Special report: NDF and private sector development by Nordic Development Fund

Special report: NDF and private sector development

CLIMATE � MITIGATION � ADAPTATION � FINANCE � 2015–2016

Energy efficiency boosters in Latin America

Geothermal energy explodes in Kenya

Greener traffic in the Mekong subregion

EcoMicro

New microfinance products help entrepreneurs to invest in energy-efficient fans, cold storages and heaters.

LATIN AMERICA

Save energy for better business Energy efficiency is good for your profits and good for our climate. NDF and other development finance institutions are helping Latin American enterprises to invest in new technology, which cuts emissions and improves competitiveness.

Free Wind 2014 / Shutterstock.com

olivia is a paradox of climate change. When the global demand for minerals and fossil fuels in creases, prices peak and Bolivia earns a lot of mon ey. Natural gas is the cash cow of the country, gener ating almost half of all export revenues. But burning the gas across the border in Brazil and Argentina doesn’t help the great Andean glaciers at all. They are melting into mist. The equilibrium has been shaken, with dangerous consequences for nature and the peo ple relying on that balance. The floods are getting worse in the valleys and water sources are drying up in the Altiplano, the arid highlands. This means serious trouble for smallholder farmers and a difficult life for micro, small and medium-sized enterprises, which can hardly afford uncertainty in energy and water sup plies. When the commodities supercycle eases, pressure grows for a diversification of the economy, industry and export.

Mineral resources are abundant in Potosi highlands, Bolivia. 2 — CHANGE

Bolivians are right when they point out that climate change is not their fault. They haven’t created the bulk of emis sions into the atmosphere, but they are forced to bear the costs. They need to adapt to and miti gate climate change and cut emissions as much as they can. In addition, the Boliv ian government must make energy avail able to the poorest regions. According to International Energy Agency statis tics, less than 50% of people in rural areas have access to electricity. These are no small issues for a coun try which, despite recent growth, re mains the poorest nation in South Amer ica. Other countries in the region face similar pressures. SMEs provide 70% to 80% of work

opportunities in Latin America. There is a growing understanding in the region that efficient energy use is one of the best opportunities to increase company prof its, build stronger balance sheets and gain a competitive edge in global markets. The problem is finance. Efficient energy technology has a proven track record but it’s expensive for local SMEs. They suffer from a weak cap ital base and the lenders are quite con servative. Green finance hasn’t been at the core of the bankers’ product portfo lios. “This is now changing in Latin Amer ican countries. With the help of interna tional development banks, new kinds of microfinance products are being devel oped, tried and tested,” says Pasi Hell-

There’s no easy way out. Efficiency must be increased in all business sectors. man, managing director of the Nordic Development Fund.

Enter green finance

NDF is a joint Nordic development fi nance institution, based in Helsinki, Fin land. Hellman says that NDF has a public mandate to support projects which help partner countries to adapt to and mitigate climate change in the world’s poorest re gions. The focus is increasingly shifting to

private sector funding activities. One of the most interesting examples is EcoMicro, a USD 7 million programme which has established partnerships with twelve microfinance institutions in Lat in America. EcoMicro is co-financed by NDF and the Multilateral Investment Fund (MIF). The goal is to facilitate a new dawn for green finance product develop ment and manage climate hazards better. CHANGE — 3

Cédric Charest

The mighty Andean glaciers are melting. The poorest regions suffer most when water sources dry up.

Countries eligible for NDF funding

Funding shares between 3 continents

18 1

5 4

13 15

“Whenever severe weather damages the infrastructure, the risks involved with bank loan portfolios increases,” Hellman explains. This is the reason why energy ef ficiency investments are a win-win for banks and their SME customers. The latter need solar panels, LED lighting, modern water pumps and heat ers, biogas reactors and new generators, which reduce their dependency on elec tricity bought from the grid. There are also finance institutions that focus on farmers’ needs. One of them is Diaconía, which serves rural clients in the La Paz region of Bolivia. Diaconía’s target is to develop a green finance prod uct, which helps its rural clients to adapt to climate change. Its average loan size is USD 940.

Little money for a big change

Yes, it’s small money but it can make a big difference. Together, the partners of EcoMicro can fund clean energy and effi ciency investments for tens of thousands of farms and enterprises, enabling emis sion reductions of up to 20%. The Ecomicro programme has 4 — CHANGE

The focus of development financiers is shifting to private sector funding. We are scaling up, says Pasi Hellman, head of NDF. achieved very real results in Bolivia, Nicaragua, El Salvador and many other countries in the region. It has also suc ceeded in making some positive noise outside it: EcoMicro was recently named one of the twelve most inspiring Light house projects by the UNFCCC, the United Nations Framework Convention on Climate Change. “These activities are assisting com munities, cities, businesses, govern ments and institutions to move towards a low-carbon, highly resilient future,” said Christiana Figueres, the UNFCCC Ex ecutive Secretary, in a recent statement. The UNFCCC concluded that the introduction of green microfinance in Latin America is a groundbreaking inno

vation because it enables local enterpris es to access climate finance for the first time. According to Figueres, EcoMicro and other similar programmes are reduc ing emissions and building resilience to the adverse effects of climate change. “They are addressing poverty and promoting sustainable development. They are building capacity to channel in vestments into renewable energy. And they are improving the lives of people in communities that need it the most.”

Beware of melting

Latin America is one of the hotspots of climate change. Lima, the capital of Peru, hosted the global climate conference in 2014. That was a major event but it pales

Tough road to adaptation

Another promising and replicable case

The volume from 2009 to 2014

14 16

1. Honduras, 2. Nicaragua, 3. Bolivia, 4. Sierra Leone, 5. Burkina Faso, 6. Ivory Coast, 7. Togo, 8. Benin, 9. Ethiopia, 10. Uganda, 11. Kenya, 12. Tanzania, 13. Zambia, 14. Malawi, 15. Zimbabwe, 16. Mozambique, 17. Mongolia, 18. Pakistan, 19. Nepal, 20. Bangladesh, 21. Laos, 22. Vietnam, 23. Cambodia, 24. Sri Lanka

in comparison to the events taking place high above the city. According to the Peruvian govern ment, 40% of the glacial ice has disap peared in forty years. What took three thousand years to form has melted in half a human lifespan. This vital source of drinking water, irrigation and hydro en ergy is drying up. Lima is already facing water shortages. The same is happening in the Afri can and Asian mountain ranges with se vere consequences for the megacities lo cated downstream. The leading experts on climate change have calculated that there will be a need for USD 100 billion in climate funds to fight humanitarian ca tastrophes – each and every year. NDF and the development banks will provide part of that but much more will be needed. The key to success is in the hands of the private sector, says Pasi Hellman of NDF: “Public money is a generator which should attract and engage private sector players and promote innovation.” According to Hellman, NDF strives to increase its collaboration with the pri vate sector. The share of the private sector work has reached almost 30% of all the fi nancing NDF has approved during its cli mate mandate, which was established in 2009. NDF is now examining further op portunities to scale up these operations. “What has worked for microfinance in Latin America could also work on the other side of the Atlantic,” Hellman says.

Latin America 29%

EUR million

Asia 21%

Africa 47%

20 21

Multiple regions 3%

is a programme called ProAdapt, which helps small and medium-sized com panies to adapt and identify business op portunities generated by climate change. Then, adds Hellman, there is the Nordic Climate Facility, which links innova tive Nordic companies to local actors in NDF’s partner countries. “The perceived risk levels due to dif ficult business environments as well as the often relatively small size of the pro jects limit the interest commercial finan ciers have in getting involved. This is where NDF is needed.” The desire to attract private leverage is increasing. In the Energy Efficiency Facility, a co-funding project between NDF and the Inter-American Development Bank (IDB), USD 10 million provided by NDF is expected to generate up to 100 million in energy efficiency upgrades and off-grid renewables – delivering an attrac tive 10:1 leverage ratio for NDF capital. “NDF is adding great value to our private sector operations,” says Julie Katzman, executive vice-president and chief operating officer at IDB. “Experience has taught us that en gaging governments in climate change is tough, but that challenge pales in com parison with the daunting task of encour aging private sector companies to invest in mitigation and adaptation.” The best partnerships, explains Katz man, incubate and release ideas into the world, helping them to thrive, scale up and replicate. There is no nation which is not exposed to climate change. Every single country wins if the best ideas are shared globally.

THIS IS NDF… ×× The Nordic Development Fund is a joint development financing institution established by Denmark, Finland, Iceland, Norway and Sweden in 1989 ×× NDF has focused on climate change mitigation and adaptation in developing countries with a new mandate since 2009 ×× NDF pays special attention to value- adding and innovative projects, with increased impact on private sector development ×× Fund capital subscribed by the Nordic countries: EUR 1 billion ×× Annual approvals for new activities: approximately EUR 40 million ×× Funding for single projects in the range of EUR 2 to 5 million ×× Co-operates with international development banks, development agencies and organisations ×× Head office in Helsinki, Finland

…AND THIS IS HOW WE ENGAGE ×× Pooling resources ×× Creating risk-sharing instruments ×× Supporting small and medium-sized projects, programmes and enterprises ×× Technical assistance ×× Investing in climate funds ×× NDF can support projects involved in infrastructure, natural resources and climate change-related capacity building ×× All projects are screened for their climate change content: –– mitigation criteria: the value of emission reductions should be at least 10% of project investment costs –– adaptation criteria: at least 50% of the project costs should be subject to the actual or expected impacts of climate change CHANGE — 5

Lýður Skúlason

Locals enjoy the hot springs of Olkaria, in Hell’s Gate National Park, Kenya. The area has geothermal power potential of 2,000 MW.

KENYA

Sitting on a steam turbo

electricity in Kenya was produced using steam from geothermal wells.” One well goes to a depth of about 2000 metres and needs about 80 days to be drilled. When it is successful, the well will supply a stable base-load power 24 hours a day, 7 days a week, totally inde pendent of weather patterns. The emis sions are relatively low if the power plant noise is not calculated. The price of the steam power is competitive compared to fossil fuels and there’s no rate volatility. According to the Kenyan plans, the average price of electricity will be halved and the total capacity of geothermal en ergy generation will reach 5,000 mega watts by 2030. That’s more than equiva lent to the combined capacity of three new large nuclear reactors. “This is a golden opportunity for Kenya,” states Eerola. “I can see more skyscrapers rising in Nairobi and indus trial production growing. And with this new energy emerging, I can’t see any rea son why East Africa can’t challenge East Asia in the long term as a new economic powerhouse.”

Geothermal energy is clean and cheap but first you have to find it.

Lýður Skúlason

elson Mandela once said that he dreamed of the uni ty of Africa. He dreamed that he would see its lead ers combine their efforts to solve the continent’s problems. He dreamed of “our vast deserts, of our for ests, of all our great wildernesses.” He knew that there would also be a vast need for energy. Without it Af rica couldn’t build, produce and export. Without energy, Africa would be slow to learn, because there would be no light in the evening for children to read fairy tales and school books. Nigeria and some other nations have discovered oil and gas. But there is even better stuff to come. Eastern African nations have real ised that they are sitting right on top of an energy source, which is huge, renew able and almost limitless. We are talking about hot ground heat – geothermal en

ergy – which is steaming under the surface of the great East Af rican Rift. NDF has partnered with the World Bank and the Icelan dic International Development Agency (ICEIDA) to help in the geothermal exploration of the region, covering thirteen coun tries from Eritrea to Mozambique. The financial framework for the Geothermal Exploration Project is estimated at USD 13 million over a period of five years. “Geothermal energy is clean and cheap to produce, but the sources must be discovered first,” says Hannu Eerola, an NDF manager who looks after operations in East Africa. “The busi ness logic is similar to oil exploration. You need to lease a drill ing rig, hire specialists to run it and drill in the right place. This is a very risky and expensive business.”

The golden moment is now

2014 was first year that geothermal wells provided the majority of electricity produced in Kenya. 6 — CHANGE

In Kenya, NDF is providing exploration finance to the stateowned Geothermal Development Company. The Kenyan strat egy is to use public resources for the high risk exploration phase and then leave the power generation to private companies. “Kenya is the leading player in East Africa in terms of searching for, developing and generating geothermal energy,” adds Eerola. “Last year was the first year that the majority of

Sorry, you have no insurance A STABLE INCOME is good in Africa but

it doesn’t help much if your family loses almost everything in a storm. Very few people have insurance that covers the risks involved in cyclones, floods and droughts. And these extreme weather conditions have certainly increased. NDF has partnered with the World Bank to find out ways to develop the in surance business in sub-Saharan Africa. The goal is better adaptation to climate change through sharing, pooling and transferring the risks. “We are now preparing the second phase of the project, which will focus on

piloting insurance options in Mozam bique,” says Aage Jorgensen. He is an NDF country manager overseeing a pro ject called Insurance Instruments for Climate Adaptation in Sub-Saharan Africa. “This is the first study to provide a com prehensive overview of insurance risks and the potential of insurance in sub- Saharan Africa.” According to Jorgensen, the current insurance penetration rate in the region is very low in all sectors. Mozambique was initially selected as a pilot country for a number of reasons, including the availability of weather data. Another example of co-operation between NDF and the World Bank is Aquaculture and Climate Change, a project which focuses on the development of a sustainable method for aquaculture to in crease local climate resilience in Mozam bique. Mangroves play a big role as a nat

ural defence for the exposed coast of this country, because they slow down wa ter movement and erosion. But in many places mangroves have been depleted. “There is a huge appetite for protein in this country,” says Johanna Palmberg, one of Jorgensen’s colleagues. “Farming for additional protein is fine but when done in the conventional way, it’s also quite pol luting and often destructive for the man groves, which are cleared. There is need for high quality and high value products made in a sustainable way, including the protection and replanting the mangroves.” The Aquaculture and Climage Change project is looking for sustaina ble solutions to aquaculture farming and harvesting. If it succeeds, the shrimps and clams produced in the channels of Mo zambique might meet the high European import and environmental standards. But first they need to feed their own people. CHANGE — 7

Robin Kay / Shutterstock.com

This transport is climate-friendly but doesn’t get very far.

“It’s also a major opportunity for climate change mitigation. We need better tech nology, better management and better drivers.”

Green freight for 23% emission cuts

MEKONG

Learning to drive There’s a long road to sustainable transport in the Mekong subregion. Emissions will double by 2030 if business goes ahead as usual.

moking trucks, reckless drivers and fleets of vehi cles running empty because there is no profession al logistics management. Welcome to the jungle of logistics. Traffic is a necessary element of economic evo lution. The economy is expanding fast in the greater Mekong subregion, which comprises Myanmar, Thailand, Cambodia, Vietnam and Laos. The rail network is sparse, so currently 80% of all goods are transported by road. Inefficient fleet manage ment and poor driver training means that fuel costs often eat up 40 to 60% of the overall costs of transport companies. It’s cheap to manufacture goods in Vietnam, but logistics costs shoot up by a factor of 2.5 when compared to most OECD countries. The lesson: if we want to see greater efficiency and less emissions in the transport sector, this is the place. NDF has targeted this challenge by joining a special pro gramme called the Greater Mekong Subregion Core Environment Programme, which is led by the Asian Development Bank. This programme has studied solutions which increase fuel effi ciency in the transport sector. “Reducing logistics costs will improve economics in the Mekong region,” says Leena Klossner, deputy director of NDF.

The NDF programme surveyed trans port companies’ capacity use in the re gion and discovered that 25% to 50% of truck trips were running with empty loads. It’s a safety issue too. When there’s something to load, it’s common practice to overload the vehicle. Speeding, idling and disregarding the rules make high ways dangerous for the slow local traffic. Klossner says that optimal results can be found if efficiency actions were tar geted at small and medium-sized truck operators. But if nothing is done and traf fic in the Mekong region increases on a business-as-usual curve, by 2030 emis sions will double from 2010 levels. “Our analysis found that green freight interventions have the potential to reduce emissions by 23% over a 20year period.” With new mainstream technology and systems this could easily be done – in theory. In addition to the policy chal lenges, one of the problems is the highly fragmented transport industry. The majority of truck operators are small enterprises which operate fewer than ten trucks. They are struggling to make profits, which could be used for ve hicle investments. Therefore, a set of new financing solutions should be explored to give transport companies access and in centives to invest in modern vehicles. One promising track has been identified from the models used in other sectors, such as energy service companies (ESCOs). The proposed ESCO model is a non-profit entity, which members would win through co-operative purchasing and lower investment costs. In addition to the incentive carrots, there may be a need for pressurising sticks as well: You pay if you pollute.

CHANGE — Climate – Mitigation – Adaptation – Finance. Special report published by NDF, Helsinki, Finland. Design and content created by Pure Media Company, Turku, Finland. Cover photo: filrom/iStockPhoto. Paper: Edixion 170 g (FSC Certified) © Nordic Development Fund 2015. 8 — CHANGE