IFC's Advisory and Financial Instruments RE Market Development and Risk Management- example of activities in the Western Balkans -

Nebojsa Arsenijevic International Finance Corporation

Global Infrastructure BaselBasel, May 22, 2014

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IFC: Part of the World Bank Group

IBRDInternational Bank for

Reconstruction and Development

IDAInternational Development Association

IFCInternational Finance

Corporation

MIGAMultilateral Investment and Guarantee Agency

Est. 1945 Est. 1960 Est. 1956 Est. 1998

Role To promote institutional, legal and regulatory reform

To promote institutional, legal and regulatory reform

To promote private sector development

To reduce political investment risk

Clients Governments of member countries with per capita income between $1,025 and $6,055

Governments of poorest countries with per capita income of less than $1,025

Private companies in member countries

Foreign investors in member countries

Products • Technical Assistance• Loans• Policy Advice

• Technical Assistance• Interest Free Loans• Policy Advice

• Equity/Loans• Risk Management• Advisory Services

• Political Risk Insurance

IFC is a Leading Investor in Emerging Markets Power

• 300+ power investments in 67 countries since 1967• We typically invest in utility-scale projects/companies:

Generation – Financed 30,000+ MW across wide range of technologies Transmission – Selected investments in transmission assets Distribution - Current power portfolio of ~160 million customers around the world

• We can also invest in: Early stage start ups in the renewable energy space Smaller assets/companies through financial intermediaries (banks, PE funds) We often invest in first-in-kind projects in markets under reform

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Key Trends in IFC Power Business

IFC Investment

Services

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• Commitment volume has been steadily growing; renewable energy investments increased 5x since 2007; 65% to 75% of power business, up from ~25% 5 years ago

• Mobilization has been an increasingly important part of our business; we mobilized $1.7 billion in B-loans and other parallel loans in FY2011

• We have been developing locally based teams with market expertise

• Greater technology diversification: not just hydro and wind, but also geothermal, solar, and biomass

• In-house technical expertise allows us to better appraise investments in new and emerging technologies / prototypes

• Investments through financial intermediaries (e.g. private equity funds, holding companies) an increasing share of our business; allow us to support smaller companies / projects

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Identified ObstaclesPolitical Obstacles

• Incomplete legal framework• Lack of institutional capacity•High political risk

RE Developers/Sponsors• Technical capacity• Financial capacity• Proper market assessment

Local Banks• Capacity relating to RE project• Experience in Project Finance• Long-term funding

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AS - Balkans Renewable Energy Program (BREP)

Component ActivitiesC1 Regulatory framework improvements

C2 Support to renewable energy sponsors (Market and company level)

C3 Support to financial institutions (Market and bank level)

BREP Countries

ALB Albania*

BIH Bosnia and Herzegovina*

MAC Macedonia**

MNE Montenegro***

KOS Kosovo***

SRB Serbia***

MDA Moldova*** (limited scope)

* Started FY10; ** Started FY12; *** Started FY13

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BREP’s Key Results – Legal Framework

Country Legal Document EnactedSRB Decree on Feed-in Tariffs

Decree on Privileged StatusDecree on End-User Fee CalculationPreliminary PPAs (below and above 5 MW)

Jan, 2013

Jun, 2013

ALB Law on Renewable Energy May, 2013BIH(RS)

Law on Renewable Energy and Efficient CogenerationLaw on Concessions

May, 2013Jun, 2013

BIH (FBIH) Law on Renewable Energy and Efficient Cogeneration Sep, 2013

Targets:• Align national regulation with EU; Fulfill obligations in accordance to EC Treaty of SEE;

• Design appropriate incentive mechanisms;

• Increase transparency of concessions granting procedure (credibility);

• Design investment promotion tools and mechanisms for SHPPs;

• Decrease collateral requirements;

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BREP’s Key Results – Support to Sponsors

Country Activity TypeALB B2B – Linking international and local SHPP companies

Registration of Programmatic CDM for SHPPsReview of the Feasibility study for a cascade of seven SHPPs

MarketCompanyCompany

SRB Analysis of biogas plants costs and incomes in Serbia MarketBIH Support in SHPP tender preparation

Review of the Preliminary design for a cascade of three SHPPsMarket

CompanyMAC Pre-feasibility study preparation for biomass plant Company

Market Level

Interventions

Company Level

Interventions

• B2B workshops

• Support to Associations

• Knowledge sharing

• Promotion of new technologies

• Designs cross-check and review

• Business plan preparation

• E&S assessment

• CDM projects registration

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BREP’s Key Results – Support to Banks

Country Activity TypeALB Country level workshop

Training and support to Credins BankTraining and support to Intesa Bank

MarketCompanyCompany

BIH Country level workshop MarketKOS Country level workshop MarketMAC Country level workshop MarketMNE Country level workshop MarketSRB Country level workshop Market

Market Level

Interventions

Bank Level

Interventions

• Training material development

• Integration of Regulatory/ Budgeting/ Engineering and Risk in the Finance Manual

• Country level workshops

• In-depth training focused on SHPPs and project finance

• Support in SHPP assessment

• Portfolio analysis and recommendations

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IFC’s Infra Venture (IV)

Objectives

$ 150 MM Global Infra

Fund

20-30% of dev. costs (up to $ 8

MM)

IFC IV equity at

fin. close

Eligibility Activities

PPP or private infrastructure (IDA or MIC)

Early stages of development

Type of projects:

•Agreement with Gvt •Tendered by the Gvt•Need of surrogate sponsor at initial stages

feasibility studies and pilot tests

economic, social, technical and

environmental studies

Financial modelling

Obtaining required permits

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Objectives

Catalyze investments

Address market barriers

Achieve demonstrati

on effect

Approach FY13 Results

Blend donor funds alongside IFC investments

Disciplined, targeted, & strategic

Examples:

•Lower interest •Longer tenor•Contractually subordinated loan alongside IFC

To support

total project

size $2.5BBlended with

$600M IFC

financing

$130M concession. funds

Blended Finance for Climate Projects

Concessional funds take higher risk than IFC’s own funds

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World Bank Group’s facilities (IBRD, MIGA)

IBRD/IDAPartial Risk Guarantees (PRG)

MIGAPartial Risk Guarantee

Main Objectives: • Back Government obligations • Cover private debt against a Gvt’s

obligations to private or public prj• Improve overall credit quality of

project-partial use of AAA mitigant• Enable viability and bankability

through strong risk mitigation

Risks Covered:• Gvt’s contractual payment

obligations: payments, termination, subsidies, etc.

• Regulatory Risk: change in law, negation of license, tariff adjustment

• Currency Risk• Political Force Majeure:

expropriation, war & civil disturbance

• Frustration of arbitration

Main Objectives: • Focusing on sustainable

development • Difficult or frontier markets• Investments in poorest countries• Supporting infrastructure projects -

both the sovereign and sub-sovereign

• Promoting cross-border investments between developing countries

Risks Covered:• Currency Transfer Restriction and

Inconvertibility• Expropriation• War and Civil Disturbance• Breach of Contract• Non-Honoring of Sovereign

Financial Obligations

Appendix

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Legal Docs DraftingC1 – Regulatory

Level

Business to Business

C2 – Market LevelProgrammatic CDMC2 – Company Level

Equity InvestmentIFC IS C3N

Country Level Workshop

C3 – Market LevelIn-depth +

AssessmentC3 – FI Level

Dedicated RE LoanIFC IS FM

AS

ISExample:

ENSO HYDROExample:

CREDINS BANK

Approach in transforming the market

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Selection of IFC’s Recent Regional RE Investments

• SHPPs in Albania owned by the Austrian enso G.m.b.H Installed power up to 50 MW Investment value up to EUR 100 million IFC equity investment EUR 6 million

• Wind power plant Sibenik in Croatia owned by the Austrian RP Global Holding Installed power 44 MW Investment value EUR 84 million IFC loan EUR 20 million; mobilized additional EUR 35 million

• Wind power plant Jelinak in Croatia owned by the Spanish Acciona S.A. Installed power 30 MW Investment value EUR 55 million IFC loan EUR 20 million; mobilization of additional EUR 25 million

• HPP privatization in Albania by the Turkish Kurum International Installed power 77 MW Investment value EUR 120 million IFC loan EUR 30 million; mobilization of additional EUR 66 million

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Challenges in RE (SHPP) Development

Design vs. Operation (or estimated vs. actual generation)