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Small Community CDM projectsSmall Community CDM projects
IDFC experience and perspectives
Ajay Narayanan
Head EMSD/DINT
IDFC
2
OutlineOutline
• Background to IDFC– Introduction– Decentralized Infrastructure– Carbon Finance
• IDFC perspective on Small projects– SELCO– IRNET
Rural electrification in India
• Perspectives for CDCF
3
IDFC BackgroundIDFC Background
• Set up as a nodal FI to lead private capital to commercially viable infrastructure
• 40% GoI, 40% international agencies• Works on project finance, policy & advisory work• Sectors
– Energy• Generation, transmission and distribution
– Integrated Transport & Logistics• Roads and Bridges• Ports and harbors
– Telecommunication & IT– Water, Sanitation and Solid waste– Food & Agriculture– Health, Education & Tourism
• Environment Management and Decentralized Infrastructure
4
Background of DI in IDFCBackground of DI in IDFC
• Limited last mile impact of centralized infrastructure• Adverse impacts of centralized development
– Not always cost effective– Environment & Social impacts– Long gestation periods
• Distortions in system for rural infrastructure & poverty alleviation
• A divide of commercial finance vs. Donor programs• IDFC has set aside US $ 2 mn.year to fund such projects
– Redefining Private sector to include any non-governmental structure
– Predicated on profit motive being a reliable driver– Focus on proper incentivisation to achieve a sustainable
project
– Based on appropriate risk return allocation– Leveraging donor funds and State Development
support to expand impact and reduce M&E costs
6
Scale up and replicationScale up and replication
Linkages
ProjectDeveloper
LocalService Provider
Local Consumers
FinancialIntermediaries
1 23 4
ProjectTechnical & CommercialSupport
Financingrelationship
Commercial/social/techrelationship
IDFC Role
1 Policy supportContractual structuringTech dev. support
2Financial structuringAdvisory servicesInvestment Development support
3 Capacity buildingFinancing
4 Model developmentReplication
7
Decentralized infrastructure - IssuesDecentralized infrastructure - Issues
• This area needs a multi-stakeholder thrust to overcome constraints. The key constraints are– Technology : Decentralized technologies have issues
of reliability and local operability– Finance : These projects are often too complicated for
local financing and too small for mainstream FI interest• Transaction costs• Sophistication of financial structures to create the
suitable risk return allocation
– Policy : Do not normally provide for DI. In areas such as energy & telecom, this needs to be addressed
– Management : Who are the entrepreneur/service providers with stake to take forward
• Finding a workable meeting ground between the development and commercial sectors
8
Activities of IDFC in Carbon FinanceActivities of IDFC in Carbon Finance
• IDFC has an MoU with PCF for US$ 10 mn value for CERS• The relationship has had a positive impact in
– Reducing transaction costs– Catalyzing the market in India– Moving the policy process
• IDFC has processed over 12 projects at varying stages– PIN– PCN– Baseline preparation has commenced
• 2 projects in advanced stage of consideration beyond PDD & validation is commencing
• IDFC is considering carbon revenues in its financial appraisal
• Working on policy and national frameworks to support the government processes to create a conducive environment– National Action Plan : Planning Commission– WB NSS (with INFRAS, TERI & NLS)
15
PVMTI
IDFC
SELCORRB/Bank
Rs. 7.5 croreloan @ 0%
ManagingAgent
Fixed deposits@ 7-8%
as incentive
Consumer
FinanceSupply of SHS
& guarantee of service
Repossessionin case of default
monitoring of scheme
1-2 % as fees
OUTLINE OF SCHEME
16
StatusStatus
• By virtue of IDFC’s willingness to take the exposure, PVMTI decided to directly take exposure on the project
• Reduction in transaction costs with exit of IDFC
• The model is working successfully • Disbursement has not yet happened
18
IRNET
NGOs SHGs
HouseholdsSHGs
Households
Deal Structure Deal Structure
loan to IRNET
SDC
IRNET buys the systems and provides them to member NGOs
Member NGOs provide them to
SHGs
Finally, SHGs sell the systems to
households
Grant support for IRNET
operating costs
Credit enhancement
19
Project risk allocationProject risk allocation
• Capital financing – End User (10-20%)– Equipment supplier (10%)– IDFC (70-80 %)
• Operating expenses– IRNET opex borne by SDC (subsidy)– Rest of transaction cost is borne from margins in the
project
• PPP– SDC provides 20% first loss cover on portfolio– The surplus made over 5 years (IDFC loan) provides a
“corpus” to enable IRNET to survive beyond the SDC funding stage
20
ChallengesChallenges
• Management capacity of IRNET and underlying NGOs
• Commercial orientation• Willingness of equipment suppliers to
take an equity stake (to shift from device sale to guarantee of service delivery)
• Developing an efficient credit tracking and monitoring system
22
Remote rural electrification (RRE)Remote rural electrification (RRE)
• Challenges– Limited paying capacity– Small village size/Dispersed population– Low energy loads– Mostly in hilly difficult terrain areas(16 states)
• Based on the above projects will not be stand-alone viable
• State to provide subsidy based on economic condition target customers– Present indicative amounts of 90% capital subsidy– Can PSP be used to leverage this amount
• Pay for service delivery rather than asset subsidy
23
PPP
Subsidy -To ensure viability-To reduce risk
Local support
EnergyCustomers
Equipment Supplier
Commercial/ local Finance
MNES
LOCALECONOMY
Technical & CommercialSupport
ProjectFinancing
Cash Flows
ServiceProvision
Subsidy/ODA
An Annuity model for RREAn Annuity model for RRE
25
Possible options for CDCFPossible options for CDCF
• Large projects with community development focus being funded by CDCF– Can work with existing frameworks for adding the
community component– Possibly another supply driven approach
• Small decentralized infrastructure projects– A longer term option for genuine local benefit and local
demand based project development– Much more difficult to get started– Requires significant development assistance for
facilitation
• The latter will have more impact but is more difficult
26
Prerequisites for CDMPrerequisites for CDM
• Carbon Financing is essentially an “additional revenue stream for a project achieved by selling CERs
• Most international buyers pay “on delivery of CERs
• However viability & financial closure of the underlying project is paramount
• This poses the main challenge for small community based projects
27
Bringing about the “Shift”Bringing about the “Shift”
• Commercial Finance– National level institutions
• Skills in project financing
• Transaction costs
• No local presence
– Local institutions and banks• Appropriate scale
• No skills in project financing
• No incentive for business development/project finance
• Local enterprises • Limited capacity/risk taking ability (equity)
• Management skills
• Equipment suppliers• Unwillingness to take exposure
28
Bringing about the “Shift”Bringing about the “Shift”
• Civil society (NGOs working in grassroots)– Limited willingness to engage in commercial models– Limited management capacity– Donor dependency is easier (especially if agency is credible)
• Governments– Reluctance to provide commercial support to private sector
for development– Reluctance to move from Target based programmes
• Donor community – Is slow to respond to new approaches– Work with new business models involving private sector– Slow internal processes
• Much effort is required for project development & structuring in addition to convincing players to “try out the approach”
• CDCF Could be a catalyst as it integrates : Development with a market mechanism (Carbon finance)
30
ConclusionsConclusions
• Underlying project viability is vital for CDM deals. • If project is not done on commercial principles, transaction
costs will be too high• This is a real challenge for small community centred
projects– Players are slow to move to a new paradigm– Barrier removal is a process
• Clearly there are too many risks for such project development unless it is support by– Development assistance and/or– ODA
• This can be either from– State support for income redistribution– Donor/Bilateral support for development
• This has been slow to move at the local level and a larger global scheme could create the required impetus (at least at a pilot level)
31
Way forwardWay forward
• Work with donors and bilaterals to create new instruments for– Risk sharing– Annuity based payment models– Output based subsidy models
• Seed these approaches with government agencies to create annuity based approaches that operate on commercial principles
• Create a pool of experimental development assistance for the above that would support (from ODA)– Project development– Capacity building– Project risk sharing (guarantees etc)
• Work with intermediaries (at the national/regional level) who should in turn work with local intermediaries to reduce transaction costs