As private sector investment flows within and into developing countries rapidly increase, the public sector has a unique opportunity to ensure that these flows are directed to meet critical climate change investment needs. This paper informs the use of public funds to leverage private sector investment in climate-relevant projects. It focuses on the public sector’s use of financing instruments, which can help improve the risk-reward profile of climate-relevant projects, especially when combined with a foundation of complementary climate change policies and financial regulations.
This paper draws on the experiences of two types of multilateral institutions responsible for providing or intermediating finance to climate change projects in developing countries: (1) climate funds and (2) development banks. It maps the financing instruments available to various public actors, with a focus on three significant institutions: the Global Environment Facility, the Clean Technology Fund, and the World Bank Group. Future working papers will map the activities of other public institutions, including bilateral, national, and regional development banks; government agencies; and public-private partnership funds.
The results of these working papers will be aggregated into detailed analyses and recommendations that inform the future public provision of climate finance with respect to leveraging private capital.
Findings from this paper for public actors and international mechanisms, like the Green Climate Fund, include the need to:
1. Better tailor the use of public financing instruments and maximize flexibility in the use of these instruments. This includes:
- Expanding the use of financing instruments beyond loans to equity and guarantees in order to mitigate specific risks faced by the private sector in different geographies.
- Coordinating support for domestic climate change policies and robust financial markets with project finance.
- Targeting grant support to markets where access to finance is most challenging and where public finance is instrumental in market development. This includes grant finance to poorer countries with less robust financial markets, as well as for new technologies that cannot achieve commercial returns without initial public support.
- Capitalizing international mechanisms like the Green Climate Fund in a manner that allows maximum flexibility in the use of different financing instruments. Specifically, the governments of developed countries should consider providing a reasonable amount of grant funding to the Green Climate Fund and its Private Sector Facility to ensure that a suite of instruments can be used flexibly as needed to most effectively mobilize investments. Loans, equity, de-risking instruments, or investments in other funds will provide a suite of products for the Fund to most effectively leverage private capital in ways that are most appropriate for individual programs or projects.
2. Address internal, institutional barriers to private sector investment; for example, by:
- Improving internal coordination and cooperation with the aim of offering a complementary suite of financing options for, or to attract private sector investment into, projects.
- Instituting incentives for employees to proactively consider options to increase private sector participation in projects, while maintaining appropriate checks to ensure that private sector activities are not unnecessarily subsidized.
- Streamlining fee structures and transaction processing times for all products, but particularly non-loan, non-grant instruments.
- Improving tracking and monitoring systems, as well as data transparency and availability to better identify and incorporate best practices in leveraging private capital.
- Familiarizing recipient governments with more complex instruments, like guarantees, to enable them to use such instruments when appropriate.