, 2012) & IEA (2012)

*: retrofitting and envelope only

Green Growth in Sweden’s Residential Sector,

1997-2007

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GH

G E

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Dwellings (2005 SEK 10^6) Residential (Gg CO2e)

Ranking of Risks in Climate Change Finance (adapted from S&P)

21 Policy Transactional Capacity Project-level

Financial mechanisms for increasing investment in the water sector

Required for increased access to

financing from

Commercial

banks

Bond

markets

Project

finance

Equity

finance

1. Blending commercial grants and repayable financing X

2. Extending the range of potential borrowers via micro-

finance X X

3. Alleviating affordability constraints with output-based

aid X X

4. Mitigating risks with guarantees and insurance X X X

5. Creating grouped financing vehicles to increase

access to finance X X

6. Increasing direct lending to sub-sovereigns X X

7. Strengthening the balance sheet via equity injections X

8. Increasing transparency in the sector via credit ratings X X X

9. Developing “bankable” projects through project

preparation facilities X X

10. Developing local equity markets X

23

Level of Financial Sector Development

Low Medium High

Low Income Countries Middle Income Countries Upper Middle Income and

High Income Countries

Banking Services Basic Banks Full Range Banks Universal Banks

Non-Bank Financial

Services

None Government Bonds

Equity

Government and

Corporate Bonds

Equity

Alternatives (Private

equity, venture capital)

Interest Rate Administrative Setting Largely Market Based Fully Market Based

Access to Finance for SMEs Limited Partial Readily Available

Availability of Long-Term

Funding

Limited

(up to 1 year)

Partial

(up to 7 years)

Full

(up to 15 years)

Risk Management Weak Adequate Robust

Clean Energy Financing

Instruments

Lines of Credit

(liquidity support)

Concessional Financing

Dedicated Debt Funds

Lines of Credit

(demonstration)

Partial Risk Guarantee

Lines of Credit

(demonstration)

Partial Risk Guarantee

Equity Funds

Consumer Financing

3. MOBILISING GREEN FINANCE Financial policies, tools and instruments

Source World Bank

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