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Redefining development finance – exploring how countries can fund geothermal development

Maximizing Finance for Development, Infographic - part (source: World Bank)
Alexander Richter 28 Sep 2018

In an article shared today, the World Bank shares its view on how countries, such as Indonesia can access the financing—but also knowledge and solutions—they need to make the critical, but costly, investments toward sustainable and inclusive development, such as for geothermal.

In an article, the World Bank shares its thoughts on how financing could be maximized for development of power projects in countries such as Indonesia.

With 20 million people lacking access to electricity, electrification is a significant challenge for a country like Indonesia. The mix of growing energy demand and meeting national goals on renewable energy targets and reduction of carbon emissions, this is a daunting task.

But with 40% of the world’s geothermal resources estimated in Indonesia, geothermal energy could provide a great opportunity to these challenges. At the same time the country faces costly challenges, due to high costs and substantial risks, often prohibitive for developers, so the World Bank.

So the bank asks, how can countries, like Indonesia, access the financing – but also knowledge and solutions – they need to make the critical, but costly investments towards sustainble and inclusive development?

Therefore the World bank is now redefining how it thinks about development finance.

With challenges like this in mind, the World Bank Group is redefining how it thinks about development finance. Building on efforts to mobilize needed resources for member clients, the Bank Group’s Maximizing Finance for Development (MFD) approach is systematically leveraging all sources of finance, expertise, and solutions to support developing countries’ sustainable growth.

[An interesting Infographic on the MFD approach by the World Bank can be accessed here.]

Rethinking development finance

Many countries face complex challenges that come with high costs. Estimates put the global cost of meeting the Sustainable Development Goals (SDGs) at $4.0-$4.5 trillion a year through 2030. Even when development aid is combined with remittances, foreign direct investment, and philanthropy, the world faces a $2.5 trillion financing gap every year.

It is now apparent that the world won’t reach the SDGs without a wider range of solutions. The MFD approach focuses on efforts that provide the right mix of resources to help countries move quickly toward meeting their development goals. This includes a much bigger role for the private sector as a source of finance, innovation, and expertise.

By engaging the capabilities from across the World Bank Group’s institutions, MFD seeks to optimize the use of public resources and expand opportunities to attract and employ private resources to meet development needs, without burdening countries with unsustainable debt or contingent liabilities. The MFD approach offers a wide range of innovative tools and strives to bring the best solutions to the unique challenges facing countries.

Unlocking private sector investment

Indonesia’s geothermal challenge  is a good example of how MFD can support development in practice. To reduce the hurdles to its geothermal development, the World Bank and the International Finance Corporation (IFC) are working with the country to unlock private investment.

To close financing gaps and mitigate risks, the World Bank is helping the government establish an innovative credit facility that will channel $650 million into geothermal exploration. This includes $150 million from the government, $175 million in concessional climate finance, and $325 million in loans from the World Bank. By supporting early-stage geothermal development, the financing is expected to unlock $4 billion in potential private sector investments.

In parallel, IFC has provided critical advice on how to structure the facility to align with the needs of the private sector. IFC is developing a financing instrument that will kick in once private investors pass through the high-risk exploration phase. This instrument is designed to bridge the gap between the Bank Group’s financing and the finance needed for a fully-functioning geothermal power station.

The support from the World Bank Group, coupled with the private finance, is projected to develop a gigawatt of capacity through 20 new geothermal sites throughout the country—enough to power about a million homes.

Partnering for sector-wide transformations

 

Recognizing that working more closely with the private sector will be critical to help countries meet their development goals, the World Bank Group has moved quickly to apply the MFD concept across its portfolio of operations. By systematically bringing together the ideas, tools, and resources countries need, the Bank Group is now looking at how the MFD approach can help create sector-wide transformations.

Overall, the Bank Group is actively working with nine countries —Cameroon, Côte d’Ivoire, the Arab Republic of Egypt, Indonesia, Iraq, Jordan, Kenya, Nepal, and Vietnam — that have asked for assistance in crowding in private solutions for development. These MFD pilots build on the existing partnerships with these countries to re-energize, re-prioritize, or add new activities that unlock newly identified opportunities.

The World Bank Group has also developed a new tool, the Infrastructure Sector Assessment Program, or InfraSAP. With this instrument, it will partner with client governments to create a plan for improving infrastructure performance among different sectors. Indonesia was one of the first countries to request an InfraSAP review, which looked closely at four key sectors—energy, transport, water, and urban development—to identify opportunities within the country’s goals and to develop a plan for financing and delivering on them.

Transforming Sectors

The Maximizing Finance for Development (MFD) approach has allowed the World Bank Group to combine its public and private sector focus and global expertise across its portfolio. Supported by the Hamburg Principles adopted by the G-20 in 2017 and by other multilateral development banks, MFD support will help promote sector-wide transformations around the world.

Meeting the world’s ambitious aims

The World Bank Group is committed to unlocking the resources needed to meet the world’s development goals. With the Maximizing Finance for Development approach, the Bank Group strives to mobilize the best mix of public and private sector solutions, expertise, and financing to help grow economies, reduce poverty, and expand opportunity for all.

Source: World Bank