Description
International climate finance providers may establish viability gap funding mechanisms to close the financing gap between possible revenues and the actual cost of quality infrastructure that would otherwise prevent an infrastructure project from being realised. Viability gap funding is usually a grant instrument or a concessional loan. One example is subordinated debt, often provided as convertible loans. Another example is credit guarantees by multi-lateral development banks, for instance, to national financial institutions that can provide credit enhancement to infrastructure project bonds so that they can achieve a higher credit rating and mobilise "cheaper" money from investors with mandated lower risk profiles, such as insurance or pension funds.
Instrument category
International climate finance
Implementation status
Moderate - tried and tested
Enabling conditions and success factors
- Can be applied in most contexts, but generally where there is already strong private sector motivation to invest.
Instrument benefits
- Viability gap funding can enable investments across public good and climate action sectors that otherwise wouldn't be commercially viable. This is particularly useful for adaptation finance for sectors with strong mitigation potential but low commercial aspects, such as solid waste management.
