Financing options: talking with the IDB15 May 2009
Alejandro Melandri, Energy Specialist at the Inter-American Development Bank, gives IWP&DC an insight into the different financing options the Bank offers hydro developers in the Latin America and Caribbean region, and provides information on how to apply for such funds
The IDB is the main source of multilateral financing and expertise for sustainable economic, social and institutional development in Latin America and the Caribbean (LAC). The IDB Group is composed of the Inter-American Development Bank, the Inter-American Investment Corporation (IIC) and the Multilateral Investment Fund (MIF). The IIC focuses on support for small and medium-sized businesses, while the MIF promotes private sector growth through grants and investments, with an emphasis on microenterprise.
The IDB’s main goals are to promote economic growth and regional integration in Latin America and the Caribbean. It strives to do so in environmentally and socially sustainable ways, in order to achieve lasting poverty reduction and greater social equity. More specifically, the Bank seeks to:
• Make countries more competitive by supporting policies and programs that increase their potential for development in the global economy.
• Modernize the state by strengthening public institutions, increasing their efficiency and transparency.
• Invest in programs and activities that expand economic opportunities for the low-income majority of the region’s population.
• Promote regional integration by forging links among countries to develop larger markets for their goods and services.
One of the IDB’s main priorities is energy and climate change, where it seeks to develop renewable energy sources and responses to the challenges posed by climate change. The countries of the LAC face growing demands for energy and tensions over reliability of supply. Ensuring affordable and reliable sources of energy is at the core of the LAC development agenda. In addition, the impacts of uncontrolled climate change threaten to undermine the regions economic and social well being, increasing its vulnerability to natural disasters, disruptions of agriculture, and loss of biodiversity.
To support the LAC region in the search for economically and environmentally sound energy options, the Inter-American Development Bank seeks to:
• efficiently meet the energy requirements of its member countries derived by the process of socioeconomic development;
• accelerate growth and diversification of the energy supply;
• foster energy conservation.
In addition to continuing support for electric energy generation, transmission and distribution projects and/or programs, as well as the development of hydrocarbon resources, the Bank will actively promote energy development in the region by means of loans and technical cooperation for technically, socio-economically and financially feasible projects, aimed at:
• developing alternative sources of energy, especially from renewable resources;
• reducing and/or replacing the utilization of hydrocarbons in the production of energy;
• promoting the efficient use of energy;
• creating and/or strengthening the institutional and technological base of the energy sector;
• mobilizing additional resources, either of internal or external origin, required for the implementation of energy projects and/or programs.
To help meet these challenges, in March 2007 the IDB Board approved the Sustainable Energy and Climate Change Initiative (SECCI). The core objectives of this initiative are to expand the development and use of renewable energy sources, energy efficiency technologies and practices, and carbon finance in the region, as well as to promote and finance climate change adaptation strategies that reduce the regions climate vulnerability.
SECCI seeks to meet these core objectives by:
• closing gaps in the financing of renewable energy and energy efficiency (RE/EE) in LAC by up-scaling Bank investments;
• integrating policy reform and removal of institutional barriers with innovative policy and project financing for market transformation;
• mainstreaming sustainable energy investment across sectors and refining financing tools;
• accessing the carbon finance market to the fullest extent;
• addressing adaptation needs in existing capital assets in LAC- and IDB-financed projects as part of natural disaster risk management;
• collaborating and forming new partnerships with the public and private sectors in LAC, donor agencies, and other financial institutions.
So what opportunities could this initiative offer to developers of hydro projects, and exactly how does the Bank help support hydro schemes in the LAC Region? To help answer these queries, we posed a few questions to Alejandro Melandri, Energy Specialist at the Inter-American Development Bank.
IWP&DC: Will hydro projects receive funds through the Sustainable Energy and Climate Change initiative?
Melandri: SECCI can support hydro projects in many ways but maybe the most relevant areas include assisting and financing carbon finance assessments and applications and climate change impact on hydrology. For example, SECCI supports Hidrocañazas, a 6MW small-scale hydro energy project, on the carbon finance component of the scheme. SECCI is assisting in the development of the project documents and supporting the project promoter throughout the CDM cycle.
What is the most common type of hydro project the Bank finances?
The Bank is financing some large hydro projects in LAC. We are also engaging in projects that support the refurbishment of old hydro projects. The IDB Energy Division expects to identify more of these opportunities in the region since a large number of hydro projects that were built in the 60s and early 70s may require a revamp in their electromechanical equipment and in some cases also in their civil infrastructure. The IDB sees an opportunity in this type of project to help borrowers increase their installed capacity with a high benefit over cost ratio, while having a minimum environmental impact. New opportunities currently under identification by the IDB include a combination of new or green-field projects and refurbishment schemes.
Could you explain the differences in the types of financing you offer? What is the most common form of finance for hydro projects?
The first distinction in the type of financing is related to whether financial risks are undertaken by the owners or there is a sovereign guarantee supporting the project. The first situation is more frequent in small to medium scale projects while the latter is almost a rule for large hydro, with relevant exceptions in the larger economies in the region. The Bank uses the resources of its Ordinary Capital (OC) for most of its lending operations.
Projects supported by a sovereign guarantee (SG or public sector loans) are financed via loans, either with OC, using concessional resources, or blending both sources, and loans following standard general terms and conditions. Virtually all OC loans are approved, disbursed and repaid in US dollars. Amortization periods of public sector loans provided with OC resources range from 15 to 25 years. Lending rates, which are periodically adjusted according to loan conditions, reflect the costs incurred by the IDB in borrowing funds, plus charges and spreads. The Bank publishes tables indicating loan charges and lending rates for its available currency facilities for Ordinary Capital.
The Bank manages concessional resources but the benefit of these resources is limited to the region’s weaker economies. Virtually all of these loans are approved in US dollars. For concessional resources loans approvals may include a 40-year maturity and a 10-year grace period, while the annual lending rate is 0.25%.
Do you finance both public and private schemes?
When there is no sovereign guarantee (NSG) on the project the IDB group can provide financing through the Structured and Corporate Finance Department (SCF) of the Bank. When the owner of the project is a state owned company, SCF and the public sector divisions of the IDB join efforts to structure the operation. OC resources are also used to finance lending to the private sector. Tenors typically range between 8 and 15 years, with fixed or floating interest rates tied to market conditions. If the project is scaled in the range of small and medium-sized businesses then another member of the IDB group, the Inter-American Investment Corporation (IIC) may become the appropriate partner.
Do new build projects receive different finance packages to rehabilitation schemes?
From the IDB standpoint there is no difference in the finance packages for new build projects or rehabilitation schemes. Of course in rehabilitation projects there are usually some obvious benefits during the preparation process since some key variables are already known and documented, such as market and regulatory conditions in relation to the project, environmental risks, owner technical and financial specific track records. In the case of NSG operations these ex-ante knowledge may result in a reduced risk perception from the market or at least a higher interest in participating in the financing.
How would a private developer apply for finance? Do you have any specific step-by-step guidelines?
The first step for a private developer to apply for finance for a private sector project is to contact the Structured and Corporate Finance Department (SCF). If the owner of the project is meant to be a state-owned company, then the developer should contact the IDB´s Energy Division (ENE). In either case IDB officers will work out with the developer the most convenient financial solution for the project, identify the most suitable lending instrument, and they will also explain in detail the particular requirements to prepare the financial structuring. A very first approach in doing business with the IDB is to visit our website in which the page http://www.iadb.org/resources/business/doingBusiness.cfm is highly recommended.
How do you decide to approve funds? Are there certain criteria a project must meet before it is approved for finance?
In the initial contacts with the client, the IDB seeks highly developmental projects supported by a viable business plan that complies with the eligibility criteria. The Bank will also evaluate what value it can add to the project by its participation (additionality). In any case whether dealing with SG or NSG financing the Bank in general expects to support projects which show financial and economical feasibility, environmental and social sustainability and of course technical soundness. If these qualities can be distinguished in a preliminary assessment then eligibility is granted and a due diligence stage takes place in order to precisely review the project.
Has the global financial crisis affected finance options for hydro projects?
The global financial crisis is affecting virtually every investment decision in different ways. Public sector decision makers are facing difficult trade-offs when deciding how to allocate public resources. Private sector financing is highly dependent on private financial sources which may be somehow harder to obtain in this environment. Nevertheless, hydro projects are generally long term developments, both in their preparation and execution stages and their overall project cycle usually extends far beyond the duration of occasional financial markets disruptions. So even though the current global financial crisis is particularly severe the IDB is dealing with several hydro projects under execution, preparation or recently proposed.
What impact has the Clean Development Mechanism had on your finance packages?
The Bank has been able to successfully support the access to carbon finance resources in some medium and small hydro projects. Currently, as part of the SECCI initiative, the Bank is offering support to projects that can benefit from CDM by means of financing required studies and assessments as well as providing in-house knowledge to assist developers.
How important is the environmental impact of a project when considering finance? Does a project have to have an environmental impact study?
Sustainability is understood at the IDB as promoting economic growth and poverty reduction that ensures the kind of lasting environmental social and economic benefits that the IDB was created to foster. The Bank recognizes that ecosystems are critical to economic growth and poverty reduction and that the inclusion of traditionally excluded groups such as indigenous peoples, women, or those with disabilities is fundamental to meaningful development. Sustainability standards are important to ensure that each project is assessed, approved and monitored with due regard to environmental, social, labor, health and safety concerns, and that all project-related impacts and risks are adequately mitigated or controlled. Accordingly, Environmental Impact Assessments (EIAs) are prepared by the borrower for projects with potentially substantial environmental impacts. EIAs are made available to affected populations and local nongovernmental organizations by the borrower before the Bank proceeds to the formal analysis of a project.
Could you give any examples of recent projects where finance has been approved?
The IDB is financing large hydro projects currently under construction, such as Tocoma in Venezuela (2160MW) and Porce III in Colombia (660MW). Recently approved projects include the rehabilitation of the 54MW Peligre plant – the largest renewable power source in Haiti – as well as the rehabilitation of the Centro América and Santa Bárbara facilities in Nicaragua.
This year the IDB celebrates its 50th anniversary – what have been the most significant developments in funding of energy projects over the last few decades?
The most significant developments are related to the Bank’s strong commitment to support social and environmental sustainability of the energy projects as well as its early adherence to supporting borrowers who want to address environmental impacts and climate change.
Finally, do you have any suggestions for project developers on the best avenues for obtaining project finance? What pitfalls should they avoid?
Maybe the most significant concept that the IDB expects as an outcome from its projects is development effectiveness. Developers who expect to engage IDB to support their projects should be aware of this and be able to state their project’s strengths from this standpoint.
For further information please contact:
Leandro Alves, Chief, Energy Division.
Email: [email protected] Tel:?+1 202 623 2065
Alejandro Melandri, Energy Specialist, Energy Division.
Email: [email protected] Tel:?+1 202 623 1938
Inter-American Development Bank, 1300 New York Ave. N.W., Washington, DC 20577