BLENDED FINANCE MODELS FOR ENERGY DIVERSIFICATION IN THE CARIBBEAN ARUN KUMAR SHARMA, IFC

KEY ELEMENTS OF BLENDED FINANCE BLENDED FINANCE IS NOW A MAINSTREAM TECHINUE OF DESIGINING DEVELOPMENT FINANCE INTERVENTIONS ACROSS THE GLOBE AT ITS CORE, IT IS SIMPLY AN INFUSION OF A COMPONENT OF FUNDNG IN A DEVELOPMENT FINANCING PROGRAM THAT DOES NOT SEEK FULL COMMERCIAL RETURNS AND\OR IS WILLING TO TAKE CERTAIN RISKS THAT THE MARKET IS NOT WILLING TO TAKE. THE INCORPORATION OR “ BLENDING” OF SUCH A FINANCE COMPONENT RENDERS THE DEVELOPMENT FINANCING PROGRAM VIABLE WHICH OTHERWISE WOULD NOT HAVE BEEN THE CASE

Examples of Blended Finance Use Reduction of risk of loans made by financial institutions to underserved market segments which have a high perceived risk Reduction of interest rates to low income borrowers by providing interest subvention grants to Financial Institutions Reduction of operational risks by credit enhancement of contractual obligations of offtakers in energy projects Improvement of returns to sponsors for essential projects that do not offer returns that can attract private capital Absorption of upfront costs incurred in development of energy projects

Key Lessons Learned in Blended Finance Use BLENDED FINANCE CAN BE VERY EFFECTIVE BUT IS NOT ENOUGH TO ACHIEVE SUCESSFUL DEVELOPMENT OUTCOMES; A NUMBER OF OTHER CRITICAL SUCCESS FACTORS HAVE TO BE PRESENT BLENDED FINANCE IS MORE EFFECTIVE IN ACHIEVING PROJECT FINANCIAL CLOSURE BUT IS LESS IMPORTANT IN ACHIEVING SUCCESFUL PROJECT EXECUTION WHICH IS MORE DEPENDENT ON OTHER FACTORS BLENDED FINANCE HAS THE POTENTIAL TO DISTORT MARKETS IF BLENDED FINANCE INTERVENTIONS ARE NOT CAREFULLY DESIGNED BLENDED HAS THE POTENTIAL TO BE MISUSED BY STAKEHOLDERS FOR IMPROVING THEIR FINANCIAL RETURNS ON PROJECTS THEY WOULD HAVE DONE OTHERWISE OR FOR ACHIEVING COMMERCIAL TERMS THAT ARE NOT EQUITABLE TO ALL STAKEHOLDERS BLENDED FINANCE CAN RESULT IN CERTAIN “UNVIABLE PROJECTS” REACHING FINANCIAL CLOSURE AND WITH NO RESULTING EXECUTION RESULTING IN A WASTE OF PRECIOUS DONOR FUNDS

INTERVENTIONS USING BLENDED FINANCE: KEY CONSIDERATIONS Specific needs for Blended finance in any project must be clearly identified: WE MUST BE CRYSTAL CLEAR ABOUT WHAT PROBLEM WE ARE TRYING TO SOLVE We must build the capacity to design the Blended Finance Intervention to optimize the impact of Blended Finance and avoid the pitfalls We need to ensure that once a project with Blended Finance usage has been closed its execution is closely monitored and there is a mechanism to withdraw concessionality if outcomes are not being achieved Operational considerations relevant to project success must take priority over financial considerations that can be addressed by Blended Finance

DESIGNING BLENDED FINANCE INTERVENTIONS IDENTIFY WHERE BLENDED FINANCE IS NEEDED IN A PROJECT: (IMPROVING RETURNS, REDUCING A PARTICULAR OPERATIONAL RISK, CREATION OF A LOCAL CURRENCY FUNDING SOLUTION, MITIGATING TECHNOLOGY RISK, REDUCING OFFTAKER RISK, LOWERING TARIFF LEVELS ETC) ENSURE ALIGMENT OF INTERESTS; SOME AMOUNT OF RISK MUST BE RETAINED BY THE SPONSOR IN THE PROJECT TO ENSURE EXECUTION COMMITMENT OPTIMIZE SIZE AND QUANTUM OF BLENDED FINANCE INTERVENTION; AUCTION PROCESS, NEGOTIATION WITH MULTIPLE INTERESTED PARTIES

APPROACH TO ENERGY DIVERSIFICATION USING BLENDED FINANCE IDENTIFY ENERGY DIVERSIFICATION STRATEGY AND PRIORITIES IDENTIFY KEY OPERATIONAL TEAMS WITHIN THE GOVERNMENT TO IMPLEMENT THIS PROGRAM AND SUPPORT\SUPPLEMENT THEM AS NEEDED WITH INTERNAL AND EXTERNAL RESOURCES OF THE HIGHEST CALIBRE ENSURE THE AVAILABILITY OF DOMAIN EXPERTISE AT THE INDUSTRY AS WELL FINANCIAL STRUCTURING LEVEL TO DESIGN AND EXECUTE THE PROGRAM ONCE THE ENERGY DIVERSIFICATION PROGRAM IS PREPARED AND BID DOCUMENTS ARE SENT OUT, A PROCESS OF “ BLENDED FINANCE NEEDS DISCOVERY” NEEDS TO BE IMPLEMENTED TO ASCERTAIN WHAT FORM AND TYPE OF BLENDED FINANCE IS NEEDED TO GET THE PROJECTS IMPLEMENTED.

BLENDED FINANCE INTERVENTIONS FOR ENERGY DIVERSTICATION: A REGIONAL APPROACH? A REGIONAL APPROACH CAN BE CONSIDERED TO ACHIEVE RESOURCE ECONOMIES AND EFFICIENCIES A REGIONAL INITIATIVE COULD POOL HUMAN AND FINANCIAL RESOURCES IN THE FORM OF A CARIBBEAN ENERGY DIVERSIFICATION FACILITY THAT WOULD BE THE FOCAL POINT OF SOURCING AND DEPLOYING BLENDED FINANCE FOR IN COUNTRY ENERGY DIVERSIFICATION INTERVENTIONS IN THE REGION THE FACILTY TEAM COULD WORK CLOSELY WITH GOVERNMENT AGENCIES TO DEVELOP THE ENERGY DIVERSIFICATION AND THEN DESIGN AND MONITOR BLENDED FINANCE INTERVENTIONS. SUCH INTERVENTIONS COULD PRIORITZE PROJECTS FOR SUPPORT BASED ON AGREED CRITERIA SUCH AS CONTRIBUTION TO CLIMATE RESILIENCE, GENDER EQUTIY, ENVIRONMENTAL AND SOCIAL RESPONSIBILITY AND FINANCIAL SUSTAINABILITY

REGIONAL ENERGY DIVERSIFICATION FACILITY THE FACILITY COULD OFFER GUARANTEES OF UNACCEPTABLE RISK TAKE SUBORDINATED DEBT POSITIONS IN CAPITAL STRUCTURES TO IMPROVE RETURNS OFFER PROJECT DEVELOPMENT GRANTS CREDIT ENHANCE SENIOR DEBT OBLIGATIONS OF PROJECTS TO ENABLE THEM TO ACCESS LOCAL CURRENCY FUNDING CREDIT ENHANCE OBLIGATIONS OF OFFTAKERS OR OTHER CONTRACTUAL COUNTERPARTIES WHOSE RISK IS CONSIDERED UNACCEPTABLE AT THIS TIME BY SPONSORS The FACILITY WOULD LIASE WITH DONORS IN SEEKING BLENDED FINANCE FUNDS FOR THIS SPECIFIC PURPOSE AND WOULD PROVIDE THE REQUIRED LEVELS OF GOVERNANCE AND REPORTING FOR SUCH A PROGRAM . The Facility would become an effective driver of this program for the entire region.

THANK YOU. This presentation does not represent the views of the ifc or constitute an offer or commitment of any financing from the ifc; any financing from the ifc would BE subject to standard ifc investment appraisal and investment procedures including appropriate management and board approvals and applicable documentation.