Monday, June 25, 2012

What's Additionality for Anyway?


Additionality
Banks like the UK Green Investment Bank (GIB) can provide partial loan guarantees or credit enhancers for green projects. The GIB is capitalized with £3 billion and seeks to address market failures affecting green infrastructure projects in order to stimulate a step up in private investment.
Given the volatility of financial markets and bonds, which are a lower-risk option for investors, yet have been few investment-grade green bond choices. Many of which have little or lacked liquidity, which keeps institutional investors away. Therefore development banks offer investors a way to scale green by providing institutional backing and a source of liquidity, if necessary, for the market to flourish.
Work is based on the “additionality” given for projects. These include non-financial and financial benefits. For example in the financial aspect, if a loan is rated AB, the development bank may assist to lengthen the tenor to 15 years from what the10 to12 offered by a private sector option. Another example, the bank could support the structure of the loan by subordinating the debt.  In the non-financial assistance, banks can offer technical assistance or non-corporate governance. Furthermore, development banks can offer oversight and evaluations (OVE) with third parties to ensure the financial deal is complete and meets the appropriate standards.
Investment banks can also offer Non-Sovereign Guarantees for public programs without state guarantees such as para-statel apparatus.  These are big-ticket items, such as the Trans-Santiago project, a public transportation program in Santiago Chile, which was $400 million to build. Development banks also assist with quasi-state deals like EASE—State owned Electricity Companies. For example in 2008, the Inter-American Development Bank (IDB) financed loans up to $270 million and lengthened the tenor from 8 to 12 years for the loan in the Bio-Energy market and Renewable Energy market.
Additionally, development banks like GIB serve to unify finances and spend them for development projects within their own countries; such projects may include waste infrastructure and water treatment projects. The UK Government unified local government spending into a lump sum of £100 million to invest in smaller waste infrastructure projects (typically in the size range of £15-25 million), on a fully commercial basis.  The waste infrastructure projects will be transacted initially through specialized fund managers experienced in this sector, in order to ensure that government funds are deployed on equal terms with private capital. The bank manages the full procurement process of these types of loans and investments.

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