Author Jin-Young Moon, Seung Kwon Na, Sunghee Lee, and Eunmi Kim Series 18-07 Language Korean Date 2018.12.31
The adoption of the Sustainable Development Goals (SDGs) and Paris Agreement in 2015 accelerated the transition to a low-carbon climate-resilient economy which requires significant investment for both new and existing infrastructure. This study aims to provide policy implications for supporting Korean companies participating in overseas climate-related infrastructure projects.
Chapter 2 provides a literature review of low-carbon climate-resilient infrastructure and the importance of investment in climate-resilient infrastructure. For the purposes of this study, climate-resilient infrastructure refers to low-carbon climate-resilient infrastructure that contributes to the mitigation of greenhouse gas emissions and adaptation efforts to climate change. Investment for low-carbon climate-resilient infrastructure provides new business opportunities and promotes capacity building in developing countries vulnerable to the adverse impacts of climate change. It has been shown that the amount of investment in climate-related infrastructure is steadily increasing, particularly in developing markets. Based on forecasts for infrastructure needs that factor in climate change, this study focuses on three sectors – energy (power), transportation and water – to perform our analyses and case studies.
In Chapter 3, the current trends of investment for climate-resilient infrastructure provided by multilateral, bilateral and private actors are analyzed. Multilateral development banks and climate funds can bridge recipient countries and private investors. The six major multilateral development banks mobilized an average of $22.05 billion in investment annually in climate-resilient infrastructure projects for the last six years(2012~17), with the energy sector (renewable and energy efficiency) receiving the majority of these funds. Meanwhile, from bilateral perspectives, Korea allocates only 9.3% of its ODA budget into climate-related projects while members of the OECD Development Assistance Committee (DAC) provide 19.1% of their ODA support for climate projects.
Since infrastructure projects require significant amounts of funds and inevitably entail risks to be shared among investors, most of the projects are conducted as public-private partnership (PPP) projects. According to the World Bank, private participation in infrastructure increased from $88 billion in 2008 to $150 billion in 2012. Energy and transportation projects received the majority of investment from private and public partnerships in 2017 and the share of energy projects has consistently increased after 2015. In addition, private climate finance and institutional investors are expected to increase their contribution to expanding investment for climate-related infrastructure. With the aim of understanding the impact of climate change and aligning this with investment decisions, the private sector has introduced numerous initiatives and efforts such as the Equator Principles, recommendations from the Task Force on Climate-related Financial Disclosures(TCFD), ESG principles and the Green Bond.
Chapter 4 examines the key features of international climate infrastructure investment and the risk factors associated with various cases, going on to analyze the conditions in Korea and obstacles to overseas investment by Korean companies. First, in light of various previous studies, renewable energy generation, energy storage systems, electric vehicles, BRT, water resource facility and water efficiency programs are suggested as promising fields of international climate infrastructure. However, prior cases of major climate infrastructure investments promoted by multilateral development banks often revealed complexities stemming from how each sector is linked and integrated. Our case analysis of major climate infrastructure projects indicates how various strategies and means for mitigating project risks have been utilized, including support from various multilateral climate funds, financial safety measures such as exchange rate indexation, participation of experts in the international community, and the adoption of comprehensive capacity building programs.
In Korea, on the other hand, various overseas investment support systems are in operation for general and climate infrastructures, but problems such as insufficient mainstreaming of climate change agendas throughout the support system, lack of a dedicated platform for climate infrastructure, biased support for renewable energy, and lack of experts outside of the EPC areas. Over the past decade, Korean companies have been expanding overseas, mainly in the field of renewable energy. However, as a result of the interviews and informal surveys conducted on participants in climate infrastructure projects, a lack of clear understanding of climate infrastructure, difficulties in financing, lack of domestic and overseas business performance, lack of business development and management capacity were pointed out as the major obstacles that Korean companies face.
In Chapter 5, based on the results of the previous analysis, the following implications can be derived for government and private initiatives to promote participation in overseas climate infrastructure projects.
First, it is necessary to establish a comprehensive support system for the whole project including the planning, construction, operation and financing of overseas climate infrastructure projects. To this end, the support system needs to perform various support functions necessary at the initial stages of the project, such as providing a wide range of business information, conducting feasibility studies for the project, and promoting participation in the project by multilateral development finance partners. In addition, the support system can serve as a window for developing projects with domestic GCF implementing organizations and for using various domestic funds. It can also provide a pool of labor that the private sector cannot secure on its own, and support training by experts in related fields.
Second, the government should improve relevant policy measures to effectively support private sector expansion overseas in climate infrastructure. First of all, the government must provide opportunities for the private sector to participate in projects by utilizing existing infrastructure funds or expanding the contribution of climate infrastructure in policy finance, and should support domestic companies to participate in the process of developing international climate infrastructure projects led by multilateral development banks. The government should also encourage institutional investors such as pension funds and private financial companies to participate in investment projects, and induce these participants to utilize specialized financial instruments such as green bonds. In addition, the government should cooperate with the private sector to develop and propose various business models, and support expert training. Finally, in order to accumulate experience and promote the performance of domestic projects related to climate infrastructure, deregulation and promotion strategies should be prepared beforehand.
Third, selection and concentration strategies based on promising areas are necessary for efficient utilization of limited investment resources. Based on this analysis of the characteristics of the international market and precedents provided by climate infrastructure project cases, our study identified notable fields such as smart eco-city development, off-grid photovoltaic power generation, disaster response and recovery projects, climate-resilient agriculture and water resource projects.
Fourth, to encourage companies to participate in investment and promote the development of government policies and regulations, it is necessary to first disclose relevant information based on a common understanding of climate change and to mainstream climate change in corporate and government decision making. First of all, the private sector should strive to transparently disclose information on risk factors, opportunities, and financial impacts associated with climate change, and develop strategies and action plans to mainstream climate change in corporate management and decision-making processes. In addition, the government also needs to redesign the system and policies for overseas infrastructure investment considering the domestic and foreign climate change issues.
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