3rd Annual OECD Green Investment Financing Forum

1. How to Bridge Financing Gap for
Low-carbon, Climate Resilient(LCR)
Infrastructure
Korea Capital Market Institute
Research Fellow, Suk Hyun
E-mail: hyun@kcmi.re.kr/ bigsuk@gmail.com

2. 2 Green Revenue Bonds
3 Green HIT Funds
Contents
4 Summary
1 Background

3. Background
1

4. Inter-relationship of LCR Infrastructure,
Climate Change and Financial Sector
Climate
Change
Financial Sector
Financial Stability
Low-carbon
Climate Resilient
Infrastructure

5. Mitigation and Adaptation Gap
Source: EIB(2010), Financing greener and climate-resilient infrastructure in developing countries-challenges and opportunities

6. Financing Gap for LCR Infrastructure
(by sector)
Source: McKinsey & Company(2016), Financing change: How to mobilize private-sector financing for sustainable infrastructure

7. One of Feasible Solutions…
Rising fiscal burdens in the post-crisis
period and falling bank loans under
stricter capital regulation (Basel III)
make infrastructure financing difficult.
Climate uncertainty, carbon price
uncertainty and technology
uncertainty widen financing gap for
the low carbon resilient(LCR)
infrastructure wider.
Asymmetric information between
lenders and borrowers due to physical
remoteness of given projects make
investment decision difficult.
National-local gap of people’s
response and acceptance for LCR
infrastructure projects.
Hometowners can
identify and finance
bankable LCR projects
based in their
hometown with
municipal revenue
bonds and hometown
investment trust(HIT)
funds proposed by
Dean Yoshino.
Close the Gap

8. Green Revenue Bonds
2

9. Innovative Financial Instruments
Characteristics
Revenue Bond Revenue bonds are municipal bonds based on the revenue generated by
a specific project, such as a toll bridge, highway and etc.
It is different from general obligation bonds (GO bonds) that can be
repaid through a variety of tax sources.
Revenue Bond
(Yoshino, 2004)
Revenue bonds combined with an internal mechanism to increase
commercial viability of a project through a one-off injection of the fixed
amount of public funds which is different from the US revenue bonds.
Performance-
linked Revenue
Bond
(Yoshino et al,
2008)
While principal and interest payments of revenue bonds are secured by
the future cash flows from the project, the level of coupon payments
varies according to the performance of the project.
Green
(performance-
linked) revenue
bond
The proceeds of (perforrnance-linked) revenue bond can be used only for
green projects and the bond is backed by the future cash flow from the
project not by the credibility of issuing company.

10. Green Bond
The Green Bond market began in June 2007, when the European Investment Bank (EIB) iss
ued the first “Climate Awareness Bond”. The growth of green bond markets have been led b
y world’s top credits like supranationals, however recently private companies, financial institu
tions and municipalities are a growing part of green bond markets
Green Bond Principles(GBP)
1. Use of proceeds. Investment in recognized green investment categories.
2. Process for project evaluation and selection: relating to use of effective criteria.
3. Management of proceeds: Segregation of funds or appropriate tracking of the flow of funds.
4. Reporting/assurance: Disclosure and verification pre- and post-issuance
Municipal Green Bonds (green revenue bond) are issued by state and local governments to
fund LCR infrastructure projects. These are not currently a large part of the overall municipal
bond market issuance, but recently have gained significant portion because municipalities (h
ometowns) have vast investment needs for LCR infrastructure.

11. Convertible (Performance Linked) Bond (1)
11
Sources: Hyun, Nishizawa, Yoshino (2008), “Exploring the Use of Revenue Bond for Infrastructure Financing in Asia” JBIC Institute
The return of convertible revenue bond depends on the success of the
project.

12. Convertible (Performance Linked) Bond (2)
Convertible Bond: from fixed to variable interest rate
-This performance-linked variable coupon mechanism(convertible bond),
uniquely proposed with characteristics of equity in part, gives investors
incentives to closely monitor the project performance that determines the level
of interest earnings for the investors.
- To introduce such mechanism in practice, the additional interest payments
should be tied to a set of variables to represent the performance of the project.
- However, such a contingent interest arrangement to link the performance of
a project with the variable coupon rate should be carefully designed, for
example, not to undermine the motivating factor, such as upside potential, for
investors to provide equity capital. Perhaps, a maximum rate needs to be
specified to establish a ceiling on the performance-linked variable coupon rate.
Debt-Equity Swap Option
- Debt(loans, bonds) is converted into equity to improve the balance sheet of
the project. Converting debt into equity reduces the debt/equity ration of a
project. The operator manage better its debt and improve cash flow.

13. Impediments to Green Revenue Bond
Financing
Complexity of LCR
projects
Special risks inherent in
LCR projects
Cyclicality of bond
market
development
Lack of depth and
liquidity of onshore
LCY bond markets
13
Lack of institutional
investor base
Lack of clear definition of
‘green’ project

14. Environment for Green Revenue Bonds
• Economic Size (GDP) • Reduced Inflation
• Economic Development • Fiscal Stabilization
Macroeconomic Fundamentals
• Banking Sector • Stable FX Market
Financial Market
• Disclosure Index • Property index
• Corruption index • Investment Freedom
Institutional Settings
14
Step 1
• Empirically examine the
determinants of green
bond market
development
Step 2
• Identify the main
opportunities and
challenges of green
bond market
development
Further Study

15. Green HIT Funds
3

16. Benefits of HIT Funds (Yoshino,2013)
HIT funds can reinforce financial stability by reducing information
asymmetric problems, transparency and risk sharing between
borrowers and lenders.
HIT funders can monitor the use of proceeds of green bonds with
more information of given projects based in their hometown.
HIT funds can supply risk capital as an alternative source of funding
because the Basel III prevents banks from making new loans by
applying a high risk weight to long-term and risky loans for
infrastructure projects.
HIT funders can choose the projects based in their hometown so they
are seeking environment protection, poverty reduction, disaster
recovery and etc in their hometown as well as financial return.

17. HIT Funds in Emerging Markets
The idea of HIT can be directly applied to community-based LCR projects in
emerging markets. However it has some limitation to implement because of narrow
investor base and lack of financial instruments (trust fund) in emerging markets.
Infrastructure investors tend to invest in their home region because asymmetric
information results from the projects outside their home region. However, recently s
ome infrastructure funds and pension funds are taking on more emerging markets proj
ects to find more deals and higher returns under the low interest rate environment.
Therefore the idea of HIT fund can be applied in emerging markets by utilizing high sa
vings of Japanese households whose financial assets have amounted to 1,746 trillion
yen as of June 2016.
Also HIT bond funds targeting revenue bonds related to LCR projects such as renewa
ble energy and energy efficiency projects can be established because Japanese retail i
nvestors have already invested into green uridashi bonds denominated in foreign
currencies. The fund seeks to provide innovative financing in the form of revenue bond
s to LCR projects based in their hometown. Issuers should build the credibility with inv
estors by managing properly the proceeds of green bonds.

18. Green Uridashi Bond
Eurobond directed to Japanese retail investors and denominated in
usually foreign currencies are called ‘uridashi’. Green bonds designed
for Japanese retail investors (Uridashi green bonds) have been popular
in Japan.
178.86
10.96 8.76
91.67
394.72
2010 2012 2014 2015 2016
Deal Total Value (million $)
Sources: Dealogic
AUD
12%
BRL
52%
IDR
6%
INR
6%
NZD
5%
RUB
1%
TRY
9%
ZAR
9%
Currency Type
Sources: Dealogic

19. Feasible Scheme in Asia (1)
Institutional
Investors
(pension fund,
insurance
company etc)
Green
Revenue
Bond
(Uridashi)
Company
MDB(ADB,
AIIB)
Government
bank
Overseas
LCR
Infrastructure
Project
JPYJPY
Asian
LCY
Swap Counterparty/
Financial Institutions
Guarantee/
Swap
Contract
19
HIT Fund for
Green Bond
H
O
U
S
E
H
O
L
D
(1,746
trillion
yen,
June
2016)

20. Feasible Scheme in Asia (2)
Institutional
Investors
(pension fund,
insurance
company etc)
Green
Revenue
Bond
Company
MDB(ADB,
AIIB)
Government
bank
Overseas
LCR
Infrastructure
Project
JPYJPY
Asian
LCY
Swap Counterparty/
Financial Institutions
Guarantee/
Swap
Contract
20
Green HIT
Fund
H
O
U
S
E
H
O
L
D
(1,746
trillion
yen,
June
2016)
Direct Investment (Equity)Asian
LCY
JPY
Database providing
information on bankable
projects
Guarantee/
Swap Contract

21. Summary
4

22. Summary
Capital market can bridge the financing gap for LCR infrastructure by using
innovative financial solutions such as green revenue bond and green HIT
fund since the Basel III makes banks more reluctant to long-term and risky
loan for LCR infrastructure.
Hometowners with more information of local projects based in their
hometown are more willing to finance LCR projects by assessing easily risk
and return of the projects due to proximity of given projects.
The emergence of institutional investors (including HIT funds) and retail
investor(green uridashi bond) will further spur the development of green
bond markets.
Public initiative, innovative financial instruments, data provision to mitigate
asymmetric information, and active private sector participation(institutional
investors, diversified issuers) can help to close the financing gap of LCR
infrastructure.
22

23. Thank You!