1
Energy Efficiency Revolving Fund
Introduction on Financial Scheme
UNIDO/GEF Project
"Industrial Energy Efficiency in Key Sectors"
December 28th, 2015
2
Contents
1. Introduction ......................................................................................................................................... 3
2. Revolving Fund-Framework and Format ......................................................................................... 3
2.1. Revolving fund .............................................................................................................................. 3
2.2. Energy Efficiency Revolving Funds ............................................................................................. 5
2.3. Examples from other Countries .................................................................................................... 9
3. Review of Previous Reports ............................................................................................................. 16
3.1. Limitations and Recommendations ............................................................................................. 19
4. Preliminary Meeting with Financial Institutions ........................................................................... 20
3
1. Introduction
Due to damaging consequences of the climate change on the environment and people's
lives, the issue is considered as a global concern. Various factors can shape the change;
however, it is very likely that humans are largely responsible for recent climate change.
Thus, by taking some measures it is possible to reduce the risks which we will face from
climate change and undoubtedly energy efficiency is the paramount factor that can mitigate
the consequences.
UNIDO/GEF project "Industrial Energy Efficiency in Key Sectors" was approved in
August 2012 and is of duration of five years to accelerate the uptake of energy efficiency.
The project consists of five components, namely policy support, training and capacity
building, direct support to industry, financial support and information dissemination and
awareness raising.
The financial support would be in the form of a revolving fund to finance energy efficiency
projects in Iran in order to support investment in energy efficiency activities in line with
the scope of aforementioned project. The main objective of this assignment is to set up the
financial scheme to establish and implement the revolving fund with utilizing capacities
and financial contribution of the banks and/or financial institutions.
2. Revolving Fund-Framework and Format
2.1. Revolving fund
When a reserve of money in a fund is used to lend and the fund’s resources circulate
between the fund and the users, the framework is called Revolving fund. Revolving funds
(RFs) are usually established by Governments or non-profit organizations. These funds are
created to achieve a special sustainable purpose or to help a particular target group by
providing them with discounted loans which can be available to the same users for more
than once. One of the most important issues to consider is establishing the fund either by
existing institutions or an independent revolving fund. Thus, in order to adopt appropriate
solutions several elements into each conditions including, investigating risk factors,
institutional policies, securities, profitability and past experiences need to be addressed.
Revolving funds may be financed by their users, users of projects or it may be financed by
third parties or both. If the financing process of the fund is dependent on small injections
such as contributions, saving deposits and phased donor financing, it will take a longer
time so as the establishment of the fund. A contribution from outside to the target group is
4
called external financing. Based on experiences, involvement of the target group in
financing has a positive impact on achieving the special purpose the fund is created for.
Revolving funds are valuable for non-profit organizations since they provide advantages
for both the donor and the non-profit organization. The working procedure of none-profit
organizations includes announcing a program, recruiting the personnel, extending
invitations or signing the contracts, raising the donations or receiving the program revenue
that will cover the costs. In such conditions a revolving fund allows the non-profit
organization to commit to programs early so that it can ensure professional execution and
the project's success. The non-profit then can work to generate the revenue, donations, or
other supports in order to repay the money spent.
Building up of Revolving Fund for Self-sufficiency
A revolving fund can make its capital available to the users which in this case the
obtainability depends on the lending periodicity and quick repayment or it can make the
yields from investments of the capital available which in this condition the capital will not
be directly valid to the users so the capital will not be declined and the interests received
by the fund will be lent to the users, these loans will subsequently bring about repaid grow
to the capital.
Management and Administration of Revolving Fund
If the revolving fund has independent legal status, it will provide statutory obligations to
submit regular financial report. The financial report should be consisted of balance sheet,
profit and loss account and cash flow statement approved by the fund’s trustees and an
external auditor and they should be completed annually in 3 months after the fiscal year. It
is recommended to provide profit and loss account and balance sheet every 3-month
altogether with a cash flow projection for the rest of the year in order to monitor and plan
the revolving fund. In many countries, the financial reporting obligation and the form in
which the reports have to be submitted are laid down by Law.
Sustainability of Revolving Fund
Revolving funds are self-sufficient after the first injection of money and their capital
remains at a constant level approximately without any external refinancing. Factors such
as interest rates, administrative expenses, payments and repayments and failure to make
them, inflation, change in energy price and etc. would affect the operation of a revolving
fund. Appropriate measures would be required to be adopted to effectively appraise and
monitor these factors for its improved operations in order to keep the revolving fund in a
self-sufficient and sustainable condition.
5
The operations of revolving funds need to be observed and assessed from time to time in
terms of characteristics of users, quickness of payments/repayments, loans and claims,
volume of transactions, rate of circulation and organizational and financial administration
and the impacts on users and other stakeholders. These measures would help strengthen
the stakeholders with the necessary framework for effective formulation and
implementation and thereby achieving sustainability.
2.2. Energy Efficiency Revolving Funds
Energy efficiency revolving funds (EERFs) are typically created to help financing public
sector EE projects in which the initial investment costs are provided, then energy savings
accruing from the results of the project are paid to the fund until the principal plus the
interests and all of the related fees and charges are fully returned. These repayments are
then utilized in order to finance new projects and in this way the capital will revolve.
EERFs are usually formed by national, state and local governments. These funds provide
lower-cost financing with less-stringent security requirements rather than commercial
loans.
Energy Efficiency Revolving Fund Structure
Figure 1: Typical structure of an EE Revolving Fund
EERFs are capitalized through different sources, including donor agencies, government
budget allocation, special tariffs or levies on electricity sales, petroleum taxes, revenue
bonds, environmental charges, etc. The fund meets public agencies’ financing needs for
their EE project investments and then the resulting energy savings are applied for paying
back the principal and interest on the debt. Repayments from public agencies replenish the
fund allowing it to revolve. Independent energy service providers (ESPs) would generally
provide the installation and other services for project implementation and they would be
6
directly paid by public agencies for the services they are providing. The structure of EERFs
is shown in Figure.1.
The Fund management and governance include oversight arrangements, choosing the
fund manager, monitoring & evaluation and reporting, which are explained as following.
A management board including representatives from ministries that have some authority
over EE is needed for supervising the fund. The board is comprised of representatives from
the government and private sector. These oversight bodies are in charge of setting the
investment strategy and policy of the fund, recruiting the management team, setting up the
criteria for choosing the projects, confirming the business plans and budgets formulated by
management team, preparing and submitting annual financial reports to the government
and scrutinizing whether the fund is functioning according to the EE strategy and plans.
The revolving fund may be managed by either an existing government agency such as a
development bank or a new organization. The management team must have the knowledge
and understanding of EE technologies and must be able to conduct credit and financial
analysis, project appraisal and must have considerable expertise in market assessment and
pipeline development. A monitoring system based on the type and scale of the projects is
required in order to track the projects’ performances with the purpose of assessing their
technical progress and financial status which would be provided by periodic progress
reports. Even a project review committee can be helpful in ensuring that the project is
correctly targeted. Evaluation is required to test planning assumptions, investigating
overall results, comparing the program performance and etc. which is occurred at specific
times. For example most World Bank funded projects have a mid-term and a final
evaluation. These evaluations are often performed by an independent third party. The fund
manager has to prepare periodic reports for the fund to see if the progress is made according
to the schedule and performance goals and appraise the quality and status of the project.
Financing windows and products of EERFs
Since some of public agencies may not have a borrowing history or borrowing capacity or
even may not be creditworthy, the fund must be established in a way to fulfill the needs of
all agencies, that’s why the fund may present several financing products or windows
including:
Debt financing window
Energy services window
Risk guarantee window
Budget capture
Grants window
Forfeiting
7
In case that the public agency is creditworthy such as a municipal, the fund may be able to
cover 100 percent debt financing and since the public agencies are not legally permitted to
use public asset as their collateral, it will not be requested as the same done in commercial
loans. The repayment period can be longer than commercial loans while the amount is less
than the resulting energy savings. Energy services agreement (ESA) is applied to the
agencies with neither sufficient capacity for borrowing nor adequate capability to
implement EE projects in an efficient way. In this case, the agency must pay some or entire
monthly energy bill to an escrow account created by the EERF within ESA duration. After
that the fund makes the investments which will cause a significant reduction by a specific
amount in energy costs. The agency will continue to pay its energy bill during the ESA
period without energy costs reduction and the surplus will be used to recover the fund
investments and its associated fees, at the end of the contract the agency can retain its
energy cost savings. The fund can use a risk sharing mechanism for funding EE projects in
which it provides credit guarantees to commercial banks/financial institutions to finance
EE projects. Budget capture window can be used when a public agency is receiving a
dedicated fund from Ministry of Finance or another government agency to pay its energy
bills. So the government will reduce its outlays to the public agency implementing the EE
project and will pay the amount of energy cost savings to the EERF instead. In case of
being sustainable funding sources existed such as government or donor agencies that they
commit to funding the EERF for a specific number of years, a grant window can be offered
in order to improve EE project economically. At last another service of EERF is forfeiting
which means selling of receivables. For example Bulgarian ESCO Fund received a loan of
€7 million from the European Bank for Reconstruction and Development (EBRD) to buy
receivables under the energy saving contracts signed by Enemona. The fund allows
Enemona to use its capital for further development of projects in both the industrial and
public sectors, including kindergartens, schools, hospitals, and other municipal buildings.
Operationalizing an EE Revolving Fund
Major steps of establishing and operating an EERF are explained as below:
Establish the legal framework for the fund. In this step it should be decided whether to
establish the fund with an existing ministry, development bank, an energy agency or to
create a new legal entity such as an independent corporation, NGO or statutory agency.
Develop reliable and sustainable funding sources. The revolving fund must be capitalized
through the sources, including governments, donor agencies and others with sufficient fund
in order to be able to start its operating and funding a number of projects.
8
Define the fund objectives and target markets. Since an EERF is not able to cover all the
energy consuming sectors, there should be concentration on special target markets such as
schools and hospitals which they do not have wide access to commercial loans and may
have limited internal financial sources.
Develop the governance structure. The government assigns a board of trustees to act as an
oversight body. It would be better to include representatives from both government and
private sectors. The private sector would bring knowledge and expertise while it prevents
political parties form capturing the fund.
Select and recruit the fund management. Different strategies can be applied in selecting
and hiring the management team. The oversight body can use existing ministry staff or can
set up an independent fund management organization. Since a private sector manager can
have several beneficiaries such as their financial structuring experience, using a
professional management team would be a better choice.
Hire the staff. In this step the fund manager has to hire a professional team expert in energy
services, EE project financing, risk appraisal and loan disbursement. Therefore hiring staff
from private sector is inevitable.
Define the major financing products. As it was discussed in previous sections, public
agencies that need financing for their EE projects may not be creditworthy or may have no
capacity for borrowing, so Energy service arrangements must be considered as one of the
EERF products.
Define Technical assistance and other service offerings. Technical assistance is an
important characteristic of a successful EERF. For example, the fund can get involved in
procurement of equipment and services for a bundle of similar projects to a number of
public agencies thus reducing transaction and equipment costs.
Develop and document eligibility criteria. Eligibility criteria should be defined and
documented for the products and windows the fund aims to offer. It can conclude factors
such as creditworthiness of the public agency, good energy bill payment discipline,
potential use of available technologies and etc.
Define the application procedures and prepare related forms. At this level, appropriate
forms should be prepared based on the eligibility criteria defined in the previous step.
Develop a marketing strategy approach and develop the project pipeline. Recognizing
public agencies according to the eligibility criteria and developing a marketing strategy
9
and approach should be devised in this step which will lead to identification of specific
projects and establishment of a project pipeline.
Subcontract to private Energy Service Providers (ESPs) to build their capacity. The fund
manager has to engage ESPs commitment to implementing process via performance-based
business models. In this way they can build their capacity to implement future energy
projects therefore they can play a positive role in the development of an energy industry.
ESPs provide a wide range of energy efficiency solutions in order to design and establish
energy saving projects.
Develop approaches for project aggregation in order to reduce transaction costs. Since
the transaction costs of EE projects are considerably high, the EERF can identify similar
projects across public agencies and aggregate them in order to reduce transaction costs.
Develop and document the monitoring, reporting, and evaluation procedures and
approaches. As it was discussed before, these are of high importance activities that must
be developed by the fund.
2.3. Examples from other Countries
This section provides some insight regarding three energy efficiency revolving funds in
various territories namely in Thailand, Bulgaria and China which may be employed in
designing and creating the UNIDO energy efficiency revolving fund in Iran.
2.3.1. Thailand’s Energy Efficiency Revolving Fund
Thailand’s Energy Efficiency Revolving Fund started its operations in January 2003 to
motivate financial sector take part in financing EE projects. The fund raises its capital from
Energy Conservation Promotion Fund (ENCON Fund) which was established based on the
Energy Conservation Promotion Act (ENCON Act) passed in 1992, representing
guidelines for Thailand’s energy conservation and renewable energy policy. The initial
amount of money allocated to the Thailand’s Energy Efficiency Revolving Fund was THB
2 billion (USD 50 million) which was determined according to Energy Efficiency market
appraisal and discussions with the banks. The Department of Alternative Energy
Development and Efficiency (DEDE) known as the primary government agency
responsible for implementing energy efficiency under the ENCON Act, issued credit lines
to six major commercial banks from the Energy Efficiency Revolving Fund within the
range of THB 100 to 400 million (USD 2.5 to 10 million).
The EE Revolving Fund receives its capital from ENCON Fund for a 10 year period and
makes it available with zero interest rate to Thai banks, banks then lend this money to the
10
proponents of Energy Efficiency projects at a fixed interest rate less than 4% annually
(which is lower than their usual lending rates) based on the financial position of the
customer. If the applicant is creditworthy and has a good banking history the interest rate
may be as low as 2.7%.
Facilities Eligible for Funding
When the fund started its activities, only designated facilities under the ENCON Act were
eligible to apply for funding their EE projects but in 2004, the eligibility criteria was
extended allowing commercial or industrial facility, whether or not it is a designated
facility, and even third parties such as Energy Service Companies (ESCOs) apply for loans.
Banks are not willing to lend money to third parties since they do not own land, buildings
and equipment and therefore they cannot provide collaterals. The maximum loan size is
THB 50 million (USD 1.25 million) per project to make sure that fund’s capital will be
used for a large number of medium-sized projects such as replacing the air conditioning
chillers of a commercial facility rather than only a few large projects.
Administration
Banks are in charge of the total lending process for financing EE projects including
marketing, economic appraisal, credit approval and repayments in case of default by
customers. In order to provide conditions for DEDE to be able to track the use of funds and
the level of investments in Energy Efficiency projects and equipment, banks are required
to prepare and submit regular reports of the projects.
Establishment of the fund
The notion of creating a revolving fund came from The Industrial Finance Corporation of
Thailand (IFCT) which is a private bank specialized in providing banking services to the
industrial sector customers. IFCT participated in a project funded by The World Bank to
replace air conditioning systems with higher energy efficiency models in 2001. The process
of acquiring the loan was so complicated that motivated a senior manager of IFCT to take
a proposal to DEDE for a simpler loan program to finance all kinds of Energy Efficiency
projects and finally led to the evolvement of an Energy Efficiency revolving fund. During
2002, a contract was established between DEDE and banks involving in the fund. There
were 4 banks participating when the fund started its activities in 2003 but there are now 6
banks operating in the fund. The lending process of the fund includes 6 stages which are
shown in fig 2. In the first stage, the eligibility of the fund has to be identified, after the
identification; a feasibility study assisted with a technical adviser has to be carried out by
the facility owner. If the bank accepts the feasibility study, the facility owner would apply
for the loan through a participating bank. In the second stage, the bank investigates the
11
project and carries out a financial and technical (in case of possibility) analysis. If the
results are acceptable, the bank passes on the application to DEDE. In the next stage, DEDE
evaluates the project and makes a decision about whether approving the project according
to the criteria and then notifies the bank whether or not the project has been approved, if
the project has been accepted by DEDE. In the fourth stage, the bank approves a loan and
submits a repayment schedule to DEDE so it can plan for the disbursement of funds from
the ENCON Fund to the bank so the applicant receives the loan and invests in its EE
project. In the last stage, the borrower has to pay back the initial investment plus interests
on the debt and also has to submit reports on Energy savings occurred as a result of
implementing the project. The bank will return the principal to DEDE in 7 days and then
DEDE pays the funds back to ENCON Fund.
Figure 2. Lending Process for the Energy Efficiency Revolving Fund
Both DEDE and banks take part in education, publicity and promotion related to Energy
Efficiency Revolving Fund. For example, DEDE runs seminars periodically and invites
participant banks to contribute. The bank identifies the capacity of applicants in returning
the loan based on their banking history. Banks usually require a mortgage over a land,
building or equipment owned by the applicant which is usually linked to the facility that
the Energy Efficiency project aims to be implemented. The problem would occur when the
applicant is a third party whose does not own any asset to use as collateral. Even some
small and medium sized enterprises may not have the ability to provide enough collateral
12
and therefore a few banks may be willing to pay loans. The technical analyses of the
projects are performed either by DEDE or banks, whichever one that has technical staff.
The total number of Projects that Received Loans from the Energy Efficiency Revolving
Fund until June 2005 (phase 1) were 66. In Investigating the performance and results,
statistics show that every dollar lent from the fund resulted in more than 10 dollars energy
cost savings. A central principle of the new programs is to shift Responsibility for
implementation away from DEDE and then let outside parties be responsible for.
2.3.2. Bulgarian Energy Efficiency Fund
The Bulgarian Energy Efficiency Fund (BEEF) is an independent legal entity created in
2005 in accordance with the provisions of the Bulgarian Energy Efficiency Act (EEA) of
2004. Since Bulgarian banks had not enough liquidity and credit risk appraisal tools to help
financing EE projects, the BEEF was designed to provide loans and partial credit
guarantees. The BEEF is a revolving mechanism that facilitates EE sector investment
process and promotes the development of an EE market in Bulgaria; it is a non-profit
organization and is supported by Global Environment Facility (GEF). The initial amount
of money allocated to the BEEF was US$10 million received from GEF which was formed
to assist the establishment and operation of the BEEF as a public-private financing facility.
Institutional Set-Up
The principal organizational structure of the Fund is presented in figure 3.
Figure 3. Organizational structure of Bulgarian Energy Efficiency Fund
13
Donations from the Bulgarian and foreign governments, international financial institutions,
international funds, interest income from current accounts or bank deposits opened by
BEEF, Loans or other credit facilities from international organizations and banks are used
as a finance sources for fund operations.
The management board (MB) of the fund which acts as the governance body is consisted
of representatives from both private and public sector with adequate knowledge and
expertise. The MB governs the overall operations of BEEF and is in charge of the strategic
direction of the Fund’s activities. The MB appoints the fund manager (FM) which is an
organization or company with sufficient experience in project management, EE appraisal,
financial structuring and procurement of EE projects. The entire daily activities of the fund
are under supervision of the fund manager. Identifying, developing, structuring and
assessing the eligible EE projects for financing, organizing and implementing technical
assistance (TA) initiatives, managing the fund’s financial resources, monitoring, reporting
and budgeting are from the FM responsibilities. The executive director (ED) is appointed
by the FM that implements administrative functions of the fund such as Intermediation
between the FM and the MB, reviewing of project proposals before submission to the MB
for approval, Reporting to MB on project pipeline development and results achieved.
Financial products
The BEEF offers three main products including, Partial Credit Guarantees (PCGs), co-
financing loans and technical assistance. PCGs are provided in favor of EE project lenders
(FIs) whereby BEEF provides assurance of repayment of the guarantee-covered amount in
the case of default by the borrower. Co-financing loans are offered to creditworthy
customers for sustainable EE projects and technical assistance component covers financing
activities in initial project pipeline development (including partial support for energy
audits) and project appraisal, workshops for potential co-financiers and customers,
marketing and dissemination of information, training of FM and partners of the Fund
(banks, ESCOs, consultants) in EE project development and financing techniques. It also
covers fund administration meaning to finance set-up and running costs of the Fund during
the first four years.
The project cycle
Project Identification: In this phase the ideas for EE projects eligibility in order to support
BEEP are identified. The outcome of this phase will be a list of pipeline projects for further
development and assessment.
Initial Project Screening: during this phase the potential projects will be allocated to
different project coordinators for further development. The target of this phase is to provide
14
information for ED in order to be able to evaluate and assess if the submitted project meets
the eligibility criteria of the BEEF.
Comprehensive Project Appraisal: the sustainability of the project from financial,
technical, EE and environmental aspects will be investigated by the financial manager. The
project should be feasible in all mentioned areas to be able to get BEEF’s support and
money allocation.
Financial Structuring of the Project: the project coordinator has to start working on the
financial structuring of the project after its pre-approval. Therefore, discussions will be
needed to take place in order to clarify the financing terms of the project together with the
partner co-financiers in a way that best reflected the specific characteristics of the
individual project.
Project Approval: the executive director will submit the complete documentation package
related to the project financial structuring to the MB. The management board will then
investigate and review the whole submitted documentation in order to approve or reject the
project if it is not in the eligibility criteria.
Financial Closure and Disbursement: when the MB approves the project, the transaction
agreement will be signed and the disbursement of funds will be carried out based on the
procedures specified in the Project Financial Management System Manual.
Project Monitoring: the financial manager through the project coordinator is in charge of
periodically collecting data in order to monitor the performance of each project to make
sure that the receiving funds are utilized in compliance with the financing conditions and
to serve as an early warning system for potential financial distress.
Credit Recovery Procedures: in case of any problem occurrence monitored by the project
coordinator such as operating in breach of the agreed terms or showing early warning signs
of difficulties in financial performance or the ability to realize the planned energy savings,
The Project Coordinator will be responsible for providing effective problem credit
administration by early detection of potential problems and immediate corrective action.
2.3.3. China Energy Efficiency Financing Project
The China Energy Efficiency Financing (CHEEF) Project consists of three phases. The
first phase is the CHEEF I project which concentrates on improving Energy Efficiency of
medium and large enterprises in China in an effort to reduce their adverse environmental
effects on climate. This phase was approved by the World Bank board in 2008 and the
15
sources of finance utilized for obtaining this objective which is one of the highest national
priorities of the government of China, come from two International Bank for
Reconstruction and Development (IBRD) loans of US$100 million and a Global
Environment Facility (GEF) grant of US$13.5 million for technical assistance to the
government and two participating banks. The second phase, the CHEEF II project was
approved in 2010 with an IBRD loan of US$100 million to “Minsheng” Bank and the third
phase, the CHEEF III project was designed for an additional financing with a loan of
US$100 million provided from IBRD to China EXIM Bank and was approved in 2011.
Since EE investments are small with high transaction costs, the expected Energy savings
related to them may not be realized, financial institutions do not have the required expertise
and willing to develop the EE business line and finally the local banks prefer large-scale
borrowers with good credit ratings or high levels of collateral, CHEEF was established and
designed to facilitate EE financing and build capacity of local banks for EE lending.
The CHEEF has two main parts. The first part includes a credit line in which IBRD
provides about US$400 million loan to three Chinese banks including China EXIM Bank,
“Huaxia” Bank, and “Minsheng” Bank. Technical assistance with support from GEF in
order to enable and support national EE policy is another part of CHEEF. Technical
assistance focuses on training and capacity building of staff for evaluating EE investment,
seeking ways to develop new financial products for ESCOs lending, carrying out studies
on market segment to stretch out the end-user sector and provide SMEs and projects with
tools for market aggregation.
Only large and medium sized enterprises with a total revenue of at least Y 30 million
(US$4.7 million) were eligible to borrow from participating financial institutions (PFIs) in
the first and second phases of CHEEF but in the third phase the eligibility criteria was
extended in which the industrial enterprises of all sizes, ESCOs and owners of buildings
such as office buildings, shopping centers, multifamily residential complexes, and other
commercial and public buildings can borrow from PFIs to run their EE projects. The
Project Eligibility criteria include renovation and rehabilitation of existing systems which
cause to Energy Efficiency. PFI underwriting criteria rely heavily on the borrowers’ credit
rating and follow the eligibility criteria in the CHEEF Operational Manual. PFIs assume
all risks.
16
3. Review of Previous Reports
The main objective of this section is to review the previous tasks which are done on
UNIDO/GEF project "Industrial Energy Efficiency in Key Sectors" and give brief
information regarding to the outcomes. This section provides a summary of local expert
report1 and the consultant comments2 and feedbacks on that. In addition, the Consultant
recommendation and limitation of local export report are presented.
The local expert report provided an analysis and proposing the framework of energy
efficiency project financing in Iran. He considered targeted industries in which E/E projects
could be devised, including cement industry, oil/refinery and petroleum industry and steel
production industry.
In order to draw a brief quick review of energy efficiency rules and available supportive
programs, the local expert report mapped of all funded program supporting E/E investment
and the pillars of the international efficiency systems in Iran and their duties. The
institutions are strategic council, council of the directors of efficiency committee,
professional institution of evaluation and monitoring. In this report the author also outlined
the legal references and main general strategies of energy efficiency in industrial divisions.
Besides, the report provided analysis of policies and results of energy efficiency in Iran.
Based on this analysis, three main categories of energy efficiency policies are defined,
including informative policies, encouraging policies and punitive policies.
According to local expert report “industrial energy efficiency (EE) in key sectors” Iran has
a combination of government-based and private sector economy where financing system
is totally bank-oriented in which life insurance companies are not involved in financial
system. In addition, non-banking companies in Iran are not allowed to lend money but it is
possible for them to invest in projects directly. Moreover, recent development in Iran
capital market presented new financing methods. Due to Islamic (sharia) rules, some
financial instruments are prohibited to apply3 and sharia compliant finance should be
considered in implementing the project. According to this report, lending rate of Iranian
financing system is between 21 and 28 percent. Furthermore, averaged duration of lending
is between 6 and 60 months.
The aforementioned report also reviewed lending mechanism of banks and capital market
of Iran and based on this information the number of lending methods, which are appropriate
1 . 2014- Mohammad Mahdi Samavaty
2 . 03/2015-Kommunalkredit Public Consulting GmbH
3. Sharia prohibits acceptance of specific interest or fees for loans of money (known as riba, or usury), whether the payment is fixed or floating.
17
for this project, is suggested. Among them, the most common lending schemes in Iran
which can be applied for this project are listed as below:
Qard Hassan
- Terms: between 6 and 36 months
- Interest rate: zero-2-4 percent commission
- Condition: there is not specific condition
- Collateral: Usually individual guarantee the borrower.
Musharakah
- Terms: between 6 and 60 months
- Interest rate: between 25 and 28 percent
- Condition: In this type of financing the project is considered as a joint-
venture project while the lender based on borrower performance will receive
at least 25-28% expected return
- Collateral: A fixed asset, real estate, stock or bonds.
Mudarabah
- Terms: Between 6 and 60 months
- Interest rate: Between 25 and 28 percent
- Condition: Based on commercially activities expected return will be
provided
- Collateral: Normally a fixed asset, real estate, stock or bonds.
Leasing
- Terms: Between 12 and 36 months
- Interest rate: Between 28 and 33 percent
- Condition: capital goods
- Collateral rules: A whole leased goods is collateral form.
The proposed framework is subject to given information, analysis and existing financing
schemes and environmental initiatives programs in Iran. The model concentrates on
financing of E/E projects through establishment of an NGO and using a bank with available
funds in the money market. An NGO would perform as a legal entity in order to support
E/E plans in Iran. Organization of the NGO requires a number of teams, including
executive committee, financial committee, technical committee and compliance and
supervision team.
Technical committee is responsible of energy efficiency proposals, business models and
action plans of applicants in field of cement, steel, oil refinery and petrochemical
industries. The primary outcome of this committee is approval or denial of the E/E projects.
18
Financial committee is in charge of allocating financing and fund for the approved projects
and cash flow management.
The executive committee would indicate execution plans consists of required steps for
implementing E/E projects. Compliances and supervision of all primary proposals are done
by compliance and supervision department (team).
The report recommended a board of nine directors in two forms of executive and non-
executive members. Executive members organize and handle interactions and operations
of NGO. They are also responsible for monitoring whether allocated funds are sufficient
to E/E plans. Moreover, executive members single out the final projects. In the board of
directions president (head of board executive), vice president, CEO, technical directors,
financial directors (a member of financial committee), and executive director (a member
of executive committee) are involved.
However, non-executive committee gives advice on final decision regarding to acceptance
or rejection of each project. UNIDO representative, Iran Fuel Conservation Company
(IFCO) representative, compliance and supervision director (a member of compliance and
supervision department) are involved in this committee.
The report drew the working process of establishing the given company, which would
establish through the office of registration of companies and non-commercial organizations
in the form of an NGO. Next, the report implied that agent bank could be selected among
the number of private and public banks in Iran. Consequently, funds are allocated to the
projects by means of a network of sponsors under supervision of IFCO and UNIDO. E/E
proposals are singled out by the committee of NGO and moneys installments are flourished
to the selected proposals.
Local expert report also suggested that source of financing could be available through
domestic and international sponsors which are interested in energy efficiency programs.
Indeed, the report mentioned that funds (in dollars) would be transferred monthly into the
banking account of the NGO. Also domestic sponsors are organized by IFCO.
Accumulated funds will be deposited in a one-year deposit account with a 22-percent
interest rate.
Under Iranian banks and capital market rules and regulation the proposed model is
developed. The report believed that at the present time the proposed framework might be
the one and only practical model in Iran. It is estimated that founding this method would
be less than two months.
19
3.1. Limitations and Recommendations
Based on previous tasks some limitations should be considered in creating the financial
scheme. In the first meeting with the representatives of Bank “Pasargad” and “Mellat”
bank, it is concluded that private banking sectors are interested in investing green-type of
projects rather than brown fields. Another limitation of the project is lack of performing a
full financing market assessment which is recommended by GEF in Iran. Moreover, high
interest rate and low/subsidized energy prices cause that industrial companies consider E/E
projects as low-priority investments. However, Energy subsidies are started being phased
out in the coming years and it can be expected this policy (E/E project) will have significant
impact on the EE investment projects returns. While based on IFCO meeting, the scope of
the E/E project needs to be widening to encompass SMEs as well, the project which is in
progress does not cover Small and Medium Sized Enterprises (SMEs).
Considering above mentioned issues recommendations could be implemented according to
local expert and the Consultant's view. After the first version of the local expert report was
reviewed by consultant, the most challenging remarkable feedback regarding to the report
was that it did not take account of any discussion on current hindrances for existing bank
lending methods to industrial companies. The local expert report also did not identify how
to overcome this challenge. Thus, the consultant recommended launching revolving fund
for E/E projects in Iran with one or two pilot projects. In order to indicate a bankable project
proposal in close cooperation with an industrial company and to provide financial
structuring services to approach and negotiate with external financiers a financing package
which needs to be devised. Afterwards, based on this pilot’s outcomes, a number of target
financing approaches could be developed. The consultant also highly recommended
implementing the project website in order to smooth the communication with stakeholders
and interested companies.
To set up a revolving fund, the Consultant recommended phased approach to implement.
The main steps of this approach are as following:
Select at least one interested company,
Develop a bankable investment project proposal with UNIDO and IFCO support
including energy audit, business plan, and cash flow projection and financing plan.
Provide support to the company how to approach agent bank, presenting the project
and negotiating a loan package.
The challenging part of the local expert report was that the report did not clearly address
the appropriate financial instruments. The consultant recommended starting with pilot E/E
projects, in which parts of the GFF-fund are applied a technical assistant in order to
20
structure the pilot projects, rather than establishing a new fund and to avoid neglecting
indication of market barriers, a phased approach for the optimal fund structure is
recommended. Therefore, local expert strongly recommended to consider availability of
financing instruments to support E/E projects as listed below:
- Investment Grants,
- Grant funded technical assistance,
- Credit lines,
- Dedicated debt with legal personality,
- Partial credit guarantees/first loss coverage.
4. Preliminary Meeting with Financial Institutions
One of the most important factors that enhance the likelihood of revolving fund
achievements to its goals is to take into account the banks and financial institutes criteria
and conditions prior to the fund establishment. Thus, in this study a number of structural
interviews with some banks and financial institution are conducted in order to shape and
implement the fund in an appropriate way. The outcome of interviews implies that is
necessary to consider flexibility element in several key issues, including:
1. The given amount could not motivate banks to make a significant contribution in
this project merely. However, banks contribution ratio in comparison with UNIDO
is rather higher which decreases bank desire to cooperate effectively.
2. Iranian banks do not have authority to determine interest rates, thus providing lower-
interest-rate loans is completely done through UNIDO sources.
3. Banks would absolutely prefer to assign the fund sources to their current customers
rather than new ones, since the credit assessment, due diligence and collateral
process could be carried out straighter forward. In addition, the field in which banks
deliver services to their clients may not be within and broaden than the scope of
UNIDO targeted industries.
4. UNIDO expects that flexible policies are implemented to pledge that are held on the
premises to the banks. Banks and financial institutes are reluctant to alleviate the
conditions of collateral requirements. However, current and loyal customers might
be rather preferable towards the banks. Moreover, banks suggest that any reduction
of collateral either by amounts or associated risks should be covered by UNIDO.
5. Regarding to risk management issues and Islamic financing concept, banks would
prefer that applicants provide a segment of loan amount by themselves.
21
6. Under circumstances that the required sources are provided by external sponsors
thoroughly and on behalf of banks fund management role, they accept other
conditions devised by the other side.
7. It seems that the majority of large public banks and small private banks are less
willing to enter in this field.
Energy Efficiency Revolving Fund
Proposed Financial Scheme for Iran
UNIDO/GEF Project
"Industrial Energy Efficiency in Key Sectors"
December 28th, 2015
2
Contents
1. The Framework of EE Revolving Fund ............................................................................................ 3
1.1. Projects Eligibility for Funding ..................................................................................................... 4
1.2. Use of Loan Funds ........................................................................................................................ 4
1.3. Administration .............................................................................................................................. 5
1.4. Major Responsibilities of the Bank ............................................................................................... 5
1.5. Lending Process for the Fund ........................................................................................................... 7
1.6. Technical Assessment and Financial Assessment of Loan Applications ...................................... 8
1.7. Payment Periods, Interest Rate and the Portfolio of the fund ....................................................... 9
1.8. Operational Expense ................................................................................................................... 11
1.9. Ownership of the Fund Project Completion................................................................................ 11
Annex I: Project Identification Form ...................................................................................................... 12
Annex II: Assessment Form ..................................................................................................................... 15
Annex III: Appraisal Form ...................................................................................................................... 27
Annex IV: Terms of References ............................................................................................................... 30
Tables and Figures Table 1: Lending Process for the Fund ......................................................................................................... 7
Table 2: Fund Lending Interest Rate According to the Rate on UNIDO Contribution .............................. 10
Table 3: Time Value of UNIDO Contribution, Considering Inflation ........................................................ 10
Table 4: Table 3: Time Value of UNIDO Contribution, Considering Risk Free Rate................................ 10
Figure 1: Structure of the Fund (Service Payment) ...................................................................................... 3
Figure 2: Structure of the Fund (Loan) ......................................................................................................... 4
3
2. The Framework of EE Revolving Fund
Based on GEF and UNIDO mission, the main objective of the fund is to finance energy
efficiency projects in Iran in order to support investment in energy efficiency activities and
to promote the development of an EE market in the country. The fund operates as a
profit-oriented business which offers lower-than-market interest rate loan.
The initial size of the fund would be 4.5 million dollars. The financial resources are
received by UNIDO from Global Environmental Fund (“GEF”) is equal to 1.5 million
dollars and the rest is financed through the bank resources (or other co-financier). On behalf
of the government, Iranian Fuel Conservation Company (IFCO) provides technical
assistance to the fund.
The structure and mechanism of governance is created as simple and practical as possible.
Based on the relationship between parties including, Energy Service Providers and Energy
Efficiency Projects, the principal structure of the fund are graphically presented as Figure
4 and Figure 5.
In Figure 4, it is assumed that there is not any direct loan to Energy Efficiency Project
while the revolving fund provides Energy Service Providers with service payments sources
in order to enable them to support EE projects by installation energy efficiency services.
However, EE projects beneficiaries would make repayments.
Funding Sources
GEF Bank
Others
Energy Efficiency
Projects
(Beneficiary)
Energy Service
Providers
Funding
Loan
Repayment
Installation
/Energy
Services Service
Payments
Figure 1: Structure of the Fund (Service Payment)
4
In figure 5, the mechanism of revolving fund is devised based on direct loan which is
assigned to EE projects beneficiaries. While first structure is preferable the second structure
seems to be more practical in the current situation.
2.1. Projects Eligibility for Funding
While the fund prefers to finance five key industrial sectors namely oil Refineries,
Petrochemicals, Iron & Steel, Cement and Brick, the scope of the eligible projects are not
limited to those sectors and will cover other industrial sectors and SMEs1. Projects which
implement energy efficiency are eligible for a loan from the fund and include, but not
limited to:
Retrofit energy saving projects;
Reduction of greenhouse gas emission through energy efficiency;
Energy performance improvement project;
Energy conservation projects.
2.2. Use of Loan Funds
Loans from the Energy Efficiency Revolving Fund may be used for:
Engineering design and supervision fees, and any savings guarantee fee payable to
an ESCO2;
Purchase, procure, supply and installation of equipment and tools;
1 Small – Medium Enterprises 2 Energy Services Companies
Funding Sources GEF
Bank
Others
Energy Efficiency
Projects
(Beneficiary)
Energy Service
Providers
Funding
Loan
Repayment
Service Contract /Payment
Installation
/Energy Services
Figure 2: Structure of the Fund (Loan)
5
Technical assistance and advice for proper installment of the purchased equipment;
Transportation costs, demolition costs, import taxes and duty and any value added
tax (VAT) associated with above mentioned costs.
Any other costs associated with the projects which are necessary and unavoidable.
More details regarding the eligibility criteria and the use of fund will be determined by
technical committee of the fund. However, the fund does not finance the following types
of projects and expenditures:
Research Based Project;
Projects focused on renewable energy resources;
Operational costs of projects including raw materials, fuels or salaries for own staff;
Rental payments and purchases which are not directly linked with the EE projects.
2.3. Administration
In close coordination with UNIDO, the bank is responsible for the entire day-to-day
operation and management of the fund. Except as otherwise stated herein, the bank is
responsible for implementation of the project cycle, managing the revolving fund
according to the agreed procedures, monitoring the utilization of the fund, managing the
disbursement and recovery of loans, and providing statements and reports as stipulated in
section 5.4.1. The bank is also responsible to sign contracts with other co-financing
partners and the beneficiary (borrowers).
Technical committee is formed by UNIDO, Iran Fuel Conservation Company (IFCO) and
the bank representatives and in addition to other roles are defined in other parts of
this section (section 5), technical committee is responsible for technical assessment of the
projects, providing technical assistance to the bank and the beneficiary and ensuring that
the projects are compliant with the main objective of the fund. The primary outcome of
this committee is approval or denial of the E/E projects on the grounds of technical criteria
of the fund.
On the other hand, financial committee will be designated by UNIDO and bank and, it is
in charge of financial assessment of the projects and is formed by the bank and UNIDO
representatives. All other co-founders may participate in financial committee. The financial
committee monitors the performance of the fund to ensure that it performs as effective as
possible. The primary outcome of this committee is approval or denial of the E/E projects
based on financial criteria of the fund. Other responsibilities of the committee maybe
defined in other parts of this section (section 5).
6
2.4. Major Responsibilities of the Bank (Required Services)
In addition to the role of the Bank that is defined in other parts of this section (section 5),
the participating bank is required to:
Open a project account, with two signatories to the fund;
Convert the fund of GEF/UNIDO in the amount of US$ 1,500,000 into the revolving
fund in IRR3 in accordance with the official exchange rate4;
Provide equivalent amount of US$ 3,000,000 as co-financing through the Bank
resources;
Offer a flexible interest rate on the fund which will be fixed annually upon
agreement between UNIDO and the Bank. In addition, if Central Bank of the Islamic
Republic of Iran imposes new regulation regarding to interest rate, the fund’s
proposed interest rate maybe revised. The Bank shall inform UNIDO within two
weeks;
Confirm reconsidering the funding terms for contribution of other co-financers;
Consider, in case of termination of the cooperation before July 2017, unutilized
balances shall be immediately returned to UNIDO, within maximum 30 days of the
termination notification;
Calculate the interest on UNIDO resource which will be added to the fund and report
it to UNIDO annually;
Provide reports as stipulated in below (subsection 5.4.1).
2.4.1. Reporting Requirements
According to bank responsibilities (section 5.4.), the bank is required to submit some
reports to UNIDO as below:
First progress report within one month of the contract signature providing the
structure of the fund and confirming the opening of a bank account dedicated for
the revolving fund (100% upfront payment);
Quarterly progress reports providing the financial statement of the interest
earned and a financial statement showing the utilization of the fund, financial status
of the main payments and technical overview. A template will be agreed upon
agreement of both parties. However, these reports will include, for each loan;
The total amount of the loan;
The total of repayments already made by the Beneficiary;
Information about the next repayment due;
3 Iranian Rial
4 Official Exchange rate is set by Central Bank of Islamic Republic of Iran
7
Projections of future drawdowns and repayments.
Final report to be submitted at the end of the contract providing the final
audited financial statements for the project using the same format and structure as
Quarterly progress reports. At the end of the contract and upon the written consent
of both, the management and ownership of the fund shall be signed off by UNIDO
to IFCO or any other governmental entities nominated by IFCO.
2.5. Lending Process for the Fund
The loan cycle will consist of the following steps:
Table 1: Lending Process for the Fund
Required time Responsible Activity Steps
Four weeks UNIDO and IFCO
Beneficiary under
UNIDO supervision
Open call for proposal
Project identification Form
(Pre-feasibility Study)
Project
Identification
Two week Technical Committee
Bank
Agreement on eligible
pipeline
Assessing credit worthiness
and guarantees
Initial
Screening
Four weeks Beneficiary under
UNIDO supervision
Technical Committee
Financial Committee
Full feasibility study
Technical approval
Financial approval
Project
Appraisal
Two week
Bank
Signature of the loan
contract with beneficiaries
which includes guarantees
and payment mechanism
Financial
closure and
disbursement
On an ongoing
basis
Bank
UNIDO and IFCO
Management and monitoring
of disbursement and
recovery of the loan
Measurement and
verification of energy saving
and GHG emission
reduction
Project
Monitoring
On an
ongoing
basis
Bank
Provide statements,
quarterly and final reports as
stipulated in subsection 5.4.1
Project
Reporting
8
The guidelines for characteristics and criteria for selection of eligible beneficiaries and EE
projects which require various templates will be further elaborated during the inception
phase by Technical Committee which will be introduced in three weeks after signature of
the contract.
Project identification involves the identification of an EE project which may be eligible for
receiving a loan from the fund. The format of Project identification form determined by
Technical Committee, will be prepared by the potential beneficiaries and submitted to
Technical and Financial Committees. Once an EE project has been identified, initial
screening is carried out by Technical Committee and the bank, in order to provide a short
list of potential projects (and also beneficiaries) after which for project appraisal, a detailed
feasibility study shall be prepared by the beneficiary. The template of full feasibility study
will be determined by Technical and Financial Committees.
Financial approval is attained to determine whether projects and measures are financially
feasible. If the results of the technical and financial assessments are acceptable and
approved, financial closure and disbursement begins with signature of the loan contract
between the bank and the beneficiary, including guarantees and payment mechanisms.
Afterwards, the beneficiary makes repayments of loan principal and interest to the bank.
UNIDO, IFCO and the bank monitor the project implementation and finally the Bank
provides required reports (according to subsection 5.4.1).
2.6. Technical Assessment and Financial Assessment of Loan Applications
2.6.1. Technical Assessment
Technical assessment of loan applications may be made by the technical committee and
the committee will determine detailed criteria, however the following criteria should be
considered as the minimum requirement:
The project is in line with the objective of the fund;
The proposed energy efficiency measures are feasible;
There is sufficient information to validate the estimates of energy savings;
Estimations of energy savings are reasonable;
Implementation schedules are achievable and do not exceed twelve months;
The lifetime of the project should be at least six years (at least twice the payback
period);
Proposal shall include a statement of measurement and verification (M&V) plan of
energy performance improvement for before and after implementation of the
project;
9
The amount of GHG reduction shall be clarified.
The project should meet the minimum level of energy efficiency in GJ/year or
kWh/year which will be determined by Technical Committee;
The committee also considers the scale, complexity, technology of the project in the
assessment. As a result of the comprehensive technical assessment of the project, the
committee approves or denies the request.
2.6.2. Financial Assessment
Financial committee is responsible for financial assessment of loan applications. In
assessing loan applications, principal eligibility criteria are listed as below however the
committee may add (or even change) some criteria in order to achieve more reliable
assessments.
There is sufficient information to validate the estimates of feasibility study;
Assumptions and estimations are reasonable and calculations are accurate;
Financial projections are achievable;
Project developer is able to co-finance at least between 20% and 30% of the total
project costs;
Calculations should be based on incremental cash flows;
The payback period of the project is not more than three years (investment cost and
energy prices will be calculated based on the date in which the proposal is
submitted);
The project should be accepted if its net present value is positive.
The discount rate should be at least 26% (considering (guaranteed) the fixed income
rates and risk premium);
Internal rate of return (IRR) should be 35% and more;
Debt ratio of the applicant should not exceed 90% after allocation of the loan;
Life cycle cost assessment of the project shall be added to the proposal of the project.
As a result of the comprehensive financial assessment of the project, the committee makes
a recommendation about the financial feasibility of the project and may approve it.
Creditworthiness of applicant is assessed by the participating bank and the bank may use
its regular lending criteria to carry out the assessment concerned with two main issues in
assessing loan applications which are the capacity of the applicant to make repayments of
loan principal and interested in accordance with an agreed repayment schedule; and the
value and quality of the collateral offered by the applicant. However, it is highly
recommended to facilitate the procedure as much as possible.
10
2.7. Payment Periods, Interest Rate and the Portfolio of the fund
The period over which the loan is provided would be three years and the repayments are
monthly. The interest rate for the applicant is suggested to be 20.5% which is the weighted
average of the interest rate on bank contribution (being 24% according to the Central Bank
of the Islamic Republic of Iran) and interest rate on UNIDO contribution (being 13.5%
based on expectations of future inflation). The given rate may be revised subject to
alteration of the regulations and inflation. Since, the banks are not flexible in terms of
interest-rate; UNIDO may reduce the interest rate of its own portion to offer more attractive
lending interest rate to potential applicants. Table 2 shows fund lending interest rate
according to the rate on UNIDO contribution.
Table 2: Fund Lending Interest Rate According to the Rate on UNIDO Contribution
Rate on UNIDO
Contribution 0% 6% 8% 10% 12% 13% 14%
Fund Lending Interest Rate 16.00% 18.00% 18.67% 19.33% 20.00% 20.33% 20.67%
While lowering interest rate may seem to be a good option to have more applicants,
purchasing power of the money is the issue that should be considered especially in
countries with high inflation rate. Table 3 provides more information regarding the various
interest rates to be proposed using 14% as the discount rate and proxy of expected inflation.
Table 3: Time Value of UNIDO Contribution, Considering Inflation
Proposed
rate
Time Value of UNIDO Contribution
1st Year 2nd Year 3rd Year 4th Year 5th Year 6th Year
0% 1.32 1.15 1.01 0.89 0.78 0.68
6% 1.39 1.30 1.21 1.12 1.04 0.97
8% 1.42 1.35 1.28 1.21 1.14 1.08
10% 1.45 1.40 1.35 1.30 1.25 1.21
12% 1.47 1.45 1.42 1.40 1.37 1.35
13% 1.49 1.47 1.46 1.45 1.44 1.42
14% 1.50 1.50 1.50 1.50 1.50 1.50
However, if 21% as the risk free interest rate is utilized, the outcome would be different.
Based on the fact that the propose of the contribution is not investment, but helping EE
projects; the outcome based on 21% is not exactly relevant for decision making, however
it is still insightful.
Table 4: Table 5: Time Value of UNIDO Contribution, Considering Risk Free Rate
Proposed
rate
Time Value of UNIDO Contribution
1st Year 2nd Year 3rd Year 4th Year 5th Year 6th Year
11
0% 1.24 1.02 0.85 0.70 0.58 0.48
6% 1.31 1.15 1.01 0.88 0.77 0.68
8% 1.34 1.20 1.07 0.95 0.85 0.76
10% 1.36 1.24 1.13 1.02 0.93 0.85
12% 1.39 1.29 1.19 1.10 1.02 0.94
13% 1.40 1.31 1.22 1.14 1.07 1.00
14% 1.41 1.33 1.25 1.18 1.11 1.05
The financial resources of the fund should comprise at least three various industries and
the maximum share of each industry may not exceed 30% of the fund resources. The
maximum share to be allocated per application is 25% of the fund resources.
2.8. Operational Expense
Any expenses incurred due to operation of the fund and to be paid for that should be agreed
upon in advance by all co-founders. All payments for project assessment and external
consultants will be made by the applicant(s). The bank will receive one present (1%) of the
total contribution as the management fee and payments are made in the beginning of each
fiscal year.
2.9. Ownership of the Fund Project Completion
As part of the contract closure and three months prior to the contract end, a hand-over
protocol should be prepared by UNIDO, IFCO and the bank. The ownership of the fund
shall be transferred to IFCO or any other governmental entities nominated by IFCO based
on the agreed protocol. The protocol indicates how the relationship between the
government of Iran and the bank shall be regulated and describes related liabilities.
12
Annex I: Project Identification Form
Project identification Form
Energy Efficiency Revolving Fund
................................................................................................
[Company Name]
........................................................................
[Province, City of Registered Company and Company Registration Number]
…………………………………………………………………………………….
[Address, Tel and Postal Code]
13
Project Title:
Project Objective:
Project Owner(s):
Project contactor:
Project duration (Months):
Energy Efficiency Measure Information
Indicate the site name that will be affected by Energy efficiency project.
Indicate the technology type.
Indicate Expected Costs and Grants.
Site Name Technology Type
Brief
Description of
Proposed
Technology
Expected
Duration
Expected
Costs
(MRLs)
Expected
Finance
(MRLs)
Replaced
Add-On
New Technology
Replaced
Add-On
New Technology
Replaced
Add-On
New Technology
SUM
Project Management Cost
Total Project Cost
14
Financing Plan Summary For The Project (MRLs)
Description 1st month 2nd month 3rd month 4th month 5th month 6st month
Expenditures
Design
Equipment delivery
Construction and installation
Commissioning activities
Total
Funding source
Applicant’s participation
Revolving Fund
Other Sources
Total
Declaration on information reliability
Hereby we declare and guarantee that all information provided here and in any other
documents enclosed herewith is true and accurate, provided that such information is
available. We confirm that we have read and fully understood the contents of the
Application Form
Name and signature of the legal representative
Date and stamp
Declaration on consent to provide information to co-financing partners
Hereby we declare our consent that the bank could transfer/release the above information
to the interested partners with the purpose of reporting and analysing the performance of
the project. Partners could be financial institutions, ESCOs, etc.
We give the bank the right to contact any person or company/ institution (including
suppliers and clients) that could offer information useful for the reporting and verification
of the data provided.
Name and signature of the legal representative
Date and stamp
15
Annex II: Assessment Form
Application Form
Energy Efficiency Revolving Fund
................................................................................................
[Company Name]
........................................................................
[Province, City of Registered Company and Company Registration Number]
…………………………………………………………………………………….
[Address, Tel and Postal Code]
16
Section1: General Information
Business Scope
(Based on Article of Association)
Type of Business Entity
Date Business Established
Bank of Business Account and Address
17
Shareholders
(At time of application)
Shareholder Company Type Registration
Number
Number of
Shares
Ownership
Percentage
Total 100
Board of Directors and CEO
Name Position
Years of director/proprietor
management experience within the
industry
Authorized Audit Company:
18
Summary of Financial Statements
(The latest Balance Sheet, income statement and cash flow statement)
Annual Energy Consumption (kWh):
Annual Energy Bill (Million RLs):
Total Numbers of Employees:
(At Time of Application)
Are There Any Court Judgments Against the Business?
Yes
No
Has the business received or applied for any other public sector support within
the last three years?
Yes
No
(If yes, what was the source of this funding? Please include any funding that you are currently applying
for.)
19
Section2. Technical Information
Proposed Energy Efficiency and/or Renewable Measures to Be Installed:
(Please list each individual measure and list any additional measures on a separate sheet of paper and
attach it to this form.)
1. Item (Project Description)
Purchase and installation cost (Million RLs):
2. Item (Project Description)
Purchase and installation cost (Million RLs):
Amount of Loan Requested (Million RLs):
Estimated Start Date of Work:
Planned Completion Date:
(Loans are only valid for FOUR months from date of offer)
Project progress timetable:
Items 1st Month 2nd month 3rd month 4th month 5th month 6th month
Design
Equipment delivery
Construction and
installation
Commissioning
activities
Startup date
20
Application Annual Energy Consumption Data
(Please provide data for the energy types affected by the proposed project e.g. Electricity for a lighting
project. Provision of all site energy data will enable a fuller energy usage analysis to be carried-out for the
customer)
Applicant Annual Energy Consumption Data Energy saving
Row Energy Source Type Units Annual Usage Annual Cost Annual
Saving
Cost Reduction/
Cost Recovery
1 Electric kWh
2 Natural Gas kWh
3 Gas Oil liters
4
5
6
Existing and proposed Technology
(The table can be modified if it is necessary)
Existing Technology
EXISTING EQUIPMENT / INSTALLATION DETAILS
Please complete where applicable or where information isn't detailed elsewhere:
Equipment Make:
Equipment Model:
Equipment Quantity:
Description of Use:
Additional Relevant Information:
21
Proposed Technology
Proposed EQUIPMENT / INSTALLATION DETAILS
Please complete where applicable or where information isn't detailed elsewhere:
Equipment Make:
Equipment Model:
Equipment Quantity:
Description of Use:
Additional Relevant Information:
Please Complete Where Applicable:
Existing Energy Source
Existing Consumption (Please state Units)
Annual Cost (RLs)
Cost Per unit of Energy Source (e.g. kWh, Litre)
Installed capacity of Existing Equipment (kW)
Approximate age of Existing Equipment (years)
Efficiency of Existing Equipment %
Proposed New System Energy Source Type
Cost Per unit of fuel (e.g. kWh, Litre)
Installed Capacity of Proposed Equipment (kW)
Efficiency of Proposed Equipment %
Percentage Savings from Additional Controls
Additional Control Type: Please Specify
Additional Savings kWh/Annum or MJ/ Annum
(if applicable) RLs/Annum
e.g. Reduced maintenance costs RLs
Other: Specify RLs
Other: Specify RLs
Other: Specify RLs
Other: Specify RLs
Other: Specify RLs
22
Section 3: Financial Assessment
Investment Costs
(At least, equipment and installment cost should be disclosed should be disclosed separately)
Proposed Project
Last Estimation
Year 13-- Expenditure Costs Remained Costs
Amount (Million RLs) % Amount (Million RLs) % Amount (Million RLs) %
Total
Local Currency
Foreign Currency
Finance Scheduling
Amounts in Million RLs
Description 1st Year 2nd Year … Total
Total In-flow
Total Out-Flow
23
Projected Income Statement (Million RLs)
(According to Iranian national accounting standards)
Description 1st Year 2nd Year … Nth Year
Existing Proposed Existing Proposed Existing Proposed
Net income
Income Statement Assumption:
(For both existing and proposed scenarios)
24
Projected Cash Flow
Description Initial
Investment
1st
Year
2nd
Year
3rd
Year
4th
Year
5th
Year
Existing Net Income
-Proposed Net Income
Surplus/Deficit
+Depreciation
+Other illiquid expenditures
+Dividend
Cash Inflow
-Cash Outflow
Net Cash Flow
Financial Indexes Based on provided information financial indexes are forecasted as following table:
Index Financial Assessment Result
Payback period
Net Present Value (Million RLs)
Internal rate of return (IRR)
Discount Rate
Note: In case that there is more than one proposed project, the company applicant is supposed to provide each financial
statement for each project separately.
25
Section 4: Other material information
Risk Factors
There are two sets (internal and external) of underlying factors which affect the
success of proposed project. The associated risks, which need to be considered in
advance, are listed as below:
-Internal Risks
-External Risk
Consultant/ Contractor/ Energy Service Company
Please submit any consulting advisory which is taken account to technical/financial study of proposed
project
Name Type of
Services Address Tel
26
Declaration on information reliability
Hereby we declare and guarantee that all information provided here and in any other
documents enclosed herewith is true and accurate, provided that such information is
available. We confirm that we have read and fully understood the contents of the
Application Form
Name and signature of the legal representative
Date and stamp
Declaration on consent to provide information to co-financing
partners
Hereby we declare our consent that the bank could transfer/release the above
information to the interested partners with the purpose of reporting and analysing
the performance of the project. Partners could be financial institutions, ESCOs, etc.
We give the bank the right to contact any person or company/ institution (including
suppliers and clients) that could offer information useful for the reporting and
verification of the data provided.
Name and signature of the legal representative
Date and stamp
27
Annex III: Appraisal Form
Appraisal Form
Energy Efficiency Revolving Fund
................................................................................................
[Company Name]
........................................................................
[Province, City of Registered Company and Company Registration Number]
…………………………………………………………………………………….
[Address, Tel and Postal Code]
28
Project Title:
Project Owner(s):
Project contactor:
Project duration (Months):
Brief Description and Purpose:
Describe How the Project Pins to the Revolving Fund Aim and Plan (Technical Committee)
Describe Findings of Technical Assessments (Technical Committee)
Detailed Explanation:
To Be Signed By, Date:
Detailed Explanation:
To Be Signed By, Date:
29
Describe Findings of Financial Assessments (Financial Committee)
Bank Comments on Bankability of the Project
Add Any Further Assessment
Detailed Explanation:
To Be Signed By, Date:
Detailed Explanation:
To Be Signed By, Date:
Detailed Explanation:
To Be Signed By, Date:
30
Annex IV: Terms of References
Terms of Reference
Set up of a revolving fund to finance Energy Efficiency Projects in Industry
Project Number: 120506
Project Title: “Industrial Energy Efficiency in key Sectors”
Duration: August 2012 to July 2017
Project Location: Iran
1. BACKGROUND INFORMATION
This Terms of Reference (TOR) will be used for setting up and management of the
revolving fund which will be designed to support investment in energy efficiency projects
within the scope of “Industrial Energy Efficiency in Key Sectors” project. In this context,
United Nations Industrial Development Organization (hereinafter “UNIDO”) will grant to
the revolving fund along with utilizing capacities and financial contribution of the banks
and/or financial institutions (hereinafter called “the Bank”).
2. PROJECT INFORMATION
The project “Industrial Energy Efficiency in Key Sectors” is financed by the GEF5 and
implemented by UNIDO as an implementing agency of the GEF. The project was
approved in August 2012 and is of duration of five years.
The objectives of the project are to accelerate the uptake of energy efficiency (EE) in
industrial sectors, providing a framework for National Energy Management Standards,
assisting in capacity building through training, developing targets, providing benchmarks
and most importantly, identifying technology improvement options to high energy
intensive industrial sectors.
2.1. The project consists of five components:
a) Policy Support: Integrating Energy Efficiency priorities into national industrial policies
and development programmes on energy intensive SMEs in Iran through setting up market-
based tools in industrial sectors, putting in place a system for monitoring and verification
of impacts and providing a framework for energy management standards.
b) Training and Capacity building: Building a national cadre of experts on energy
management systems and system optimization as well as energy auditors, introducing the
5 . Global Environment Facility
31
concepts of energy management systems and system optimization to the company
management, training enterprises on the preparation of bankable projects.
c) Direct support to Industry: Implementing one demonstration project within each
sector to act as show case for other industries and supporting those with energy audits,
energy auditing equipment and energy metering equipment.
d) Financial Support: Facilitating financing by training banks and financial institutions
on the financial appraisal of EE projects and establishing a revolving fund to support
investments in EE.
e) Information dissemination and Awareness raising on EE good practices, selected
case studies, sectoral benchmark reports, discussion forums and setting up of a data bank
on EE technologies and suppliers.
3. OBJECTIVE
The objective of the present terms of reference is to define the terms and conditions of the
cooperation between UNIDO and the Bank in setting up a revolving fund.
Based on GEF and UNIDO mission, the main objective of the fund is to finance energy
efficiency projects in industries in order to promote the development of an EE market in
the country. The fund operates as a profit-oriented business which offers lower-than-
market interest rate loan to the eligible industrial applicants (hereinafter called “the
Beneficiary”).
4. SCOPE OF SERVICES
In close coordination with UNIDO, the Bank is responsible for the entire day-to-day
operation and management of the fund. Except as otherwise stated herein, the Bank is
responsible for implementation of the project cycle, managing the revolving fund
according to the agreed procedures, monitoring the utilization of the fund, managing the
disbursement and recovery of loans, and providing statements and reports as stipulated in
section 7. The Bank is also responsible to sign contracts with other co-financing partners
and the Beneficiary.
4.1. Required Services
In addition to the role of the Bank that is defined in other parts of this TOR, the Bank is
required:
To open a project account, with two signatories to the fund;
To convert the fund of GEF/UNIDO in the amount of US$ 1,500,000 into
the revolving fund in IRR6 in accordance with the official exchange rate7;
6 Iranian Rial 7 Official Exchange rate is set by Central Bank of Islamic Republic of Iran
32
To provide equivalent amount of US$ 3,000,000 as co-financing through the
Bank resources;
To offer a flexible interest rate on the fund which will be fixed annually upon
agreement between UNIDO and the Bank. In addition, if Central Bank of the Islamic
Republic of Iran imposes new regulation regarding to interest rate, the fund’s
proposed interest rate maybe revised. The Bank shall inform UNIDO within two
weeks;
To confirm reconsidering the funding terms for contribution of other co-
financers;
To consider, in case of termination of the cooperation before July 2017,
unutilized balances shall be immediately returned to UNIDO, within maximum 30
days of the termination notification;
To calculate and report the interest on UNIDO resource which will be added
to the fund, to UNIDO annually;
To provide reports as stipulated in section 7, below.
5. LOAN CYCLE
UNIDO, IFCO8 and the Bank will nominate their representatives for technical committee
within three weeks after signing the contract between UNIDO and the Bank. UNIDO and
IFCO are responsible for final technical approval.
The representatives of UNIDO and the Bank for Financial Committee will be designated
within three weeks after signing the contract between UNIDO and the Bank. The Bank is
responsible for final financial approval.
Criteria for selection of eligible EE projects and, required templates for screening the
proposals will be determined by Technical Committee.
Financial criteria for selection of eligible beneficiaries, financial statements, required credit
worthiness, guarantees and corresponding templates will be determined by the Bank.
Project identification involves the identification of an EE project which may be eligible for
receiving a loan from the fund. The format of Project identification form determined by
Technical Committee will be prepared by the potential beneficiaries and submitted to
Technical and Financial Committees. Once an EE project has been identified, initial
screening is carried out by Technical Committee and the Bank in order to provide a short
list of potential projects (and also beneficiaries) after which for project appraisal, a detailed
feasibility study shall be prepared by the beneficiary. The template of full feasibility study
will be determined by Technical and Financial Committees.
8 Iranian Fuel Conservation Company (National Counterpart of UNIDO)
33
Financial approval is attained to determine whether projects and measures are financially
feasible. If the results of the technical and financial assessments are acceptable and
approved, financial closure and disbursement begins with signature of the loan contract
between the Bank and the Beneficiary, including guarantees and payment mechanisms.
Afterwards, the Beneficiary makes repayments of loan principal and interest to the Bank.
UNIDO, IFCO and the Bank monitor the project implementation and finally the Bank
provides required reports according to section 7.
Lending Process and main steps are presented in table 1.
Table 6 : Lending Process and main steps
Required
time
Responsible Activity Steps
Three weeks UNIDO and IFCO
Beneficiary under
UNIDO supervision
Open call for proposal
Project identification Form
(Pre-feasibility Study)
Project
Identification
Two week Technical Committee
Bank
Agreement on eligible
pipeline
Assessing credit worthiness
and guarantees
Initial
Screening
Four weeks Beneficiary under
UNIDO supervision
Technical Committee
Financial Committee
Full feasibility study
Technical approval
Financial approval
Project
Appraisal
Two week
Bank
Signature of the loan
contract with beneficiaries
which includes guarantees
and payment mechanism
Financial
closure and
disbursement
On an
ongoing basis
Bank
UNIDO and IFCO
Management and
monitoring of disbursement
and recovery of the loan
Measurement and
verification of energy
saving and GHG emission
reduction
Project
Monitoring
On an
ongoing
basis
Bank
Provide statements,
quarterly and final reports
as stipulated in below
(subsection 7)
Project
Reporting
34
6. TIME SCHEDULE
The total duration for the whole assignment is estimated to be 18 months starting from the
contract award. The Bank is requested to submit the proposed cash flow analysis for the
revolving fund.
The above mentioned duration could be extended, if required.
The work is planned to start as soon as possible after the award of the contract.
7. REPORTING
According to “Required Services” (section 4.1.), the Bank is required to submit some
reports to UNIDO as below:
First progress report within one month of the contract signature providing the
structure of the fund and confirming the opening of a bank account dedicated for
the revolving fund (100% upfront payment);
Quarterly progress reports providing the financial statement of the interest
earned and a financial statement showing the utilization of the fund, financial status
of the main payments and technical overview. A template will be agreed upon
agreement of both parties. However, these reports will include, for each loan;
The total amount of the loan;
The total of repayments already made by the Beneficiary;
Information about the next repayment due;
Projections of future drawdowns and repayments.
Final report to be submitted at the end of the contract providing the final
audited financial statements for the project using the same format and structure as
Quarterly progress reports. At the end of the contract and upon the written consent
of both, the management and ownership of the fund shall be signed off by UNIDO
to IFCO or any other governmental entities nominated by IFCO.
8. FUND MANAGEMENT STRUCTURE
The Bank is required to plan fund management team with individuals having at least five
years of expertise and experience in the banking and financial sectors. The Bank should
also propose management fee as a fixed percentage of funds under management before the
signature of the contract.
9. ADDITIONAL INFORMATION
At the initial stage and, in addition to what is stated in Section 8 above, following
information should be disclosed to UNIDO:
Industries/beneficiaries that the Bank is more interested to cooperate with;
35
Capital adequacy ratio;
Bad and doubtful debt ratio.
10. LANGUAGE
Fluency in both English and Persian is required for this assignment. The reporting language
will be in English.
11. OWNERSHIP OF THE FUND AFTER PROJECT COMPLETION
As part of the contract closure and three months prior to the contract end, a hand-over
protocol should be prepared by UNIDO, IFCO and the Bank. The ownership of the fund
shall be transferred to IFCO or any other governmental entities nominated by IFCO based
on the agreed protocol. The protocol indicates how the relationship between the
government of Iran and the Bank shall be regulated and describes related liabilities.