CASE STUDY Supporting Energy Efficiency in Vietnam Designing the Financial Structure of an Energy Efficiency Credit Line OVERVIEW Vietnam is one of the most energy- intensive countries in East Asia. But few Vietnamese companies seek to participate in energy-saving or renewble energy projects, in part because only a few financial institutions in the country have dedicated business lines to promote such investments. To improve this situation, the World Bank Treasury designed the financial structure of a US$100 million credit line that helps Vietnamese financial institutions set up energy efficiency lending as a business line. Supporting Vietnam in their quest become more energy efficient Photo credit: Thinkstock. Background line in the form of an IBRD loan of US$100 million Lack of access to financing is a significant barrier to support the project. The Ministry of Finance will to energy efficiency investments in developing on-lend the funds to pre-selected financial countries. To minimize this barrier, the World Bank institutions, which will in turn lend the funds to offers local banks and other financial institutions industrial enterprises for energy efficiency credit lines to offset costs incurred in establishing investment subprojects. new business lines for energy efficiency lending. Appropriate financing terms are key to such credit Typically, the credit line is extended to the lines. The World Bank typically requires that the financial institution as a low-interest loan via the financial institutions on-lend to the end-borrower at national government. The financial institution then market rates to avoid creating market distortions on-lends the funds to borrowers (industries and and competitive advantages. But interest rates other private entities) for investments in energy also have to be attractive enough to encourage efficiency projects. and motivate industrial enterprises to undertake Financing Objective the necessary investments. The Vietnam Energy Efficiency for Industrial Financial Solutions Enterprises project aims to improve energy The terms of IBRD loans are fully flexible, offering efficiency in the industrial sector by improving a variety of maturities up to 35 years. Treasury access to financing from local financial institutions. bankers work with borrowers to identify suitable In April 2017, the World Bank approved a credit loan terms. For the Vietnam energy efficiency has maturity-based pricing—i.e., the lower the project, several options were considered: maturity, the lower the interest rate. Thus fully matching the terms of the primary loan and the on- Option 1. The government would borrow from lent loan offers the government and participating IBRD at 35 years and on-lend to the financial financial institutions lower pricing for shorter- institutions at 10 years. The advantage of this maturity IBRD loans. It also keeps the cost to the option was that it allowed the government to pay end-borrowers as low as possible, which for the primary loan over a long period. encourages them to undertake energy efficiency Option 2. The government would exactly match investments that contribute to the government’s the terms of the credit line (IBRD loan) with the on- energy investment plans. Third, by matching lending terms. Given that the average payback financing terms with the needs of the end- period for energy efficiency projects in Vietnam is borrower (concerning the payback period for the five years, the government would borrow from energy efficiency projects), the government avoids IBRD at five years and on-lend to the financial tying up Vietnam’s credit exposure with IBRD institutions at five years; or the government would beyond project needs and thus uses IBRD borrow from IBRD at 10 years and on-lend to the resources more efficiently. Finally, fully matching financial institutions at 10 years, allowing them to the repayment terms of the primary loan with on- roll over (recycle) the funds to support several lending terms helps minimize the government’s projects. risk. Option 3. The government would fully customize The IBRD loan offers the borrower the option of IBRD loan terms for each participating financial starting to repay the loan at commitment or at institution at source and fully meet its needs. The disbursement. For the first time, the government of government would sign separate loan agreements Vietnam selected disbursement-linked repayment under one US$100 million loan package with terms, which gives the participating financial IBRD. The maturity and amortization schedule for institutions additional time to identify suitable each loan in the package would be set according clients before the start of the repayment period. to the preference of each participating financial This was Vietnam’s first fully customized IBRD institution. For example, Loan 1 would be US$50 loan. The Treasury team is now exploring local million with a final maturity of 10 years, including a currency financing options that would add further grace period of five years; and Loan 2 would be value for the end-borrower. US$50 million with a final maturity of five years, including a grace period of two years. Designing the financial structure of energy efficiency credit lines is one of the many ways the The Treasury banker worked with the project World Bank helps member countries become team, the Ministry of Finance, and participating more resilient to economic shocks. IBRD’s AAA financial institutions to help them understand the credit rating, market presence, and convening options available and select the best option for power enable the World Bank Treasury Financial project and debt management purposes. Products team to develop innovative new products Outcome that help clients maximize financing and mitigate The Ministry of Finance and the financial risk. institutions jointly selected Option 2, for several reasons: First, under domestic regulation (Decree 78 of 2010 regarding on-lending of the government’s foreign loans), the government can on-lend foreign, commercial, and concessional loans (including IBRD loans) only at the same terms as the primary loan. Second, the IBRD loan For information: Miguel Navarro-Martin, Manager of Banking Products, mnavarromartin@worldbank.org, +1 (202) 458 4722