Blended finance can mobilize private capital flows to emerging and frontier markets

PUBLISHED: Tue, 06 Jun 2017 11:28:30 GMT
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Investing in renewable energy in emerging and frontier markets is possible through public-private financial models. Blended finance can make risky investments bankable.

Investing in solar power in the Maldives and wind power in Kenya will contribute to reduce the countries dependence on import of fossil fuel. For PensionDanmark they are only made possible through blended finance models.

Providing drinking water to 150,000 people in the Maldives based on solar power and investing in 365 wind turbines in Kenya could seem too ambitious for a minor institutional Danish investor like PensionDanmark. And as pure private investments they would be totally unfeasible for a pension fund as PensionDanmark. However, blended finance models have made these investments possible through the Danish Climate Investment Fund (KIF) and the Danish Agribusiness Fund (DAF).

In the Maldives producing clean drinking water from seawater is very energy intensive and has historically been based on diesel plants, which are both costly and pollutive. KIF has invested in Nordic Power Partners, a development company, who will build and manage the solar plants using photovoltaic (PV) solar cells, which creates electricity in a material exposed to light. The return on investment is based on a long-term power purchase agreement and the solar plants will reduce energy cost and considerably reduce the CO2 emission.

Similarly, KIF has made its first big investment (DKK 87 million, EUR 11.6 million) in a wind farm by Lake Turkana in Kenya. The wind power project will be the largest wind farm in Sub-Saharan Africa with 310MW. When fully functioning it will produce around 20 per cent of Kenya’s current installed electricity generating capacity at a very cost efficient price and replace fuel imports of approximately DKK 900 million (EUR 120 million) annually.

The commitments to KIF are split between the Danish government, IFU – Denmark’s Investment Fund for Developing Countries, and the institutional investors PKA, PBU and PensionDanmark. PensionDanmark has committed DKK 200 million (EUR 27 million) to investments through KIF. EKF, Denmark’s Export Credit Agency, has simultaneously provided approximately DKK 1 billion (EUR 135 million) in loan guarantees for the project. EKF’s guarantee relieves the funding providers of risk, thus enabling the institutional investor’s participation.

The fund is managed by IFU, which since its inception 50 years ago has participated in 1,200 investments in more than 100 countries in cooperation with Danish trade and industry. Therefore, KIF and IFU offer strong financial experience, substantial knowledge about local business conditions and a broad international network.

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Alongside the investments in KIF, PensionDanmark has also committed DKK 200 million (EUR 27 million) to the Danish Agribusiness Fund (DAF) investing in improved production, distribution and food sales in developing countries. In the two funds PensionDanmark is investing along with the Danish government, IFU, and the pension fund PKA, which has also committed DKK 200 million. The initial investments of DKK million (EUR 107 million) and DKK 775 million (EUR 103 million) to the funds, KIF and DAF, are expected to ensure induced investments of approx. DKK 7-9 billion (EUR 1-1.2 billion) for each of the funds, due to the fund investing with local investors in the projects.

To summarize, blended finance can make these types of risky investments in emerging and frontier economies bankable and thereby interesting for institutional investors around the world. The concept has three key characteristics:

  • Leverage: Use of development finance and philanthropic funds to attract private capital into deals
  • Impact: Investments that drive social, environmental and economic progress
  • Returns: Financial returns for private investors in line with the market rate, based on real and perceived risks

Blended finance can foster private financing for environmentally-friendly projects enabling the diffusion of climate-friendly technology throughout the economy, and at the same time initiate projects, that under normal circumstance would involve too high a degree of risk for private investors, bankable and financially sustainable. Especially the ability to reduce political and regulatory risks through the use of blended finance models are central to what makes the model relevant.