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OPINION: Boosting private sector investment in low-emissions development

Ari Huhtala of CDKN reports from the Low Emissions Development Strategies (LEDS) Asia Forum.

The Low Emission Development Strategies (LEDS) Global Partnership features three regional groupings that bring together policy makers and practitioners to debate issues of particular relevance to their conditions and state of development. The Asia LEDS Partnership held its first Asia LEDS Forum (ALP) in 2012 and interest in engaging in this process continues to grow with each annual meeting attended by more keen participants.

The third ALP was held in Yogyakarta, Indonesia, 11-13 November 2014, with an emphasis on peer learning, skills acquisition, and strengthening of policymaker and practitioner communities. There was a series of technical sessions on a range issues including case presentations and analysis on effective LEDS practices, innovative approaches to strengthen linkages across sectors for successful LEDS planning and implementation, prioritizing mitigation options, designing nationally appropriate mitigation actions and sector LEDS, and creating monitoring and evaluation frameworks.

My particular interest was to follow what was said about the role of the private sector which is essential in ensuring that transition to LEDS in Asian economies becomes a reality. There is evidence of a steady increase in government commitment to launching policies and schemes that support this transition. There are also numerous examples of successful pilots, but this has not resulted in a paradigm shift from business as usual.

A major gap remains between conducive central government understanding and the provincial, district, city and community levels. Both top-down and bottom-up initiatives are needed. In his keynote address Dr. S.S. Krishnan, Head of India’s Energy Efficiency and Sustainable Energy Policy Programme at the Centre for Study of Science, Technology and Policy, made a bold statement that LEDS can actually accelerate development with lower cost long-term solutions. He also highlighted the importance of continuity between national and sub-national policies, and particularly the key role of a strong consultative process that engages a critical number of stakeholders to enable a sense of ownership by those who invest and implement infrastructure and industrial projects. The private sector is a key participant in this process.

CDKN convened a session “Increasing financing for LEDS through private sector action” which featured presentations on green infrastructure challenges and opportunities by Harris Wahyu from the Indonesian Chamber of Commerce and Industry, perspectives from a financial institutions by Erwanza Nirwan from Bank Mandiri (largest financial institution in Indonesia), and constraints for independent power producers (IPPs) in developing mini-hydro projects by Mark Hayton from PT. Entec and Himsar Ambarita from Sumatera Utara University.

All speakers gave generally positive messages about improving government commitment to LEDS, but several challenges remain. Despite overall good economic progress low labour productivity remains a serious challenge in some of the lower middle income economies in the region. Another concern for infrastructure investments is the availability of land. There are sometimes conflicting policies which create confusion among investors. Banks are still primarily commercial rather than project financiers, and particularly smaller companies and projects consider lending conditions too hard to comply with.

Banks are usually looking for much larger financial volumes than the individual project proposals represent. This would require a change of attitude in financial institutions to see the advantage of starting small, to get going and gradually build up the expected scale. Bank Mandiri’s example of criteria for assessing commercial loan proposals is quite universal: assess trends, market demand, customer capacity, available incentives, and likely benefit. LEDS investment needs to meet these criteria particularly if no specific earmarked concessional facilities are available.

Useful support measures to facilitate LEDS investments through the private sector include assistance in preparing bankable project proposals that explain the business case of a renewable energy or energy efficiency investment to a financial institution in a language and with arguments that they understand. Related barriers include maximum loan equity ratio, grace periods, limitations to use loans for acquiring land, collateral requirements, availability of qualified external consultants for verification, perceived risk of cost overruns, and absence of guarantee schemes for small projects. Support programmes should not be overcomplicated but follow proven engineering and implementation models. Experience shows that projects in bio-energy have been quite readily embraced by financial institutions whereas solar power plants are much less understood.

Interviews carried out with independent power producers in Indonesia have revealed that generally district governments have been very supportive of their projects. They particularly value the experience in establishing “single window” facilities (Pusat Penanaman Modal dan Perizinan Terpadu, PPMPT) which has introduced a fast-track system for simplifying and accelerating the process of applying for permits and resources.

Slides of all presentations made at the ALP are available on line here.

Photo credit: Dominic Sansoni / World Bank

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