1 Ministry of Foreign Affairs Department for Green Growth File no.: 2015 - 25730 Grant Committee Meeting 6 October 2015 Agenda Item no.: 3 1. Title: Climate Envelope 2015: Regional Energy Savings Insurance Program (ESI-LAC) 2. Partners: Inter-American Development Bank (IDB) 3. Amount: 35.0 mio. DKK (Global Frame) 4. Duration: 60 months. December 2015 – December 2020 5. Presentation to the Programme Committee: 19 February 2015 6: Previous Grants: DKK 3 million from the Danish Climate Envelope 2013 Title: Insurance/Risk Mitigation for Energy Savings – IDB pilot in Mexico 7: Strategies and policy priorities: Strategic Framework for Natural Resources, Energy and Climate Change (2013) and The Right to a Better Life (2012). 8: Danish National Budget account code: 06.34.01.70. Climate Envelope 9: Desk officer: Jakob Rogild Jakobsen, GRV / Mia Sulsbrück, MEUC 10: Head of Department: Morten Elkjær, GRV 11. Summary: Building on experiences from pilot programs in Columbia and Mexico, the Inter-American Development Bank (IDB) has partnered with the Government of Denmark to replicate and scale up an innovative risk management package with an Energy Savings Insurance (ESI) with the aim to reduce greenhouse gas emissions. The aim is to overcome barriers to energy efficiency (EE) investments for small and medium-sized companies in the Latin America and Caribbean (LAC) region. DKK 35 million from the “Global Frame of the Danish Climate Envelope in 2015”.
Transcript
1
Ministry of Foreign Affairs Department for Green Growth File no.: 2015 - 25730
Insurance Program (ESI-LAC) 2. Partners: Inter-American Development Bank (IDB)
3. Amount: 35.0 mio. DKK (Global Frame) 4. Duration: 60 months. December 2015 – December 2020 5. Presentation to the Programme Committee:
19 February 2015
6: Previous Grants: DKK 3 million from the Danish Climate Envelope 2013
Title: Insurance/Risk Mitigation for Energy Savings – IDB pilot in Mexico
7: Strategies and policy priorities: Strategic Framework for Natural Resources, Energy and
Climate Change (2013) and The Right to a Better Life (2012).
8: Danish National Budget account code:
06.34.01.70. Climate Envelope
9: Desk officer: Jakob Rogild Jakobsen, GRV / Mia Sulsbrück, MEUC 10: Head of Department: Morten Elkjær, GRV 11. Summary: Building on experiences from pilot programs in Columbia and Mexico, the Inter-American Development Bank (IDB) has partnered with the Government of Denmark to replicate and scale up an innovative risk management package with an Energy Savings Insurance (ESI) with the aim to reduce greenhouse gas emissions. The aim is to overcome barriers to energy efficiency (EE) investments for small and medium-sized companies in the Latin America and Caribbean (LAC) region. DKK 35 million from the “Global Frame of the Danish Climate Envelope in 2015”.
2
Table of content
1. Thematic and regional context ............................................................................................................ 4
2. Presentation of the project ................................................................................................................... 5
Annex 7: Follow-up on appraisal .......................................................................................................... 33
3
List of Abbreviations
AT Appraisal Team
CIF Climate Investment Fund
CMT Capital Markets and Financial Division (of IDB)
CTF Clean Technology Fund
DCIF Danish Climate Investment Fund
DEA Danish Energy Agency
EE Energy efficiency
ESI-LAC Regional Energy Savings Insurance Program
FIRA Mexican agricultural development bank
GCF Green Climate Fund
GCPF Global Climate Partnership Fund
GIF Green Investment Fund
GHG Green House Gas
HRBA Human Rights Based Approach to Development
IDB Inter-American Development Bank
IEA International Energy Agency
IFD/CMF IDB’s Capital Markets and Financial Institutions Division
ESI Energy Savings Insurance instrument
LAC Latin American and Caribbean region
LFI Local Finance Institution
MEUC Ministry of Energy, Utilities and Climate
MFA Ministry of Foreign Affairs
NAMA National Appropriate Mitigation Action
NDB National Development Bank
PSG Project Specific Grant
SDG Sustainable Development Goal
SE4All Sustainable Energy for All
SME Small and medium-sized enterprises
The Lab Global Innovation Lab for Climate Finance
ToC Theory of Change
UNFCCC United Nations Framework Convention on Climate Change
4
1. Thematic and regional context Energy efficiency is a Danish priority due to the substantial Green House Gas (GHG) mitigation potential, and in particular its contribution to keeping the door open for meeting the global target of limiting the increase in global temperature to 2 °C. According to the International Energy Agency (IEA), energy efficiency is the largest contributor to additional GHG emissions savings, amounting to roughly half of the cost-efficient additional savings needed by 2030. Macroeconomists have stated that energy efficiency is the safest energy supply that exists. Presently, up to 60-70% of potential energy savings in industry and buildings remain untapped. Moreover, IEA projections for 2035 show that as much as two-thirds of energy efficiency potential will remain untapped unless policies change; even though solutions and technology are readily available. According to expert consensus, this failure stems, in large measure, from banks’ (i.e. local finance institutions, LFIs) lack of familiarity with the energy efficient technologies, and their consequent exaggeration of their risks and underestimation of their benefits. Further, loans to individual energy efficiency projects are often seen as too small to support the transaction costs LFIs must incur in their evaluation, processing, and monitoring. On the end-user side, financial decision-makers in small and medium-sized enterprises (SME) are often characterized as either unaware of energy efficiency savings potential or skeptical of estimates for the size of that potential. The Energy Savings Insurance (ESI) instrument seeks to overcome these barriers by introducing an insurance component underwriting minimum savings estimated for specifically defined energy efficiency measures. To make this work it is crucial to have standard evaluation criteria agreed upon by those involved, as well as a third party organization: 1) to ensure that the standards are applied equally to all of the energy efficiency projects and 2) to act as an independent third party in any controversy and 3) to validate that there is a claim to be paid by the insurer. Specifically, the insurance mechanism removes savings performance considerations from the financial calculus of the energy efficiency investment. This assures the SME customer that the energy efficiency equipment will provide the savings required to service the financing. And it allows the LFI to focus on the standard credit worthiness of their SME clients. Additional financial security for the LFIs is ensured by providing project capital through national development banks (NDBs) with targeted credit lines. These credit lines and additional private investments are many times greater than the needed donor support for covering the transactions costs needed for setting up and implementing the ESI third part validation. In other words, the ESI instrument ensures a substantial leveraging effect of the public money. The Danish grant will be used for technical assistance to minimize transaction costs to SME and technology solution providers participating in the program. Thus, the grant is crucial in the initial phase to address the financing barriers for energy efficiency investments. As observed in a recent report on energy efficiency in the LAC region produced by the Copenhagen Centre on Energy Efficiency (SE4ALL Energy Efficiency Hub), the region has experienced a growing interest in promoting energy efficiency, but a large untapped potential remains. Some LAC countries have introduced policy, regulatory and institutional frameworks,
5
but the implementation of energy efficiency activities has generally been limited in the LAC region, often being prioritized as a response to crises or deficits in energy supply. Building on developed countries’ commitment to mobilize 100 billion USD in climate finance for developing countries by 2020, and the importance of engaging private sector climate financing, Denmark is very much focused on utilizing public finance in the smartest way to leverage private sector finance. The Danish priority is to make the “market work” in promoting climate friendly and sustainable financing solutions. As illustrated in Diagram 1, Denmark funds a range of climate financing instruments through the Climate Envelope to leverage private sector finance. These address key barriers through different means; they provide valuable lessons and strengthen the international climate finance architecture. One category of instruments includes readiness projects aimed at strengthening the capacities of developing countries to plan for, access, deliver, and report on climate finance in ways that are catalytic and fully integrated with national development priorities. One category includes support to large climate funds, filling gaps in the existing architecture and scaling up financing efficiently. Finally, a category includes developing instruments overcoming barriers for mobilizing private climate finance, including guaranties and insurances. ESI is an example of an innovative energy efficiency financing instrument with a considerable private sector leverage effect; it is targeting a risk-mitigation gap in the market by overcoming key barriers for building and promoting confidence in commercially attractive energy efficiency projects. Diagram 1: Overview of selected initiatives financed through the Climate Envelope
- Green Climate Fund is the climate finance fund within the framework of the UNFCCC founded as a mechanism to assist developing countries in adaptation and mitigation. - NAMA Facility develops projects with transformational political and regulatory elements and has inspired the design of the GCF, including the fund's criteria for selecting and evaluating project applications.
Warranties and Insurance - ESI guarantees a regular return on the EE investments by SMEs, which is expected to boost private investment for energy efficiency initiatives. - Green Investment Fund makes a bank guarantee of 50 per cent of EE investments available for SMEs local funding sources, i.e. banks.
Covering risks and capital - By using IFU's competence Danish Climate Investment Fund develops attractive business cases that offer favorable risk coverage and return structure. - Global Climate Partnership Fund has developed an innovative financing instrument, where public funds 'gears' private investment with an expected factor of four.
- UNOPS/UNEP DTU and CCAP respectively design and implements readiness projects in developing countries having the overall purpose to ensure that developing countries are ready to join their national reduction actions (NAMA) to the Green Fund.
2. Presentation of the project
2.1 Overall objective The objective of ESI-LAC is to promote investments in energy saving measures by SMEs in five countries in the LAC region: Brazil, Colombia, El Salvador, Mexico, and Peru by addressing existing financial and non-financial barriers related to both demand and supply of financing for energy savings projects by private sector companies. The project will support the development of markets for energy efficiency services by conducting market analysis and developing financing strategies, identify energy efficiency project opportunities, providing credit lines and build trust and confidence among market actors. The project builds on partnerships with national development banks, international insurance companies and verification entities. The ESI-LAC is intended to benefit the following target groups:
SME that could potentially invest in energy efficiency to lower their energy costs, increase their competitiveness and reduce their carbon footprint;
LFI interested in promoting new business lines, facilitating the allocation of funding into low-carbon projects and markets by catalyzing further investments in energy efficiency;
Service and technology suppliers of energy efficiency equipment and solutions would see an increasing demand for their products and services by increased access to credit - thereby enhancing their business opportunities in the markets they serve;
Governments, supporting key sectors in achieving GHG reduction targets and enhancing the competitiveness and environmental sustainability of their economies.
In the short term ESI-LAC is expected to mobilize credit lines of the IDB of USD 100 million, and additional private investment, resulting in reduced energy consumption and associated GHG reductions in targeted sectors. In the long term the impact of the ESI instrument is potentially substantial. Estimates based on analysis by The Lab suggests that the global potential of expanding of the ESI model to the so-called “BRICS” and ‘Next 11’ countries could catalyze investment in the range of USD 10-100 billion and annual emission reductions of 27-234 MtCO2 through to 2030. For comparison the total emissions from Danish energy consumption was approximately 37 MtCO2 in 2012. 2.2 Project outline ESI-LAC builds upon IDB’s experiences from the ESI pilot projects in the Mexican agro-industry and the Columbian building sectors for clinics and hotels. These pilots are now at an advanced stage. As illustrated in the diagram below, the ESI-LAC approach includes several elements:
Market analysis and financing strategies;
Standardized performance contracts (on energy efficiency investment projects);
Energy savings insurance instrument;
Validation and verification mechanisms by independent third party;
Stakeholder engagement via awareness raising, capacity building, partnerships, and pilot project implementation;
Financing via credit line from IDB channeled through a NDB. Each element leads to a number of interventions in a given country and sector comprising a tailored risk mitigation package. This will be ensured by supporting each of the NDBs benefitting of ESI-LAC through the following three main components:
1) First component develops a ready-to-use, tailored financial strategy by establishing a combination of financial instruments in each of the recipient countries (e.g. guarantees, long term credit lines, contingent credit lines, insurance, etc.) and non-financial instruments (e.g. introduction of standard performance contracts, engagement of third-party validators and qualified energy services providers).
2) Second component supports implementation of the financial strategies by supporting each NDB in the implementation of ESI through awareness-raising and capacity building activities aimed at beneficiaries of the various tools developed under the program. It also support NDB in defining source and final amount of funding, the selection and launching of pilot projects (including some seed finance) as well as the continuous monitoring and verification of program results.
7
3) Third component establishes a Knowledge Platform to promote the collection of information and dissemination of lessons learned and good practices in developing strategies to finance energy efficiency The Platform will serve to open up opportunities to expand ESI across recipient countries/sectors within the LAC region as well as countries in African or Asian regions.
Focus is on sectors and technologies where standard energy efficiency solutions are readily available. These sectors include commercial buildings and SME/light industry. Technologies covered to date include air-conditioning, electric motors, industrial boilers, refrigeration, compressed air systems, cogeneration, refrigeration systems, and solar water heating. 2.3. Justification for support and underlying reflections The ESI-LAC has been designed taking the five general OECD DAC principles into consideration. Relevance: A long term objective of the Climate Envelope is to assist developing countries with transition to a low carbon economy. The Global Frame of the Climate Envelope targets mitigation in emerging economies aiming at the overall objective of keeping the average global temperature rise below 2°C. The proposed ESI-LAC fits well with existing guidelines for the Climate Envelope, including strategic guidelines of the Danish Ministry for Energy Utilities and Climate (MEUC) for selection of Global Frame interventions. Especially the focus on energy efficiency and the pioneering nature of ESI-LAC as an innovative climate finance instrument with significant (private sector) leverage potential. 2015 is a momentous year on the international arena with regard to climate change, sustainable development and energy. Landmark events include the process toward a globally binding agreement at the COP21 in Paris in December, as well as the recent UN Summit on the 2030 Sustainable Development Goals in New York. The ESI instrument is very well aligned with and supportive of both processes. The proposed SDG #7 on energy embodies the objectives of SE4ALL of doubling the global rate of improvement in energy efficiency and ensuring universal access to modern energy services by 2030. Energy efficiency is a core part of providing modern energy and thus crucial in addressing poverty, improving human well-being and securing a country’s economic development. Also relevant is the SDG #9 on building resilient infrastructure, promoting inclusive and sustainable industrialization and fostering innovation. Climate financing is a key issue in the UNFCCC COP 21 negotiations. ESI-LAC will be an example of concrete measures being undertaken to harness the potential, thereby helping to demonstrate concrete action, potentially contributing to momentum in the UNFCCC process. In addition, ESI has been recognized by the Group of Seven major advanced economies (G7) and recommended to the Green Climate Fund (GCF) ESI-LAC is also supportive of the UN Sustainable Energy for All (SE4All) goals of doubling the rate of improvement in energy efficiency. ESI implementing partner, IDB, is the SE4ALL Regional Hub for the LAC Region, enabling ESI to exploit synergies with SE4ALL activities in participating countries and beyond. The link to the SE4ALL Energy Efficiency Hub in
8
Copenhagen provides opportunities for further use of lessons learned beyond the actual project activities. It is furthermore a priority of SE4ALL to address financing barriers to achieving its objectives, including in particular on mobilizing private financing. As a part of this, SE4ALL has identified insurance instruments – including insurance for energy efficiency performance – as key instruments in reducing risks and mobilizing increasing private sector investment in sustainable energy. Following extensive reviews, including relevant private sector experts, the ESI instrument was endorsed as a high-impact financing instrument to be one among the four most promising instruments (and the only one focusing on energy efficiency) from an initial list of more than 90 proposals worldwide received by the so-called Global Innovation Lab for Climate Finance in an international call for proposals for innovative, actionable, transformative and catalytic climate finance instruments. This endorsement from the Lab highlights the substantial leveraging effect of private climate finance. Effectiveness: The potential effectiveness in leveraging must be considered significant. In the short term the financing from NDBs would leverage at least an additional 20% in financing from SMEs’ own resources; in the medium to long term each dollar in financing provided by a NDB could leverage 1.5 dollars in private sector financing. Inception and mid-term reviews will be carried out to assess and gauge the speed of implementation of objectives and biannual progress reports will be submitted to the MEUC. IDB has developed a consistent and thorough results framework including indicators (see section 2.5 and annex 2). Efficiency: IDB is a well-known Danish multi-lateral partner. IDB procedures for procurement, monitoring and control will be adhered to during implementation. The choice of partners at national level has been subject to a screening process and market studies conducted by IDB. The opportunity for synergies between ESI-LAC and other activities funded by the Climate Envelope, e.g. the GCF and the SE4ALL Energy Efficiency Hub, further contributes to enhanced efficiency. In addition, synergies between ESI-LAC and bilateral programs in e.g. Vietnam funded by the Climate Envelope exist, since the ESI-LAC model in principle can be implemented very broadly geographically. Sustainability: ESI-LAC is designed to leverage private sector climate financing by overcoming initial uncertainty and risk aversion by private sector investors regarding EE investments. ESI-LAC is designed to span five years of support to create the enabling environment for IDB to establish a total of 140 million USD of initial credit lines to NDBs in five countries. The Danish support to ESI-LAC is not expected to continue after 2020. It is a clear aim and expectation that the role of the public sector and donors will diminish as the role of the private sector grows due to the commercialisation of the ESI-LAC model. Thus, the expectation is that ESI-LAC will mature to be viable at market conditions. Impact: The impact of ESI-LAC is potentially huge. ESI-LAC seeks to scale up private investment in energy efficiency, limiting greenhouse gas emissions and creating other benefits as a result of
9
market transformation enabled by innovative risk instruments. ESI-LAC will support the participating countries in exploiting energy efficiency investment opportunities through the development of local markets. It will serve as a platform for knowledge sharing within in LAC and facilitate outreach to other regions such as Africa and Asia where it is possible best practices from ESI-LAC could be replicated. Also, ESI-LAC has potential to deliver multiple co-benefits as elaborated in section 2.4 below. 2.4 Theory of Change Underlying the project is a Theory of Change (ToC) (see Annex I) building on the premise that in the current situation energy efficiency investments are not occurring due to barriers to investments. The ToC includes measures applied to address significant barriers to energy efficiency investments. The lack of experience with financing of energy efficiency investments by LFIs and the lack of trust in actual energy savings coming forward - combined with the commercial prioritization of other investments - have hindered energy efficiency investments from materializing. The ToC diagram illustrates how the proposed technical assistance aims to address these barriers and improve on the current situation for energy efficiency investments in the LAC-region. The third party validation and the standard contract of the ESI-LAC will reduce technology risk for SME buyers (and participating LFIs) by ensuring that the energy efficient equipment financed will save sufficient energy to repay the loan. Outreach, marketing and capacity building efforts will assure energy efficiency equipment vendors that they will reach an expanded SME market. In parallel, LFIs will become increasingly familiar with the real risks vis-à-vis the perceived risks and subsequent returns associated with energy efficiency investments. Combining these activities will enable an understanding of the demand and supply forces of the local market for energy efficiency financing and its current challenges, as well as structuring a strategy to address these challenges. The outputs of these activities result in a strategy that has been developed and tested with local relevant private actors for energy efficiency investments including potential investors (SMEs), LFIs, and technology service providers. Furthermore, capacity building measures support market development by creating new lines of business for key participating stakeholders. Risks of the proposed program are of contextual, programmatic, institutional and reputational nature. These are mitigated as part of the program design. The impact of the ESI-LAC financing strategy is realized in reduction of GHG emissions through avoided emissions due to energy savings investments by SMEs and financed by LFIs. Outcomes of the program further include additional financing for energy efficiency investments, the development of standardized instruments (energy savings contracts, validation methods and insurance conditions) for the energy efficiency market, increased awareness of energy efficiency potentials/opportunities of market actors, as well as increased investments. Finally, energy efficiency is delivering multiple co-benefits such as improved access to energy, improved productivity, improved energy security, reduced local air-pollution, and health improvements. It can also improve competitiveness and, in many instances, create local jobs in the partnering countries.
10
Through these interventions a number of changes in recipient countries are expected, such as:
Reduced GHG emissions by key sectors/sectors;
Leverage of additional investments in energy efficiency by scaling up IDB credit lines to NDBs by a factor-20 (in relation to the ESI-LAC budget);
Increase levels of private investments by SMEs in energy efficiency projects (in the short term the financing from NDBs would leverage at least an additional 20% in financing from SMEs’ own resources; in the medium to long term each dollar in financing provided by a NDB could leverage 1.5 dollars in private sector financing);
Strengthen national business environment by building capacity (in relation to energy efficient technologies) within the domestic private financial sector, increasing the access to energy efficiency finance of SMEs, and overcoming barriers to investments;
The ToC also reflects the risk factors and risk mitigation measures of ESI-LAC.
3. Previous Danish support and preliminary results MFA and MEUC, in particular the DEA, have in collaboration with the IDB been closely involved in the concept development and analysis of the ESI instrument. The then Danish Prime Minister launched the ESI pilot project in Mexico at the UN climate summit on 23 September 2014 in the context of the UN Secretary General’s urge for private and public leaders to present new initiatives enabling “leapfrogging” to cleaner, more climate resilient economies. The Danish support for the ESI pilot project in Mexico complements a collaborative program between the IDB and the Mexican agricultural development bank (FIRA) to promote energy efficiency investments in the food processing industry, also co-financed by the Climate Investment Fund’s (CIF) dedicated Clean Technology Fund (CTF). The purpose of the Danish support to the Mexican ESI pilot project is to pave the way for a systematic replication and scaling up of the ESI concept. The ESI-pilot projects in Mexico and Columbia are both in an advanced stage. All operational elements, developed with technical assistance grants, are in place to launch the credit lines. It is anticipated that both BANCOLDEX (Columbian NDB) and FIRA (Mexican NDB) credit lines will be launched by mid-October 2015 and the first energy efficiency projects contracted by January and February 2016. So far 35 companies in Columbia and 14 companies in Mexico have expressed strong interest in investing in energy efficiency projects through the programs. Reference is given to the Update on Progress report from IDB in Annex 5, including the pipeline inventory of potential projects in Columbia and Mexico.
4. Budget In total, the budget for ESI-LAC is approximately DKK 41.4 Million; with DKK 34.5 Million plus DKK 0.5 Million dedicated for a review of ESI financed via the Ministry of Foreign Affairs. Thus, in total the proposed grant amounts to 35 Million DKK. Additionally, the budget of ESI-LAC includes DKK 6.9 Million in-kind counterpart resources from beneficiary entities. This includes IDB contributing through its personnel (USD 1,250,000 covering five staff for five years) and technical cooperation grants (USD 500,000). There could also be resources from existing IDB loans which could leverage new credit lines developed by
11
beneficiary NDBs under the support of ESI-LAC. NDBs delivers in kind support (e.g. logistical support, dedicated staff, IT systems required to track and maintain data) amounting to 10-20% of the technical cooperation / grants (i.e. around USD 1,000,000). Main components (see Project Outline) are highlighted in Table 1. A detailed budget on output level covering the full duration from 2016 to 2020 is provided in Annex 5. Table 1: Budget by main components
Activity Danish funding Counterpart** Total
Component 1: Demand and supply of finance analysis and design of financial strategy
17,750,000 4,320,000 22,070,000
Component 2: Support implementation of financing strategy
8,100,000 1,600,000 9,700,000
Component 3: Global and regional knowledge platform
* Additional 0.5 Million DKK will be dedicated for reviews of the ESI-LAC program ** Size of counterpart contributions is only indicative, based on exchange rates and commitments 18 July 2015.
5. Results framework and indicators Below are the main elements of the results framework at outcome and output level. A detailed list is provided in Annex 3. Outcomes:
Additional financing is made available for energy efficiency through beneficiary NDBs;
Development of insurance products and markets to cover promised energy efficiency savings in the markets of beneficiary entities;
Development of standard contracts that can be used by SMEs and technology and energy efficiency service providers;
Increased awareness and capacity of LFIs, technology and energy efficiency service providers to implement the promoted business model;
Increased levels of investments by SMEs in energy efficiency projects have materialized or are in the pipeline toward realization thus leveraging private investments in energy efficiency and alleviate dependence on fossil fuels;
Increase the awareness of the ESI instrument internationally, thus contributing to the advancement of the international climate finance practice and architecture.
Outputs:
Feasibility analysis studies, identifying energy efficiency sectors to be prioritized;
Market assessment studies, identifying financial and non-financial barriers to be addressed, main stakeholders to be involved in their deployment, and their GHG reductions potential;
Implementable ready-to-use financing strategies, including a complete set of financial and non-financial instruments and operational mechanisms to deploy them;
12
Fully fledged electronic registry systems put in place for the monitoring and evaluation of projects and program’s results;
Dedicated divisions / structures to support the implementation of the financing strategies developed to promote private investments in energy efficiency;
Training and outreach events (TOE’s) for LFIs on the financing strategies developed to promote private sector investments in energy efficiency;
TOE’s implemented in each country, targeting local technical verifiers;
Training programs implemented in each country, targeting energy efficiency services and technology providers;
Demonstration projects supported with seed finance (such as co-funding of the design of a batch of demonstration projects; partial coverage of insurance premiums);
Knowledge platform - learning products for global and regional ESI knowledge transfer for use in Platform by targeted groups.
6. Risk assessment and management The MEUC acknowledges the potential risk identified by the Appraisal Team (AT) that ESI-LAC may not gain the desired momentum under market conditions. However, in the view of MEUC this risk is very low. Although the pilots have been delayed, this delay in creating pipelines is often seen for climate finance instruments and funds. The ESI instrument is at an initial stage and experience related to loan disbursement has not yet been generated. However, the clear assessment is that a solid pipeline of potential projects has been built and that actual loan agreements are very close to being entered. Early lessons from the two pilot projects indicate that, while the initial phase of setting up the instrument and engaging stakeholders may take longer time than anticipated (e.g. validators, insurers, equipment providers), there is substantial interest and on-the ground engagement from both implementing NDBs and LFIs (as evidenced in e.g. the pipeline of 35 potential projects for hotels, clinics and hospitals to be financed through IDB’s pilot program in Columbia, see Annex 5). In cooperation with the IDB, the MEUC has set up a number of safeguards and monitoring mechanisms being incorporated in the program up-front. These consist of the following elements:
1. Down-scaling the program from seven to five countries, IDB can concentrate on
ensuring a successful implementation of the program in only three countries instead of five. As a consequence, the grant has been reduced from 40 mio. DDK to 35 mio. DKK, which reduces the financial risk for Denmark as a donor.
2. A part of the grant will be allocated resources for the secondment of a Danish expert dedicated to the IDB team responsible for the implementation of ESI. The secondment will specifically strengthen the capacity of IDB’s Capital Markets and Financial Institutions Division (CMF) placed in Washington. Also, the secondment enhances the possibility for MEUC and the MFA to follow the progress closely.
3. A part of the grant will be allocated for demonstration projects – “seed finance” to test run the ESI mechanism and demonstrate of the viability of the concept. This risk mitigation measure was proposed by IDB in the dialogue with the appraisal team on risk mitigation and welcomed by the appraisal team.
13
4. An inception review and a mid-term review will be conducted, which will allow further fine-tuning of the approach based on lessons learned, including by making any necessary adjustments to outputs and the budget.
5. The MEUC will follow the implementation process of ESI-LAC closely. Monitoring of output and outcome indicators will take place semi-annually using the data sources, methods and means of verification indicated in the Results Matrix Framework. In the context of any dedicated credit line for energy efficiency being established as a result of the program, a separate monitoring and evaluation plan, with its respective Results Matrix Framework, will be designed for such lending operation. On a semi-annual basis in context of the progress reporting, the IDB and the MEUC will via telephone conferences discuss the status of the program. In addition, IDB and the MEUC will meet face-to-face once a year.
This risk profile is an implicit result of the market-based nature of ESI and the fact that market behavior inherently cannot be precisely predicted. This is especially true for an immature market such as the market for SME investments in energy efficiency in the selected countries. For the same reasons – as ESI is a market-based instrument – ESI-LAC holds substantial potential and the ability to operate without donor support once matured. The Danish grant is crucial in the initial phase to overcome the market barriers for energy efficiency investments and foster the market. The risk management framework developed by IDB sets out contextual, programmatic and institutional risks in accordance with the Danida guidelines. A detailed risk management framework is presented in Annex 4. Contextual risks relate primarily to public management and governance issues, which are addressed by ensuring that ESI-LAC country engagement are demand-driven and in alignment with government priorities. Programmatic risks relate firstly to the up-take level/momentum of the instrument by key stakeholders, and secondly to the risk that the high risk perceptions by energy efficiency investing firms and LFIs are not overcome through ESI-LAC on country levels. Both are addressed through interventions intended to raise awareness, build capacity and bring down transaction costs while continuously monitoring progress. Institutional risks relate to the lack of experience of the ESI instrument and related negative impact on both the IDB and GoD in case of failure due to real or perceived mismanagement. Continued engagement between the IDB and the implementing partners, most of which have a long-standing relationship with the IDB, is intended to ensure buy-in at management level. Also, ESI-LAC must be endorsed by the IDBs Executive Board, ensuring a high-level buy-in and attention on the successful implementation.
7. Management/governance structure IDB is the multilateral financial institution, which has the longest track record of work with NDBs in the LAC region, increasingly also working with NDBs to integrate climate change and environmental concerns in their businesses. The design, financial structuring and establishment of credit lines for productive and sustainable development is core business for IDB.
14
The management of ESI-LAC is with IDB’s Capital Markets and Financial Institutions Division. The management is conducted in cooperation with the relevant IDB country offices and consultancy services by local and international experts in energy efficiency, validation, technical actor coordination and engagement. Relevant IDB departments will administratively support the execution including legal services, grants management for timely disbursement of donor funds, and contracting and fiduciary services. Coordination at country level is crucial to transform results from the technical cooperation into implementation activities and discussions with relevant ministries over lending operations between the IDB and the respective ESI-recipient country. The implementing NDB will take the lead in coordinating with relevant national authorities such as the finance ministries and involving key ministries such as the energy, environment, and planning ministry, depending on the country. External consultants to support the successful ESI implementation will be hired in as needed in each country. The IDB, the Ministry of Foreign Affairs of Denmark (MFA), and the MEUC will conduct (physical or virtual) meetings at least twice a year to discuss progress in implementation, including possible complementarity and synergy with Danish bilateral collaboration in the region.
8. Monitoring, reporting and reviews In order to ensure proper execution, progress will be continuously monitored by the IDB, and it will provide an annual progress and financial report to the Danish MFA. The annual report will be discussed at a meeting between the IDB, the MFA, and the MEUC. Monitoring of output and outcome indicators will take place semi-annually using the data sources, methods and means of verification indicated in the Results Matrix Framework (see Annex 2). In the context of any dedicated credit line for energy efficiency being established as a result of the program, a separate monitoring and evaluation plan, with its respective Results Matrix Framework, will be designed for such lending operation. Key indicators in the progress reporting should include the number and type of end-user loans, leveraging of private finance and estimates for energy savings/avoided CO2-emissions on the living assets on a country-by-country basis. On a semi-annual basis in context of the progress reporting, the IDB and the MEUC will via telephone conferences discuss the status of the program. A joint Inception Review (approximately November 2016) and a joint mid-term review with participation of IDB, MEUC, MFA and other relevant partners will be conducted. In particular, the inception review should reveal if there are major delays in implementing the ESI-LAC program or if there are unforeseen negative market reactions which may require adjustments. Furthermore, a “lessons learnt” report will be timed so as to be available prior to the Inception Review, and at the same time late enough to incorporate lessons learnt on the ground in both Mexico and Colombia. Finally, an review of the program is intended to be carried out upon project completion.
9. Exit strategy There is no direct link between the Danish support and the duration of the IDB credit lines. The ESI-LAC should demonstrate the attractiveness of funding energy efficiency projects and based on these (expected positive) findings attract commercial bank funding for these projects in the
15
future. Hence a diminishing role of the public sector and donors on the one hand, and a growing role of the private sector as the instrument matures to increasing commercialization. At this point there will be no point in continued Danish donor engagement in the further development of the ESI model; unless additional countries and sectors are added to the ESI-LAC, which would depend on subsequent decisions on funding support.
16
Annex 1: Theory of Change of ESI-LAC
Annex 2: Partner – brief description ESI-LAC is based on the engagement of several key public and private partners in the respective countries. The choice of beneficiary countries is based on the following criteria: profiles:
alignment of country objectives with ESI-LAC;
existence or interest in preparation of a credit line with the country or implementing beneficiary;
market potential for energy efficiency equipment and the status of market development;
availability of a suitable insurance market for ESI;
suitability for and options for replication, impact potential, and country size. The criteria for selecting implementing NDB partners include:
existence of a government mandate for SME financing, focusing either explicitly on energy-efficiency and renewable energy financing or broader productivity development;
sectoral expertise, experience and credibility in the beneficiary country;
availability and reach of an established client network of local financial institutions ;
interest in building up new or enhancing existing capacity;
existing IDB operations with the implementing NDB;
institutional incentives to provide financing to end-beneficiaries. Private sector partners (including validators, technology service providers, LFIs, SME end-beneficiaries, and insurance providers) are scoped and engaged through the market assessment and subsequent consultations as well as during the development of the aforementioned risk mitigation instruments. Key selection criteria include their technical capacity and the presence of client networks. Following these selection criteria, ESI-LAC will be executed by the IDB to support the following institutions which have formally confirmed their interest and are already collaborating with the IDB in other green initiatives.
New Market Assessment Extending existing sectoral
scope of pilots
Replication in smaller highly emitting economies
El Salvador - Development Bank of El Salvador (BANDESAL)
- not applicable
Replication in large / medium size economies
Brazil - Development Bank of Espírito Santo (BANDES) - Development Agency of Goiás - Development Bank of South (BRDE) Peru - Development Financial Corporation (COFIDE)
Colombia - Development Bank of Colombia (BANCOLDEX) Mexico - Energy Efficiency Savings Trust Fund (FIDE)
18
Annex 3: Results Framework Outcomes and related indicators, as included in this document, should be understood in line with the Danish Aid Management Guidelines, which make it clear that while the Project provides a material contribution to the outcomes and impacts, outcomes and impacts stem from factors both within and beyond control of the engagement. The inclusion of the Outcomes and indicators is therefore not to be interpreted as a formal commitment by the IDB or its partner implementing entities to achieve the outcomes. The technical cooperation contributes to the outcomes outlined below. Outcome Additional financing is made available for energy efficiency through beneficiary NDBs
Baseline Year 2015 Limited or zero level of NDB financing channeled toward energy efficiency (EE) despite the availability of financing lines
Target Year 2020 Significantly increased level of targeted EE finance. (Based on previous experiences, it is expected that each beneficiary bank would assign a credit line of at least USD 20 million in average)
Outcome Development of insurance products and markets to cover promised energy efficiency savings in the markets of beneficiary entities
Baseline Year 2015 Non-existing Energy Savings Insurance products (except for Mexico and Colombia)
Target Year 2020 ESI products developed and available in local markets.
Outcome Development of standard contracts that can be used by SMEs and technology and EE service providers
Baseline Year 2015 Absence of standardized contracts targeting SMEs and technology providers.
Target Year 2020 Standardized contracts developed and being applied in local markets.
Outcome Increased awareness and capacity of LFIs, technology and EE service providers to implement the promoted business model.
Baseline Year 2015 Limited awareness and capacity to facilitate SME EE investments by the main categories of actors in the local market.
Target Year 2020 Significantly increased awareness and capacity to implement the SME EE finance business model in each of the local markets.
Outcome Increased levels of investments by SMEs in energy efficiency projects have materialized or are in the pipeline toward realization thus leveraging private investments in energy efficiency and alleviate dependence on fossil fuels
Baseline Year 2015 Limited SME investments in EE.
Target Year 2020 It is expected that in the short term the financing from NDBs would leverage at least an additional 20% in financing from SMEs’ own resources. In the medium to long term, once LFIs and investors become aware of the real risks and returns associated with EE investments, each dollar in financing provided by an NDB could leverage 1.5 dollars in private sector financing through LFIs co-financing and SMEs own resources.
Outcome Increase the awareness of ESI internationally, thus contributing to the advancement of the international climate finance practice and architecture
Baseline Year 2015 Awareness on ESI through Climate Finance Innovation Lab before implementation of program.
Target Year 2020 The Scale-up and replication efforts in Latin America will provide lessons learnt for the replication in other regions as thus provide valuable inputs to the evolving international climate finance practice and architecture.
19
Outputs are a direct impact of the technical cooperation. Output Feasibility analysis studies, identifying EE sectors to be prioritized
Output indicator Number of completed feasibility analysis studies (cumulative)
Baseline Year 2 El Salvador (Bandesal) and Colombia (Bancoldex) have prioritised their sectors.
Target Year 1 7 All Brazilian partners and Mexico have prioritised its EE sectors. Till the second half of the year, Peru finalises its prioritisation.
Target Year 2 7 All implementing partners have completed feasibility analysis.
Target Year 3 7
Target Year 4 7
Target Year 5 7
Data Source, means of verification
Each NDB/implementing partner supported should have a complete feasibility study identifying the specific EE sectors and technologies to be prioritized / supported by the financial strategy. It is expected that feasibility studies should be ready 6 months after the startup of support to each of the NDBs. The feasibility studies should be made available from the IDB and NDB/implementing partners’ information systems.
Output Market assessment studies, identifying financial and non-financial barriers to be addressed, main stakeholders to be involved in their deployment, and their GHG reductions potential
Output indicator Number of completed market studies (cumulative)
Baseline Year 1 El Salvador (Bandesal) has finalised its market assessment
Target Year 1 6 Brazil, Mexico, Colombia finalised their market assessment
Target Year 2 7 All implementing partners finalised their market assessment and presented the assessment to relevant authorities and market actors
Target Year 3 7 -
Target Year 4 7 -
Target Year 5 7 -
Data Source, means of verification
Each NDB/implementing partner supported should have a complete market assessment study identifying: i) the potential size of the intervention and the key financial and non-financial barriers preventing the promotion of EE sectors; and ii) and the main stakeholders to be involved in the financing strategies. The market assessments should be made available from the IDB and NDB/implementing partners’ information systems.
Output Implementable ready-to-use financing strategies, including a complete set of financial and non-financial instruments and operational mechanisms to deploy them.
Output indicator Number of financing strategies for implementation of financing line (cumulative)
Baseline Year 1 Colombia (Bancoldex) has a financing strategy that needs to be adapted to new sectors.
Target Year 1 2 El Salvador (Bandesal) has finalised its financing strategy
Target Year 2 5 Five implementing partners have finalised financing strategies
Target Year 3 7 All implementing partners have financing strategies
Target Year 4 7 -
Target Year 5 7 -
Data Source, means of verification
Each NDB/implementing partner supported should have a tailor-made, ready to use financing strategy to promote private sector investments in EE, including the required set of financial and non-financial instruments and mechanisms, respectively. The strategy shall be adopted by the NDB management. The information should be made available from IDB and NDB/implementing partners’ information systems.
Output Fully fledged electronic registry systems put in place for the monitoring and evaluation of projects and program’s results.
Output indicator Number of electronic registry systems (cumulative)
Baseline Year 1 Colombia (Bancoldex) has an electronic registry system.
Target Year 1 1 El Salvador (Bandesal) has an electronic registry system.
Target Year 2 5 Five implementing partners have an electronic registry system.
20
Target Year 3 7 All implementing partners have an electronic registry system by the first quarter of the year.
Target Year 4 7 -
Target Year 5 7 -
Data Source, means of verification
It is expected that each implementing agency/NDB will have developed an operational monitoring and evaluation system to track: i) private investments in promoted technologies stemming from the financing strategies developed; ii) their energy savings and/or new power generation; and iii) their respective GHG emission reductions. The monitoring and evaluating system of participating NDBs, should be based on an electronic registry system capable of collecting / indexing information stemming from supported EE projects intermediated by first tier LFIs. Such registry should also have clear format, templates and methodologies for collecting, maintaining and analyzing data. They should rely also on publicly available data systems and other relevant information needed to evaluate impacts, in particular national emissions factors, national energy generation plans and matrices, as well as promoted technology standards. The IDB will be tracking the development and establishment of the monitoring and evaluation systems and their compliance with best practices in this area and the program’s requirements in order to collect and maintain data relevant to each financing strategy being promoted.
Output Dedicated divisions / structures to support the implementation of the financing strategies developed to promote private investments in EE
Output indicator Number of NDB dedicated divisions / structures (cumulative)
Baseline Year 1 Colombia (Bancoldex) has a dedicated ESI implementation structure.
Target Year 1 2 El Salvador (Bandesal) has a dedicated ESI implementation structure.
Target Year 2 2 -
Target Year 3 4 Four implementing partners have dedicated EE financing structures
Target Year 4 6 Six implementing partners have dedicated EE financing structures
Target Year 5 7 All implementing partners have dedicated EE financing structures
Data Source, means of verification
Beneficiary information systems and IDB Systems.
Output Training and outreach events (TOE) for LFIs on the financing strategies developed to promote private sector investments in EE
Output indicator Number of LFIs informed and trained (cumulative)
Baseline Year 10 Colombian an Mexican LFIs informed and trained.
Target Year 1 20 El Salvadorian (Bandesal)’ and 5 Brazilian LFIs informed and trained.
Target Year 2 25 LFIs for five implementing partners have been informed and trained.
Target Year 3 35 LFIs in all implementing partner countries have been informed and trained
Target Year 4 35 -
Target Year 5 35 -
Data Source, means of verification
Each NDB should have outreached through campaigns and workshops at least 5 of the most relevant client LFIs (i.e. those LFIs identified during the market assessment phase as active credit providers for priority sectors with large potential for EE investments). The project will also attempt to outreach at least 50% of the EE technology and energy services providers in the sectors where EE investments will be promoted. The training and outreach to LFIs and EE energy services and technology providers will be made relying on the NDBs existing promotion systems and capacity. Information in this regard will be collected by the IDB from actual participation lists in workshops, events, webinars and other relevant mailing lists.
Output Training and outreach events implemented in each country, targeting local technical verifiers
Output indicator Number of local technical validators informed and trained with ESI methodologies (cumulative)
Baseline Year 2 Colombian and Mexican validators informed and trained.
Target Year 1 4 El Salvadorian validators trained. Brazilian validators informed
Target Year 2 8 Brazilian validators informed and trained. Peruvian validators informed.
21
Target Year 3 10 Relevant validators per implementing country informed and trained on ESI.
Target Year 4 10 -
Target Year 5 10 -
Data Source, means of verification
The training and outreach to local technical verifiers will be made through the NDBs existing promotion systems and capacity. Information in this regard will be collected by the IDB from actual participation lists in workshops, trainings and other capacity building events.
Output Training programs implemented in each country, targeting EE energy services and technology providers
Output indicator Number of technology service providers trained and informed with ESI instruments (cumulative)
Baseline Year 10 Colombian and Mexican TSPs informed and trained.
Target Year 1 20 El Salvadorian TSPs trained. Brazilian and Peruvian TSPs informed.
Target Year 2 30 Relevant TSPs informed and trained.
Target Year 3 40 TSPs trained through additional trainings
Target Year 4 40 -
Target Year 5 40 -
Data Source, means of verification
The training and outreach events for EE energy services and technology providers will be made through the NDBs existing promotion systems and capacity. Information will be collected by the IDB from the actual participation lists of the workshops and training events.
Output Demonstration projects supported with seed finance (such as co-funding of the design of a batch of demonstration projects; partial coverage of insurance premiums)
Output indicator Number of pilot demonstration projects supported (dependant on combination of co-funding share) (cumulative)
Baseline Year 0
Target Year 1 0
Target Year 2 0
Target Year 3 20 Demonstration projects supported. More if through solely partial coverage of insurance premiums.
Target Year 4 25 Demonstration projects supported.
Target Year 5 35 Demonstration projects supported.
Data Source, means of verification
Loan applications and approvals for demonstration projects to test run ESI mechanism. Beneficiary information systems and IDB Systems
Output Knowledge platform - Number of learning products for global and regional ESI knowledge transfer (ESI Documentation Package, tools, e-learning, country reports, two webinars and three international events) prepared, edited and published for use in Platform by EE target group
Output indicator Number of products/publications, events, country market reports, webinars published (cumulative)
Baseline Year 1 International event to launch ESI and knowledge collaboration
Target Year 1 7 ESI Toolbox, National consultation event, regional event for NDBs, structure of knowledge web-module, 1 international event, webinar, updated lessons learnt report.
Target Year 2 30 5 Country Market Assessment Factsheets, two national consultation events, validation, contract and insurance templates finalized for 5 implementing partners.
Target Year 3 43 Country Market Assessment Factsheets, and validation, contract and insurance templates finalized for all implementing partners, regional event for NDBs, international event, webinar
Target Year 4 45 Interim report of lessons learnt of implementation
Target Year 5 52 Country and implementing partner status reports, international event
Data Source, means of verification
New Regional Platform to be established. It is expected that the following knowledge products will be developed for each of the NDBs supported: webinars; training packages; technical report on lessons learned / case study; newsletter.
22
The materials should be made available in a dedicated electronic platform for the Program, as well as under the IDB dedicated web pages for NDB green finance, i.e. Klave Finanzas Verdes” and the community of practices for FIs on green finance in the “Finanzas Carbono” platform.
IDB will be tracking through these networks (data sources) the usage of the materials through website hits, downloads, as well as the number of new content, webinars and forums created by participants. The quality of the content of the materials posted on the different electronic platforms will be assessed through surveys to NDB clients and other target groups (LFIs, project developers, etc.). Products should be reviewed as of high quality by at least 50% of surveyed users.
The materials will also be shared and promoted through IDB regional and national banking association partners and networks, such as ALIDE, FELABAN and ABDE. It is expected that at least 2 national dissemination workshops would be organized by implementing partners / NDBs (i.e. 20 workshops) to consult on and promote the financing strategies developed with local authorities, LFIs, local EE energy services and technology providers, as well as firms investing in EE projects through the program.
One regional event to disseminate experiences with other NDBs would be organized using the ALIDE, FELABAN and ABDE networks, to name a few.
IDB will be tracking the satisfaction of participants and the usage of materials and information shared through dedicated surveys to be undertaken as follow up to each of the events organized. The information will be compiled and made available through the IDB information system.
Annex 4: Risk Management Framework Consistent with the Theory of Change of the program, the risk management addresses the key risk and the program’s ability to generate key outputs and the broader factors influencing the achievement of outcomes. The table below provides a summary of the risks identified for the project and the risk mitigation response:
Public management and governance: The interest or commitment of governments or implementing partners could be reduced as a result of changing policy priorities and/or economic conditions
Low High In each country/sector intervention, the project engages both the implementing partner and government to ensure that the intervention is aligned with government priorities and demand-driven. A market study is carried out initially to confirm the market potential and interest by key market actors. Terms of reference as well as selection of consultants of all activities of all the projects under the program will be agreed with the beneficiary entities.
Low
Programmatic Risk
Risks relating to the up-take/lower than expected momentum of the instrument by countries’ energy end-users, energy service providers, financial institutions and insurance companies.
Low High Market analysis on demand and supply for energy efficiency investment financing and underlying extensive stakeholder engagement and consultations are undertaken with key market actors to confirm interest in the intervention and to socialize and get feedback on the design of each element of the interventions. The intervention is designed to minimize transaction costs to SMEs and technology solution providers participating in the program. This is achieved by standardizing and simplifying documentation and procedures. Seed support for a number of pilot projects, once financing strategies have been deployed by beneficiary entities, will support demonstration of the viability of the concept. – Inception (approximately November 2016) and mid-term review, and an update of the “lessons learnt” (approximately October 2016) report timed so as to be available prior to the Inception Review, and at the same time late enough to incorporate lessons learnt from pilot programs in Mexico and Colombia The inclusion of 1) an international technical consultant which supports the program implementation and 2) a local coordinator consultant to supervise expert consultants in each country respectively.
Low
High risk perceptions by investing firms and LFIs on
Medium High The EE program, through a third-party technical validator, will assess the technical expertise of EE energy services and technology providers on behalf of potential beneficiaries; and the
energy efficiency projects. technical quality and expected results of their project proposals on behalf of potential beneficiaries. Awareness events for potential beneficiaries, to inform and educate them on energy efficiency technologies and the real risks and returns associated with the deployment of those technologies. Capacity building efforts for NDBs, to make them aware of the real risks and returns associated with the financing of EE technologies and to help them to develop dedicated energy efficiency credit lines that address the specific needs of private sector investments in energy efficiency. Capacity building efforts for NDB’s first-tier clients (LFIs), to make them also aware of the real risks and returns associated with the financing of EE technologies and to increase their capacity to assess the real credit risks associated with the financing of those technologies.
Institutional Risk
Complications and delays resulting from limited experience of the implementing partner (NDB) in managing a complex program focusing on energy efficiency investments.
Medium High The experience from IDB’s piloting of the instrument in Colombia and Mexico has shown that this risk can be mitigated through: 1) the package of technical assistance, in particular continuous support provided for the overall coordination and integration of the program into the operations of the NDB. 2) Continued engagement between the IDB and the implementing partners, most of which have a long-standing relationship with the IDB, to ensure buy-in at management level.
Low
Reputational Risk Reputational risk: Reputational risk may affect both the Danish Government and IDB, and Denmark and IDB have a common interest in addressing such risks. Reputational risk could be caused for instance by
a) The financing of activities that are not acceptable. b) The potential failure of the project through mismanagement of resources (e.g.
corruption, fiduciary responsibilities).
Financing of activities that do not comply with the Danish regulations (e.g. Tobacco, Weapons).
Low High The IDB Environmental and Social Safeguards policy excludes the financing of harmful activities through an exclusion list. Furthermore, where implementing partners have their own Environmental and Social Safeguards Management Systems a binding agreement is signed to ensure that the stricter of the two is applied. The IDB CMF division managing the Program is working actively with NDBs to build their internal capacity to manage environmental and social risks. (See for instance: Managing
Environmental and Social Risks: A Roadmap for National Development Banks in Latin America and the Caribbean http://publications.iadb.org/handle/11319/6437?locale-attribute=en )
Potential failure of the project through mismanagement of resources (e.g. corruption, fiduciary responsibilities)
Low High Fiduciary risk: Fiduciary risk is limited by the IDB’s well-established framework to comply with its fiduciary duties. In the framework of this technical assistance, IDB will manage the funds by the Danish Government and no monetary transfer to the local implementing partners is foreseen, strongly limiting any fiduciary concerns related to the local implementation. All program relevant services (e.g. consultants, program-, knowledge development, and sharing-relevant travel) will be procured and paid through IDB systems. Furthermore, the IDB has a well-established framework for addressing the likelihood of fraud and corruption in IDB Group-financed activities. The IDB Office of Institutional Integrity conducts comprehensive tailored risk assessments, Integrity Risk Reviews (IRR), developed in close collaboration with IDB Country Offices and project staff to facilitate the prevention and detection of fraud and corruption. Within this framework, the Office of Institutional Integrity conducts training and provides support to operational divisions of the Bank regarding integrity. Additionally, the Office of Institutional Integrity works in coordination with other multilateral development banks to share anti-corruption experiences and practices and to develop integrity programs and strategies. The IDB information pages on Corruption and Fraud Policy are:
Annex 5: Budget at output level Detailed budget by component
DKK DKK DKK USD USD USD
Description IDB/Fund Funding DKK*Counterpart Total IDB/Fund Funding Counterpart TotalComponent 1 Demand and Supply of Finance Analysis and Design of Financial
Strategy 17,750,000 4,320,000 22,070,000 2,573,750 626,400 3,200,150 Component 1a: Feasibility analysis to determine EE sector per implementation
country/NDB mandate (Brasil, Colombia, El Salvador, Mexico, Peru) and
Component 1b: Market assessment per EE sector in Brasil, Colombia, El Salvador,
Mexico, Peru Assessments of market size and key characteristics (including
barriers, segmentation, opportunities, etc.), Technology analysis, Assessment of
local insurance markets, Including size, financing requirements and availability,
country-specific legal and institutional framework and existing initiatives. 3,500,000 840,000 4,340,000 507,500 121,800 629,300 Component 1c: Financing strategy that provides financing support and structure
the demand of the financing per implementation NDB 7,000,000 1,680,000 8,680,000 1,015,000 243,600 1,258,600 Component 1d: Support the development of a registry of expected impacts of
financing strategies per implementation NDB in Brasil, Colombia, El Salvador,
Mexico, Peru 6,000,000 1,500,000 7,500,000 870,000 217,500 1,087,500 Component 2 Support implementation of financing strategy 8,100,000 1,600,000 9,700,000 1,174,500 232,000 1,406,500 Component 2a Support implementation of financing strategy 2,500,000 482,759 2,982,759 362,500 70,000 432,500 Component 2b Support in awareness raising and capacity building of beneficiaries 1,500,000 413,793 1,913,793 217,500 60,000 277,500 Component 2c Support NDB in defining source and final amount of funding 300,000 206,897 506,897 43,500 30,000 73,500 Component 2d Support in the continuous monitoring and verification of program
results 1,300,000 413,793 1,713,793 188,500 60,000 248,500 Component 2e Seed support for demonstration projects (7.5%) 2,500,000 82,759 2,582,759 362,500 12,000 374,500 Component 3: Global and Regional Knowledge Platform: Collection and sharing
of best practices among NDBs in promoting financing for EE including the
development of studies, events, webinars and fostering collaboration with
national and regional networks of relevant actors, trainings and outreach to
SMEs, LFIs, and energy providers, design, maintenance and promotion of a
The inception and the mid-term review are financed outside the proposed budget by Danish Contribution. ToRs are developed and implemented in collaboration between MCEB/GRV and IDB.
The budget in USD is only for illustration for this document, based on the exchange rate 1 DKK = 0.145 Dollar of July 18th, 2015 . However, for the IDB approval process, the Technical cooperation budget will have
to be illustrated in USD. To ensure the budget is realistic, the contingency resources have been increased to cover exchange rate swings up to 3%, which reflects the last 6month USD-DKK volatility as of 28th of
July.
* Components 1 & 2 will be conducted in Brazil, Colombia, El Salvador, Mexico, and Peru. ** The Technical consultant will be responsible for supporting CMF in the design and implementation of the ESI program
as well as green financing operations of the CMF division.
28
Budget by output, year and development partners (implementing beneficiaries) In DKK
Budget per output per Financing partner in DKK 2016 2017 2018 2019 2020 Total
Output A.1 - Development for each of the NDBs of ready-to-use tailored
financial strategies consisting of a combination of financing instruments and non-
The inception and the mid-term review are financed outside the proposed budget by Danish Contribution. ToRs are developed and implemented in collaboration between MCEB/GRV and IDB.
29
Annex 6: Detailed preliminary results This update illustrates and reports on the progress in the two ESI-LAC pilots in Mexico and Colombia. Since the AT review in June 2015 substantial progress on the role out of ESI-LAC has been made. Project development and consolidation, is ongoing, all non-financial operational elements (insurance, validation, and performance contracts) have been finalized, and in the very near-term (Mid-October) the first credit lines are expected to be operational. By January 2016 and February 2016 the first projects are expected to be contracted in Colombia and Mexico, respectively. Table 1 illustrates the status of the operational infrastructure and crucial elements to successfully implement the program. Table 2a and 2b show indicative pipelines of ESI-LAC investments in Colombia and Mexico, respectively. Table 1 – Operational elements
The operational elements are a necessary condition to launch the ESI-LAC model in the respective countries. Table 1 illustrates that all operational elements, developed with technical assistance grants, are in place to launch the credit line. The launch of the credit line is
30
expected to be operational by mid-October 2015. Individual project preparation can start once the credit line is launched. The first project to be financed with the credit line is expected in January 2016. Realized and Expected Milestones (Sept. 2015 – February 2016)1
1 Both implementing partners, BANCOLDEX (Colombia) and FIRA (Mexico) have conducted pre-launch events in June and August 2015, respectively.
Table 2a and 2b2 illustrate the revealed interest in EE investments in Colombia and Mexico, respectively.3 Table 2a shows that 35 firms from the 3 sub-sectors hotels (22), clinics, and hospitals have indicated interest in investing in EE projects. Most revealed demand is for air-conditioning systems, air-conditioning control systems, followed by boilers. Potential projects are mainly in the pre-liminary stages and having undergone a general energy diagnostic. The average investment is about USD 165.000 with ranges between USD 27.000 and USD 494.000. Most projects have calculated approximate costs, rather than estimated costs (for preliminary ideas). Table 2b illustrates that 14 companies have expressed interest in investing in and requiring financing for EE projects. These companies are located in the Guanajuato, Michoacán and Sonora and the companies conduct a different mix of processes from the selection of produce, packaging, cooling, freezing and juice processing. Promotional activities for the preparation of the credit line launch are ongoing to reveal and raise interest in additional Mexican States.4
2 The column in table 2a ”Earliest estimated project start date” indicates when the project developer/investor could propose the project for financing at the earliest time. Preparations for financing the project will follow and the actual financing of the first project are expected in January 2016. 3 The numbers in Table 2a and 2b are based on surveys. They do not make a claim on the completeness of the demand for Colombia and Mexico and are thus for illustrative purposes only. 4 FIRA has started its promotional activities in late August 2015.
33
Annex 7: Follow-up on appraisal
Title of (Country) Programme Regional Energy Savings Insurance (ESI-LAC) Programme
File number F2 2015-25730
Appraisal report date 10 July 2015
Grant Committee meeting date 06 October 2015
Overall conclusion of the appraisal This project has a high political priority for Denmark, as clearly reflected in the strong attention at the highest political levels and in the media. ESI-LAC was endorsed by the Global Innovation Lab for Climate Finance at its meeting in New York on 16 April 2015, discussed by the Danish Minister for Climate Energy and Building (MCEB) at his meeting with the President of the Inter-American Development Bank (IDB) on 20 April, and presented by MCEB at the Clean Energy Ministerial in Merida Mexico during 27-28 May. The Appraisal Team (AT) has found that there is a broadly recognized need for an innovative mechanism to unlock private investments in energy efficiency (EE), as traditional instruments so far have not created the expected results. The AT has concluded that the ESI-LAC instrument is well aligned with Danish and IDB policies and strategies and has potential synergies with many other initiatives at global level (Sustainable Energy for All (SE4ALL), the proposed Sustainable Development Goal (SDG) #7 on energy, the process toward COP 21 in Paris in December 2015, etc.), regional level (Latin American and Caribbean – LAC, where IDB is the SE4ALL Regional Hub, IDB loan portfolios on energy, etc.) and national level (Mexico, where the AT had the opportunity to meet with key stakeholders involved in the ongoing ESI pilot). The appraisal is positive and ESI-LAC is recommended for approval provided that there is relevant and adequate follow-up on the appraisal recommendations by MCEB with IDB in consultation with GRV. In particular the AT recommends a number of safeguards and risk mitigating measures in light of the risk profile of the Programme.
Summary of possible recommendations not followed The Ministry of Energy, Utilities and Climate (MEUC) acknowledges the risk profile of ESI-LAC anticipated by the appraisal team. This risk profile is an implicit result of the market-based nature of the Programme and the fact that market behavior inherently cannot be precisely predicted. This is especially true for an immature market such as the market for SME investments in EE in the selected countries. For the same reasons – as ESI is a market-based instrument - ESI holds enormous potential and the ability to operate without donor support once matured. The Danish grant is crucial in the initial phase to unlock the market for EE investments. While a precondition for disbursement, e.g. concrete loans granted to SMEs, is not possible to introduce due to approval procedures of IDB, MEUC agrees that the ESI pilots must show progress. For this reason the MEUC has requested a report from IDB outlining the current status of the pilots. This report shows good progress of the pilots with credit lines to be officially launched by mid-October 2015 and that the pilots have advanced substantially since the appraisal mission in June. The report is attached to the Grant Proposal in annex 6. Also, MEUC and IDB have agreed on a set of risk mitigation measures being incorporated in the project document.
Recommendations by the appraisal team
Follow up by the Representation
1. Country programme Level: 1. Justification and rationale of the country programme, preparation process and strategic linkages between country programme vis-à-vis the country policy document.
1.1 N/A 1.1
2. Thematic Programme Level: 2. Consideration of relevant Danida strategies.
2.1 N/A 2.1
34
3. Proposed thematic programme support design including rationale, effectiveness, efficiency, impact and sustainability and partner choices.
The process leading to the selection of partners is an important element to secure transparency, accountability and sustainability. The Programme is only a means to the end of achieving energy savings and reduction in the emission of greenhouse gases though risk reduction measures that facilitate private EE investments in small and medium scale enterprises (SMEs). Recommendation #4: The Programme document should: - present the methodology and criteria for selection of partners in the respective countries; and - be adjusted so the Programme design and description demonstrates the interrelationship between the Danish technical assistance (TA) grant as an enabling facility and the creation of credit lines.
3.1. MEUC agrees with the recommendation. The Project Document has been revised to include information on methodology and criteria for selection of partners. The criteria for the choice of countries are reflected in the Annex on Country profiles and Beneficiary profiles. The Project Document has been revised to describe the interrelationship between the Danish grant and the creation of credit lines. Also, a Theory of Change has been developed explaining this interrelationship.
4. Adherence to the aid effectiveness agenda
The relevance of the Programme is very clear in the global context of climate change mitigation and sustainable energy initiatives, but this needs to be further elaborated with a view to identifying synergies and complementarities. Recommendation #1: IDB should describe how ESI supports the EE objective of SE4ALL and contributes to SDGs and the process towards COP 21.
4.1. MEUC agrees with the recommendation. The Project Document has been revised on the basis of the appraisal recommendation.
5. Budget
35
The budget is an important instrument to convey priorities and objectives of the Programme. The Danida Aid Management Guidelines (AMG) require presentation of the budget on output levels per year. Furthermore, the budget in the proposed Programme needs to be adjusted according to the recommendations of the AT. Included in these recommendations are additional safeguards to mitigate risks, which include the definition of a pre-condition for Programme initiation as well as joint reviews to monitor Programme implementation. Recommendation (#6): The Programme budget should: -be presented at output level for all years, and the interconnection to the establishment of credit lines should be visible. Any funding obtained by IDB to ESI from other donors will complement Danish inputs to ESI; -be presented reflecting a scaled-down number of countries to be agreed by MCEB with IDB and thus a reduced total grant amount; and -be reduced by DKK 500,000 while at the same time the MFA must ensure that a similar amount is otherwise approved to cover funding of consultancy inputs to be procured by the MFA for joint reviews. The flow of funds should commence upon fulfilment of the agreed preconditions to be defined by MCEB with IDB.
5.1. MEUC agrees with the recommendation as regards revision of the budget. The budget of the Project Document has been revised on the basis of the appraisal recommendations. It should be noted that there are no direct budgetary allocations for the credit lines made under the Program. Credit lines provided by IDB to NDBs are part of the ordinary IDB operations and as such the program does not allocate grant funding directly for the credit lines. As referred to in the response to Recommendation #4, the Project Document has been updated to further clarify that there is a clear link between Project’s interventions and the intended establishment and/or re-orientation of existing credit lines for energy efficiency investments in ESI host countries. MEUC acknowledges the potential risk identified by the Appraisal Team (AT) that ESI-LAC may not gain the desired momentum under market conditions. However, in view of MEUC this risk is very low. Although the pilots have been delayed, this delay in creating pipelines is often seen for climate finance instruments and funds. The ESI-LAC instrument is at an initial stage and experience related to loan disbursement has not yet been generated. However, the clear assessment is that a solid pipeline of potential projects has been build and that actual loan agreements are very close to be entered. Early lessons from the two pilot projects indicate that, while the initial phase of setting up the instrument and engaging stakeholders may take longer time than anticipated (e.g. validators, insurers, equipment providers), there is substantial interest and on-the ground engagement from both implementing NDBs and LFIs (as evidenced in e.g. the pipeline of 35 potential projects for hotels, clinics and hospitals in to be financed through IDB’s pilot program in Columbia, see Annex 6). While a precondition for disbursement, e.g. concrete loans granted to SMEs, is not possible to introduce due to approval procedures of IDB, MEUC agrees that the ESI pilots must show progress. For this reason, the MEUC has requested a report from IDB outlining the current status of the pilots. This report shows good progress of the pilots with credit lines to be officially launched by mid-October 2015 and that the pilots have advanced substantially since the appraisal mission in June. The report is attached to the Grant Proposal in annex 6.
6. Identified risks and risk management
36
The implementing partner IDB may have a slightly different risk perspective than the donor, given that the TA grant is to be provided up-front at a time when ESI pilots are only beginning to demonstrate results. At the time of appraisal, the proof of the ESI concept had yet to be demonstrated in terms of concrete loans granted to SMEs. The risk management framework needs address this and set out relevant risk mitigating activities. Recommendation #7: The risk management framework should explicitly address fiduciary and reputational risks as well as the risk that the ESI instrument may not gain the desired momentum under market conditions in relation to the results framework. Mitigation actions addressing these risks should be more clearly linked to activities under the components. This could include re-allocation within the budget to support subsidies in selected demonstration activities.
6.1 MEUC acknowledges the risk profile of ESI-LAC described by the appraisal team and agrees with the recommendation. This risk profile is an implicit result of the market-based nature of the Programme and the fact that market behaviour inherently cannot be precisely predicted. This is especially true for an immature market such as the market for SME investments in EE in the selected countries. For the same reasons – as ESI is a market-based instrument – ESI-LAC holds enormous potential and the ability to operate without donor support once matured. The Danish grant is crucial in the initial phase to unlock the market for EE investments. In cooperation with IDB, MEUC has composed a set of risk mitigation measures being incorporated in the project. The package consists of the following elements: 1) Downscaling the program from seven to five countries and the grant from 40 mio. DDK to 35 mio. DKK. Thus, the grant size and thereby also the risk for Denmark as a donor - is reduced. In addition, IDB can concentrate on ensuring a successful implementation of the project in only five, rather than seven, countries. 2) A part of the grant will be allocated for the secondment a Danish expert dedicated to thw work related to the implementation of ESI. The secondment will strengthen the capacity of IDB’s ESI-LAC team placed in Washington. 3) A part of the grant will be allocated for demonstration projects – “seed finance” to test run the ESI-LAC mechanism and demonstrate of the viability of the concept. 4) An inception review and a mid-term review will be conducted, which will allow further fine-tuning of the approach based on lessons learned, including by making any necessary adjustments to outputs and the budget. 5) MEUC will follow the process of the project closely. Monitoring of output and outcome indicators will take place semi-annually using the data sources, methods and means of verification indicated in the Results Matrix Framework. On a semi-annually basis in context of the progress reporting, the IDB and the MEUC will via telephone conferences discuss the status of the program. In addition, IDB and the MEUC will meet face-to-face once a year.
7. Follow-up to the recommendations of the Danida Programme Committee
7.1 N/A 7.1
8. Other recommendations
8.1 N/A 8.1.
9. Engagement Level 9. Capacity of partners
N/A 9.1.
10. Results Framework
37
It is crucial to clearly demonstrate the interrelationship between the TA and credit lines that will enable the resulting loan activities at SME level. The AMG require that outcomes be defined together with outcome indicators. Recommendation #2: IDB should ensure that the ESI Programme results framework is aligned with IDB results framework with regard to the corresponding loan activities supported by the ESI Programme and that outcomes and outcome indicators are introduced into the ESI Programme results framework. Outcome and outcome indicators could possibly be shared between the ESI Programme and the IDB loan activities and should address the expected changes defined by the ESI Programme as presented above.
10.1. MEUC agrees with the recommendation. The Project Document has been revised based on the appraisal recommendations. A set of outcomes has been included in the Project Document and integrated into the results framework including indicators to be assessed at the end of the program. ESI-LAC results framework is aligned with IDB Results Framework. It is important to note, however, that IDB’s internal Results Framework for client supported technical cooperation is limited to results that can be achieved within the technical cooperation and which are under the direct control of the project. This is to ensure that the IDB is held accountable only for results that are under its control. It is also a way of avoiding possible conflicts of interest whereby technical support could be conditioned on partners taking loans from IDB. The outcomes and related indicators which are included in the Project Document must be understood in line with the Danish Aid Management Guidelines, which make it clear that while the project provides a material contribution to the outcomes, outcomes stem from factors both within and beyond control of the engagement. The inclusion of the outcomes and indicators is therefore not to be interpreted as a commitment by the IDB or its partner implementing entities to achieve the outcomes. The ultimate timing of the establishment of credit lines is dependent on a number of factors beyond the direct control of the project cf. the Theory of Change of the project.
The assumptions underlying the Theory of Change (ToC) are critical to achieve the desired results. Monitoring of whether assumptions continue to be valid is an important part of risk management in the Programme. Recommendation #3: Coherence should be demonstrated between the results framework, risk management framework and Theory of Change.
10.2. MEUC agrees with the recommendation. The Theory of Change has been updated to illustrate how the outputs generated from the Danish grant are expected to create the enabling conditions for the introduction or reorientation of credit lines by overcoming barriers to SME demand for EE investments and offering reassurance to both end-users, local financial institutions and technology providers. The Theory of Change also demonstrates that each country level partnership will lead to increased financing via credit lines, and the program and its interventions are geared toward creating the local conditions and capacities enabling this to happen. Finally, the Theory of Change demonstrates three main preconditions that a successful outcome of the project is influenced by, thus constituting the main risks of the project.
11. Budget allocation
11.1 N/A 11.1.
12. Identified risks and risk management
12.1 N/A 12.1.
13. Monitoring and reporting arrangements
38
To support risk mitigation and assist the Project to adapt to opportunities and possible implementation challenges two reviews are proposed to monitor Project progress. Recommendation #8: In addition to the suggested safeguards - a joint inception review (after 6-12 months) and a joint mid-term review are planned and budgeted for.
13.1. MEUC agrees with the recommendation. The Project Document has been updated to reflect the agreement between MEUC and IDB that an inception review and a mid-term review will be conducted, which will allow further fine-tuning of the approach based on lessons learned, including by making any necessary adjustments to outputs and the budget.
14. Others
39
The proposed Project spans multiple departments within the IDB and involves a number of regional stakeholders. This will require solid management arrangements in the IDB, at regional level and will also require well defined relations with the donor. The Administrative Agreement between IDB and the Ministry of Foreign Affairs of Denmark should satisfy Danish requirements. Moreover, IDB must ensure that the revised project document – adjusted in response to the appraisal recommendations- is reflected in IDB’s internal project approval process. Recommendation #5: with regard to the description of project management: - The ESI anchoring in IDB, IDB internal coordination with other departments and the role of IDB regional offices should be described; - The role of MCEB should be specified; - Coordination committees at country level should be considered so as to ensure coordination and synergies between the various EE stakeholders across administrative boundaries; - The Administrative Agreement must specify IDB’s measures to curb corruption and must be annexed to the project document; and - The internal IDB TC document makes a specific reference to the ESI-LAC project document as modified on the basis of appraisal recommendations.
14.1 MEUC agrees with the recommendation. The Project Document has been revised based on the appraisal recommendations. Measures to curb corruption will be included in the Administration Agreement based on the language included in the Administration Agreement signed in context of the previous grant for the IDB pilot in Mexico.
I hereby confirm that the above-mentioned issues have been addressed properly as part of the appraisal and that the appraisal team has provided the recommendations stated above. Signed in Copenhagen, Denmark on 10 July 2015 Jens Lorentzen, Team leader/TAS representative ___________________________________________________________________________ I hereby confirm that the follow-up activities stated above have been undertaken. In cases where recommendations have not been accepted, reasons for this are given either in the table or in the notes enclosed.
40
Signed in……………….….on the…………….….………………………………..… for the Danish Ministry of Climate, Energy and Building, in liaison with the Department for Green Growth of the Ministry of Foreign Affairs of Denmark
