Sayed at Sustainability Conference 2015, NCPC

1. |
FINANCING THE GREEN ECONOMY:
GREEN FUND
GCIP Business Clinic
21 JULY 2015

2. Green Economy
1. The role the DBSA is playing in mobilising resources for
the roll-out of green economy projects
2. Types of Investment Agreements and Financing
Mechanisms
3. Non traditional yet flexible and responsive mechanisms
in funding green economy programmes

3. Green Economy
“an economy that results in improved human well-being and
social equity, while significantly reducing environmental risks
and ecological scarcities” UNEP (2011)
green economy driven by investments that:
• Reduce carbon emissions and pollution;
• enhance energy and resource efficiency; and
• prevent the loss of biodiversity and ecosystem services.
resilient, equitable and pro-employment development path that
reduces carbon dependency, promotes resource and energy efficiency
and lessens or prevents environmental degradation.

4. DBSA Driven green initiatives
Some of the DBSA green economy initiatives:
Implementation of SA Renewable Energy Independent
Power Producer Programme (REIPPP)
Implementation of the National Green Fund
GEF and GCF accreditation

5. Green Fund
 The Green Fund is resource mechanism to contribute to a wide range of goals
of transitioning to a greener economy
 Managed by the DBSA, established in 2012
 R1.1 billion has been allocated to the fund to date through the Department of
Environmental Affairs
 Aimed at facilitating investment in green initiatives;
 To transition SA to a greener economy
 To support socio-economic development
Key Objectives
 Promoting innovative and high impact green programmes and projects
 Reinforcing climate policy objectives and sustainable economic
development through green interventions
 Building an evidence base for the expansion of the green economy
 Attracting additional resources to support South Africa’s green economy
development

6. |
Green Fund Financing Offering
• Funding in the form of Non-Recoverable Grants
Recoverable Grants, Loans, and Equity across the
thematic windows supports project development ,
capacity building in green initiatives and research and
development initiatives that feeds into policy and
regulatory environment for the green economy
• The Fund allocation for the three products is as follows:
6
Product Offering Allocation
Project development 75%
Capacity building 20%
Research and development 5%

7. Financial Instrument - 1
Grant (non-recoverable)
7
Allocation and/or contribution (in cash or kind)
• Agreed set of deliverables consistent with the mandate of the
Funder
• Specific conditions detailed in the Grant Agreement.
• This amount is generally not recoverable from the applicant during
any period.

8. Financial Instruments - 2
Grant (recoverable)
8
Allocation and/or contribution (in cash or kind) to an eligible recipient
• Agreed set of deliverables consistent with the mandate of the
Funder
• Specific conditions detailed in the Grant Agreement.
• This amount is generally recoverable from the applicant.
• Contingent on success, possibly linked to revenues
• Recovery of the initial amount invested and an appropriate
portion of the returns

9. Financial Instruments - 3
Loan
9
An arrangement, in which the Funder lends money to an eligible borrower (or
applicant)
• Agreed set of deliverables consistent with the mandate of the
Funder
• the borrower agrees to return the money (with interest)
through defined set of installments at a specified period in
the future
• Not contingent on success
• The terms, such as interest rates, repayment period may
be concessionary
• Determination based on Capacity/Ability to repay: aspects such as, team,
historical, current and projected operating performance.

10. Financial Instruments - 4
Equity
10
An arrangement, in which the Funder allocates money to an eligible investment
target (or applicant) as capital contribution
• in exchange for an ownership interest and
• the associated economic and voting rights
• Returns through capital gains and dividends
• Agreed set of deliverables
• Determination based on:
1) Understanding the context,
2) Understanding the business, and Industry
3) Development of business forecasts,
4) Selection of the appropriate analytical frameworks and models,
5) Conversion of forecasts into an investment model with analysis
6) Investment structuring

11. Value Chain Participation
11
Investment principles:
Catalytic participation, unlocking barriers and investment stretching across
the entire innovation value chain
Project Prep (Tech &
Product
Development)
Research & Dev
Implementation and
Launch
Expansion (Scale Up)
Typical types of value chain participation
 Equity
 Loans
 Grants Recoverable
 Technical and
Business Support
 Equity
 Loans
 Guarantees
 Technical and Business
Support
 Grants
 Technical and Business
Support
 Grants Recoverable
 Technical and Business
Support
High Impact:
Environmental,
Social and
Economic
Must fall
within funding
windows
Addition
ality
Private
Sector
Particip
ation
Sharing
of Risks
Green Fund’s Role: Catalyst for Green Economy Transition

12. Investment Philosophy
Elements include:
• Full Investment Life Cycle Opportunity Arrangement
• The Fund prefers opportunities that are packaged and arranged in
manner that demonstrates at least in principle support and
performance based commitments of follow on funding from others
• Origination
• Passive – closed calls and open calls
• Active – investment programmes
• Investment Programmes
• Very High Impact Projects
• Programmatic Approach

13. Initial Funding Focus
Based on research and extensive consultation the following
three thematic windows were identified for the initial focus
of the Green Fund
• The focus areas and eligibility criteria for each window is different and
informed by key national policies
Green Cities and
Towns
Low Carbon
Economy
Environmental
& Natural
Resource
Management
Three funding windows – not mutually exclusive

14. Green Cities and Towns
• Greening core municipal engineering services, especially where cost savings
can be realised
– Waste management and recycling, water demand management, public
transport, RE and EE on municipal buildings and infrastructure, urban greening
e.t.c
• Applicants from public and private sector, with support from relevant
municipality
• Strong emphasis on project preparation, with appropriate finance to take to
scale
Vision: well run, compact and efficient cities and towns that deliver essential services
to their residents without depleting natural resources

15. Low Carbon Economy
• Focused on climate mitigation, renewable
energy, energy efficiency, cleaner
production, sustainable transport and bio-
fuels
• Interventions include innovative structuring
of EE and RE rollout, vehicle fleet
conversions, clean production programmes
• Typical applicants include private
companies, research organisations, SMEs,
NGOs
• Regulatory support for development of
standards, SEAs
Vision: a low carbon economy that is aligned with the targets for a
peak, plateau and decline trajectory for greenhouse gas emissions

16. Environmental and Natural
Resource Management
Vision: resilient eco-system services supporting the long term
development path
• Focused on biodiversity and ecosystem management,
sustainable agriculture, fisheries, rainwater harvesting
• Demonstrate PES, convert conventional to sustainable
agriculture and replicate success
• Primary beneficiaries are farmer and community based
organisations, research organisations, private sector, NGOs
• Targeting community based enterprises as well as project
preparation for PES projects, supported by appropriate
finance
• Regulatory support on adaptation planning, biodiversity
offsets, PES, standards and eco-labelling

17. |
Green Fund Portfolio
17

18. | 18
DBSA’s Role in Climate Finance: GEF
Project Summary Proposed/Requeste
d GEF Funding
Tentative
Co-financing
Agency Fees Way Forward DBSA
Interface
1. Equity Fund for
the Small Projects
Independent Power
Producer
Programme (SP-
IPPP)
DBSA has formulated a Facility for
Investment in Renewable Small
Transactions (FIRST) which will
provide debt (proposed 90%) to small
projects investors.
KfW through DBSA will contribute
€5mil (for technical assistance) and
€14mil (non-interest bearing loan) to
be blended with DBSA’s contribution
(about R1.8 billion) to capitalise
FIRST.
The proposed GEF funded Equity
Fund will provide equity (10%) to small
projects.
US$ 15million US$195,000
• DBSA
155,000,000
• KfW 20,000,000
(TA facility and
debt loan)
• Beneficiaries
15,000,000
US$1,350,000 PIF endorsed by
GEF CEO and
included in
Council Work
Programme for
June meeting.
SA
Financing –
Energy &
Environment
2. Building a
resilient and
resource efficient
Johannesburg:
Increased access to
urban services and
improved quality of
life
The proposal will foster city level
resilience, resource efficiency,
emission reductions and other co-
benefits through area-based pilot
demonstrations, systems analysis
(food), and institutionalization of
evidence-based decision making
through integrated planning.
US$ 8,000,000
(DBSA is collaborating
with UNEP to implement
this project)
US$120,000,000
(City
of Johannesburg)
US$ 365,000 PIF endorsed by
GEF CEO and
included in
Council Work
Programme for
June meeting.
SA
Financing –
Metros,
Water
Utilities
3. Unlocking
biodiversity benefits
through
development
finance in critical
catchments
To develop policy and capacity
incentives for mainstreaming
biodiversity and ecosystems values
into national, regional and local
development policy and finance:
application demonstrated in two water
catchments
US$7,200,000 30,500,000 US$650,000 PIF endorsed by
GEF CEO and
included in
Council Work
Programme for
June meeting.
Financing
Operations –
Sector
Specialist
Totals US$30,200,000 US$345,000,000 US$2,365,000

19. |
What is Green Climate Fund (GCF)?
• An operating entity of the financial mechanism of the United
Nations Framework Convention on Climate Change (UNFCCC).
• Objective: to promote the paradigm shift towards low-emission
and climate-resilient development pathways.
• Current global pledge: $10.2 billion for next 3 years
• Aims for a 50:50 balance between mitigation and adaptation
over time.
• Aims to allocate 50% adaptation funds to vulnerable countries,
least developed countries (LDCs), small island developing states
(SIDS) and African states
19
DBSA’s Role in Climate Finance: GCF

20. |
Fund’s Investment Criteria:
• Impact potential- potential of the programme/project to contribute to the achievement
of the Fund's objectives
• Paradigm shift potential- degree to which the proposed activity can catalyze impact
beyond a once-off project or programme investment
• Sustainable development potential: wider benefits and priorities, including
environmental, social, and economic co-benefits as well as gender-sensitive
development impact
• Responsive to recipients needs: vulnerability and financing needs of the beneficiary
country and population in the targeted group.
• Promote country ownership: beneficiary country ownership of and capacity to
implement a funded project or programme (policies, climate strategies and institutions)
• Efficiency & effectiveness: economic and, if appropriate, financial soundness of the
programme/project, and for mitigation-specific programmes/projects, cost-effectiveness
and co-financing
20
DBSA’s Role in Climate Finance: GCF

21. SUPPLY CHAIN FINANCE:
GREEN FUND PARTNERSHIP
WITH SEFA AND

22. About SCF Capital Solutions
 SCF Capital Solutions is an SME financing
company with specific focus on the green
economy, agriculture and corporate supply
chains involving SMEs
 In Aug 2015, together with the DBSA Green
Fund and SEFA, the company will be
launching a fund for SMEs in the green
economy

23. Why SMEs struggle to get commercial bank
funding
Factors Considerations SMMEs (new businesses) Established businesses
The need for an effective
service model
Cost to serve
Skill level
Product tailoring
Over the counter service,
lower skilled service, non-
tailored solutions
Relationship managed,
higher skilled, more
tailored solutions
Credit assessment
methods
Repayability Subjective assessment of
business plan projections
Leverage and gearing ratio
assessments based on
history and projections
Equity contribution Many SMME do not have Can cover this from
retained profits
Security (Suretyship and
assets as collateral )
Many SMMEs do not have May have already created
assets
Capital costs and
profitability
Risk worthiness of client
(probability that they can
default)
High capital costs, less
profitable
Lower capital requirement,
more profitable

24. What is Supply Chain Financing (SCF)
 Financing of commercial purchase and sale
transactions, especially where supplier is an SME and
buyer is a large company
 The lender finances the underlying commercial
transaction, instead of the business
 SCF shifts lender risk from SME supplier to either the
financing structure or the large corporate buyer
 SCF has been used successfully in Europe, US and
Asia to
 Provide access to finance working capital of small
suppliers
 Reduce borrowing costs of small suppliers
 Stabilize supply chains of large multinational companies by
ensuring their suppliers have access to working capital

25. How does it work?
Accelerate cash flows
1. Buyers issues contract to SME to provide
service or do an installation etc…
2. SME supplier delivers on the contract
3. SME suppliers invoices the Corporate
Buyer, but as is usually the case, payment
will be made in 30, 60 or 90 days.
4. SME supplier submits invoices to SCF
Capital Solutions to accelerate payment
5. SCF Capital Solutions structures the
financing
6. SCF Capital pays SME Supplier early
7. SCF Capital get paid by Corporate Buyer in
30, 60 or 90 days
Supplier1
Supplier 2
Supplier 3
Supplier n
Corporate
Buyer
SCF IT
platform
2
1
4
SCF5
6
3
7

26. How does it work?
Purchase of equipment
1. Buyer issues contract to SME
Supplier to provide service or do
an installation etc…
2. SME Supplier gets purchase
order from Buyer
3. SME Supplier applies for
financing to purchase required
equipment from SCF Capital
Solutions
4. SCF Capital Solutions structured
the financing
5. SCF Capital solutions pays the
supplier of equipment
6. Supplier of equipment delivers
equipment to SME Supplier
7. SME Supplier completes the
project
8. Corporate Buyer makes payment
Supplier1
Supplier 2
Supplier 3
Supplier n
Corporate
Buyer
SCF IT
platform
2
1
3
SCF
Supplier
4
5
7
8
6
8

27. |
 Managing Risk is challenging
The level of matching contribution is used to help reduce exposure. Some good projects
may not meet matching thresholds.
 Private Sector Participation could be better
Some progress has been made, however there still remains significant scope for increasing
participation of the private sector.
 Follow on Funding (Full life cycle opportunity arrangement is
challenging)
Risk return characteristics including early stage of development and long period to
payback with relatively high uncertainty reduce the scope for follow on funding and support
from risk averse financial return oriented investors such as commercial banks. There is
however significant scope for support from risk tolerant multiple outcome returns oriented
investors in the mould of development finance institutions
Lessons Learnt

28. |
 Effectively discharging the role of a catalytic finance mechanism
and being measured on the right performance indicators
To measure the performance of a catalytic mechanism using absolute aggregates/
indicators such as total amount of carbon emissions reduction attributable to projects
supported may be inappropriate, if the scope of focus areas/funding windows supported is
broad.
 Asset Allocation
Can be very difficult to balance the portfolio and gain exposure to all the desired focus
areas owing to market characteristics. E.g limited uptake in transport
 Applying Concessionary terms
Adding concessionary terms has to been done diligently and using sound analytics in order
to avoid moral hazard and the crowding out of free market participants through cheap
money.
Lessons Learnt

29. THANK YOU
Email:
MuhammedS@dbsa.org