NORDIC PUBLIC DEVELOPMENT FUND S MALL GRANT FACILITY PROPOSAL FOR FINAL CONSIDERATION Project Fact Sheet Partner Agency Inter -American Development Bank (IDB) Executing Agency IDB Capital Markets and Financial Institutions Division (CMF) S ector Banking and Financial Services Formal Sector Financial Intermediaries C RS Code: 24030 C ountry Nicaragua Budget USD 700,000 - NDF EUR 480,000 (USD 530,000') - Partner Agency USD 70,000 in kind - Other Funders Produzcamos Bank (USD 100,000 in kind) Project Period 2017 - 2018 Mode of Finance Joint co -finance Previous Support to Credits: EUR 16.6 million; SDR 29.4 million C ountry Grants: EUR 13.4 million R io Markers Mitigation: 2 =principal objective Adaptation: 0 =not targeted G ender Marker 1 =significant objective C limate Screening Yes Satisfied Processing Schedule Final - Nov 2016 Signature - Jan 2016 E ffective - Jan 2017 ' Exchange rate 1 EUR = 1.1 USD
Transcript
NORDIC PUBLIC
DEVELOPMENTFUND
SMALL GRANT FACILITY PROPOSAL FOR FINAL CONSIDERATION
Project Fact Sheet
Partner Agency Inter-American Development Bank (IDB)
Executing Agency IDB Capital Markets and Financial Institutions Division (CMF)
Sector Banking and Financial Services Formal Sector Financial Intermediaries
CRS Code: 24030
Country Nicaragua
Budget USD 700,000
- NDF EUR 480,000 (USD 530,000')
- Partner Agency USD 70,000 in kind
- Other Funders Produzcamos Bank (USD 100,000 in kind)
Project Period 2017 - 2018
Mode of Finance Joint co-finance
Previous Support to Credits: EUR 16.6 million; SDR 29.4 million
Country Grants: EUR 13.4 million
Rio Markers Mitigation: 2 =principal objective
Adaptation: 0 =not targeted
Gender Marker 1 =significant objective
Climate Screening Yes
Satisfied
Processing Schedule Final - Nov 2016
Signature - Jan 2016
Effective - Jan 2017
' Exchange rate 1 EUR = 1.1 USD
PROJECT SUMMARY
NDF Grant: EUR 480,000Project Period: 2017-2018Partner Agency: Inter-American Development Bank (IDB)Implementing Agency: IDB Capital Markets and Financial Institutions Division (CMF)
Objective
The Promoting Energy Savings Insurance project will support preparation and structuring ofan Energy Savings Insurance (ESI) scheme in Nicaragua with the objective of promotingaccess to finance for small and medium sized enterprises (SMEs) investing in energyefficiency (EE) upgrades and energy saving technologies.
Investments in EE constitute one of the most cost-effective means available to nationaleconomies for realizing quick reductions in the national energy bill. SMEs in Nicaragua andelsewhere, however, continue to face significant barriers to realizing these investments,notably, limited access to credit, lack of knowledge, and overall perceptions that investmentsin EE are not "business as usual."
The ESI scheme, already developed and rolled-out by IDB in Colombia, El Salvador andMexico, is designed to accompany a dedicated financing line for EE investments with atoolkit of financial and non-financial instruments, including energy savings insurance, thatserve to de-risk key aspects of EE transactions and create a framework for aligning interestsbetween SMEs, technology providers and local lenders.
Outcomes
Preparatory activities financed through the NDF small grant are expected to put in place theframework and methodology for a dedicated EE line of credit with an indicative target ofUSD 20 million. This line of credit is expected to mobilize an additional USD 5 million indirect investment by SMEs in energy saving equipment and technology, in turn estimated toresult in aggregate emissions reductions of at least 280,000 tons of CO2 equivalent.
Financing
The total project cost estimate is USD 700,000. NDF is providing EUR 480,000 orapproximately USD 530,000 in grant support while IDB and Produzcamos Bank, the localNational Development Bank partner, will provide approximately USD 70,000 and USD100,000 respectively in in-kind support during implementation.
TABLE OF CONTENTS
1. INTRODUCTION AND PROJECT BACKGROUND ................................. 1
2. RELEVANCE AND RATIONALE .............................................................. 1
CMF Capital Markets and Financial Institutions Division
CPI Climate Policy Initiative
CPML Nicaraguan Centre for Cleaner Production
CTF Clean Technology Fund
EE Energy Efficiency
ESCO Energy Service Company
ESI Energy Savings Insurance
ESTP Energy Services and Technology Provider
GCF Green Climate Fund
IDB Inter-American Development Bank
LFI Local Financial Institution
NCF Nordic Climate Facility
NDB National Development Bank
NDF Nordic Development Fund
iv
1. INTRODUCTION AND PROJECT BACKGROUND
The project stems from discussions between NDF and the Inter-American Development Bank
(IDB) Capital Markets and Financial Institutions Division (CMF). It will finance preparation
and structuring of an Energy Savings Insurance (ESI) scheme in Nicaragua with the objective
of promoting access to finance for small and medium sized enterprises (SMEs) investing in
energy efficiency (EE) upgrades and energy saving technologies.
NDF small grant financing will enable CMF to adapt and deliver the ESI concept, already
developed and rolled-out in Colombia, El Salvador and Mexico, in an NDF target country.
The project framework also complements ongoing NDF support to the GREENPYME
program by providing a potential window for access to finance for the SME beneficiaries of
EE audits under GREENPYME.2
The project will be jointly led and executed by CMF teams in Washington and at the IDB
office in Managua in partnership with the Produzcamos Bank, a Nicaraguan National
Development Bank (NDB) established in 2007. The project will develop a toolkit of financial
and non-financial instruments, including energy savings insurance, that serve to de-risk key
aspects of EE transactions. This work will prepare the marketplace architecture and
methodology for a dedicated EE financing line with an indicative target of USD 20 million to
be raised in combination between IDB, Produzcamos and other sources of international
climate finance.
Produzcamos Bank will be the lead local partner during implementation of the small grant
and will ultimately serve as host for the dedicated financing line. Indirect beneficiaries of the
project include SMEs, local banks and energy services and technology providers (ESTPs) and
other stakeholders who will benefit from the available financing.
2. RELEVANCE AND RATIONALE
2.1. Project Relevance
Nicaragua shows significant potential for the implementation of EE measures given its high
energy intensity and heavy reliance on petroleum derivatives for energy generation in the
industrial and service sectors.3 Various EE measures, such as substitution of air conditioning
and refrigeration equipment, have been estimated to have an energy savings potential of up to
29% as compared to the baseline.4
2 GREENPYME is a regional technical assistance program for SMEs focusing on mitigating climate change andimproving SME competitiveness by reducing energy costs and greenhouse gas emissions. NDF has providedmore than EUR 5 million to the program covering 2 phases of GREENPYME. The GREENPYME approach isbased on information dissemination and training targeted to SMEs, energy auditors, local financial institutionsand government. In Nicaragua, GREENPYME has made possible energy audits for more than 100 SMEs.3 CEPAL et al., Informe Nacional de Monitoreo de la Eficiencia Energ~tica de Nicaragua, 2015.4 SE4ALL, Rapid Assessment Gap Analysis Nicaragua, 2013.
1
EE investments constitute one of the most cost-effective investment opportunities available to
a national economy for realizing quick reductions in the national energy bills However, EE
investments at the level of SMEs face significant barriers in Nicaragua, notably: (i) limited
tenor and higher costs; (ii) lack of knowledge and capacity on the part of Local Financial
Institutions (LFI) regarding transaction risks; (iii) lack of knowledge by potential
beneficiaries about economic benefits; and (iv) overall perceptions by the market including
LFIs, SMEs and ESTPs that EE projects are not "business as usual" investments.
The project aims to address these barriers by preparing and putting in place a toolkit of
financial and non-financial instruments intended to enable structuring and de-risking of SME
investments in EE in Nicaragua. Combined with a dedicated financing line, this toolkit is
designed to enable SMEs to overcome the key barriers to EE investments and position
investments in EE technologies as a smart, "business as usual" strategy.
2.2. Relevance to NDF's Mandate and Strategy
The project is well aligned with the NDF climate change mitigation mandate and with the
NDF strategy, touching directly on multiple strategic focal areas including catalytic and
leverage role, preparatory funding and support for private sector development.
Mitigation. Justification for the project as a mitigation activity is based on analysis of
indirect emissions reductions stemming from follow on SME investments undertaken within
the ESI framework and receiving financing from a follow on line of credit. Loans from this
line to SMEs for investments in energy saving equipment and technology are estimated to
result in aggregate emissions reductions of at least 280,000 tons of CO2 equivalent over the
useable life time of those investments, representing an estimated 20,000 tons reduced on an
annual basis. Using the NDF valuation methodology, the value of these reduced emissions
savings is estimated at more than 3 times the value of the NDF small grant. NDF support will
also cover development of a methodology for accounting and measuring energy savings.
3. THE PROPOSED PROJECT
3.1. Objectives
The objective of the project is to promote access to finance for SMEs investing in EE in
Nicaragua. The project will achieve this by providing the funds to support CMF, working in
partnership with Produzcamos Bank, in adapting, structuring and deploying a framework for
ESI in the Nicaraguan market.
The ESI scheme, as developed by the IDB CMF team jointly with the Climate Policy
Initiative (CPI), consists of specific tools for de-risking investments in energy saving
technologies, notably: (i) a standard contract which distributes the performance risk of EEprojects between SMEs and ESTPs; (ii) a 3rd party verification process to validate technical
capacity of ESTPs and projected energy savings to be obtained from specific technologies;
and (iii) an insurance instrument to be offered by local private insurance firms to cover
potential energy savings shortfall stemming from non-performance of select technologies.
The graphic below was developed by CPI to illustrate the key stakeholders and relationships
in the ESI framework. NDF grant support is represented in gray in the graphic and provides
the funds necessary for setup and preparation. Grant flows are depicted supporting activities
by both IDB CMF and Produzcamos. A dedicated line of credit is represented in green
channelled through Produzcamos and reaching LFIs who process individual loans to SMEs.
The ESI scheme provides a structured framework for de-risking investment in energy savings
by SMEs. A standard contract template (see 1 in graphic) is developed to provide comfort on
acquisition of specific EE technologies. This reduces the transaction time and provides
comfort for all parties including LFIs. An independent verification agent (see 2 in graphic)
provides supervision of the process. Local insurance providers offer insurance coverage (see
3 in graphic) on promised energy and cost savings to be derived from the technologies. The
insurance takes effect if the technology does not deliver anticipated savings, essentially
underwriting the estimated savings derived from specific energy saving technologies. This
enhances the comfort for SMEs and de-risks the exposure of lenders (see 4 in graphic).
1 CREDl4T L1NF ~R~~FOR ADDRESSEDSMEs: WITH:
PEAFORMAMCECONTRACt ~1P~~~~ ~ saan
payments d Repayment Sn°nageoi
iecnnaei 2performance average L~n~ ~ ~E
Equipment fees 1~
8 services
Premium...~. FIN NC L ~' 2' 3
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'~+ LU~n PxlPlndf • f ~7 ~fPremium t ~ Repayment ~~'~
¢ 1 Coverage Creditu~
l~erificafion
3~~~ INSURANCE~~Qi ~ Coordinates ~ Lvart Grant
verilrcafion RePaYme~~
•pro(ecf R Provider validafi0n ~O~Ss Loån•project wrahudron verification ,~'""~•verily reports during operabon - -- "'"`
2VERIFICATION & ~~ ~~ f. Grant •
VALfDAT10N PROCESS
Source: CPI
The indicative target for the dedicated credit line is estimated at USD 20 million. Part of the
preparation support provided by NDF will cover fund raising activities for this line which is
also expected to mobilize an additional USD 5 million in direct investment by SMEs,
representing a total leverage ratio for NDF finance of 1:40 for additional donor finance and
1:10 for follow-on private sector investment.
Loan terms between LFIs and SMEs will be structured to address the key barriers to access to
finance for SMEs, notably long tenor and high prices, while ensuring program sustainability
3
and market alignment beyond the period of donor support. To this effect, Produzcamosactivities will include performance analysis throughout implementation.
3.2. Project Activities
Project activities are structured on the basis of the existing experience that the CMF team hasaccumulated with other NDBs in Latin America.
Activities are planned to fall under 2 main components as follows:
Component 1 -Preparation. CMF will support Produzcamos to develop ready-to-use,tailored financing strategies, consisting of a combination of financial and non-financialinstruments through the following activities: (i) feasibility analyses, to determine investmentappetite and financing constraints and assess relevant EE technologies in priority EE sectors,building on experience from GREENPYME and to include direct surveys with SMEsengaged in GREENPYME EE audits; (ii) market assessments including a review of existingregulatory frameworks; (iii) support for the design of EE financing strategies, includingfinancial, i.e. insurance or surety products, and non-financial instruments, including abusiness plan for the deployment of the EE financing strategy and guidelines for thepromotion and marketing of the strategy; (iv) support for capacity of ESTPs to convert to andoperate as Energy Service Companies (ESCOs) providing technology leasing services toSMEs as an alternative to SME direct acquisition; and (v) support for the design andimplementation of a system to monitor, report and verify results.
Component 2 -Implementation. Funds allocated to this phase will serve to: (i) validate theESI instrument by financing pilot transactions including transactions with ESTPs acting asESCOs; and (ii) enable Produzcamos and CMF to undertake fund raising and resourcemobilization activities through international climate finance windows and other channels forthe dedicated line of credit.
3.3. Cost Estimates and Financing Plan
The overall project cost is estimated at USD 700,000 including USD 70,000 and USD100,000 in in-kind contributions from IDB and Produzcamos respectively. NDF willcontribute EUR 480,000 (USD 530,000) through the NDF small grant window. Thefollowing table presents a breakdown of NDF financing in USD.
Market study and sector priority 15,000
Development of financing strategy 20,000
Project technical backstopping and management 40,000
Development of standard contract between ESTP and SME 40,000
Methodolo ies for assessment and validation of energy savings 45,000
Information management system (registry) 25,000
Sub-total
Validation
185,000
200,000
Promotion 20,000
4
Support to project preparation for access to international climate finance 10,000
Monitoring and reporting 40,000
Sub-total 270,000
Contingencies 50,000
Fee (5%) 25,000
Total 530,000
The project serves to lay the groundwork and prepare the methodology and instruments to
raise a dedicated financing line. Preliminary estimates for the scale of the financing target
approximately USD 20 million to be raised in combination between IDB, Produzcamos and
other sources of international climate finance.
3.4. Nordic Interest
The project serves Nordic interest by replicating and adapting an innovative EE financing
scheme in an NDF priority country for the region. NDF financing for the project also
complements previous financing from the Danish Ministry of Foreign Affairs Department of
Green Growth supporting development of the ESI pilot in Mexico and elsewhere in the
region. Depending on results of the project, NDF also has an option of looking at
participating in the capital raise for the follow on financing line.
3.5. NDF's Added Value and Comparative Advantage
The project also builds on previous collaboration between NDF and IDB in Nicaragua
specifically through the GREENPYME program which has financed 103 simple EE audits
and 30 detailed audits for SMEs in Nicaragua to date with the main objective of scaling up
EE awareness and investments. Thanks to GREENPYME, there is a ready pipeline of SMEs
seeking access to the tools being developed through the ESI project. The CMF project team
will coordinate closely with GREENPYME stakeholders throughout the implementation
process to identify opportunities to bring GREENPYME-supported SMEs into the ESI
financing framework. NDF financing through its Nordic Climate Facility (NCF) window also
supported establishment of a Nicaragua Energy Efficiency Office which can now be
leveraged as an additional channel for market analysis and awareness raising during the
preparation activities.
4. IMPLEMENTATION ARRANGEMENTS
4.1. Technical Aspects
CMF experience indicates a targeted approach to promoting EE investments in specific
sectors and technologies achieves best results. Sectors and technologies will be identified on
the basis of a feasibility analysis and market assessment to be undertaken in the Preparation
Phase. The CMF team employs an ESI Evaluation Matrix which serves to identify priority
sectors on the basis of localized data on potential energy savings, energy costs and existing
lending in the portfolio of Produzcamos. This last aspect is to ensure ownership and
alignment with Produzcamos business planning.
5
Assessments of priority sectors and technologies will be complemented by availableinformation from existing initiatives, notably GREENPYME. The CMF project team willcoordinate closely on this internally with IDB colleagues and externally with key localstakeholders involved in implementation of GREENPYME, including the Nicaraguan Centrefor Cleaner Production (CPML). The CPML overview and summary reports on EE financingin Nicaragua and the results of the GREENPYME program will serve as a basis for theplanned feasibility study and market assessment.
4.2. Institutional Aspects and Project Organization
The project will be directly executed by IDB's CMF Division. Launch, mid-term and finalreview meetings will be organized with Produzcamos and participating consultants for eachof the project phases. NDF involvement and visibility will be emphasized at every stage ofimplementation.
4.3. Procurement and Contract Structure
IDB will contract individual consultants, consulting firms, as well as services other thanconsulting, in accordance with its procurement policies and procedures.
4.4. Risk Analysis
Potential risks are grouped into 4 main categories described in the table below and all deemedlow probability with appropriate mitigation measures planned and in place.
- Stakeholder engagement, consultations and informationcampaigns with market actors to confirm interest in EE andvalidate conditions for investment and lending- Additional assurance provided by the recent track record ofESI schemes in other countries in the region includingColombia, El Salvador and Mexico in partnership with localNDBs. Key progress to date includes:
Poor uptake of the 1) Development of methodology, technical standards, standard
instrument in the market Performance contract in a113 countries, in partnership with
Market risk by SMEs, ESTPs, banks
Bancoldex in Colombia, FIRA in Mexico and BANDESAL in
and insurance companies El Salvador;2) Development of insurance product in a113 countries;3) Secured financing for follow on line of credit in a113countries consisting of USD 20 million in the case of Colombiaand Mexico and USD 40 million in El Salvador representingfinancing from IDB, local NDBs, Clean Technology Fund(CTF) and the Green Climate Fund (GCF);4) Ongoing developing and structuring of initial projects in a113countries.- Experience from IDB pilots of the same instrument elsewherein the region provide a template for engagement with NationalDevelopment Banks with significant government ownership
Delays and poor - IDB CMF direct oversight of the project together with IDB
Institutional and performance related to Fack record with Produzcamos provides integrity risk mitigation
Integrity risk capacity and governance of and assurance
local NDB partner - Produzcamos is actively implementing institutional reform toenhance performance and governance with actions including:opening up shareholding to private sector; diversifying Boardcomposition; enacting new risk management policies; andoverhauling the senior management.
C:~
- Produzcamos will also put in place a project focal point withinProduzcamos with decision makin mandate
Changes in nationalpolicies or regulatoryframework could impact -Continuous engagement and awareness raising with
Public sector riskcommitment of local government authorities by Produzcamos with support from IDB
stakeholders and/orProduzcamosEnvironmental hazardscaused by poor - Produzcamos together with IDB will design and implement a
Environmentaldecommissioning or Decommissioning and Disposal Protocol in full compliance with
and socialdisposal of obsolete local regulations and IDB safeguardse ui ment
4.5. Monitoring and Evaluation
The CMF team will be responsible for monitoring and reporting progress against milestones
and indicators in the project results matrix (See Annex 1).
5. ECONOMIC AND SOCIAL ASPECTS
5.1. Economic Justification
Energy and access to finance registered as 2 of the top 3 constraints to growth for SMEs in
Nicaragua as reported ina 2010 World Bank Enterprise Survey of 336 business owners.
Market demand for a financing mechanism that addresses both is expected to be significant.
NDF small grant financing will provide support to prepare the ESI toolkit along with market
analyses, capacity building and training and marketplace linkages necessary to effectively
mobilize and deploy a dedicated EE financing line estimated at USD 20 million. The net
present value of CO2 emissions reductions generated by follow on investments supported by
this line of financing is estimated at more than 3 times the initial NDF financing
demonstrating a high catalytic value for NDF preparatory funds.
5.2. Environmental and Social Aspects
The project is expected to have positive environmental and social outcomes. Follow on
investments as a result of the project are projected to provide greater EE in the SME sector,
providing a path to low carbon, green growth and yielding an equivalent of 280,000 tons of
CO2 emissions reductions. Risk of environmental hazard as a result of decommissioning and
disposal of obsolete equipment will be mitigated by an appropriate protocol in place and in
full compliance with IDB safeguards.
The project will establish a minimum target that 30% of participating and/or beneficiary
SMEs have women in management roles or women represent a significant percentage of the
employee group.
6. CONCLUSION
The project will leverage small grant financing from NDF to prepare the way for aline-of-credit dedicated to financing SME investments in energy saving technology. The projectpresents an opportunity for NDF to support replication and adaptation of an innovative EEfinancing scheme in an NDF target country. The project also builds on and extendscooperation on SME EE financing already established between NDF and IDB in Nicaraguaunder the GREENPYME project.
7. RECOMMENDATION
NDF Management approved grant financing of up to EUR 480,000 to the projectNICARAGUA -PROMOTING ENERGYSAVINGS INSURANCE.
Helsinki, 11 November 2016
/~~'~.
Pasi Hellman
Managing Director Country Program Manager
s
Annex 1 -Project Results Matrix
Component 1: Preparation Phase
Feasibility analysis, identifying EE sectors to be# 1 Dec 2016
Training and outreach events # 20 July 2018CMF/IDB monitoring; Produzcamos' information
-------------------------------------------------------------- ------ ------------- ------------- s stems-y ------------------------------------------------------
Percentage of fems supported with simple or detailed EECMF/IDB monitoring; Produzcamos' informationaudits under GREENPYME engaged in market assessment,
o/0 100 July 2018
surveys or outreach activities-------------------------------------------------------------- ------ ------------- ------------- systems
Percentage of participating finns with women in management---------------------------------------------------------CMF/IDB monitoring; Produzcamos' informationroles or representing significant share of employee group (i.e.
o/0 30 July 2018
more than 40 /off --------------- ---------------------------------------------- ------ ------------- -------------
