IMPACT Issue 19 | February 2020 Source: 451 Derece Production. IMPROVING ENERGY EFFICIENCY FOR SMALL AND MEDIUM ENTERPRISES IN TURKEY An ESMAP-funded analytical tool helped local banks in Turkey evaluate projects’ potential energy savings in order to facilitate more than 300 loans through a $201 million World Bank credit line to small and medium enterprises (SMEs) to purchase modern equipment, improve industrial processes, and upgrade production lines. BRIDGING THE GAP KEY ACHIEVEMENTS BETWEEN SMEs 300+ loans provided through a $201 million • AND ENERGY EFFICIENCY World Bank credit line, resulting in $262 LENDING million total investments (including $61 SME equity and co-financing from the three Turk- Improving energy efficiency in Turkey is crucial for ish public banks) reducing expensive energy imports and meeting climate change targets. Small and medium enterprises (SMEs) play a very important role in the Turkish economy in generating income and employment: SMEs are esti- mated to account for 99 percent of all enterprises and 78 percent of employment. Improving energy efficiency for small businesses can help reduce their energy-re- lated expenses, allowing them to grow and become more competitive. New equipment and processes can also help expand and accelerate production, improve product quality, reduce defective products, and lower 274 of these loans extended to SMEs for • maintenance costs. about $144 million to purchase new and mod- However, investments in energy efficiency do not hap- ern equipment, improve industrial processes, pen on their own due to several challenges, including: and upgrade production lines SMEs and banks are unaware about opportunities and don’t have the staff and technical skills to iden- 10 million MWh estimated energy saved by • tify and implement investments in energy efficiency; the project SMEs struggle to get loans or other forms of financing 400,000 tons of CO2 equivalents/year reduc- • for energy efficiency upgrades; and these types of investments are often relatively small, and some effort tion in greenhouse gas emissions, equivalent is required to identify and assess them—making them to taking 1.5 million cars off the road less attractive for banks to finance. (See infographic here: https://www.worldbank.org/en/ news/infographic/2019/11/26/turkey-energy-efficiency-in- small-and-medium-size-enterprises) CREATING A TOOL TO DETERMINE ENERGY EFFICIENCY IN SMALLER PROJECTS Because the projects seeking funding were relatively small at a cost of several hundred thousand dollars each, it was not necessary, or too costly, to conduct full feasibility studies or energy audits. SME lending is about a high volume of smaller loans requiring the process to be simple and for transaction costs to be as low as possible. However, the Turkish banks were con- cerned that without such technical assessments they Source: 451 Derece Productions. would not be comfortable determining if the projects actually saved energy and if they would meet the mini- mum criteria established with the World Bank. Another solution had to be found for the banks to move forward TURKEY SMALL AND MEDIUM with financing. ENTERPRISES ENERGY To help overcome these challenges, ESMAP provided EFFICIENCY PROJECT funding to develop an analytical tool to help the banks determine the energy savings of potential SME invest- To help overcome these challenges and scale up ments by allowing the banks to compare data from the commercial bank financing for energy efficiency baseline equipment (i.e., lighting, boilers/kilns, chillers, investments in SMEs, the World Bank financed motors, and other industrial equipment and machin- the Turkey Small and Medium Enterprises Energy ery) with the replacement equipment. The tool would Efficiency Project. It was the first World Bank loan calculate the energy savings, estimated cost savings, globally that specifically targeted energy efficiency reductions in CO2 emissions, simple payback period, projects for SMEs. and net present value. Implemented between December 2013 and Sep- Such a tool was easy to use, quick—which was critical tember 2019, the project provided financing through for the SME market, and provided the information nec- three Turkish public banks (Halkbank, Vakif Bank, essary for the banks to confirm that the projects were and Ziraat Bank) to SMEs across Turkey for energy eligible for the World Bank credit line, which required efficiency upgrades and helped develop and imple- a minimum level of 20 percent energy savings. The ment different business models for these investments, tool also had tables to convert units of energy, default such as equipment leasing, vendor financing, and values for older equipment, prices for different energy performance-­ based, or energy service company sources, and other features requested by the banks. (ESCO) contracts. The tool played a critically important role early on to To scale up commercial bank lending for energy effi- help sensitize the banks and their risk profiles to ensure ciency investments in SMEs, the three Turkish public the projects seeking funding would deliver on their banks needed a way to determine if projects seek- energy efficiency targets. Without such a tool, there ing funding would save energy and be able to repay was a very real possibility that the project would not the loans with the cost savings generated from the have been able to go forward, or would have to rely on investment. energy audits, which could have really limited demand. 2 ESMAP Impact | Issue 19 ISSUING THE LOANS CONFIDENTLY AND GAINING NEW SKILLS FOR ENERGY EFFICIENCY LENDING Once it was determined that projects met the energy efficiency criteria, the project provided financing to SMEs through the three banks. They each received $67 million through the World Bank loan and issued a total of 300 loans to Turkish SMEs for about $201 mil- lion. Total investments under the project, including SME equity and co-financing from the three banks, were more than $262 million. Source: Video—Energy Efficiency Helps Reduce Turkey’s About $3.6 million was also provided as a grant from Energy Imports and Meet Climate Change Targets (https:// the Global Environment Facility (GEF) to provide addi- www.worldbank.org/en/news/video/2019/11/26/energy- tional technical assistance to the banks and Ministry of efficiency-helps-reduce-turkeys-energy-imports-and-to-meet- Energy and Natural Resources to support SME energy climate-change-targets). efficiency. Through the project, the participating Turkish public These investments saved approximately 10 million banks developed awareness and skills required for MWh of energy, and greenhouse gas emissions have energy efficiency lending. They improved their capacity been reduced by about 400,000 tons of CO2 per year— to develop and market financial products for energy equivalent to taking 1.5 million cars off the road. efficiency financing, appraise energy efficiency invest- ments, monitor the project portfolio, and verify energy The project allowed SMEs to increase their profitability savings. The banks also developed relationships with and productivity, access financing more easily, and vendors of energy equipment and energy service make long-term payments with favorable interest rates. companies—which make the investments, guarantee the level of energy savings, and are paid from the resulting energy cost savings. These relationships will be sustained beyond the project, and the banks have expressed interest in continuing to finance investments in energy efficiency. MEETING ENERGY EFFICIENCY AND REACHING CLIMATE CHANGE GOALS The project financed upgrades to more energy efficient equipment and machinery across all industry sectors in Turkey, with the largest shares of financing going to the textile and clothing industry, metallurgical industry, and chemical industry. Source: 451 Derece Productions. ESMAP Impact | Issue 19 3 efficiency upgrades, such as reduced operating costs (including cost of electricity and cost of mainte- nance), improved quality of their produced goods, and increased output. REPLICATING THE TOOL IN OTHER COUNTRIES Although this tool was created for use by the Turkish banks, it could be customized for use in other countries with World Bank industrial investment programs as a way to screen potential energy efficiency investments to determine their eligibility. As the Bank currently has or recently completed indus- trial financing projects in many countries—including China, India, Tunisia, Turkey, Ukraine, Uzbekistan and Source: 451 Derece Productions. Vietnam—there is a strong potential for replicating the tool. Please contact us at esmap@worldbank.org if you would like more information. “Without the tool, I believe we wouldn’t have For instance, the Çizgisan textile company used a loan had the operation. It had become such a sticking through the SME energy efficiency project to purchase point for the banks to determine ‘if an SME new generation printing press machines, which allowed replaces a boiler, how much energy would they them to produce products with near-zero errors. This save?’ Applying the tool significantly overcame minimized waste, which is one of the biggest problems their concerns without introducing new in the textile industry. Taner Turgu, the owner of the requirements and transaction costs by helping company, said they “have also created employment them estimate the energy savings, project cost and produce 40 percent more with the same amount of savings and cash flows, rates of return and other energy.” key indicators.” Other SMEs that were part of the project not only —Jas Singh, Lead Energy Specialist, Energy & improved their energy efficiency but also reported Extractives Global Practice, Europe and Central many other benefits through the financed energy Asia Region, World Bank ESMAP MISSION The Energy Sector Management Assistance Program (ESMAP) is a global knowledge and technical assistance program administered by The World Bank. It provides analytical and advisory services to low- and middle-income countries to increase their know-how and institutional capacity to achieve environmentally sustainable energy solutions for poverty reduction and economic growth. ESMAP is funded by Australia, Austria, Canada, ClimateWorks Foundation, Denmark, the European Commission, Finland, France, Germany, Iceland, Italy, Japan, Lithuania, Luxembourg, the Netherlands, Norway, the Rockefeller Foundation, Sweden, Switzerland, the United Kingdom, and the World Bank. 1818 H Street, NW Washington DC 20433 www.esmap.org esmap@worldbank.org 4 ESMAP Impact | Issue 19 Fe b r uar y 20 20