Guarantee schemes for green projects A new tool in the toolbox?

What’s our scope? What’s green? Sustainable use of natural resources is often involved Sustainable forestry Renewable Energy Biodiversity conservation Sustainable economic growth is based on three pillars : economic, social and environmental Green projects = projects promoting a sustainable economic growth Objective is to ‘meet the needs of the present without compromising the ability of future generations to meet their own needs’ Energy Efficiency Sustainable agri-practices Sustainable use of water

Why are green projects different? Because they involve a lot of ‘NEW’ New technologies Ex. biodigestors, new motors, co-generation, solar energy, new irrigation technique New financial models Ex. savings must be included in the cash flows for energy efficiency projects New counterparts Ex. new technology providers, new groups of borrowers

Why are green projects difficult for lenders? Because ‘NEW’ translate into ‘RISKS’ New technologies High perceived (performance) risks New financial models Difficulty to price New counterparts High perceived (credit) risks or Low interest for some segments (too small, scaling up not easy)

Why are green projects difficult for borrowers? High perceived (performance) risks Difficulty to price High perceived (credit) risks or Low interest for some segments (too small, scaling up not easy) Credit is refused Collateral requirement is too high Price is too high

Can guarantee schemes help then? In practical terms: On the short term : guarantees will allow Financial Institutions to ‘start’ by allowing them to offer better pricing lower collateral requirement or even just the loan to happen On the long term : guarantees are supporting financial institutions over their ‘learning curve’ and should not be necessary on the long-term Yes because one of the main issues is perceived risks Interest Rate (r) Risk r0 S0 Loan Volume D r1 r* S1 SCG rCG Increased access Guarantees will help close the gap between perceived risks and real risks without creating market distortion

Are green guarantees different? No If they try to mitigate excessive perceived credit risks (e.g. excessive collateral requirements) Yes If the issue is the financial modeling (Partial) Credit Guarantee Schemes Performance Guarantee Schemes

One example of PCG NDB Commercial Bank Final beneficiary Guarantee Risk assessed is the credit risk of the final beneficiary This risk is known from both FIs No need of other stakeholders Risk is shared Different versions: with or w/o ad hoc vehicle, single or portfolio guarantee NDB Commercial Bank Final beneficiary Guarantee Loan Collateral Loan repayments Claims

One example of Performance Guarantee NDB Commercial Bank ESCO or EE project or EE beneficiary Guarantee Loan Collateral Loan repayments Claims X Technical verification - Evaluates the claim Technical performance validator - Evaluate and approve EE project and MV plan Risk assessed is performance of savings This risk is unknown to the commercial Bank and to the NDB, that is why we need experts The commercial Bank can integrate the savings into the project cash flows The commercial Bank stays with the risk it knows well : credit risk (unless PF)

The use of green guarantees worldwide Guarantee schemes have been widely used to support SMEs 2250 schemes in 100 countries Green guarantees seem to be still at an early stage of development So is green itself But a couple of very interesting initiatives are worth mentioning Carbon credits (performance guarantee) Energy Efficiency guarantee schemes in very diverse countries such as China or Bulgaria (performance guarantee) Guarantee schemes in support of the sustainable use of natural resources in agriculture (credit guarantees)

The use of green guarantees in LAC In LAC too, credit guarantees are widely used. 15 countries boast public schemes for MSMEs The volume in guaranteed loans has doubles between 2007 and 2010 We identified 10 schemes dedicated to green programs Fonaga Verde, Fonagua and Fonafor (FIRA) Fosefor (Financiera Rural) Areca and Cambio (BCIE) Fondo ABC (Banco do Brasil) Smart Energy Fund (BID and Government of Barbados) EEGM (BID and BNDES) Dominican Republic……..

Can guarantees ‘solve it all’? Our research shows that green projects face many different kind of barriers Non friendly regulatory frameworks Adverse market conditions (higher upfront payments and longer payback periods) Lack of awareness or appetite from the banking sector (small beneficiaries, niche markets) Lack of liquidity in some cases or lack of credit at appropriate terms Weak level of structuration on the demand side Prioritizing savings investment vs. expanding investment is not easy Lack of awareness on the potential beneficiaries side, trust issues towards new technologies and technology providers Lack of financial sophistication : few bankable projects, access to credit can be an issue

Guarantees can work if they are one brick of a well built program Blending of financial resources Guarantee scheme Banking sector capacitation TA for demand structuring

NDBs are strategically placed? NDBs have key role to play in the implementation of National green strategies as they have access to all the tools They can access and channel funding to blend different source of funds to provide technical assistance resources They can execute in the best conditions because they have a very deep knowledge and contact with the local private sectors to be involved Guarantees are not new to NDBs and Green programs either The next step is to combine both fields of expertise NDBs in LAC have here a powerful community of practice This workshop is one example Green Guarantees could be one of our initiative

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