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International Finance Corporation Investing in Environmental Projects

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Title: International Finance Corporation Investing in Environmental Projects


1
International Finance CorporationInvesting in
Environmental Projects
IFCs mission is to promote sustainable private
sector investment in developing countries,
helping reduce poverty and improve peoples lives
2
International Finance Corporation (IFC)
  • Member of World Bank Group - owned by 175
    governments
  • Operates on a commercial basis
  • Profitable every year since founded in 1956
  • AAA rated international borrower
  • Net worth of 6.3 billion
  • Committed loan and equity portfolio of 15.1
    billion
  • In FY02, IFC approved 4.0 billion of financing
    for 223 new investments with a total project cost
    of 15.5 billion

3
IFCs Guiding Principles
  • Mobilization of capital
  • Minority position, non-operating role
  • Investment limit of 25-35
  • Complements, not displaces, private sector
  • Same risks/returns as other investors
  • Market pricing
  • No government guarantees
  • Honest broker/neutral partner
  • Benefits host country economy
  • Commercially viable
  • Environmentally sound
  • Socially sound

? Catalyst
? Partner
? Sustainable
4
IFC The resources of a development bank and the
flexibility of an investment bank
  • Long-Term Financing
  • Debt Project finance and corporate finance
  • Equity / Quasi-equity

Global industry and local country knowledge
  • Capital Mobilization
  • Syndication with commercial banks (B loan
    program)
  • Co-financing

Understanding of government policies
IFCs Products
Commercial and technical skills in emerging
markets
  • Advisory Services
  • Financial structuring
  • Industry and technical
  • Government (capital markets, foreign investment)

Plus special initiatives for high priority
sectors SMEs, Environment, Social Development
5
IFCs Investment Portfolio by Region
Investment commitments of 15.1 billion in 1,402
companies in 117 countries as of June 30, 2002.
6
IFCs Investment Portfolio by Sector
Investment commitments of 15.1 billion in 1,402
companies in 117 countries as of June 30, 2002.
7
IFCs Approach to Environmental Projects
  • Mainstream IFC Projects
  • Encourage improvements in all IFC projects by
    adding value through IFCs new Sustainability
    Framework
  • Environmental Projects
  • Support projects with direct environmental
    benefits (e.g. clean water) and alternative
    technologies (e.g., renewable energy, energy
    efficiency)
  • Environmental Initiatives
  • Where appropriate, access limited concessional
    funding to expand the range of sustainable
    private-sector activities

8
IFCs Sustainability Framework
  • Developmental Benefits
  • The economic activity conducted by the project or
    company is in accordance with accepted national
    and international (IFC) standards for mitigating
    potential environmental or social harm stemming
    from the activity.
  • Handling of environmental/social issues
    materially exceeds minimum standards.
  • In so doing, the project or company creates local
    or global benefits in terms of reduced waste,
    emissions, or use of natural resources of its
    economic activity or helps spread the benefits
    accruing from its economic activity to the local
    community or to groups which often fail to
    benefit from such activity.
  • Corporate governance practices are good enough to
    affect positively views of investors about
    investing in the country.
  • Handling of environmental and social issues
    materially exceeds WBG minimum standards.
  • Formalization of practices or other steps enable
    good practices on environmental, social and
    corporate governance issues to leverage change
    broadly within a region, a sector, or a supply
    chain.
  • Economic activity beyond the firm is influenced
    in the direction of improved resource intensity
    and inclusion of new beneficiaries.
  • Corporate governance attributes of the project
    are sufficiently advanced so that a demonstration
    effect is possible.
  • Company is actively engaged on many fronts in the
    dissemination of best practice.
  • Economic activity well beyond the firm is
    influenced in the direction of improved resource
    intensity and inclusion of new beneficiaries
  • Firm is seen as a global corporate governance
    leader, with wide influence.

Performance Level Level 1 Complies with IFC and
national minimum standards Level 2 Added
environmental, social, or corporate governance
value Level 3 High performance Level 4
Leadership
9
Potential Challenges Market Distortion Barriers
  • Inadequate regulatory ? Uncertainty too high for
  • framework private sector investors
  • Example Government calls for private sector to
    build wastewater treatment plants without
    adequate regulations and/or pricing
  • Conventional competitors ? Reduced
    competitiveness
  • using underpriced resources of environmental
    project
  • Example Government policy subsidizes use of
    fossil fuels
  • Example Wind project competes with coal-fired
    plant that is not fully paying for mine
    reclamation or particulate GHG emissions
  • Excess concessional funding ? Commercial
    financing
  • crowded out
  • Example Home country aid agency provides
    concessional funding for export of wind turbine
    without considering whether it is necessary

10
Potential Challenges Transactional Barriers
11
Environmental Initiatives
  • On a highly selective basis, IFC accesses
    concessional funding to support increased
    environmental and social sustainability
  • Objectives
  • Expand the range of activities associated with
    IFCs market-rate investments
  • Accelerate market adoption of new technologies,
    services and business models
  • Sources
  • Global Environment Facility
  • Donor Trust Funds
  • 3 New Environmental Facilities
  • IFC-Netherlands Carbon Facility

12
IFCs Strategy for Using Concessional Funding
  • Cautious with subsidies Projects must have a
    clear path to financial sustainability
  • Market-based interventions Stay as close to
    commercial viability as possible
  • Market-based instruments Match the type of
    support to the obstacles or risks blocking the way
  • Prefer non-grant financing
  • Minimize use of concessional resources
  • Maximize leverage of concessional resources
  • Where possible, co-finance with IFC

13
IFC/GEF Activities
  • GEF provides limited, concessional funding for
    projects that achieve global environmental goals
  • Climate change, biodiversity and international
    waters
  • IFC/GEF portfolio 12 projects totaling 130 M
  • Highly innovative projects that have pioneered
    the use of non-grant financing (e.g., loans,
    guarantees, equity)
  • Primarily clean energy but also biodiversity
  • IFC/GEF pipeline 20 M p.a. (2-4 projects)
  • Increasing share of biodiversity more clean
    energy

14
Examples of IFC/GEF Projects
  • Hungary Energy Efficiency Cofinancing Program
  • 17 M partial guarantee facility
  • Solar Development Group
  • 40m global equity/TA fund for off-grid solar
    power
  • Terra Capital Fund
  • 15 M equity fund for biodiversity ventures in
    Latin America
  • Small and Medium Scale Enterprise Program
  • 21 M for SMEs from Costa Rica to Viet Nam
  • Photovoltaic Market Transformation Initiative
  • 30 M to accelerate solar power in India, Kenya,
    Morocco
  • Includes both GEF and IFC financing.

15
New Environmental Facilities
  • OBJECTIVE Expand IFCs support for
    environmental and social sustainability
  • Environmental Opportunities
  • Catalytic project development funding and
    flexible investment financing for innovative
    projects that address local environmental
    problems
  • Corporate Citizenship
  • Guidance and support to the private sector in
    developing and implementing corporate citizenship
    initiatives and activities
  • Financial Institutions
  • Comprehensive and innovative sustainability
    program to strengthen the capacity of the
    financial sector through training courses and
    local consultant development
  • Consistent with key Johannesburg commitments
    to improve the quality of peoples lives
  • Facilities began operations July 2002
  • Combined program targeted at 55 M over 5
    years
  • IFC has approved funding but most will come
    from donors

16
IFC-Netherlands Carbon Facility
  • 40 M to purchase greenhouse gas emission
    reduction credits (carbon credits) on behalf of
    the Dutch government
  • Pursuant to Clean Development Mechanism of the
    Kyoto Protocol
  • Supplemental funding for IFC and third-party
    projects that reduce GHG emissions compared to
    baseline
  • Increased funding for sustainable projects
  • Improve access to cleaner technologies in
    developing countries
  • Reduce cost of compliance with Kyoto Protocol
  • Develop a new market for environmental services
  • Target sectors Renewable energy, energy
    efficiency, fuel switching

17
Environmental Opportunities Facility
  • Focus on innovative projects that generate
    primarily local environmental benefits
  • Overcome uncertainty associated with new markets,
    new business models, and new technologies
  • Two types of support
  • Project Preparation -- Grant funding for
    preparation of business plans, market
    assessments, etc.
  • Investment Funding Flexible financing products
  • Market-rate funding for risky, small ventures
  • Seed capital for companies using post RD
    technologies and project developers

18
Environmental Opportunities Facility
  • Project Proposal Water Purification Services
  • Description Water purification and delivery
    services using an innovative technology,
    targeting rural and urban areas
  • Environmental Benefit Clean drinking water at a
    lower cost, improving health and quality-of-life,
    especially for underserved groups
  • Challenges
  • Small initial scale
  • New service-oriented business model
  • New technology risks

19
How can projects like this be funded?
  • IFC? Too small and too risky for mainstream IFC
    investment. Maybe in the future.
  • GEF? Ineligible for GEF funding, which is
    strictly limited to global environmental
    objectives (e.g., climate change, biodiversity)
  • Trust Funds? Possibly, but not always available
    and can only be used for project preparation
  • Others? Local financial institutions and
    international venture capital firms have limited
    interest
  • Conclusion Gap in the available resources of
    financing for early-stage, private-sector
    projects that address local environmental
    problems

20
EOF Sectors
  • Priority sectors
  • Environmental Services Pollution
    Reduction/Abatement
  • Clean drinking water Industrial
  • Wastewater treatment Indoor air pollution
  • Solid waste management
  • Eco-Efficiency/Cleaner Production
  • Improvements
  • Secondary sectors (only if no GEF or other
    funding)
  • Sustainable Resource Use Sustainable Energy
  • Organic farming Renewable energy
  • Certified forestry Energy efficiency

21
Current Projects Under Review
  • Water Purification Services
  • (i) Developing and marketing a line of
    proprietary, scaleable water purification and
    disinfection devices to deliver affordable
    potable water, especially to underserved
    populations (Philippines, Mexico and Bangladesh)
    (ii) Point of sale leasing to SME's for water
    treatment equipment in the LAC region.
  • Electric Vehicles
  • The project consists of the manufacturing and
    marketing of electric vehicles as well as the
    development of the required infrastructure
    facilities associated with the project in India.
    The project will provide important local
    environmental benefits by introducing an
    innovative indigenous technology that will help
    reduce pollution in congested cities in India.
  • Renewable Energy / Eco-Efficiency
  • ESCO model to market and sell small scale
    biomass gasifiers in India

22
Current Projects Under Review
  • Pollution reduction in pulp paper
  • The project comprises the development of a
    technology that will reduce/eliminate the
    pollution of non-wood (straw) pulp mills. This
    technology is expected to be deployed in projects
    located primarily in China, one of the largest
    producers on straw pulp in the world.
  • Cleaner Production in Sugar Processing
  • Technical assistance to design and install a new
    bagasse waste treatment system for an IFC
    project, recoverable against cost savings
    performance targets (Colombia).
  • Sustainable Conch Mariculture
  • To reduce pressure on wild stocks of conch and
    provide a sustainably harvested alternative for
    this high protein mollusk which is widely
    consumed in the Caribbean.

23
EOF s Guidelines
  • Funding Guidelines
  • As close to commercial financing as possible
  • Maximize leverage of EOF resources
  • Selection Guidelines
  • Local environmental benefits
  • Expectation of commercial sustainability
  • Strong sponsor
  • Demonstrated and incremental need
  • Innovation, Demonstration Effect, Potential for
    Replication
  • Emphasis on Partnerships
  • Partners are essential both for identifying and
    managing a portfolio of small investments in
    diverse regions
  • Partners will include financial intermediaries
    serving SMEs, other multilaterals and bilaterals,
    and local technical institutes

24
Key Contacts
  • Environmental Opportunities
  • Alex Leite (202) 473-2559
  • aleite_at_ifc.org
  • Jeff Liebert (202) 458-7885
  • jliebert_at_ifc.org
  • Sustainable Financial MarketsFacility
  • Dan Siddy (44-797) 685-2108
  • dsiddy_at_ifc.org
  • Zenaida Chavez (202) 473-8202
  • zchavez_at_ifc.org
  • Corporate Citizenship Facility
  • Mark Eckstein (44-131) 313-6162
  • meckstein_at_ifc.org
  • Sarah Ruck (202) 473-0841
  • sruck_at_ifc.org
  • IFC-Netherlands Carbon Facility
  • Vikram Widge (202) 473-1368
  • vwidge_at_ifc.org
  • Global Environment Facility
  • Dana Younger (202) 473-4779
  • dyounger_at_ifc.org

25
International Finance CorporationInvesting in
Environmental Projects
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