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Sources of Funding
A very useful summary of the principles of Project Financing, supported by IEA Coal Research and the UK Department of Trade and Industry,and with a focus on Clean Coal Projects but with much wider relevance, is available from the UK DTI web site.
The following lists the main types of sources of funding. You can follow the links to more detailed descriptions of the rules and systems for granting investment approval and for links to the web pages of the sources themselves.
Multilateral Development Banks: African Development Bank, Asian Development Bank (ADB), European Bank for Reconstruction and Development (EBRD, Inter-American Development Bank (IADB), World Bank Group, United Nations.
OECD/GREENTIE sponsoring countries: Australia, Denmark, France, Italy, Japan, Korea, Netherlands, Norway, Sweden, UK, USA
Multilateral Development Banks
The international Development Banks are one of the main arms of funding assistance to developing economies and economies in transition. The principals are the governments in the recipient countries and, usually with assistance from the banks they are responsible for managing project loans. The main banks under this category include:
African Development Bank
The African Development Bank Group is a multinational development bank supported by 77 nations from Africa, North and South America, Europe and Asia. Headquartered in Abidjan, Cote d’ Ivoire, its mission is to contribute to the economic development and social progress of its regional members - individually and jointly through loans, equity investments, and technical assistance. The Bank’s mission, therefore, is to assist Regional Member Countries (RMCs) to break the vicious cycle of poverty in which they are entrapped. The Bank’s operational focus is on the following key areas:
- at the country level, three broad sectoral themes, namely agriculture and rural development, human resource development and private sector development;
- one generic theme, namely, governance;
- at the regional/continental level, economic integration and co-operation; and
- two cross-cutting issues, namely, environment and gender, which permeate all aspects of the development effort, both at the national and regional levels.
In each of the sectoral areas, the Bank would ensure that environment and gender issues are mainstreamed in a fully participatory manner. For those sectors (such as power, industry, telecommunication and transport), where the Bank does not intend to play a leadership role it is building synergy and consolidating gains by targeting its assistance so that it complements that of other development partners.
Asian Development Bank
The Asian Development Bank (ADB) is engaged in promoting the economic and social development of countries in the Asian and Pacific region. The bank encourages productive and operational efficiency. It aims to attract private investment and participation in energy developments by the removal of unjustified and uneconomic subsidies which limit commercial viability. Based on its Energy Policy Paper of 1995, the broad focus for recent energy projects has been the restructuring of the power sector, expansion of supply, enhancement of operation efficiency and institutional strengthening. ADB have made loans against energy efficiency and renewables based projects.
European Bank for Reconstruction and Development
The European Bank for Reconstruction and Development (EBRD) was established in 1991 and exists to foster the transition towards open market-oriented economies and to promote private and entrepreneurial initiative in the countries of central and eastern Europe and the Commonwealth of Independent States (CIS) committed to and applying the principles of multiparty democracy, pluralism and market economics
The EBRD seeks to help its 27 countries of operations to implement structural and sectoral economic reforms, promoting competition, privatisation and entrepreneurship, taking into account the particular needs of countries at different stages of transition. Through its investments it promotes private sector activity, the strengthening of financial institutions and legal systems, and the development of the infrastructure needed to support the private sector. In fulfilling its role as a catalyst of change, the Bank encourages co-financing and foreign direct investment from the private and public sectors, helps to mobilise domestic capital, and provides technical co-operation in relevant areas. It works in close co-operation with international financial institutions and other international and national organisations. In all of its activities, the Bank promotes environmentally sound and sustainable development.
Inter-American Development Bank
The Inter-American Development Bank (IADB) is the principal source of multilateral financing for economic, social and institutional development projects in Latin America and the Caribbean. IDB is the oldest and largest regional multilateral development institution, being established in of 1959 to help accelerate economic and social development in Latin America and the Caribbean. Since this time it has become a major catalyst in mobilising resources for the region.
The Bank's Charter states that its principal functions are to utilise its own capital, funds raised by it in financial markets, and other available resources, for financing the development of the borrowing member countries; to supplement private investment when private capital is not available on reasonable terms and conditions; and to provide technical assistance for the preparation, financing, and implementation of development plans and projects. The Bank provides loans and technical assistance using capital provided by its member countries, as well as resources obtained in world capital markets through bond issues. The Bank also promotes and participates in a significant number of project co-financing arrangements with other multilateral, bilateral and private organisations.
The Bank's operations cover the entire spectrum of economic and social development. In the past, Bank lending emphasised the productive sectors of agriculture and industry, the physical infrastructure sectors of energy and transportation and the social sectors of environmental and public health, education and urban development. Current lending priorities include poverty reduction and social equity, modernisation and integration, and the environment.
World Bank Group
The World Bank is the largest multilateral development finance organisation. The World Bank finances projects in developing countries by making large loans, usually over US$50 million, with long maturities, 15-20 years, and grace periods of usually 5 years. The bank aims to reduce poverty and improve the standard of living by promoting sustainable growth. By and large the Bank funds support studies, planning and infrastructure improvements.
The World Bank consists of four closely associated institutions, the International Bank for Reconstruction and Development (IBRD); the International Development Association (IDA); the International Finance Corporation (IFC); and the Multilateral Investment Guarantee Agency (MIGA). Of these it is the IFC which is currently most active in direct investment in renewables. The role of IFC includes promoting growth in developing countries through support of the private sector. It invests in commercial enterprises by means of loans and equity financing in collaboration with other investors. Always a minority partner, IFC seeks project sponsors from industrial and developing countries around the world with which the corporation can from joint enterprises. In addition to funding, it also provides financial, legal and technical advice to private enterprises.
Recognizing that global warming will have the most impact on its borrowing client countries, in 1999 the Executive Directors of the World Bank approved the establishment of the Prototype Carbon Fund (PCF). The PCF, with the operational objective of mitigating climate change, aspires to promote the Bank's tenet of sustainable development, to demonstrate the possibilities of public-private partnerships, and to offer a "learning-by-doing" opportunity to its stakeholders. The PCF is intended to invest in projects that will produce high quality greenhouse gas emission reductions that could be registered with the United Nations Framework Convention on Climate Change (UNFCCC) for the purposes of the Kyoto Protocol. To increase the likelihood that the reductions will be recognized by the Parties to the UNFCCC, independent experts will follow validation, verification and certification procedures that respond to UNFCCC rules as they develop.
The World Bank also has several initiatives that are aimed specifically at clean energy development. These include: the photovoltaic market transformation initiative (PVMTI); the solar development corporation (SDC), the renewable energy and energy efficiency fund (REEF); plus the Bank's involvement in the Global Environment Facility.
United Nations
A number of United Nations agencies have programmes which provide assistance to developing countries. Often the focus of these is on technical assistance rather than formal projects. The UNDP is the world’s largest source of grant funding for development co-operation. Following the development of the UN Initiative for Sustainable Energy, energy is seen as a central issue and is regarded as the means of achieving the goal of improving a host of economic and social concerns. UNDP sets out to help implement this strategy by:
- mobilising support for indigenous capacity building;
- encouraging national Governments to introduce policy measures to foster sustainable energy development;
- innovative demonstration projects;
- supporting national energy action programmes.
The United Nations Environment Programme UNEP, supporter of the SANet service to which this website is affiliated, also supports:
International Aid Funds of OECD countries
International development finance from bilateral and multilateral institutions is potentially very important to the financing of energy investments. The humanitarian and environmental agendas of these organisations generally involve increasing of standards of living, including access to electricity. These international organisations aim to be involved where commercial lenders find the levels of risk unacceptable, or where environmental costs cannot be met.
Most developed countries have bilateral development finance organisations. These are similar in objectives to the multilateral aid agencies, but require equipment or services to be sourced from within the country. While the characteristics of these corporations vary, all of them promote joint ventures between their own country’s companies and partners in emerging economies. Often they seek to foster technology and know-how transfer. Sometimes they have a regional or geographic focus. All offer a varying mix of loans, equity and guarantees. Multilateral grants from the development organisations provide the most direct support for development where market forces are insufficient. Multilateral assistance usually takes the form of ‘soft’ support for development e.g. in the form of services and consultancy.
Export Credit Agencies (ECAs) are public or private sector organisations that provide insurance and guarantees for risks associated with the export of goods, focusing especially on the non-business risk like political risk, or repatriation of profit. These guarantees are often used to back commercial bank loans. Some agencies provide both (soft) loans and insurance. Commercial banks which specialise in export finance can help in arranging the most appropriate banking package and negotiating terms. Equipment suppliers or manufacturers can also be of assistance in arranging export finance. Forfaiting is where a commercial bank purchases the trade receivables, at an agreed discount. It enables a seller to offer credit terms (30 days to eight years) to overseas buyers and still receive payments soon after delivery of the goods.
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