Financial sector

Green growth in Southeast Europe

Public-private partnerships have proven their worth in the sphere of micro and SME finance. The model is being extended to serve other purposes. In particular, the focus is on financing investments in energy efficiency and renewable energy sources. The first of these new investment vehicles is the Green for Growth Fund, Southeast Europe, which was initiated by the KfW Entwicklungsbank and the ­European Investment Bank.

[ By Lloyd Stevens and Luke Franson ]

In recent years, governments and donor agencies have recognised the limitations on what they can accomplish using their own resources, and have increasingly sought to incorporate the private sector in their efforts. This has resulted in the growth of public-private partnerships (PPPs), in which a private party provides or supports a public service and assumes part of the financial, technical and operational risks. Initially focusing on infrastructure projects, the PPP model has been adapted to meet a variety of public needs. For instance, it is being applied in the financial sector.

PPP in the financial sector

The model typically involves the creation of a dedicated investment vehicle, or fund, to provide investments, on commercial or nearly commercial terms, to achieve a public good such as fostering the development of micro and small enterprises or mitigating climate change. These areas have long suffered from insufficient levels of investment due to information asymmetries and externalities. ­Accordingly, there is a strong rationale for public intervention.

In the PPP model, development minis­tries or donor agencies provide an investment into the junior-most tranche (the ­“C shares”) of a structured PPP investment fund to absorb any losses that the investments made by the fund might incur. The next layer above this first-loss tranche is taken up by international financial institutions (IFIs) – multilateral development banks that, although created and sup­ported by the public sector, seek to provide market returns on their investments. This mezzanine tranche (the “B shares”) also serves to absorb any losses that might exceed the amount of C shares available in the structure. These two layers – the purely­ public C shares, and quasi-public ­B shares – provide a risk cushion that ­enables the fund to issue senior securities (“A shares”) and notes to private investors.

In a typical commercial structure, the ­C share layer, which takes the highest risk, would be expected to earn the highest return. In a PPP investment fund, however, this is generally not the case. In some ­cases, the C shares may earn the lowest return among the investors, and capitalise any such returns back into the structure. From the donors’ perspective, however, they are achieving a much higher “return”: through leveraging their contribution with quasi-public and private investments, they are achieving better outreach and more development impact than would otherwise be possible.

For example, in a structure with an ­allowable leverage factor of seven to one (implying a minimum C share cushion of 12.5 %) each euro invested by the donor agency leads to seven additional euros of investment. The impact is further multiplied as money is repaid and re-lent. Given that donors want to boost the impact of their policies rather than their financial return, this approach makes perfect sense. The structure allows private investors to reduce their exposure to risk, so they become more likely to invest. That is precisely what the policymakers want.

The ultimate goal of a PPP investment fund is to make a market viable and create development impact. For this purpose, it is necessary to catalyse private investments in an effective and sustainable manner. The donors and the IFIs are in effect providing a stepping stone between pure donor finance and pure commercial finance – overcoming precisely those information and coordination problems that called for the PPP’s initiation. This approach allows private-sector partners to become active in fields they lack familiarity with (for ­instance, microfinance or energy efficiency) without having to demand excessive risk premiums.

Finance in Motion, the alternative asset-management firm, has a solid track record of working with these types of investment funds. The company was involved in the establishment (first through the preparatory stages, and then as Fund Advisor) of the European Fund for Southeast Europe (EFSE), the world’s largest microfinance and SME investment fund with over € 800 million in committed capital. This fund was initiated by KfW Entwicklungsbank, the German ­government’s development bank. EFSE is now supported by a wide array of governments, donors, IFIs and, crucially, private investors. All summed up, EFSE has become the “gold standard” for the PPP model in de­velop­ment finance.

The core investors in EFSE have adapted the ­model when designing PPP funds with other purpo­ses. One example is REGMIFA, a micro and SME finance investment fund serving sub-Saharan Africa. More recently, the focus has been on boosting investment in energy efficiency (EE) and renewable energy sources (RE). Finance in Motion has been engaged in several of these structures. For instance, it has acted as investment adviser to Green for Growth Fund (GGF), Southeast Europe, which was the first PPP investment vehicle to become operational with the mission of boosting RE and EE.

The regional setting

Southeast Europe (which the GGF defines as Albania, Bosnia and Herzegovina, Croatia, Kosovo, Macedonia, Montenegro, Serbia and Turkey) is an important market for EE/RE financing. All countries and territories in the region are in some stage of accession to the European Union, either through the signing of a ­formal acquis communautaire, or through the Western Balkan “stabilisation and association” process. ­Accordingly, the EU’s 20/20/2020 programme, which seeks to reduce both energy consumption and carbon emissions by 20 % by 2020, is relevant to each of these countries.

For historical reasons, the region’s economies (with the exceptions of Turkey and Albania) have rather low levels of energy efficiency and emit a lot of CO2 per economic output. This is evident in data from the International Energy Agency (2009). The Serbian economy, for instance, is more than twice as energy and carbon intensive as Germany’s. Albania has an ­advantage because it largely relies on hydropower. To a lesser extent, this is also true of Turkey.

Given the growth that these markets will undergo as they converge with the EU, there will be an increa­sing demand for energy. The region is already a net ­energy importer, depending on gas and electricity supplies from neighbouring regions. The need for increased self-sufficiency is particularly acute in Turkey, a country that imports 80 % of the energy it uses.

Growing energy demand can be met either through conventional energy sources like fossil fuels or through increased energy efficiency and leap-frogging the carbon-intensive path of developed economies to a more sustainable basis of renewable energy production. In view of global warming and constrained supplies of fossil fuels, the latter is clearly preferable to the former. It obviously makes sense to bank on EE and RE utilisation. To promote this course of action is the mission of the GGF. By lending money to local ­financial institutions at comparatively low interest rates, the GGF allows them to provide finance for EE and RE investments by private households, businesses and municipalities.

Such loans to financial institutions account for approximately 70 % of the Fund’s investments. They are intended to foster “green” loan products within the ­region’s financial sector. The GGF has a companion Technical Assistance Facility. It provides support to partner institutions, helping them to identify market niches, develop loan products, train staff and implement these products.

On the other hand, the GGF directly finances investments in RE projects, for instance by providing funds for small hydropower plants, small wind farms, biomass projects or solar power generation. Whether the GGF finances projects directly or indirectly through local financial institutions, it always facilitates investments which will have a lasting impact and contribute to creating a sustainable green energy market in the target region.

To ensure that it is fulfilling its mission, the GGF has set a minimum requirement of 20 % energy savings and/or 20 % reduction in CO2 emissions. This is in line with the EU’s 20/20/2020 target. The GGF insists that partners monitor and report the progress made. There is a host of meaningful investment opportunities (see box).


Given the average age and overall efficiency levels of technology and infrastructure in the region, there is substantial growth potential for GGF in Southeast ­Europe. However, the degree to which this potential is realised will depend on developments in the general ­legal and regulatory framework, as well as building the necessary web of supporting market structures to make EE and RE investments possible.

It is reasonable to foresee the GGF investing over ­€ 400 million in the region in the next five years. This would indicate annual GGF-induced savings of over 70,000 tons of carbon emissions per year. However, this figure only quantifies the direct and immediate savings. Once the investment’s loan is fully repaid, the energy savings do not disappear – they continue for decades thereafter. Therefore, unlike grants or subsidies, the money invested by the GGF will be used again for similar purposes in the future. In view of this compounding effect of loans for EE and RE investments, the GGF will be able to invest into new projects each year that, over their lifetime, will save up to 420,000 tons of carbon dioxide, the equivalent of removing 81,000 cars from the road annually.

By channelling these investments largely through the financial sector, the GGF will also foster the development of a green finance industry. By lending to local financial institutions, and investing in Technical Assistance to enable those financial institutions to develop green products and methodologies, the impact is further multiplied. As GGF loans are repaid, the financial institutions will continue to mobilise their own resources to expand their green portfolio. Ultimately, the GGF will have achieved its mission when it is no longer needed in its initial markets – by bridging the gap between the nascent EE/RE markets and the financial sector, it will have institutionalised this business in the region. Until this day arrives, the team of Finance in Motion will be moving with passion and confidence to deepen and broaden the energy efficiency and renewable energy markets in Southeast Europe.

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