International Finance Corporation Investing in Environmental Projects

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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
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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

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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
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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
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IFCs Investment Portfolio by Region
Investment commitments of 15.1 billion in 1,402
companies in 117 countries as of June 30, 2002.
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IFCs Investment Portfolio by Sector
Investment commitments of 15.1 billion in 1,402
companies in 117 countries as of June 30, 2002.
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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

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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
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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

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Potential Challenges Transactional Barriers
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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

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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

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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

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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.

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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

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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

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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

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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

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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

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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

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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

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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.

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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

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Key Contacts

• Environmental Opportunities
• Alex Leite [phone]
• aleite_at_ifc.org
• Jeff Liebert [phone]
• jliebert_at_ifc.org
• Sustainable Financial MarketsFacility
• Dan Siddy (44-797) 685-2108
• dsiddy_at_ifc.org
• Zenaida Chavez [phone]
• zchavez_at_ifc.org

• Corporate Citizenship Facility
• Mark Eckstein (44-131) 313-6162
• meckstein_at_ifc.org
• Sarah Ruck [phone]
• sruck_at_ifc.org
• IFC-Netherlands Carbon Facility
• Vikram Widge [phone]
• vwidge_at_ifc.org
• Global Environment Facility
• Dana Younger [phone]
• dyounger_at_ifc.org

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International Finance CorporationInvesting in
Environmental Projects
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