Move beyond individual transactions to scale up blended finance: MAS’ Gillian Tan
Suggestions include establishing operating platforms to mobilise various sources of capital, and providing a range of financing structures and products to cater to different needs
TO SCALE up the volume of blended finance to support South-east Asia’s decarbonisation, there is a need to move away from the traditional approach of structuring such transactions on a project-by-project basis.
Establishing operating platforms to mobilise various sources of capital to achieve a diversity of risk and returns is one avenue to increase the volume of blended finance deals, said Gillian Tan, chief sustainability officer of the Monetary Authority of Singapore (MAS) on Tuesday (Oct 22).
Providing a range of financing structures and products to cater to the different needs of various capital contributors in blended finance projects, as well as removing strict investment mandates are two other key ways to scale up such deals, added Tan, who was among several panellists speaking at the Singapore International Energy Week conference.
“Development capital has always been earmarked to a particular country or a particular sector, but it doesn’t work for a platform approach. We want to pull capital together to achieve that aggregation-multiplier benefit. So we do need to think about how we can break away from this project-by-project, transaction-by-transaction approach, and think more broadly about a platform,” said Tan.
Calls for investors to allocate more capital into blended finance have been growing, including in Singapore. Last year, the city-state launched a blended finance initiative called Fast-P – short for Financing Asia’s Transition Partnership – that aims to invest up to US$5 billion to support Asia’s green transition.
It is a capital-raising approach that leans on investors with higher risk appetites, such as development funds and philanthropists, to draw in commercial investors that normally shun risky projects such as climate-tech research.
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Blended finance has been offered as an important avenue to address the shortfall in investments required to fund the region’s energy transition.
As South-east Asia is mainly made up of emerging markets, investors tend to place a risk premium when investing in the region, especially in infrastructure projects that typically require high levels of capital.
To account for this risk premium, Tan said that there is a need to focus on the early retirement of coal-fired power plants in the region, as well as upgrading its grid infrastructure and battery energy storage systems.
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To support the early closure of coal power plants, MAS, along with consulting firm McKinsey, had previously proposed the creation of a new asset class of carbon credits, known as transition credits, which can be generated when coal-fired power plants are retired early and replaced with cleaner energy sources.
A pilot transaction involving transition credits is currently being tested to support the early retirement of a coal plant owned by Acen in South Luzon, Philippines.
As for grid expansion, Tan noted that battery storage technologies continue to be too expensive for the region, and that innovative financing mechanisms need to be developed to increase investments into these areas.
Key to unlocking more investments is the development of the Asean power grid.
“It’s not easy,” said Tan. “We are a very diverse region, but the market is watching. (It’s) watching to see whether (we), governments, get our act together and actually harmonise and make interoperable our standards, our methodologies. And if we can do that, I think commercial investment will come in.”
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