Scaling up Climate Change Finance Barriers, Options and the Private Sector Clean Energy Finance Workshop, June 28, Ankara, Turkey Martin Dasek Sustainability and Climate Business, EMENA Coordinator IFC, Global Financial Markets, Istanbul mdasek@ifc.org
I. Where is the Opportunity II. IFC and it s Role in Climate Change Finance III. Public Finance and Markets
The Global Challenge: Financing Climate Business Current levels of annual climate financing for developing countries ($9 billion) falls short of annual estimated needs $140-175 billion for Mitigation $30-100 billion for Adaptation For this to be achieved and attained, private sector participation and financing is crucial (estimated at 75%) Enabling private sector financing will be critical for this Climate Business is a strategic priority for IFC with a commitment to achieve 20-25% of our new investments in Climate by 2013 Source: World Development Report 2010
The Market for Investments in key Climate Sectors WIND ENERGY Over $70 billion invested in wind per year - half of this in emerging markets SOLAR PV & THERMAL Annual investment in solar PV is $70 billion largely in emerging markets WASTE & RECYCLING Potential solid waste market of $250 billion per year in emerging markets GREEN BUILDINGS Market in emerging economies expected to be $450 billion per year to 2020 ENERGY EFFICIENCY Global application of Best Practices could save 3.2 GtCO 2 e GHG emissions per year WATER & WASTEWATER The water / wastewater market is $270 billion in emerging markets
I. Where is the Opportunity II. IFC and it s Role in Climate Change Finance III. Public Finance and Markets
Introducing IFC We create opportunity for people to escape poverty and improve their lives The world s largest private sector-focused development bank (Part of the World Bank Group) Established in 1956, over half our 3,438 staff work from over 100 offices in 92 countries. We invest, advise, mobilize capital, and manage assets. Committed portfolio for FY11: $55.2 billion; 1,737 firms. Investments in FY11: $12.2 billion for IFC s own account, $4.7 billion mobilized. Under management within the Asset Management Company: $4 billion. Advisory expenditure for FY11: $333.8 million IFC started formal environmental and social screening of its investments in the early nineties and became the acknowledged world leader on these issues when the Equator Principles were launched in 2004. The biggest challenge to development today is climate change. While public policy is key, the private sector must also play a leading role. That is why Climate Business is a core priority for IFC 6
What IFC means by Support of Climate Change Mitigation? Providing financial products and/or advisory for FIs under Sustainable Energy Finance (SEF) product line in following areas: Energy Efficiency (EE): Investing into fixed asset to reduce energy bill of end-users through increased efficiency of energy use Home EE renovation loans, SME loans, Corporate EE finance Renewable Energy (RE): Investing into technologies generating power or heat from renewable resources Project finance: Hydro power plants, wind, solar etc. Resource Efficiency: Investing into technologies minimizing waste and emissions from industrial processes and maximizing product output Improved industrial processes, Waste water treatment Cross-Cutting Areas: Sustainable value chains- supporting FI partners in supply value chains lending for sustainability upgrade financing. ESCo financing - providing finance for providers of energy services Green buildings - Providing financing and support for developers and end-user of environmentally friendly and energy sustainable buildings
IFC s SEF Outstanding Portfolio (thorough FIs) 62 FIs in 27 countries, over US$1.5 billion total portfolio, >300 GWh/pa RE produced, 17,700 GWh/pa saved, 19.5 Mtons GHG/pa avoided IFC SEF projects/facilities (IS & AS)
Sustainable Energy Finance - IFC in Turkey YAPIKREDI Leasing Turkey FINANSLEASING Turkey CTF - $5,000,000 IFC - $20,000,000 CTF - $10,000,000 IFC - $40,000,000 Senior Debt 2010 Sustainable Energy Financing Senior Debt 2010 Sustainable Energy Financing TSKB Turkey YAPIKREDI BANK Turkey AKBANK Turkey YAPIKREDI Leasing Turkey IFC - $75,000,000 IFC - $45,000,000 IFC - $75,000,000 IFC - $75,000,000 IFC - $40,000,000 Senior Debt 2012 Sustainable Energy Financing DPR 2011 Sustainable Energy Financing DPR 2010 Sustainable Energy Financing Senior Debt 2008 Sustainable Energy Financing 9
SEF Financing through FIs Essentially a specification of the use of proceeds of IFC s financing. The financial instrument is a separate consideration The eligibility criteria are not as evident as say Housing or microfinance and additional work by the FI is required to ensure product integrity Need market conditions and enabling frameworks as a prerequisite Critical barriers are Transaction costs for the extra work Risk Perceptions Can be found in any part of the economy SME/Industrial opportunities Energy Efficiency, Cleaner production Infrastructure opportunities Renewables, utility energy efficiency Housing renovation Including financing efficient household appliances Municipal Water and electricity efficiency Transport interventions Microfinance Selling small off grid devices through MFI networks
What IFC may offer for Scaling-up SEF for FIs Credit lines and senior loans (mediumto long- term) Risk sharing products and partial guarantees Mezzanine financing and subordinated debt Trade guarantees Investment Products tailored to the needs of diverse markets Advisory Services Market development, analysis and product development designed for help to build a profitable SEF business Capacity building, trainings for staff on all levels Tools and resources Linkages with contractors/escos/ vendors
SEF Financial products and their use Financial Product Potential for use Leverage (IFC : local FI) Trade finance Long term credit line Pari-passu Risk sharing facilities (funded/unfunded) Addresses trade in EE/RE equipment Asset liability matching and liquidity for projects with longer paybacks Addresses risk perception (soft) and exposure barriers Public funds role 1:1:3 None/potenti ally a subsidy 1:1.3 None : Potentially a subsidy >1:2 Public Fund funds take a first loss Public Fund leverage (Public Fund to FI) NA NA >1:10 Decreasing simplicity Increasing development impact and more catalytic Increasing leverage and value add Equity through Funds Provides risk capital and growth equity 1:1 NA NA Subordinated risk sharing facilities (funded or unfunded) Addresses financing gaps, risk appetite, >1: 3 Public Fund funds take a first loss >1:20
Level of Market Development IFC s Experience Leveraging Public Funds HIGH Leverage Factor (LF) = Private $ mobilized per Public Fund $ OTP US$250 mm facility IFC RE Mezz facility (2009) LF 100 times CHUEE II(2007): US$350 mm facility LF 30 times CHUEE (2005): US$50 mm facility LF 10 times CEEF (1997) L F = 1 times Across various IFC projects
I. Where is the Opportunity II. IFC and it s Role in Climate Change Finance III. Public Finance and Markets
Requirements to Scale up Climate Financing Driven by enabling frameworks End users Other beneficiaries Equipment Manufacturers Service providers Technical Firms Market Capacity Creation Demand Product/ Service to meet demand Sustainability Financing of products and demand fulfillment Pure Commercial finance Market can sustain after incentives have been phased out Investors Financiers Scaling up financing
Roles for Public Finance Type of intervention Role of public finance Rationale Establishing the necessary regulatory framework Financing pilot products in new/emerging technologies Establishing capacity in the market Performance based incentives Blended finance : (State first loss blended with commercial funds for equity, mezzanine and debt) Grants and Technical Assistance Capital/interest subsidies as Grants to make project viable Grants and Technical Assistance Performance based subsidies to transform market behavior Higher risk investments Frameworks are necessary to create the demand Help price public goods : Water, energy, other resources Demonstration will lead to lowering of technology costs and to scale up Capacity is necessary to create a pipeline of projects for scale up Market behavior changes lead to scale up Reduces risk of private financial investors leading to higher risk appetite and scaling up Create demand and market drivers Support market ability to provide solutions Enabling financing 17
Summary Climate financing is intrinsically a viable proposition but there are many barriers Financing is often a necessary but rarely a sufficient condition Requires viable pipeline of projects Requires policy and enabling frameworks The traditional approaches for green/climate financing are Financing what is out there (commercially) CSR to finance what is unviable (but to feel good) An emerging approach : financing what is marginal : Increasing the size of the pie Key barriers to expanding the pie are Transaction costs Risk perceptions Not enough public finance but enough to move the private sector Eventual solution will require local financing (to address sustainability and transaction costs) 18