Financing Options and Instruments
This section presents different modes of financing an asset recycling finance. Private sector participants in an asset recycling transaction will be required to fund the upfront payment to secure the concession or lease. The private sector may also be required to fund any required capital expenditure to refurbish or re-develop the asset. This section discusses the financing options and instruments available to the private sector and provides the relevant Authority with an understanding of the criteria issues to ensure the bankability of any proposed asset recycling scheme.
Traditionally, public sources have been the main source of capital available for finance, including financial resources from multilateral development banks (MDBs), multilateral organizations, governments, infrastructure funds and aid agencies. However, the cost of mitigating and adapting to climate change increasingly outweighs the amount of public funds available, thus there is a global need to increase and capitalize funds from the private sector and private sources such as commercial financial institutions, philanthropic organizations, institutional investors, non-profit organizations, corporate actors, institutional funds, etc.
This finance gap has led to the introduction of blended finance, where public and private sources contribute to a single funding flow, helping to reduce investment risks for the private sector. The blended-finance refers to the targeted use of alternative financing for high-impact projects (i.e., large infrastructure projects) where actual or perceived risks are too high for commercial lenders to enter on their own. While the search and preparation costs associated with accessing this means of financing may not always make it economically feasible, especially for small projects, as a rule, for larger projects it is worth exploring options to apply for this type of funding.
There are different typologies of financial instruments which generally fall under four (4) main categories: i) debt instruments; ii) equity instruments; iii) credit enhancement instruments; and iv) risk transfer instruments.
Types of Financing Instruments
The selection of the adequate instrument and/ or finance provider will depend on the type of asset recycling project as well as the type of concessionaire/ private partner selected. In the following table, a list of different types of instruments per category are presented:
Table 8: Types of Financing Instruments
Documentation
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Definition
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Finance Provider
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Debt Instruments
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Non-concessional loans
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Sum of money that is given but needs to be repaid.
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Commercial banks, corporates
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Concessional loans
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Sum of money that is given at a relative cheaper cost.
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Governments, multilateral/bilateral finance institutions, infrastructure funds
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Grants
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Sum of money that is given but does not need to be repaid.
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Public and private investors, MDBs
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Debt swaps
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Sale of a foreign currency debt to an investor or debt forgiveness by the creditor, in exchange for the debt relief.
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Public and private investors
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Green, social, thematic and sustainability linked bonds
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Debt instruments where proceeds are used to finance or refinance, in part or in full, new and/or existing eligible projects/assets/companies.
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Public (national, sub-national or municipal) and private investors, banks or corporations
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Quasi equity
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Debt, typically unsecured and subordinated that raises capital base with no changes to the ownership structure.
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Public and private investors
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Equity Instruments
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Equity securities
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Ownership interest held by shareholders in an entity (a company, partnership, or trust), realized in the form of shares of capital stock.
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Public and private investors
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Investment grants
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Sum of money that does not need to be repaid.
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Governments, multilateral/bilateral finance institutions
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Co-financing
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Joint financing between two entities working to finance an activity.
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Public and private investors
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Credit-enhancement Instruments
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Interest-rate softening mechanisms
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Lower interest rates and other costs below the market rates.
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Governments, multilateral/bilateral finance institutions
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On-lending / re-financing
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Borrowing from external or domestic sources and thereafter pass the loan to another entity / replacement of an existing debt obligation with another debt obligation under different terms.
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Development / institutional finance institutions
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Project bond credit enhancement
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Subordinated instrument, either a loan or contingent facility, to support senior project bonds issued by a project company.
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Multi-lateral / bi-lateral finance institutions
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Subordination of credit trenching excess spread, over collateralization, reserve accounts, etc.
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Prioritization of collateralized debts, ranking one behind another for purposes of collecting repayment from a debtor. Subordinated debts are riskier than higher priority loans, transferring risk in the event the results of projects are not fully achieved.
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Local and national governments
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Risk-transfer Instruments
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Insurances
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The creation of risk transfer mechanisms that provide resources for disasters and transfer loss liabilities to capital market investors.
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Insurance companies
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Guarantees
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A promise to repay the debt of another in the event of default.
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Governments, multilateral/bilateral finance institutions
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Results-based climate finance
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Funds are disbursed by the donor or investor after pre-agreed results of the activity are achieved and verified.
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Governments, multilateral / bilateral finance institutions
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Blended finance
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Development capital as part of the effort to mobilize private capital.
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Governments, multilateral/bilateral finance institutions
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Technical assistance grants
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Sum of money that is given for capacity building and information and expertise, instruction, training and consultation related to a climate activity but does not need to be repaid.
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Governments, multilateral/bilateral finance institutions
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Risk capital
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Funds (equity / concessional loans) allocated to climate mitigation / adaptation activity with high level of uncertainty.
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Governments, multilateral / bilateral finance institutions
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Instruments that can reduce debt vulnerability risks while facilitating long-term investments would allow private sector to consistently take long-term risks into account.
Alternative financing and funding mechanisms
Beyond financial instruments and policy tools to mobilize traditional finance, there are alternative financial mechanisms that can be deployed to facilitate asset recycling transactions.
Climate Finance
Climate finance can play a central role in enabling sustainable transitions to a low-carbon, climate resilient future and asset recycling transactions may benefit from this alternative source of financing. The detailed write-up on the innovative financing is presented in Module 8 and provides key guidance for both public sector project owners (in charge of structuring and tendering the asset recycling transaction) and the private sector (selected private investors or Concessionaire) for mobilizing climate finance.
Box 9: Case Study on Innovative Financing in Peru
Innovative Financing (Green Bond), Peru
Project Title: 500 kV Mantaro-Nueva Yanango-Carapongo Interconnection and Associated Substations
Sector: Renewable energy – Transmission
Issuer: ISA CTM - Consorcio Transmantaro S.A. (Non-Financial Corporate)
Invested amount: USD 164.4M (no refinancing); 58% Co-financing
Project Description: The project allows the reinforcement of the transmission system in the central zone of the country, as well as the evacuation of surplus generation from the Mantaro zone towards Lima, foreseen in the new generation projects that will start operations in that area.
The project company signed the concession contract with the Peruvian State on September 19, 2017. The contract expires after 30 years from the date the service becomes operational.
Thanks to the abundant water resources, the central zone of Peru is a large nucleus of hydroelectric generation. To the emblematic complex of the Mantaro, the construction of two important projects, the Cerro del Águila Power Plant and the Chaglla Power Plant, have been added in recent years; the joint generation is around 2,000 MW. The YANACOYA projects will contribute to the efficient transport of the large amount of energy coming from these two plants.
These projects are integrated with each other and will allow to meet (through the National Interconnected Electric System) the expected increase in the demand for electric power, as well as the strengthening of the electric transmission capacity in the central zone of Peru and Lima in a timely manner and with quality.
Use of proceeds: The net proceeds of the green financing instruments will be exclusively used to finance and/ or refinance eligible green projects in three main categories:
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Renewable Energy: Investments in the installation of electricity transmission lines that facilitate increased development and connection of renewable electricity generation sources
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Energy Efficiency: Investments related to energy efficiency improvements to transmission infrastructure
Impact: Increase in the injection or reliability of green energies & reduction of non-green energies
Islamic Finance
In asset recycling transactions, public infrastructure assets are monetized with the proceeds invested in greenfield infrastructure assets. Islamic finance is an asset-based and risk-sharing financing technique. Given this common feature, Islamic finance appears to be a natural fit for assets recycling transactions.
Unlike loan based conventional financing techniques, Islamic finance is asset based and generally involves: (a) an equity-based / sharing-based structure, e.g., musharakah (partnership) and mudarabah (partnership in profit); (b) a sale based structure, e.g., murabahah (sale with profit), istisna'a (build / manufacture) and salam (advance purchase); (c) a lease-based structure, e.g., ijarah (leasing); or (d) a fee-based structure, e.g., wakalah (agency), kafalah (guarantee) and ju’alah (service contract).
An asset recycling transaction involves the transfer of control of an asset for financial consideration, Islamic financing techniques that can facilitate assets recycling transactions includes lease (ijarah) based structures such as: (a) sale and leaseback, (b) long-term lease and short-term lease (head lease and sub-lease); and (c) asset-backed sukuk al-ijarah.
The detailed write-up on the innovative financing is presented in Module 9.
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