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

2 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 contribution to development We invest, advise, mobilize capital, and manage assets – providing solutions for an inclusive and sustainable world Who We Are, What We Do

3 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

4 What We Do - Three Businesses IFC Investment Services IFC Advisory Services IFC Asset Management 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

5 IFC Highlights

6 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

7 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

8 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

9 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% Subnational Finance 1% Health and Education 3% Oil, Gas, Mining and Chemicals 8% Private Equity and Investment Funds 3% Global Financial Markets 54% Agribusiness 4%

IFC Climate Business 10

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

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 12

Financial Policies for Climate Change Mitigation: Challenges and Opportunities of Low-Carbon Economic Development 13

Current levels of annual climate financing for developing countries ($9 billion) fall short of annual estimated needs  $ billion for Mitigation  $ 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 Change 14

Abatement cost € per tCO 2 e 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 tCO 2 e 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 1 st 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 build Iron 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 electronics Residential appliances Retrofit residential HVAC Insulation retrofit (commercial) Power plant biomass co-firing Geothermal Coal CCS retrofit Degraded land restoration Abatement potential GtCO 2 e per year Solar CSP Building efficiency new build 2 nd 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 16

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 17

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 18

Policy Instruments Increasing cost efficiency & Decreasing control 19

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 20

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 21

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 22

Investors Financier Market can sustain after incentives have been phased out Manufacturer Service provider End user Demand Product/ Service to meet demand Financing of production and demand fulfillment Sustainability Creating space for a new product/service 23

Creation of Demand InterventionComments 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 breaksNeeds 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 desirability 24

Incentivizing Manufacturers/Service Providers InterventionComments 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 breaksThis 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 25

Enabling Financing InterventionComments Policy support to enable the range of finance required 1 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 riskVery 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 26

Energy Efficiency Financing Potential IFC role 27

Renewable Energy Financing Potential IFC role 28

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 29

Some State Fund Models InterventionComments 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. 30

Increasing leverage State Fund Direct financing Financial Institution Project Subsidizing capital Risk sharing- pari passu Risk sharing subordination Sustainability Low Medium High 31

Increasing leverage State Fund Direct financing Financial Institution Project Subsidizing capital Risk sharing- pari passu Risk sharing subordination 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 32

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 33

Thank You! 34 Peter A. Cook Sr. Investment Officer, IFC Climate Business Group Beijing, China Phone: