How does your proposed innovation leverage public intervention in catalyzing private SME finance?
The Department of Energy (DOE) predicts the onset of an energy supply shortage within the next few years. To help ensure the country’s energy security, the DOE and other like-minded organizations have embarked on various programs and nationwide campaigns on energy conservation, energy efficiency and renewable energy. Given all the known benefits of SE investments, there are still very limited projects being implemented. These could be attributed to general lack of awareness and the lack of available financing for such projects. Companies usually invest in activities that can immediately increase profit and expand market share, rather than spend on technology improvements for cost efficiency that can provide long-term benefits. There is also a prevailing mentality of not replacing old equipment “as long as it still works” without taking into account its energy consumption. But as energy prices in the country rise, it will soon be imperative for SMEs to actively consider investing in more efficient technologies to be more sustainable.
SEF encourages these SMEs to start thinking “sustainable” now. The innovation directly addresses the financing barrier by providing clients a cash-flow-based financing solution for energy projects. In promoting SEF, we leverage on previous work done by other organizations by highlighting the advantages and the business case of SE investing and giving them the chance to implement the projects for real.
Upon technical and financial evaluation of the proposed project, our account officers come up with customized financing schemes which are designed in such a way that the client will be able to pay their loan with the savings generated by the energy project. We believe that by introducing this innovation, we will pave the way for the banking sector to get more involved in catalyzing private financing of energy projects.
What barriers does your proposed solution address?
Lack of collateral, Lack of financial capacity, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs, Lack of institutional capacity of financial intermediaries.
If you checked any of these barriers, describe how your solution addresses them
SEF primarily addresses the lack of private sector financing or a specific financing product available for energy efficiency and renewable energy investments. These sectors are perceived to be high risk, hence the lack of willing investors. There is little private capital mobilized for such energy investments. Through SEF, companies may access technical advisory/ assistance and financing through commercial banking.
Other barriers that SEF addresses are the lack of financial capacity of SMEs to invest in new EE technologies, lack of collateral and lack of SME access to skills, knowledge and markets. Energy projects typically form part of the capital expense budget but are shelved in favor of more direct revenue-generating and production-based projects. The SEF’s risk-sharing feature of the loan can augment the financial deficiency and mitigate other risks associated with energy efficiency projects. The energy cost savings form part of the cash-flow and improves the risk profile of the loan without need of hard collateral. SEF also ensures that energy products that are developed/ being developed curb high transaction costs for SMEs and to continue improving the products available to clients.
To address SMEs’ lack of skills and knowledge, we are committed to working closely with clients regarding their energy projects. Our technical experts are available for clients’ consultation so they can make sound decisions about their investments. This process gives our SME clients more access to knowledge and information related to energy efficiency and renewable energy. With the technical evaluation and confirmation of viability, the bank is provided with additional comfort other than the traditional review criteria such as management composition, market and financials. For the SME borrower, he learns to veer away from the lure of equipment vendors whose motive is simply to sell the product without providing for a total energy saving solution for the company.
Aside from sharing skills with our clients, SEF also helps develop the market for energy service companies (ESCO). ESCOs are a relatively new market segment in the Philippines. ESCOs provide end-users both simple and complex sustainable energy solutions and opens up additional financing avenues for SMEs. They could also provide guarantees for savings that could improve the cash-flow and substitute for loan payments on investments in energy projects.
Before BPI launched our SEF program, there were no private banks offering SME loans specifically for sustainable energy. The market was a new area that banks were not familiar with, hence the lack of institutional capacity of financing intermediaries to serve SME needs. Our SEF program was borne out of our cooperation with the IFC, the private sector arm of the World Bank group. Throughout this partnership, we undergo internal capacity-building trainings and one- on-one consultations with technical experts to enable our bank staff to understand sustainable energy. As first mover in the Philippines in the field of SE financing, we are also setting the stage for increasing capacity of financial intermediaries to handle such projects.