As global mean temperatures rise, governments and public financial institutions are seeking ways to mobilize the several hundred billion dollars of finance required to limit the growth of greenhouse gas emissions in developing countries and develop climate-resilient economies. This working paper is one in a series of papers that examines how public funds can mobilize private investment to help meet the significant needs of developing countries. We examine two public actors—the Overseas Private Investment Corporation (OPIC) and the Export-Import Bank of the United States (Ex-Im Bank)—which together intermediated 37% (over $2 billion) of total US assistance to developing countries for climate change activities from 2010 to 2012 by exclusively financing private sector projects.
The paper draws from the experiences of OPIC and Ex-Im Bank to inform other public financial institutions and mechanisms—including the Green Climate Fund and public intermediaries of climate finance—about how financial instruments can be employed to promote private sector investment in climate-relevant sectors.
The paper focuses on three aspects of OPIC and Ex-Im Bank’s climate-relevant financing activities:
- Financial instrument offerings and trends in their use to inform how public institutions can tailor financial tools and terms to specific sectoral and project requirements;
- Replicable financing structures that showcase how public financial institutions can work with each other and with the private sector to overcome unique investment barriers in climate-relevant investments in developing countries; and
- Institutional barriers that can hamper public institutions like OPIC and Ex-Im Bank from more effectively deploying financial instruments to unlock investment in climate-relevant markets.
1) Tailoring traditional financial instruments to address investment risks specific to climate-relevant sectors can unlock new sources of private finance. Unique financing structures have helped address specific project requirements for climate-relevant projects. For instance, OPIC structured a direct loan to ContourGlobal Solutions Holdings to serve as a portfolio credit facility, and created a loan guarantee to SunEdison Thailand to act as a revolving construction bridge financing facility (see Section III). OPIC has also designed new political risk insurance instruments that protect against unexpected changes in climate change-related policies (see Section III and the Oddar Meanchey case study).
2) Public financial institutions can maximize their impact by playing complementary roles depending on their risk profiles and instrument offerings. For example, OPIC is often a first-mover, supporting first-of-their-kind projects and testing out new financial instruments. Ex-Im Bank, on the other hand, provides very inexpensive debt on concessional terms, but has a lower risk-tolerance relative to OPIC, and thus tends to finance more established players. OPIC clients could graduate to become Ex-Im Bank clients to benefit from the comparative advantages of each institution and help Ex-Im Bank build its pipeline of climate-relevant projects. Furthermore, OPIC and Ex-Im Bank support can be further complemented by financing from other multilateral and bilateral public financial institutions—either concurrently or at different points in time (see Section III and IV and case studies, particularly the Azure Power case study).
Findings from this paper underscore the need for public financial institutions and mechanisms, including the Green Climate Fund and its Private Sector Facility, to:
1) Tailor public financial instruments and maximize flexibility in the use of these instruments. This includes:
- Providing a suite of financial instruments—including loans, loan guarantees, equity/quasi-equity and insurance—to mitigate specific investment risks faced by the private sector that commercial sources may not provide. WRI’s portfolio analysis reveals that the private sector took advantage of the full range of OPIC and Ex-Im Bank instruments, though some were utilized more frequently than others.
- Developing insurance policies that are tailored to cover political and regulatory risks unique to climate-relevant projects. For instance, OPIC has designed policies to address risk in three areas: feed-in tariffs, carbon credit/Clean Development Mechanism (CDM), and REDD.
- Establishing a full suite of financial instruments in an institution’s governing document or building in flexibility to test or add additional instruments over time, particularly if the institution is profitable and/or is able to manage its risk appropriately.
2) Address institutional barriers to maximizing private sector investment in climate-relevant projects, for example by:
- Creating a governance structure, employee incentives, staffing capacity, and a long-term mandate (i.e., one that will provide continuity through changes in an institutions’ board and the sponsoring governments’ political leaning) that prioritizes investment and support for environmentally sustainable activities and safeguards.
- Improving tracking and monitoring systems, as well as data transparency and availability on total project costs, private sector participation, and public sector co-financing, at least at aggregate levels if confidentiality restrictions present a challenge.
3) Coordinating with other agencies and donors as well as state and national governments to provide complementary policy and direct financing support for climate-relevant private sector projects. This could include creating and adopting clear, streamlined due diligence procedures, approval processes, and requirements for combining different sources and types of public sector co-financing. Both agencies, but particularly OPIC, co-finance many projects with other development finance institutions, so having these types of mechanisms in place would facilitate collaboration, as evidenced by the agreement between OPIC and the IFC, which has helped save time and reduce costs for both institutions as well as their clients.