WGES 2017: Can PPPs cut the red tape on the green economy?

This is the first of two articles about the future of global and regional green economies.

In December 2015, Italy’s Law No. 221 marked a legislative landmark for global green economy ambitions. Globally, governments had been actively designing programs to catalyze enviro-economic sustainability, but Italy’s Law No. 221 was among the first to cascade a regulatory framework that held corporations accountable as it did with citizens.

In the region, the UAE launched in 2012 the Green Economy initiative, under which the country aims at becoming a global hub of the new green economy, to enhance the country's competitiveness and sustainability and preserve its environment for future generations.

For those operating and living at the expense of the environment, an absolute green economy seems utopian. It is precisely why, despite global bloc and country-level efforts, green models remain in the grey area.

The problematic transition to an economy where environmental sustainability drives, rather than stunts corporate and government interests, was lost on neither private or public sector reps at this year’s World Green Economy Summit (WGES), which took place in Dubai late October. Both, however, are betting – and betting big – on its inevitability for sustainable nations, businesses, and ultimately, people. Why, and why now?

Necessary good

Hajir Naghdy (Image via WGES).

Alongside nationwide reform programs executed in various areas of the world, tech advancements in the energy sector are speedily moving the needle toward green economies, explained Hajir Naghdy, senior managing director and Group Head of Macquarie Capital for Asia and the Middle East, in his WGES keynote speech. “Efforts to decarbonize economies around the world are intensifying,” Naghdy said, backed by stricter global government policies, and shorter-term, more frequent environmental targets. A lot is riding on the year 2020; by then, the United Nations Framework Convention on Climate Change’s (UNFCC) Green Climate Fund should have raised $100 billion, and Dubai should have reached its seven percent clean energy target.

Plummeting oil prices, and hence, a dire need to diversify away from hydrocarbons, have further shifted public and private interests toward renewable energy. Globally, cheap tech will be a key player in the democratization and transparency of the energy sector - nowhere more evidently than in the MENA region, where a slew of startups have emerged to actively tackle energy problems.  

This shift, Naghdy pointed, will be most evident in decentralized energy distribution and trading models, and ultimately, startups. The money will follow, but not as naturally as expected. “What is clear is that a business-as-usual approach to green infrastructure investment won’t be enough,” he added.

Public opinion

The Paris Agreement of the United Nations Framework Convention on Climate Change, which entered into force in November 2016, should have been a great start. The agreement rallies governments from around the world to combat climate change, putting in place financial, technology and capacity building frameworks. However, owing to its ‘nationally determined contributions’ approach, which offered member nations too much flexibility, critics have since deemed it too lax. And then, President Trump pulled out, on the grounds that the US would re-enter the agreement with more favorable conditions.

Paris agreement panel (Image via WGES).

In a panel discussion around the agreement, Morocco’s Minister of Energy, Mines and Sustainable Development, Aziz Rabbah, said that “developed countries that pollute more should have a genuine intention to tackle climate change.” He argues that the agreement should account for the wealth and clout of rich nations, particularly in regulating their benefits out of investing into the Green Climate Fund.

Under the Paris agreement, the latter was designed to help developing countries fund their own capacity building. Out of the planned $100 billion by 2020, it has raised $10.3 billion. It has a narrow window of time to deliver on its promise.

Against limited resources, developing countries are better investing in technologies that are suitable for their economic and social needs, regardless of how advanced they were, Rabbah stressed. They also should, ideally, have “no place for international companies in our countries if they don’t respect the environment,” he added.

Practice makes perfect

Rabbah’s idealism does not necessarily resonate in big economies rooted in corporate interests. The sense of urgency is higher for those directly affected by climate change; a point that was strongly worded in a later panel discussion by Edem Bakhshish, chief of division for Arab States, Europe and the CIS at United Nations Office for South-South Cooperation.

Bakhshish’s remit is for the global south [developing countries], a region that covers “the most motivated stakeholders” in climate change efforts. He is particularly critical of corporate workarounds to environmental regulations.

Economic success, he explained, “often directly correlates with increased, unsustainably growing rates of consumption”; usually of tech products with “built-in obsolescence” that secured steady revenue streams for tech companies. At scale, however, obsolescence can take a catastrophic toll on the environment, as it did with Ghana’s neighborhood turned largest e-waste dump in the world. The country is the final destination of 215,000 tons of second hand consumer electronics, mainly from Western Europe and the US.

“They send this hardware with a label of second-hand merchandising to ‘bridge the digital divide’, whereas in reality, most of this merchandise is useless,” explained Bakhshish.

Through a toolkit of 41 Key Performance Indicators (KPIs) covering social, economic and environmental aspects of its green economy transformation, the UAE is now quantifying the progress of its Green Agenda 2015-2030, asserted Aisha Al Abdooli, director of green development department, Ministry of Climate change and Environment.

She stressed on transferring power to green enterprises through financing opportunities, with a laser focus on PPPs (public-private partnerships).

How can the regional PPP ecosystem scale beyond mega-financing infrastructure deals? Predictable and transparent “policies that translate into strategies with objectives and KPIs, which translate later into laws and a regulatory framework, and eventually transparent and socially environmental procedures,” according to Wissam Rabadi, COP (Chief of Party) of the Jordan Competitiveness Program.

That’s a lot of jargon. But as Rabadi learned firsthand, the devil is in the details of PPPs. In 2011, “with oil prices skyrocketing and the Egyptian gas pipeline being disrupted, [Jordan’s energy sector] found itself in a really difficult position,” Rabadi recounted.

And so, the government set a 15 percent target for the share of renewable out of its total electricity production by 2020. It struck large purchasing deals with 12 independent power producers, and two years later, tried to negotiate these down as energy tech got cheaper. “This really jeopardized the government’s credibility with the private sector,” explained Rabadi.

Poorly or inflexibly designed to account for systemic risks and industry developments, PPP tenders can turn sour. But open communication lines can lead to success stories, one example of which was also in Jordan.

Having initially faced resistance, Rabadi recounted, a consortium program by hospitals in Jordan to generate their own 50 megawatts of renewable energy won by negotiation: hospitals would up their power generation to 60 megawatts, and redirect 10 percent of it into heating public schools. It remains unclear whether this midway compromise came to fruition.

The green thumb

But then, “you have the lenders, who are usually keen to find very steady, predictable environments,” said Sebastien Bernard, general counsel at Veolia Middle East. PPP lenders prioritize the ability of sponsors to deliver on cash flow and debt servicing promises above all else. What does this mean for green financing?

Green financing is subject to the same risk-return dynamics in other sectors, explained Bernard. But when financial sense is blurred with the need for such investments to drive socio-economic sustainability, specialists and committed investors will need to step in and push the frontier of “what is considered commercially investible,” Naghdy stressed in his speech.

Green finance panel (Image via WGES).

“There is a big impression that banks and [institutional finance] are not doing enough in green investment,” said Antony Currie, associate editor at Reuters’ Breakingviews, preluding a panel on green finance. He hints at the next generation of environmentally conscious millennials, the inheritors of grey wealth, as key motivators for banks’ green agendas.

Frank Beckers, head of project finance and advisory at First Abu Dhabi Bank, admitted to local banks’ lukewarm commitments to smaller green investments, away from mega-financing projects. In the same token, ambitious environmental targets, “much higher than in other countries”, will require massive liquidity from capital markets, he stressed. Lenders cannot go it alone.

Green bond issuance has been the center of corporate stunts around clean energy – Apple’s being the latest. But then, “is it a market ploy for cash-rich companies?” Currie asked.

Robert Todd, HSBC’s global head of renewables and clean tech, is not as skeptical. He believes the oversubscription on green bonds, and diversity in financing sources, owe to the maturity of renewable energy projects.

The banking sector has called for regulatory incentives on green financing, namely, lower capital requirements for green bonds and loans. But many object to undermining the risk associated with environmental sustainability projects for the sake of capital flexibility. Capital flaws aside, a key barrier is “that the market and financial institutions are confused as to the definition of green economy,” Professor Valerio de Luca, executive chairman at the international academy for economy and social development, concluded the panel. And that’s a baseline with a big B.  

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