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Energy Efficiency Revolving Fund

Introduction on Financial Scheme

UNIDO/GEF Project

"Industrial Energy Efficiency in Key Sectors"

December 28th, 2015

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Contents

1. Introduction ......................................................................................................................................... 3

2. Revolving Fund-Framework and Format ......................................................................................... 3

2.1. Revolving fund .............................................................................................................................. 3

2.2. Energy Efficiency Revolving Funds ............................................................................................. 5

2.3. Examples from other Countries .................................................................................................... 9

3. Review of Previous Reports ............................................................................................................. 16

3.1. Limitations and Recommendations ............................................................................................. 19

4. Preliminary Meeting with Financial Institutions ........................................................................... 20

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1. Introduction

Due to damaging consequences of the climate change on the environment and people's

lives, the issue is considered as a global concern. Various factors can shape the change;

however, it is very likely that humans are largely responsible for recent climate change.

Thus, by taking some measures it is possible to reduce the risks which we will face from

climate change and undoubtedly energy efficiency is the paramount factor that can mitigate

the consequences.

UNIDO/GEF project "Industrial Energy Efficiency in Key Sectors" was approved in

August 2012 and is of duration of five years to accelerate the uptake of energy efficiency.

The project consists of five components, namely policy support, training and capacity

building, direct support to industry, financial support and information dissemination and

awareness raising.

The financial support would be in the form of a revolving fund to finance energy efficiency

projects in Iran in order to support investment in energy efficiency activities in line with

the scope of aforementioned project. The main objective of this assignment is to set up the

financial scheme to establish and implement the revolving fund with utilizing capacities

and financial contribution of the banks and/or financial institutions.

2. Revolving Fund-Framework and Format

2.1. Revolving fund

When a reserve of money in a fund is used to lend and the fund’s resources circulate

between the fund and the users, the framework is called Revolving fund. Revolving funds

(RFs) are usually established by Governments or non-profit organizations. These funds are

created to achieve a special sustainable purpose or to help a particular target group by

providing them with discounted loans which can be available to the same users for more

than once. One of the most important issues to consider is establishing the fund either by

existing institutions or an independent revolving fund. Thus, in order to adopt appropriate

solutions several elements into each conditions including, investigating risk factors,

institutional policies, securities, profitability and past experiences need to be addressed.

Revolving funds may be financed by their users, users of projects or it may be financed by

third parties or both. If the financing process of the fund is dependent on small injections

such as contributions, saving deposits and phased donor financing, it will take a longer

time so as the establishment of the fund. A contribution from outside to the target group is

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called external financing. Based on experiences, involvement of the target group in

financing has a positive impact on achieving the special purpose the fund is created for.

Revolving funds are valuable for non-profit organizations since they provide advantages

for both the donor and the non-profit organization. The working procedure of none-profit

organizations includes announcing a program, recruiting the personnel, extending

invitations or signing the contracts, raising the donations or receiving the program revenue

that will cover the costs. In such conditions a revolving fund allows the non-profit

organization to commit to programs early so that it can ensure professional execution and

the project's success. The non-profit then can work to generate the revenue, donations, or

other supports in order to repay the money spent.

Building up of Revolving Fund for Self-sufficiency

A revolving fund can make its capital available to the users which in this case the

obtainability depends on the lending periodicity and quick repayment or it can make the

yields from investments of the capital available which in this condition the capital will not

be directly valid to the users so the capital will not be declined and the interests received

by the fund will be lent to the users, these loans will subsequently bring about repaid grow

to the capital.

Management and Administration of Revolving Fund

If the revolving fund has independent legal status, it will provide statutory obligations to

submit regular financial report. The financial report should be consisted of balance sheet,

profit and loss account and cash flow statement approved by the fund’s trustees and an

external auditor and they should be completed annually in 3 months after the fiscal year. It

is recommended to provide profit and loss account and balance sheet every 3-month

altogether with a cash flow projection for the rest of the year in order to monitor and plan

the revolving fund. In many countries, the financial reporting obligation and the form in

which the reports have to be submitted are laid down by Law.

Sustainability of Revolving Fund

Revolving funds are self-sufficient after the first injection of money and their capital

remains at a constant level approximately without any external refinancing. Factors such

as interest rates, administrative expenses, payments and repayments and failure to make

them, inflation, change in energy price and etc. would affect the operation of a revolving

fund. Appropriate measures would be required to be adopted to effectively appraise and

monitor these factors for its improved operations in order to keep the revolving fund in a

self-sufficient and sustainable condition.

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The operations of revolving funds need to be observed and assessed from time to time in

terms of characteristics of users, quickness of payments/repayments, loans and claims,

volume of transactions, rate of circulation and organizational and financial administration

and the impacts on users and other stakeholders. These measures would help strengthen

the stakeholders with the necessary framework for effective formulation and

implementation and thereby achieving sustainability.

2.2. Energy Efficiency Revolving Funds

Energy efficiency revolving funds (EERFs) are typically created to help financing public

sector EE projects in which the initial investment costs are provided, then energy savings

accruing from the results of the project are paid to the fund until the principal plus the

interests and all of the related fees and charges are fully returned. These repayments are

then utilized in order to finance new projects and in this way the capital will revolve.

EERFs are usually formed by national, state and local governments. These funds provide

lower-cost financing with less-stringent security requirements rather than commercial

loans.

Energy Efficiency Revolving Fund Structure

Figure 1: Typical structure of an EE Revolving Fund

EERFs are capitalized through different sources, including donor agencies, government

budget allocation, special tariffs or levies on electricity sales, petroleum taxes, revenue

bonds, environmental charges, etc. The fund meets public agencies’ financing needs for

their EE project investments and then the resulting energy savings are applied for paying

back the principal and interest on the debt. Repayments from public agencies replenish the

fund allowing it to revolve. Independent energy service providers (ESPs) would generally

provide the installation and other services for project implementation and they would be

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directly paid by public agencies for the services they are providing. The structure of EERFs

is shown in Figure.1.

The Fund management and governance include oversight arrangements, choosing the

fund manager, monitoring & evaluation and reporting, which are explained as following.

A management board including representatives from ministries that have some authority

over EE is needed for supervising the fund. The board is comprised of representatives from

the government and private sector. These oversight bodies are in charge of setting the

investment strategy and policy of the fund, recruiting the management team, setting up the

criteria for choosing the projects, confirming the business plans and budgets formulated by

management team, preparing and submitting annual financial reports to the government

and scrutinizing whether the fund is functioning according to the EE strategy and plans.

The revolving fund may be managed by either an existing government agency such as a

development bank or a new organization. The management team must have the knowledge

and understanding of EE technologies and must be able to conduct credit and financial

analysis, project appraisal and must have considerable expertise in market assessment and

pipeline development. A monitoring system based on the type and scale of the projects is

required in order to track the projects’ performances with the purpose of assessing their

technical progress and financial status which would be provided by periodic progress

reports. Even a project review committee can be helpful in ensuring that the project is

correctly targeted. Evaluation is required to test planning assumptions, investigating

overall results, comparing the program performance and etc. which is occurred at specific

times. For example most World Bank funded projects have a mid-term and a final

evaluation. These evaluations are often performed by an independent third party. The fund

manager has to prepare periodic reports for the fund to see if the progress is made according

to the schedule and performance goals and appraise the quality and status of the project.

Financing windows and products of EERFs

Since some of public agencies may not have a borrowing history or borrowing capacity or

even may not be creditworthy, the fund must be established in a way to fulfill the needs of

all agencies, that’s why the fund may present several financing products or windows

including:

Debt financing window

Energy services window

Risk guarantee window

Budget capture

Grants window

Forfeiting

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In case that the public agency is creditworthy such as a municipal, the fund may be able to

cover 100 percent debt financing and since the public agencies are not legally permitted to

use public asset as their collateral, it will not be requested as the same done in commercial

loans. The repayment period can be longer than commercial loans while the amount is less

than the resulting energy savings. Energy services agreement (ESA) is applied to the

agencies with neither sufficient capacity for borrowing nor adequate capability to

implement EE projects in an efficient way. In this case, the agency must pay some or entire

monthly energy bill to an escrow account created by the EERF within ESA duration. After

that the fund makes the investments which will cause a significant reduction by a specific

amount in energy costs. The agency will continue to pay its energy bill during the ESA

period without energy costs reduction and the surplus will be used to recover the fund

investments and its associated fees, at the end of the contract the agency can retain its

energy cost savings. The fund can use a risk sharing mechanism for funding EE projects in

which it provides credit guarantees to commercial banks/financial institutions to finance

EE projects. Budget capture window can be used when a public agency is receiving a

dedicated fund from Ministry of Finance or another government agency to pay its energy

bills. So the government will reduce its outlays to the public agency implementing the EE

project and will pay the amount of energy cost savings to the EERF instead. In case of

being sustainable funding sources existed such as government or donor agencies that they

commit to funding the EERF for a specific number of years, a grant window can be offered

in order to improve EE project economically. At last another service of EERF is forfeiting

which means selling of receivables. For example Bulgarian ESCO Fund received a loan of

€7 million from the European Bank for Reconstruction and Development (EBRD) to buy

receivables under the energy saving contracts signed by Enemona. The fund allows

Enemona to use its capital for further development of projects in both the industrial and

public sectors, including kindergartens, schools, hospitals, and other municipal buildings.

Operationalizing an EE Revolving Fund

Major steps of establishing and operating an EERF are explained as below:

Establish the legal framework for the fund. In this step it should be decided whether to

establish the fund with an existing ministry, development bank, an energy agency or to

create a new legal entity such as an independent corporation, NGO or statutory agency.

Develop reliable and sustainable funding sources. The revolving fund must be capitalized

through the sources, including governments, donor agencies and others with sufficient fund

in order to be able to start its operating and funding a number of projects.

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Define the fund objectives and target markets. Since an EERF is not able to cover all the

energy consuming sectors, there should be concentration on special target markets such as

schools and hospitals which they do not have wide access to commercial loans and may

have limited internal financial sources.

Develop the governance structure. The government assigns a board of trustees to act as an

oversight body. It would be better to include representatives from both government and

private sectors. The private sector would bring knowledge and expertise while it prevents

political parties form capturing the fund.

Select and recruit the fund management. Different strategies can be applied in selecting

and hiring the management team. The oversight body can use existing ministry staff or can

set up an independent fund management organization. Since a private sector manager can

have several beneficiaries such as their financial structuring experience, using a

professional management team would be a better choice.

Hire the staff. In this step the fund manager has to hire a professional team expert in energy

services, EE project financing, risk appraisal and loan disbursement. Therefore hiring staff

from private sector is inevitable.

Define the major financing products. As it was discussed in previous sections, public

agencies that need financing for their EE projects may not be creditworthy or may have no

capacity for borrowing, so Energy service arrangements must be considered as one of the

EERF products.

Define Technical assistance and other service offerings. Technical assistance is an

important characteristic of a successful EERF. For example, the fund can get involved in

procurement of equipment and services for a bundle of similar projects to a number of

public agencies thus reducing transaction and equipment costs.

Develop and document eligibility criteria. Eligibility criteria should be defined and

documented for the products and windows the fund aims to offer. It can conclude factors

such as creditworthiness of the public agency, good energy bill payment discipline,

potential use of available technologies and etc.

Define the application procedures and prepare related forms. At this level, appropriate

forms should be prepared based on the eligibility criteria defined in the previous step.

Develop a marketing strategy approach and develop the project pipeline. Recognizing

public agencies according to the eligibility criteria and developing a marketing strategy

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and approach should be devised in this step which will lead to identification of specific

projects and establishment of a project pipeline.

Subcontract to private Energy Service Providers (ESPs) to build their capacity. The fund

manager has to engage ESPs commitment to implementing process via performance-based

business models. In this way they can build their capacity to implement future energy

projects therefore they can play a positive role in the development of an energy industry.

ESPs provide a wide range of energy efficiency solutions in order to design and establish

energy saving projects.

Develop approaches for project aggregation in order to reduce transaction costs. Since

the transaction costs of EE projects are considerably high, the EERF can identify similar

projects across public agencies and aggregate them in order to reduce transaction costs.

Develop and document the monitoring, reporting, and evaluation procedures and

approaches. As it was discussed before, these are of high importance activities that must

be developed by the fund.

2.3. Examples from other Countries

This section provides some insight regarding three energy efficiency revolving funds in

various territories namely in Thailand, Bulgaria and China which may be employed in

designing and creating the UNIDO energy efficiency revolving fund in Iran.

2.3.1. Thailand’s Energy Efficiency Revolving Fund

Thailand’s Energy Efficiency Revolving Fund started its operations in January 2003 to

motivate financial sector take part in financing EE projects. The fund raises its capital from

Energy Conservation Promotion Fund (ENCON Fund) which was established based on the

Energy Conservation Promotion Act (ENCON Act) passed in 1992, representing

guidelines for Thailand’s energy conservation and renewable energy policy. The initial

amount of money allocated to the Thailand’s Energy Efficiency Revolving Fund was THB

2 billion (USD 50 million) which was determined according to Energy Efficiency market

appraisal and discussions with the banks. The Department of Alternative Energy

Development and Efficiency (DEDE) known as the primary government agency

responsible for implementing energy efficiency under the ENCON Act, issued credit lines

to six major commercial banks from the Energy Efficiency Revolving Fund within the

range of THB 100 to 400 million (USD 2.5 to 10 million).

The EE Revolving Fund receives its capital from ENCON Fund for a 10 year period and

makes it available with zero interest rate to Thai banks, banks then lend this money to the

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proponents of Energy Efficiency projects at a fixed interest rate less than 4% annually

(which is lower than their usual lending rates) based on the financial position of the

customer. If the applicant is creditworthy and has a good banking history the interest rate

may be as low as 2.7%.

Facilities Eligible for Funding

When the fund started its activities, only designated facilities under the ENCON Act were

eligible to apply for funding their EE projects but in 2004, the eligibility criteria was

extended allowing commercial or industrial facility, whether or not it is a designated

facility, and even third parties such as Energy Service Companies (ESCOs) apply for loans.

Banks are not willing to lend money to third parties since they do not own land, buildings

and equipment and therefore they cannot provide collaterals. The maximum loan size is

THB 50 million (USD 1.25 million) per project to make sure that fund’s capital will be

used for a large number of medium-sized projects such as replacing the air conditioning

chillers of a commercial facility rather than only a few large projects.

Administration

Banks are in charge of the total lending process for financing EE projects including

marketing, economic appraisal, credit approval and repayments in case of default by

customers. In order to provide conditions for DEDE to be able to track the use of funds and

the level of investments in Energy Efficiency projects and equipment, banks are required

to prepare and submit regular reports of the projects.

Establishment of the fund

The notion of creating a revolving fund came from The Industrial Finance Corporation of

Thailand (IFCT) which is a private bank specialized in providing banking services to the

industrial sector customers. IFCT participated in a project funded by The World Bank to

replace air conditioning systems with higher energy efficiency models in 2001. The process

of acquiring the loan was so complicated that motivated a senior manager of IFCT to take

a proposal to DEDE for a simpler loan program to finance all kinds of Energy Efficiency

projects and finally led to the evolvement of an Energy Efficiency revolving fund. During

2002, a contract was established between DEDE and banks involving in the fund. There

were 4 banks participating when the fund started its activities in 2003 but there are now 6

banks operating in the fund. The lending process of the fund includes 6 stages which are

shown in fig 2. In the first stage, the eligibility of the fund has to be identified, after the

identification; a feasibility study assisted with a technical adviser has to be carried out by

the facility owner. If the bank accepts the feasibility study, the facility owner would apply

for the loan through a participating bank. In the second stage, the bank investigates the

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project and carries out a financial and technical (in case of possibility) analysis. If the

results are acceptable, the bank passes on the application to DEDE. In the next stage, DEDE

evaluates the project and makes a decision about whether approving the project according

to the criteria and then notifies the bank whether or not the project has been approved, if

the project has been accepted by DEDE. In the fourth stage, the bank approves a loan and

submits a repayment schedule to DEDE so it can plan for the disbursement of funds from

the ENCON Fund to the bank so the applicant receives the loan and invests in its EE

project. In the last stage, the borrower has to pay back the initial investment plus interests

on the debt and also has to submit reports on Energy savings occurred as a result of

implementing the project. The bank will return the principal to DEDE in 7 days and then

DEDE pays the funds back to ENCON Fund.

Figure 2. Lending Process for the Energy Efficiency Revolving Fund

Both DEDE and banks take part in education, publicity and promotion related to Energy

Efficiency Revolving Fund. For example, DEDE runs seminars periodically and invites

participant banks to contribute. The bank identifies the capacity of applicants in returning

the loan based on their banking history. Banks usually require a mortgage over a land,

building or equipment owned by the applicant which is usually linked to the facility that

the Energy Efficiency project aims to be implemented. The problem would occur when the

applicant is a third party whose does not own any asset to use as collateral. Even some

small and medium sized enterprises may not have the ability to provide enough collateral

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and therefore a few banks may be willing to pay loans. The technical analyses of the

projects are performed either by DEDE or banks, whichever one that has technical staff.

The total number of Projects that Received Loans from the Energy Efficiency Revolving

Fund until June 2005 (phase 1) were 66. In Investigating the performance and results,

statistics show that every dollar lent from the fund resulted in more than 10 dollars energy

cost savings. A central principle of the new programs is to shift Responsibility for

implementation away from DEDE and then let outside parties be responsible for.

2.3.2. Bulgarian Energy Efficiency Fund

The Bulgarian Energy Efficiency Fund (BEEF) is an independent legal entity created in

2005 in accordance with the provisions of the Bulgarian Energy Efficiency Act (EEA) of

2004. Since Bulgarian banks had not enough liquidity and credit risk appraisal tools to help

financing EE projects, the BEEF was designed to provide loans and partial credit

guarantees. The BEEF is a revolving mechanism that facilitates EE sector investment

process and promotes the development of an EE market in Bulgaria; it is a non-profit

organization and is supported by Global Environment Facility (GEF). The initial amount

of money allocated to the BEEF was US$10 million received from GEF which was formed

to assist the establishment and operation of the BEEF as a public-private financing facility.

Institutional Set-Up

The principal organizational structure of the Fund is presented in figure 3.

Figure 3. Organizational structure of Bulgarian Energy Efficiency Fund

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Donations from the Bulgarian and foreign governments, international financial institutions,

international funds, interest income from current accounts or bank deposits opened by

BEEF, Loans or other credit facilities from international organizations and banks are used

as a finance sources for fund operations.

The management board (MB) of the fund which acts as the governance body is consisted

of representatives from both private and public sector with adequate knowledge and

expertise. The MB governs the overall operations of BEEF and is in charge of the strategic

direction of the Fund’s activities. The MB appoints the fund manager (FM) which is an

organization or company with sufficient experience in project management, EE appraisal,

financial structuring and procurement of EE projects. The entire daily activities of the fund

are under supervision of the fund manager. Identifying, developing, structuring and

assessing the eligible EE projects for financing, organizing and implementing technical

assistance (TA) initiatives, managing the fund’s financial resources, monitoring, reporting

and budgeting are from the FM responsibilities. The executive director (ED) is appointed

by the FM that implements administrative functions of the fund such as Intermediation

between the FM and the MB, reviewing of project proposals before submission to the MB

for approval, Reporting to MB on project pipeline development and results achieved.

Financial products

The BEEF offers three main products including, Partial Credit Guarantees (PCGs), co-

financing loans and technical assistance. PCGs are provided in favor of EE project lenders

(FIs) whereby BEEF provides assurance of repayment of the guarantee-covered amount in

the case of default by the borrower. Co-financing loans are offered to creditworthy

customers for sustainable EE projects and technical assistance component covers financing

activities in initial project pipeline development (including partial support for energy

audits) and project appraisal, workshops for potential co-financiers and customers,

marketing and dissemination of information, training of FM and partners of the Fund

(banks, ESCOs, consultants) in EE project development and financing techniques. It also

covers fund administration meaning to finance set-up and running costs of the Fund during

the first four years.

The project cycle

Project Identification: In this phase the ideas for EE projects eligibility in order to support

BEEP are identified. The outcome of this phase will be a list of pipeline projects for further

development and assessment.

Initial Project Screening: during this phase the potential projects will be allocated to

different project coordinators for further development. The target of this phase is to provide

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information for ED in order to be able to evaluate and assess if the submitted project meets

the eligibility criteria of the BEEF.

Comprehensive Project Appraisal: the sustainability of the project from financial,

technical, EE and environmental aspects will be investigated by the financial manager. The

project should be feasible in all mentioned areas to be able to get BEEF’s support and

money allocation.

Financial Structuring of the Project: the project coordinator has to start working on the

financial structuring of the project after its pre-approval. Therefore, discussions will be

needed to take place in order to clarify the financing terms of the project together with the

partner co-financiers in a way that best reflected the specific characteristics of the

individual project.

Project Approval: the executive director will submit the complete documentation package

related to the project financial structuring to the MB. The management board will then

investigate and review the whole submitted documentation in order to approve or reject the

project if it is not in the eligibility criteria.

Financial Closure and Disbursement: when the MB approves the project, the transaction

agreement will be signed and the disbursement of funds will be carried out based on the

procedures specified in the Project Financial Management System Manual.

Project Monitoring: the financial manager through the project coordinator is in charge of

periodically collecting data in order to monitor the performance of each project to make

sure that the receiving funds are utilized in compliance with the financing conditions and

to serve as an early warning system for potential financial distress.

Credit Recovery Procedures: in case of any problem occurrence monitored by the project

coordinator such as operating in breach of the agreed terms or showing early warning signs

of difficulties in financial performance or the ability to realize the planned energy savings,

The Project Coordinator will be responsible for providing effective problem credit

administration by early detection of potential problems and immediate corrective action.

2.3.3. China Energy Efficiency Financing Project

The China Energy Efficiency Financing (CHEEF) Project consists of three phases. The

first phase is the CHEEF I project which concentrates on improving Energy Efficiency of

medium and large enterprises in China in an effort to reduce their adverse environmental

effects on climate. This phase was approved by the World Bank board in 2008 and the

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sources of finance utilized for obtaining this objective which is one of the highest national

priorities of the government of China, come from two International Bank for

Reconstruction and Development (IBRD) loans of US$100 million and a Global

Environment Facility (GEF) grant of US$13.5 million for technical assistance to the

government and two participating banks. The second phase, the CHEEF II project was

approved in 2010 with an IBRD loan of US$100 million to “Minsheng” Bank and the third

phase, the CHEEF III project was designed for an additional financing with a loan of

US$100 million provided from IBRD to China EXIM Bank and was approved in 2011.

Since EE investments are small with high transaction costs, the expected Energy savings

related to them may not be realized, financial institutions do not have the required expertise

and willing to develop the EE business line and finally the local banks prefer large-scale

borrowers with good credit ratings or high levels of collateral, CHEEF was established and

designed to facilitate EE financing and build capacity of local banks for EE lending.

The CHEEF has two main parts. The first part includes a credit line in which IBRD

provides about US$400 million loan to three Chinese banks including China EXIM Bank,

“Huaxia” Bank, and “Minsheng” Bank. Technical assistance with support from GEF in

order to enable and support national EE policy is another part of CHEEF. Technical

assistance focuses on training and capacity building of staff for evaluating EE investment,

seeking ways to develop new financial products for ESCOs lending, carrying out studies

on market segment to stretch out the end-user sector and provide SMEs and projects with

tools for market aggregation.

Only large and medium sized enterprises with a total revenue of at least Y 30 million

(US$4.7 million) were eligible to borrow from participating financial institutions (PFIs) in

the first and second phases of CHEEF but in the third phase the eligibility criteria was

extended in which the industrial enterprises of all sizes, ESCOs and owners of buildings

such as office buildings, shopping centers, multifamily residential complexes, and other

commercial and public buildings can borrow from PFIs to run their EE projects. The

Project Eligibility criteria include renovation and rehabilitation of existing systems which

cause to Energy Efficiency. PFI underwriting criteria rely heavily on the borrowers’ credit

rating and follow the eligibility criteria in the CHEEF Operational Manual. PFIs assume

all risks.

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3. Review of Previous Reports

The main objective of this section is to review the previous tasks which are done on

UNIDO/GEF project "Industrial Energy Efficiency in Key Sectors" and give brief

information regarding to the outcomes. This section provides a summary of local expert

report1 and the consultant comments2 and feedbacks on that. In addition, the Consultant

recommendation and limitation of local export report are presented.

The local expert report provided an analysis and proposing the framework of energy

efficiency project financing in Iran. He considered targeted industries in which E/E projects

could be devised, including cement industry, oil/refinery and petroleum industry and steel

production industry.

In order to draw a brief quick review of energy efficiency rules and available supportive

programs, the local expert report mapped of all funded program supporting E/E investment

and the pillars of the international efficiency systems in Iran and their duties. The

institutions are strategic council, council of the directors of efficiency committee,

professional institution of evaluation and monitoring. In this report the author also outlined

the legal references and main general strategies of energy efficiency in industrial divisions.

Besides, the report provided analysis of policies and results of energy efficiency in Iran.

Based on this analysis, three main categories of energy efficiency policies are defined,

including informative policies, encouraging policies and punitive policies.

According to local expert report “industrial energy efficiency (EE) in key sectors” Iran has

a combination of government-based and private sector economy where financing system

is totally bank-oriented in which life insurance companies are not involved in financial

system. In addition, non-banking companies in Iran are not allowed to lend money but it is

possible for them to invest in projects directly. Moreover, recent development in Iran

capital market presented new financing methods. Due to Islamic (sharia) rules, some

financial instruments are prohibited to apply3 and sharia compliant finance should be

considered in implementing the project. According to this report, lending rate of Iranian

financing system is between 21 and 28 percent. Furthermore, averaged duration of lending

is between 6 and 60 months.

The aforementioned report also reviewed lending mechanism of banks and capital market

of Iran and based on this information the number of lending methods, which are appropriate

1 . 2014- Mohammad Mahdi Samavaty

2 . 03/2015-Kommunalkredit Public Consulting GmbH

3. Sharia prohibits acceptance of specific interest or fees for loans of money (known as riba, or usury), whether the payment is fixed or floating.

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for this project, is suggested. Among them, the most common lending schemes in Iran

which can be applied for this project are listed as below:

Qard Hassan

- Terms: between 6 and 36 months

- Interest rate: zero-2-4 percent commission

- Condition: there is not specific condition

- Collateral: Usually individual guarantee the borrower.

Musharakah

- Terms: between 6 and 60 months

- Interest rate: between 25 and 28 percent

- Condition: In this type of financing the project is considered as a joint-

venture project while the lender based on borrower performance will receive

at least 25-28% expected return

- Collateral: A fixed asset, real estate, stock or bonds.

Mudarabah

- Terms: Between 6 and 60 months

- Interest rate: Between 25 and 28 percent

- Condition: Based on commercially activities expected return will be

provided

- Collateral: Normally a fixed asset, real estate, stock or bonds.

Leasing

- Terms: Between 12 and 36 months

- Interest rate: Between 28 and 33 percent

- Condition: capital goods

- Collateral rules: A whole leased goods is collateral form.

The proposed framework is subject to given information, analysis and existing financing

schemes and environmental initiatives programs in Iran. The model concentrates on

financing of E/E projects through establishment of an NGO and using a bank with available

funds in the money market. An NGO would perform as a legal entity in order to support

E/E plans in Iran. Organization of the NGO requires a number of teams, including

executive committee, financial committee, technical committee and compliance and

supervision team.

Technical committee is responsible of energy efficiency proposals, business models and

action plans of applicants in field of cement, steel, oil refinery and petrochemical

industries. The primary outcome of this committee is approval or denial of the E/E projects.

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Financial committee is in charge of allocating financing and fund for the approved projects

and cash flow management.

The executive committee would indicate execution plans consists of required steps for

implementing E/E projects. Compliances and supervision of all primary proposals are done

by compliance and supervision department (team).

The report recommended a board of nine directors in two forms of executive and non-

executive members. Executive members organize and handle interactions and operations

of NGO. They are also responsible for monitoring whether allocated funds are sufficient

to E/E plans. Moreover, executive members single out the final projects. In the board of

directions president (head of board executive), vice president, CEO, technical directors,

financial directors (a member of financial committee), and executive director (a member

of executive committee) are involved.

However, non-executive committee gives advice on final decision regarding to acceptance

or rejection of each project. UNIDO representative, Iran Fuel Conservation Company

(IFCO) representative, compliance and supervision director (a member of compliance and

supervision department) are involved in this committee.

The report drew the working process of establishing the given company, which would

establish through the office of registration of companies and non-commercial organizations

in the form of an NGO. Next, the report implied that agent bank could be selected among

the number of private and public banks in Iran. Consequently, funds are allocated to the

projects by means of a network of sponsors under supervision of IFCO and UNIDO. E/E

proposals are singled out by the committee of NGO and moneys installments are flourished

to the selected proposals.

Local expert report also suggested that source of financing could be available through

domestic and international sponsors which are interested in energy efficiency programs.

Indeed, the report mentioned that funds (in dollars) would be transferred monthly into the

banking account of the NGO. Also domestic sponsors are organized by IFCO.

Accumulated funds will be deposited in a one-year deposit account with a 22-percent

interest rate.

Under Iranian banks and capital market rules and regulation the proposed model is

developed. The report believed that at the present time the proposed framework might be

the one and only practical model in Iran. It is estimated that founding this method would

be less than two months.

19

3.1. Limitations and Recommendations

Based on previous tasks some limitations should be considered in creating the financial

scheme. In the first meeting with the representatives of Bank “Pasargad” and “Mellat”

bank, it is concluded that private banking sectors are interested in investing green-type of

projects rather than brown fields. Another limitation of the project is lack of performing a

full financing market assessment which is recommended by GEF in Iran. Moreover, high

interest rate and low/subsidized energy prices cause that industrial companies consider E/E

projects as low-priority investments. However, Energy subsidies are started being phased

out in the coming years and it can be expected this policy (E/E project) will have significant

impact on the EE investment projects returns. While based on IFCO meeting, the scope of

the E/E project needs to be widening to encompass SMEs as well, the project which is in

progress does not cover Small and Medium Sized Enterprises (SMEs).

Considering above mentioned issues recommendations could be implemented according to

local expert and the Consultant's view. After the first version of the local expert report was

reviewed by consultant, the most challenging remarkable feedback regarding to the report

was that it did not take account of any discussion on current hindrances for existing bank

lending methods to industrial companies. The local expert report also did not identify how

to overcome this challenge. Thus, the consultant recommended launching revolving fund

for E/E projects in Iran with one or two pilot projects. In order to indicate a bankable project

proposal in close cooperation with an industrial company and to provide financial

structuring services to approach and negotiate with external financiers a financing package

which needs to be devised. Afterwards, based on this pilot’s outcomes, a number of target

financing approaches could be developed. The consultant also highly recommended

implementing the project website in order to smooth the communication with stakeholders

and interested companies.

To set up a revolving fund, the Consultant recommended phased approach to implement.

The main steps of this approach are as following:

Select at least one interested company,

Develop a bankable investment project proposal with UNIDO and IFCO support

including energy audit, business plan, and cash flow projection and financing plan.

Provide support to the company how to approach agent bank, presenting the project

and negotiating a loan package.

The challenging part of the local expert report was that the report did not clearly address

the appropriate financial instruments. The consultant recommended starting with pilot E/E

projects, in which parts of the GFF-fund are applied a technical assistant in order to

20

structure the pilot projects, rather than establishing a new fund and to avoid neglecting

indication of market barriers, a phased approach for the optimal fund structure is

recommended. Therefore, local expert strongly recommended to consider availability of

financing instruments to support E/E projects as listed below:

- Investment Grants,

- Grant funded technical assistance,

- Credit lines,

- Dedicated debt with legal personality,

- Partial credit guarantees/first loss coverage.

4. Preliminary Meeting with Financial Institutions

One of the most important factors that enhance the likelihood of revolving fund

achievements to its goals is to take into account the banks and financial institutes criteria

and conditions prior to the fund establishment. Thus, in this study a number of structural

interviews with some banks and financial institution are conducted in order to shape and

implement the fund in an appropriate way. The outcome of interviews implies that is

necessary to consider flexibility element in several key issues, including:

1. The given amount could not motivate banks to make a significant contribution in

this project merely. However, banks contribution ratio in comparison with UNIDO

is rather higher which decreases bank desire to cooperate effectively.

2. Iranian banks do not have authority to determine interest rates, thus providing lower-

interest-rate loans is completely done through UNIDO sources.

3. Banks would absolutely prefer to assign the fund sources to their current customers

rather than new ones, since the credit assessment, due diligence and collateral

process could be carried out straighter forward. In addition, the field in which banks

deliver services to their clients may not be within and broaden than the scope of

UNIDO targeted industries.

4. UNIDO expects that flexible policies are implemented to pledge that are held on the

premises to the banks. Banks and financial institutes are reluctant to alleviate the

conditions of collateral requirements. However, current and loyal customers might

be rather preferable towards the banks. Moreover, banks suggest that any reduction

of collateral either by amounts or associated risks should be covered by UNIDO.

5. Regarding to risk management issues and Islamic financing concept, banks would

prefer that applicants provide a segment of loan amount by themselves.

21

6. Under circumstances that the required sources are provided by external sponsors

thoroughly and on behalf of banks fund management role, they accept other

conditions devised by the other side.

7. It seems that the majority of large public banks and small private banks are less

willing to enter in this field.

Energy Efficiency Revolving Fund

Proposed Financial Scheme for Iran

UNIDO/GEF Project

"Industrial Energy Efficiency in Key Sectors"

December 28th, 2015

2

Contents

1. The Framework of EE Revolving Fund ............................................................................................ 3

1.1. Projects Eligibility for Funding ..................................................................................................... 4

1.2. Use of Loan Funds ........................................................................................................................ 4

1.3. Administration .............................................................................................................................. 5

1.4. Major Responsibilities of the Bank ............................................................................................... 5

1.5. Lending Process for the Fund ........................................................................................................... 7

1.6. Technical Assessment and Financial Assessment of Loan Applications ...................................... 8

1.7. Payment Periods, Interest Rate and the Portfolio of the fund ....................................................... 9

1.8. Operational Expense ................................................................................................................... 11

1.9. Ownership of the Fund Project Completion................................................................................ 11

Annex I: Project Identification Form ...................................................................................................... 12

Annex II: Assessment Form ..................................................................................................................... 15

Annex III: Appraisal Form ...................................................................................................................... 27

Annex IV: Terms of References ............................................................................................................... 30

Tables and Figures Table 1: Lending Process for the Fund ......................................................................................................... 7

Table 2: Fund Lending Interest Rate According to the Rate on UNIDO Contribution .............................. 10

Table 3: Time Value of UNIDO Contribution, Considering Inflation ........................................................ 10

Table 4: Table 3: Time Value of UNIDO Contribution, Considering Risk Free Rate................................ 10

Figure 1: Structure of the Fund (Service Payment) ...................................................................................... 3

Figure 2: Structure of the Fund (Loan) ......................................................................................................... 4

3

2. The Framework of EE Revolving Fund

Based on GEF and UNIDO mission, the main objective of the fund is to finance energy

efficiency projects in Iran in order to support investment in energy efficiency activities and

to promote the development of an EE market in the country. The fund operates as a

profit-oriented business which offers lower-than-market interest rate loan.

The initial size of the fund would be 4.5 million dollars. The financial resources are

received by UNIDO from Global Environmental Fund (“GEF”) is equal to 1.5 million

dollars and the rest is financed through the bank resources (or other co-financier). On behalf

of the government, Iranian Fuel Conservation Company (IFCO) provides technical

assistance to the fund.

The structure and mechanism of governance is created as simple and practical as possible.

Based on the relationship between parties including, Energy Service Providers and Energy

Efficiency Projects, the principal structure of the fund are graphically presented as Figure

4 and Figure 5.

In Figure 4, it is assumed that there is not any direct loan to Energy Efficiency Project

while the revolving fund provides Energy Service Providers with service payments sources

in order to enable them to support EE projects by installation energy efficiency services.

However, EE projects beneficiaries would make repayments.

Funding Sources

GEF Bank

Others

Energy Efficiency

Projects

(Beneficiary)

Energy Service

Providers

Funding

Loan

Repayment

Installation

/Energy

Services Service

Payments

Figure 1: Structure of the Fund (Service Payment)

4

In figure 5, the mechanism of revolving fund is devised based on direct loan which is

assigned to EE projects beneficiaries. While first structure is preferable the second structure

seems to be more practical in the current situation.

2.1. Projects Eligibility for Funding

While the fund prefers to finance five key industrial sectors namely oil Refineries,

Petrochemicals, Iron & Steel, Cement and Brick, the scope of the eligible projects are not

limited to those sectors and will cover other industrial sectors and SMEs1. Projects which

implement energy efficiency are eligible for a loan from the fund and include, but not

limited to:

Retrofit energy saving projects;

Reduction of greenhouse gas emission through energy efficiency;

Energy performance improvement project;

Energy conservation projects.

2.2. Use of Loan Funds

Loans from the Energy Efficiency Revolving Fund may be used for:

Engineering design and supervision fees, and any savings guarantee fee payable to

an ESCO2;

Purchase, procure, supply and installation of equipment and tools;

1 Small – Medium Enterprises 2 Energy Services Companies

Funding Sources GEF

Bank

Others

Energy Efficiency

Projects

(Beneficiary)

Energy Service

Providers

Funding

Loan

Repayment

Service Contract /Payment

Installation

/Energy Services

Figure 2: Structure of the Fund (Loan)

5

Technical assistance and advice for proper installment of the purchased equipment;

Transportation costs, demolition costs, import taxes and duty and any value added

tax (VAT) associated with above mentioned costs.

Any other costs associated with the projects which are necessary and unavoidable.

More details regarding the eligibility criteria and the use of fund will be determined by

technical committee of the fund. However, the fund does not finance the following types

of projects and expenditures:

Research Based Project;

Projects focused on renewable energy resources;

Operational costs of projects including raw materials, fuels or salaries for own staff;

Rental payments and purchases which are not directly linked with the EE projects.

2.3. Administration

In close coordination with UNIDO, the bank is responsible for the entire day-to-day

operation and management of the fund. Except as otherwise stated herein, the bank is

responsible for implementation of the project cycle, managing the revolving fund

according to the agreed procedures, monitoring the utilization of the fund, managing the

disbursement and recovery of loans, and providing statements and reports as stipulated in

section 5.4.1. The bank is also responsible to sign contracts with other co-financing

partners and the beneficiary (borrowers).

Technical committee is formed by UNIDO, Iran Fuel Conservation Company (IFCO) and

the bank representatives and in addition to other roles are defined in other parts of

this section (section 5), technical committee is responsible for technical assessment of the

projects, providing technical assistance to the bank and the beneficiary and ensuring that

the projects are compliant with the main objective of the fund. The primary outcome of

this committee is approval or denial of the E/E projects on the grounds of technical criteria

of the fund.

On the other hand, financial committee will be designated by UNIDO and bank and, it is

in charge of financial assessment of the projects and is formed by the bank and UNIDO

representatives. All other co-founders may participate in financial committee. The financial

committee monitors the performance of the fund to ensure that it performs as effective as

possible. The primary outcome of this committee is approval or denial of the E/E projects

based on financial criteria of the fund. Other responsibilities of the committee maybe

defined in other parts of this section (section 5).

6

2.4. Major Responsibilities of the Bank (Required Services)

In addition to the role of the Bank that is defined in other parts of this section (section 5),

the participating bank is required to:

Open a project account, with two signatories to the fund;

Convert the fund of GEF/UNIDO in the amount of US$ 1,500,000 into the revolving

fund in IRR3 in accordance with the official exchange rate4;

Provide equivalent amount of US$ 3,000,000 as co-financing through the Bank

resources;

Offer a flexible interest rate on the fund which will be fixed annually upon

agreement between UNIDO and the Bank. In addition, if Central Bank of the Islamic

Republic of Iran imposes new regulation regarding to interest rate, the fund’s

proposed interest rate maybe revised. The Bank shall inform UNIDO within two

weeks;

Confirm reconsidering the funding terms for contribution of other co-financers;

Consider, in case of termination of the cooperation before July 2017, unutilized

balances shall be immediately returned to UNIDO, within maximum 30 days of the

termination notification;

Calculate the interest on UNIDO resource which will be added to the fund and report

it to UNIDO annually;

Provide reports as stipulated in below (subsection 5.4.1).

2.4.1. Reporting Requirements

According to bank responsibilities (section 5.4.), the bank is required to submit some

reports to UNIDO as below:

First progress report within one month of the contract signature providing the

structure of the fund and confirming the opening of a bank account dedicated for

the revolving fund (100% upfront payment);

Quarterly progress reports providing the financial statement of the interest

earned and a financial statement showing the utilization of the fund, financial status

of the main payments and technical overview. A template will be agreed upon

agreement of both parties. However, these reports will include, for each loan;

The total amount of the loan;

The total of repayments already made by the Beneficiary;

Information about the next repayment due;

3 Iranian Rial

4 Official Exchange rate is set by Central Bank of Islamic Republic of Iran

7

Projections of future drawdowns and repayments.

Final report to be submitted at the end of the contract providing the final

audited financial statements for the project using the same format and structure as

Quarterly progress reports. At the end of the contract and upon the written consent

of both, the management and ownership of the fund shall be signed off by UNIDO

to IFCO or any other governmental entities nominated by IFCO.

2.5. Lending Process for the Fund

The loan cycle will consist of the following steps:

Table 1: Lending Process for the Fund

Required time Responsible Activity Steps

Four weeks UNIDO and IFCO

Beneficiary under

UNIDO supervision

Open call for proposal

Project identification Form

(Pre-feasibility Study)

Project

Identification

Two week Technical Committee

Bank

Agreement on eligible

pipeline

Assessing credit worthiness

and guarantees

Initial

Screening

Four weeks Beneficiary under

UNIDO supervision

Technical Committee

Financial Committee

Full feasibility study

Technical approval

Financial approval

Project

Appraisal

Two week

Bank

Signature of the loan

contract with beneficiaries

which includes guarantees

and payment mechanism

Financial

closure and

disbursement

On an ongoing

basis

Bank

UNIDO and IFCO

Management and monitoring

of disbursement and

recovery of the loan

Measurement and

verification of energy saving

and GHG emission

reduction

Project

Monitoring

On an

ongoing

basis

Bank

Provide statements,

quarterly and final reports as

stipulated in subsection 5.4.1

Project

Reporting

8

The guidelines for characteristics and criteria for selection of eligible beneficiaries and EE

projects which require various templates will be further elaborated during the inception

phase by Technical Committee which will be introduced in three weeks after signature of

the contract.

Project identification involves the identification of an EE project which may be eligible for

receiving a loan from the fund. The format of Project identification form determined by

Technical Committee, will be prepared by the potential beneficiaries and submitted to

Technical and Financial Committees. Once an EE project has been identified, initial

screening is carried out by Technical Committee and the bank, in order to provide a short

list of potential projects (and also beneficiaries) after which for project appraisal, a detailed

feasibility study shall be prepared by the beneficiary. The template of full feasibility study

will be determined by Technical and Financial Committees.

Financial approval is attained to determine whether projects and measures are financially

feasible. If the results of the technical and financial assessments are acceptable and

approved, financial closure and disbursement begins with signature of the loan contract

between the bank and the beneficiary, including guarantees and payment mechanisms.

Afterwards, the beneficiary makes repayments of loan principal and interest to the bank.

UNIDO, IFCO and the bank monitor the project implementation and finally the Bank

provides required reports (according to subsection 5.4.1).

2.6. Technical Assessment and Financial Assessment of Loan Applications

2.6.1. Technical Assessment

Technical assessment of loan applications may be made by the technical committee and

the committee will determine detailed criteria, however the following criteria should be

considered as the minimum requirement:

The project is in line with the objective of the fund;

The proposed energy efficiency measures are feasible;

There is sufficient information to validate the estimates of energy savings;

Estimations of energy savings are reasonable;

Implementation schedules are achievable and do not exceed twelve months;

The lifetime of the project should be at least six years (at least twice the payback

period);

Proposal shall include a statement of measurement and verification (M&V) plan of

energy performance improvement for before and after implementation of the

project;

9

The amount of GHG reduction shall be clarified.

The project should meet the minimum level of energy efficiency in GJ/year or

kWh/year which will be determined by Technical Committee;

The committee also considers the scale, complexity, technology of the project in the

assessment. As a result of the comprehensive technical assessment of the project, the

committee approves or denies the request.

2.6.2. Financial Assessment

Financial committee is responsible for financial assessment of loan applications. In

assessing loan applications, principal eligibility criteria are listed as below however the

committee may add (or even change) some criteria in order to achieve more reliable

assessments.

There is sufficient information to validate the estimates of feasibility study;

Assumptions and estimations are reasonable and calculations are accurate;

Financial projections are achievable;

Project developer is able to co-finance at least between 20% and 30% of the total

project costs;

Calculations should be based on incremental cash flows;

The payback period of the project is not more than three years (investment cost and

energy prices will be calculated based on the date in which the proposal is

submitted);

The project should be accepted if its net present value is positive.

The discount rate should be at least 26% (considering (guaranteed) the fixed income

rates and risk premium);

Internal rate of return (IRR) should be 35% and more;

Debt ratio of the applicant should not exceed 90% after allocation of the loan;

Life cycle cost assessment of the project shall be added to the proposal of the project.

As a result of the comprehensive financial assessment of the project, the committee makes

a recommendation about the financial feasibility of the project and may approve it.

Creditworthiness of applicant is assessed by the participating bank and the bank may use

its regular lending criteria to carry out the assessment concerned with two main issues in

assessing loan applications which are the capacity of the applicant to make repayments of

loan principal and interested in accordance with an agreed repayment schedule; and the

value and quality of the collateral offered by the applicant. However, it is highly

recommended to facilitate the procedure as much as possible.

10

2.7. Payment Periods, Interest Rate and the Portfolio of the fund

The period over which the loan is provided would be three years and the repayments are

monthly. The interest rate for the applicant is suggested to be 20.5% which is the weighted

average of the interest rate on bank contribution (being 24% according to the Central Bank

of the Islamic Republic of Iran) and interest rate on UNIDO contribution (being 13.5%

based on expectations of future inflation). The given rate may be revised subject to

alteration of the regulations and inflation. Since, the banks are not flexible in terms of

interest-rate; UNIDO may reduce the interest rate of its own portion to offer more attractive

lending interest rate to potential applicants. Table 2 shows fund lending interest rate

according to the rate on UNIDO contribution.

Table 2: Fund Lending Interest Rate According to the Rate on UNIDO Contribution

Rate on UNIDO

Contribution 0% 6% 8% 10% 12% 13% 14%

Fund Lending Interest Rate 16.00% 18.00% 18.67% 19.33% 20.00% 20.33% 20.67%

While lowering interest rate may seem to be a good option to have more applicants,

purchasing power of the money is the issue that should be considered especially in

countries with high inflation rate. Table 3 provides more information regarding the various

interest rates to be proposed using 14% as the discount rate and proxy of expected inflation.

Table 3: Time Value of UNIDO Contribution, Considering Inflation

Proposed

rate

Time Value of UNIDO Contribution

1st Year 2nd Year 3rd Year 4th Year 5th Year 6th Year

0% 1.32 1.15 1.01 0.89 0.78 0.68

6% 1.39 1.30 1.21 1.12 1.04 0.97

8% 1.42 1.35 1.28 1.21 1.14 1.08

10% 1.45 1.40 1.35 1.30 1.25 1.21

12% 1.47 1.45 1.42 1.40 1.37 1.35

13% 1.49 1.47 1.46 1.45 1.44 1.42

14% 1.50 1.50 1.50 1.50 1.50 1.50

However, if 21% as the risk free interest rate is utilized, the outcome would be different.

Based on the fact that the propose of the contribution is not investment, but helping EE

projects; the outcome based on 21% is not exactly relevant for decision making, however

it is still insightful.

Table 4: Table 5: Time Value of UNIDO Contribution, Considering Risk Free Rate

Proposed

rate

Time Value of UNIDO Contribution

1st Year 2nd Year 3rd Year 4th Year 5th Year 6th Year

11

0% 1.24 1.02 0.85 0.70 0.58 0.48

6% 1.31 1.15 1.01 0.88 0.77 0.68

8% 1.34 1.20 1.07 0.95 0.85 0.76

10% 1.36 1.24 1.13 1.02 0.93 0.85

12% 1.39 1.29 1.19 1.10 1.02 0.94

13% 1.40 1.31 1.22 1.14 1.07 1.00

14% 1.41 1.33 1.25 1.18 1.11 1.05

The financial resources of the fund should comprise at least three various industries and

the maximum share of each industry may not exceed 30% of the fund resources. The

maximum share to be allocated per application is 25% of the fund resources.

2.8. Operational Expense

Any expenses incurred due to operation of the fund and to be paid for that should be agreed

upon in advance by all co-founders. All payments for project assessment and external

consultants will be made by the applicant(s). The bank will receive one present (1%) of the

total contribution as the management fee and payments are made in the beginning of each

fiscal year.

2.9. Ownership of the Fund Project Completion

As part of the contract closure and three months prior to the contract end, a hand-over

protocol should be prepared by UNIDO, IFCO and the bank. The ownership of the fund

shall be transferred to IFCO or any other governmental entities nominated by IFCO based

on the agreed protocol. The protocol indicates how the relationship between the

government of Iran and the bank shall be regulated and describes related liabilities.

12

Annex I: Project Identification Form

Project identification Form

Energy Efficiency Revolving Fund

................................................................................................

[Company Name]

........................................................................

[Province, City of Registered Company and Company Registration Number]

…………………………………………………………………………………….

[Address, Tel and Postal Code]

13

Project Title:

Project Objective:

Project Owner(s):

Project contactor:

Project duration (Months):

Energy Efficiency Measure Information

Indicate the site name that will be affected by Energy efficiency project.

Indicate the technology type.

Indicate Expected Costs and Grants.

Site Name Technology Type

Brief

Description of

Proposed

Technology

Expected

Duration

Expected

Costs

(MRLs)

Expected

Finance

(MRLs)

Replaced

Add-On

New Technology

Replaced

Add-On

New Technology

Replaced

Add-On

New Technology

SUM

Project Management Cost

Total Project Cost

14

Financing Plan Summary For The Project (MRLs)

Description 1st month 2nd month 3rd month 4th month 5th month 6st month

Expenditures

Design

Equipment delivery

Construction and installation

Commissioning activities

Total

Funding source

Applicant’s participation

Revolving Fund

Other Sources

Total

Declaration on information reliability

Hereby we declare and guarantee that all information provided here and in any other

documents enclosed herewith is true and accurate, provided that such information is

available. We confirm that we have read and fully understood the contents of the

Application Form

Name and signature of the legal representative

Date and stamp

Declaration on consent to provide information to co-financing partners

Hereby we declare our consent that the bank could transfer/release the above information

to the interested partners with the purpose of reporting and analysing the performance of

the project. Partners could be financial institutions, ESCOs, etc.

We give the bank the right to contact any person or company/ institution (including

suppliers and clients) that could offer information useful for the reporting and verification

of the data provided.

Name and signature of the legal representative

Date and stamp

15

Annex II: Assessment Form

Application Form

Energy Efficiency Revolving Fund

................................................................................................

[Company Name]

........................................................................

[Province, City of Registered Company and Company Registration Number]

…………………………………………………………………………………….

[Address, Tel and Postal Code]

16

Section1: General Information

Business Scope

(Based on Article of Association)

Type of Business Entity

Date Business Established

Bank of Business Account and Address

17

Shareholders

(At time of application)

Shareholder Company Type Registration

Number

Number of

Shares

Ownership

Percentage

Total 100

Board of Directors and CEO

Name Position

Years of director/proprietor

management experience within the

industry

Authorized Audit Company:

18

Summary of Financial Statements

(The latest Balance Sheet, income statement and cash flow statement)

Annual Energy Consumption (kWh):

Annual Energy Bill (Million RLs):

Total Numbers of Employees:

(At Time of Application)

Are There Any Court Judgments Against the Business?

Yes

No

Has the business received or applied for any other public sector support within

the last three years?

Yes

No

(If yes, what was the source of this funding? Please include any funding that you are currently applying

for.)

19

Section2. Technical Information

Proposed Energy Efficiency and/or Renewable Measures to Be Installed:

(Please list each individual measure and list any additional measures on a separate sheet of paper and

attach it to this form.)

1. Item (Project Description)

Purchase and installation cost (Million RLs):

2. Item (Project Description)

Purchase and installation cost (Million RLs):

Amount of Loan Requested (Million RLs):

Estimated Start Date of Work:

Planned Completion Date:

(Loans are only valid for FOUR months from date of offer)

Project progress timetable:

Items 1st Month 2nd month 3rd month 4th month 5th month 6th month

Design

Equipment delivery

Construction and

installation

Commissioning

activities

Startup date

20

Application Annual Energy Consumption Data

(Please provide data for the energy types affected by the proposed project e.g. Electricity for a lighting

project. Provision of all site energy data will enable a fuller energy usage analysis to be carried-out for the

customer)

Applicant Annual Energy Consumption Data Energy saving

Row Energy Source Type Units Annual Usage Annual Cost Annual

Saving

Cost Reduction/

Cost Recovery

1 Electric kWh

2 Natural Gas kWh

3 Gas Oil liters

4

5

6

Existing and proposed Technology

(The table can be modified if it is necessary)

Existing Technology

EXISTING EQUIPMENT / INSTALLATION DETAILS

Please complete where applicable or where information isn't detailed elsewhere:

Equipment Make:

Equipment Model:

Equipment Quantity:

Description of Use:

Additional Relevant Information:

21

Proposed Technology

Proposed EQUIPMENT / INSTALLATION DETAILS

Please complete where applicable or where information isn't detailed elsewhere:

Equipment Make:

Equipment Model:

Equipment Quantity:

Description of Use:

Additional Relevant Information:

Please Complete Where Applicable:

Existing Energy Source

Existing Consumption (Please state Units)

Annual Cost (RLs)

Cost Per unit of Energy Source (e.g. kWh, Litre)

Installed capacity of Existing Equipment (kW)

Approximate age of Existing Equipment (years)

Efficiency of Existing Equipment %

Proposed New System Energy Source Type

Cost Per unit of fuel (e.g. kWh, Litre)

Installed Capacity of Proposed Equipment (kW)

Efficiency of Proposed Equipment %

Percentage Savings from Additional Controls

Additional Control Type: Please Specify

Additional Savings kWh/Annum or MJ/ Annum

(if applicable) RLs/Annum

e.g. Reduced maintenance costs RLs

Other: Specify RLs

Other: Specify RLs

Other: Specify RLs

Other: Specify RLs

Other: Specify RLs

22

Section 3: Financial Assessment

Investment Costs

(At least, equipment and installment cost should be disclosed should be disclosed separately)

Proposed Project

Last Estimation

Year 13-- Expenditure Costs Remained Costs

Amount (Million RLs) % Amount (Million RLs) % Amount (Million RLs) %

Total

Local Currency

Foreign Currency

Finance Scheduling

Amounts in Million RLs

Description 1st Year 2nd Year … Total

Total In-flow

Total Out-Flow

23

Projected Income Statement (Million RLs)

(According to Iranian national accounting standards)

Description 1st Year 2nd Year … Nth Year

Existing Proposed Existing Proposed Existing Proposed

Net income

Income Statement Assumption:

(For both existing and proposed scenarios)

24

Projected Cash Flow

Description Initial

Investment

1st

Year

2nd

Year

3rd

Year

4th

Year

5th

Year

Existing Net Income

-Proposed Net Income

Surplus/Deficit

+Depreciation

+Other illiquid expenditures

+Dividend

Cash Inflow

-Cash Outflow

Net Cash Flow

Financial Indexes Based on provided information financial indexes are forecasted as following table:

Index Financial Assessment Result

Payback period

Net Present Value (Million RLs)

Internal rate of return (IRR)

Discount Rate

Note: In case that there is more than one proposed project, the company applicant is supposed to provide each financial

statement for each project separately.

25

Section 4: Other material information

Risk Factors

There are two sets (internal and external) of underlying factors which affect the

success of proposed project. The associated risks, which need to be considered in

advance, are listed as below:

-Internal Risks

-External Risk

Consultant/ Contractor/ Energy Service Company

Please submit any consulting advisory which is taken account to technical/financial study of proposed

project

Name Type of

Services Address Tel

26

Declaration on information reliability

Hereby we declare and guarantee that all information provided here and in any other

documents enclosed herewith is true and accurate, provided that such information is

available. We confirm that we have read and fully understood the contents of the

Application Form

Name and signature of the legal representative

Date and stamp

Declaration on consent to provide information to co-financing

partners

Hereby we declare our consent that the bank could transfer/release the above

information to the interested partners with the purpose of reporting and analysing

the performance of the project. Partners could be financial institutions, ESCOs, etc.

We give the bank the right to contact any person or company/ institution (including

suppliers and clients) that could offer information useful for the reporting and

verification of the data provided.

Name and signature of the legal representative

Date and stamp

27

Annex III: Appraisal Form

Appraisal Form

Energy Efficiency Revolving Fund

................................................................................................

[Company Name]

........................................................................

[Province, City of Registered Company and Company Registration Number]

…………………………………………………………………………………….

[Address, Tel and Postal Code]

28

Project Title:

Project Owner(s):

Project contactor:

Project duration (Months):

Brief Description and Purpose:

Describe How the Project Pins to the Revolving Fund Aim and Plan (Technical Committee)

Describe Findings of Technical Assessments (Technical Committee)

Detailed Explanation:

To Be Signed By, Date:

Detailed Explanation:

To Be Signed By, Date:

29

Describe Findings of Financial Assessments (Financial Committee)

Bank Comments on Bankability of the Project

Add Any Further Assessment

Detailed Explanation:

To Be Signed By, Date:

Detailed Explanation:

To Be Signed By, Date:

Detailed Explanation:

To Be Signed By, Date:

30

Annex IV: Terms of References

Terms of Reference

Set up of a revolving fund to finance Energy Efficiency Projects in Industry

Project Number: 120506

Project Title: “Industrial Energy Efficiency in key Sectors”

Duration: August 2012 to July 2017

Project Location: Iran

1. BACKGROUND INFORMATION

This Terms of Reference (TOR) will be used for setting up and management of the

revolving fund which will be designed to support investment in energy efficiency projects

within the scope of “Industrial Energy Efficiency in Key Sectors” project. In this context,

United Nations Industrial Development Organization (hereinafter “UNIDO”) will grant to

the revolving fund along with utilizing capacities and financial contribution of the banks

and/or financial institutions (hereinafter called “the Bank”).

2. PROJECT INFORMATION

The project “Industrial Energy Efficiency in Key Sectors” is financed by the GEF5 and

implemented by UNIDO as an implementing agency of the GEF. The project was

approved in August 2012 and is of duration of five years.

The objectives of the project are to accelerate the uptake of energy efficiency (EE) in

industrial sectors, providing a framework for National Energy Management Standards,

assisting in capacity building through training, developing targets, providing benchmarks

and most importantly, identifying technology improvement options to high energy

intensive industrial sectors.

2.1. The project consists of five components:

a) Policy Support: Integrating Energy Efficiency priorities into national industrial policies

and development programmes on energy intensive SMEs in Iran through setting up market-

based tools in industrial sectors, putting in place a system for monitoring and verification

of impacts and providing a framework for energy management standards.

b) Training and Capacity building: Building a national cadre of experts on energy

management systems and system optimization as well as energy auditors, introducing the

5 . Global Environment Facility

31

concepts of energy management systems and system optimization to the company

management, training enterprises on the preparation of bankable projects.

c) Direct support to Industry: Implementing one demonstration project within each

sector to act as show case for other industries and supporting those with energy audits,

energy auditing equipment and energy metering equipment.

d) Financial Support: Facilitating financing by training banks and financial institutions

on the financial appraisal of EE projects and establishing a revolving fund to support

investments in EE.

e) Information dissemination and Awareness raising on EE good practices, selected

case studies, sectoral benchmark reports, discussion forums and setting up of a data bank

on EE technologies and suppliers.

3. OBJECTIVE

The objective of the present terms of reference is to define the terms and conditions of the

cooperation between UNIDO and the Bank in setting up a revolving fund.

Based on GEF and UNIDO mission, the main objective of the fund is to finance energy

efficiency projects in industries in order to promote the development of an EE market in

the country. The fund operates as a profit-oriented business which offers lower-than-

market interest rate loan to the eligible industrial applicants (hereinafter called “the

Beneficiary”).

4. SCOPE OF SERVICES

In close coordination with UNIDO, the Bank is responsible for the entire day-to-day

operation and management of the fund. Except as otherwise stated herein, the Bank is

responsible for implementation of the project cycle, managing the revolving fund

according to the agreed procedures, monitoring the utilization of the fund, managing the

disbursement and recovery of loans, and providing statements and reports as stipulated in

section 7. The Bank is also responsible to sign contracts with other co-financing partners

and the Beneficiary.

4.1. Required Services

In addition to the role of the Bank that is defined in other parts of this TOR, the Bank is

required:

To open a project account, with two signatories to the fund;

To convert the fund of GEF/UNIDO in the amount of US$ 1,500,000 into

the revolving fund in IRR6 in accordance with the official exchange rate7;

6 Iranian Rial 7 Official Exchange rate is set by Central Bank of Islamic Republic of Iran

32

To provide equivalent amount of US$ 3,000,000 as co-financing through the

Bank resources;

To offer a flexible interest rate on the fund which will be fixed annually upon

agreement between UNIDO and the Bank. In addition, if Central Bank of the Islamic

Republic of Iran imposes new regulation regarding to interest rate, the fund’s

proposed interest rate maybe revised. The Bank shall inform UNIDO within two

weeks;

To confirm reconsidering the funding terms for contribution of other co-

financers;

To consider, in case of termination of the cooperation before July 2017,

unutilized balances shall be immediately returned to UNIDO, within maximum 30

days of the termination notification;

To calculate and report the interest on UNIDO resource which will be added

to the fund, to UNIDO annually;

To provide reports as stipulated in section 7, below.

5. LOAN CYCLE

UNIDO, IFCO8 and the Bank will nominate their representatives for technical committee

within three weeks after signing the contract between UNIDO and the Bank. UNIDO and

IFCO are responsible for final technical approval.

The representatives of UNIDO and the Bank for Financial Committee will be designated

within three weeks after signing the contract between UNIDO and the Bank. The Bank is

responsible for final financial approval.

Criteria for selection of eligible EE projects and, required templates for screening the

proposals will be determined by Technical Committee.

Financial criteria for selection of eligible beneficiaries, financial statements, required credit

worthiness, guarantees and corresponding templates will be determined by the Bank.

Project identification involves the identification of an EE project which may be eligible for

receiving a loan from the fund. The format of Project identification form determined by

Technical Committee will be prepared by the potential beneficiaries and submitted to

Technical and Financial Committees. Once an EE project has been identified, initial

screening is carried out by Technical Committee and the Bank in order to provide a short

list of potential projects (and also beneficiaries) after which for project appraisal, a detailed

feasibility study shall be prepared by the beneficiary. The template of full feasibility study

will be determined by Technical and Financial Committees.

8 Iranian Fuel Conservation Company (National Counterpart of UNIDO)

33

Financial approval is attained to determine whether projects and measures are financially

feasible. If the results of the technical and financial assessments are acceptable and

approved, financial closure and disbursement begins with signature of the loan contract

between the Bank and the Beneficiary, including guarantees and payment mechanisms.

Afterwards, the Beneficiary makes repayments of loan principal and interest to the Bank.

UNIDO, IFCO and the Bank monitor the project implementation and finally the Bank

provides required reports according to section 7.

Lending Process and main steps are presented in table 1.

Table 6 : Lending Process and main steps

Required

time

Responsible Activity Steps

Three weeks UNIDO and IFCO

Beneficiary under

UNIDO supervision

Open call for proposal

Project identification Form

(Pre-feasibility Study)

Project

Identification

Two week Technical Committee

Bank

Agreement on eligible

pipeline

Assessing credit worthiness

and guarantees

Initial

Screening

Four weeks Beneficiary under

UNIDO supervision

Technical Committee

Financial Committee

Full feasibility study

Technical approval

Financial approval

Project

Appraisal

Two week

Bank

Signature of the loan

contract with beneficiaries

which includes guarantees

and payment mechanism

Financial

closure and

disbursement

On an

ongoing basis

Bank

UNIDO and IFCO

Management and

monitoring of disbursement

and recovery of the loan

Measurement and

verification of energy

saving and GHG emission

reduction

Project

Monitoring

On an

ongoing

basis

Bank

Provide statements,

quarterly and final reports

as stipulated in below

(subsection 7)

Project

Reporting

34

6. TIME SCHEDULE

The total duration for the whole assignment is estimated to be 18 months starting from the

contract award. The Bank is requested to submit the proposed cash flow analysis for the

revolving fund.

The above mentioned duration could be extended, if required.

The work is planned to start as soon as possible after the award of the contract.

7. REPORTING

According to “Required Services” (section 4.1.), the Bank is required to submit some

reports to UNIDO as below:

First progress report within one month of the contract signature providing the

structure of the fund and confirming the opening of a bank account dedicated for

the revolving fund (100% upfront payment);

Quarterly progress reports providing the financial statement of the interest

earned and a financial statement showing the utilization of the fund, financial status

of the main payments and technical overview. A template will be agreed upon

agreement of both parties. However, these reports will include, for each loan;

The total amount of the loan;

The total of repayments already made by the Beneficiary;

Information about the next repayment due;

Projections of future drawdowns and repayments.

Final report to be submitted at the end of the contract providing the final

audited financial statements for the project using the same format and structure as

Quarterly progress reports. At the end of the contract and upon the written consent

of both, the management and ownership of the fund shall be signed off by UNIDO

to IFCO or any other governmental entities nominated by IFCO.

8. FUND MANAGEMENT STRUCTURE

The Bank is required to plan fund management team with individuals having at least five

years of expertise and experience in the banking and financial sectors. The Bank should

also propose management fee as a fixed percentage of funds under management before the

signature of the contract.

9. ADDITIONAL INFORMATION

At the initial stage and, in addition to what is stated in Section 8 above, following

information should be disclosed to UNIDO:

Industries/beneficiaries that the Bank is more interested to cooperate with;

35

Capital adequacy ratio;

Bad and doubtful debt ratio.

10. LANGUAGE

Fluency in both English and Persian is required for this assignment. The reporting language

will be in English.

11. OWNERSHIP OF THE FUND AFTER PROJECT COMPLETION

As part of the contract closure and three months prior to the contract end, a hand-over

protocol should be prepared by UNIDO, IFCO and the Bank. The ownership of the fund

shall be transferred to IFCO or any other governmental entities nominated by IFCO based

on the agreed protocol. The protocol indicates how the relationship between the

government of Iran and the Bank shall be regulated and describes related liabilities.