October 20, 2014

Taking Sustainable Transport to Scale: An Intermediary Approach

Zhengzhou Cover zhengzhou-kf-010709_048

The Global Environmental Facility (GEF), a partnership for international cooperation where 183 countries work together with international institutions, civil society organizations and the private sector, to address global environmental issues, is on the verge of adopting a new pilot program that has promise to scale up sustainable transportation faster and more effectively.

Since 1991, the GEF has provided $12.5 billion in grants and leveraged $58 billion in co-financing for 3,690 projects in 165 developing countries. For 23 years, developed and developing countries alike have provided these funds to support activities related to biodiversity, climate change, international waters, land degradation, and chemicals and waste in the context of development projects and programs.

At the GEF Council meeting on October 28-30, they are proposing a non-grant instrument pilot program. Non-Grant Instruments, cited below, apply to the energy sector, but could be transposed and adapted to a number of transport sector programmatic activities. Examples could include intermediary facilities or funds that invest in such things as:

A Global High Shift Scenario_Thumb

♦  Urban parking management linked to business improvement districts that support improved pedestrian/bicycle infrastructure,

♦  Public bike systems linked to advertising,

♦  Intermodal public transport terminal construction linked to commercial center development and housing development, and

♦  Bus Rapid Transit (BRT) system development linked to Transit Oriented Development (TOD)

As the recent Global High Shift to Public Transport, Walking, and Cycling report by UC Davis/ITDP shows, the global environmental benefits of such investment shifts can be formidable and generative of large positive returns, some of which can be internalized to provide a source of long term financing. The new GEF pilot program proposes to disperse its funds fully over the coming year. The transport sector – not just energy — should be actively organized to take part in the action.

Examples of GEF Use of Non-Grant Instruments

(From GEF-6 Non-Grant Instrument Pilot and Updated Policy for Non-Grant Instruments

(i) Risk Mitigation Products

The GEF has a long history of working with the IFC to establish risk-sharing facilities. Starting from a GEF project with the IFC in Hungary, the GEF and the IFC eventually went on to launch 12 sustainable energy finance programs supported with concessional funding. An additional three were subsequently established without GEF funding, based on the GEF model. The total efforts include engagements with 30 financial intermediaries resulting in over 20 risk sharing facilities, six credit lines, and one funded mezzanine facility. These facilities are expected to eventually support $1.4 billion of lending, of which $680 million has been achieved to date, on the basis of a total GEF investment of $70 million accompanied by IFC exposure of $302 million. One of the most successful examples of these risk-sharing facilities is the CHUEE project, initiated by GEF and IFC in 2006 in which GEF funding is used to partly fund a risk-sharing facility for Chinese local banks. Phase 1 and 2 of CHUEE used $16 million from the GEF and $40 million from IFC to take the first loss of lending from local banks to utility companies installing energy efficient equipment, triggering $800 million (as of 2012) of investments. Phase 3 of CHUEE has just started, using $10 million of GEF funding, and could add another $100 million or more of leveraged financing.

(ii) Debt

Revolving funds are the most common type of debt instrument used in GEF projects—UNDP alone has implemented 14 non-grant projects with revolving loan funds; other agencies using revolving funds include the IADB, World Bank, UNEP, and UNIDO. The second most common debt instrument is a loan or credit-line, which can be used to provide loans to local financial institutions for on-lending, or direct loans to private sector partners.

(iii) Equity

A recent example is the Africa Renewable Equity Fund, in which the GEF has provided $4.5 million that is placed in the Fund as Class A shares (with the return capped at 4 per cent) and; $25 million has been provided by other donors. By accepting a capped return, this tranche is expected to increase net returns to other investors by 2-3%, which will (1) increase the range of potentially investable projects by boosting the returns of the fund in circumstances where project returns might be lower than generally acceptable, and (2) mitigate the need in certain projects to seek more complex forms of donor or tariff support to make projects bankable, which often results in delays or project suspension. A potential investment of $4.5 million of GEF resources and $25 million of AfDB resources has been used as seed funding to attract $150 million of funding from partners. The fund managers will actively pursue renewable energy projects across Africa with a focus on meeting the goals of Sustainable Energy for All (SE4ALL).

Kids hugging on Lanzhou BRTThese equity investments are expected to attract significant additional private sector investment, primarily as debt, for the actual projects, with a pipeline already worth half a billion ($470 million). Another example is IADB’s MIF Public-Private Partnership Program, which is funded by a US$15 million GEF equity investment and expects to raise more than $260 million in targeted equity investments in funds to promote energy efficiency, renewable energy, and biodiversity in Latin America. The investments will contribute to energy savings, new renewable energy supply, reduction of greenhouse gas (GHG) emissions, preservation of natural resources, protection of biodiversity, and development of sustainable business models. The IADB has identified three leading funds for negotiation.

Each fund has identified a pipeline of investments in Latin America that will address selected program goals and has already attracted significant private sector investment interest. The GEF funding will be used along with IADB funding and other investor funding to help projects “get to close” and begin implementation.

 

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