Sustainable Urban Infrastructure: Financing mechanisms and eco-efficiency
Descripción
Expert Group Meeting “Developing Eco-efficient and Sustainable Urban Infrastructure in Asia and Latin America” Bangkok, 10-12 February 2009
Sustainable Urban Infrastructure: Financing mechanisms and eco-efficiency
Ricardo Jordán Sustainable Development and Human Settlements Division Economic Commission for Latin America and the Caribbean
FINANCING MECHANISM FOR ECO-EFFICIENCY There are four main financial mechanisms: •
MARKET INSTRUMENTS – Commercial Banking, Insurers, Rating Agencies
•
PUBLIC INSTRUMENTS – Subsidies, Taxes, Incentives, Development Banking
•
INTERNATIONAL COOPERATION – Multilateral Banking, Official Development Assistance (ODA), Bilateral Agencies
•
PROJECT FINANCING INSTRUMENTS – Clean Development Mechanisms (CDM)
MARKET MECHANISMS •
PRINCIPLE OF ECUADOR (Commercial Banking): – Financial organizations are committed to evaluate and to consider social and environmental risks in projects that are being financed in developing countries; and to grant credits only to those projects that can prove the suitable management of their social and environmental impacts, like biodiversity protection, the use of renewable resources, waste management, protection of human health and population displacements, among others.
•
FRAMEWORK FOR INFRASTRUCTURE INDUSTRIES AND RELATED SERVICES: – COMMERCIAL BANKS: To evaluate credit and the credit capacity will depend on how eco-efficient is the project – INSURANCE COMPANIES: Elevated primes to high risk industries that have greater probability of GHG emissions, high use of natural resources and social exclusion (accesses to goods and services) – RATING AGENCIES: Companies that evaluate credit capacity could communicate the progresses in eco-efficiency to markets through the risk qualification and labeling
•
MARKET RESTRICTIONS – Financial markets take decisions regarding inconsistent and low quality information. – Low prices of natural resources facilitates their intensive use. – Main difficulties to quantify and measure risks’ costs on eco-efficient initiatives.
FINANCING MECHANISM FOR ECO-EFFICIENCY There are four main financial mechanisms: •
MARKET INSTRUMENTS – Commercial Banking, Insurers, Rating Agencies
•
PUBLIC INSTRUMENTS – Subsidies, Taxes, Incentives, Development Banking
•
INTERNATIONAL COOPERATION – Multilateral Banking, Official Development Assistance (ODA), Bilateral Agencies
•
PROJECT FINANCING INSTRUMENTS – Clean Development Mechanisms (CDM)
PUBLIC INSTRUMENTS • Fiscal instruments are needed, even though are less cost-effective for society (taxes, subsidies) • Financial incentives are useful, but high cost-effective to develop new markets. (preferential rates) • Voluntary instruments are effective depending on specific policy framework. (labeling, public buildings) • Regulation and control instruments are the most effective and costeffective instruments, if its applicability can be guaranteed by norms and law. • In order to ensure these instruments’ implementation, it is necessary to have participatory agreements, which have to be promoted.
DEVELOPMENT BANKING AT REGIONAL LEVEL (LATIN AMERICA AND THE CARIBBEAN) •
The region has a low development of capital market for medium and long term financing, thus development banks (DB) were created the mid 60’s.
•
DB are specialized systems for resources’ intermediation on medium and long term. They facilitate extra-banking services, which are uncovered by the traditional commercial bank.
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In their capacity of promoting agents of economic and social development, DBs act not only as financing organizations but also technical cooperation and capacity building institutions.
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DBs can respond to policies of innovation and financial complementing, for eco-efficient urban infrastructure projects.
SECTORIAL DISTRIBUTION OF THE LOANS PORTFOLIO (Percentage)
Source: Data from ALIDE 2004 Note: It includes 48 IFD pertaining to 16 countries of the region
75% DB correspond to public sector
RECOMENDATIONS • • •
Redefinition of development corporative mission to include eco-efficiency Financial intermediation process has to be made without political. interferences regarding credit allocation and instruments’ management. For small projects financing in sustainable infrastructure: – Formulate public policies that allow improving the capacity of local governments to capture resources in market – Improve management and regulation in order to facilitate monitoring risk and reduce transaction costs. Applying low cost technologies, accessible for this kind of institutions
Important: Capacity and effectiveness where financial system managements aren't capable to canalize resources towards eco-efficient projects, will depend on: • Services’ provision of low intermediation costs • Development of instruments and financial institutions that can adapt to: – different risk’s profiles – liquidity needs – timelines that eco-efficiency projects require
FINANCING MECHANISM FOR ECO-EFFICIENCY There are four main financial mechanisms: •
MARKET INSTRUMENTS – Commercial Banking, Insurers, Rating Agencies
•
PUBLIC INSTRUMENTS – Subsidies, Taxes, Incentives, Development Banking
•
INTERNATIONAL COOPERATION – Multilateral Banking, Official Development Assistance (ODA), Bilateral Agencies
•
PROJECT FINANCING INSTRUMENTS – Clean Development Mechanisms (CDM)
INTERNATIONAL COOPERATION •
International cooperation is crucial due to: – Strengthen government (national and subnational) institutional capacity – Improve environmental policies, regarding eco-efficiency – Improve incentives and taxes design, related to sustainable infrastructure
•
Private financial flows and development official assistance: – Extend the financial and technical capacity for the development of infrastructure projects.
RECOMENDATIONS •
It is necessary new cooperation modalities and mechanisms of international financing: – Creation of regional funds – Private donations – Global taxes to burden currency transactions; armament commerce and world contamination would allow to collect more than US$ 400,000 million (ECLAC, 2008)
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Reinforce internal resources mobilization require a set of economic and financial policies, that are oriented to develop financial markets and promoting financial savings on the long term.
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Improve financial intermediary instruments of the commercial banks and the Development Banking (DB). This one plays a significant role assigning credits to sectors and projects that hardly could be financed by commercial bank.
ECLAC (2008) Tendencias y Desafíos en la cooperación internacional y la movilización de recursos para el desarrollo en América Latina y el Caribe
MULTILATERAL DEVELOPMENT BANKING •
In the region operate seven MDB and also work several bilateral cooperation agencies that mobilize resources for soft loans and donations.
•
Main financing challenges of MDB are that many loans are carried out under competition schemes, creating tension and frictions among MDB.
•
Lack of coordination imposes high costs to countries whom do not count with enough administrative capacity to interact with each MDB or bilateral cooperation agency. Proportion of infrastructure loans of the Multilateral Bank of Development in the Region, in the Nineties %
100
100 90 80
73,9
70 60 50
43,1 37,7
40 30
22,9
29,8
27
20 10 0 BID
BM
CAF
BCIE
Fonplata
CDB
BDAN
Source: ECLAC 2003 Note: BID information is from 1991-2001; Data BM, CAF and BCIE from 1991-2000; Fonoplata 1990-1999; CDB 1999-2000; BDAN;1994-2000
RECOMENDATIONS •
For the promotion of eco-efficiency the challenge is to transform MDB and bilateral cooperation agencies into an efficient, effective and integrated financial network and complementary services: – Coordination efforts – Division of work – Complementing efforts among bilateral agencies, international organisms and multilateral development banks – Resources are destined in a strategic way, prioritizing sensible sectors like environment, infrastructure, etc. – It does not have to be priority to grant loans towards sectors that can attract deprived financing – MDB help to create a favorable investment climate and confidence to private investors
GENERAL CONSIDERATIONS FOR ECO-EFFICIENCY •
Prices must reflect real costs, so investments in eco-efficiency will be more profitable. A gradual retirement of the traditional subsidies could be considered within the plans, just like more expensive clean technology should establish concessions or tax discounts to overcome the barrier of market entrance costs.
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The design of concessions and/or discounts must have temporary limitations.
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In countries with smaller relative development, international financing and construction capacity is essential, specially considering the structure of the local market and institutionalism, so that uniform solutions carrying to suboptimal answers.
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Success will depend on a mix of instruments: – Standards, labeling and financial incentives – Regularization instruments and Information programs – Public leadership programs and hiring efficient and guaranteeing energy services
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Countries could promote building capacity, technical cooperation, information campaigns and pilot projects.
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Creation of financing funds represent the major challenge. While some countries can finance through internal mechanisms (like tariffs and taxes), others will have to rely on international financial support.
FINANCING MECHANISM FOR ECO-EFFICIENCY There are four main financial mechanisms: •
MARKET INSTRUMENTS – Commercial Banking, Insurers, Rating Agencies
•
PUBLIC INSTRUMENTS – Subsidies, Taxes, Incentives, Development Banking
•
INTERNATIONAL COOPERATION – Multilateral Banking, Official Development Assistance (ODA), Bilateral Agencies
•
PROJECT FINANCING INSTRUMENTS – Clean Development Mechanisms (CDM)
ENERGETIC EFFICIENCY IN THE BUILDING SECTOR AND CDM AS FINANCING MECHANISM POTENTIAL REDUCTION ESTIMATION IN DIFFERENT SECTORS IN 2030 AS FUNCTION FROM THE COSTS ASSIGNED IN ACCORDANCE WITH REDUCTION (US$/tons of equivalent CO2)
Esta sección esta basada en las siguientes investigaciones UNEP (2006), Buildings and Climate Change: Status, Challenges and Opportunities, IPCC, (2007):Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment; WBCSD, (2007) Energy Efficiency in Buildings: Business Realities and Opportunities. OLADE (2007) El Mecanismo de Desarrollo Limpio (MDL) en América Latina y el Caribe: Lecciones Aprendidas a nivel regional.
KEY ISSUES Between 1970-1990 the increase of global GHG emissions in the building sector was 75%. The sector is responsible from the 30 to 40% of the total used energies. Building industry have the major and at the same time cheapest ratio potential regarding initial studied sectors. Within available technology new constructions could reduce their consumption between 30 and 50% with respect to the old constructions. To May 2008 only one project has obtained the Certificate of Emissions Reduced (CERs) among 3,000 postulations.
MAIN OBSTACLES –
Many constructions, but their market individual participation are very small.
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Building sector has a long lifecycle, where interact stakeholders in different phases, poorly coordinated.
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Sector’s fragmentation entails divergent economic interests.
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Scarce information and knowledge in all the levels of construction sector regarding to climatic change.
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Perception of high risk business, lifecycle costs and benefits are underestimated, there are few records of real projects.
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Economic incentives to reduce energy use are weak, energy costs are small regarding total costs of a building construction.
MAIN BARRIERS •
CER are generally aimed to projects of Hidrofluorocarbons (HFC), Perfluorocarbons (PFC) and Nitrous Oxide (N2O).
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Projects of construction sector which present high CO2 levels, are not economically attractive for investors.
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Economic incentives are weak to justify transaction costs that require projects of this magnitude
• a) b) c) d)
Main sector’s problems are: The size of projects Market fragmentation Dispersion of incentives and information asymmetries Financial barriers
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The choice is to implement programmatic CDM because they provide: – a joint coordination – quality assurance – reduce the investment risk – attract new financing mechanisms
RECOMMENDED POLITICS AND INSTRUMENTS (I) •
It is essential to count with widen variety of policies and national instruments so that governments could generate incentives for mitigation measures. Its applicability will depend on: – national circumstances – understanding of its interactions – acquired experience
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For instruments and policies implementation have been identified four criteria to validate them: – environmental effectiveness – cost effectiveness – distribution effects, including equity – institutional viability
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Normative instruments, as regulations and standards, provide some certainty of emissions levels. But asymmetries or lack of information will block both products and consumers to respond to the prices signals. It is preferable to use other mechanisms, like instruments of normative character, although these do not foment the innovations nor a greater technological advance.
RECOMMENDED POLITICS AND INSTRUMENTS (II)
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Financial incentives stimulate development and diffusion of new technologies, but economically, they involve higher relative costs for governments.
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Taxes are an efficient form to internalize GHG emissions costs. They can determine a price for carbon, but they cannot guarantee a certain level of emission.
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Economic instruments based on the market, allow higher environmental efficiency because: – emissions volumes are determined – they establish a carbon price – location has distributive consequences – fluctuations of carbon price make difficult the estimation of commitments costs of emission permissions
RECOMMENDED POLITICS AND INSTRUMENTS (III)
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Promotion of voluntary actions increases the awareness of the interested parts, but majority of agreements does not reach emissions reductions beyond tendency.
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Informative instruments can have positive effects but their emissions impacts are difficult to be measured.
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Best documented results are those where: – Policies related to climate change are integrated with other more attainable development policies, which facilitates the implementation and barriers overcoming. – Consistent policies in R+D+I subject are settle down; these policies stimulate technological advances, reduce them and promote progress towards emissions’ stabilization.
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