Promoting Private Investments in PPPs for Street Lighting

About

LED lamps have high potential to reduce energy consumption and, given their longer lifetime, reduce OPEX. The initial CAPEX of LED technologies are very high requiring long term payback periods. International LED technology providers would be willing to produce lamps locally in Colombia and reduce costs considerably if a sufficient scale of investments in new lamps materializes.

There is, however: (i) lack of knowledge and interest from local financial institutions (LFIs) to offer long term finance for these technologies, and (ii) lack of common standard contracting and practices for PPPs across municipalities, increasing transaction costs for technology providers.

The instrument aims to promote the scale of investments and address non-financial market barriers through the following program:

  • A credit line at adequate terms and conditions for first-tier local financial institutions so that they can in turn provide sub-loans to private sector operators interested in investing in street lighting projects based on LED technology;
  • Engagement of LFIs in the development of risk sharing mechanisms (insurance) to mitigate the under-performance of LED technology projects and hence of their financial return;
  • Technical cooperation to support the structuring of PPPs across municipalities that make the investments in LED technologies attractive to private investors, through development of PPP standard contracts and bidding processes at adequate terms for private sector engagement, engagement with technology providers and development of standards and mechanisms to structure sound projects and monitor, report, and verify their results.

The integrated approach combining standardization of PPP practices, insurance to cover the associated risks of LED technology performance and Providers, and a sector-wide financing line proves to be more effective than promoting LED projects for municipalities on a case-by-case basis.