green fund | supporting green initiatives€¦ · the investment strategy provides broad guidelines...
TRANSCRIPT
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GREEN FUND: INVESTMENT STRATEGY
April 2013
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1 Table of Contents 1. INTRODUCTION ........................................................................................................................ 1
2. RATIONALE OF THE INVESTMENT STRATEGY ..................................................................... 1
3. OBJECTIVES OF THE FUND .................................................................................................... 2
4. INVESTMENT CONTEXT ........................................................................................................... 3
4.1 South African Policy Context .................................................................................................. 3
4.2 Legal Context ........................................................................................................................ 3
4.2.1 Public Finance Management Act No 1 of 1999 (as amended) .........................................................3
4.2.2 Intellectual Property Rights from Publicly Financed Research and Development Act ....................4
GREEN FUND POSITIONING .................................................................................................... 5 5.
INVESTMENT RISK AND RETURN OBJECTIVE ...................................................................... 6 6.
6.1 Return Objective .................................................................................................................... 6
6.1.1 Complexity of the return objective ..................................................................................................6
6.1.2 Financial return expectation .............................................................................................................7
6.1.3 Non-Financial return expectation .....................................................................................................7
6.2 Risk Tolerance ....................................................................................................................... 8
INVESTMENT CONSTRAINTS .................................................................................................. 9 7.
7.1 Horizon .................................................................................................................................. 9
7.2 Liquidity/ Budget .................................................................................................................... 9
7.3 Taxation ............................................................................................................................... 10
7.4 Unique Considerations ......................................................................................................... 10
7.4.1 Regulatory...................................................................................................................................... 10
7.4.2 Government Support ..................................................................................................................... 10
7.4.3 Sustainability ................................................................................................................................. 10
INVESTMENT PHILOSOPHY .................................................................................................. 11 8.
8.1 Core Investment Tenets ....................................................................................................... 12
8.3 Opportunity Definition .......................................................................................................... 13
8.4 Thematic Funding Windows ................................................................................................. 14
8.4.1 Green Cities and Towns ................................................................................................................. 14
8.4.2 Low Carbon Economy .................................................................................................................... 14
8.4.3 Environmental and Natural Resource Management ..................................................................... 14
8.5 Fund Allocation (Strategic Asset Allocation) ......................................................................... 14
8.5.1 Fund allocation for the functional areas ....................................................................................... 14
8.5.2 Fund allocation for the thematic windows .................................................................................... 15
8.6 Origination of Investments ................................................................................................... 16
8.6.1 Passive Origination ....................................................................................................................... 16
8.6.2 Active Origination ......................................................................................................................... 16
8.7 Investment Programmes ...................................................................................................... 17
8.7.1 Very High Impact Projects ............................................................................................................. 17
8.7.2 Programmatic Approach for Municipalities .................................................................................. 17
8.8 Structuring of Investment transactions ................................................................................. 18
8.9 Board Representation .......................................................................................................... 18
8.10 Investment Exit .................................................................................................................... 19
8.11 Interaction with other green funding programmes ................................................................ 19
8.12 Restrictions on Investments ................................................................................................. 19
9. RISK MANAGEMENT .............................................................................................................. 20
9.1 Regulations .......................................................................................................................... 20
9.2 Investment Focus Areas ...................................................................................................... 20
9.3 Procedures .......................................................................................................................... 21
9.4 Strategic Asset Allocation .................................................................................................... 21
9.5 Monitoring and Reporting ..................................................................................................... 21
9.6 Financial Instruments ........................................................................................................... 21
FINANCIAL INSTRUMENTS .................................................................................................... 21 10.
10.1 Objectives of the Instruments ............................................................................................... 22
10.2 Guiding Principles ................................................................................................................ 22
10.3 Classification of Green Fund Investees ................................................................................ 23
10.4 Innovation Value Chain ........................................................................................................ 25
10.5 Instrument/Entity Matrix ....................................................................................................... 26
10.6 Set of Instruments ................................................................................................................ 28
10.7 Investment Policy Guidelines ............................................................................................... 31
RESOURCE MOBILISATION ................................................................................................... 38 11.
GREEN FUND GOVERNANCE STRUCTURE ......................................................................... 41 12.
12.1 The Government Advisory Panel ......................................................................................... 41
12.2 The Management Committee (Mancom) .............................................................................. 41
12.3 The DBSA Fund Management ............................................................................................. 42
NEXT STEPS ........................................................................................................................... 43 13.
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1. INTRODUCTION
The national Green Fund (Green Fund) is a unique fund established through an initial allocation of
R800 million from the Government of South Africa, that seeks to support green initiatives to assist
South Africa’s transition to a low carbon, resource efficient and climate resilient development path
delivering high impact economic, environmental and social benefits.
A memorandum of agreement (MOA) was entered into between the Department of Environmental
Affairs (DEA) and the Development Bank of Southern Africa (DBSA) in terms of which the DBSA is
responsible for managing the Green Fund as an implementing agent on behalf of the DEA.
Apart from representing a critical resource mechanism to achieve a green economy and transition
South Africa onto a low carbon and resource efficient growth path, it is envisaged that the Fund will
establish an evidence base consisting of lessons learned through funding the implementation of
programmes and projects which may inform future policy and programmes on the green economy.
2. RATIONALE OF THE INVESTMENT STRATEGY
In accordance with the MOA the DBSA as the implementing agent is required to prepare all founding
documents for the Green Fund and submit them for approval by the Green Fund Management
Committee (Mancom). The Investment Strategy is a key component of such required founding
documents.
The Investment Strategy outlines general principles and the mechanisms that the Green Fund will
apply to make investments in pursuit of the Green Fund’s objectives, covering project development
and implementation. The matters that it specifically addresses include the objectives, the fund
positioning, return objective, risk tolerance, investment constraints, investment processes and
resourcing of the fund so as to enable the parties to the Green Fund and other key stakeholders to
have a common understanding of the investment objectives and mechanisms of the Green Fund. The
Investment Strategy is a critical element of the Green Fund’s governance framework that encourages
effective communication, facilitates transparency, consistency and compliance and provides a
framework for reporting to its decision structures.
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The Investment Strategy provides broad guidelines to facilitate investment decisions which the Green
Fund Mancom deem appropriate in pursuit of the Green Fund’s mandate, strategic objectives and in
alignment with prevailing legal requirements.
This Investment Strategy serves as a starting point in an iterative process that will be shaped and
informed by experience; it is expected to evolve with time and will therefore be subject to continuing
refinement.
3. OBJECTIVES OF THE FUND
The Green Fund aims to provide catalytic finance to facilitate investment in green economy initiatives
that will support poverty reduction and job creation. The Green Fund will respond to market
weaknesses currently hampering South Africa’s transition to a green economy by:
i. Promoting innovative and high impact green programmes and projects
ii. Reinforcing climate policy objectives through green interventions
iii. Building an evidence base for the expansion of the green economy, and
iv. Attracting additional resources to support South Africa’s green economy development.
The Green Fund will maximise partnerships with other funders, private sector and government to
leverage other additional resources.
It is this context that informs the fund positioning, return expectations and risk tolerance, evaluation
criteria, investment constraints, financial instruments and the overall investment philosophy of the
fund.
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4. INVESTMENT CONTEXT
4.1 South African Policy Context
The concept of environmental sustainability as a requirement for sustainable development, which
underpins the green economy is widely recognized. In the South African context, it has informed
the government’s vision of economic development and therefore laid the basis for policy
orientation towards the green economy. South Africa’s overall economic development and hence
its policy towards the green economy is governed by three strategic plans, namely;
- The National Development Plan (NDP)
- The New Growth Path (NGP) and
- The National Strategy for Sustainable Development (NSSD)
4.2 Legal Context
4.2.1 Public Finance Management Act No 1 of 1999 (as amended)
In order for the Green Fund to adequately fulfill its role as a catalytic resource mechanism and
to give effect to its mandate, as per the Investment Strategy it may need to enter into a number
of different types of transactions in the normal course of its business that include:
establishment or participation in establishment of a company;
participation in a significant partnership, trust, unincorporated joint venture or similar
arrangement;
acquisition or disposal of a significant shareholding in a company;
acquisition or disposal of a significant asset;
commencement or cessation of a significant business activity; and
a significant change in the nature or extent of its business interest in a significant
partnership, trust, unincorporated joint venture or similar arrangement.
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Section 54(2) of the Public Finance Management Act No.1 of 1999 (as amended) (PFMA)
requires the Green Fund to obtain approval from the Minister of Finance for the
aforementioned range of transactions to the extent to which they exceed significance levels as
contained in a Materiality and Significance framework agreed with the Minister of Finance.
However, Section 54(4) of the PFMA provides that the Minister of Finance as the executive
authority for the DBSA (and by extension the Green Fund) may exempt the Green Fund from
the application of section 54(2).
DBSA has engaged with the Departments of Environmental Affairs and National Treasury on
the process to be followed to obtain appropriate Ministerial exemptions from section 54(2) of
the PFMA on the grounds that the transactions listed in section 54(2) of the PFMA section are
expected to be conducted as part of the normal business of the Green Fund.
The DBSA as implementing agent has a Materiality and Significance framework in place.
Therefore the Green Fund will operate within the ambit of the DBSA’s significance framework
whilst it engages National Treasury with regards to a Section 54(4) exemption.
4.2.2 Intellectual Property Rights from Publicly Financed Research and Development Act No. 51 of
2008
Projects and ventures that result in the development of intellectual property through financial
assistance provided by the Green Fund fall within the ambit of the Intellectual Property Rights
from Publicly Financed Research and Development Act No. 51 of 2008 (IPR Act) in terms of
which the Green Fund is a Funding Agency and any entity to which the Green Fund provides
funding will be a Recipient. The Act provides that intellectual property emanating from publicly
financed research and development is identified, protected, utilised and commercialised for the
benefit of the people of the Republic, whether it be for a social,economic, military or any other
benefit. Accordingly recipients are required to actively manage intellectual property developed
with Green Fund funding and comply with the requirements of the IPR Act.
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GREEN FUND POSITIONING 5.
The Green fund role is that of a catalyst in the transition towards a green economy. As such the fund
seeks to unlock barriers and bridge gaps, wherever they exist along the innovation value chain. The
Green Fund will thus provide appropriate financial and other support to various entities in both the
public and private sectors engaged in green economic activities from early stage research and
development right through to the project expansion phase.
Through an emphasis on investment principles that include, additionality through the provision of
enabling finance, encouraging risk sharing and strong private sector participation, and a focus on
sustainable environmental, social and economic impact, the Green Fund aims to achieve its objectives
in enabling the transition to a Green Economy.
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A significant share of green initiatives that the Fund seeks to support falls in the early stages of the
innovation value chain. This space is characterized by high levels of risk that is typically hard to
quantify and analyse appropriately, hence it is generally considered unattractive by most traditional
funders, including those in private equity and venture capital.
Private sector participation is very limited and the sources of funding are mostly fiscus or donor based
and typically in the form of either grants or soft loans. One of the key challenges arising from the
limited participation by potential players is that the pipeline of high impact projects and programmes
across the innovation value chain is relatively thin. The investment success rate is consequently quite
low and therefore results in very low investment recovery rates.
It is within this context that the Green Fund aims to operate and position itself in a catalytic role.
Therefore the fund’s ability to, facilitate the de-risking of opportunities to the extent that they begin to
be attractive to other funders (e.g. Venture Capital, Private Equity funders etc.), as well as its ability to
leverage additional funding from other private, government or donor sources of funds locally and
internationally will be crucial in order for the fund to achieve the impact it seeks to achieve.
INVESTMENT RISK AND RETURN OBJECTIVE 6.
6.1 Return Objective
The Green Fund’s main aim is to achieve a multiplicity of outcomes from environmental, social and
economic fronts in driving the transition towards a low carbon and resource efficient growth path,
through financing innovative projects and programmes.
6.1.1 Complexity of the return objective
Therefore, it is recognized that the risk/return objective function for the Green Fund in respect of the
investments it undertakes is complex and comprised of both quantitative and qualitative parameters of
financial and non-financial aspects of environmental, social and economic variables.
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Each individual investment project or programme will therefore be considered on its merits through a
holistic investment appraisal and due diligence process in determining an appropriate blend of:
i. financial return from the economic success of each specific opportunity and
ii. non-financial return in the form of sustainable environmental and social impact aligned with
national benefit and strategic priorities
6.1.2 Financial return expectation
Accordingly the financial return expectation will be informed by the stage of development and
commercial/ financial return potential of an opportunity such that it may be low for high social
impact/public good initiatives, approaching market returns when closer to financial markets and
material where significant wealth may be created.
Furthermore due consideration will be given to:
a) the impact of the Green Fund’s return expectation on the participation of private sector
funders.
b) spill-over effects from the funded activities
c) the level of risk assumed and
d) the need to obtain a reasonable share of wealth created and to create the prospect for
recovery of funds obtained from the public purse.
6.1.3 Non-Financial return expectation
Broad Non-Financial return expectations are defined by the Green Fund’s focus with regard to
thematic window design and policy priorities in the National Development Plan, the New
Growth Path and the NSSD. Specific non-financial return expectations for each project are
established at the due diligence stage and informed by the project’s aims and objectives. The
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expected outcome is that projects that are supported will be gearing South Africa towards an
environmentally sustainable green economy.
6.2 Risk Tolerance
The risk profile of Green initiatives is generally higher and mostly unattractive to traditional funders
owing to a number of reasons. Key of which include 1) the difficulties in fully characterizing and
therefore pricing the risks involved in green ventures and 2 market failure arising mainly from
informational asymmetries and the partial appropriability (the inability to capture the full value) of
innovations.
It is for this very purpose that interventions like the Green Fund are in place to provide catalytic
finance to help de-risk opportunities to the extent that they become attractive to traditional funders.
Risk tolerance is comprised of two elements: 1) ability to take on risk and 2) the willingness to take on
risk.
1) Willingness to take risks
The Green Fund willingness to take on risks is considered to be high from a mandate
perspective
2) Ability to take risks
In order to adequately fulfill its mandate, the Green Fund’s ability to take on risks needs to be
high. With an initial endowment of R800 million from the Government of South Africa, on
establishment, the ability of the Green Fund to take on risk is high. Maintaining that ability in the
future will be dependent on a number of factors including:
The fund’s ability to attract additional resources and leverage cofounding opportunities both
locally and internationally
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National priorities and policy imperatives
Macro and micro economic structural changes
The state of the national system of innovation
The quality of the Green Fund’s investment portfolio of projects
The Green Fund’s risk tolerance is considered to be high in the short to medium term horizon.
INVESTMENT CONSTRAINTS 7.
7.1 Horizon
The Green Fund’s fiscal allocations thus far, are for disbursement during the 2012 to 2014 Medium
Term Expenditure Framework (MTEF) cycle. It is recognized that the successful funding
implementation and conclusion of innovative projects and programmes is described in terms of an
investment lifecycle or investment horizon, which generally consists of ordered phases of origination,
investment appraisal, deal structuring , contract execution, fund disbursements, post investment
management and investment exit. Typically, for transactions were there is an element of fund
recoverability or returns, such as those involving loans, recoverable grants or equity, the investment
horizon will extend well beyond the fund disbursement phase. Therefore the investment horizon for
green fund investments would range from two to ten years or even longer, depending on the nature of
the project.
7.2 Liquidity/ Budget
The Green Fund has received an initial allocation from government of R800 million and a further R300
million. Furthermore the fund has the opportunity attract additional resources from local and
international sources to enable it to play an even bigger role in catalysing green economic activity
through focused resource mobilisation.
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7.3 Taxation
The DBSA as the implementing agent of the Green Fund is a public entity that is currently exempt
from paying taxes on the investments that it undertakes.
7.4 Unique Considerations
7.4.1 Regulatory
The Green Fund’s activities fall within the ambit of several key pieces of legislation including
the PFMA and the IPR Act that have a direct bearing on how it can conduct its business.
7.4.2 Government Support
The Government of South Africa views the Green Fund a critical catalyst and resource
mechanism for the transition to a green economy and as such is providing significant support.
7.4.3 Sustainability
The Green Fund is a proactive but medium-term response to a greener economy, with funding
provided in the context of the Medium Term Expenditure Framework allocation.
In order for the fund to be sustainable it will require a combination of 1) a portfolio of successful
investments in respects of current resources at its disposal and 2) further resourcing and
replenishment in the longer term based on the current investment climate for green initiatives
and its ability to leverage additional funding. The fund will thus adopt a phased approach
towards sustainability involving, a transition from the reliance on fiscal support in the short to
medium term to a reliance, in the long term, on non-fiscal sources of funding which may
include internally generated funds/returns from successful projects as well local and
international funders.
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Therefore the fund intends to blend and refine the following options in order to ensure
sustainability:
a. “Self-sustainability”: Green Fund progressively takes on a financial return instrument
focus and phases out non-financial return instruments such as non-recoverable grants
In this option the Green Fund adopts an increasing recoverable grant, loan and equity
focus within this MTEF (FY2012/15), with a greater number of projects approved being
subjected to financial return based transaction structuring.
b. Green Fund receives continued fiscal support beyond the current MTEF
Continued fiscal support (may allow for non-recoverable grants to remain a key offering
of the Green Fund. Continued fiscal support would be subject to verifiable performance
of the Fund and its prioritization in the national budget
c. Green Fund crowds in additional finance from local and international sources
The Green Fund may approach various international and national sources of capital
including donors to contribute to both its operating costs and disbursements, leveraging
off the existing and potential future fiscal donations. In respect of donors, however the
extent of potentially undesirable conditionalities would need further investigation.
INVESTMENT PHILOSOPHY 8.
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8.1 Core Investment Tenets
8.1.1 Additionality – The fund aims to unlock barriers, address market failures, stimulate and create
new investment in Green projects as opposed to substituting or crowding out private
investment. Therefore investments are only undertaken if there is sufficient scope for
complementing the resources that are available to, and catalysing investment by, primary
participants in the green economy
8.1.2 Risk sharing – Where appropriate, the applicant will be required to manage and to share in
the risks of a proposed venture through directly providing a proportion of the funding of that
venture. The baseline requirement would be a rand for rand in matching contribution (50:50).
The matching requirement may be reduced to take into account factors such as the specific
circumstances of the applicant in terms of need, the stage of development of the proposed
venture and the level of private sector participation. In the case of reductions, the matching
funding requirements should not be less than 20%.
8.1.3 Private Sector Participation- The fund recognizes that private sector participation is central
to sustainable economic activity. Therefore investment activity will be conducted in a catalytic
manner that actively fosters, facilitates and where possible incentivises the participation of
private economic actors in the transition to a green economy. In engaging private sector
participants the appropriate packaging of investment opportunities will be critical.
For private sector co – financing and partnerships, investment opportunities will generally fall
into three categories, which will inform the kind of resources that will be required for
participation:
1. High social impact/public good initiatives with low financial return – the targeted
resource would be non-financial return type funding such as corporate social
investment (CSI) funds which typically do not have a financial return requirement
2. Moderate economic, social and environment return – the targeted resource would
be a blend of non-financial return type CSI funding, and some risk capital (possibly
with concessionary cost of capital / return requirements)
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3. High economic, social and environmental return – risk capital deployed on an
equitable co –financing and risk sharing basis plus incentives
8.1.4 Impact focused Orientation – The fund prioritises impact focused green economy ventures
promising sustainable economic activity, with tangible social and environmental outcomes.
8.1.5 Return Expectations - The Fund follows a ‘multiple outcomes’ approach in defining its return
expectations which include financial and non-financial components. Accordingly in respect of
the setting financial return expectations (and therefore hurdle rates), a case by case basis is
applied.
8.1.6 Full Investment Life Cycle Opportunity Arrangement – The Fund prefers as much as
possible to engage in investment opportunities that are packaged and arranged in manner that
demonstrates at least in principle support and performance based commitments of follow on
funding from other funders. This approach helps bridge funding gaps, enables performing
projects to smoothly graduate along the innovation value chain in a directionally sound manner
and avoids the pitfalls of funding projects in a disjointed manner. Such arrangements allow the
development of a coherent investment pipeline of projects that can progress towards tangible
outcomes.
8.3 Opportunity Definition
The fund will seek out and catalyze innovative opportunities for investment funding across the
innovation value chain where:
The opportunity is relevant to a specific thematic window: Projects shall be directly
related to one of the thematic windows with the objective of a distinct environmental
benefit.
Projects demonstrate Additionality: Projects must demonstrate evidence of their own
contribution and that they are unable to secure funding from other sources.
Projects demonstrate Strength of Developmental Impact: Projects shall support the
national development priorities, notably economic growth, infrastructure development,
job creation and poverty alleviation.
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Projects that demonstrate Spatial distribution: Projects that support national economic
strategy with special attention paid to the spatial distribution of the projects; and
Projects that demonstrate Potential for scalability and replication where there are
insufficient other resources available to progress the opportunity.
8.4 Thematic Funding Windows
The Green Fund will initially consider applications for the following three funding Windows.
8.4.1 Green Cities and Towns
The Green Cities and Towns window is to facilitate funding projects that supports well run,
compact and efficient cities and towns that deliver essential services to their residents, utilising
low carbon development and available natural resources efficiently and sustainably.
8.4.2 Low Carbon Economy
The Low Carbon Economy window will facilitate funding projects that support a low carbon
growth trajectory in line with national climate change policy principles and green economy
policies.
8.4.3 Environmental and Natural Resource Management
The Environmental and Natural Resource Management window will facilitate funding for
projects that strive for protected and conserved resources for sustained ecosystem services to
support South Africa's development path.
8.5 Fund Allocation (Strategic Asset Allocation)
8.5.1 Fund allocation for the functional areas
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The spread of the funds across functional focus areas as outlined in the MoA is as follows:
75% of the funds will be allocated for project development of and /or investment in
green projects and programmes.
20% for capacity building in green initiatives and
5% for policy and regulation from feedback loops from the roll-out of projects
8.5.2 Fund allocation for the thematic windows
In conventional asset management, asset allocation is a powerful risk and return management
tool. For the Green Fund there is not yet an established track record to quantify the effect of
asset allocation to portfolios of investments various thematic windows or other appropriate
categorisation. However given the likely size of the Green Fund’s portfolio and the need to
effectively harness risk exposure, there is a role for some form of strategic asset allocation.
Therefore options and approaches to strategic asset allocation (both quantitative and
qualitative) will be explored and investigated with a view to a phased implementation informed
75% Project Development
20% Capacity Building
5% Policy & Regulations
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by experience, the demand and uptake of investment funds and other pertinent data as well as
the needs of the Green Fund.
The initial approach of the Green Fund will be to follow a balanced portfolio method of
allocating funds to projects covering the respective thematic funding windows to optimise
impact of the Fund. Therefore the fund allocation per window will generally not exceed 50% of
the total funds available for disbursement over a three year period.
8.6 Origination of Investments
The Fund will employ both passive and active forms of originating investment opportunities as follows:
8.6.1 Passive Origination
Closed Calls where applications for investment are only considered during defined
periods of time in a year and the engagement with potential applicants is limited
Open Calls where applications for investment are considered on an unrestricted basis
throughout the year. However the engagement with potential applicant remaining
limited
8.6.2 Active Origination
A business development approach wherein the fund takes on a more pronounced role
in finding , developing and securing potential investees
Applications are therefore considered as per business needs with proactive
engagement with the value chain and potential applicants to develop the project
pipeline
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The fund will generally employ the two origination approaches with a measure of flexibility in order to
drive its mandate and optimise the portfolio of investments. Passive Origination will generally be used
in respect of the bulk of the fund’s standard investment projects whereas for Investment Programmes
such as the Very High Impact Projects the use of the Active Origination approach will be more
dominant.
8.7 Investment Programmes
Over and above the standard pipeline of green projects typically derived through passive origination,
the Green Fund will seek to develop key investment programmes in order to achieve scale, replication
and impact over defined time frames as follows:
8.7.1 Very High Impact Projects
These consist of scalable green projects with a disproportionately high potential for economic ,
social and environmental impact that the fund actively develops with key economic actors and
participants drawn from public and private spheres as per the nature of the opportunity
8.7.2 Programmatic Approach for Municipalities
Working in close collaboration with key stakeholders such as South African Local Government
Association (SALGA), the fund will seek to facilitate initiatives that tackle environmental and
climate change challenges to sustainable urban development. Focus areas to be explored
include energy efficiency, water conservation, waste management and transport. Once clear
value propositions in respect of the eventual focus areas have been established, the fund
would look at appropriate financing mechanisms to facilitate the initiatives.
Based on the needs of the fund and drawing on the experiences from the implementation of these
initial investment programmes, further programmes may be developed.
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It is envisaged that in addition to demonstrably delivering tangible economic, social and environmental
outcomes, the investment programmes will also facilitate feedback and help in strengthening the
enabling environment for the Green transition (including policy and capacity building)
8.8 Structuring of Investment transactions
The Green fund will negotiate and structure each transaction on a case by case basis so that there is
an appropriate blend of financial return and non - financial returns as per the investment risk /return
objective of the fund. The structuring of transactions will be informed by a holistic investment
assessment, due diligence, and investment decision making process. Pertinent and venture specific
insights related to aspects such as stage of development, investment risk, market opportunity and
participants involved, would inform instrument choices and combinations and investment terms
8.9 Board Representation
Green Fund may appoint directors to the boards of companies where it obtains that right or
responsibility from its investments.
Directors may be drawn from DBSA, Green Fund employees or from external individuals, each of
whom should be suitably experienced and qualified to perform their function on the Board of Directors,
on a case-by-case basis.
Green Fund will provide Director’s liability insurance only for those of its appointed Directors that are
DBSA or Green Fund employees. In the case of DBSA or Green Fund employees, engagements to
serve as directors will be deemed to be part of their normal employment with the DBSA or Green
Fund, therefore they may not accept Directors’ fees from the investee companies in respect of such
service
The decision making processes of the Green Fund shall have due regard to the potential conflicts of
interest which may arise when employees or external individuals are appointed to boards of
companies.
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A Director appointed by Green fund would be responsible for the positive performance of the company
in creating value for Green Fund as a shareholder. In doing so a Director would be expected to act in
the best interests of company whilst appropriately taking into account the interests of other
stakeholders in line with established corporate governance standards of best practice.
8.10 Investment Exit
The Green Fund will hold its investments only for as long as it is necessary to do so in fulfilling its role
as a catalytic resource mechanism. The fund will seek to responsibly exit mature investments once
the opportunity has achieved success in terms of the desired economic , social and environmental
objectives .
The Green Fund may responsibly terminate investments where, in the opinion of the Mancom, the
investments are not likely to yield any of the originally intended results due to factors such as, changes
in the market, change in competitiveness of the product or offering, material changes to the team
receiving funding where changes cannot be remedied in a reasonable time.
8.11 Interaction with other green funding programmes
To maximize impact the Green Fund will work together with other funding institutions and relevant
programmes within the national funding ecosystem as well as internationally.. The Green Fund will
explore and implement initiatives to enhance cooperation, information and knowledge sharing with
other participants in the transition to a Green Economy. The Green Fund will explore risk sharing and
co-funding opportunities with these institutions.
8.12 Restrictions on Investments
The following are specifically excluded from financial support by the Green Fund:
1. Opportunities that seek to expand markets for:
a. tobacco,
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b. liquor,
c. recreational drugs,
d. gambling, and
e. sex trade
2. Bio-fuels projects that utilise invasive plants and food sources as feedstock.
3. Costs of conversion from conventional agriculture to sustainable agriculture for private sector
applicants.
9. RISK MANAGEMENT Green economy initiatives are a domain of significant risk that is hard to measure and manage. Risk
management is therefore central to the Green Fund’s investment activities in order to achieve its
objectives. The framework for risk management comprises the overall operating model of the Green
Fund as enabled by the MOA, founding documents as well as the institutional capacity of the DBSA.
This framework includes:
9.1 Regulations
Fully utilising any flexibilities whilst actively and fully complying with the national legislation and
regulatory frameworks, including:
1.1.1 the PFMA; and
1.1.2 anti-bribery and corruption provisions.
9.2 Investment Focus Areas
Identifying, selecting and managing priority funding windows and focus areas for investment ;
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9.3 Procedures
The operating procedures including the origination, investment appraisal, investment decision making,
investment execution as well as the monitoring and evaluation frameworks for the ongoing monitoring
and project management of each investment through to exit, tailored to identify and respond to green
economy investment challenges ;
9.4 Strategic Asset Allocation
Allocation of the funds to categories of investments in a manner that seeks to predominantly align the
profile of investments with aspects such as national policy and strategic imperatives , funding
windows, stage of development and a diversified balanced exposure in risk and return efficient and
effective manner;
9.5 Monitoring and Reporting
Fund portfolio monitoring, analytics and reporting that informs the composition and management of the
Green Fund’s investments. The monitoring of the fund’s portfolio is conducted within the ambit of an
overarching monitoring and evaluation framework which specifies three levels of monitoring and
evaluation: i) Green Fund level (the business and organization constituting the fund), ii)
Portfolio performance level (the portfolio of investments) and iii) the Project level (individual
investments) ;
9.6 Financial Instruments
Financial instrument design that encourages risk sharing through co-investment, and seeks multiple
outcomes including a reasonable financial return
FINANCIAL INSTRUMENTS 10.
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In achieving the Goals of the Green Fund, various instruments are to be used.
10.1 Objectives of the Instruments
The rationale underlying the design of the financial instruments can be summarised as follows:
Enable the Green Fund to effectively and appropriately play its role in providing catalytic
finance and unlocking barriers wherever they may occur across the entire innovation value
chain
Balance risk between the Green Fund and the recipients of funding
Provide guiding principles on the allocation of funds to various applicants;
Provide incentives to catalyse Green economic activity and encourage private sector
participation
A basis upon which applicants may be guided into varying financial instruments for ease of
evaluation and clearer understanding of the financing need
10.2 Guiding Principles
The following are the guiding principles relating to the financial instruments:
Risk sharing – Where appropriate, the applicant will be required to manage and to share in
the risks of a proposed venture through directly providing a proportion of the funding of that
venture.
Commercial and Impact focused orientation – The instruments are designed in order to
enable impact focused green economy ventures promising sustainable economic activity to
proceed.
Return Objective – The return objective function is complex, consisting of financial and
non-financial aspects of environmental, social and economic returns. The instruments are
designed as a mechanism with which to accelerate environmental, social and economic
impact and create the prospect to recover some funds over time
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The financial instruments matrix should be used for guidance in “lookup” mode and not as
a representation of the sequence that a given entity/opportunity should follow. A due
diligence process and the exercise of professional judgement and alignment to the
objectives and orientation of the Fund may be required in determining appropriate
instrument choice and deal structure. Accordingly the Green Fund may recommend
instruments that differ from the type requested by an applicant.
Combinations - financial instruments may be used either independently or in combination,
based primarily on the type of client (and their needs), the stage in the investment life cycle
and the instruments deployed by co-investors or partners as well as any pertinent due
diligence findings
Due Diligence – the financial instruments are designed to be delivered within the ambit of a
holistic investment assessment, due diligence, deal structuring process and ultimately the
guidance of the Mancom. Pertinent and venture specific insights related to aspects such as
stage of development, investment risk, market opportunity and participants involved, would
inform instrument choices and combinations
10.3 Classification of Green Fund Investees
The potential applicants and investees of the Green Fund are broadly categorized as either public
sector or private sector. Public sector applicants include provincial governments, municipalities, state
owned enterprises and higher education institutions. Private sector applicants typically include small
to medium sized companies and large corporates.
The categorization is primarily based on client types in terms of risk profiles and needs. This serves as
input into the instrument/entity matrix which essentially provides the framework for the deployment of
financial instruments.
The full classification is provided in the table below.
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Sector Sub sector Applicant types Instrument Types
Public Sector P11
National Departments
Provincial Governments Municipalities (market 3) Higher Education
Institutions (Historically black)
Science Councils and Research Institutes
Grants (Non Recoverable )
Grants (Non Recoverable) + Matching
Grants (Recoverable) + Matching
P2 SOEs
Metros Municipalities (market 2) Higher Education
Institution
Science Councils and Research Institutes
Grants (Recoverable) + Matching
Loans
P3 NGOs
Trusts
Not for profit companies
Grants (Non Recoverable )
Grants (Recoverable) + Matching
Private Sector PV1 Start-ups
SMME’s
Individual Entrepreneurs
Grants (Recoverable) + Matching
Loan
Equity
PV2 Medium sized companies
Large companies
Grants (Recoverable) + Matching
Loan
Equity: Preference
PV3 Privately managed funds/Venture Capital /Private Equity,
Investors
Grants (Recoverable) + Matching
Loan
Guarantees
Equity: Preference
Equity: Ordinary
1 P1 to P3 denote a categorisation of public sector applicants including non-for-profit organisations whereas PV1 to PV3
applies to private sector applicants
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10.4 Innovation Value Chain
The innovation value chain is broken down as follows:
Stage 1
Pre – Commercial
Research and Development
Proof of Concept Develop, test and
promote new technology
Stage 2
Pre – Commercial
Project Preparation (Technology and Product Development)
Feasibility studies, Demonstration of
feasibility and scalability
business plans, regulatory approvals
and financing
Product Development
Prototypes
Stage 3
Commercial
Implementation
(Market Validation and Launch)
Market Discovery Market Entry Manufacture of
sufficient volumes to overcome barriers
Stage 4
Commercial
Expansion (Scale Up and Replication)
Market Penetration
New Market Development
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10.5 Instrument/Entity Matrix
The objective of the instrument/entity matrix is to enable the Green Fund to deploy a comprehensive
set of instruments that result in efficient negotiations and deal structuring that attracts partners,
balances the risks and results in effective Green Economy interventions. The Green Fund will
generally deploy a range of financial instruments in providing catalytic finance to entities engaged in
activities falling in the stages of the Innovation Value Chain as shown in the matrix below, based
primarily on the type of client (and their needs), the stage in the investment life cycle, due diligence
and the instruments deployed by co-investors. The clustering of client types to applicable investment
instruments and stage of innovation with particular risk profiles also enables coherent management of
similar risk investments.
Stage 1 ( Research and Development)
Stage 2 ( Project Preparation)
Stage 3 (Implementation & launch)
Stage 4 (Scale Up)
Public Sector P1 Provincial Governments, Municipalities(Stages 3 & 4 to happen with Private sector participants)
Grant (Non Recoverable)
Grant (Non recoverable) + Matching
NA
NA
Public Sector P2 Municipalities, SOE’s, HEI's and SC's (Stages 3 & 4 to happen with Private sector participants or SOE)
Grant (Non Recoverable) + Matching
Grant (Non Recoverable)+ Matching, Grant (Recoverable) + Matching
Grant (Recoverable) + Matching, Loan
Loan
Public Sector P3 NGO's and Trusts (Stages 3 & 4 to happen with Private sector participants where applicable)
Grant (Non Recoverable)+ Matching, Grant (Recoverable) + Matching
Grant (Non Recoverable)+ Matching, Grant (Recoverable) + Matching
NA
NA
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Stage 1 ( Research and Development)
Stage 2 ( Project Preparation)
Stage 3 (Implementation & launch)
Stage 4 (Scale Up)
Private Sector PV1 Entrepreneurs / SMME's
Grant (Non Recoverable)+ Matching, Grant (Recoverable) + Matching
Grant (Recoverable) + Matching
Equity Ordinary Shares, Equity: Preference Shares, Loan
Equity: Preference Shares, Loan,
Private Sector PV2 Medium and Large companies
Grant (Recoverable) + Matching
Grant (Recoverable) + Matching
Grant (Recoverable) + Matching, Equity: Preference Shares, Loan
Loan
Private Sector PV3 Investors and Managed funds
Direct Co-financing: ( Grant Recoverable)
Direct Co-financing: Grant (Recoverable), Equity
Direct Co-financing: Grant (Recoverable), Equity: Ordinary Shares, Equity: Preference Shares
Direct Co-financing: Grant (Recoverable), Equity: Ordinary Shares, Equity: Preference Shares, Loan, Guarantees
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10.6 Set of Instruments
a. Description of the Instruments
Financial Instrument
Definition
Grant
(Non-recoverable)
Allocation and/or contribution (in cash or kind) bestowed by the Green Fund to an eligible recipient (grantee or applicant) for either capital contribution or on project development activities, for an agreed set of deliverables consistent with the mandate of the Green Fund and with specific conditions detailed in the Grant Agreement. This amount is generally not recoverable from the applicant during any period.
Grant
(Recoverable)
Allocation and/or contribution (in cash or kind) bestowed by the Green Fund to an eligible recipient (grantee or applicant) for either capital contribution or on project development activities, for an agreed set of deliverables consistent with the mandate of the Green Fund and with specific terms and conditions detailed in the Grant Agreement. This amount is generally recoverable, contingent on success, possibly linked to revenues, in accordance with terms and conditions specified in the Grant Agreement. Depending on the commercial potential of a project, recoverability may involve recovery of the initial amount invested and an appropriate portion of the returns.
Loans An arrangement, in which the Green Fund allocates, contributes, subsidises or lends money to an eligible borrower (or applicant) for use as either capital contribution or on project development activities consistent with its mandate and the borrower agrees to return the money (with interest) at a specified period in the future. The terms, which may be concessionary, and conditions of this arrangement, are contained in the Loan Agreement.
Equity
Allocation and/or contribution (in cash or kind) bestowed by the Green Fund to an eligible recipient (investee or applicant) as capital contribution on activities consistent with the mandate of the Green Fund and with specific terms and conditions detailed in the Funding Agreements in exchange for an ownership interest and the associated rights in respect of the relevant investment target.
Guarantees (modalities yet to be finalised)
An arrangement, in which the Green Fund guarantees a certain return to investors and/or takes a subordinated position in the distribution of the funds’ profits, as capital contribution on activities consistent with the mandate of the Green Fund and with specific terms and conditions detailed in the Funding Agreements. This leverages and enables private investors to participate in high risk green ventures with protection against major losses of principal (downside risks are capped) for some portion of capital invested.
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b. Prudential Limits
The Green Fund will apply the following prudential funding limits:
Stage of Development Project Funding limit
Indicative Portfolio allocation
Stage 1 R15 Million 30%
Stages 2, 3 R50 Million 40%
Stage 4 R70 Million 30%
An applicant may apply for more than one financial instrument from the Green Fund. The total
funding allocated to any project is a maximum of R70 Million. The limit may be waived by
Mancom in the case of very high impact initiatives with compelling motivation.
The budget allocation and prudential project funding limits indicated above are based on the
pre-liminary projected investment portfolio. Accordingly these may need to be revised from
time to time. The revision will be based on implementation experiences and risk/returns
modelling that will be conducted in order to inform topping-up requirements, timelines and the
overall sustainability of the Fund.
c. Rates of return
Pricing of debt
For concessional loans market based reference rate less concessionary discount of (0 to 4 %)
will be applicable. Applicable market reference rates and indicators with appropriate
concessions will also be applied on a case by case basis considering aspects such as project
stage of development and applicant type. The following market reference rates may be applied
depending on applicability:
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South Africa’s Prime Lending Rate (Prime)
Johannesburg Interbank Offered Rate (JIBAR)
Long term South African Government bond rates such as the R186
Valuation
In conducting equity valuations and discounted cash flow analyses, appropriate analytical
frameworks are employed in the determination of required rates of return. Discount rate
estimation techniques such as, capital asset pricing models, the build-up method, the venture
capital method and or comparables may be used.
Internal Rate of Return (IRR) Analysis
Analysis of returns for purposes of investment appraisals, is undertaken in line with the fund’s
financial return objective whereby financial return expectation is informed by the stage of
development and commercial/ financial return potential of an opportunity such that it may be
low for high social impact/public good initiatives, approaching market returns when closer to
financial markets and material where significant wealth may be created.
Therefore the minimum project investment hurdle rates are set as follows
i) IRR should be positive for high social impact/public good initiatives with a low
financial return
ii) IRR should be greater than Prime for projects that are sufficiently progressed
along the Innovation Value Chain (towards Implementation and Launch stage)
and are closer to financial markets
iii) IRR for opportunities promising high economic impact and financial return, that
can be significantly progressed along the Innovation Value Chain (towards
Expansion) and graduated into mainstream financial markets are categorised
according to risk profile. The following investment hurdle rates will generally
apply:
IRR investment hurdle rates
Low Risk Medium Risk High Risk
10 % 15% 18%
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10.7 Investment Policy Guidelines
I. Recoverable Grant
a. Recoverable Grant Types
The following types of recoverable grants may be offered to applicants:
1. Partial Capital Recovery grants in which only part of the initial funding provided is
expected to be repaid.
2. Full Capital Recovery grants whereby all the funding provided is expected to be repaid.
3. Capital Recovery plus Return (Royalty) grants whereby a project is expected to provide
a recoupment of capital plus an equitable share of the economic returns of the project
The determination of the applicable grant type and hence level of recoverability is based on the
nature and duration and investment case of the proposed project as informed by a due
diligence process.
b. Basis of Recovery
Repayment is contingent on success of the project. Therefore it is only where a project is
successful that it is expected to pay the fund in respect of the recoverable grant. An
appropriate cash flow may be used for calculating the nature and level of recoverable grant
payments.
c. Direct vs Indirect Commercialisation
In determining the nature and level of recoverability, the fund will also take into account
whether the commercial exploitation of the intellectual property developed by a project is
undertaken:
1. directly by the project sponsor/applicant or its affiliates, or a commercial vehicle created
by the applicant to commercialise the Project IP Portfolio, or
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2. not directly by project sponsor/applicant, e.g. licensing or sale to an independent third
party/parties
d. Collateral
Recoverable grants are completely unsecured.
e. Recoverability Analytics
The fund will use appropriate analytical methodologies (quantitative and qualitative) and
subjective assessments in the evaluation and structuring of recoverable grants. In evaluating
projects, the fund will pay particular attention to the degree of operating leverage, operating
margins and ability to repay as indicated by aspects such as the risk adjusted free cash flow
generating ability of the project.
f. Length/Term of Recoverable grant
The period during which a project may make recoverable grant repayments (royalty payments)
is contingent on the success of the project and where applicable, the duration of patent
protection in the case where new intellectual property is created. The fund will generally expect
the repayment period to be not more than 20 years (in line with the period of commercial
exploitation of intellectual property developed) from the initiation of the project.
g. Conversion to Equity
The recoverable grant may be structured with the option to convert part or all of the funding
provided to an equity interest in an appropriate commercial vehicle.
II. Loan
i. Risk Based Lending Loan Types
The following types of loans may be offered to applicants:
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1. Project Finance loans which are backed by the cash flows generated by the project,
wherein finance is provided through a special purpose vehicle/ company set up to deal
solely with the proposed project or through the sponsor/applicant
2. Traditional Company/Corporate finance which may be backed by the balance sheet of
the applicant
ii. Use of funds
Borrowed funds will typically be used for fixed capital expenditure, working capital and
general purposes.
iii. Borrower Type
The fund may lend directly to:
i. Applicant or Project Sponsor
ii. Special Purpose Vehicle/Company set up to deal solely with the proposed project
iv. Collateral
Security may be taken over the project assets and the cash flows generated by the project. In
the case of lending directly to applicant/project sponsor/company, the fund may limit its
recourse to the assets of the project and not to other rights and assets of the applicant/project
sponsor/company.
The fund may also require the following forms of security:
1. General Notarial Bond
2. Guarantee
3. Maintenance of a debt reserve account
4. Cession of shareholder’s loans
5. Cession and pledge of shares
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v. Credit Analytics
The fund will use appropriate analytical methodologies (quantitative and qualitative) and
subjective assessments in the evaluation and structuring of loans. In evaluating projects,
the fund will pay particular attention to debt sustainability and ability to repay as indicated
by aspects such as the risk adjusted free cash flow generating ability of the project.
A loan rate for each project is generally determined via analytical placement in the risk
based lending matrix as of the time of due diligence. The applicant’s matrix level
determines the level of concessionality of the loan interest rate and the score ranges are as
follows:
Hence the loan rate awarded will be equal to the relevant base rate less the matrix based
concession.( e.g for a high social and environmental impact project with a
financial/economic strength score of 1 the loan rate could be prime (base rate) minus 4%
(HSE1 rate).
The determination of the financial /economic strength scores and the relevant
social/environmental impacts is conducting through a due diligence process.
vi. Length/Term of Loan and Repayment
The maturity of a loan would be determined according to the project's risk adjusted forecast
cash flows. In addition to income and expenditure, a project’s need for additional working
capital would be taken into consideration to create a payment plan/ loan amortisation
schedule to suit its cash flow.
Financial/Economic Strength Score
Social/Environmental Impact
1
2
3
4+
High HSE1 (3 -4%) HSE2 (2.5-3% HSE3 (1.5-2.5%) HSE4 (0-1.5%)
Medium MSE1 (2.5-3%) MSE2 (2-2.5%) MSE3 (1-2%) MSE4 (0-1%)
Low LSE1 (2-2.5%) LSE2 (1.25-2%) LSE3 (0.75-
1.25%) LSE4(0-0.75%
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Debt would generally be expected to be serviced within a period of 2 to 10 years from the
initiation of a project
vii. Rates of Interest
Interest is charged as variable rate linked to market reference rates. The appropriate
reference rate is chosen based on the nature and duration and investment case of the
proposed project as informed by a due diligence process.
viii. Applying Concessions to the Loan Terms
i. Interest Rate
Interest rates may be reduced significantly below market rates (up to 4
percentage points below an applicable reference rate)
ii. Repayment
Flexibilities may be introduced to the repayment terms including repayment
holidays (moratorium on interest and/or capital) of up two years
iii. Length /Term of Loan
Tenor of the loan may be increased up to 15 years
ix. Conversion to Equity
A loan may be structured with the option to convert part or all of the funding provided to an
equity interest in an appropriate commercial vehicle
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III. Equity
a. Market Characteristics and Segment Definitions
The fund will generally invest in implementation and launch and expansion stages of the
innovation value chain, and the technology and product development (project preparation)
stage.
Unique investment characteristics of equity investments include:
• Privately negotiated transactions.
• Active participation and strategic guidance in companies by the investor.
• Long-term, illiquid commitments.
• Superior expected returns/risks in excess of public market returns/risks over the long-
term.
b. Valuation and Pricing
Valuations and the attainment of reasonable returns appropriate to the specific opportunity
and principled negotiations are used as the basis for determining the equity stake that the
fund would take in each investment.
c. Shareholding thresholds
The fund will prefer to hold equity stakes that are below 50 percent.
d. Valuable rights
The fund will generally require voting rights and board of directors’ representation that is
appropriate to the specific risks and strategy aspects of an investment opportunity as well
as the level of financial contribution and percentage shareholding taken.
e. Investment Vehicles
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Investment may be undertaken through incorporated entities such as special purpose
vehicles and companies. In the case of some projects, investment may be undertaken on
an unincorporated basis (e.g project feasibility studies, joint ventures or similar
arrangements) with equity interest eventually being transferred to an incorporated structure
as the project develops.
f. Controlling Investment Risks
Controlling risk will be effected through diversification of investment type and thorough due
diligence during the evaluation, acquisition, and monitoring stages of the investment
process.
In order to help reduce portfolio risk, the fund will diversify in the following areas:
i. Financing Stage
The portfolio shall gain exposure through exploiting the best investments at different
stages of the innovation value chain from project preparation through to expansion
ii. Geographic and Economic Region
In the selection of equity investments, the fund shall not favour particular economic or
geographic regions
iii. Industry
Within the funding windows, the fund will seek to invest in a variety of industries in the
focus areas. For high risk green ventures, it is recognized that opportunities may be
more readily realised in some industries more than in others.
iv. Investment Size
The maximum equity investment in any direct investment shall not exceed R150 million.
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g. Alignment of Interests
The fund shall actively negotiate equity investment agreements. The foremost duty in
negotiations shall be to ensure that other shareholder interests are aligned with interests of
the Green Fund as drawn from its mandate. Therefore negotiated terms and shareholding
should be structured so that the Green Fund is treated fairly, is adequately compensated
for the risk taken and able to strategically direct the investment opportunities in achieving
environmental, social and economic impact
RESOURCE MOBILISATION 11.
The Green Fund intends to attract additional financial resources not only through leveraging co-
funding at the individual project level but also at the fund level from a number of sources in order to
enhance the capital adequacy of the Fund. Additional financial resources may be mobilized through
fiscal support, domestic private sector support and support from international funders. In order to
access such resources however, requires an in depth analysis of the resource requirements of the
Green Fund and as well as specific partnership approaches. Accordingly an appropriately robust
Resource Mobilization Plan will be developed.
Some of the key principles that will inform the resourcing plan include:
• Complementing existing funding and the leveraging of resources alongside existing
government institutions with green funding mandate in order to achieve scale
• Cohesion and maximizing partnerships across intergovernmental (local, provincial, national)
funding mechanisms, other funders and the private sector through focused . interaction in
order to leverage additional financial resources.
• Diversification of funding sources, in order to strengthen prospects for sustainability as well as
the potential to secure opportunities to develop new innovative financing mechanisms in
support of a Green Economy. The GF may therefore seek funding from different
resources/funders at different stages in its life time as may be appropriate.
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• A focus on value addition and potential synergies in the selection of resourcing partners in
areas such as the governance and reporting.
Current and potential future sources of funding:
SOURCES OF FUNDING OPPORTUNITY
Fiscal support • The Green Fund’s current budget allocation is R300 million for 2012/13 financial year and R500 million for 2013/14 as well as an additional R300 million. Subject to performance, it is expected that National Government will provide additional allocation for the years beyond 2013/14.
• Alignment with existing green programmes and funding of other government departments provides opportunity for leveraging additional finance.
Domestic - other than fiscal support
• The Green Fund may also source funds from local private sector agencies, banks and Non-Profit Organisations that promote South Africa’s transition to a green economy.
• Potential partners/sources include SA private banks, pension funds and insurance, tax incentives, carbon market, CSR/CSI programmes, other local DFIs.
Multilateral Finance Institutions
• The Green Fund can partner with multilateral financing institutions such as The World Bank, African Development Bank and others on specific programme and project activities.
Bilateral Finance Institutions and International Donor agencies
• Different funding resources are available for project preparation, capacity building, M&E, project implementation finance from bilateral donors.
• The Green Fund can access credit lines and grant funding from bilateral finance institutions.
• These agencies may include amongst others, KfW, DFID, AfD, Swiss, USAID that have approached the Green Fund.
International multi-donor Funding Facilities
• Position the Green Fund as a potential catchment for Green Climate Fund (GCF) funding flows to South Africa. Gaining the GEF agency status provides acknowledgement of DBSA’s fiduciary and environmental and social safeguards.
• Effective use of GEF allocation provides co-financing potential with the Green Fund.
International Private Sector agencies, Banks and NPOs
• There is potential to source funding from or co-fund with other international funding sources such as international private sector (including banks) as well as NPO’s
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The resource mobilisation plan will flesh out resourcing considerations in order to inform partnership
approaches in respect of the following key sources:
SOURCES OF FUNDING
Some Considerations PARTNERSHIP APPROACH
International • The positioning of the Green fund
• Opportunities to enable access to international climate finance through the Green Fund
• Compatibility of governance structures in respect of aspects such as international fiduciary and environmental and social safeguard standards, and reporting frameworks
• Partnership management and coordination of: different partnership requests received
• Engagement with National Treasury on appropriate resource mobilisation: provide basis for themed programme areas and define programme needs e.g. technical assistance, loans and grants, including technology transfer.
• Bilateral engagements on specific operational needs of Green Fund (e.g. MRV frameworks),
• Positioning the GF as catchment for the GCF funding flows into SA.
•
Fiscal Support/ Public Finance
• The appropriate evidence base for
demonstration of development impact and catalytic role
• Identification of market failures and recommendations on how they can be overcome.
• Adherence to principles of public funding and investment strategy framework,
• Explore new funding avenues: carbon tax revenues, environmental tax incentives, improved regulatory environment.
• Transparency and communicate mandate of the GF to
• Alignment and collaboration with other funding partners to leverage resources
Private Sector • Identification of the funding niche between development/government and private sector funding
• Demonstration of the economic potential of good projects for follow on funding
• Identification of critical projects that demonstrate the significance of what the GF can do including to the catalytic role in commercial finance,
• Design and development of appropriate financial instruments
• Appropriate packaging of opportunities to encourage and incentivise private sector, participation, distinguishing
o High social impact/public good initiatives with low financial return
o Moderate economic, social and environment return)
o High economic, social and environmental return
• Knowledge sharing: engaging the financial sector in terms of addressing barriers to green finance (risk analytics, and technical due diligence, under-funded areas, project needs, opportunity to scale,)
• Targeted direct engagements with institutional investors
• Investigating co-funding possibilities and provide funding niche support while leveraging funding for large scale projects (e.g. IDC partnership)
• legislative support for enabling resource mobilisation such as “BEE”-scoring for environmental performance.
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GREEN FUND GOVERNANCE STRUCTURE 12.
The Green Fund governance is through committees that have been constituted based on MOA
entered into by the DEA and DBSA. The responsibilities of the various committees are listed below:
12.1 The Government Advisory Panel
Responsibilities include serving as a consultative forum to support the vision of the Green Fund,
through inter alia:
Receiving information and advising on the approach and issues being considered by the
Green Fund.
Exchanging and reviewing key social, economic and environmental policy developments that
may be relevant to the orientation of the Green Fund.
Raise any other issues that may arise from time to time that may impact the strategic direction
of the Green Fund.
12.2 The Management Committee (Mancom)
Exercising leadership, enterprise, integrity and judgment and, at all times act in the best interests of
the Green Fund as well as taking primary responsibility of the overall performance of the Green Fund,
through inter alia:
Provide advice and guidance for achievement of the objectives of the Green Fund.
Approve the work-plan and targets for the Fund.
Review and approve the Green Fund’s founding documents and amendments thereto,
including the operating guidelines, policies, budget, investment strategy, application
procedures, and eligibility criteria for projects.
Consider the proposals for funding, and make decisions on activities and projects to be
funded.
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Receive and evaluate progress reports on the Green Fund. The reports will include
performance against targets, a progress report setting out the general functions and matters
that require direction from the Committee and a financial report on the progress on
disbursements from the Fund.
Regularly review and evaluate the risks to the activities of the Green Fund, and ensure the
existence of appropriate internal controls to mitigate against such risks
May recommend the investigation of certain issues relevant to the objectives of the Green
Fund.
May establish sub-committees and Advisory Panels from time to time to assist the
Management Committee it in its work.
Create any legal entities which may be necessary to give effect to the Agreement.
12.3 The DBSA Fund Management
Responsibilities include:
recommending investment decisions to the Mancom for approval
developing and managing the investment strategy
periodically reviewing the Investment Strategy and making amendment recommendations
when necessary;
Evaluation of new applications in line with the investment strategy
ensuring that investment are structured in a way that comply with this strategy;
developing, implementing and maintaining up-to-date Investment Processes, including
internal procedures, guidelines and templates for application for Funds/support, application
evaluation and investment monitoring manuals.
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NEXT STEPS 13.
The Investment Strategy is a living document, therefore it will be subject to continuing refinement
based on the experiences and lessons learned through the operations of the Green Fund as well as
changing circumstances. Key areas that may be developed and/or further refined either directly in the
strategy or through operational mechanisms as appropriate, include the following:
- Resource Mobilisation Planning
- Enhancing the alignment and synergies between project development, capacity building
and policy feedback components
- The work around the Programmatic Approach
- Research on Funding Windows and the Green Economy
- Building the Evidence Base for the transition to a Green economy through the Green
Fund’s work
- Strategic Asset Allocation per programme window and/or other relevant variables such as
stage of development , focus areas, and geographic spread
- Incorporating elements of the alignment with similar national funds targeting environmental
objectives (i.e. low carbon and resource efficient development)
- Reviewing the Investment Risk/Return Objective of the Green Fund
- Private Sector participation
- Sustainability and the future direction of the fund.