In the fifth issue of the IPA Observer, UNCTAD examines how investment promotion agencies (IPAs), in different locations and circumstances, can contribute to green and sustainable development through innovative approaches tailored to local conditions.

The transition to a green economy, as required by the Sustainable Development Goals (SDGs) and the new global climate change goals, calls for profound transformations in energy, transportation, and most industries. Facing a financing gap of trillions of US dollars in this ‘going green’ endeavor, many developing country governments have tasked their IPAs with mobilizing green foreign direct investment (FDI) to meet their needs.

This paper examines how IPAs, in different locations and diverse policy and market circumstances, can contribute to the greening of their economies.

Introduction

The United Nations Sustainable Development Goals (SDGs) have set a new global agenda through 2030 with a strong green dimension cutting across many goals and targets. Subsequently at the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change (COP21) in Paris, 195 member States agreed on further measures to reduce green-house gas (GHG) emissions with the aim of keeping the rise in global temperature for this century well below two degrees Celsius (°C) above pre-industrial levels. These ambitious action plans call for profound transformations of energy, transportation, and dozens of other industries, demanding investment in the order of trillions of U.S. dollars. This will translate into more public institutions, including investment promotion agencies (IPAs), being asked by their governments to actively look for ways to contribute to national climate goals. It is, therefore, incumbent upon all IPAs to integrate climate goals and green investment promotion in their strategic considerations.

Meanwhile, green technologies are becoming increasingly viable in commercial terms, making them bigger and better targets for investment promotion. For example, in some places the costs of wind and solar energy generation have become competitive with traditional fossil fuel energy sources.

As described by UNCTAD, low-carbon investment, which we will name green investment in this study, can comprise of: investment in production processes with a reduced GHG impact; investment in clean energy generation; and investment in research and production facilities to manufacture GHG reducing products and provide related services. These are technology-intensive and often capital-intensive industries with technologies that are quickly evolving. In those developing countries, where green industries and practices are still nascent or non-existent, foreign companies are vital to jump-starting the low-carbon economy and should be more aggressively pursued.

This note uses three case studies to extract lessons on how this can be done. It examines IPAs, including investment promotion and business development agencies from developed and emerging economies, in diverse locations and circumstances. The very different approaches taken by the three IPAs to green their economies show that there is no one-size-fits-all solution and that a going-green strategy must be tailored to local circumstances. In many cases, an IPA needs to ‘think outside the box’ to seek niches and possibilities for green investment, consider what can be done given each agency’s limited resources and look for partners to pursue the strategy, programme or project. Practices and lessons highlighted in this note are therefore relevant to a range of IPAs and business development agencies, including those from low-income countries.

The first agency featured in this note is Investment South Africa (InvestSA), the national IPA of South Africa that has facilitated the country’s first foreign direct investment (FDI) projects in renewable energy generation and equipment manufacturing. The second is the Portland Development Commission (PDC) in Oregon, United States of America, a subnational IPA that has proactively attracted foreign venture capital for the expansion of local cleantech clusters. The third is the Ulsan Eco-Industrial Park (EIP) Center of the Republic of Korea, which has coordinated the creation of a symbiotic network of companies in the Ulsan EIP that give rise to opportunities to reduce waste and environmental impact while cutting costs.

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Investment South Africa

Using FDI to Jump Start Renewable Industries

In South Africa, InvestSA, the national IPA which is embedded in the Department of Trade and Industry (DTI), leveraged FDI in renewable power generation and turned this investment into a catalyst for domestic manufacturing of renewable energy equipment. InvestSA did this with strategically commissioned studies, a practical approach to local linkages and good stakeholder networks including agencies such as the South African Independent Power Producers (IPP) Office and the National Department of Energy.

Policy background

South Africa is heavily dependent on fossil fuels, which represent 87 per cent of the national energy supply. The country has large coal reserves, making that energy source easy and cheap, yet a green economy features prominently in national development plans. In 2011, the South African government, business community, organized labour, and civil society signed a Green Economy Accord. The Accord is one of several development plans that need to be reflected in DTI’s Industrial Policy Action Plan. The Action Plan, in turn, provides strategic direction to InvestSA, which is expected to identify areas to which it can contribute by generating investment and jobs.

The Green Economy Accord makes 12 commitments to the advancement of a green economy, including the roll-out of renewable energy, the reduction of industrial waste through reuse and recycling, and industrial retrofitting. The roll-out of renewable energy includes a government commitment to purchase four gigawatts of electricity by 2016 from new, renewable, and domestically generated capacity. By guaranteeing a market in this way and awarding contracts through public bidding, the government has stimulated major interest from foreign investors, which InvestSA is responsible for managing.

Another government measure in support of renewable energy is a cash grant of up to US$3 million to cover 30 per cent of the costs incurred by a company retrofitting existing industrial facilities to use renewable energy, such as through the purchase and installation of rooftop solar panels.

How InvestSA promotes green investment

InvestSA targets three types of green investments: renewable energy (generation and equipment manufacturing), waste management (reduction, treatment, conversion to energy), and energy efficiency (biofuels and greening of traditional industries).

This note looks into the agency’s experience in promoting FDI in renewable energy generation. While the IPP Office, together with the South African Department of Energy, administers the bidding process for would-be energy providers, InvestSA provides foreign investors with information and assistance before and during the bidding process, coordinates procedures for startups with provincial and local governments, and helps bid winners tap into other sources of support for green projects. Bids are scored on the dual basis of electricity price (70 per cent) and economic development impact (30 per cent), which includes linkages that investors can create with local suppliers and the use of locally sourced equipment and services.

About 60 per cent of InvestSA’s work is spent proactively marketing opportunities to targeted investors, and promoting the cash grant to green traditional industries (including encouraging existing companies to use renewable energy in their operations). The other 40 per cent of InvestSA’s work is devoted to supporting firms that are attracted to South Africa, due to the country’s strategic location and its government’s procurement commitments.

Challenges and lessons learned

The country strategy for the promotion of green FDI was well defined by the national government, and it provided a framework for the work of the agency in the area. However, InvestSA’s green economy department was created only after the signing of the Green Economy Accord, and initially the staff assigned to the department had little knowledge of the diverse range of highly technical fields under that label.

The first challenge faced by the agency was how to fill this knowledge gap as rapidly as possible through learning-by-doing. The renewable industry is relatively new, and the country itself had no experience in the sector setting. The localization potential for photovoltaics and wind equipment manufacturing, which InvestSA should promote, was unclear for the agency itself as well as for other partner government agencies. To meet this challenge, DTI’s Industrial Development Division (IDD) commissioned two studies on the localization potential for photovoltaics and for wind equipment. The two studies gave InvestSA the understanding of domestic production capacity and competitiveness to make the business case to potential investors.

Recognizing the need for energy suppliers to buy into the technical feasibility of local content and linkages, IDD took a flexible position on requirement levels in its first negotiations, which were with the Spanish wind giant Gestamp Renewable Industries (GRI). InvestSA was involved in the negotiations from the very beginning and the overall government objective was to ensure that an appropriate and feasible level of local linkages was achieved. Effective consultations among relevant government agencies, such as InvestSA, IDD and the Department of Energy, were extremely helpful to develop a good understanding of the potential for localization, and finally helped bring GRI on board. In the end, GRI invested US$210 million in a wind farm,6 stimulating substantial local production of wind towers. The following year, GRI announced a US$29 million investment expected to create more than 200 jobs in the manufacturing of 150 towers per year for the South African market. The success of the first projects not only generated much needed buzz for renewable projects in the investment community, but also revealed the potential for localization in the industry.

InvestSA’s support for local suppliers to increase their absorption capacity also proved crucial. With collaboration and support from the agency, DCD Wind Towers, a South African company, became the first African company to manufacture wind towers. The support appears to be essential to the development of domestic suppliers, as it has proven difficult for domestic manufacturers to obtain finance, even with the growing demand of energy suppliers. Another six companies supported by InvestSA are now assembling or manufacturing renewable energy equipment, including four making solar panels and two making inverters.

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The IPA Observer series is prepared by the Investment Promotion Section of UNCTAD. Its objective is to show examples of strategic and operational best practice in investment promotion from agencies worldwide to practitioners and governments in developing countries, with a view to share lessons that are practical and replicable for their investment promotion agencies.