Expert Group Meeting on Enabling Measures for an Inclusive Green Economy in Africa

23-24 September 2014, Addis Ababa, Ethiopia

Financing inclusive green economy in Africa

Outline

• Introduction • The role of finance in fostering an IGE• Trends and gaps in financing• Challenges and opportunities• Key messages

Introduction

The transition to a green economy will require major investments and structural changes, all of which will require financial resources to materialize;

Financial resources are required for effective deployment of all enablers of IGE (technology; capacity devt; institutions and policies);

Introduction/…

The GE is an opportunity for investors, governments, and IGOs: - New technologies and products; - New policies or tweaks in existing policies;- Refocus support to SD;

Financial resources are needed to support GE transition in all major sectors including agriculture, fisheries, forestry, energy, industry, tourism, transport, water and infrastructure.

The role of finance in fostering an IGEAn opportunity to develop economic and social

infrastructure, strengthen institutions, and implement GE projects;

Could stimulate investments in arguably high risk sectors that normally fail to attract funds- smallholder/land use;

Access to finances is an entry barrier into high value GE sectors (Beck, 2011: higher levels of financial development associated with SME-led industrialization);

Dual role of financial markets: channeling investment capital to GE; fostering new and emerging niches in green finance (green financial assets e.g., green bonds);

The role of finance/…Huge initial cost of GE investments- – Domestic resources could reduce risks and costs of

external funding (declining ODA, unpredictable flows, high transaction costs on loans);

GE is an opportunity to review public finance management: – Realign priorities to accommodate GE projects;– Identify bottlenecks that impede appropriate and

effective use of public resources; – Reallocate the resources to productive sectors;

The role of finance/…Strengthen financial services and investment in

developing countries;– Governments must provide the enabling environment

to reduce risksPooling resources through the domestic financial

system could help overcome investment indivisibilities; – Good for private sector development and for exploring

economies of scale;– Mitigates information and transaction costs ;– Signal new growth opportunities for the private sector

The role of finance/…Opens investment windows in sectors that were

previous unattractive:– 75% increase in investments in food production and

land management;– Rising trend of private equity funds in infrastructure and

natural resources, e.g., Blackstone Group’s $3b investment in hydroelectricity in TZ, Rwanda and Ethiopia

The role of finance/…Associated with the transfer and diffusion of

green technologies, skills and capacity:– FDI and PPPs involving international cooperation;– FDI enhances productivity and competitiveness of

sectors;– Could reduce environmental pressures from efficiency

gains;

Trends and gaps in financing Financing SD: Africa’s yearly requirements>

– $200b ($100b infrastructure) , – $2b deforestation/forest degradation costs,– $10b for agriculture (CAADP)- $198b to green agriculture (UNEP), – $22b sustainable water; – Transition to low-carbon development: $9b- $12b/year by 2015– Incremental cost of CC adaptation : $13b-$19b/year by 2015;

• $1.2 trillion for global infrastructure; • Best guestimate: 2 to 3 % of GDP for Africa to transition to

GE

Trends and gaps/…National green economy plans and their

funding facilities:– Ethiopia’s Climate Resilient Green Economy (CRGE) Strategy

and CRGE Facility;– Rwanda’s national climate change and environment fund

(FONERWA)– South Africa’s National Strategy for Sustainable Development

and the Green FundMultilateral climate financing mechanisms:

– The Clean Development Mechanism (CDM);– The Global Environment Facility (GEF) and Climate Investment

Funds (CIF);– UN REDD/REDD+ programme

Trends and gaps/…Green bonds:

– $15b raised through green bonds market- mainly for renewable energy projects;

– World Bank green bond facility launched in 2008: $5.6b (62 transactions, 17 currencies);

Official development assistance:– Not transparent and pledges not forthcoming;

Private investment flows– Focused on natural resource sector

Challenges and opportunitiesChallenges: No policy framework to guide the transition to IGE- policy and

institutional risks; Comprehensive estimates required based on sectoral requirements

with complete data; Huge competition for public resources ( development priorities); Risk associated with private financing; Green projects have longer gestation periods than most investor’s

planning horizons; Unfulfilled pledges to SD in developing countries; Multiplicity of financing mechanisms- fragmented approach; Underdeveloped capital markets ; “Identity crisis”- Investors targeting profits not green sectors.

Challenges and opportunities/…

Opportunities: GE is a platform for poverty eradication and wealth

creation;GE strategies and programmes are marketing tools;Building domestic financial markets, and competitive

private sector;Potential for green bonds market to flourish

(secondary transactions are key);Channeling private investment flows to priority

sectors (not just natural resources);Improve investment climate and channel resources to

the wider economy

Key Messages There is need for comprehensive estimate of the financial resources

required for African countries to transition to an IGE;

Private investment in natural resource based sectors is at all time high in Africa. To achieve a broader and inclusive economic diversification and to further galvanize economic growth, there is need to channel public and private investment to complementary sectors;

Bank based financial services and credit are critical for SMEs in Africa. Non-traditional financing options should be explored within the framework of national development. In this regard, private sector and financial market development should be part of the financing strategy;

The international community should address the fragmentation of sustainable development funding mechanisms. GE strategies are an opportunity fulfilling international commitments towards sustainable development financing;

International partners could support the initial investments but domestic resource mobilization will be critical during the transition. In this regard, there is need for effective deployment of international support, and enhancing domestic resource mobilization.

Thank You