Minister for Development Cooperation Flemming Møller Mortensen says: “To achieve the UN Sustainable Development Goals and fulfil the targets of the Paris Agreement, we must greatly ramp up our green initiatives, which includes significantly increased climate investment. This is especially true in developing countries, where it is difficult to attract private investment due to the higher investment risk. For all of these reasons, Denmark is proud to present this innovative new instrument, which fortifies development assistance with state guarantees of up to DKK 2 billion to increase private investment in developing countries.”
Mortensen adds: “The guarantee instrument will potentially mobilise an additional DKK 3-4 billion for development efforts. I will have it in my bag when I go to COP26 in Glasgow. The Government has already set the bar high and expects Denmark to contribute at least 1% of the international funding target for climate efforts in developing countries. By setting this ambitious example, I hope that Denmark will pull other countries in a more ambitious and green direction.”
The new guarantee instrument supports the implementation of Denmark’s development policy strategy, as well as the Government’s long-term strategy for global climate efforts. This includes the Government’s ambition to contribute at least 1% of the developed countries’ collective goal of mobilising at least USD 100 billion annually for climate efforts in developing countries. Climate funding mobilised by the instrument can be reported as part of Denmark’s global climate contribution.
The state guarantees of up to DKK 2 billion during the pilot period that runs until 2025 have the potential to mobilise an additional DKK 3-4 billion in private funding for development purposes. A large share of this funding is expected to be channelled into climate investment. State guarantees can reduce investment risk in developing countries and thereby facilitate lending to small and medium-sized enterprises, as well as lending for investment in the green transition, including renewable energy projects and energy efficiency initiatives.
The guarantee instrument is administered by the Investment Fund for Developing Countries (IFU) and will be implemented in collaboration with Sweden, building on the experience of the Swedish International Development Cooperation Agency (Sida), which has mobilised significant sums for sustainable investment in developing countries using state guarantees.
A small slaughterhouse in Uganda wants to invest in new and more energy-efficient refrigeration systems to reduce its electricity consumption. However, banks are reluctant to lend the company money for this investment despite an estimated ROI of just a few years. Given the small size of the company, and perhaps due to inexperience in lending for energy efficiency projects, the banks assess the risk as being too high.
In this situation, a state guarantee can reduce the bank’s risk in the event of a potential default on the loan. If the company is unable to repay the loan, the guarantee will cover a portion of the bank’s losses. The bank pays a premium to the state guarantee programme for the guarantee, which is comparable to an insurance policy. These guarantee premiums from banks cover the expected losses under the programme. As the bank gains positive experience with lending for these types of investments, it will be increasingly willing to grant loans without requiring a state guarantee.
Examples of possible guarantee partners:
Guarantees for funds which lend to companies that supply villages and households with energy from solar power systems.
Guarantees on lending by local banks to small and medium-sized companies for renewable energy and energy efficiency solutions.
Guarantees on cooperation with multilateral institutions to increase climate investment in developing countries by institutional investors, such as pension funds and insurance companies, for projects such as solar and wind farms and water supply systems.
Laura Sørensen Topp tel. 61 97 92 41, [email protected]