There has been much hype over some of the bilateral agreements that get signed by nations that seek development. For those of us domicile in emerging economies (fancy word for 3rd world country), it is evident that development of infrastructure to provide the most basic of services has required financing that is concessional.
Concessional loans are financial “instruments” that are extended on terms substantially more generous than market loans. These are often preferable because the rate of return in the projects that they financing are used for would not normally make money for those investing in them.
Until now, the largest appetite for concessional loans is governments of emerging economies. The favorable terms associated with these loans are what has given rise to desire for on-lending loan agreements. This appetite has been driven by the need to fast track national development through the construction and reinforcement of state infrastructure that is critical for growing the economy.
On lending Concessional loans are often issued by Development Finance Institutions (DFIs), non-governmental finance organizations and ubiquitously (in most emerging countries) through nations that have signed bilateral development aid agreements.
When compared to commercial banks, these organizations are willing to accept higher risk in the pursuit of developmental agendas. Advanced Consulting states that some of the conditions that may apply in concessional loans include:
- longer maturities (up to 10-12 years)
- longer grace periods (up to 3-4 years)
- lower collateral requirements
- subordinated debt or other forms of quasi-equity finance
- syndication of loans
- technical assistance grant
- other direct and indirect benefits.
Unfortunately, businesses in Zambia may not have the opportunity to access such financing because of the requirement of sovereign guarantees. However, as Financial Insight we believe that it is important to keep an eye on these loans as and when they availed. The opportunity that lies in this arena is that if the agreements are designed to purchase goods and services in the local communities where the projects are being executed, small and medium sized business have a change to have a piece of the pie.
However, this requires that loan agreements are prepared with explicit clauses that ensure that there is local benefit from not only the final project being deliver but also for commerce that is in the environment. Hence the importance of shopping around for the right concessional loan.
The World Bank is an example of a DFI where nations can “shop” from because it has had a plethora of instruments in the concessional realm. One such instrument that is attracting a lot of attention is the Green Bond.
Spotlight: Green Bonds
With the issue of carbon emissions becoming a hot topic, Green bonds have emerged as an interesting flavor of concessional financing. According to Investopedia, “A green bond is a tax-exempt bond issued by federally qualified organizations or by municipalities for the development of brownfield sites. Brownfield sites are areas of land that are underutilized, have abandoned buildings or are underdeveloped, often containing low levels of industrial pollution. Green bonds are short for qualified green building and sustainable design project bonds”.
The World Bank has emerged as a major issuer of green bonds. Having been active since 2016, they have issued over 500 million USD. India has been one of the big beneficiaries of these bonds as they have helped finance Hydropower Projects which aim at providing low carbon hydroelectric power.