As clean technologies and other health and sustainability products prove commercially viable and reliable (low risk, relatively high reward), they become increasingly popular with entrepreneurs, existing project developers, as well as larger and more risk-averse investors and fund managers worldwide.
While early stage venture capital remains a key source of technology innovation and new jobs, in the current economy, early and late stage project finance (more on the difference between “project” and “venture” capital), particularly in deploying clean technologies in developing countries, continues to deliver:
- Non-dilutive capital — debt finance preserves equity for the owners while offering an attractive and affordable source of funding
- A source of positive social impacts, including good jobs with the potential to help lift people out of poverty … enabling self-reliance, communities that are autonomous, prosperous and self organizing
- Often a powerful and sustainable way to protect valuable natural resources — projects begin to push back on traditional “take-make-waste” economic development pressures
- An engine for sustainable economic development and improved quality of life for populations typically overlooked and ignored by Western-style capitalism
- A “free and open market” — not reliant upon grants (though they can still be leveraged when available for R&D, technical assistance, etc.), market-distorting incentives or manipulative policies — and thus a more sustainable path to a cleaner environment and a just society.
The true cost of capital: Project principals, sponsors and equity owners appreciate access to affordable, non-dilutive capital, preserving ownership stakes, with loans secured by project assets, and repaid to investors at nominal costs (low interest rates, if that matters) to the principals. Some borrowers actually prefer to pay greater than market rates because there is less paperwork involved (think Mafia). However, qualified and professional teams can obtain long-term debt at or below market rates (sometimes called “concessionary” loans), which is a common scenario in impact investing, as roughly one third of investors recently said of their expectations for returns. See also, 2013 article on impact investing for sustainability.
Where is project finance most cost effective in this current economy, and why? Key territories include developing economies, frontier and emerging markets worldwide, including Latin America (especially Brazil, Chile, Ecuador and Peru), Middle East / Northern Africa (MENA), Southeast Asia (particularly Malaysia, Vietnam, Thailand, etc.), S. Korea, India, and others. See project finance frequently asked questions, or where we work.
Ripe for Innovation: In many developing countries that lack a well-regulated banking system for affordable lending, or the physical assets for telephones or electricity transmission, for example, clean technology projects for “distributed” (local) power generation prove more affordable than building infrastructure. This is so-called “leapfrog” innovation (see references to Stuart Hart’s research, below). In some regions, the answer is both distributed power and building necessary infrastructure, to prepare for further development and growing regional affluence.
Internationally, clean energy, health and sustainability-related project finance is growing and succeeding, one of the few bright spots in the current global economy. It works at the intersection of purpose-driven “impact” investing, positive social change and sustainable business.
Further Reading:
- Low Carbon Development and Poverty Alleviation: Options for development cooperation in energy, agriculture and forestry (PDF, DIIS Report 2009:20, August 2009, 104 p.)
- Reducing Emissions from Deforestation and Degradation (REDD): An overview of risks and opportunities for the poor, by Mikkel Funder (PDF, DIIS Report 2009:21 August 2009, 64 p.); http://www.diis.dk/sw83507.asp
- Stuart L. Hart article, “Converging On Green” (PDF, 5 pages, July/Aug 2009), reference to “leapfrog innovation” on pg. 4
- Stuart L. Hart, author of Fortune at the Base of the Pyramid, PowerPoint presentation
