SePtember 2008 46071 About the Author Working together to move Client WilliAm beloe has been Sustainability relationships from Advice to Partnership Program manager for iFC Philippines for two years. in Sustainable energy Finance APProving mAnAger euan marshall, head of Advisory Services, iFC IFC has successfully developed sustainable en- energy projects, and is expected to result in: (i) Philippines. ergy projects in a number of emerging mar- improved access to financing for sustainable kets over the last decade. While each inter- energy projects, which will continue beyond vention is tailored to its specific markets and the support of IFC financial instruments and the needs of our clients, in general the initia- advisory services; (ii) growth and business de- tives have focused on using local financial in- velopment for private enterprises related to termediaries as aggregating agents to stimu- ee/re projects; and (iii) promotion of more sus- late investment in both energy efficiency and tainable development, with better use of nat- renewable energy, thus reducing both client ural resources and a reduction in projected operating costs (and improving the clients' greenhouse gas emissions. this program also margins) and greenhouse gas emissions. this supports the national government, as it imple- paper focuses on the sustainable energy fi- ments both its national energy efficiency and nance project IFC has developed in the Philip- climate change mitigation campaigns. pines and how we have leveraged more devel- oped projects and ensured a one-IFC approach, the IFC signed cooperation agreements with the importance of focused research, listening two of the Philippines' three largest financial to and being responsive to clients, and main- institutions (FIs) earlier this year to provide taining flexibility and realistic objectives in the them with the support necessary to develop program design. portfolios in the area of sustainable energy, e.g., ee and re. Phils SeF is an 18-month en- this document is intended for IFC colleagues gagement worth approximately US$650,000 responsible for developing projects in various focused on building capacity, pipelines, and business lines and regions, with particular rel- portfolios within partner FIs and raising aware- evance to those involved with either sustain- ness for the business cases behind ee and re able energy or local financial institutions. the for the wider community. lessons are presented with minimum technical jargon to make the message accessible to as the Project went through a number of clear wide an audience of project/program develop- stages before we got to where we are today. ers as possible. these stages are elaborated on below. Background Lessons Learned the Philippines Sustainable energy Finance 1) While a market opportunity may look Project ("Phils SeF" or the "Project") supports obvious to you, it may not be to your client. the creation of a commercial financing market Bringing value to clients is easier once you for sustainable energy projects in the Philip- understand what they want. pines. this program will assists the Philippines in improving energy security and economic "We don't see things as they are. We see productivity, and promoting private enterprise things as we are." anais nin in the energy sector. Phils SeF covers both en- ergy efficiency (ee) and renewable energy (re) the inception of this project, like many others projects. in this space, began with some important work done by the environment and Social Develop- the program is designed to leverage IFC's ca- ment Department (CeS). they undertook re- pabilities and experience, backed by donor re- search three years ago comparing various sources, to catalyze financing for sustainable countries in order to ascertain the next market IFC SmartLeSSonS -- SePtemBer 2008 1 to roll out an SeF program. this was a key step, and the in the sustainable energy field, CGF colleagues are able to Philippines were clearly the most appropriate market. our introduce financial products to clients that help mitigate research showed that there was a strong business case for climate change, a key World Bank Group strategic pillar. SeF: with electricity prices consistently among the highest in this provides them with a clear "additionality" role, where the region, over 50 percent of power reliant on imported IFC is providing a service that is not otherwise available in oil, but with a comparatively sophisticated local banking the market. industry, government commitment to energy efficiency and renewable energy, the country had significant potential to 2) Leveraging success from elsewhere does not mean see rapid growth in the sustainable energy financing mar- adopting it in its entirety. Adaptation is a powerful ket. However, when we took these findings to the local FIs, tool. it became clear that, while they were interested in the con- cept, even the most enthusiastic of them were unwilling to "If we keep doing what we're doing, we're going to keep invest resources in building internal capacity to lend to this getting what we're getting." Stephen Covey market. While the business case looked clear to us, to the local FIs more detailed data were needed before they would as we were building relationships with these priority cli- seriously consider investing in the market. ents, the IFC team, including local as well as regional/global CGF, advisory Services, CeS, and Structured Finance col- In order to begin work with the FIs, we needed to under- leagues, were all on the same page with regard to the mod- take some more detailed, local research to garner the nec- el we wished to leverage. We had spent time looking at the essary information about the size of different market seg- models that had been successful elsewhere. We engaged ments, the barriers to developing them, the potential and received valuable support from Central europe, russia, financing opportunities they contained, potential pipelines, and China, as well as from Headquarters. deal aggregators, etc. the China model in particular was recognized as a success this gave us a chance to do two things: we wanted to emulate. It included advisory Services and Investment Services engagements in lock step. In order for · Establish a clear strategy with our Global Financial this model to work, FIs needed to buy into the opportunity Markets Department (CGF) colleagues as to which FI both by paying fees for advice, (and investing their own clients IFC most wanted to build a relationship with. resources in building capacity and pipelines), and by enter- IFC Philippines Investment Services and Advisory Ser- ing into a financial engagement at the same time, before vices teams had already agreed that the financial mar- the pipeline had been built. Philippine banks are compara- kets sector was a key pillar of our country strategy. tively sophisticated, compared to other emerging markets. Working with CGF to identify and then cultivate rela- However, they are also comparatively risk-averse. this tionships with key potential clients allowed Advisory meant that they were unwilling to incur the expenses re- Services to leverage the stronger relationships that our lated to engaging in IFC's risk Sharing Facility (rSF) until Investment Services colleagues had with the local FIs' they had a greater degree of certainty that they were going senior management, while Advisory Services could of- to fill it with deals. fer services to the FIs that could help unlock the door to greater interaction with these clients. It also meant at this point in the project development cycle, the time that we were working in tandem to develop these re- spent with our CGF colleagues in setting priorities paid divi- lationships. When we met obstacles, we could brain- dends. as a team we had agreed that these were clients IFC storm together to work out the best strategies for was willing to invest in building a relationship with. to- overcoming them; and gether we were able to analyze the investment advisory Services could make in beginning these relationships, and · Based on the joint strategy we developed as a result of the opportunity cost of not being able to use these advi- the above point, we were able to focus on two or three sory Services resources elsewhere. With country manage- banks with which to begin the program, and to under- ment and regional industry management involvement, a take the research that was of most use to those banks. clear decision was made that in this case, advisory Services should play a catalytic role in building IFC's relationships once we had completed these pieces of research, we shared with these priority banks by supporting these FIs to build our findings with the wider financial community. However, their SeF portfolios before a firm commitment for an Invest- our priority clients were the keenest and most enthusiastic ment Services product had been made. the advisory Ser- to work with us in developing the opportunities this re- vices intervention was viewed as a worthwhile investment search had uncovered and, as such, we were able to lever- of IFC's time and resources, as it provided IFC with an excel- age the research into engaging with both of them. Both lent opportunity to interact more frequently with the cli- were now willing to invest in allocating a small group of ents and get to know them better, and, by providing sup- their staff to be tasked with developing the project and de- port in building their pipelines and portfolios, IFC was livering on SeF pipeline and portfolio objectives and, in helping them get a firmer understanding of the true size of both cases, paying 50 percent of the costs for the specific the market opportunities, thus developing their appetite work that was designed for them. for IFC's financial products. n.B. an additional advantage of the close working relation- In both cases, CGF and Structured Finance colleagues have ship between advisory Services and CGF is that by working been increasingly engaged with these clients in talks about 2 IFC SmartLeSSonS -- SePtemBer 2008 both rSFs and other financial products. IFC would not be in the growth of sustainable energy financing. this position if it had not been for the day-to-day interac- tion our team now has with them. However, based on a strict implementation of IFC's advisory services pricing policy and an honest assessment of the realis- n.B. In developing our strategy at the country, industry, and tic opportunities for meaningful IFC intervention, at the ap- project levels, and in ascertaining whether IFC should com- propriate time to write the project approval document mit advisory Services resources without a committed invest- (taaS-PDS ), i.e., the project design document, we could not ment project, the framework below proved a valuable tool justify using that sum efficiently. as a result, PeP Philippines, in ensuring we had a value proposition for the client. having invested some considerable time and money in devel- oping the project, decided to finance the initial engagement 3) Scale up sensibly. Don't rush to expand; waiting for from core PeP Philippines funds rather than access the larger the right conditions will mean money will be better GeF grant. this allowed us to develop an appropriate inter- spent and the project is better placed for success. vention for the current state of the market and its current readiness for the opportunities available. "A mediocre idea that generates enthusiasm will go further than a great idea that inspires no one."mary Kay ash Having spent the last six months working with our partner FIs, we (and they) now have a firmer grasp of the potential another valuable piece of work that CeS completed at an for FIs to engage in the field of sustainable energy. Both FIs early stage was to engage the Global environment Facility. now have healthy pipelines, with a combined value of over as a result, GeF earmarked a significant grant for the pro- US$50 million and with $25m in loans already approved. posed SeF engagement in the Philippines. this included US$5 Both are now interested in investigating additional areas un- million in funds both for advisory services and the introduc- der their SeF programs. Further, other FIs are beginning to tion of suitable financial products into the market to catalyze showinterest.andthroughourworkoverthelast18months, IFC SmartLeSSonS -- SePtemBer 2008 3 IFC has a much firmer grasp of the other chal- lenges and opportunities facing this market in the areas of regulation, new market opportuni- ties, work with service providers and equipment manufacturers, and our development partners. as a result we are now in a much better posi- tion to allocate the GeF funds to the most ap- propriate objectives, and we are much more confident that we know the best ways we can reach those objectives. Given the encouraging start this program has made, the commitment our clients have dem- onstrated, the growing awareness of the po- tential for sustainable energy finance, and the need for greater and wider market awareness raising, IFC is now in the right position to, and is working to, design a second phase of this proj- ect that will be funded by the Global environ- ment Facility funds mentioned above. the sec- ond phase is likely to cover the following areas: expanded work with current and new partners; work in the policy/regulation space; and work with relevant stakeholders to support the coun- try's renewable energy development, with par- ticular focus on policies and conditions effect- ing investment in this area. this moment is opportune because of the imminent passage of a renewable energy bill in the Philippine Con- gress. DiSClAimer iFC Smartlessons is an awards program to share lessons learned in development-oriented advisory services and investment operations. the findings, interpretations, and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of iFC or its partner organizations, the executive Directors of the World bank or the governments they represent. iFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. Please see the terms and conditions at www.ifc.org/ smartlessons or contact the program at smartlessons@ifc.org. IFC SmartLeSSonS -- SePtemBer 2008 4