Identifying Sources of Financing

Sources of financing for EE projects in emerging markets range from commercial banks, to specialized EE funds, to socially responsible investors.

Financing through commercial banks remains difficult, in many cases, because EE investments often do not meet the standard investment criteria, such as collateral requirements. However, a growing number of specialized financing sources for EE efficiency are presently available. Each source has its own set of priorities and criteria used to select projects for investment. However, all of the sources have a commonality—they want to invest in projects that will generate enough EE savings cash flow to repay their investment. To obtain financing, the investors should be convinced that the project will be able to repay its financing.

This section describes some of the key sources currently available to finance EE projects in emerging markets. While other sources exist, the institutions have departments that are active. For financing EE projects, each country should rely on its domestic resources more than on the external sources. Foreign aid is not a sustainable source of funding, although it plays a significant stimulating role in domestic resource mobilization. Only domestic funds can assure long-term financial sustainability. The state should set realistic conditions, and not be too ambitious. Environmental authorities need time to earn the credit worthiness to access funds such as municipal bonds. Through performance standards, the state should provide incentives to use the best available environmental technology. Figure 9.7 shows financing channels for EE projects.

Figure 9.7 Financing Channels

Figure 9.7 Financing Channels

Source: Authors.

External financial resources are needed for at least five purposes:34

• To bridge the gap between the domestic demand and supply;

• To resolve cash flow problems. The outputs of a project accrue only after months or years whereas the inputs (costs) must be paid immediately;

• To cushion the short-term impacts of policy reforms, or to pay compensations;

• To cover the foreign exchange components of investments and

• To fix and clean up contaminated sites.

Banks are interested in EE only in case they can accept the risks, returns and transaction costs. The risks must be adequately balanced by the returns: the greater the risk, the greater must be the return.

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