M02_L3_Presentation_Script.pdf

Module 02Climate FinanceLesson 3The Role of National Development Banks (NDBs) to Scale-UpPrivate Finance

Climate Finance Module 2

Presentation Script

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Module 2: Lesson 3 – The Role of National Development Banks to Scale-Up Private Finance Presentation Script

Welcome to Lesson 3: the role of national development banks to scale-up private finance.

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1.2 Key Publication

This lesson is based on the information and findings from the Report “The Role of National Development Banks in Catalyzing International Climate Finance” published by the Inter-American Development Bank in 2013. The report discusses the unique role that national development banks (referred to as NDBs from hereon) can play in scaling up private financing for climate change mitigation projects, specifically, how NDBs intermediate international and national public climate finance in their respective local credit markets and the conditions that would be needed for NDBs to be most effective in catalyzing climate finance investing. Click the link to read the full report.

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1.3 About Lesson 2

In this lesson, you will better understand the role of NDBs in scaling-up climate finance to support low carbon growth. You will specifically learn about the financial instruments NDBs use and their leverage potential to scale up private sector participation. Case studies of NDBs scaling up climate finance in Latin America and the Caribbean (referred to as the LAC region) will also be presented.

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1.4 About Lesson 2

Some key questions that will be addressed during this lesson include:

Why do NDBs have a critical role as catalyzers of climate finance?

What is the capacity of NDBs to support climate finance investments?

What are the financial instruments that NDBs use to leverage climate finance?

What are the needs of NDBs for effectively scaling up climate finance?

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1.5 What is a National Development Bank?

We know from previous lessons that mobilizing private sector climate finance is critical in order to tackle climate change. Public financing from NDBs can be used to leverage private investment, contributing directly to the incremental cost of implementing low-carbon projects. In this lesson, we can define NDBs as government-owned financial institutions with a specific public policy mandate to promote a country's economic development. NDBs have diverse ownership structures, and differ in terms of their financial and policy objectives, supervisory requirements, and financial instruments.

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1.6 NDB Capacity to Support Climate Finance Investment

One of the goals that NDBs have is to contribute to the incremental cost of low-carbon projects by increasing the demand for investments and supply of finance in climate friendly projects. Take a moment to review how NDBs are uniquely positioned to achieve this goal of increasing demand for climate finance investment.

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1.7 NDB Capacity to Support Climate Finance Investment

Another goal that NDBs have is to contribute to the incremental cost of low-carbon projects by providing the necessary incentives to mobilize climate-friendly investments from the private sector. Take a moment to review how NDBs are uniquely positioned to achieve this goal of mobilizing climate finance investment.

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1.8 Key Characteristics of NDBs

NDBs have a privileged position in their local markets. Given a number of characteristics, NDBs can play a potentially crucial role in scaling up and delivering climate finance directly or by leveraging private capital. Click each of these characteristics to learn more about what makes NDBs well suited to scale up climate finance. On the next screen, you'll learn more from a concrete example.

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1.9 Example of NDB Characteristics in Practice

As an example, Mexican NDB National Financiera has established itself as an innovator, incubating novel and catalytic financial instruments to support local micro, small, and medium enterprises to maximize their business opportunities. NAFINSA is able to catalyze private capital to projects from its unique NDB position, channeling international resources and connecting funds to local players, as well as structuring financial packages taking into account constraints.

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1.10 Financial Instruments NDBs Use in Scaling-Up Climate Finance

Now that we have reviewed the unique characteristics of NDBs that well-position them to scale-up and mobilize climate finance, how exactly is this achieved? NDBs employ specific activities and financial instruments that can address both demand for, and supply of, climate finance.

During the pre-investment phase, NDBs focus on increasing and structuring the demand for climate finance by creating an enabling business environment that is conducive to making climate-related investments.

During the investment phase, NDBs have the goal of attracting capital-both debt and equity. We will now turn to learn more about each in greater detail.

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1.11 NDBs Financial Instruments: Grants

Grants are one type of financial instrument used by NDBs to increase demand for, and supply of, finance. For example, grants supporting technical assistance can help the project or company become investment ready and strengthen the enabling environment for receiving investment. Grants can also be used to lower the interest rate, mixed with commercial credits and used as a guarantee fund for losses. These grants can be blended with loans from NDBs to support projects directly, or to channel funds via Local Financial Institutions. Click the link to view an example of an NDB's use of grants.

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1.12 NDBs Financial Instruments: Tier 1 Loans

Tier 1 loans are direct loans with some or all of the project obligor's credit risk assumed by the NDB. In this case, the NDB acts like a commercial bank, extending credit directly to a project or a company. The long-term financing can be senior debt or subordinated debt, putting the NDB in a role of secondary creditor. In these cases, NDB financing can be blended with concessional funding (grant or low-interest loans) from international climate partners. Click the link to view an example of an NDB's use of Tier 1 Loans.

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1.13 NDBs Financial Instruments: Tier 2 Loans

Tier 2 loans are loans by NDBs to Local Financial Institutions for on-lending. The NDBs take the credit risk of the local financial institutions directly, and in turn, they assume the credit risk of the project. As in the previous case, NDBs can blend their own resources with highly concessional resources obtained from their own government, international sources of public financing, and multilateral and bilateral institutions, in order to improve the terms and conditions of their funding to Tier 1 banks. As such, NDBs can offer better loan terms and conditions to project developers. Click the link to view an example of an NDB's use of Tier 2 Loans.

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1.14 NDBs Financial Instruments: Equity

Some NDBs have a mandate to provide equity. They invest in technology companies and projects directly, or via venture capital or seed funds. NDBs can be in a first-loss position vis-àvis other investors, or they can invest alongside other investors. The NDB investment in this case is seen as an anchor fund, drawing additional local and international capital. Click the link to view an example of an NDB's use of equity.

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1.15 NDBs Financial Instruments: Management of Funds

In some cases, NDBs are asked to manage funds on behalf of other entities. You may recall from Module 1 that climate funds can play an important role via concessional resources. In these cases, the NDB is not using its own resources, but rather the capital is provided by a third party, and the NDB manages it for a fee. As a public sector entity that acts within the financial sector, an NDB is an ideal player to take on this role, given the skills, expertise, and reliable systems that it has. More information about how climate funds function can be found in Module 1. Click the link to view an example of an NDB managing funds.

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1.16 NDBs Financial Instruments: Guarantees

Guarantees typically involve an NDB providing credit enhancement to a Local Financial Institution, or other third party financial intermediary providing direct funding or other investments. The NDB assumes some or all of the credit risk associated with a project. There are guarantees relating to credit risk as well as traditional credit guarantees which provide unconditional, irrevocable assurance to a third-party lender. Full credit guarantees may cover up to 95 percent of the payment obligations, while partial credit guarantees may cover 25 to 30 percent of the payment obligation. Click the link to view an example of an NDB's use of guarantees.

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1.17 Leverage Effect by LAC NDBs

Let's now review the leverage effect by NDBs.

Within the LAC region, the estimated climate change mitigation investment needs will range between 40 and 80 billion US dollars per year until 2030.

However, current financial resources to meet these needs in the region amount to only 15 to 25 billion US dollars per year.

NDBs have the ability to engage the private sector for scaling up financing through tailored and innovative financing solutions. There are a number of estimates of leveraging ratios available from NDBs, ranging from 1 to 3 as well as 1 to 8. That is to say, for every single dollar channeled by bilateral and multilateral banks, 3 to 8 US dollars are mobilized from commercial banks and other sources, such as capital markets or governments.

Click the two case study buttons to learn more.

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1.18 Summary

In this lesson, we have learned that NDBs play a significant role in scaling-up climate finance, drawing from key characteristics that make NDBs well-suited to increase demand for, and supply of, private sector climate finance. NDBs are already utilizing an array of financial instruments to promote private sector climate investments. Further enhancing the role of NDBs could help leverage and mobilize even greater amounts of climate finance to help fill the gap in climate change mitigation investment.

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1.19 Key References and Resources

You have reached the end of Lesson 3. Displayed are some links that you may visit for additional information.

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M02_L3_Presentation_Script.pdf