Accessing climate finance - Lessons from CDKN

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Accessing climate finance - Lessons from CDKN

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Date: 18th November 2016
Author: CDKN Africa
Type: Feature
Countries: Africa, Mozambique
Tags: climate finance, COP22, infrastructure, water

 

Kamlesham Pillay and Charlotte Ellis discuss two key factors to financing climate-resilient infrastructure: bankability and the private sector. Here they share a presentation they gave at COP22 in Marrakech. 

To fully unpack the issues around financing climate resilient water infrastructure in Africa, it is critical to first understand the climate finance landscape – specifically the barriers and opportunities to accessing finance.

A team is currently evaluating the 27 climate finance related projects in developing countries that CDKN supported. Lessons learnt will fall under two themes: bankability and private sector engagement. The aim of the project is to highlight these learnings such that National Implementing Entities (NIE) and National Designated Authorities (NDA) can streamline their project development processes thereby accessing greater climate finance flows.

Bankability was selected as a theme as it is concerned with the ability to create successful proposals. Bankability can influenced by the source of funding (private vs. public sector), objectives of the stakeholders and the needs of the recipient, project type (mitigation or adaptation) and the use of financial instruments in packaging the project.

The private sector is critical to ensuring climate finance is scaled to the appropriate levels. Sustainable development needs to be continuous and extends into the long term – something with which the private sector should be concerned.

However, one of the primary determinants to private sector involvement is the type of project to be financed. Certain projects types such as those within the renewable energy sector tend to be more attractive to the private sector as there is a defined revenue stream which can enhance the return on investment. Conversely, other projects types under adaptation tend to less attractive owing to the issue of tangibility. Such projects do not always have obvious outcomes for the private sector.

The private sector may also be reluctant to invest owing to significant risks being prevalent. Risk reduction measures such as the use of insurance or guarantees can possible entice the private sector.

One of the most significant barriers in Africa is the lack of capacity of local financial actors, which translates into difficulties in selecting financial instruments as well as the different climate funds that may be approached for particular project types. In addition, climate finance access is limited by the credit rating of many countries which can further deter private investors.

Enhancing climate finance access in Africa must focus on the identification of the appropriate financial instruments. It will also be necessary to package project finance into a form that aligns with the investment frameworks of different climate funds. Lastly, if projects require private sector involvement then it is critical that these actors be involved from the outset during the planning phases of the project.

To enhance the climate finance instrument understanding amongst NIEs and NDAs, CDKN is currently developing a handbook that seeks to illuminate on the different forms of financial support recognised by different climate funds. This will be supplemented by case studies from each climate fund demonstrating the practical workings of different instruments.

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