NAMA Financial Mechanismsccap.org/assets/Brad-Johnson-NAMA-Financial-Mechanisms.pdf · Comparative...
Transcript of NAMA Financial Mechanismsccap.org/assets/Brad-Johnson-NAMA-Financial-Mechanisms.pdf · Comparative...
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NAMA Financial Mechanisms
Issues to be Considered
Brad JohnsonBrad Johnson
Center for Clean Air Policy
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Objectives of NAMA Financial Mechanisms
• Expand availability of commercial financing of clean energy projects
• Use NAMA funds to attract private sector financing for climate change projects
• Use NAMA funds to mitigate project risks that are difficult to cover by the private sector
• Use or blend NAMA funds with private sector funds to make projects affordable
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NAMA Financial Mechanism Design Criteria
• Sustainability – NAMA’s should be used in a
revolving manner. Use donor resources wisely.
• Leveraging capabilities - Capacity to bring in private
sector financing for every dollar of donor funding.
Mobilize as much private financing as possible with
limited donor resources.limited donor resources.
• Affordability - Financing climate change projects
exclusively with private sector financing is not
affordable in most countries. NAMA funds should
leverage private sector financing on affordable terms
to project sponsors and developers.
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Financial Impediments
• Lack of knowledge of renewable energy (RE) and
energy efficiency (EE) technology by local banks
• High perceived credit risk of developers
• Local bank preference for balance sheet financing
while energy projects are usually financed based on while energy projects are usually financed based on
revenue flow - project financing mechanisms
• Currency risk
• High transaction costs for smaller-scale projects
• Affordability – high interest rates in many countries
can not be covered by project revenues
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Partial Credit Risk Coverage
• Provides partial guarantees to local banks, up to 50%,
for lending to climate change projects
• Designed to stimulate local financing of eligible
projects
• Has been used with mixed results by the Global
Environment Facility (GEF)
• Shown to have limited leveraging capacity
• Limited application in high interest rate environments
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GEF/NAMA
$10 million Grant
Guarantee Reserve
Account held by
Trustee
Local
Financial Institution
Loan Repayment
Guarantee
50% of Loan
Partial Credit Guarantee
RE or EE Project
Issues
•Leverage
•Eligible Projects
•Interest earned on reserve account
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Performance Guarantees
• Proposed for energy efficiency projects
• Provides lenders a guarantee of projected savings in an Energy Services Company (ESCO) contract
• Would make payment equal to the difference between guaranteed and actual energy savings
• Would make payment equal to the difference between guaranteed and actual energy savings from a project
• Takes performance risk off the table for lenders with limited understanding of the ESCO business
• Has higher leveraging capacity
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Two Primary ESCO Business Model
Guaranteed Savings
• Preferred by ESCOs
• Works best with start-up ESCO industry
Shared Savings
• Preferred by customer
• Off balance sheet to ESCO customer
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Guaranteed Savings
BorrowerCUSTOMER
Savings Fixed
ESCO Lender
Savings
Guarantee
Fixed
Repayment
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Shared Savings
Customer
ESCO
Borrower
Performance &
Credit Risk
Lender Funding
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Two Elements of all RE and EE
Project Risks
• Credit risk – capacity of ESCO or RE client – hotel,
industry, utility to repay loan. Evaluation of this risk
is core business of commercial banks. Credit
Guarantee
• Project risk – capacity of project to achieve level
of energy production or guaranteed energy
savings. Evaluation of this risk is beyond the core
capacity of commercial banks. Performance
Guarantee
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GUARANTEE TRUST FUNDPrivate Sector Administrator
LOAN
PROCEEDS
GEF /NAMA Grant
BANK
100%
PERFORMANCE
GUARANTY CONTRACT
PREMIUM
Flow of Funds and Contractual Agreements
100% Performance Risk Guarantee Program
DEBT
SERVICE
Contractual
Structure
ESCO
TRUST ACCOUNT
C C C
Flow of Funds
BANK LOAN CONTRACT
/ TRUST
AGREEMENT
EXCESS CASH AFTER
DEBT SERVICE
SAVINGS
PAYMENT
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Creation of Special Funds to Finance Eligible
Projects When Banks Will Not Lend
• Where commercial bank financing is not
available. NAMA resources capitalize special
funds with specific project eligibility criteria
• Competitive bidding for private sector • Competitive bidding for private sector
management of the fund
• Repayments to the Fund from loans revolve
and are used to finance future projects
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Creation of Special Purpose Entities
• Can be used to bundle small-scale projects for financing from the private sector
• Can be public or private entities
• Can address management and capacity constraints in project risk assessment
• Management of SPE have special financial and project skills unique to target sector
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Simplified Flow of Funds for SPE Pooled Financing
$100 Million
Gov’t
Grant/or
NAMA Grant
Reserve
Account
$33m
Gov’t SPE
Pooled
Financing
Authority
Investors
$100m
Bonds
Local
Gov’t
Project
Local
Gov’t
Project
Local
Gov’t
Project
Local
Gov’t
Project
Trustee
Principal & Interest Payments
If Necessary
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Profile of Pooled Financing of Local
Environmental Projects in New York State
Offering Number of
Borrowers
Bond
Amount
Average
Project Size
EFC Financing
(US$ in Millions)
2010 29 $ 80.3 $5.6
2009 59 $248.3 $4.2
2008 29 $147.6 $5.6
2007 42 $326.7 $8.0
2006 15 $ 75.5 $5.0
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SPE
Managed by Private
-
Credit Enhancements
NAFIN – Partial Guarantee
NAMA Grant
NADBANK
50% = $7 million
CAINTRA – FINANCE STRUCTURE
Debt- 70% Equity - 30%
$20 million
$6 million Managed by Private
Sector
AdministratorOther Debt
Financing
50% = $7million
OPIC, NAFIN
NAMA LoanCAINTRAMember Company
$6 million
Equity investors
CAINTRAMember Company
CAINTRAMember Company
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Extension of Lending Maturities
• Provides longer-term financing for eligible
projects than available from local banks
• Can substantially lower annual debt service
payments for projectspayments for projects
• Has great leveraging capacity
• Relies on local lending institutions to make
credit risk assessment
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Comparative Debt Service Table on a $100 Million Loan
TermTerm InterestInterest Annual PaymentAnnual Payment
7 7 yrsyrs 13%13% $21.8 M$21.8 M
7 yrs7 yrs With Credit With Credit
Enhancement 8%Enhancement 8%$18.7 M$18.7 M
Enhancement 8%Enhancement 8%
7 yrs7 yrs With Credit With Credit
Enhancement 6%Enhancement 6%$17.5 M$17.5 M
15 yrs15 yrs 13%13%$15.2 M$15.2 M
15 yrs15 yrs With Credit With Credit
Enhancement 8%Enhancement 8%$11.5 M$11.5 M
15 yrs15 yrs With Credit With Credit
Enhancement 6%Enhancement 6%$10.1 M$10.1 M
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Development Bank Co-financial with Local
Banks at Below Market Rates
• Provide zero or low- interest loans to projects
as a co-financing partner with local banks
• Relies on local banks to make credit risk
assessment assessment
• Can substantially lower annual debt service
payments of projects
• Repayment of loan principal is used to finance
new loans/ revolving fund
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JBIC/DBP Loan
50% loanLocal Private Bank Loans
50% loan volume
Stand-by credit line
For Bank loan
Refinancing rollover every 7years
Co-financing PWRF Structure
50% loan
4.5%
20 year tenor
50% loan volume
12.5% floating
7 year tenor
Creditworthy RE projects
Blended interest rate 8.5%
Tenor 20 years
+
Creditworthy RE projects Creditworthy RE projects
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3 Billion Peso Loan Program
Comparative Annual Amortization of Debt Calculations Y E A R S
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
PFI 100%
428
428
428
428
428
428
428
0
0
0
0
0
0
0
0
0
0
0
0
0
TOTAL 428 428 428 428 428 428 428 0 0 0 0 0 0 0 0 0 0 0 0 0
Y E A R S
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
PFI
PFI 50%
214
214
214
214
214
214
214
0
0
0
0
0
0
0
0
0
0
0
0
0
JBIC 50%
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
TOTAL 289 289 289 289 289 289 289 75 75 75 75 75 75 75 75 75 75 75 75 75
Y E A R S
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
PFI 50%
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
JBIC 50%
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
75
TOTAL 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150
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Mobilization of Pension Funds
• Provides financing on longer terms and at lower interest rates than local banks
• Removes currency risk
• NAMA funds could be used for co-financing projects to address risk sharing requirement of projects to address risk sharing requirement of pension funds
• Must be designed to address constraints in pension fund project risk assessment capabilities
• Pension funds are generally more conservative than local banks
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Kenya Pension Fund Framework
USAID
DCA Guarantee
World Bank
Identify and Prepare Projects for Financing
SPE
Master Trust
Pension Fund
6.5% 20 yearsJICA
4% years
20
Local Gov’t
Projects
Contractor
AfDB 8% 20
years
Local Gov’t
Projects
Contractor
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Financial Mechanisms To Address ImpedimentsRisks/Barriers Instrument
Perceived credit quality
of borrowers or entering
a new sector
Partial Credit Risk Guarantee – but not helpful in high
interest rate environments
High transaction costs of
smaller-scale projects
Creation of Special Purpose Entity (SPE) for project
implementation
Lack of familiarity with Performance GuaranteeLack of familiarity with
technology
Performance Guarantee
High interest rate
environments and/or lack
of project revenues to
cover market- terms of
financing
Extension of lending maturities
Soft loans
Co-financing with local banks
Lack of capacity in local
banks
Special Funds
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How to Design NAMA Financial Mechanisms
Financial Market Assessment
• Work with financial specialist to assess local financial conditions
• Bank lending terms – interest rates, maturities, collateralcollateral
• National Development Bank lending – eligible sectors and terms
• Bond market – is it available
• Borrowing capacity of project sponsors
• Credit rating capacity and credit ratings
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How to Design of NAMA Financial Mechanisms
Identify Impediments and Design Solution
• Discuss financing issues with project developers, bankers
and government officials – focus on specific projects and
specific impediments
• Consider the best way to use NAMA funds to address
financial impediments – low costs financing, guarantees, financial impediments – low costs financing, guarantees,
SPE or special funds
• Discuss NAMA financial mechanisms with potential
lenders/investors – use term sheets of specific projects
• Requires continuous dialogue among lenders,
borrowers/donors, and government representatives
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How to Design NAMA Financial Mechanisms
Implementation Issues
• Consider local conditions
• Consider donor requirements
• Designed to work effectively with NAMA policy actions
• Consider time and expenses of setting up NAMA • Consider time and expenses of setting up NAMA financial mechanism
• Consider administrative costs and responsibilities
• Who will manage the mechanism/program?
• How will administrative costs be covered?
• What is the exit strategy for the program?
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NAMA Perspective Innovative
• Careful Financial Analyses
• Identification of Real Barriers
• Design of Appropriate Tools
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NAMA Financial Mechanism Design Criteria
• Acceptable to private lenders – A financial structure that does not require lenders to compromise on lending criteria or terms.
• Acceptable to national and local governments –Provides private sector financing at the lowest possible costs to local NAMA program beneficiaries.
• Acceptable to borrowers – Financial program will be utilized by project developers/borrowers
• Unique to local conditions -Designed to work effectively within policy and financial framework of the host country.
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Conclusions• NAMA financing mechanisms are currently undefined
and therefore can be very flexible
• NAMA mechanisms must nevertheless be consistent with donor requirements and conditions
• Limited donor assistance requires that NAMAs leverage private sector financing and are sustainable
• Examples of GEF and other innovative financial • Examples of GEF and other innovative financial programs can be very helpful but each NAMA has to reflect and respond to local financial and policy frameworks
• NAMA mechanisms must be designed through extensive consultations among donors, lenders, borrowers and local governments
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California Residential Reservations Since
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