Guarantee schemes for green projects

A new tool in the toolbox?

What’s our scope? What’s green?

Why are green projects different?

Why are green projects difficult for lenders?

Why are green projects difficult for borrowers?

Can guarantee schemes help then?

Yes because one of the main issues is perceived risks

In practical terms:

– On the short term : guarantees will allow Financial Institutions to ‘start’ by allowing them to offer

– better pricing – lower collateral requirement– or even just the loan to happen

- On the long term : guarantees are supporting financial institutions over their ‘learning curve’ and should not be necessary on the long-term

Guarantees will help close the gap between perceived risks and real risks without creating market distortion

Interest Rate (r)Risk

r0

S0

Loan Volume

D

r1

r*

S1

SCG

rCG

Increased access

Are green guarantees different?

One example of PCG Risk assessed is the credit risk of the

final beneficiary This risk is known from both FIs No need of other stakeholders Risk is shared Different versions: with or w/o ad hoc

vehicle, single or portfolio guarantee

NDBNDB

Commercial Bank

Commercial Bank

Final beneficiaryFinal beneficiary

Guarantee

LoanCollateral Loan repayments

Claims

One example of Performance Guarantee

Risk assessed is performance of savings This risk is unknown to the commercial Bank

and to the NDB, that is why we need experts The commercial Bank can integrate the

savings into the project cash flows The commercial Bank stays with the risk it

knows well : credit risk (unless PF)

NDBNDB

Commercial Bank

Commercial Bank

ESCO or EE project or EE beneficiary

ESCO or EE project or EE beneficiary

Guarantee

LoanCollateral Loan repayments

Claims

X

Technical verification

- Evaluates the claim

Technical verification

- Evaluates the claim

Technical performance

validator- Evaluate and

approve EE project and MV

plan

Technical performance

validator- Evaluate and

approve EE project and MV

plan

The use of green guarantees worldwide

Guarantee schemes have been widely used to support SMEs– 2250 schemes in 100 countries

Green guarantees seem to be still at an early stage of development– So is green itself

But a couple of very interesting initiatives are worth mentioning– Carbon credits (performance guarantee)

– Energy Efficiency guarantee schemes in very diverse countries such as China or Bulgaria (performance guarantee)

– Guarantee schemes in support of the sustainable use of natural resources in agriculture (credit guarantees)

The use of green guarantees in LAC

In LAC too, credit guarantees are widely used. – 15 countries boast public schemes for MSMEs

– The volume in guaranteed loans has doubles between 2007 and 2010

We identified 10 schemes dedicated to green programs

Fonaga Verde, Fonagua and Fonafor (FIRA)Fosefor (Financiera Rural)Areca and Cambio (BCIE)Fondo ABC (Banco do Brasil)Smart Energy Fund (BID and Government of Barbados)EEGM (BID and BNDES)Dominican Republic……..

Can guarantees ‘solve it all’?

Our research shows that green projects face many different kind of barriers– Non friendly regulatory frameworks

– Adverse market conditions (higher upfront payments and longer payback periods)

– Lack of awareness or appetite from the banking sector (small beneficiaries, niche markets)

– Lack of liquidity in some cases or lack of credit at appropriate terms

– Weak level of structuration on the demand side• Prioritizing savings investment vs. expanding investment is not easy• Lack of awareness on the potential beneficiaries side, trust issues towards

new technologies and technology providers• Lack of financial sophistication : few bankable projects, access to credit can

be an issue

Guarantees can work if they are one brick of a well built program

Guarantee scheme

Blending of financial resources

Banking sector

capacitation

TA for demand

structuring

NDBs are strategically placed?

NDBs have key role to play in the implementation of National green strategies as they have access to all the tools – They can access and channel funding

• to blend different source of funds • to provide technical assistance resources

– They can execute in the best conditions• because they have a very deep knowledge and contact with the local private

sectors to be involved

Guarantees are not new to NDBs and Green programs either– The next step is to combine both fields of expertise

NDBs in LAC have here a powerful community of practice– This workshop is one example– Green Guarantees could be one of our initiative

http://www.iadb.org

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