A Financial Architecture for Restoration — How Initiative 20x20 is Helping the Private Sector Restore Degraded Land
Post authored by Walter Vergara, Senior Fellow WRI, and Coordinator of Initiative 20x20
Initiative 20x20, a country-led effort to bring 20 million hectares of land in Latin America and the Caribbean into restoration by 2020, proposes a financial architecture to support and increase leadership from the private sector in the process of restoration. Keys to the architecture include providing equity along with debt and risk reducing instruments to jump-start the process of restoration and sustainable land use.
Financing restoration in Latin America faces significant barriers.
The financial architecture in support of 20x20 activities focuses on addressing some of these barriers. It emphasizes support for private sector investment in restoration. It basically includes four elements.
The first is to pool private investment resources (equity capital) seeking to finance restoration projects in the region. Today, 12 investment partners have earmarked $1,150 million in equity for investment until 2020. The partners are Althelia Climate, Moringa Partnership, Permian Global, Terrabella Fund, Ecoenterprises, Carana Corporation, SLM Partners, EcoPlanet Bamboo, Forest and Climate Change Fund, LXG Amazon Reforestry Fund, Andes Amazon Fund and Rare. There is the expectation that during the current calendar year about 20% of these resources would be actually invested in specific projects.
In support of private sector investment, the financial architecture includes efforts to structure a partial guarantee mechanism to address the many risks faced by investments in land restoration. Last November, the GEF approved a partial risk facility to be deployed by IIC (Inter American Investment Corporation, the private sector window of the IDB) for US$15 million, which is expected to become operational later this year. In parallel, a proposal for a partial risk guarantee is being prepared for submission to the Green Climate Fund through CAF. Together these instruments are intended to reduce perception of risk and promote investment.
While equity is much required, a key element that can delay progress in attaining restoration goals is the lack of a robust investment portfolio, a large enough group of investment opportunities in the region with the necessary level of preparation and specific to attract the necessary capital. To address this difficulty, the Initiative is supporting efforts to create an Investment Readiness Fund that could provide contingent grants for project preparation. Proposals have been prepared in partnership with UNEP for several funders seeking resources for the proposed $10 million fund.
Multilateral and regional Banks have expressed interest in participating in debt finance for projects in restoration. To date, the IIC, CAF and the World Bank have become associated to the Initiative expressing their interest in helping structure debt for 20x20 investments.
Finally, there is a need to provide for working capital, especially in situations where otherwise well-structured projects face a time gap between anticipated revenues from restoration investments and the initial costs of implementation. The Initiative is seeking partners who could source working capital requirements.
The Initiative is continuously evolving. It is based on and requires the participation of private sector players, the cooperation of governments and the active engagement of the Initiative’s technical partners.