financial terms and conditions of grants and concessional ... · gcf/b.06/16 page 1 financial terms...
TRANSCRIPT
FinancialTermsandConditionsofGrantsandConcessionalLoans
GCF/B.06/166February2014MeetingoftheBoard19‐21February2014Bali,IndonesiaAgendaitem16
GCF/B.06/16Pageb
RecommendedactionbytheBoard
ItisrecommendedthattheBoard:
(a) Takesnoteofthefinancialtermsandconditionsofgrantsandconcessionalloans,presentedindocumentGCF/B.06/16FinancialTermsandConditionsofGrantsandConcessionalLoans;
(b) AdoptsthedraftdecisionpresentedinAnnexItothisdocument.
GCF/B.06/16Page1
FinancialTermsandConditionsofGrantsandConcessionalLoans
I. PriorBoarddecisions
1. AtitsOctober2013meeting,theBoard,initsdecisionB.05/07,decidedtoadopt,fortheinitialoperationalizationoftheFund,theprinciplesandfactorsforthetermsandconditionsofgrantsandconcessionalloans,ascontainedinAnnexIIItodocumentGCF/B.05/23,andrequestedtheSecretariattodeveloptermsandconditionsofgrantsandconcessionalloansforconsiderationbytheBoardatitsfirstmeetingin2014,guidedbytheseprinciplesandcriteria,andtakingintoconsiderationprogressonthebusinessmodelframework.
2. Atthesamemeeting,theBoardalsoconsideredhowtheFundcouldmobilizefundsfromvarioussources(documentGCF/B.05/04)anddecided,initsdecisionB.05/04,thattheFundwillmaintainflexibilitytoreceivefinancialinputsandthat:
“theFundwillreceivegrantsfrompublicandprivatesources,andpaid‐incapitalcontributionsandconcessionalloansfrompublicsources,andmayreceiveadditionaltypesofinputsatalaterstagetobedecidedbytheBoard”.
3. ThisdocumentfocusesonthefinancialtermsandconditionsofgrantsandconcessionalloanstobeprovidedbytheFundinitsinitialstage.
II. Guidingprinciples
4. Theguidingprinciplesfordeterminingtermsoffinancialinstruments,adoptedbytheBoardinitsdecisionB.05/07(AnnexIIItodocumentGCF/B.05/23),are:
(a) Grantelementsshouldbetailoredtoincrementalcostortheriskpremiumrequiredtomaketheinvestmentviable,ortocoverspecificactivitiessuchastechnicalassistance;
(b) Seekingtherightlevelofconcessionality,soasnottodisplaceinvestmentsthatwouldotherwisehaveoccurred,includingforprivatesectorinvestment;
(c) Levelsofindebtednesscapacityoftherecipientshouldbetakenintoaccountsoasnottoencourageexcessiveindebtedness;
(d) Structuretermsonacase‐by‐casebasistoaddressspecificbarriers;
(e) Avoidcrowdingoutcommercialfinancing;
(f) Leveragingofotherfinancing,includingpublicandprivatefinancing,seekingtomaximiseleverageinthecaseofprivatefinancing;
(g) Promotelong‐termfinancialsustainability;and
(h) Applyduediligencetoassesstherisktotheinvestment.
5. Broadly,theapplicationoftheseguidingprinciples1wouldbeasfollows.Duringprojectorprogrammeappraisal2,theactivitytobefundedwouldbeassessedtodeterminetheincrementalcostortheexcessiveriskpremium3comparedtothealternative.Thiswouldenablethedeterminationoftheminimumgrantelementnecessarytomaketheinvestmentviable.The 1Inparticular,thefirstguidingprinciple:“Grantelementsshouldbetailoredtoincrementalcostortheriskpremiumrequiredtomaketheinvestmentviable,ortocoverspecificactivitiessuchastechnicalassistance”.
2SeedocumentGCF/B.06/08.3Inthecaseoftheriskpremium,todeterminetheincrementalreturnthatwouldberequiredtobringittothedecisionhurdlerateoftheinvestor.
GCF/B.06/16Page2
grantelementwouldthenbeextendedtotheprojectorprogrammefundingeitherinpuregrantformorblendedaspartofaconcessionalloan.
6. AnnexIIaddressesinmoredetailhowtheproposedtermsandconditionswilladdresseachoftheaboveguidingprinciples.
III. Proposedtermsandconditionsofgrantsandconcessionalloans
3.1 Initialinstruments
7. Asindicatedabove,theFundwillinitiallydeliveritssupportthroughgrantsandconcessionalloans.ItwilldevelopandemployadditionalfinancialinstrumentsasnecessarytoeffectivelyachievetheobjectivesoftheFund,asmaybeapprovedbytheBoard.Implementingentities(IEs)andintermediarieswillplayanimportantroleintheinitialstageinappraisingprojectsandprogrammesand,whereappropriate,tailoringtherightblendoffinancialproductstomakeprogrammesviablewithoutdisplacingotherpotentialsourcesoffinance.
8. Financialinstruments:ThefollowingfinancialinstrumentswillbedeployedbytheFundinitsinitialstageofoperations:
(a) Grants;and
(b) Concessionalloans:4
(i) Concessionalloans1(deeplyconcessional);
(ii) Concessionalloans2(moderatelyconcessional).
9. Lendingcurrencies:Grantsandthetwosetsofconcessionalloanswouldbemadeininternationalcurrenciesandinthelocalcurrencyoftheprojectorprogramme,dependingonthefundingrequirementsoftheprojectorprogrammeandotherconcerns,suchascountryindebtedness.Inthecaseoflocalcurrencyloans,theFundwillensurethatappropriateriskhedgingstrategies(suchascurrencyswaps)areinplaceandwillcloselymonitorexchangerisk.Anoperationalguidelineonhowtodealwithlocalcurrencylendingriskswillbedevelopedaspartoftheimplementationofthefinancialriskmanagementframework,undertheguidanceoftheRiskManagementCommittee.
10. Servicefee:Bothconcessionalloans1and2wouldchargeaservicefeeequivalentto0.75percent,consistentwiththepracticeofconcessionallendinginotherinstitutions,tocovertheFund’smobilizationcosts.
11. TheFund’sinitialfinancingterms(includingthoseofthePrivateSectorFacility(PSF))aresummarizedinTable1andFigure1.
12. AnnexIIIoffersacomparisonwiththeconcessionalandmarket‐basedtermsoftheCleanTechnologyFund(CTF),theInternationalDevelopmentAssociation(IDA)andtheInternationalFinanceCorporation(IFC).Theinterestrate,servicefeeandmaturityofconcessionalloans1iscomparabletoregularIDAloansaftertherecentadjustmentoflendingterms.TheservicechargeforCTF’ssofterconcessionalloansforprojectsandprogrammeswithnegativeratesofreturn,andratesofreturnbelownormalmarketthreshold,islower(0.25percent).
4Initsbroadestmeaning,concessionalfinancecomprisesfinancialproducts,includingloans,guarantees,andequityinvestments,providedontermsthatarebelowmarketrates.AccordingtotheOrganisationforEconomicCo‐operationandDevelopment(OECD)/InternationalMonetaryFund(IMF)definition,concessionalloansareloansextendedontermsmoregenerousthanmarketloans.Concessionalityisachievedeitherthroughinterestratesbelowthoseavailableonthemarket,theimpactofwhichcanbefurtherenhancedthroughafavourable,tenororrepaymentprofile.AmethodologytocalculatetheappropriateconcessionalityoffundingfromtheFundwillbedeterminedatalaterstage.
GCF/B.06/16Page3
Table1:FinancialtermsandconditionsofgrantsandconcessionalloansfortheinitialphaseoftheFund’soperations
Currency Interestrate Servicefee Maturity GraceperiodGrants International
LocalNorepaymentrequired
Concessionalloans1
International Local
0percent 0.75percent
15to40years
5to10years
Concessionalloans2
International Local
Benchmarkrateoflendingcurrency,e.g.:‐Euros:EuropeanCentralBankrate‐USdollars:UnitedStatesTreasurybondrate
0.75percent
8to15years
2to4years
13. Eachinstrumentcanbeusedseparatelyandthethreeinstrumentscouldbeblendedtogivetherightlevelofincentivestomakeprojectsandprogrammesviablewithoutdisplacingor“crowdingout”otherpotentialsourcesoffinancingthatwouldotherwisehavebeenprovided.ThiswillenabletheFundtoprovideabroadrangeofconcessionalsupport,rangingfrompuregrantstobenchmarklending(nearcommercial)rates,sothattheFundcantailoritssupporttoprovidetheabsoluteminimumsubsidynecessarytoachieveitstransformationalobjectives.Foreachprojectorprogramme,theamounttheconcessionalelementnecessarytomakeaninvestmentviableorcoverspecificactivitieswillbeassessedduringappraisal.
Figure1:Fundingflows
14. GrantsandconcessionalloansfromtheFundwillalsobeblendedwithIEs’andintermediaries’ownfinancing,toprovideafinalfinancingcosttoprojectsandprogrammesthatislowerthanitwouldhavebeenwithouttheFund’sparticipationinthatproject’sorprogramme’sriskprofile.Suchfinalblendedfinancingmightnotnecessarilybebelowmarketratesfortheentirefinancingenvelopeoftheprojectorprogramme,butitwouldbebelowthe
GCF/B.06/16Page4
ratethattheprojectorprogrammewouldhavereceivedonthatmarket,givenitsriskprofile.Inthisway,riskyactivitieswithahighpotentialofclimateimpactwillbeabletoobtainfinancing.
15. AnexampleofsuchblendingisprovidedinFigure2.
Figure2:BlendingoftheFund’sgrantsandconcessionalloanswithimplementingagencies’andintermediaries’ownfinancing
16. TheFundmayconsiderestablishinggeneralcriteriaforconcessionaltermsbasedonclassificationofcountries(e.g.smallislanddevelopingStatesandleastdevelopedcountries),typeofproject(adaptation,mitigation,privatesector),andspecificsectors.ThesecriteriawouldbepartoftheFund’sinvestmentframework(seedocumentGCF/B.06/11).
17. GrantsprovidedintheinitialphaseoftheFund’soperationsaretraditionalgrantswithoutrepaymentobligation,exceptintheeventthatdisbursementswereobtainedduetocorruptionorfraudulentaction.Atalaterstage,variousspecialtypesofothergrantscouldbeconsidered,suchasgrantslinkedtoperformance(e.g.forthedevelopmentofnewtechnologies)orgrantswithrepaymentobligations(e.g.revolvinggrantfacility).Suchgrantsmightbeusefulinthecontextofcertaintypesofmitigationprogrammes.
GCF/B.06/16Page5
18. Fundpolicyconcerningcountryindebtedness:Thetermsandconditionsforlendingactivitieswilltakeintoaccounttheexpectedriskandthereturnoftherespectiveprojectorprogramme,includingacountry’sindebtednessandabilitytorepay.TheFundwillpayparticularattentiontoavoidcontributingexcessivelytosovereignindebtedness.Astheprojectandprogrammebeneficiarieswillbeeitherpublic,private,orpublic‐privatepartnerships,inthecasesofpublicactivitiesandpublic‐privatepartnerships,thedegreeofincreasedsovereignindebtedness(loans)orcontingentliabilities(guarantees)wouldbeassessed.ClosecoordinationwithcountryauthoritiesandtheIMFwouldbeundertakentoavoidbreachingloanandliabilitylimits,forexample,byrelyingongrantsonlyforpublicprojectsorprogrammesinhighlyindebtedcountriesandcountrieshavingbenefittedfromtheHighlyIndebtedPoorCountry(HIPC)debtreductioninitiative.CountryindebtednesswillalsobeactivelytrackedaspartoftheFund’sfinancialriskmanagementframework.
3.2 Keygrantandloandocuments
19. ThekeydocumentsthatwillberequiredfortheinitialmodalitiesoftheFund’soperationsare:
Grants
(a) Termsheet;
(b) Grantagreement;and
(c) Project/programmeagreement.
Loans
(a) Termsheet;
(b) Loanagreement;and
(c) Project/programmeagreement.
20. Thelegaldocumentswilldeterminetheagreement’stermsandconditions,maturity,andotherconditions,includingdefaultanddescribetheproject/programmeanditsmilestonesindetails.ThisprocessislaidoutindocumentGCF/B.06/08.
21. ThesegrantandloandocumentswouldbenegotiatedwithIEsandintermediariesandwouldbebasedonstandardFundtemplates,preparedbytheFund’sGeneralCounsel.
22. AnnexIVprovidesadraftsampletermsheettemplate.
GCF/B.06/16Page6
AnnexI:DraftdecisionoftheBoard
TheBoard:
ApprovesthefinancialtermsandconditionsofgrantsandconcessionalloanspresentedinTable1fortheinitialphaseoftheFund’soperations.
Table1:FinancialtermsandconditionsofgrantsandconcessionalloansfortheinitialphaseoftheFund’soperations
Currency Interestrate Servicefee Maturity GraceperiodGrants International
LocalNorepaymentrequired
Concessionalloans1
International Local
0percent
0.75percent
15to40years
5to10years
Concessionalloans2
International Local
Benchmarkrateoflendingcurrency,e.g.:‐Euros:EuropeanCentralBankrate‐USdollars:UnitedStatesTreasurybondrate
0.75percent
8to15years
2to4years
GCF/B.06/16Page7
AnnexII:Guidingprinciplesandfinancialtermsandconditionsofgrantsandconcessionalloans
Guidingprinciples Instruments
Grantelementsshouldbetailoredtoincrementalcostortheriskpremiumrequiredtomaketheinvestmentviable,ortocoverspecificactivitiessuchastechnicalassistance
Theincrementalcostsortherequiredriskpremiumwillbeassessedduringtheappraisaloftheproject.IEsandintermediarieswillappraisetheprojects.
Seekingtherightlevelofconcessionality,soasnottodisplaceinvestmentsthatwouldotherwisehaveoccurred,includingforprivatesectorinvestment
ThelevelofrequiredconcessionalitywillbeassessedduringappraisaltominimizetheuseoftheFund’sresources.
Blendingoffinancialproductswilldeterminetheaverageoverallconcessionality.
Countryriskshouldbeincludedintheevaluation.
Levelsofindebtednesscapacityoftherecipientshouldbetakenintoaccountsoasnottoencourageexcessiveindebtedness
Targetstobeestablished,basedonOfficialDevelopmentAssistance(ODA)practice.
ClosecoordinationwithcountryauthoritiesandIMF.
InhighlyindebtedcountriesorcountrieshavingbenefittedfromtheHIPCinitiative,grantsonlywouldbeprovidedforpublicactivitiesandthepublicshareofpublic‐privatepartnerships.
Structuretermsonacase‐by‐casebasistoaddressspecificbarriers
Specifictermsforeachfundedactivitywillbedeterminedbasedonbarriersassessedduringtheappraisaloftheproject.
Avoidcrowdingoutcommercialfinancing Thelevelofrequiredconcessionalitywillbeassessedduringappraisaltoavoidunderpricing.
Leveragingofotherfinancing,includingpublicandprivatefinancing,seekingtomaximizeleverageinthecaseofprivatefinancing
MaximizingexternalfinancingisconsistentwiththeguidingprincipleofminimizingtheFundgrantelementneededforproject/programmeviability.
Promotelong‐termfinancialsustainability Onlyprojectsthatdemonstratefinancialviability,intheformofanacceptablefinancialrateofreturnandotherratios(e.g.debtservicecoverageratio)willbefinancedtobesetintheinvestmentandfinancialriskmanagementframeworks.
Applyduediligencetoassesstherisktotheinvestment TheFundwillcarryoutdiligenceoftheappraisaloftheprojectpreparedbytheintermediaryorIEtoassessproject’sorprogamme’sriskprofile.
GCF/B.06/16Page8
Termsoffinancialinstruments
TheaverageconcessionalityorgrantelementofthefinancialinputstotheFundThegrantelementofconcessionalfinancewillbetailoredtoprovidetheappropriateincentivetofacilitatetheimplementationofmitigationandadaptationactivities
Interestrate Servicefee
Maturity Graceperiod
Grants Norepaymentrequired
Concessionalloans1
0percent 0.75percent
15to40years
5to10years
Concessionalloans2
Benchmarkratebasedoncurrencyoflending
0.75percent
8to15years 2to4years
Concessionalformsoffinancewillbedesignedtominimizemarketdistortionsandpotentialdisincentivestoprivateinvestment
IEs’andintermediaries’termswillapply.Duringappraisal,anassessmentwillbedeterminedhowtoavoidmarketdistortionsandpotentialdisincentivestoprivateinvestment.
Theexpertiseandcapacityofintermediariesandimplementingentities
IEsandintermediarieswillappraiseprojectsandprogrammes.
TheFundwillassesstheirexpertiseandcapacityasapartofaccreditation.
GCF/B.06/16Page9
AnnexIII:Financialtermsandconditionsofotherinstitutionsprovidingconcessionalmarket‐basedloans
I. CleanTechnologyFund(CTF)
1. TheCleanTechnologyFund(CTF)offersgrantsandtwoloanproducts:
(a) Softerconcessionalloans(0percentinterestrate,40yearsmaturity,10yearsgraceperiod,0.25percentservicecharge)forprojectswith:
(i) Negativeratesofreturn;and
(ii) Ratesofreturnbelownormalmarketthreshold;
(b) Harderconcessionalloans(0percentinterestrate,20yearsmaturity,10yearsgraceperiod,0.75percentservicecharge)forprojectswithi)ratesofreturnnearorabovenormalmarketthreshold,butbelowriskpremiumforprojecttype,technologyorcountry,andii)ratesofreturnnearorabovenormalmarketthreshold,butaccelerationindeployingthelowcarbontechnologywillhavehigheropportunitycosts.
2. InterestrateandothertermsofCTFprivatesectorloansareindividuallytailoredtotheprojectontheprincipleof“minimumconcessionality”,andarenotdisclosedbymultilateraldevelopmentbanks(MDBs).
Source:CleanTechnologyFund,FinancingProducts,TermsandReviewProcedures,forPublicSectorOperations,November2013.
II. InternationalDevelopmentAssociation(IDA)
2.1 IDA‐16
3. TheInternationalDevelopmentAssociation(IDA)’slendingtermswereadjustedinJuly2011toreflecttheeconomiccapabilitiesofIDA’sclients:
(a) ThelendingtermsofferedtoIDA’smoreeconomicallyadvancedrecipients(blendandgapcountries)werehardenedtoreflecttheirstrongerfinancialcapacity.Thenewtermscombinetheoldblendterms(35yearmaturities)forblendcountriesandhardenedtermcredits(20yearmaturities)forgapcountriesintoanewblendcreditwith25‐yearmaturity,5‐yeargraceperiodand1.25percentinterestrate(inadditiontothestandardservicechargeof0.75percentandcommitmentcharges);
(b) ThematurityofIDA’shardtermcreditswasshortenedfrom35yearsto25years,witha5‐yeargraceperiod,andexpandedeligibilitytoincludeallblendcountries.Finally,allsmallislanddevelopingStatesarenoweligibletoreceiveassistanceonregularcreditterms.
Table2:SummaryofIDA’scurrentlendingtermsbyproducttypeinfinancialyear2013
Producttype Maturity(years)
Graceperiod(years)
Servicecharge1(percent)
Interest(percent)
Grants n/a n/a n/a n/aRegular 40 10 0.75 n/aBlend 25 5 0.75 1.25Hardterm 25 5 0.75 1.5Partialriskguarantee
n/a n/a 0.75 n/a
1)0.75percentofthedisbursedandoutstandingcreditbalance.Source:IDA16Mid‐TermReview,ImplementationandResultsProgressReport.
GCF/B.06/16Page10
2.2 IDA‐17
4. TheInternationalDevelopmentAssociationproposedthatconcessionalloans(frompartners)havetermsasfollows:
(a) Maturity:Maturitieswouldbeeither25or40yearstomatchthetermsofIDA’scredits;
(b) Graceperiod:Graceperiodwouldbe5yearsfora25‐yearloanor10yearsfora40‐yearloan;
(c) Principalrepayment:Principalrepaymentsofconcessionalloanswouldbeginafterthegraceperiod;
(d) Coupon/Interest:IDAconcessionalloanswouldhaveanall‐inspecialdrawingrights(SDR)‐equivalentcouponofupto1percent;
(e) Currencies:IDAwouldacceptconcessionalloansinSDRoranyoneoftheSDRbasketcurrencies,namelytheUSdollar,Euro,JapaneseyenandBritishpound.
Source:IDA17ConcessionalPartnerLoans,November21,2013.
III. InternationalFinanceCorporation(IFC)
5. TheInternationalFinanceCorporation(IFC)pricesitslendingbasedonamatrixofcountryandprojectrisks,whichisnotpubliclydisclosed,andiscontinuouslyupdatedbasedonmarketdevelopments.Thisiscomparedwithotheravailableindicators,say,recentbondissues;aloaninsamesectorinanothercountrywiththesamecreditrating,andthefinaltermsaredecidedupon.
GCF/B.06/16Page11
AnnexIV:Drafttermsheettemplate(sample)
GREENCLIMATEFUNDTERMSHEET
Summaryoffinancialtermsandconditions
(date)
Project/programmetitle
Project/programmeobjective
Borrower
Guarantor
Implementingentityorintermediary
Projectsponsor
Activitytobefunded
Countryorregion
HowdoestheactivityseekingGreenClimateFundfundingsupportthecountry’s/region’sobjectivestolimitorreducegreenhousegasemissionsand/orclimatechangeadaptation?
Explanation:
Theme(adaptationormitigation)
Doestheactivitysupportclimatechangeadaptationinavulnerablecountry?(yes/no)
IsthisactivityfundedthroughthePrivateSectorFacility?(yes/no)
Totalactivityfinancing
RequestedGreenClimateFundfunding
GCF/B.06/16Page12
Financialinstrumentsandterms
Grant Amount(US$million)
Currency Disbursementperiod
Fee/charges Reimbursable? Ifreimbursable,term,schedule
(Yes/no)
ConcessionalloanI Amount(US$million)
Currency Maturity
Interestrateandaccrualperiod
Graceperiod Disbursementperiod
Fees/charges
ConcessionalloanII Amount(US$million)
Currency Maturity
Interestrateandaccrualperiod
Graceperiod Disbursementperiod
Fees/charges
TotalGreenClimateFundfundingprovided(Grant+loan)
Amount(US$million)
Specialconditions
Conditionsprecedenttoeffectiveness(CP)
1. CP12. CP23. CP34. …
Loancovenants
1. Covenant1(e.g.minimumdebtservicecoverageratio–DSCR)
2. Covenant23. Covenant34. …
__________