Governments should have active programs of public finance to support, underpin and develop investment grade projects that mobilize private capital for green growth. In the early stages of market development, this is likely to involve direct investment by government and subsidies in the form of grants, concessional loans, and tax relief in order to encourage and incentivize investment. More developed markets require less direct finance and more support from government.
Direct investment to support pilot programs and projects can provide a demonstration function and build a track record of the likely risk-return profile involved. In addition to various policies and public procurement measures to support project development, governments can provide direct grant, debt, or equity investment to demonstration projects, establish project pipeline facilities, and provide financial support for feasibility studies and project preparation (Jones, 2012).
As markets mature for green products and services, and private investment grows, public-private partnerships can become more important. Public funds can provide seed capital or concessional finance for large investment structures such as public-private partnership funds. The initial stages of the project cycle are often where commercial banks and other financiers would find it difficult to invest. A specific example of this is South Africa’s Green Fund, which has been designed to provide support to projects at the initial stages through project development grants/loans, with the aim of enabling them to develop into sustainable ventures.
Dedicated government agencies can also have a key role in building project development expertise as well as generating a stream of investable projects. Dedicated agencies can be useful as a single focal point to coordinate policy analysis, project management, marketing, and program evaluation and to carry out other functions (IEA, 2010). The Moroccan Agency for Solar Energy (MASEN) was established by the Moroccan government in 2010 using an innovative approach so that all concentrated solar power (CSP) projects could be developed as Public-Private Partnerships (PPPs) sitting off the balance sheet of the systems operator. This extra-budgetary approach avoids putting additional financial burden on the existing energy and fiscal system (Buchner et al., 2012; Falconer et al., 2012).
Once markets have sufficiently matured, government intervention can then take the form of risk guarantees, technical assistance, and changes to contractual arrangements where less public funds and more institutional support are required.