Catalyzing Private Sector Finance for Climate Change Mitigation Projects in East Asia and Pacific

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Beverly Strickland
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1 Catalyzing Private Sector Finance for Climate Change Mitigation Projects in East Asia and Pacific Romel M. Carlos, PhD Clean Energy and Sustainable Energy Finance Workshop on Accessing Finance for Green Growth and LEDS Hanoi, Vietnam March 2014

2 IFC: Part of the World Bank Group IBRD IDA IFC MIGA ICSID International Bank for Reconstruction and Development International Development Association International Finance Corporation Multilateral Investment and Guarantee Agency International Center for Settlement of Investment Disputes Loans to middle-income and creditworthy lowincome country governments Interest-free loans and grants to governments of poorest countries Solutions in private sector development Guarantees of private sector investment s noncommercial risks Conciliation and arbitration of investment disputes 2

3 Towards a Sustainable Energy Future for All: Directions for the World Bank Group s Energy Sector Goal: help countries secure affordable, reliable, and sustainable energy supply needed to end extreme poverty and promote shared prosperity. Objectives: achieving universal access, accelerating improvements in EE, and doubling the global share of RE by Universal Access: grid, mini-grid, and off-grid solutions; financial solutions or guarantees will be made available for the most feasible energy options. Accelerate Efficiency Gains: one of the most cost-effective ways to expand supply and reduce environmental impact; increase efficiency by rehabilitation of existing energy infrastructure ; moderating demand for energy, adopting more efficient technologies, and making cities more energy efficient. Expand RE: support and finance all forms of RE, based on the country s resource endowment, institutional and technical capacity, policy environment, availability of financing for cost differences, and trade-offs. Create an enabling environment and intensify global advocacy. 3

4 Our Three Businesses Integrated Solutions, Increased Impact Investment Services Advisory Services IFC Asset Management Company Loans Equity Trade finance Syndications Securitized finance Risk management Blended finance $49.6 b portfolio (FY13) Access to finance Investment Climate Sustainable Business Public-Private Partnerships $232 m (FY13) Wholly owned subsidiary of IFC Private equity fund manager Invests third-party capital alongside IFC $5.5 b under mgmt (FY13) 4

5 What is our strategic approach? 5

6 How do we push beyond business as usual? 6

7 How do we push beyond business as usual? 7

8 Concessional Finance: Climate Change Investments (FY09-FY13*) Approved Projects Donor Investment (USD Millions) IFC Investment (USD Millions) Total Project Cost (USD Millions) ,021 3,431 Projects by Region World $5 (1) Projects by Product Equity $5 (1) Projects by Industry Eastern Europe $24 (4) East Asia $36 (8) Africa $65 (6) Guarantee $28 (5) Sub Debt $30 (2) Senior Debt $120 (16) MAS $20 (1) CIN $84 (7) CGF $ 79 (16) La<n America $50 (5) *Figures in USD Millions; Numbers in (brackets) refer to project count

9 IFC s Principles for deploying Blended Finance Moves Beyond IFC Additionality Only supports transactions where both the client and IFC need a subsidy to complete a transaction Avoids Market Distortion Minimum concessionality: Provide minimal subsidy to make project happen and accelerate market transformation Leads to Sustainability Time-bound: subsidy limited in time until track record is proven Promotes Transparency Conflicts of interest addressed by: Blended Finance Committee approves use, structure and terms of concessional donor funds Blended Finance IOs structure, process, and supervise concessional donor funds in a transaction Subsidy should benefit project as a whole, not IFC alone

10 What Blended Finance Investments should NOT do Be structured as grants or giveaways Crowd out IFC or other commercially driven financiers Seen to provide additional financial returns for IFC Address Integrity Due Diligence or reputational issues Always deployed alongside a new IFC investment Mitigate credit issues in existing IFC deals Perceived to distort markets Strong emphasis on minimal concessionality Concessional investment cannot exceed IFC s investment amount

11 Financial Products - From Equity to Debt Equity Mezzanine / Quasi Equity Senior Debt & Equivalents Corporate and JV Typically 5-15% shareholding (not to exceed 20% of total equity) Long-term investor, typically 6-8 year holding period Not just financial investor, adding to shareholder value Usually no seat on board Infraventures (early equity investments) Subordinated loans Income participating loans Convertibles Other hybrid instruments Senior Debt (corporate finance, project finance) Fixed/floating rates, US$, Euro and local currencies available Commercial rates, repayment tailored to project/company needs Long maturities: 8-20 years, appropriate grace periods Range of security packages suited to project/country Mobilization of funds from other lenders and investors, through Co-financings, syndications, underwritings and guarantees 11

12 How IFC Finances Projects IFC s total investment size on its own account is set by the following criteria: Greenfield with total cost >= $50 million à Up to 25% of project cost Greenfield with total cost < $50 million à Up to 35% of project cost Expansion or rehabilitation à Up to 50% of project cost IFC can deliver the following complements to its own debt investment B loans Syndicated loans where IFC is lender of record, typically with funds provided by international commercial banks. Parallel loans IFC can mobilize parallel lenders, typically DFIs or local lenders IFC is able to work alongside co-lenders as part of lender group IFC s equity investment typically cannot exceed 20% of total share capital 12

13 Wholesaling: Reaching Smaller EE/RE Projects Approach 1 Approach 2 Risk Positions at the Level of the Bank: Credit Lines Equity Subordinated debt Currency swap Trade finance Financial Products Local Financial Institution Bank Loans to EE/RE Projects Advisory Services Project A Project B Project C Portfolio of EE/RE Projects Risk Positions at the Level of the Underlying Assets: Guarantees Portfolio Risk Sharing RE Mezzanine Facility

IFC s Value-Add in Sustainable Energy Transactions From Patient Equity to Long Term Debt Sector Expertise Country Risk Mitigation Environmental & Social Risk Management Advisory Services DEBT Long

project or company On selective basis, start-up equity/co-developer under Joint Development Extensive sector knowledge gained from experience In-house Engineers: Can offer technical advice and

14 IFC s Value-Add in Sustainable Energy Transactions From Patient Equity to Long Term Debt Sector Expertise Country Risk Mitigation Environmental & Social Risk Management Advisory Services DEBT Long Maturities Tailored to Project Needs Fixed/Floating Rates, Local Currencies Flexible Amortization Profile Syndication/Mobilization SUB-DEBT Terms tailored to meet project needs EQUITY Up to 20% in project or company On selective basis, start-up equity/co-developer under Joint Development Extensive sector knowledge gained from experience In-house Engineers: Can offer technical advice and consider new technologies In-house Market Expertise: Can assess and structure for Merchant Risk In-house Regulatory Expertise: Can assess and structure for Regulatory Risk Government Relations Neutral broker Role World Bank Synergies Advice on Environmental and Social Best Practices Equator Principles Modeled after IFC Standards Access to Donor Funding/Concessionary Support Coordination Programs to assist client, including: Local Supplier Development, Corporate Governance, Community Development Funding Carbon Finance Agreement 14

15 Standard Setting Our Performance Standards 1 Assessment and management of environmental and social risks and impacts 2 Labor and working conditions 3 Resource efficiency and pollution prevention 4 Community, health, safety and security Land acquisition and involuntary resettlement Biodiversity conservation and sustainable management of living natural resources Indigenous peoples Cultural heritage 15

16 Climate Change-Related Projects in EAP Sustainable Energy Finance China, Philippines, Vietnam, Thailand Clean Energy Thailand, Pacific, Indonesia, Myanmar (under development) Green Buildings China, Indonesia, Philippines, Vietnam Water Efficiency China Resource Efficiency Vietnam Small hydro Lao PDR Agriculture (commodity supply chain, post-harvest) Cambodia (rice), Indonesia, Philippines, Vietnam, Myanmar (under development) Environmental and Social Standards for FIs China, Indonesia, Philippines, Thailand, Vietnam 16

17 Thank you! IFC Mekong Somerset Chancellor Court Nguyen Thi Minh Khai street District 1, Ho Chi Minh City, Vietnam Tel: Fax: Web: 17

IFC Power and Renewables

IFC Power and Renewables Dzenan Malovic Technical Specialist Balkans Renewable Energy Program International Roundtable on Water and Energy Nexus in transboundary basins in SEE Sarajevo, 06. 11. 2013 IFC: