Export finance turns over a new leaf

Governments worldwide regularly pledge to support the growth of renewable energy and shift away from a reliance on fossil fuels. Yet are providers of export finance seizing the opportunity to finance more environmentally-friendly projects? Rebecca Spong reports.


Speaking at the Rio summit held in June, US secretary of state Hillary Clinton urgently called for governments and the private sector to work together to develop sustainable sources of energy that avoid distorting the climate or destroying the environment. “Governments, yes; let’s do our part. Let’s do more than our part. Let’s pave the way for more clean energy investments, take on the entrenched political and economic interests that stand in the way of clean energy, technology and sources being used in nations around the world,” she urged. She concluded her speech with the ultimatum: “We simply cannot afford to fail.”

One US government-led initiative she announced at the UN conference on sustainable development in Rio was the US-Africa clean energy financing initiative, which includes a US$20mn pledge of government funding to be used to unlock “hundreds of millions of dollars in private financing” for clean energy projects in Africa. This initial fund is set to support much larger investment flows from the Overseas Private Investment Co-operation (Opic).

Clinton’s words of support for green initiatives have been echoed by many other governments, banks and corporates across the world, but how much substance these pledges have is very much open for debate.

A brief look at any of the online forums discussing the Rio summit suggests that the conference was somewhat of a wash-out.

Coming under particular attack was the decision to omit a clause calling for the phasing out of fossil fuel subsidies from the draft action plan drawn up and signed by the world leaders present at the summit.

In 2009 the G-20 pledged that it would phase out “inefficient” government subsidies of fossil fuels in the medium term. Yet, the total value of global fossil fuel subsidies is growing and is now estimated to be between US$775bn and more than U$1tn in 2012, according to research from the WorldWatch Institute. However, if the vast sums of promised investment in renewables do eventually materialise, then there will be increased possibilities for providers of export finance to carve out a profitable share of the renewables market.

Improving image

Reflecting the various government-led initiatives, the majority of global banks and ECAs have some form of renewables strategy in place, and at least outwardly recognise the opportunity this sector has for various financing opportunities, including the provision of export and trade finance.

Multilateral bodies such as the OECD have even revised their policies governing the use of export credits from ECAs and development banks to make financing options for renewable projects more attractive.

In June the OECD broadened its 2009 agreement on renewable energy and water projects to allow tenors of up to 18 years for export credits used in support of technologies that combat climate change. Advanced technologies such as carbon capture and storage and fuel substitution such as hybrid power plants have been added to the list of eligible transactions.

“The terms and conditions for each project will have to meet several environmental standards and be financially justifiable. This agreement will be reviewed regularly to ensure that future technologies will be included within the scope of the sector understanding on export credits,” the OECD said in a statement.

The OECD also updated another set of guidelines governing the use of export credits and related environmental and social due diligence processes. Under its new 2012 Commons Approaches, the organisation has changed some of the criteria that qualify a project to be categorised as a category A.

This category of project is considered to have the potential to cause adverse environmental effects and would require borrowers of export credits to conduct an extensive environmental impact assessment.

This amendment could make it more challenging for export credit-backed deals to be closed, remarks Marcia Davis, head of structured trade for the Americas at Bank of America Merrill Lynch. “The environmental guidelines for category A transactions require a complete, detailed environmental review and analysis before an ECA can act upon an application. That will certainly increase the cost of the project as well as the timeline to the financial close.”

She adds: “While the market intuitively embraces the purpose and spirit of the guidelines, it remains to be seen how many projects that are identified as category A will actually make the cut for ECA board level reviews.”

The new regulations will also require due diligence reports to include projections of annual greenhouse gas emissions caused by potential projects as well
as plans for how high carbon emissions will be minimised or offset.

Banks and ECAs boost capacity Bank of America Merrill Lynch has publicly committed itself to supporting the renewables sector, having announced in June it was upping its pledge to lend US$20bn to the green economy to US$50bn over the next 10 years.

Alexandra Liftman, global environmental executive at Bank of America states that in 2011 the bank made “substantial progress” on its original US$20bn target, committing more than US$3.65bn towards underwriting, advising on and financing transactions that are intended to encourage a move towards a low-carbon economy.

“Of the US$17.9bn delivered on the current initiative to date, roughly 47% comes from energy-efficiency transactions. The remaining majority comes from renewable and other forms of low-carbon energy deals,” she adds.

In terms of export finance, the bank is currently working with US Exim on a US$32.1mn deal in support of equipment purchases for two Brazilian wind farms. The Brazilian buyer is Wind Power Energia and the loan will be used to buy wind turbine blades from a US exporter to complete a 180MW wind farm in Bahia and a 211MW farm in Ceara.

“We are seeing a steady stream of interesting renewable-focused transactions that support our clients of all sizes and nationalities,” comments Davis, giving examples of financing exports for solar and wind projects as well as companies developing technologies that can create power from biogas.

Other banks have also jumped on the green bandwagon, with Goldman Sachs announcing in May that it is set to invest US$40bn in clean energy investment plans over the next decade.

The investment bank is eyeing up the renewable sector as one of the most significant investment opportunities of the future.

German banking group KfW has also pledged to extend €100bn in loans for renewable energy projects in the next five years. It has also lowered interest rates for projects that fall under its renewables programme.

KfW’s export finance arm, KfW-Ipex has been active in supporting wind farm development. In July, it provided a €164.5mn loan in conjunction with LBBW to finance the construction of a wind farm in Turkey. However the bank’s overall activity in export and project finance fell in the first half of 2012, reaching €5.7bn from €8.4bn recorded in 2011.

There are a number of ECAs playing a role in supporting the expansion of the renewables sector. Canada’s export credit agency EDC established the support of clean technology or “Cleantech” as a corporate priority for 2011, and has been increasingly active in supporting the export of Canadian technology used in renewable energy or energy-efficient projects.

In 2011 EDC supported C$561mn-worth of clean technology exports, increasing from C$436mn recorded in 2010. Although the overall value of the business supported by EDC has grown, the number of companies supported fell from 223 in 2010 to 203 the following year.

EDC differs from many other ECAs in that it provides a lot of direct financing to Canadian exporters. EDC’s chief corporate and social responsibility advisor, Signi Schneider tells GTR that much of its day-to-day work in supporting environmental technology deals involves offering contract insurance and bidding. US Exim is another ECA trying to ramp up its support of renewable technology.

“When we established our office in renewable energy in 2009, that’s when it really shifted into high gear and when the industry progressed in terms of technology and market demand,” notes Craig O’Connor, office of renewable energy and environmental exports at US Exim.

He tells GTR that in 2009 the bank financed roughly US$100mn in exports related to renewable energy; this jumped to US$332mn in 2010 and hit US$721mn in 2011. Total US Exim support for all environmentally-friendly projects reached US$889mn in 2011. “We’ve hit many milestones,” O’Connor notes.

“We are the top financiers of solar projects in India and we were the first international financial institution to approve a project under India’s national solar mission. In the fiscal year 2011, we financed seven Indian solar projects totaling US$256mn.”

Another milestone for US Exim was a US$48.6mn direct financing for US green technology exports in support of a biogas project in Brazil signed in May this year. The transaction is the first US Exim financing for biogas reclamation and development.

The deal involves the financing of exports of equipment from a US firm to support the Novo Gramacho biogas project in Rio, Brazil, located near the infamous Jardim Gramacho landfill, one of the world’s largest open-air landfill sites. The plant will convert the site’s dirty methane gas produced by the decomposing rubbish into usable biomethane gas.

The environmental benefits of this project will see reductions of landfill emissions to the atmosphere. Furthermore, the biogas produced will directly replace roughly 10% of the natural gas derived from fossil fuel sources that are consumed at the Brazilian oil company Petrobras’ refinery, states US Exim. The bank also notes that the reduction of greenhouse gases is the equivalent to removing 280,000 passenger vehicles from the road each year.


Yet some ECAs are not seeing such levels of growth in their support of renewable technology exports. The UK’s ECA UK Export Finance (previously known as ECGD) has seen little increase in such business.

Between 2011 and 2012, UK Export Finance supported £2.3bn-worth of business through its traditional guarantee and insurance products. Yet, its annual report reveals few renewables or energy-efficient projects, with just a £6mn project in support of exports from Green Fuels, a UK exporter specialising in the biodiesel processers, to Nigeria’s Gentec Energy, standing out.

This is not necessarily due to UK Export Finance’s lack of interest in the renewables sector, but rather a lack of demand for the agency’s services from what is a very nascent industry for the UK.
“We are demand-driven, in other words we don’t seek out to support a particular type of export, renewables or anything else,” explains Steve Dodgson, director of the business group at UK Export Finance, adding that the department had actively engaged with companies and trade associations to promote awareness of its products and services.

“Demand from the renewables sector is very, very low, so UK Export Finance has supported very little renewables business,” he adds.

He highlights one recent deal that UK Export Finance has been working on in mid-2012 helping a UK company that builds masts for wind turbines raise raising contract bonds for a wind turbine development in Germany. But, Dodgson explains, this type of deal remains very much a rarity.

Many UK companies are still in the early research and development stages, and as such not requiring any help from UK Export Finance.

The other issue, Dodgson raises, is that the more mature UK renewable firms are targeting the domestic market or traditional western export markets, rather than venturing further afield into regions that would require a level of UK Export Finance support.

The NGO backlashAlthough ECAs can cite a number of success stories in supporting the renewable sector, there is still a high degree of criticism levied at them for their continuing support of fossil fuels and other projects deemed by some to be environmentally unfriendly.

In the UK the coalition government made a commitment in 2010 to ensure that the then-ECGD would become a champion for British companies that “develop and export innovative green technologies around the world, instead of supporting investment in dirty fossil-fuel production”.

The pledge caused much debate, particularly surrounding the use of the phrase ‘dirty fossil fuel’, and resulted in UK Export Finance putting out a statement in July this year to explain that they were not planning to stop financing fossil fuels or sectors such as the aerospace industry, but would continue to support transactions that comply with international environmental standards.

“As for support for dirty fossil-fuel energy production, ‘dirty’ should be taken as referring to projects which produce pollution in excess of international environmental standards,” the statement read. UK Export Finance states that it adheres to OECD guidelines to make decisions on whether to finance a particular transaction or not.

However there is currently an all-party parliamentary enquiry taking place in the UK looking at UK Export Finance’s track record and the environmental or social impact of previous transactions. UK Export Finance has provided written and oral evidence to the group and non-governmental organisations (NGOs) have also provided statements.

The enquiry is not an official government investigation which would usually be carried out by a select committee. The all-party group is preparing a report on ECGD and is expected to release its findings in September or October.

The problem in the Pacific

US Exim is facing even tougher examination and has become the target of a lawsuit. Three conservation groups are attempting to sue US Exim and force it to retract its support for two LNG projects in Queensland, northeast Australia.

The Australia Pacific LNG and Queensland Curtis LNG projects are set to be built near to Great Barrier Reef World Heritage Area, but the conservation groups believe the LNG developments will threaten the survival of a number of different species living in the region.

GTR reported in May that Australia Pacific LNG had signed a US$8.5bn project finance facility with a syndicate of domestic and international commercial banks and export credit agencies. The facility comprises a 16-year commercial bank tranche, a 17-year US Exim tranche and an Export-Import Bank of China tranche. US Exim is now being pressurised to withdraw its US$2.87bn direct financing tranche.

The bank has received an application for financing US exports to the Queensland Curtis LNG project, but it is still considering the application, and environmental due diligence on the project is being carried out.

Doug Norlen, policy director at Pacific Environment, one of the NGOs behind the attempted lawsuit, tells GTR they have given US Exim a 60-day notice of intent and are waiting for a response back from the bank.

Norlen explains the reasons behind the lawsuit: “We and partner organisations initiated these legal actions because we want to stop US Exim’s skyrocketing fossil fuel financing from damaging the Great Barrier Reef, endangered species and global climate.

“Australian groups are challenging these projects in their country, and we in the US have a responsibility to ensure our own government does not violate environmental laws and commitments at home and abroad.”

However, Pacific Environment does not just want to see US Exim retract from the Australian LNG projects, the group fundamentally disagrees with the use of ECA financing to support fossil fuel-related deals.

“We have been calling for an end to ECA financing of fossil fuel projects for over a decade, and will continue to do so until this demand is met. Given the severity of global climate change, and its negative environmental, social, human rights and economic impacts, to shovel more public subsidies at the very projects causing the crisis is irresponsible public policy and must be stopped.”

Norlen also claims that despite US Exim’s pledge to support renewables, its annual fossil fuel financing has increased disproportionately. This level of growth dwarves the advances US Exim has made in support of renewable technology.

“During this time [2009-2011] US Exim’s financing for renewable energy has grown, but from a base of near zero, and it remains overshadowed by the far greater increase in fossil fuel financing,” Norlen adds.

He sees renewables as the growth market, and argues that ECAs should focus more resources on this sector. “Renewables technology has made huge progress in the last five years. The more we subsidise fossil fuels, the slower the pace towards renewables will be,” he states.

US Exim tells GTR that the bank “does not comment specifically on pending or possible litigation”.

But, regarding the Australia Pacific project, they confirm that the bank “based its environmental review upon the project’s environmental impact statement provided to the bank. US Exim also applied its environmental procedures and guidelines.”

It adds: “In accordance with provisions of its guidelines, US Exim’s review of the environmental and social effects of private-sector projects such as the Australia Pacific LNG project and the Queensland Curtis LNG project draw upon the requirements of the performance standards on environmental and social sustainability of the International Finance Corporation (IFC) and the applicable environmental health and safety (EHS) guidelines of the World Bank Group.”

The future is green

It is highly unlikely that NGOs, banks and ECAs will see eye-to-eye on the issue of fossil fuel-related projects for some time to come.

However, it is clear that all parties involved do recognise renewable and green technology as a growth market. It is a sector that can offer profitable new revenue sources for banks and governments, as well as a means to boost employment and create a sustainable future.

Goldman Sachs, perhaps the bank that epitomises the get-rich-quick era of banking, has even recognised the importance, both environmentally and commercially, of investing in green technology.

In a public statement made in June by Stuart Bernstein, global head of the bank’s clean technology and renewables group referred to the sector as: “one of the largest and most compelling emerging market opportunities in the world”.