Development finance institutions for sustainable industrial development
Wind turbines along a beach in Brazil (Image: Pedro Henrique Santos via Unsplash).

Development finance institutions are key to sustainable industrial development

An analysis of DFIs policy flow from the decision to implementation level.

By João Carlos Ferraz

Climate change and the energy transition are fundamental drivers of the renewed interest in industrial policy. However, the initiatives that promote sustainability are typically fraught with uncertainty: projects may lack a track record of costs and returns; demand is not necessarily guaranteed; new markets and new firms have yet to emerge; infant industries face numerous challenges; and institutional frameworks have yet to be consolidated. Because of uncertainties, publicly sourced climate finance (loans, grants, equity and guarantee instruments) takes centre stage in green industrial policies. With the backing of political guidance and policy directives, development finance institutions (DFIs) have the DNA, profile and capability to effectively innovate and foster sustainable development.

From development challenges to outcomes

Mobilizing finance for sustainable development requires national strategies, starting with the identification and prioritization of a country’s challenges to determine adequate and necessary policy actions. From the moment a policy is defined up until its impacts are realized, political compromises are forged, and expectations are raised. Societal influence also plays a crucial role, as public institutions are not insulated from the legitimate pressures exerted by relevant social actors (see the figure below).

Development challenges, political decisions, policy implementation and outcomes

Figure 1 - Development finance institutions for sustainable industrial developme
Source: Adapted from Ferraz and Coutinho (2019).

As the figure shows, development challenges are identified and translated into political decisions at the decision level. These are reflected in the design of an industrial policy, including in directives for various executive agencies. At the executive level, these agencies (e.g., DFIs) transform directives into priorities and instruments and mobilize resources through action plans. This triggers a sequence of activities in DFIs, culminating in operational procedures to evaluate, approve, grant and follow up on project results. At the implementation level, following DFIs’ project finance approval, beneficiaries convert investment projects into operational installations, and consequently deliver specific goods and services.

A DFI’s effectiveness is assessed in terms of the positive impacts of the funded project on various socioeconomic spheres. It is necessary to point out, however, that due to their very nature and mission, DFIs live with inherent contradictions. Development projects are expected to result in positive externalities, but to varying extents, they may well have negative impacts and/or be perceived differently by different stakeholders. Tensions arising from such inherent contradictions must be acknowledged and dealt with by consistently prioritizing the public good in negotiations and decision-making processes.

The case of Brazil’s wind power industry

The rise of Brazil’s wind industry is impressive. Between 2008 and 2018, 620 (mostly private) wind farms were installed, operating over 7,500 turbines and generating more than 15.5 GW (representing around 9 per cent of Brazil’s total energy capacity, see the figure below). By 2016, the industry directly employed 150,000 staff – an equivalent of 15 jobs per MW installed. In addition to these positive externalities, wind-powered electricity generation avoided around 78.5 million tonnes of CO2 emissions from 2012 to 2019 (about 2 per cent of total emissions of Brazil over the 7-year period).

Brazil’s wind power industry exemplifies the long journey from political decisions to policy outcomes. The global breakthroughs in wind-energy technologies together with the country’s market size and its existing political and policy frameworks opened a space for the development of wind energy and supply industries, in which the Brazilian Development Bank (BNDES) played an essential role. The BNDES aligned priorities with policy directives, building on its long-standing track record of supporting Brazil’s energy industries; its strong balance sheet, its diversified product portfolio, and its capability culture of exploring new ways to foster innovative economic activities.

At the BNDES, targets were set for annual disbursement as well as for added wind energy capacity, along with allocations of human and organizational resources and adequate financing conditions. BNDES also had technical and operational autonomy to choose between “good” and “bad” projects.

BNDES contributed USD15.2 billion (40 per cent) of the total USD35.6 billion invested in wind projects, which added 15.5 GW of generation capacity to the Brazilian grid. The remaining 60 per cent provided by investors and private loans. Moreover, wind farms financed by BNDES were obliged to source equipment from local suppliers, stimulating the establishment of more than 100 new wind supply companies, including six wind turbine providers. This resulted in BNDES having, between 2004 and 2019, the highest global debt portfolio in clean energy (USD31.3 billion).

Installed wind electricity capacity (MW) in Brazil, 2000 - 2021

Note: Unit, Megawatt MW. The renewable power capacity data shown in these tables represents the maximum net generating capacity of power plants and other installations that use renewable energy sources to produce electricity.

Source: IRENA (2022), Renewable energy statistics 2022, International Renewable Energy Agency (IRENA), Abu Dhabi.

Innovative and effective DFIs for sustainable development

As the case of BNDES illustrates, DFIs can play a strategic role in industrial policies to promote sustainable development. For a DFI to pursue consistent engagement and support uncertain, risk-intensive projects with the potential of driving sustainable development, it must have a strong capital base and a long-term balance sheet. Internally, DFIs must maintain and strengthen their organizational and technical autonomy based on collective decision-making processes. An innovative environment must be cultivated to develop and implement new operational procedures, analytical methods and financial products, and to open a space for opportunities to address the challenges associated with sustainable development projects. This requires continuous learning and explicit efforts in building and maintaining trustworthiness, based on constant interactions with financial partners, and with project beneficiaries and stakeholders.

In short, there are two fundamental pre-conditions for an effective DFI: sensible political decisions with explicit support from political leaders, and daring but feasible challenge-oriented policy goals.

  • João Carlos Ferraz is Professor at the Federal University of Rio de Janeiro (IE/UFRJ), Brazil.

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

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