1. 100 Queen Street, Suite 1350. Ottawa. Ontario. K1P 1J9. Canada tel: 1.613.742.7829 fax: 1.613.742.7099 www.g-capitaladvisors.com info@g-capitaladvisors.com Opportunities and Challenges for Financing the Development Dividend IISD Bonn Panel May 17, 2006 Diana Smallridge Managing Director

2. 2 IISD Multinational, Multi-Discipline Task Force Goal  Increase understanding of the challenges in providing enhanced socio-economic and environmental benefits – the “development dividend” – via CDM  Present options for enhancing the CDM development dividend while recognizing the need of Annex I countries to access cost-effective emission reduction credits

3. 3 Financing the Development Dividend  Understanding the Challenge  Case Studies  Existing Finance Support Mechanisms  Supply and Demand Side Finance Gaps  Possible Solutions

4. 4 Understanding the Challenge Project proponents face several key financing challenges:  Seeking financing from a variety of local and international sources  Understanding what investors and lenders are looking for in a “bankable” project  Thinking like a banker, investor or buyer of carbon credits  Finding the right risk/reward balance for each project funder

5. 5 Understanding the Challenge Project funders need to assess not only “traditional” risk/rewards but also new CDM risk/rewards:  Investment environment in host country traditional project risk analysis plus commitment to environment  Project viability traditional project risk analysis plus new technology, non-traditional feedstock, non-traditional purchasers and new stakeholder communities  Carbon credit revenues New potential source of finance, security enhancement, and contribution to equity ROI

6. 6 Understanding the Challenge As a result, development dividend projects often give rise to financing gaps in terms of:  Defining the risk/reward balance  Assessing these risks and rewards  Valuing the risk-factored rewards in terms of enhanced ROI to investors or security to lenders

7. 7 Case Studies  Four projects were reviewed, each having a strong development dividend but difficulty sourcing financing: 1.Low cost housing energy upgrade project in South Africa 2.Bellville South landfill gas recovery project in South Africa 3.The Vanilla Jatropha project in Kenya 4.Solar technology for electricity provision in Kenya  Case study analysis included country, project, and carbon credit challenges

8. 8 Case Studies: Country Challenges  South Africa – relatively stronger investment climate Weak labour skills and education Crime, theft & disorder  Kenya – relatively weaker investment climate Crime, theft & disorder, corruption Cost of financing Anti-competitive practices, tax administration Weak infrastructure Uncertain economic and regulatory policy

9. 9 Case Studies: Project Challenges  Insufficient local supply capacity, retail level credit risks capacity to supply solar water heaters credit risk of purchasers of bio diesel fuels  Relatively small carbon credit flow, ownership and delivery is uncertain  Kyoto - CDM process and carbon credit benefits not well understood by project decision makers  Need for grant funding or similar financial assistance

10. 10 Case Studies: Carbon Credit Challenges  CER delivery risk uncertainty  CER volume may be too small to justify costs and risks to buyers  Voluntary market/offset buyers not aware of the projects and their relatively high SD/DD value  Ownership of carbon credits may not be clear: Kenya solar project – carbon credits owned by project sponsors or rural schools and home owners?

11. 11 Existing Financing Support Mechanisms Traditional and emerging potential sources of financing include:  Multilaterals, Carbon Funds, ECAs, Equity Providers  Commercial Banks (local and international), Regional Development Banks  Other stakeholders (e.g. local, regional and national governments)  Individual Carbon Credit Buyers  ODA and Others

12. 12 Existing Financing Support Mechanisms Key themes:  Not driven primarily by sustainable development Carbon funds focus on compliant CERs ECAs focus on “export” benefits Banks, equity, insurers prefer large scale projects where transaction costs can be absorbed more easily  Risk/reward is not in balance Equity focus on ROI Debt providers focus on min. term, max. interest and adequate security  Scarce technical and resource capacity to handle “one off” or more complex projects

13. 13 Summarizing the Financing Gap  Demand-side project proponents seek: More flexible, risk tolerant debt & equity sources Up-front purchases of carbon credits CERs and offsets (voluntary) ODA/grants Sustainable development funds  Supply-side sources of financing need: Good “bankable” projects regardless of the DD Credible, timely, cost-effective CDM and host country approval processes Risk sharing

14. 14 Possible Solutions: Country Level  Build CDM capacity within host country governments to make better use of carbon finance for projects  Link projects with high DD potential to national priorities and grant finance sources  Develop national/regional “clearing house” for DD project assessment and prioritization  Expand role and risk capacity of rural and community development banks to leverage financing  Engage ODA to catalyze CDM projects with high DD potential

15. 15  Demystify the financing process for local project developers in terms of potential carbon credit revenue streams  Improve capacity building on small volume project commercialization in host countries  Develop tool to screen cost/benefit of developing projects with high DD potential  Develop tailored insurance and other risk mitigation instruments for use in ERPAs to enhance the attractiveness of projects with high DD potential Possible Solutions: Project Level

16. 16  Explore CDM transaction cost reduction strategies via bundling of small volume projects, sector- and policy-based CDM, and programmatic CDM  Greater understanding of the risk perception of carbon revenue streams, including in the carbon offset market Possible Solutions: Carbon Credit Level

17. 17  GCA specializes in advisory services relating to the financing for sustainable investment and development.  Extensive work globally with stakeholders in the areas of environment and carbon finance: United Nations Environment Programme World Bank Carbon Finance Business World Energy Council Environment Canada Natural Resources Canada Industry Canada Green Municipal Fund National Roundtable on Environment and the Economy  GCA is an affiliate of International Financial Consulting Ltd., a leading provider of advisory services to multilateral, public, and private sector clients. Green Capital Advisors Ltd.