5.3.3 Potential Financial Solutions
Slow diffusion together with the consideration of cost and availability of
finance suggest that there is potential for innovation and focus to help support
and accelerate the transfer of environmentally sound technology. In particular,
certain types of finance appear to offer particular potential for helping to
finance the transfer of technology, although they may require adaptation to
the specific issue; it is worth considering these in more detail. (Mansely et
al., 1997a and b).The public-private partnerships discussed in Section
5.6 can play a role in developing and implementing these solutions.
Project finance. Project finance is the packaging of investment into
specific, stand-alone projects. Notably there is only limited recourse to other
parties (e.g., the promoters and financiers) if the project runs into difficulties,
so the project has to stand on its own merits. Of particular relevance to climate
change are energy projects, which are frequently financed this way. Project
finance uses a range of finance instruments and typically consists of a mixture
of debt (normally secured loans) and equity (strategic investors and institutions).
Project finance aims to reduce risks and thus financing costs through a series
of robust contracts, notably to charge for the services provided (e.g., power).
Negotiating these contracts can be difficult and time consuming. Often there
can be some flexibility over ownership of the facility - such as build-operate-transfer
(BOT) structures. One key issue for climate change technologies is the need
to achieve a certain scale. To justify the transaction costs involved, project
finance normally requires sums of US$20 million and above. This can restrict
its applicability in many areas such as renewable energy and energy efficiency
where only few projects in certain sectors reach this size. Project finance
is particularly relevant to government-driven pathways, and to the transport,
energy, solid waste and coastal zone adaptation sectors.
Leasing. Leasing is a highly flexible form of finance used throughout
business to finance everything from photocopiers to aircraft. In 1994 over US$350
billion of new equipment, machinery and vehicles were financed through leasing,
and some US$44 billion in developing economies. It is often packaged as a form
of sales financing - i.e., it helps customers of a company buy that company's
equipment. Despite higher spreads than conventional lending, leasing offers
several advantages such as simplified security arrangements, convenience and
speed, flexibility, low transaction costs and frequently tax advantages. The
principle constraint on the development of leasing has been access to local
currency medium-term lending. MDBs, notably the IFC, have been active in promoting
leasing businesses and have found it to be a successful form of investment (Carter,
1996). Leasing offers potential to be a major source of finance for the transfer
of EST, particularly to the business community (private-sector-driven pathways).
Leasing has been used to buy various types of environmental technology from
monitoring equipment to wind turbines, although it has not been possible to
identify any leasing company focusing specifically on environmental technology.
There is scope to encourage leasing companies to support the transfer of EST
through selective tax incentives, information sharing and bringing together
environmental entrepreneurs and leasing companies. Leasing is particularly relevant
to the private-sector-driven pathways, although it can be used by governments,
and especially the industrial sector, although it can be used in several other
An example of an established and successful leasing company that focuses specifically
on environmental technology is Towarzystwo Inwestycyjno-Leasingowe Ekoleasing
S.A. (joint stock company Investment and Leasing Society Ekoleasing) in Poland.
It was established in 1993. Currently the share capital is almost US$1 million.
Over 40% of the total value of PLZ 33 million (about US$9 million) of contracts
concluded in 1998 was leasing of specifically environmental technologies.
Private equity from strategic investors. Strategic investors, often in
the form of multinational corporations, have the potential to be major investors
in technology transfer. As large organisations they have ready access to finance.
As well as using capital internally they can also act as external investors,
investing in projects or businesses. They look for a financial return but also
usually expect other business benefits, such as a role as supplier to a project
or investing in a joint venture as a way to gain access to new markets. They
frequently bring additional skills and expertise as well as finance. They are
major suppliers of equity to many energy projects already, and with many major
companies becoming increasingly interested in climate change (such as Enron,
BP and Shell) are increasingly investing in renewable and clean energy internationally.
This type of investor is also the most interested in the flexibility mechanisms
of the Kyoto Protocol, as indicated by their participation in the various precursor
instruments such as joint implementation and the Carbon Investment Fund, probably
because they can see benefits beyond the strictly financial ones.
Portfolio investment. For listed companies in developing countries, issuing
new stock is an option for raising capital that can be attractive. Doing so
enables risk capital to be raised, without involving loss of control, for example
to overseas partners, and enables investment in several needed areas, which
may include energy efficiency or environmental technologies, without changes
to management or business structure. However, the vast majority of portfolio
investors will place little direct importance on the investment in environmental
technologies, and will instead consider more general aspects of the firm and
management's track record when deciding to purchase the new shares. Furthermore,
the ability to raise such capital cannot be guaranteed, and depends on market
conditions and on the company's performance at the time.
Venture capital. Venture capital is particularly relevant to the development
and transfer of new technologies. Venture capitalists are prepared to back risky
investments in return for high returns and will invest in small companies, such
as those who have developed new technology, and/or have difficulties raising
capital from most other investors. Venture capitalists have a relatively long-term
focus, aiming to hold companies for several years before selling them, and have
a more active approach than most other types of investors, in terms of participating
in management of the company. This means they can play an active role in supporting
technology transfer if it forms part of the business development plans of their
investee companies. Venture capital is largest in the US but has grown recently
in the rest of the world, including in developing countries where multilateral
institutions have provided substantial support. Venture capitalists have tended
to focus on high-return sectors such as computer software and biotechnology,
and to date only a relatively small amount of finance has gone into environmental
business, and only a few funds focus on environmental ventures. Indeed, the
environmental sector has had a very mixed track record in delivering returns
to investors. However, there is growing interest in venture capital funds with
an environmental focus and a number are expected to be launched in coming years.
Venture capital is predominantly relevant to private-sector-driven pathways,
and especially important in the industrial sector, with some relevance in the
transport and energy sectors. It does require a relatively sophisticated financial
Micro-credit. Micro-credit is the provision of small amounts of finance
to individuals. While the basic concept is the same as traditional banking,
the attitude to risk is radically different, because micro-credit institutions
are prepared to lend to those ignored by conventional financial institutions
- those on low incomes or with no assets. A particular emphasis is on enabling
access. It is often provided by non-conventional financial intermediaries such
as cooperatives, farmers' associations and distributors. Micro-credit has been
successful in many areas now and is receiving increasing attention from Multilateral
Financial Institutions as a way of encouraging development (Ledgerwood, 1999).
Many believe there is substantial scope for adapting and focusing micro-credit
to finance the uptake of ESTs at the household level. However, others have argued
that micro-credit is generally not suitable for environmental technologies.
because the credit is usually short-term (less than 1 year), comes with high
interest rates, is limited to small amounts (US$100, whereas a solar home system
might cost US$600) and is not granted for capital investments (van Berkel and