UNTT Working Group on Sustainable Development Financing

ii Executive summary In order to achieve a transition to sustainable development, economies will need to be radically transformed. Businesses and households will be responsible for the bulk of the investment needed. Such a radical transformational change will require the blending of public and private, domestic and international, capital and technical assistance finance. Global capital markets representing some USD 212 trillion in financial assets should, in principle, have the size and depth to meet large investment requirements, subject to improvements in enabling policy environment to address the significant institutional constraints in specific sectors and areas. The public sector has a critical role in setting goals, building a regulatory environment including establishing clear incentives and price signals, and investing in public infrastructure in ways that also create conditions for attractive investment risk/return profiles. A wide range of public policy and financing mechanisms can be used for this purpose. Investment can be scaled up by adopting a range of risk reduction strategies. Those include reducing risks (through fostering long-term policy stability, streamlined licensing processes, local supply of expertise, etc.), direct risk-sharing (through co-investment, guarantees and insurances.), and increasing rewards (through premium prices, tax credits, etc.) compared to existing alternatives. So far, the bulk of international public funds have been used to provide subsidies to the private sector through concessional loans or grants or risk sharing mechanisms. In recent blended energy projects financed with public support, it has been found that the rate of subsidization can easily exceed 50% of the project costs — largely eliminating the risk to the private investors and almost guaranteeing them large profits for years to come. While this approach has proven effective to demonstrate green technologies and encourage early entrant investors, it is not sustainable over the longer term and cannot promote investment at the required scale. Over the longer term, mechanisms that focus on risk-mitigation rather than risk sharing/compensating can more appropriately 'crowd-in' private sector finance. However, improvement of structural conditions for investment usually takes time – one or two decades. Thus, it may still be desirable to compensate private investors for extra risks or lower returns compared to other investment opportunities during this transition. This nevertheless, should be based on a cost-effective analysis of various mixes of risk mitigation, risk sharing and compensation instruments. Such an analysis will determine the efficiency of blended finance for sustainable development The capacity of developing countries to access financial …