Considerations in mobilizing private for global climate finance 2013.12.3 Regional Head of Climate Change & Sustainability, KPMG Asia Pacific Using Country

Considerations in mobilizing private for global climate finance

2013.12.3

Regional Head of Climate Change & Sustainability,KPMG Asia Pacific

Using Country Systems to ManageClimate Change Finance

Kim, Sungwoo

2© 2013 KPMG Samjong Accounting Corp., the Korea member firm of the KPMG network of independent member firms affiliated

with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Korea.

Various area for cooperation with the private sector in the global climate landscape

Through long-standing efforts to integrate the private sector into the global climate finance architecture, a wide variety of private partners and possible areas for cooperation have been identified.

Lessons learned

from existing climate funds

Cooperation scheme

by investors

• Available only to direct mitigation projects and its sponsors

Need to expand

Narrow coverage

• Uneven support level due to case by case approach

Need to enhance MRV system

Lack of transparency • Possible of harming

public sector’s not-for-profit public service role in its cooperation with private entities

Need to enhance risk sharing function

Public sector responsibilities

• Failure in knowledge sharing with private investors

Knowledge sharing through co-work

Insufficient knowledge

sharing

Direct investors Indirect investors Others

Equity Investor

• PPP (BOT)Enhancing sovereign guarantee

• Equity Investment

Debt Investor

• Subordinated loan

• Credit line support

Fund Investor

• PPP - Investment in Private Equity

Bond Investor

• Green Bond - 1st-loss tranche

Carbon Investor• Carbon credit

purchase• Ground price guarantee

Tech. Provider

• Green export insurance/guarantee

examplesKfW

Global Climate Partnership Fund

AFDInteract Climate

Change Fund

EIBGlobal EE and Re

Energy Fund

WBGreen Bond

ADB Future Carbon

Fund

N.A.



Four cooperative schemes employed by existing climate funds

Funds11

Modality of involvement

- Fund of Funds (bottom-up approach)

Benefits

- Utilizing the private sector’s expertise and

experiences in market/technology risk

management

Bonds12


- Bond issuance / credit enhancement to bond

issuers (top-down approach)

Benefits

- Ease of attracting private capital through

guarantee

Capital raising Disbursement

Co-investment


- Subordinated loans

Benefits

- Enhancing repayment capability of projects and

building capacity of involved (local) private

banks

13

Investment in relevant infrastructure


- Separate investment

Benefits

- Creating an enabling environment and avoiding

possible crowding out effect

14

Existing climate funds have been utilizing diverse ways of incorporating the private sector throughout the financing cycle, from raising capital to the disbursement of the resources.



Overview of the existing schemes – capital raising through fund

Initiation

11

Risk sharing

12

Profitability enhancement

13

Operation

14

raising capital in a form of fund-of-funds

Identifying suitable PEFs managed by the private

Public’s acts requiredCooperation progress

acquiring the 2nd priority stock of the invested PEF (similar to subordinated tranche)

enhancing other private investors’ profitability through unequal dividends (through “late charge”)

The public’s intervention through a Fund-of-Funds structure aims to expand the boundary of eligible climate projects to PEFs by sharing risks of other private investors

Utilizing private GP’s expertise and experiences in risk management

Example - GEEREF

GEEREF is sponsored by the European Union, Germany and Norway and is advised by the European Investment Bank Group

Structured as a Fund-of-Funds, GEEREF invests in private equity funds that specialize in providing equity finance to small and medium-sized project developers and enterprises (SMEs)

These SMEs should focus on renewable energy and energy efficiency projects and/or technologies

The target funding size for GEEREF is €200-250 million and as of March 2013, GEEREF has secured a total €112 million.

Portfolio: Renewable Energy Asia Fund (€12.5mn), Evolution One Fund (€10mn), DI Frontier Market Energy and Carbon Fund (€10mn), Armstrong South East Asia Clean Energy Fund (€10mn), etc. This approach has advantages in project identification and support for small-to-medium size projects by

utilizing relevant expertise of the private sector. Methods to attract and leverage more private capital for scaling up need to be developed.



Overview of the existing schemes – capital raise through bond

Initiation

11

Risk sharing

12


13

Operation

14

Designing bonds in several tranches with appropriate yield rates, maturity and denominated currencies


Utilizing high credit rates of the public

acquiring 1st-loss tranche

Issuing multiple tranches with different yield rate

Bonds are one of the most efficient instruments for mobilizing large capital from the market and the preference for bonds is growing by new international financial regulations such as Basel III. Small-to-medium business, however, needs to be integrated into this scheme.

Securing project pipeline to be financed

Example – Green bond

Green bond was issued by the World Bank in context of "Strategic Framework for Development and Climate Change“ aiming to help stimulate and coordinate public and private sector activity to combat climate change

Since 2008, the World Bank has issued USD 4 bln in Green Bonds through 59 transactions and 17 currencies

The bonds have been issued with AAA credit rate but a wide range of yield rate from 0.5~8.75%

Capital raised from the bonds has been utilized in supporting mitigation and adaptation activities in its 19 member states.

Investors: institutional investors including AP2 – Second Swedish National Pension, Blackrock, California State Treasurer’s Office and Nikko Asset Management

Securing project pipeline to be financed is key for successful operation of the green bonds

Bond is an efficient instrument for mobilizing private capital but its applicability is very limited only to high credit rated entities. A way how to enlarge its applicability to small-to-medium companies needs to be examined.



Overview of the existing schemes – disbursement through co-investment

Initiation

11

Risk sharing

12


13

Operation

14

Identifying eligible projects and appropriate co-investment partners

(local financial institutions)


Holding subordinated tranche

Providing favorable interest rate

Syndication between public funds and local institutions in debt financing of climate projects is effective in enhancing access to local financial markets necessary for micro financing but the scheme is still in its infancy

Working with local banks to build their risk management capacity

Example – Eurus wind project

The project is located in Oaxaca, Mexico developed by Acciona of Spain.

Eurus is the largest operating wind farm in Latin America and construction was divided into 3 phases.

1st phase(67.5MW): financed by MDBs with no private’s involvement

2nd phase (250.5MW): financed a total of USD 375 mn by ten financial institutions consisting of 8 MDBs and 2 private entities (BBVA and Banco Spirito Santo)*The public held subordinated position to help mitigate off-taker credit risk and other operational risks

3rd phase (396MW): financed by private (USD 536 mn)

Through the participation, local banks could build risk management capacity in wind farm development allowing active engagement in the subsequent project

Capacity building of local financial institutions is crucial for strengthening accessibility to domestic capital markets, especially for micro-financing, in developing countries. This scheme needs to be further disseminated



Overview of the existing schemes – disbursement through investing in relevant infrastructure

Initiation

11

Risk sharing

12


13

Operation

14

Identifying necessary social infrastructure for climate change mitigation and adaptation activities


providing related infrastructure which is necessary for stable operation of projects funded by the private

Establishing related infrastructure as a separate project which results in cost saving to private investors

Lack of relevant infrastructure acts as a significant bottleneck of climate change mitigation and adaptation activities more than market immaturity in many developing countries.

Closely collaborating with local governments as most of these projects are categorized as ‘social overhead capital’

Example – Rajastan transmission project

Transmission of renewable energy faces several challenges including cost recovery and reliability issues

Government of Rajasthan targeted nearly 8,000 MW of solar photovoltaic, concentrated solar power and wind projects by 2018. Financing for this target will mainly come from private sources.

The Rajasthan Renewable Energy Transmission Investment Program formed a part of the overall scheme for transmission development in Rajasthan

ADB has agreed to lend $300 million from its ordinary capital resources and $200 million cofinancing from the ADB Clean Technology Fund.

The public supported the private‘s investment indirectly by providing necessary infrastructure and subsequently reducing project costs

Lack of relevant infrastructure of developing countries hinders the private’s participation in the market. Securing adequate infrastructure is a precondition of attracting private capital



Key considerations in mobilizing private for global climate finance

1 Climate-friendly technologies are still expensive. Thus, financial support from the public is inevitable but it should be provided in a sustainable manner

Financial supports from the public should be sustainable though adopting loss offset schemes which can generate revenue to offset losses from the support

“Efficiency” in leveraging private capital is also an important criterion in selecting appropriate schemes

2 Public-driven approach is generally suitable for large-scale programs/projects resulting significant impacts to the market. This approach, however, is not effective to be duplicated by private,

“Green bond” is a applicable scheme only to high credit rated entities. This limitation of applicability hinders dissemination of the scheme and consequently leverage of private resources.

3 To fully leverage private finance, the public should utilize the private’s expertise and their languages

Finding business opportunities and maximizing benefits from them is the private’s distinct expertise. Who can identify and manage risks of the market most effectively and efficiently is also those who lives in there, the private

Timing is a virtue for the private sector, which is often ignored by the public. To attract the private, the sector needs to communicate in terms familiar to the private sector.

4 The market is the answer

Provided the public gives clear signal, the market will leverage the private capital by itself

The market has proven its ability to evolve itself to attract more players and secure greater liquidity in many other industries



Quick ideas for innovative schemes to leverage the private finance – Bond guarantee program

The bond guarantee program can facilitate micro-financing for small scale projects and induce active participation of private parties by providing credit enhancement to bond issuers

Program overview at glance

Bond Guarantee Program(IFI)

Tranche A(pension funds)

Tranche B(insurance com.)

Tranche C(PEFs)

Credit enhancementFee payment

(offsetting losses)

PJT #1

PJT #2

PJT #3

Securitization of assets*

Bond issuance with multiple tranchesBond investment

Higher yield with lower priority

Public

Private

* Borrowing the “covered bond” concept

Key features

1 Profit generating scheme with a leverage rate of 15~20 times The bond guarantee program can generate revenue through guarantee fee charged to bond issuers and offset losses of performance ‘default’ events

The expected leverage ratio of ‘Project Bond initiative’ in EU is 20 times and the program will have a similar degree of leverage ratio

2 Business model tailored for small-to medium size companies The program is applicable to small-to-medium size companies through establishing an asset pool consisting of small projects

3 Private-driven approach Roles of the public in the program is limited to providing

guarantees to bond issuers and the transaction is executed by private parties

4 Utilizing the market mechanism Transaction is taken place in the market and diverse derives

(forward rate, Asset/liability swap, IRS, CRS, etc) can be involved gradually.



Quick ideas for innovative schemes to leverage the private finance – Acquisition program for small scale renewable projects

This program will give a clear market signal by acquiring small renewable projects after its commissioning and performance verification. The signal will induce participation of diverse private players, which will turn the program into private-driven

Identification

Financing

EPC

Early operation

operation

Transaction(asset transfer)

The Private

(mainly developer or EPC company)

The Public

Identification

Financing

EPC

Early operation

operation

2nd transaction

(asset transfer)

The Private

(mainly developer or EPC company)

The Public

1st transaction

The Private

(bridging finance)

3rd transactionThe Private

(asset M&A)

Program overview at glance

<introduction stage>

<Maturity stage>

Key features

1 Clear signal to the market The program is to acquire small

renewable projects after commissioning and performance verification.

The program will give a clear signal to private parties involved and induce participation of other private financiers2 Market mechanism utilization The clear signal will enable the program to fully utilize the market mechanism and diverse investors will participate into the market accordingly through various derives and transactions

The participation of diverse private parties will turn the program into private-driven

DISCLAIMER

This presentation has been prepared exclusively for internal use of the intended recipient and does not carry any right of publication or disclosure to any other party. This presentation is incomplete without reference to and should be viewed solely in conjunction with the oral briefing provided by Samjong KPMG Accounting Corp (“KPMG”). Neither this presentation nor its content may be used for any other purpose without prior written consent of KPMG.

The information in this presentation is based upon publicly available information and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of any information available from public sources.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Whilst the information presented and views expressed in this presentation and the oral briefing have been prepared in good faith, KPMG accepts no responsibility or liability to any party in connection with such information or views.

This presentation is made by KPMG, a Korean member firm of the KPMG network of independent firms affiliated with KPMG International, a Swiss cooperative, and is in all respects subject to the negotiation, agreement, and signing of a specific engagement letter or contract. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

Kim, Sungwoo

Regional Head of Climate Change & Sustainabil-ity,

KPMG Asia [email protected] 82-2-2112-3200

Documents

Considerations in mobilizing private for global climate finance 2013.12.3 Regional Head of Climate Change & Sustainability, KPMG Asia Pacific Using Country