Assessing the Investment Climate for Climate Investments in South Asia

High economic growth in South Asia has fueled an insatiable thirst for energy.  Rising energy demand is driven by urbanization, industrialization, and prosperity, all of which are part of a broader process of development that is lifting millions of South Asians out of poverty. However, increased energy consumption has been accompanied by rising greenhouse gas emissions. On average, emissions have risen at about 3.3% annually in the region since 1990 – more rapidly than in any other region except the Middle East.  However, per capita emissions of the region are still extremely low by international standards – less than one-fifth of the developed countries.

A new study, “Assessing the Investment Climate for Climate Investments: A Comparative Clean Energy Framework for South Asia in a Global Context,” was designed to evaluate the environment for private sector investment in climate mitigation or low-carbon technologies.  A regulatory survey of six South Asian countries — India, Pakistan, Bangladesh, Nepal, Sri Lanka, and the Maldives  — was undertaken to evaluate the presence of important enabling policies, regulations, incentives, and institutions, providing a snapshot of how each country fared in terms of the preconditions necessary for attracting climate-friendly investments.  A broader comparison of South Asian economies with other emerging economies and developed regions was also undertaken, leading to the pilot construction of a “Climate Investment Readiness Index (CIRI).”

“The private sector clearly has to play an important role if we are to make the kind of clean energy transition needed to achieve our climate change goals. Governments have to play a catalytic role by creating the enabling environment to attract private investments in these sectors,” said Muthukumara Mani, a senior environmental economist with the World Bank, and the author of the report.

Many South Asian countries have started to incorporate elements of low-carbon growth in their economic strategies, in large part due to the potential synergies with other development objectives, including energy access, energy diversification and enhanced service delivery in urban services, sustainable urban transport and reduced air pollution.

The key study findings suggest that the impact of these frameworks on clean energy investments has been mixed. Renewable energy and energy efficiency frameworks in South Asia are relatively new, and are expected to evolve and develop further. India shows a greater degree of sophistication as compared to its neighbors, and India’s 2003 Electricity Act can be strongly correlated with specific increases in private sector investment inflows. In other countries, the policies, regulations, incentives, and institutional capacities are at early stages of development.

Secondly, the study reveals considerable variation in the regional approach to low-carbon and clean energy investments, reflecting, one would presume, the techno-economic needs, realities and priorities of each country. For example, in predominantly rural countries of Nepal and Bangladesh, the lack of grid connectivity has prompted investors to focus successfully on off-grid renewables rather than grid-connected preferential tariffs or an electricity grid code. In India, the size and diversity of the population provides opportunities to develop different renewable energy sources, while smaller countries may need to emphasize sources that are more easily tapped, such as small hydro (Nepal) or solar PV (Maldives). India also provides regulatory autonomy for different states, which can then compete to attract investors, which is not the case for most other countries.

When key investors were surveyed on the relative merits of various policies, regulations, and incentives, some startling results came up. While welcoming some of attractive preconditions that have been put in place, they were worried about the long-term commitments of countries. They were still looking for clarity and consistency of policy regimes in some cases. They were concerned about the compliance of utilities and capacity of agencies to enforce compliance given their current track record. The investors found that some of the traditional bottlenecks of doing business, such as getting clearances, continued to bog them down, while getting financing was a major hurdle as commercial banks in the countries were still not ready to invest in clean energy sector. Murky rules governing grid connectivity and inadequate mapping of solar and wind sites were listed as other concerns for investors.

“Even attractive incentives will work only if supported by a stable regulatory environment, transparent rules of the game, and consistent implementation and enforcement of the policies,” Mani said.