Show me the money | Part 2 Financing the Blue Economy and Marine Renewable Energy

By Gail Hurley, Policy Specialist on Development Finance, UNDP and Dr. Justin Ram, Director of Economics, Caribbean Development Bank

This opinion piece was originally published by UNDP

Efforts to exploit the Caribbean’s ocean resources are not new; coastal tourism and fisheries are well established industries. However, the blue economy concept represents a (relatively) new paradigm shift in that it is centred on the long-term sustainable use of ocean and coastal resources in both traditional and new ocean-based industries. Part 1 in this blog series offered four policy suggestions for Caribbean governments who wish to pursue this approach. Part 2 looks at ways this can be financed.

While governments may be inspired by the blue economy paradigm shift, their pockets may not be quite so deep. Innovative financing mechanisms – such as those discussed in the Caribbean Development Bank (CDB) and United Nations Development Programme’s (UNDP) recent paper “Financing the Blue Economy: A Caribbean Development Opportunity” – will be critical if the sustainable benefits of the blue economy approach are to be realised. This is especially the case in key blue economy sectors, such as marine renewable energy, which can carry high investment costs for relatively small economies.

Marine renewable energy remains an under-explored area in the Caribbean, yet it is one in which investment can – and must – be accelerated. Many Caribbean countries have set themselves ambitious targets to diversify their energy mix. For example, Barbados aims to derive 65% of its energy from renewable sources by 2030; Montserrat is aiming for a 100% renewable energy grid by 2020. Yet investments in renewables are low and the Caribbean region remains heavily dependent on fossil fuels. Electricity tariffs are high, averaging 35¢/kWh (compared to just 12¢ in the US and 20¢ in the UK).

The region has large untapped sources of renewable energy with huge solar, wind, geothermal and marine energy potential. There are however multiple challenges associated with leveraging private sector investment: limited economies of scale and substantial environmental vulnerabilities diminish the attractiveness of these opportunities for investors. This is coupled with a limited awareness of opportunities, the lack of a high-quality investment pipeline and weak national capacities for project design and implementation. These factors all contribute to high financing costs. Many investments in these areas have, to-date, been financed by bilateral and multilateral development partners; however resources remain limited.

Part 1 of this blog series showed how governments could take policy measures to accelerate private investment in the blue economy through, for example, de-risking investments and improving the business environment. The joint CDB-UNDP paper also shows that innovations in finance can also play an important role to catalyse investment.

For example, contingently recoverable grants (where a grant is converted to a loan should the project go ahead) and new insurance products can help reduce the risks and upfront costs associated with the exploratory phase of capital intensive projects. CDB has explored a mix of loan, grant, and contingently recoverable grant financing on a number of sustainable energy initiatives in its borrowing member countries. This strategy has helped to strengthen governments’ positions when coming to the table with major private sector interests, and enabled them to negotiate fairer terms and resource allocations. Opportunities for blended finance in support of the blue economy also remains underexplored across the Caribbean.

Green and blue bonds should also be explored. Fiji recently became the first small island state to issue a green bond for investments in renewable energy and resilience to climate change. The Seychelles has piloted a blue bond for investments in sustainable fisheries development, with partial credit guarantees issued by the World Bank and the Global Environment Facility to help lower interest costs.

High debt ratios in the Caribbean (in 2017, the average public-sector debt stood at 64.3% of GDP compared to 48.3% across emerging and developing countries) make debt-for-nature swaps an attractive avenue to pursue.

Extreme environmental vulnerabilities also create opportunities for new insurance schemes, such as the coral reef insurance being piloted in Mexico by The Nature Conservancy and UNDP. The restoration of key ecosystems which can effectively and rapidly sequester carbon could also help to position Caribbean countries within the international carbon sequestration market. UNDP and Grenada’s Blue Innovation Institute are currently exploring whether impact investment could be harnessed to support coral reef, mangrove and seagrass bed restoration.

Aside from investing in renewable energy and resilience-building ventures, there are opportunities for the Caribbean to transition established industries, e.g. fisheries, tourism and marine transport to more sustainable practices. The implementation of marine reserves or no-take areas as well as more sustainable fisheries and aquaculture practices have emerged across the Caribbean and can yield a triple dividend: ecosystem and biodiversity preservation, the protection of livelihoods while at the same time serve as a major tourist attraction. It is equally important that individuals and enterprises operating in these sectors are formalised so they can contribute tax revenues, and access finance and insurance.

To take advantage of these opportunities, the region needs to build capacities in new financing models and approaches. The paper proposes a regional finance facility to pool expertise and build an investible project pipeline on a region-wide basis. Governments could voluntarily adopt Green Bond Principles and global best practices to enable them to more readily use these securities. Multilateral development banks and the Green Climate Fund could, in turn, provide guarantees or partial-guarantees, thus bolstering the credit rating of the overall green or blue bond issue. Issuance costs could also be supported through a grant facility. A collaborative platform between governments, development banks and international investors could meanwhile enable the exchange of information about the pipeline of blue economy infrastructure projects and discuss barriers to capital flows to the region.

On the lender side, innovations in loan instruments, such as the hurricane or catastrophe clauses which automatically reduce or halt debt service payments when a major shock strikes can help to boost short term fiscal space, reduce the need to take on more debt and reduce macroeconomic risks. UNDP, the Commonwealth Secretariat and the IMF have made the case to roll these innovations out more widely.

Finally, the reliance on income per capita as a measure of a country’s level of development and its financing needs renders many Caribbean countries ineligible for concessional financing from certain donors and lenders. Yet this methodology does not take into account the region’s structural economic and environmental vulnerabilities. UNDP has made the case that a basket of indicators, including environmental vulnerabilities, capacities to mobilise domestic and external finance, poverty levels and type of project being financed should be used to determine access to official finance and the most appropriate level of concessionality. CDB is developing an index that provides a more holistic assessment of the economic, social and environmental vulnerabilities of the region.

In summary, the blue economy will require new partnerships between nations (particularly to develop regional initiatives) and with the private sector (for example through blended finance arrangements) to harness private finance. The Caribbean Development Bank and UNDP will undertake further work to explore in-depth how new financing models and approaches can be piloted and rolled-out across the Caribbean in support of the blue economy. The work is just beginning.

 

 

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