Green guarantees are a key component of the EU’s drive to support energy transition and climate adaption in developing countries. A large share of the investment programmes will be implemented by DFIs, as FMO’s David Kuijper explains.
“In this time of climate transition, the war in Ukraine and major macroeconomic stress, it is especially important that development banks fulfil their countercyclical role”, says David Kuijper, who manages Dutch entrepreneurial development bank FMO’s public investment and blended finance department.
“There is a lot of debate on how we can best mobilise flows of private capital for projects that are bankable but have difficulty to find investors. Guarantees are an instrument that is ideally suited to redistribute risks. Of course guarantees alone are not enough, you have to build a house around it. The EFSD+ program allows us to do so.”
As Impact Investor reported a few weeks ago, the European Fund for Sustainable Development plus (EFSD+) has approved €6.05bn in financial guarantees to support 40 investment programmes in sub-Saharan Africa, Latin American and Asia Pacific. The guarantees are expected to generate more than €50bn in investments in key sectors of the EU’s Global Gateway, such as renewable energy, digital infrastructure and climate resilience and health.
The programmes will be implemented by European financial institutions, such as the European Investment Bank, the European Bank for Reconstruction and Development, and development financial institutions (DFIs) within the member states.
These DFIs submitted seven joint EFSD+ proposals, supported by their EDFI Management Company platform. All of these proposals were successfully approved, for a total amount of up to €1.28bn.
Additionally, 20 individual proposals were accorded to European DFIs Cassa Depositi e Prestiti (Italy), Cofides (Spain), DEG (Germany), Finnfund (Finland), FMO (Netherlands), IFU (Denmark), and Proparco (France), amounting to €2.4 billion.
“By entrusting such a large part to the European DFIs”, Kuijper says, “EFSD+ as well as the EU member states show that they trust us to create the right conditions for effective participation of the private sector in the implementation of the programme.”
Scaling up existing programmes
Three FMO proposals for EFSD+ have been approved, for a total amount of slightly over €500m. Kuijper expects contract negotiations with the European Commission to start soon and hopes at least two of the three will be able to start this year.
Guarantees worth €265m are meant for an extension of the existing Nasira programme. This is a risk sharing facility, meaning it passes on a second-loss guarantee given by the European Commission and the Dutch government to local banks.
With this guarantee, they can lend to people they would usually consider too risky, such as farmers as well as young, female, and migrant entrepreneurs. Nasira became effective under the EFSD programme in 2019, with a focus on sub-Saharan Africa and countries neighbouring Europe.
With the expansion of the EU guarantee programme, Nasira can be scaled up to other regions. Building on lessons learnt, the programme will also stimulate local production and food security, as well as clean energy solutions. “We expect that with the additional guarantee”, says Kuijper, “in combination with a technical assistance programme, this top-up package will help to leverage €1.3bn of loans to medium and small companies globally.”
A second FMO programme to be expanded with the assistance of EFSD+ is the Dutch Fund for Climate and Development (DFCD). The mission of this fund is to create ‘scalable climate solutions’ to increase the resilience of communities and ecosystems most vulnerable to climate change.
Since the programme’s inception in 2019, 30 projects were contracted with grants, development equity and debt solutions in developing countries.
“We expect the initial DFCD’s €160m grant to be fully invested by the end of 2023”, Kuijper says. “A top-up is needed for continuation. With this we will be able to significantly scale the current activities: via a EFSD+ 50% guarantee (up to €150m), the fund will be topped-up with a €300m loan. This allows us to mobilise commercial money much faster than we originally anticipated.”
A third FMO proposal to EFSD+ is the creation of the £90m Indesta fund, offering an on-demand credit guarantee to be applied on a project-by-project basis, starting at financial close of a transaction and decreasing with loan repayments. The programme aims to support the bankability of relatively new energy sub-sectors, such as decentralised energy generation – mainly mini-grid and metro-grid projects – , transmission and distribution, and energy storage projects.
Checks and balances
Asked about lessons learnt so far about he guarantee instrument, Kuijper mentions again “the house” that has to be built around the instrument to make it most effective.
“With Nasira and DFCD we have created the environment for guarantees to thrive. Combining the guarantee with the right amount of technical assistance and solid and transparent contracts are key to the success of these facilities. That is also true for funded activities of the EC, such as Climate Investor One and Two. The more we are able to set up such facilities, the greater the effectiveness of guarantees.
He continues: “Governance is important, including checks and balances, to make the instrument as effective as possible. Effective risk management means that you filter out the hidden contingencies, or hidden liabilities. Also, you need to improve your ability to develop a pipeline of high quality projects.”
Offering risk-sharing solutions such as guarantees should be a two-way street, he adds: “The public sector should not unconditionally de-risk the private sector. There is a lot of perceived risks, and there is a fair chance that guarantee facilities show better financial results than expected.”
“It is important for the taxpayer to see that these facilities do not lead to excessive financial returns that only benefit the private sector. It is therefore very good that the Commission continues to build up its investment and finance expertise. With that expertise they can engage more actively in the set-up and governance in those facilities and bridge the language and culture divide between the public and private sector.”