24631 - China Utility-Based Energy Efficiency Finance Program

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Summary of Proposed Investment

Project Number

24631

Company Name

INDUSTRIAL BANK CO LTD

Date SPI Disclosed

Mar 28, 2006

Country

China

Industry

Financial Markets

Projected Board Date

Apr 20, 2006

Status

Completed

Sector

Other Non-Depository Credit

Department

Regional Industry - FIG Asia & Pac

Environmental Category

Previous Events

Approved : May 4, 2006
Signed : May 17, 2006

Project Description

The proposed China Utility-Based Energy Efficiency Finance Program (“the Program”) entails an IFC investment of up to RMB ￥405 million (approximately US $50 million at today’s exchange rate), in Risk Sharing Facilities (“RSF”) for 2-3 participating commercial banks in China to support up to RMB ￥932 million (approximately US $115 million equivalent at today’s exchange rate) energy efficiency (“EE”) equipment loans, mostly to small-and-medium sized energy users.

The Program has three key developmental objectives:

- Pro-active engagement with IFC portfolio and non portfolio banks in China to improve current lending and risk management practices and;

- Development of SME lending capacities of IFC’s portfolio and non-portfolio banks;

- Promotion of the energy efficiency equipment financing market.

The Program is expected to be partially funded by a grant of US$16.5 million from the Global Environment Facility (“GEF”) and a US $3.0 million from Finland’s Ministry of Trade and Industry (MTI). A large portion of the GEF funds, between US$10.0 to US$11.5 million will be used to cover IFC’s RSF liabilities.

IFC’s exposure on its own account will be up to RMB ￥312 million on the second loss risk sharing position, calculated at today’s exchange rates. The balance of GEF funding, plus the MTI bilateral donor funding, will be used primarily for engineering services, technical advisory and program management activities.

The Program will be implemented by IFC’s Financial Markets Department (“CGF”), the Environmental Finance Group (EFG), and the China Project Development Facility (“CPDF”) through IFC’s Beijing office.

Sponsor / Cost / Location

Product Line	IFC Investment (million USD)
Risk Management
Guarantee	49.84
Loan
Equity

Development Impact

This is a FI Type 1 project according to IFC''s environmental and social review procedure. The banks availing of the RSF must ensure that the projects supported under the facility are in compliance with applicable National Environment, Health, Safety and Social laws. The participating banks would , prior to their participating in the RSF, need to establish an Environmental and Social Management System (ESMS), to the satisfaction of IFC, and designate appropriate individuals who will have responsibility for the implementation of the ESMS. The banks must submit an annual environmental performance report to IFC, as per an IFC format.
Location of environmental documents In locally affected community

The project is expected to generate significant development impact in China’s financial market development, energy efficiency equipment market development and environmental improvements.

Financial Markets Development: The RSF will provide an effective credit risk management tool that will encourage banks to develop improved risk management practices, introduce new lending products and to expand coverage to under-served SME segments.

Specifically, the Program and IFC RSF will enable banks to:
- Assess risk and underwrite loans more on the basis of borrower cashflow and ability to pay, including the economic merits (energy cost savings) of the project being financed;
- Apply risk-weighted pricing and use extra spread to cover additional risk;
- Offer three to five year loan tenors (for equipment that has useful lives of 10-20+ years) and amortize loans with installment payments of principal. This reduces bank risk on the medium term balloon payment loans, and reduces borrower total interest costs;
- Apply other credit enhancement methods, e.g., collections of loan payments together with utility bills with the threat of suspending utility service in loan default, debt service reserves for individual loans, and additional bank loss reserves, etc.

There is a large and relatively untapped market for equipment term loans that can be offered on these terms. The Program envisions a clear pathway to commercialization whereby banks can employ the credit risk management methods on a profitable sustainable basis without the IFC risk sharing.

Energy Efficiency Development. In addition to financing barriers, under-developed market awareness of and marketing capacities for EE equipment also hinder the development of energy efficiency equipment market. Besides providing a financing channel, the Program will also expand marketing channels for EE equipment, educate customers, build sales capabilities of EE equipment suppliers, and enable partner utilities to reach, educate, and deliver a comprehensive set of services to a large set of energy users systematically.

Environmental Improvement. China’s energy supply mix relies overwhelmingly on coal, a cheap but highly polluting fuel. China’s government is promoting a rapid increase in natural gas use as an energy supply alternative and to address chronic local environmental pollution problems. By improving efficiency of energy use and promoting expanded use of clean burning natural gas, the Program will reduce emissions of air pollutants. In particular, the partnership with Xinao will serve medium size cities, for example, Shijiazhuang (Hebei Province) and Changsha (Hunan Province) which are highly polluted.

Fit With World Bank Group Strategy and IFC Role. According to FY03-05 CAS, three main themes of the Bank’s operational strategy in China are to (i) improve the business environment and help accelerate China’s transition to a market economy; (ii) address the needs of the poorer and disadvantaged people and regions; and (iii) facilitate an environmentally sustainable development process.

Within this broad framework, IFC''s strategic priorities are: (i) improving the business environment, particularly as it relates to financial markets, private participation in infrastructure and SMEs; (ii) encouraging development of SMEs through capacity building, and the development of alternative sources for SME financing; (iii) helping deepen and broaden the financial sector by supporting private banking and non-bank financial institutions; (iv) supporting private sector development in China’s western and interior provinces; (v) enterprise reform through model transactions promoting industry consolidation and restructuring; and (vi) expanding the presence of private enterprises in infrastructure, social services, and environmental technology sectors. The focus will be on model transactions that are setting standards for private sector investments in corporate governance, international accounting, environmental technologies and practices, and efficiency of operations, with the aim of creating demonstration effects and helping Chinese companies become global and internationally competitive players. The proposed project is fully consistent with this strategy.

IFC plays a critical catalyst role in bringing together local banks, partner utilities, and GEF to pioneer EE finance development in China. IFC, with the support of GEF funding will help the participating banks to overcome the hurdle of unknown and perceived high risk of EE financing through the RSF. IFC’s other contributions will include providing technical assistance to the banks on improving risk management skills and to partner utilities on building EE marketing capabilities, as well as providing project execution support through the Program Management Office.

Contacts

For Inquiries About the Project, Contact

Alexander Wellsteed, Investment Officer, Global Financial Markets
Email: awellsteed@ifc.org, or
Jeffrey Liebert, Investment Officer, Environment and Social Development Department Email: jliebert@ifc.org

This Summary of Project Information (SPI) is prepared and distributed to the public in advance of the IFC Board of Directors' consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC's activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only. The following SPI is disclosed in accordance with IFC's Disclosure of Information Policy that went into effect September 1998.

The map is for illustrative purposes and does not imply the expression of any opinion on the part of the World Bank, concerning the legal status of any country or territory or concerning the delimitation of frontiers or boundaries. Country borders or names do not necessarily reflect the World Bank Group's official position. In some cases, available project location information is limited to the country of the project's activities. Locations are approximate.

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