04 Financing the circular economy transition in LAC
The circular economy transition requires significant investment. While this may start with national and local government financing, the private sector and multilateral agencies also have roles to play.
The transition to a circular economy in the LAC region requires significant investments in infrastructure – in particular, in waste collection, management and recycling. The IADB estimates that annual infrastructure investment of $250 billion is needed across the region over the next few years, and that an additional $30 billion per year will be required to introduce measures that will bring countries’ processes in line with the SDGs and the objectives of the Paris Agreement.186 For example, to address the challenge of providing sustainable and safe sanitation for all in the LAC region, the IADB has estimated that annual investments of about $180 million would be needed each year until 2030.187 Although there are no accurate figures available at present regarding investment needs in the solid waste management and recycling sector for the different countries in the LAC region, addressing the existing challenges will require the use of resources from both national and local governments, and private-sector participation, as well as requesting loans and technical cooperation from multilateral agencies.188
Development finance institutions and the Global Environment Facility
Circular economy projects funded by the World Bank and the CAF Development Bank of Latin America tend to focus on funding waste management programmes in countries such as Argentina, Brazil and Colombia. In 2018 the World Bank launched a new initiative, the ‘Wastewater: From Waste to Resource’ project, which focused on raising awareness among decision-makers across the LAC region regarding the potential of wastewater as a resource and aimed to introduce circular economy principles in wastewater management. More specifically, the initiative had the purpose of encouraging ‘a paradigm shift’ in the sanitation sector ‘in which the value proposition of wastewater in a circular economy is recognized’.189
The IADB is a leading source of long-term financing for economic, social and institutional projects in the LAC region. Through its own Multilateral Investment Fund and other sources, the IADB has provided finance for a range of different projects linked to the circular economy in Brazil, Chile and Uruguay, as well as across the Caribbean. The IADB, together with MIT Solve (an initiative of the Massachusetts Institute of Technology that describes itself as ‘a marketplace for social impact innovation’)190 has also developed an initiative to find the most innovative solution to substantially reduce or eliminate single-use plastic and plastic waste in the region, with prizes totalling some $60,000 on offer.191
The circular economy has been recognized by the GEF as a unique opportunity to pursue a suite of environmental benefits through public–private partnerships.
The circular economy has been recognized by the GEF as a unique opportunity to pursue a suite of environmental benefits through public–private partnerships. The circular economy is highlighted under the broad GEF-7 strategy, within two distinct focal areas – international waters, and chemicals and waste – as well as within the Sustainable Cities Impact Program. GEF-7 investments focus on actions that can lead to a shift in global supply chains and by regional and national economic development strategies from ‘take–make–throw away’ to ‘redesign–reduce–reuse–repair–recycle’ approaches. Under its Small Grants Program,192 the GEF has funded a number of projects that have tested innovative practices for plastic waste management in the LAC region using a circular economy approach. Examples of projects include promoting the recycling of plastic waste and addressing the disposal of PET plastics in countries such as Guyana, Peru and Suriname.
KfW Development Bank has been financing circular solutions to wastewater management in Bolivia, Nicaragua and Peru. In Nicaragua, KfW-financed sewage treatment plants have developed a new solution to dispose of sewage sludge through the addition of a solar facility that dries out the sludge at the treatment plant. The resultant granulate is rich in nitrates and phosphates and can be used for as a fertilizer or to improve soil quality.193 In the Peruvian capital of Lima, which is located on desert land, a treatment and recycling plant for industrial wastewater processes water so that it can be used to water the city’s parks and green areas. This solution bypasses the drinking water network, which was used in the past for watering the city’s green areas.194
Government-funded circular economy initiatives in LAC
Across the region, there are considerable differences in government support for circular economy projects. This has a direct impact on the availability of funding from national and commercial banks. Examples are given below for the types of support available within four major economies.
The Chilean Ministry of the Environment, in conjunction with the national economic development agency CORFO, provides financial support to circular economy activities in Chile, for example, through the creation of technology development centres in the country. In 2018, CORFO launched the programme Prototipos de Innovación en Economía Circular (Innovation Prototypes in the Circular Economy) in conjunction with the Ministry of the Environment and the Ministry of the Economy and Development.195 The programme was open to Chilean companies and self-employed entrepreneurs for at least one year, with co-financing of up to 60 million pesos being made available for eligible projects. The funding can be used to carry out activities aimed at designing and developing circular economy prototypes. The percentage of co-financing depends on the size of the company: large companies can obtain financing for up to 30 per cent of the total project cost, while medium-sized companies can obtain 50 per cent.196
In Uruguay, the national development agency ANDE has spearheaded a Circular Economy Opportunities Programme (Oportunidades Circulares).197 In the first round, in 2019, one component of the programme provided funding for the validation process that would test circular economy ideas (up to $5,000) and a second component focused on project implementation, with co-funding of up to $100,000. For the second round, financial support was added with non-reimbursable funds for the realization of prototyping (up to a maximum of $40,000 per project). In the first round, the projects that were submitted mainly focused on waste recycling, demonstrating a general lack of understanding of the broader circular economy principles. The inclusion of prototype financing in the second round facilitated the entry of Industry 4.0 technologies and promoted a greater hierarchization of circular economy elements.
In Peru and Colombia, the Swiss State Secretariat for Economic Affairs (SECO) supported a ‘green credit line’ for cleaner technology implementation in small and medium-sized enterprises (SMEs). In the case of Peru, a reimbursement of up to 25 per cent of the loan was offered as an incentive to would-be borrowers. After verifying the proper implementation of cleaner technology, and the expected reduction in environmental impact (according to a predefined environmental indicator), the reimbursement was transferred to the bank and the SME could reduce either the monthly payment amounts or the period of the loan. The green credit line was operated through two commercial banks (Banco de Crédito del Perú and Scotiabank Perú Canada) with technical assistance from the national cleaner production centre operated by Grupo GEA. Fifty SMEs participated in the green credit line, accounting for $21 million of credits made available in the sectors of metalworking, tanneries, food, brick manufacture, paper and packaging, among others.198
Table 2. Overview of circular economy finance schemes in LAC
|
Financial institution |
Countries |
Financial products |
Circular economy practices and sectors |
|---|---|---|---|
|
World Bank |
Argentina, Bolivia, Brazil, Colombia, Peru |
Traditional loans, grants, results-based financing |
Waste management and recycling; wastewater treatment and resource recovery |
|
Inter-American Development Bank (IADB) |
Belize, Bolivia, Brazil, Chile, Suriname, Uruguay |
Traditional loans, grants, guarantees |
Waste management and recycling; wastewater treatment and resource recovery |
|
Global Environment Facility (GEF) |
Guyana, Peru, Suriname, Uruguay |
Small grants, small business subsidies |
Plastic waste management, PET recycling and waste valorization |
|
National Development Agency (ANDE) |
Uruguay |
Small business subsidies; funds for prototyping, validation of circular economy ideas and project implementation |
Recycling, Industry 4.0 technology adoption |
|
Ministry of Environment and CORFO |
Chile |
State co-financing |
Circular economy technology design and prototyping |
|
Swiss State Secretariat for Economic Affairs (SECO) |
Colombia, Peru |
Green credit lines for SMEs |
Cleaner production and waste reduction in manufacturing |
|
KfW Development Bank |
Bolivia, Nicaragua, Peru |
Federal funds |
Wastewater disposal and sewage sludge recycling |
Source: Compiled by the authors.
Post-COVID-19 recovery finance
In April 2020, ECLAC predicted that the prevailing COVID-19 pandemic would lead to an estimated 29 million more people in the LAC region living in poverty, and a further 16 million descending into a situation of extreme poverty.199 ECLAC called for both the forgiving and deferring of debt where necessary, as well as lending at favourable interest rates. In the immediate term, priority must of course be given to dealing with the health crisis and providing support to those with lost incomes. In the medium term, which should coincide with the aftermath of the crisis, the world should take the opportunity to create more resilient production networks, and recalibrate investment into inclusive and sustainable development.200
Some LAC countries have already announced inclusive COVID-19 economic recovery funds to support businesses and the unemployed, including informal sector workers. In Chile, the government launched an $11.75 billion stimulus package to boost health spending, allow the deferral of taxes, fund loans to individuals and SMEs, and provide income support to the unemployed.201 In Brazil, a $150 billion package was announced, including income support, aid for informal workers, loans to SMEs and financial support to states, as well as support to carbon-intensive industries such as airlines.202
As COVID-19 recovery funds are extended, they offer an opportunity for LAC governments to support more circular economy activities, in particular via central support to green SMEs and international investment in green industries. China, a major trade and investment partner in the region, has historically invested in many high-carbon mining and oil extraction projects. Given the dramatic fall in oil prices, which has accompanied the pandemic, redirecting investment towards green alternatives could help regional economic recovery, while also reducing emissions. The renewable energy and clean transport sectors have already grown in the LAC region over the past five years, partly thanks to Chinese investments – for example, in the development of the Cauchari solar park in northern Argentina, as part of the Belt and Road Initiative. Indeed, green investments are in alignment with the aims of a white paper published in 2016 by China’s Ministry of Foreign Affairs, which restated its commitment to increasing cooperation with LAC countries on the environment and climate change.203 Continued investment from China, at similar levels, will of course be dependent on China’s own economic recovery from the pandemic. However, the region would do well to push for green international investment in the future, both from an environmental and an economic perspective, with the estimated creation of 7.7 million additional jobs if the energy and transport sectors are to become carbon-neutral by 2050.204
186 Reymond, A., Egler, H.-P., Masullo, D. and Pimentel, G. (2020), Financing sustainable infrastructure in Latin America and the Caribbean, Inter-American Development Bank, March 2020, https://publications.iadb.org/publications/english/document/Financing-Sustainable-Infrastructure-in-Latin-America-and-the-Caribbean-
Market-Development-and-Recommendations.pdf (accessed 18 May 2020).
187 Inter-American Development Bank (2019), ‘How is Latin America in terms of sanitation?’.
188 UN Environment Programme (2018), Waste Management Outlook for Latin America and the Caribbean.
189 Rodriguez, Serrano, Delgado, Nolasco and Gustavo (2020), From Waste to Resource: Shifting paradigms for smarter wastewater interventions in Latin America and the Caribbean.
190 Massachusetts Institute of Technology (MIT) (2020), Solve, https://solve.mit.edu/ (accessed 29 Jul. 2020).
191 Inter-American Development Bank (2019), ‘IDB Group Launches Open Innovation Challenge to reduce plastic use’, news release, 26 September 2019, https://www.iadb.org/en/news/idb-group-launches-open-innovation-
challenge-reduce-plastic-use (accessed 18 Oct. 2019).
192 Global Environment Facility Small Grants Programme (2019), ‘Project Search Results’, https://www.sgp.undp.org/spacial-itemid-projects-landing-page/spacial-itemid-project-search-results.html?view=allprojects (accessed 18 Oct. 2019).
193 KfW Development Bank (2016), Project Information, Water – Nicaragua, https://www.kfw-entwicklungsbank.de/PDF/Entwicklungsfinanzierung/L%C3%A4nder-und-Programme/Lateinamerika-Karibik/Projekt-Nicaragua-Wasser-2014-EN.pdf.
194 KfW Development Bank (2016), Project Information, Water – Peru, https://www.kfw-entwicklungsbank.de/PDF/Entwicklungsfinanzierung/L%C3%A4nder-und-Programme/Lateinamerika-Karibik/Projekt-Peru-Wasser-2014.pdf.
195 Gobierno de Chile (2018), ‘Lanzan programa de innovación en economía circular pionero en América Latina’, 9 August 2018, https://www.gob.cl/noticias/lanzan-programa-de-innovacion-en-economia-circular-pionero-en-america-latina/ (accessed 22 Aug. 2019).
196 Corporación de Fomento de la Producción (CORFO) (2019), ‘Strategic Investment Incentives’, https://www.corfo.cl/sites/cpp/movil/webingles (accessed 17 Oct. 2019).
197 ANDE and Biovalor (2019), ‘ANDE, PAGE Uruguay y Biovalor impulsan la economía circular a través de un programa de fondos y generación de capacidades entorno a la Economía Circular’, http://oportunidadescirculares.org (accessed 15 Jul. 2020).
198 UN Industrial Development Organization (2009), Funding options for Small and Medium Size Enterprises to finance Cleaner Production projects and Environmentally Sound Technology investments, Vienna: UNIDO,
http://www.ioew.at/ioew/download/09-80065_Ebook-UNIDOFundingoptions.pdf.
199 ECLAC (2020), ‘COVID-19 Pandemic Will Lead to the Biggest Contraction in Economic Activity in the Region’s History: A -5.3% Drop in 2020’, press release, 21 April 2020, https://www.cepal.org/en/pressreleases/covid-19-pandemic-will-lead-biggest-contraction-economic-activity-regions-history-53 (accessed 15 May 2020).
200 OECD (2020), ‘COVID-19 in Latin America and the Caribbean: Regional socio-economic implications and policy priorities’, 29 April 2020, https://read.oecd-ilibrary.org/view/?ref=129_129904-k3xp17fqbl&title=
COVID-19-in-Latin-America-and-the-Caribbean-Regional-socio-economic-implications-and-policy-priorities (accessed 15 May 2020).
201 Thomson, E. and Fuentes, V. (2020), ‘Chile Plows Billions Into the Economy as Virus Threat Mounts’, Bloomberg, 19 March 2020, https://www.bloomberg.com/news/articles/2020-03-19/chile-s-government-
announces-11-75-billion-stimulus-plan (accessed 18 Jun. 2020).
202 KPMG (2020), ‘Brazil: Government and institution measures in response to COVID-19’, https://home.kpmg/
xx/en/home/insights/2020/04/brazil-government-and-institution-measures-in-response-to-covid.html (accessed 18 Jun. 2020).
203 Koop, F. (2020), ‘Latin America needs a green stimulus. Will it come from China?’, Diálogo Chino, 6 May 2020, https://dialogochino.net/en/climate-energy/35184-latin-america-needs-a-green-stimulus-will-it-come-from-china/ (accessed 17 Jul. 2020).
204 UN Environment Programme (2019), ‘Latin America and the Caribbean could save US$621 billion by 2050 through the decarbonization of energy, transport sectors’, press release, 12 December 2019, https://www.unenvironment.org/news-and-stories/press-release/latin-america-and-caribbean-could-
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