Transcript IFC

IFC & Low Carbon
Economic Development
Asia Pacific Finance and Development Center 2010 Biennial Forum on
Fiscal and Financial Policies for Low-carbon Economic Development
November 26, 2010
Shanghai, China
Peter A. Cook, Sr. Investment Officer
Climate Business Group, IFC Beijing
Who We Are, What We Do
• IFC is the largest global development finance institution focused on
the private sector – the global leader in private sector development
finance
• We create opportunity for people – to escape poverty and improve
their lives
• Driven by our vision and purpose, we make a unique contribution
to development
• We invest, advise, mobilize capital, and manage assets – providing
solutions for an inclusive and sustainable world
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Who We Are - Structure
• Owned by 182 member countries
• IFC is the main driver of private sector development in the
World Bank Group
• Collaborates with other members of the group, including the
World Bank (IBRD and IDA, MIGA and the International
Centre for Settlement of Investment Disputes)
• Global: Headquartered in Washington, D.C.
• Local: More than 100 offices worldwide in 86 countries,
including Beijing and Chengdu in China
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What We Do - Three Businesses
IFC Investment Services
IFC Advisory Services
• Loans
• Advice
• Equity
• Problem-solving
• Other forms of financing
• Training
IFC Asset
Management
Company
• Wholly-owned
subsidiary of IFC
• Private equity fund
manager
• Invests third-party
capital alongside IFC
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IFC - 2010 Highlights
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IFC - Fiscal Year 2010 Highlights
• Investments: 528 new projects in 103 countries
• Advisory services: $268 million in annual expenditures
• $18 billion in financing: $12.7 billion for IFC’s own account, $5.3
billion mobilized
• IDA countries account for half of IFC projects overall:
 $2.4 billion invested in Sub-Saharan Africa, 33 percent
increase over past year
• IFC earned net income of $1.7 billion for the year, and also made
a $200 million grant to IDA
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What We Do - The Reach of IFC’s Projects
IFC’s activities help raise living standards
for people throughout the developing world
Last year our clients provided:
• 2.2 million jobs
• $112 billion in micro, small, and medium enterprise loans
• 8 million patients with health care treatment
• 35 million people with clean water
• 29 million people with power connections
• 1.4 million students with education services
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IFC Reach in China in Fiscal Year 2010
Last year our clients provided:
• 285,000 jobs
• $12 billion in micro, small, and medium enterprise loans
• 1 million patients with health care treatment
• 15 million customers with clean water
• 16 million customers with power connections
• 14 million customers with gas distribution
• Services to 510,000 farmers
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Investments by Region/Industry, FY10
Commitments for IFC’s Account: $12.7 Billion
Middle East and
Global 1%
North Africa 12%
Oil, Gas, Mining
and Chemicals 8%
Sub-Saharan Africa
19%
Private Equity
and Investment
Funds 3%
Subnational
Finance 1%
Agribusiness 4%
Infrastructure 12%
Latin
America and
the
Caribbean
24%
East Asia and
Pacific 13%
Health and
Education 3%
Global Manufacturing
and Services 11%
Global Information and
Communication Technologies
4%
South Asia 8%
Europe and Central Asia 23%
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Global Financial
Markets 54%
IFC Climate Business
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IFC’s Climate Change Agenda
 Grow
climate-related business to 20-25% of annual commitments by 2013
Thought
Leadership
•
•
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Methodologies for setting and monitoring climate goals and standards across all sectors
GHG intensity accounting, impact assessment and efficiency guidelines
Capacity building for private and public clients related to climate business/policy
Engagement with DFIs, institutional investors, academia and civil society
Business
Opportunities
•
•
•
•
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Support IFC investments with global knowledge and technical expertise
Develop scalable climate business models
Invest in new and transferable technologies
Develop relations with global and local climate technology companies
Stay abreast with climate-related business solutions and markets
Financial
Innovation
• Leverage and adapt existing financial products (e.g., carbon)
• Develop new innovative financial products
• Develop efficient mechanisms to leverage public funds with private investment: tap into
new climate finance
• Scale up through intermediation with financial institutions and funds
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Planned Climate Investments for IFC’s Account
• IFC’s plans to grow its commitment in climate-related
investments for its own account from about
$1 billion/year in FY10 to $3 billion/year by FY13
• By FY13, investments in climate-friendly projects will
be scaled across IFC:
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Infrastructure & Natural Resources finances
on/off-grid renewables; efficiency in
power/T&D, transport & ICT; water
Manufacturing, Agribusiness & Services finance
industrial EE & CP; renewables supply chain;
green buildings; agri and forestry
Financial Markets works through FIs to finance
small/medium green investments and climaterelated projects
Clean Technology – investments in innovative,
transferable, scalable climate technologies
Climate Financial Products & Funds across all
sectors
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Financial Policies for Climate Change Mitigation:
Challenges and Opportunities of Low-Carbon
Economic Development
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The Global Challenge: Financing Climate Change
• Current levels of annual climate financing
for developing countries ($9 billion) fall 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
• Solutions need to integrate new business
models based on:
 Innovation
 Scalability
 Policy-based incentives and reforms
Source: World Development Report 2010
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Global GHG abatement cost curve – 2030
Abatement cost
€ per tCO2e
60
50
40
30
20
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Low penetration wind
Cars plug-in hybrid
Residential electronics
Degraded forest reforestation
Residential appliances
Nuclear
Pastureland afforestation
Retrofit residential HVAC
Degraded land restoration
Tillage and residue mgmt
Insulation retrofit (residential)
2nd generation biofuels
Gas plant CCS retrofit
Coal CCS retrofit
Iron and steel CCS new build
Coal CCS new build
Power plant biomass
co-firing
Reduced intensive
agriculture conversion
High penetration wind
Solar PV
Solar CSP
Building efficiency
new build
Cars full hybrid
Waste recycling
0
-10
5
10
15
-30
-40
Small hydro
1st generation biofuels
Rice management
Efficiency improvements other industry
-50
-60
-80
-90
-100
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Geothermal
Grassland management
Reduced pastureland conversion
Reduced slash and burn agriculture conversion
-20
-70
20
25
Organic soil restoration
Electricity from landfill gas
Clinker substitution by fly ash
Cropland nutrient management
Motor systems efficiency
Insulation retrofit (commercial)
Lighting – switch incandescent to LED (residential)
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Note: The curve presents an estimate of the maximum potential of all technical GHG abatement measures below €60 per tCO2e if each
lever was pursued aggressively. It is not a forecast of what role different abatement measures and technologies will play.
Source:Global GHG Abatement Cost Curve v2.0
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Abatement potential
GtCO2e per year
Policy instruments to promote Sustainability and
Sustainable Energy
• Policy instruments are required to promote change in market
behavior for the public good. This is particularly common for
sustainability
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Environmental protection
Energy efficiency
Renewable energy development
Cleaner production
• Can range from command and control to market based
mechanisms
• Policy instruments essentially serve to overcome market
barriers for the transformation
• Where the underlying sector has economic value, market based
instruments provide the most efficient way of achieving a
market transformation
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Aspects of Sustainable Energy
• Supply side Efficiency
 Transmission lines
 Power factor correction
 Public transportation
• taxis
• Supply side renewables
 Promotion of grid connected renewable energy
• End user use of renewables
 Solar hot water and PV
 Industrial captive power
• Demand side
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Industrial consumers
Municipalities (street lighting, pumping)
Commercial and residential : Buildings and Appliances
Vehicular standards and fuels switch
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Barriers to Sustainable Energy
• Awareness
 Industry
 General public
 Use of public transport
• Capacity
 Utility
 ESCO/equipment
 Industry
• Commercial
 Incentives
 Business case
• Financial
 Technical capacity of banks
 Transaction size
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Policy Instruments
Increasing cost efficiency & Decreasing control
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Roles of the State
• Policies reflecting climate change and sustainability
challenges
 Energy policy including role of renewable energy, energy efficiency
framework & targets
 Environmental policies
• Institutional & legal framework
 Energy efficiency/renewable energy promotion agencies
 Energy efficiency standards/labeling
 Energy auditing and market capacity
 Renewable energy supporting schemes (feed-in tariffs, off-take
structures)
 PPP frameworks (ESCo/EPC support)
 Utility programs/incentives
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Roles of the State
• Financial incentives
 Removing energy price subsidies, targeted
structures for low-income households
 Direct subsidies
• Mobilization of the market
(investment subsidies, cash-back incentives)
• Managing the risk (first loss guarantees)
 Fiscal incentives
• Tax credits, tax reductions, accelerated depreciations
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Getting the Policy Instruments Right
• Should be sustainable : the market behavior should have
changed permanently after the incentives are phased out
• Should be cost-effective
• Should simultaneously support and reinforce all the sections of
society that need to change
End user
Manufacturer/
distributor
Financier
• People do not want to change and therefore try to maximize
the incentives
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Creating space for a new product/service
• End user
• Manufacturer
• Service provider
Demand
Product/
Service to
meet demand
Sustainability
Financing of
production
and demand
fulfillment
• Market can
sustain after
incentives have
been phased out
• Investors
• Financier
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Creation of Demand
Comments
Providing
capital
subsidies
Cheaper to implement and effective in the
short term to change behavior but demand
drops when subsidy is phased out.
Use based
subsidies
More expensive to implement but less
distortive and therefore more sustainable
Tax breaks
Needs to fit within existing tax paying regime
Financing
incentives
To enable end users to choose the desired
alternative: Most efficient and least distortive
Awareness
creation of
benefits
Most important aspect required for all other
interventions
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desirability
Intervention
Incentivizing Manufacturers/Service Providers
Intervention
Comments
Providing capital
subsidies
Useful to get critical mass of manufacturing capacity
in place and to capture environmental externalities.
Better to subsidize factors of production and sale
rather than production cost.
Tax breaks
This is effective to help set up manufacturing and
service provision capacity but is preferable at point of
sale/service provision rather than installation of
capacity
Financing of
Both equity and debt financing are vital for
manufacturer and manufacture. Financing of end use helps expand and
end use
create demand to make sure the enterprise is
successful
Awareness
creation of
benefits
Not as critical as with end-users or financiers. Need
support in accessing finance effectively
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Enabling Financing
Intervention
Comments
Policy support to
enable the range of
finance required1
•
•
•
•
Subsidizing cost of
capital
Useful to get the process started but can become a
dependence and market may fail once the subsidy is phased
out
Subsidizing risk
Very critical and efficient as the FI gets more comfortable
with the business, this can be phased out
Subsidizing
transaction costs
Necessary and efficient as the FI builds capacity and
familiarity with the market, the market grows, transaction
costs drop as a % of business enabling this to be phased out
Awareness creation
of benefits
Critically important as financiers typically tend to be
conservative.
1 more
Early stage venture for new manufacturing
Private equity
Debt
Consumer and end-use
details on following slides
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Energy Efficiency Financing
Potential
IFC
role
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Renewable Energy Financing
Potential
IFC
role
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Thoughts for Creation of a State Fund
• All players will want to maximize subsidies
in the short term
• The State should:
 Maximize leverage of the fund to create
maximum impact
 Maximize sustainability/Minimize distortions
 Work through the financial sector to ensure
long-term ownership
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Some State Fund Models
Intervention
Comments
Fund support
demonstration
projects
This works well in principle as it gets pilots off the ground
quickly. However these do not engage the financial markets
who don’t replicate once the pilots are over
Fund subsidizes
interests rates
through FI
While the financial markets are involved, they often lose
interest when the subsidy is removed
Fund shares risk –
pari passu
This is effective but has moderate leverage and does not
really address the risk perceptions of an FI
Fund shares risk–
Subordination
This has highest leverage and sustainability but is more
complex to structure
Subsidizing
transaction costs
Necessary and efficient as the FI builds capacity and
familiarity with the market, the market grows, transaction
costs drop as a % of business enabling this to be phased out
Awareness creation
of benefits
Critically important as financiers typically tend to be
conservative.
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State
Fund
Increasing leverage
Direct
financing
Risk sharingpari passu
Subsidizing
capital
Risk sharing
subordination
Financial Institution
Project
Project
Project
Project
Project
Project
Project
Project
Project
Project
Project
Sustainability
Low
Medium
High
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State
Fund
Increasing leverage
Direct
financing
Risk sharingpari passu
Subsidizing
capital
Risk sharing
subordination
Financial Institution
Project
Project
Project
Project
Project
Project
Project
Project
Project
Project
Project
The value of the state fund and the component of
project requiring market financing
Only the risk sharing structures make an impact
on financing and risk
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Summary
• The risk sharing structures are the only structures that address
risks that banks may be concerned about
• Capital subsidies reduce project costs but the risk to the bank is
the same (except on the smaller loan amount)
• The subordinated risk sharing provides maximum leverage,
impact and sustainability and is the preferred model
 Here the state fund can provide a first loss for banks loans extended to
the desired sector
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Thank You!
Peter A. Cook
Sr. Investment Officer,
IFC Climate Business Group
Beijing, China
Phone:+ 86 10 5860 3000
Email: [email protected]
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