Small Community CDM projects IDFC experience and perspectives Ajay Narayanan Head EMSD/DINT IDFC.

Small Community CDM projectsSmall Community CDM projects

IDFC experience and perspectives

Ajay Narayanan

Head EMSD/DINT

IDFC

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OutlineOutline

• Background to IDFC– Introduction– Decentralized Infrastructure– Carbon Finance

• IDFC perspective on Small projects– SELCO– IRNET

Rural electrification in India

• Perspectives for CDCF

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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

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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

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A DI project modelA DI project model

STATE/DONOR

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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

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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

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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)

DI project examples in IndiaDI project examples in India

SELCO SELCO

Home lighting system finance

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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

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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

IRNETIRNET

An NGO network as an intermediary

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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

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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

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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

Remote rural electrification : Remote rural electrification : IndiaIndia

A PPP model

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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

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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

CDCF and doing dealsCDCF and doing deals

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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

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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

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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

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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)

Opportunities for CDCFOpportunities for CDCF

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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)

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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

Thank youThank you