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IFC & Low Carbon Economic Development Asia Pacific Finance and Development Center 2010 Biennial Forum on Fiscal and Financial Policies for Low-carbon Economic Development November 26, 2010 Shanghai, China. Peter A. Cook, Sr. Investment Officer Climate Business Group, IFC Beijing .

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slide1

IFC & Low Carbon Economic Development Asia Pacific Finance and Development Center 2010 Biennial Forum onFiscal and Financial Policies for Low-carbon Economic DevelopmentNovember 26, 2010 Shanghai, China

Peter A. Cook, Sr. Investment Officer

Climate Business Group, IFC Beijing

who we are what we do
Who We Are, What We Do
  • IFC is the largest global development finance institution focused on the private sector – the global leader in private sector development finance
  • We create opportunity for people – to escape poverty and improve their lives
  • Driven by our vision and purpose, we make a unique contributionto development
  • We invest, advise, mobilize capital, and manage assets – providing solutions for an inclusive and sustainable world
who we are structure
Who We Are - Structure
  • Owned by 182 member countries
  • IFC is the main driver of private sector development in the World Bank Group
  • Collaborates with other members of the group, including the World Bank (IBRD and IDA, MIGA and the International Centre for Settlement of Investment Disputes)
  • Global: Headquartered in Washington, D.C.
  • Local: More than 100 offices worldwide in 86 countries, including Beijing and Chengdu in China
what we do three businesses
What We Do - Three Businesses

IFC AssetManagementCompany

IFC Investment Services

IFC Advisory Services

  • Loans
  • Equity
  • Other forms of financing
  • Advice
  • Problem-solving
  • Training
  • Wholly-owned subsidiary of IFC
  • Private equity fund manager
  • Invests third-party capital alongside IFC
ifc fiscal year 2010 highlights
IFC - Fiscal Year 2010 Highlights
  • Investments:528 new projects in 103 countries
  • Advisory services: $268 million in annual expenditures
  • $18 billion in financing:$12.7 billion for IFC’s own account, $5.3 billion mobilized
  • IDA countriesaccount for half of IFC projects overall:
    • $2.4 billion invested in Sub-Saharan Africa, 33 percent increase over past year
  • IFC earned net income of $1.7 billion for the year, and also made a $200 million grant to IDA
what we do the reach of ifc s projects
What We Do - The Reach of IFC’s Projects

IFC’s activities help raise living standards for people throughout the developing world

Last year our clients provided:

  • 2.2 million jobs
  • $112 billion in micro, small, and medium enterprise loans
  • 8 million patients with health care treatment
  • 35 million people with clean water
  • 29 million people with power connections
  • 1.4 million students with education services
ifc reach in china in fiscal year 2010
IFC Reach in China in Fiscal Year 2010

Last year our clients provided:

  • 285,000 jobs
  • $12 billion in micro, small, and medium enterprise loans
  • 1 million patients with health care treatment
  • 15 million customers with clean water
  • 16 million customers with power connections
  • 14 million customers with gas distribution
  • Services to 510,000 farmers
investments by region industry fy10
Investments by Region/Industry, FY10

Commitments for IFC’s Account: $12.7 Billion

SubnationalFinance 1%

Private Equity and Investment Funds 3%

Global 1%

Middle East and

North Africa 12%

Agribusiness 4%

Oil, Gas, Miningand Chemicals 8%

Sub-Saharan Africa 19%

Infrastructure 12%

East Asia and Pacific 13%

Latin America and the Caribbean 24%

Health andEducation 3%

Global Manufacturing and Services 11%

Global Information and Communication Technologies 4%

South Asia 8%

Global FinancialMarkets 54%

Europe and Central Asia 23%

ifc s climate change agenda
IFC’s Climate Change Agenda

 Grow climate-related business to 20-25% of annual commitments by 2013

Thought Leadership

  • Methodologies for setting and monitoring climate goals and standards across all sectors
  • GHG intensity accounting, impact assessment and efficiency guidelines
  • Capacity building for private and public clients related to climate business/policy
  • Engagement with DFIs, institutional investors, academia and civil society

Business Opportunities

  • Support IFC investments with global knowledge and technical expertise
  • Develop scalable climate business models
  • Invest in new and transferable technologies
  • Develop relations with global and local climate technology companies
  • Stay abreast with climate-related business solutions and markets

Financial

Innovation

  • Leverage and adapt existing financial products (e.g., carbon)
  • Develop new innovative financial products
  • Develop efficient mechanisms to leverage public funds with private investment: tap into new climate finance
  • Scale up through intermediation with financial institutions and funds
planned climate investments for ifc s account
Planned Climate Investments for IFC’s Account
  • IFC’s plans to grow its commitment in climate-related investments for its own account from about $1 billion/year in FY10 to $3 billion/year by FY13
  • By FY13, investments in climate-friendly projects will be scaled across IFC:
    • Infrastructure & Natural Resources finances on/off-grid renewables; efficiency in power/T&D, transport & ICT; water
    • Manufacturing, Agribusiness & Services finance industrial EE & CP; renewables supply chain; green buildings; agri and forestry
    • Financial Markets works through FIs to finance small/medium green investments and climate-related projects
    • Clean Technology – investments in innovative, transferable, scalable climate technologies
    • Climate Financial Products & Funds across all sectors
slide13
Financial Policies for Climate Change Mitigation: Challenges and Opportunities of Low-Carbon Economic Development
slide14

The Global Challenge: Financing Climate Change

  • Current levels of annual climate financing for developing countries ($9 billion) fall short of annual estimated needs
    • $140-175 billion for Mitigation
    • $30-100 billion for Adaptation
  • For this to be achieved and attained, private sector participation and financing is crucial
  • Solutions need to integrate new business models based on:
    • Innovation
    • Scalability
    • Policy-based incentives and reforms

Source: World Development Report 2010

global ghg abatement cost curve 2030

Gas plant CCS retrofit

Abatement cost

€ per tCO2e

Coal CCS retrofit

Global GHG abatement cost curve – 2030

Iron and steel CCS new build

60

Low penetration wind

Coal CCS new build

Cars plug-in hybrid

Power plant biomass co-firing

50

Residential electronics

Degraded forest reforestation

Reduced intensive agriculture conversion

Residential appliances

Nuclear

40

Retrofit residential HVAC

Pastureland afforestation

High penetration wind

30

Degraded land restoration

Tillage and residue mgmt

Solar PV

2nd generation biofuels

Solar CSP

Insulation retrofit (residential)

20

Building efficiency new build

Cars full hybrid

10

Waste recycling

0

5

10

15

20

25

30

35

38

Organic soil restoration

-10

Abatement potentialGtCO2e per year

Geothermal

-20

Grassland management

Reduced pastureland conversion

-30

Reduced slash and burn agriculture conversion

-40

Small hydro

1st generation biofuels

-50

Rice management

Efficiency improvements other industry

-60

Electricity from landfill gas

-70

Clinker substitution by fly ash

Cropland nutrient management

-80

Motor systems efficiency

-90

Insulation retrofit (commercial)

Lighting – switch incandescent to LED (residential)

-100

Note: The curve presents an estimate of the maximum potential of all technical GHG abatement measures below €60 per tCO2e if each lever was pursued aggressively. It is not a forecast of what role different abatement measures and technologies will play.

Source: Global GHG Abatement Cost Curve v2.0

policy instruments to promote sustainability and sustainable energy
Policy instruments to promote Sustainability and Sustainable Energy
  • Policy instruments are required to promote change in market behavior for the public good. This is particularly common for sustainability
    • Environmental protection
    • Energy efficiency
    • Renewable energy development
    • Cleaner production
  • Can range from command and control to market based mechanisms
  • Policy instruments essentially serve to overcome market barriers for the transformation
  • Where the underlying sector has economic value, market based instruments provide the most efficient way of achieving a market transformation
aspects of sustainable energy
Aspects of Sustainable Energy
  • Supply side Efficiency
    • Transmission lines
    • Power factor correction
    • Public transportation
      • taxis
  • Supply side renewables
    • Promotion of grid connected renewable energy
  • End user use of renewables
    • Solar hot water and PV
    • Industrial captive power
  • Demand side
    • Industrial consumers
    • Municipalities (street lighting, pumping)
    • Commercial and residential : Buildings and Appliances
    • Vehicular standards and fuels switch
barriers to sustainable energy
Barriers to Sustainable Energy
  • Awareness
    • Industry
    • General public
    • Use of public transport
  • Capacity
    • Utility
    • ESCO/equipment
    • Industry
  • Commercial
    • Incentives
    • Business case
  • Financial
    • Technical capacity of banks
    • Transaction size
policy instruments
Policy Instruments

Increasing cost efficiency & Decreasing control

slide20

Roles of the State

  • Policies reflecting climate change and sustainability challenges
    • Energy policy including role of renewable energy, energy efficiency framework & targets
    • Environmental policies
  • Institutional & legal framework
    • Energy efficiency/renewable energy promotion agencies
    • Energy efficiency standards/labeling
    • Energy auditing and market capacity
    • Renewable energy supporting schemes (feed-in tariffs, off-take structures)
    • PPP frameworks (ESCo/EPC support)
    • Utility programs/incentives
slide21

Roles of the State

  • Financial incentives
    • Removing energy price subsidies, targeted structures for low-income households
    • Direct subsidies
      • Mobilization of the market (investment subsidies, cash-back incentives)
      • Managing the risk (first loss guarantees)
    • Fiscal incentives
      • Tax credits, tax reductions, accelerated depreciations
getting the policy instruments right
Getting the Policy Instruments Right
  • Should be sustainable : the market behavior should have changed permanently after the incentives are phased out
  • Should be cost-effective
  • Should simultaneously support and reinforce all the sections of society that need to change
  • People do not want to change and therefore try to maximize the incentives

End user

Manufacturer/distributor

Financier

creation of demand
Creation of Demand

desirability

enabling financing
Enabling Financing

1 more details on following slides

thoughts for creation of a state fund
Thoughts for Creation of a State Fund
  • All players will want to maximize subsidies in the short term
  • The State should:
    • Maximize leverage of the fund to create maximum impact
    • Maximize sustainability/Minimize distortions
    • Work through the financial sector to ensure long-term ownership
slide31

State Fund

Increasing leverage

Risk sharing- pari passu

Subsidizing capital

Risk sharing subordination

Direct financing

Financial Institution

Project

Project

Project

Project

Project

Project

Project

Project

Project

Sustainability

Project

Low

Medium

High

Project

slide32

State Fund

Increasing leverage

Risk sharing- pari passu

Subsidizing capital

Risk sharing subordination

Direct financing

Financial Institution

Project

Project

Project

Project

Project

Project

Project

The value of the state fund and the component of project requiring market financing

Only the risk sharing structures make an impact on financing and risk

Project

Project

Project

Project

summary
Summary
  • The risk sharing structures are the only structures that address risks that banks may be concerned about
  • Capital subsidies reduce project costs but the risk to the bank is the same (except on the smaller loan amount)
  • The subordinated risk sharing provides maximum leverage, impact and sustainability and is the preferred model
    • Here the state fund can provide a first loss for banks loans extended to the desired sector
thank you
Thank You!

Peter A. Cook

Sr. Investment Officer,

IFC Climate Business Group

Beijing, China

Phone:+ 86 10 5860 3000

Email: pcook@ifc.org