What does RECONECT bring to the financier community?
There are several demonstration projects implemented within the RECONECT project that pilot Nature-Based Solutions. Having those demonstration projects consolidated under RECONECT fosters both quality in planning and evaluation, but also momentum for uptake of projects both within the RECONECT consortium, as well as in the demonstrators regions. When these pilots are then up-scaled, that is where financiers can step in and invest.
The finance community has substantial differences between financiers. For example, the European Development Financial Institutions (EDFIs) only invests in developing countries, and further only in projects with private sector participation. Most infrastructure developments in the Netherlands, like e.g. Room for the River, are however financed by public means. Having members of the finance community on the advisory board of RECONECT allows projects to be informed on what financiers are looking for in a project. Many times financiers are confronted with amazing technical proposals, but are not able to fund them due to the lack of a business case for these projects. Communicating criteria for making a solid business case to the project owners is a valuable process that takes place within RECONECT.
Ultimately RECONECT is expected to provide the evidence base for successful business cases for implementing Nature-Based Solutions. Further, a pipeline of projects for investment is an expected outcome of RECONECT that is interesting for the finance community because it provides opportunities to directly fund innovative approaches that address hydro-climatic risks.
How can RECONECT ensure bankability?
Bankability refers to a project meeting all the criteria to make it affordable and financeable. There are social financiers looking for social benefits of projects, and then commercial banks who look for return of investment within a short period. What financiers do you want to tap into and what do they need? Making a project bankable means encompassing all financial considerations and building the financial case for the project where the fundability and affordability of the project is assessed, and meeting the criteria of the financier.
Looking at projects with municipalities, they tend to be predominantly public finance oriented. If a municipal project area also has private companies with a strong interest in implementing e.g. a NBS from which they would profit, then there is potential for a private element for investment. One such element for private profit are for example a potential increase in property prices. So it is necessary to look at the physical landscape and the stakeholders in that landscape. There are many elements that can be investigated to evaluate an investment, but it comes down to the project specific areas. What RECONECT can do is help identify the suitable finance mechanisms and make the finance criteria clear from the start for upscaling NBS projects.
What do you see as opportunities and challenges in the business case for RECONECT?
Opportunities: Large demonstrations give the opportunity to actually have some case studies that provide a starting point for building future business cases. These insights can then be transferred to other collaborators in RECONECT and beyond. A business case means ‘does it make sense to finance this project or not’. Is there a social business case? Is there a monetary business case? What is the business case to do this and what is the case not to do it? Normally, a cost-benefit analysis is used for this assessment. When going through the process of building a business case, the kind of projects and applications of NBS and the business models to base them on are determined in order to access funds from specific financiers. Future projects are not starting from scratch in a sense that they can already build on what has been done and what is currently being done by the demonstrators of the RECONECT consortium.
Challenges: People who are actually implementing those NBS projects on the ground need to really understand the concept of a business case and bankability to take them forward. The project owners are the ones who need to take the leadership on this, however this understanding of developing a business case does not necessarily come from the typical technical partners on the projects. Because tomorrow, when project owners seek to upscale their pilot projects, whether it’s within their municipality or within the country, they have to show that there is a validated business case for this. Of course financiers can support them where required, but creating these capacities is one challenge that RECONECT needs to address.
“What we want to see coming out of the RECONECT project is a demo business case for investing in Nature-Based Solutions, one that future projects can build on and that reflects the needs of financiers.”
How do you think RECONECT can influence financing of NBS projects?
Apart from technical validation, the objective of this project is to build a business model so it can be up-scaled. Business models that have been built, tested and evaluated allow financiers to basically copy and paste the model and replicate it in other places with minimal risk.
The difficulty with conceptual ideas relating to NBS, is that they often sound great and tick a lot of SDG boxes, but they are not financeable, yet, because the business case has never been tested and proven. But through RECONECT, there is the possibility of developing examples where e.g. in Italy a NBS approach was used to reduce landslides, therefore in a similar environment this could be replicated to a certain extent. Although this will work in many regions, we need to remember that:
“a model that works for example in Odense, Denmark, would not necessarily work in a different European country, and even less in a developing country. Therefore it’s good that RECONECT has institutions from some developing countries involved as collaborators, to really see how this can work on their end as well.”
Key message
Having a business plan template from successful case studies makes it easier for financiers to step in and contribute to up-scale of NBS.
Disclaimer
The statements made and opinions voiced in this article do not represent the views of any financial institution, but are the opinions of Ms. Pritha Hariram in her personal capacity.
