In Conversation with Mr. Philippe Serres, Regional Manager for South Asia, Proparco and Mr. Nicolas Fornage, Regional Director for India & Bangladesh, Agence Française de Développement (AFD)
What is Proparco’s investment mix and what are the plans in terms of further investments?
During the month of September, Proparco – the private sector arm of the French Development Agency (AFD) has celebrated its 40th anniversary. Today Proparco has operations in 80 countries and our investment mix is different in each of these. Our first investment in India took place in 2009 and since then, we have made close to 30 investments representing close to EUR 380 million. In India, our mandate is to support a green and inclusive growth by stimulating job creation, developing and deepening financial markets and promoting responsible and sustainable economic models. To achieve that, we have dedicated close to 50% of our investments to green energies or energy efficiency project. The rest of our portfolio is dedicated to conventional energy, agribusiness, education, microfinance and healthcare. In terms of financial instruments, 70% of our investments are loans, 24% are equity and the rest are quasi-equity products.
In line with the commitments made during the Addis-Ababa Conference on Financing for Development and Paris COP21, former French President François Hollande has set up ambitious objective for the AFD Group. Proparco will play a significant role in achieving those objectives as reflected in its 2017-2020 strategy: to double its yearly commitment and to triple its impacts in terms of job creation, CO2 emissions reduction, access to essential goods and services for the populations and emergence of innovative solutions for a greener and more inclusive development.
In India, Proparco will continue to dedicate significant part of its investments to green energies both for production capacity increase but also to foster technologies that will help set up a favourable ecosystem for an enlarged use of renewable power. Proparco also wants to further support decentralized solutions for providing solar energy to Indian households and industries like solar-home-systems, pumps, rooftops. We are working on ways to support innovative financing schemes for solar projects, like green bonds.
Our commitment to social inclusion is also evolving as we start exploring new financing schemes (including guarantees) and innovative sectors like fintechs. In terms of financial product, we expect that equity investments will represent a more substantial part of our investment mix.
What are the parameters on which Proparco selects the company while lending loans?
We always think first about impacts and then about financial risks. Therefore, before any loan or equity decision, we will always ask ourselves elemental questions such as: How many jobs are we creating? How many MW are we contributing to generate? How many women will have access to financial services? Then, as a financial institution, we need to make sure that our clients have the capacity to absorb and pay back the funding we are giving them. Therefore we run a deep financial analysis of the company, its sponsors and its business perspectives. We also conduct thorough due diligence at the environmental and social level (using the IFC Performance Standards), of the company’s governance practices and make sure that our prospect is not presenting any risk of money laundering, corruption or terrorism financing.
As a financer, what are some key risks that Proparco evaluates before investing in Solar energy projects?
We attach great importance to environmental and social risks and conduct thorough E&S due diligences based on the IFC’s Performance Standard. We have a dedicated E&S team but also work with external consultants. Be it for SPV or corporate-level investments, we always look at three important elements related to sponsor’s risk: (1) expertise and credentials, (2) financial solidity, (3) compliance with our Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) requirements. Finally, we give great importance to the local ecosystem in favour of renewable energies: political willingness, existence and quality of the legal framework, robustness of the PPA, off-taker payment track record.
India, which benefits from a high solar irradiation, offers a great diversity of solar energy solutions and each present a different risk profile that local banks are not yet comfortable with. While we see a lot of liquidity available for utility-scale PV projects, with competitive pricing and long maturities, we observe that a large part of the solar market remains untapped. We are exploring ways to better understand the risks related to this “untapped market” and offer adapted financial solutions. Last year for example, we closed an equity investment (USD 1.1m in two tranches) in Sympa Networks, a Indian solar-home-system (SHS) manufacturer and distributor to help the company roll-out its business in new states. Our long-term and patient investment will support the ambitious development strategy of the company: making electricity accessible, affordable and reliable to a million households within the next five years.
Can you give more insights about the Line Of Credit AFD extended to IREDA for financing renewable energy projects?
Following its mandate to promote sustainable and inclusive growth, AFD has placed green energy at the center of its mission since the beginning of its operations in India in 2008.
AFD has provided IREDA with financial and technical support via two “green” credit lines.
The first credit line financed the implementation of renewable energy projects for hydro, solar and wind power, cogeneration and biomass. This 70M € credit line was combined with a technical assistance component, including market analyses, study trips and analyses of practical cases in order to strengthen IREDA’s management of its operations. A second financial allocation of 100M€ in 2013 mainly focuses on financing solar projects. 19 renewable energy projects have been developed for a total capacity addition of 244 MW. The project helped to avoid 375 000 tons of CO2 equivalent per year.
What kind of Technical & Financial support AFD has extended to SIDBI for promoting energy savings investments within the micro, small and medium units? How has been the progress so far?
SMEs have substantial potential for energy savings. However, a few years ago, return on investment for energy efficiency was not valued by industries or financial institutions, which were generally reluctant to finance this type of investment. In that context the loan allocated to SIDBI by AFD has allowed to fund investments in high energy performance equipment. Nationwide more than 400 Indian SMEs in various sectors, such as ceramics, textiles, foundry and metallurgy have received support for the implementation of actions that lead to a reduction in their energy consumption. It has thereby limited their greenhouse gas emissions, without hampering their growth. The energy saved thanks to this financing is estimated at 84.3 GWh a year.
These two projects come under AFD’s green finance label SUNREF, a green credit line developed by AFD that offers banks in the South special partnership conditions to allow them to seize the opportunities of green finance. In July 2017, AFD also launched in partnership with NHB the SUNREF Housing India program to scale up the development of green housing in India.