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, ChinaPeter A. Cook, Sr. Investment Officer

Climate Business Group, IFC Beijing

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• 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, What We Do

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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

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What We Do - Three Businesses

IFC Investment Services

IFC Advisory Services

IFC AssetManagement

Company

• 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

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IFC - 2010 Highlights

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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 countries account 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

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What We Do - The Reach of IFC’s Projects

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

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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

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Investments by Region/Industry, FY10

Commitments for IFC’s Account: $12.7 Billion

Sub-Saharan Africa 19%

South Asia 8%

Europe and Central Asia 23%

Latin America and the Caribbean 24%

Middle East and

North Africa 12%

East Asia and Pacific 13%

Global 1%

Global Information and Communication Technologies 4%

Global Manufacturing and Services 11%

Infrastructure 12%

SubnationalFinance 1%

Health andEducation 3%

Oil, Gas, Miningand Chemicals 8%

Private Equity and Investment Funds 3%

Global FinancialMarkets 54%

Agribusiness 4%

IFC Climate Business

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IFC’s Climate Change AgendaIFC’s Climate Change Agenda

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 Opportunit

ies

• 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

FinancialInnovation

• 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

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

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Planned Climate Investments for IFC’s Planned Climate Investments for IFC’s AccountAccount

• 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

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Financial Policies for Climate Change Mitigation: Challenges and

Opportunities of Low-Carbon Economic Development

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• 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

The Global Challenge: Financing Climate The Global Challenge: Financing Climate ChangeChange

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15

35 38250

10

20

105 15 20 30

30

40

50

60

-10

-100

-20

-30

-40

-50

-60

-70

-80

-90

Abatement cost€ per tCO2e

Global GHG abatement cost curve – 2030

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

Lighting – switch incandescent to LED (residential)

Cropland nutrient management

Tillage and residue mgmt

1st generation biofuels

Clinker substitution by fly ash

Electricity from landfill gas

Small hydro

Reduced slash and burn agriculture conversion

Reduced pastureland conversion

Grassland management

Organic soil restoration

Pastureland afforestation

Nuclear

Degraded forest reforestation Reduced intensive agriculture conversion

Coal CCS new buildIron and steel CCS new build

Motor systems efficiency

Rice management

Cars full hybrid

Gas plant CCS retrofit

Solar PV

Waste recycling

High penetration wind

Low penetration wind

Residential electronicsResidential appliances

Retrofit residential HVAC

Insulation retrofit (commercial)

Power plant biomass co-firing

Geothermal

Coal CCS retrofit

Degraded land restoration

Abatement potentialGtCO2e per year

Solar CSPBuilding

efficiency new build

2nd generation biofuels

Efficiency improvements other industry

Insulation retrofit (residential)

Cars plug-in hybrid

• 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

Policy instruments to promote Sustainability and Sustainable Energy

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• 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

Aspects of Sustainable Energy

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• Awareness Industry General public Use of public transport

• Capacity Utility ESCO/equipment Industry

• Commercial Incentives Business case

• Financial Technical capacity of banks Transaction size

Barriers to Sustainable Energy

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Policy Instruments

Increasing cost efficiency & Decreasing control

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•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

Roles of the State

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•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

Roles of the State

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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 userManufacturer

/distributor Financier

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Creating space for a new product/service

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Creation of Demand

Intervention

Comments

Providing capital subsidies

Cheaper to implement and effective in the short term to change behavior but demand drops when subsidy is phased out.

Use based subsidies

More expensive to implement but less distortive and therefore more sustainable

Tax breaks Needs to fit within existing tax paying regime

Financing incentives

To enable end users to choose the desired alternative: Most efficient and least distortive

Awareness creation of benefits

Most important aspect required for all other interventions

desira

bility

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Incentivizing Manufacturers/Service Providers

Intervention Comments

Providing capital subsidies

Useful to get critical mass of manufacturing capacity in place and to capture environmental externalities. Better to subsidize factors of production and sale rather than production cost.

Tax breaks This is effective to help set up manufacturing and service provision capacity but is preferable at point of sale/service provision rather than installation of capacity

Financing of manufacturer and end use

Both equity and debt financing are vital for manufacture. Financing of end use helps expand and create demand to make sure the enterprise is successful

Awareness creation of benefits

Not as critical as with end-users or financiers. Need support in accessing finance effectively

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Enabling Financing

Intervention Comments

Policy support to enable the range of finance required1

• Early stage venture for new manufacturing• Private equity• Debt• Consumer and end-use

Subsidizing cost of capital

Useful to get the process started but can become a dependence and market may fail once the subsidy is phased out

Subsidizing risk Very critical and efficient as the FI gets more comfortable with the business, this can be phased out

Subsidizing transaction costs

Necessary and efficient as the FI builds capacity and familiarity with the market, the market grows, transaction costs drop as a % of business enabling this to be phased out

Awareness creation of benefits

Critically important as financiers typically tend to be conservative.

1 more details on following slides

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Energy Efficiency Financing

Potential IFCrole

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Renewable Energy Financing

Potential IFCrole

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• 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

Thoughts for Creation of a State Fund

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Some State Fund Models

Intervention Comments

Fund support demonstration projects

This works well in principle as it gets pilots off the ground quickly. However these do not engage the financial markets who don’t replicate once the pilots are over

Fund subsidizes interests rates through FI

While the financial markets are involved, they often lose interest when the subsidy is removed

Fund shares risk – pari passu

This is effective but has moderate leverage and does not really address the risk perceptions of an FI

Fund shares risk– Subordination

This has highest leverage and sustainability but is more complex to structure

Subsidizing transaction costs

Necessary and efficient as the FI builds capacity and familiarity with the market, the market grows, transaction costs drop as a % of business enabling this to be phased out

Awareness creation of benefits

Critically important as financiers typically tend to be conservative.

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Increasing leverage

State Fund

Direct financing

Financial Institution

Project

Project

Project

Project

Project

Project

Project

Project

Project

Project

Project

Subsidizing capital

Risk sharing-

pari passu

Risk sharing subordinatio

n

Sustainability

LowMediumHigh

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Increasing leverage

State Fund

Direct financing

Financial Institution

ProjectProject

Project

ProjectProject

Subsidizing capital

Risk sharing-

pari passu

Risk sharing subordinatio

n

The value of the state fund and the component of project requiring market financingOnly the risk sharing structures make an impact on financing and risk

Project

Project

Project

Project

Project

Project

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• 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

Summary

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Thank You!

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Peter A. CookSr. Investment Officer, IFC Climate Business GroupBeijing, ChinaPhone:+ 86 10 5860 3000Email: pcook@ifc.org