Enhancing India’s Readiness to Climate Finance

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Lessons & Options for India Enhancing India’s readiness to access and deliver international climate finance Like Brazil, India should involve the private sector on strategic planning decisions on climate change to avoid operational barriers when implementing programmes such as the NCEF, PRGF, and VCF. India has been successfully in accessing climate finance through the CDM mechanism and more recently for wind and solar energy. A key lesson for India is to replicate this in other sectors and learn from China and Mexico to more strategically engage the private sector on climate change issues. In Brazil the private sector is represented on the steering committee of the Brazil National Fund on Climate Change, which provides confidence to the private sector on government actions, and which ensures that private sector concerns and market barriers can be clearly acknowledged in design and implementation plans. Similarly, China and Mexico have used their CDM experience more strategically than India to engage with the private sector on climate issues. For example, the China CDM fund provides advisory and financial services for the private sector, which has successfully attracted private sector investment into low-carbon initiatives such as feed-in tariffs, emission trading scheme pilots, and 45 46 the implementation of the Large Substitutes for Small (LSS) programme. Likewise, Mexico has used CDM experience to enhance the country’s capacity to take advantage of the potential for market-based measures. With the establishment of the Mexican Carbon Fund (FOMECAR), Mexico has been able to promote new investments in more efficient and cleaner technologies from both domestic and foreign sources, by incentivising the participation of private financial institutions in renewable energy projects through the provision of competitive finance and/or equity. 47 In some cases, India has implemented similar initiatives to those mentioned in other countries – for example feed-in tariffs or preferential financing arrangements for low-carbon projects. Yet the main different between these initiatives and those undertaken in Brazil, China and Mexico, is that India’s initiatives have suffered from weak uptake and lower compliance – mainly due to a low level of engagement with the private sector when designing these schemes. Readiness Gap 4 DFIs in India have limited capacity to implement climate-related projects beyond a narrow range of themes, sectors, and geographies. India therefore faces challenges in developing a pipeline of bankable projects, which could help remove barriers for project financers and increase climaterelated investment in the country. Bankable project are projects that have sufficient collateral, cashflow, and probability of success that give institutional investors the confidence to invest in them. Generally speaking, institutional investors are highly risk-adverse, particularly in emerging areas (such as climate-compatible development) where they have less experience financing projects. Investors therefore need to be sent strong signals to demonstrate that the risk-profile of investment is low, if countries want them to invest in climate-related projects. One way to send this signal is for countries to develop a pipeline of welldeveloped, low-risk projects that are ready to begin operations but currently lack adequate funding. However in India, many investors claim that a lack of bankable projects is preventing them from investing larger volumes in climate-related projects, and of spreading investment to new sectors and 45 The LSS programme was launched in 2007, and is intended to remove most of China’s existing small scale and inefficient power plants and energy intensive units from operation. The programme has been successful, but has faced barriers such as a lack of reliable emission data at the regional and sectoral levels, which India must be aware of when launching similar initiatives. 46 Vivid Economics (2012). Climate finance architecture in China. 47 The Nature Conservancy (2012). Climate finance readiness: lessons learned in developing countries. Ref: Ricardo-AEA/R/ED59216/Final Report 41
Enhancing India’s readiness to access and deliver international climate finance regions of the country. In this respect, a lack of expertise in preparing and developing new projects is a major capacity constraint which is limiting the overall absorptive capacity for climate finance in India. Lessons & Options for India Experience from Mexico shows that formally designating DFIs to be responsible for different sectors, themes, and activities across the national climate change response can help countries develop a pipeline of bankable projects by providing more sources and instruments for finance across a variety of sectors. Experience from China shows that focusing on capacity building at sub-national levels can help improve project development, design, and implementation that are the necessary first steps to developing a pipeline of bankable projects. In Mexico, DFIs have been given greater mandates to finance their national plans on climate change. The central role of DFIs in delivering the country’s national climate change strategy, has led to the development of programmes and projects across a broader range of sectors, themes and regions. For example, the Mexican DFI NAFIN manages a number of individual programmes, including: the Mexican Forest Fund which provides payment for environmental services; the Mexican Carbon Fund, which promotes the development and use of low-carbon-emission technologies; the Trust Fund for Electric Energy Savings which promotes efficiency; and Support Services for Agricultural Marketing which works to liberalise markets and channel financial resources directly to producers. Separately, another DFI which specialises in urban development, the National Bank of Public Works and Services (BANO BRAS), operates the Energy Transition Fund (FTE) to provide municipalities and low-income households with grants to increase energy efficiency through appliance and streetlight modernisation. These DFIs provide a combination of loans, training, and technical assistance to public authorities, NGOs, and businesses to implement their programmes. As such, investors in Mexico have the option of funding projects across a wider range of sectors and activities than in India. In China, the CDM Fund provides capacity building and training for the private sector, which has helped to remove market and technical barriers for project developers to design good quality projects. One of the main lessons from this experience is that government-supported readiness activities need to link capacity building and technical implementation at the early stages of the project design phase so that the project developers can submit technically viable proposals that adhere to appropriate fiduciary standards demanded by institutional investors or international financial agencies. With experience in developing high-quality projects that are successfully funded, project developers can slowly begin to expand their reach and develop a pipeline of projects. Developing a pipeline of bankable projects has been challenging for most countries and is not unique to India. In fact, India has a number of well-established DFIs (e.g. SIDBI and NABARD) that already manage some projects that generate climate co-benefits. However DFIs in India are not as formally linked with the national climate change response as in Mexico, nor have they explicitly mainstreamed climate change into their wider project portfolio. As such, they have limited capacity to develop bankable projects in new sectors & themes beyond the traditional RE and EE sectors (to a lesser extent), where institutional investors may see room for climate-related investments. Readiness Gap 5 Climate finance delivery institutions (e.g. DFIs) have limited ability to match finance needs with a blend of climate finance sources and instruments. Many of India’s peer countries are setting up new national climate finance institutions, which have the mandate to blend funding from multiple sources and allocate the funding to climate related activities using a variety of instruments that include grants, loans, equity, green bonds, de-risking, guarantees, and other forms of investment. Ref: Ricardo-AEA/R/ED59216/Final Report 42
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Enhancing India’s Readiness to Climate Finance

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