In 2011-12, India’s construction sector accounted for 8.2% of country’s GDP, employing 41 million people, and is poised to become the world’s third-largest construction sector by 2018 (Global Construction 2020, Pricewaterhouse Cooper, 2011).

In 2009, India declared intention to reduce emission intensity of its GDP by 20%–25% from 2005 levels by 2020 (Parikh, 2011). To mainstream green-building and energy-efficiency practices, Government of India has several policy initiatives in the form of regulations and voluntary schemes.

Investment in green buildings is held back by exaggerated assumed cost premiums and a range of barriers that range from financial constraints to fragmented structure of the industry (Erten, 2011). Most green buildings cost between 5% and 7% more than conventional buildings and the benefits are borne by homeowners over a long term. The need for a long payback period leading to low rates of return on investment in the face of preference for investments offering quick returns (especially for retrofitting projects) is a constraint on private investment (Erten, 2011).

Since a house is one of the largest investments a family ever makes, cost is a major factor. Some buyers are prepared to pay a premium, and the long-term savings in energy costs seem incentive enough for others. While benefits for energy efficiency are still quantifiable, benefits from aspects like material use, siting and planning are difficult to quantify and monetize. The added cost without clear benefits alienates many buyers and users, and the value proposed by developers is not convincing enough to translate into large sales. People are generally more concerned about the cost than the sustainability of the building. Although there are savings for the state, industry and consumers from building green, the initial costs can be prohibitive, especially when combined with uncertain and/or long-term returns. Methods to quantify benefits, small size of investments, difficulties in standardising investment, and the continuing debate on the nature of discount rate, still discourage investments in energy efficiency (T’Serclaes, 2007).

While housing finance has boomed, green housing finance has still not caught on. There are some instances of financial institutions taking the initiative to offer customised products to green homeowners. A programme was initiated jointly by NHB and KfW in 2008 to promote energy-efficient residential housing by extending financial and technical assistance through housing loans to individual borrowers via retail-lending institutions for purchase and/or construction of energy-efficient residential houses and flats (Calov, 2012). Some banks like the State Bank of India, Bank of Maharashtra, etc. have created eco-housing mortgages for Eco-Housing-certified projects. The government also offers financial incentives to builders and developers for green buildings. However, these initiatives are only functional on a pilot scale and are yet to be mainstreamed across the sector. Lack of awareness among users as well within financial institutes about these schemes retards uptake.

In order to achieve scale and impact in financing affordable eco-housing, it is essential to get all key stakeholders on board. Financial institutions relevant to green construction range from responsible property investors or impact investors who have strong environmental imperatives (even requirements of environmental returns on investments), to commercial actors seeking market-rate returns on individual mortgages or large loans to property developers (UN Habitat, 2011).

It is also important to ensure that finance is available at all stages. Finance for affordable housing is often not forthcoming due to small ticket size of the loans, coupled with difficulties in repayments and administrative hassles due to limited paper work. Development Alternatives (DA’s) experiences on the field have shown that forming Joint Liability Groups (JLGs) is an effective way of crossing this barrier. The grouping system will essentially validate the choice of borrowers, bring in efficiency and co-ordination in the construction process and bring peer-pressure among group members in repayment process. The groups formed would be responsible to ‘build together and pay together’ meaning that they will have to take onus of ensuring building progress of other group members and also assume joint liability over other group member repayments.

Another area where finance is almost completely lacking is in the MSME sector that supplies building material and services. These are unorganised MSMEs, which often need capital to improve existing technologies or move to energy-efficient technologies. Currently there is no fund catering to this need.

Green construction has a lot of potential to cater to the dual challenge of meeting construction and housing demands while mitigating environmental damage. However, there is a need to engage with financial actors to provide boost to the sector, from both the demand (user) and supply (developer and material supply) end. Some recommendations to mainstream green construction include:

• Availability of data and analytical tools for lenders would enhance confidence in investment in green building. There is a need to develop tools and methodologies to quantify the benefit accrued from green buildings to both the developers and the end user.

• Greater coordination between financial institutions and re-financing bodies would help to increase the investment funds available for green buildings. Expansion of green construction would be facilitated by better access for green building developers to financial mechanisms, and it could be encouraged by financial incentives. In particular, financial mechanisms are needed to overcome the problem that developers do not benefit from the energy savings incurred during the occupation and use of green buildings.

• MSMEs in construction and building materials sectors face diverse and complex range of potential financial mechanisms, which makes it difficult for them to obtain investment capital. Streamlining of financial mechanisms for construction MSMEs through Small Industries Development Bank of India (SIDBI) would facilitate their access to investment capital.

• Financial mechanisms are also needed to enable building owners to finance higher initial investment cost from savings achieved during a green building’s occupation. Well-targeted financial incentives for green buildings would encourage development of the market. Fiscal and economic instruments, e.g. tax rebates, subsidised loans, regulatory instruments, removal of fossil-fuel subsidies, promoting use of domestic resources (building materials and techniques), would encourage development of the green building market.

• Specialized financial mechanisms for rural and semi urban areas need to be developed, in order to accommodate concerns of land rights, limited availability of paperwork and a tendency to slack on repayments. Models based on peer pressure such as joint Liability groups have proven to be successful.

• The existing financial mechanisms are limited in scope and coverage. Guidelines from agencies like the National Housing Bank, to other banks for eco-loans and products, will help in mainstreaming them across banking and non banking financial institutions. Capacity building of financial institutions is required to ensure benefits reach out. At the same time awareness generation among users is required to showcase demand for these products.

Neither markets nor public intervention will overcome the financial barrier alone. There is a need for policy and markets to move together to overcome the initial upfront cost barrier while creating demand and supply for affordable eco construction. q