Report and Recommendation of the President to the Board of Directors Project Number: 41922 March 2008 Proposed Equity Investment in Asian Clean Energy Private Equity Funds In accordance with ADB’s public communications policy (PCP, 2005), this abbreviated version of the RRP excludes confidential information and ADB’s assessment of project or transaction risk as well as other information referred to in paragraph 126 of the PCP. ABBREVIATIONS ACE – Asia Clean Energy Fund ADB – Asian Development Bank CCEC – China Clean Energy Capital CEF III – China Environment Fund III CEFPF – Clean Energy Financing Partnership Facility CFP – call for proposals DMC – developing member country GEF – Global Environment Fund Management Corporation GEF-SA – GEF South Asia Clean Energy Fund GHG – greenhouse gas IPO – initial public offering KPMG/SIA – KPMG Samjong Investment Advisory KTIC – Korea Technology Investment Corporation MAP – MAP Clean Energy Fund OECD – Organisation for Economic Co-operation and Development PRC – People’s Republic of China PSCM – Capital Markets and Financial Sectors Division of the Private Sector Operations Department PSOD – Private Sector Operations Department RSID – Energy, Transport and Water Division of the Regional and Sustainable Development Department SCAF – Seed Capital Assistance Facility UNEP – United Nations Environment Programme NOTE In this report, “$” refers to US dollars. Vice President L. Jin, Operations 1 Director General R. Bestani, Private Sector Operations Department (PSOD) Director W. Willms, Capital Markets and Financial Sectors Division, PSOD Team leader S. Kim, Investment Specialist, PSOD Team members J. Klein, Investment Specialist, PSOD S. Tumiwa, Senior Energy Specialist, Regional and Sustainable Development Department P. Bailet, Counsel, Office of the General Counsel CONTENTS [CONFIDENTIAL INFORMATION HAS BEEN DELETED] Page INVESTMENT SUMMARY I. INVESTMENT PROPOSAL 1 II. RATIONALE: BACKGROUND, CHALLENGES, AND OPPORTUNITIES 1 A. Challenges and Opportunities 1 B. Call for Proposals 3 C. Development Impact and ADB Value Addition 5 III. THE FUNDS 6 A. Asia Clean Energy Fund (ACE) / Korea Technology Investment Corporation (KTIC) and KPMG Samjong Investment Advisory (KPMG/SIA) 6 B. China Clean Energy Capital (CCEC) / CCEC Partners 7 C. China Environment Fund III (CEF III) / Tsing Capital 7 D. GEF South Asia Clean Energy Fund (GEF-SA) / Global Environment Fund 7 E. MAP Clean Energy Fund (MAP) / Middle East and Asia Capital Partners 7 IV. INVESTMENT BENEFITS, IMPACT, AND RISKS 8 A. Social and Environmental Safeguard Policies 8 B. Anticorruption Policy, and Policy of Combating Money Laundering and Financing of Terrorism 8 C. Exposure Limits and Waiver 8 V. ASSURANCES 8 VI. RECOMMENDATION 8 Appendix 1. Design and Monitoring Framework 10 1 I. INVESTMENT PROPOSAL 1. I submit for your approval the following report and recommendation on proposed equity investments in five clean energy–focused private equity funds: Asia Clean Energy Fund (up to $20 million), China Clean Energy Capital (up to $20 million), China Environment Fund III (up to $20 million), GEF South Asia Clean Energy Fund (up to $20 million), and MAP Clean Energy Fund (up to $20 million). II. RATIONALE: BACKGROUND, CHALLENGES, AND OPPORTUNITIES A. Challenges and Opportunities 1 2. Rapid Increase in Global Energy Demand. Global energy demand is higher today than ever before and is increasing every year. The base case developed by the International Energy Agency projects primary energy demand worldwide in 2030 to be more than 53% higher than current demand. More than two thirds of this increase is attributed to developing countries, with their rapid economic growth and population increase. 3. Developing Asia a Large Part of Energy Demand. Large parts of Asia, in particular, are in a sustained period of fast economic growth, driving ever-increasing demand for energy (integral to economic growth). New energy infrastructure is being installed at unprecedented rates across the region, and energy use is expected to grow faster in Asia than in the rest of the world for the next 2 decades. Indeed, “business as usual” forecasts anticipate energy use in Asia to increase 89% between 2006 and 2030, at which point Asia (in particular, rapidly developing economies like the People’s Republic of China [PRC] and India) will be consuming 30% of the world’s energy. While energy demand will fall from 59% in 2000 to 47% by 2030 among Organisation for Economic Co-operation and Development (OECD) countries, it will rise from 20% to 27% in developing Asia. 4. Higher Greenhouse Gas Emissions. Asian countries, as mentioned above, are installing new energy supply infrastructure at an unprecedented rate. The International Energy Agency estimates that energy supply infrastructure in developing Asia will require a staggering $6.3 trillion in investments between now and 2030, $3.7 trillion of that amount for the PRC alone. The energy investments are strongly carbon-intensive, with major energy-consuming countries showing a keen preference for coal-fired power generation. More than half of the anticipated investment of $6.3 trillion is projected to be in electricity generation, primarily from coal-fired plants. 2 This trend toward coal-fired power generation is contributing significantly to the increase in greenhouse gas (GHG) emissions in Asia. The region’s share of GHG emissions worldwide increased from less than 9% in 1973 to 24% in 2003, and is projected to increase to 29% by 2030. Developing countries will overtake the OECD countries in GHG emissions by 2010, and the PRC (which surpassed the US as the world’s largest producer of GHG in 2007) will be responsible for 39% of the worldwide increase between 2004 and 2030, according to the International Energy Agency. 1 The Challenges and Opportunities section, including much of the wording, draws on a recent report—Carmody, Josh, and Duncan Ritchie. 2007. Investing in Clean Energy and Low Carbon Alternatives in Asia. Manila: ADB. The deal team thanks the authors for this excellent report. 2 The PRC alone is reportedly adding coal-fired generation capacity at the rate of close to 2,000 megawatts per week. 2 5. Global Climate Change. Scientific evidence points to increasing risks of serious, irreversible impact from climate change associated with the anticipated trajectories of GHG emissions. The Fourth Assessment Report of the Intergovernmental Panel on Climate Change warns with more than 90% certainty that human activity contributes to climate change: “Warming of the climate system is unequivocal, as is now evident from observations of increases in global air and ocean temperatures, widespread melting of snow and ice, and rising global mean sea level.” 3 6. Urgent Action Needed to Mitigate GHG Emissions in Asia. The situation calls for immediate action to mitigate global GHG emissions, including early and decisive action to adopt sustainable energy development worldwide. Because of developing Asia’s quickly enlarging role in energy consumption and carbon dioxide emissions, without increased and urgent GHG mitigation in Asia, global GHG emissions cannot be reduced to a level that will prevent dangerous climate change. Indeed, if the trillions of dollars invested in new energy supply infrastructure in Asia over the next 20 years still go into carbon-intensive supply infrastructure, attempts to reduce GHG emissions in more energy-efficient parts of the world, such as Europe, are unlikely to make a meaningful dent in total GHG emissions. Asia must therefore diversify its energy and fuel supply. A substantial proportion of the investment capital flowing into Asian energy supply infrastructure over the next two to three decades must be dedicated to clean energy and low-carbon investment alternatives. 7. Recognition of Need for Urgent Action among ADB’s Developing Member Countries. Countries across Asia recognize the need for action, and have begun to set targets for reducing their dependence on carbon-intensive forms of energy. The PRC looks forward to producing 10% of its energy from renewable sources by 2010, 4 and 16% of primary energy and 20% of power generation capacity from renewable energy sources by 2020. Energy ministers of the Association of Southeast Asian Nations (ASEAN) have agreed on a 10% target for power generation from renewable resources by 2010. Renewable energy is foreseen to supply 10% of India’s energy needs by 2012, 5 and 8% of Thailand’s commercial primary energy by 2011. 6 Governments are taking action to achieve these targets. In the Philippines, the Government is offering geothermal blocks to developers, letting 14 mini-hydro sites, and offering several gas and light natural gas blocks for exploration and development. In Viet Nam, independent power producer contracts are being offered for wind sites throughout the country, while in Indonesia, investment in biofuels and geothermal is increasing in response to government policies that promote their development and use. Countries across the region are also working to make their investment climates friendlier to investors in clean energy projects. Private companies in the forefront of the industry, such as Suzlon Energy in India and Suntech Power in the PRC, have capitalized on the new opportunities. 8. Need for Increased Capital Flows into Asian Clean Energy Investments. The urgent need to arrest and, if possible, reverse the upward spiral in GHG emissions in the energy sector 3 Specific effects in Asia include (i) more frequent and intense typhoons affecting the Pacific as well as East and South Asia; (ii) more uncertain water supply in key basins such as the Aral Sea, the Indus River, and the Ganges River because of the retreat of glaciers in the Himalayas plus the greater variability of rainfall; and (iii) more droughts in many parts of the region. 4 Asia Pacific Development. 2006. Asia Increasingly Turning to Renewable Energy. Issue 7, June. Available: http://www.apdpower.com/pastissue/article.asp?art=26786&issue=164 5 Ibid. 2006-04-03-voa10.cfm?CFID=207895267&CFTOKEN=80840904 6 Australian Business Council for Sustainable Energy. 2005. Renewable Energy in Asia: The Thailand Report. Carlton Victoria, Australia (August). Available: http://www.bcse.org.au/docs/International/ BCSE%20Thailand%20Final%20V2.pdf 3 has led to a worldwide boom in investment in clean energy. In 2006, global investment in clean energy reached $100 billion (45% higher than in 2005), with just over $70 billion in new investments, and $30 billion in merger and acquisition and buyout transactions. In addition, the global carbon market grew to about $30 billion (a 177% increase over 2005). This market is anticipated to grow rapidly in coming years: the United Nations Environment Programme (UNEP) foresees a $1.9 trillion global market for clean energy financing and a $2 trillion global market for GHG emission trading by 2020. A mandated clean energy target of 20% for Asian nations by 2020 would lead to almost $1 trillion in clean energy investment in Asia by 2030, of which almost $50 billion would be required yearly until 2020. 7 The business opportunities are thus clear. Up to this point, however, most of the capital invested in the clean energy sector has gone to OECD markets; Asia has received only a small fraction of the total. B. Call for Proposals 8 9. Given the aforementioned imbalance between Asia and the OECD countries in capital invested in clean energy projects, ADB is taking up the challenge of encouraging the growth of risk capital in the Asian clean energy sector by investing equity in several private equity funds, which will, in turn, invest equity in clean energy projects and companies. Over the last decade, private equity funds have proliferated across Asia, particularly in bigger markets like the PRC and India. In the last year or two, clean energy funds have emerged as a distinct niche in the private equity industry; indeed, in 2006, ADB received more than 10 clean energy fund concepts and proposals from either project developers or fund managers. Most of those potential fund managers, however, lacked the combination of strong private equity performance and specific clean energy expertise needed to receive investment from ADB. For this reason, ADB sought to find truly high-caliber clean energy private equity fund managers in ADB’s developing member countries (DMCs) by issuing a call for proposals (CFP). 10. CFP Concept. The CFP, which was issued to the market in July 2007, stated that ADB anticipated financing up to five funds selected through the CFP, and laid out a timetable for the selection and approval of these funds. The CFP indicated that ADB would provide a total of up to $100 million for investment in the funds, representing less than 25% of the total capital of a given fund. 9 In issuing the CFP, ADB hoped to make both the private equity sector and the clean energy sector aware of its commitment to increasing equity funding to clean energy investments, and to motivate these two sectors to merge their expertise in order to evolve better-quality fund managers, and catalyze increased equity investment in clean energy projects in ADB’s DMCs. 11. Sector and Geographic Focus. The CFP identified a broad range of sectors within 7 Such targets are not significantly beyond the present agenda in Asia since, as mentioned above in the main text, the PRC has set a target of producing 16% of primary energy and 20% of power generation capacity from renewable sources by 2020, and ASEAN energy ministers have agreed on a 10% target for power generation from renewable sources by 2010. 8 With financing from the Government of Canada, ADB’s Private Sector Operations Department (PSOD) carried out a small-scale technical assistance to design a CFP in 2007. See ADB. 2007. Technical Assistance for Establishing Renewable Energy, Energy Efficiency, and Greenhouse Gas Mitigation Investment Funds (TA 6384). In the second quarter of 2007, PSOD finalized a CFP with general guidelines for investment fund proposals and fund manager selection, plus a timeline, aimed at creating more private equity funds for renewable energy, energy efficiency, and GHG emission abatement projects. As the CFP process is a new, innovative procedure in ADB, PSOD consulted with relevant departments, particularly the Office of the General Counsel and the Strategy and Policy Department, before issuing the call. Details on the CFP are available at http://adb.org/Clean-Energy-CFP/proposals.asp. 9 The balance of each fund’s capital is to be raised from other sponsors and private sector investors. 4 clean energy, including (i) renewable energy, 10 (ii) energy efficiency, 11 (iii) GHG abatement projects, 12 and (iv) other clean technology. 13 The CFP had a liberal geographic focus, considering funds with both regional and country-specific mandates within ADB’s DMCs. The potential clean energy investments range from those in the very early stages of development (i.e., start-up or clean technology–based investments) to those in the late stages (i.e., companies in the project development phase or before the initial public offering [IPO]). Private equity funds can invest at any stage of the clean energy project life cycle. An investment at a very early (concept) stage provides great opportunity for a fund to benefit from the project’s potential upside; at the same time, however, the fund takes on virtually all of the risk inherent in funding venture or concept projects. Investing at a later stage, such as during construction, may somewhat reduce the returns of the project but also mitigates at least some of the risks involved in getting the project off the ground. At the other end of the spectrum, a fund can invest in an existing late-stage or pre-IPO company, with a significantly lower risk; the fund, however, thus forfeits some of the returns that accrue to investors that are willing to absorb the risk of investing earlier in the project cycle. The CFP did not categorically specify the stage of the portfolio company in which the funds would invest, and indeed sought the diversification of risk that funds with different investment strategies would bring to the portfolio. Above all, ADB was looking for: (i) fund managers that combined strong private equity performance with clean energy sector expertise; (ii) solid and creative proposals clearly describing the fund manager’s target market, investment thesis, and investment methods; and (iii) fund concepts that were likely to achieve ADB’s objective of expanding clean energy investment. 12. Fund and Fund Manager Selection Criteria. 14 In assessing the proposals, ADB considered a range of standard criteria for evaluating private equity funds, as well as criteria specific to the clean energy sector, including: (i) the credibility and thoughtfulness of the proposal and the fund manager’s investment strategy; (ii) the fund manager’s target market(s), investment thesis, and marketing and project sourcing strategy; (iii) the track record of the prospective fund manager in making, reaping value from, and exiting from equity investments (in emerging markets, Asia, clean energy, etc.); (iv) the experience, depth, credibility, and team cohesiveness of the fund manager, as well as its competitive positioning relative to other funds; (v) the fund manager’s experience as a fiduciary vis-à-vis fund reporting and administration; and (vi) the degree to which the terms and conditions of the proposed fund matched ADB’s requirements. 13. CFP Selection Process and Timetable. The CFP was issued to the market on 13 July 2007, and proposals were received until 13 September 2007. The proposals were evaluated with the help of an external consultant, and short-listed funds were invited to Manila for initial interviews, which took place in October 2007. These half-day interviews were attended by representatives of ADB’s Capital Markets and Financial Sectors Division (PSCM) of the Private Sector Operations Department (PSOD); the Energy, Transport and Water Division (RSID) of the Regional and Sustainable Development Department; the Office of the General Counsel; the Office of Cofinancing Operations; the Economics and Research Department; and 10 I.e., wind, solar thermal, solar photovoltaic, geothermal, biomass (wood, agricultural waste, municipal waste), biofuels (ethanol and biodiesel), biogas, tidal, and small hydro. 11 Power plant optimization, power transmission and distribution system upgrades, cogeneration systems, waste heat recovery power generation, and a range of efficient end-use technologies (e.g., motors, lighting, boilers, controls, industrial process equipment, pumping systems, compressors, heating and air conditioning, and other equipment). 12 Such as landfill gas, coal mine methane, hydrochlorofluorocarbons, and nitrogen dioxide recovery projects. 13 Integrated gasification combined cycle and supercritical boiler systems. 14 More information in detail is on ADB’s CFP web page: http://adb.org/Clean-Energy-CFP/ 5 regional departments. 15 After these interviews, RSID and the Economics and Research Department gave their evaluation and feedback on each fund from a technical perspective; with these assessments, as well as those of the project team and the consultant, the team selected a number of funds for full due diligence. Due diligence on the funds took place in November and December 2007. Five funds presented truly compelling stories and met ADB’s assessment criteria, and are proposed in this report for investment. C. Development Impact and ADB Value Addition 1. Development Impact 14. ADB’s investments in the funds will have the following development impact: (i) The investments will facilitate significant development in different subsectors of clean energy (such as small hydro, 16 solar, wind, biofuels, biomass, geothermal, clean technology, and energy savings and efficiency), and thus reduce GHG emission and mitigate climate change. (ii) The investments support the promotion of environmentally friendly, sustainable economic growth in ADB’s DMCs. (iii) The CFP affirmed the credibility and potential of private equity in the clean energy sector. ADB’s investment in the selected clean energy funds will help to develop the asset class and, by demonstrating the potential of private equity in clean energy, will attract more firms into the sustainable energy market, deepening the penetration and viability of this specialized asset class. (iv) The investments will help to develop a class of fund managers and financial professionals in the sustainable energy sectors in the region. ADB’s support of local players helps the private equity industry to grow and carry on in the target sector in the region. (v) The money invested by the funds is to be used not only for the growth and expansion of portfolio companies but also for greenfield projects, thus developing individual companies in the private sector, creating jobs, increasing local tax revenue, and contributing to sustainable employment in the region. (vi) The funds will provide management advice to companies in financial planning, project development, business expansion strategies, human resource development, technology, environmental and social issues, and international best practices in corporate governance, thus raising the quality of individual companies. 2. Value Added by ADB 15. Catalytic Effect. First of all, of the five funds proposed for investment in this report, four are (to some degree) first-time fund managers in the clean energy sector in ADB’s DMCs. ADB’s investment will be extremely helpful to the funds in further fundraising. Indeed, ADB’s demonstrated interest has already catalyzed interest from other investors. Second, with ADB’s investment, the funds will be eligible for financing from the Asia Pacific Carbon Fund, CEFPF, 15 All of these ADB departments, as well as the Risk Management Unit, were invited to the initial interviews. Those of their staff who were interested and were available attended. 16 “Small hydro” projects are projects that meet the small hydro eligibility criteria of ADB’s CEFPF. 6 and the Seed Capital Assistance Facility (SCAF), which will assist the funds in developing their underlying assets. Without ADB’s investment, the funds will not have such access. 16. Demonstration Effect. Besides helping to launch the funds, ADB anticipates that success on the part of these funds will help to demonstrate the credibility of private equity in the emerging clean energy sector in its DMCs, and mobilize capital to support other private equity funds in the target sector. The CFP effort can be replicated and expanded elsewhere in the region in succeeding years; indeed, ADB has had conversations with other multilateral institutions that plan to run their own CFPs in clean energy investment. Additionally, ADB has received proposals from other clean energy funds and clean energy financing companies interested in leveraging ADB’s resources beyond the CFP. 17. Management Support and Professionalization. ADB (both PSCM and RSID staff) will add value to the funds by assisting them in gaining access to the Asia Pacific Carbon Fund, CEFPF, and SCAF. ADB will also take a seat on the funds’ advisory boards, and will thus have a say in fund corporate governance. In the case of somewhat more experienced fund managers, ADB’s value addition will take the form of helping the fund expand its investment platform and further professionalize (e.g., meet more rigorous standards of administration, reporting, and investor relations). 18. Environmental and Social Awareness. Fund managers and other investors appreciate ADB’s strong attention to environmental and social safeguards and to corporate governance. ADB’s involvement in environmental, social, and governance issues reduces the risk to the funds’ reputation and creates confidence in locally managed funds. 3. Development Outcome 19. ADB will measure the expected development outcome of the proposed investments in accordance with the design and monitoring framework (Appendix 1). III. THE FUNDS A. Asia Clean Energy Fund (ACE) / Korea Technology Investment Corporation (KTIC) and KPMG Samjong Investment Advisory (KPMG/SIA) 20. The ACE concept was developed by Kee-Doo Hong, vice chairman until recently of KPMG Korea, whose professional career and pursuits in the clean energy sector motivated him to create a partnership between the fund’s two sponsors, KTIC and KPMG/SIA. KTIC is a well-known Korean technology venture capital firm, and has over two decades of experience investing in technology-based projects and companies in the Republic of Korea. It has invested $1 billion in more than 520 portfolio companies, has $486 million under management, and has run 19 venture capital funds and nine corporate restructuring funds. KPMG Korea is part of the global KPMG Group, and SIA provides investment and financial advisory services to numerous Korean corporate clients and institutional investors for domestic as well as global projects. SIA specializes in advising on cross-border transactions and corporate finance overseas, and maintains deal sourcing offices in Central Asia, the PRC, India, Viet Nam, Cambodia, Laos, and the rest of Southeast Asia. With a target size of $200 million, ACE will invest in clean technology, renewable energy, and energy efficiency investments throughout Asia. 7 B. China Clean Energy Capital (CCEC) / CCEC Partners 21. Although it is a first-time fund, CCEC has spent substantial time positioning itself to succeed in the PRC market. It is one of only two local clean energy–focused fund managers in the domestic market. The CCEC team primarily comprises multilingual, multicultural PRC nationals; the team members have decades of local and international senior management experience in energy project development, engineering, finance, banking, and operations, with such organizations as Veolia Environmental Services, Veolia Energy, China National Offshore Oil Corporation, the Development Research Center of the State Council of the PRC, CIBC World Markets, and Viventures. With a target size of $100 million–$150 million, CCEC will invest in renewable energy projects/technologies, energy savings/energy efficiency, and other clean energy technologies in the PRC. C. China Environment Fund III (CEF III) / Tsing Capital 21. Having raised its first clean energy fund 7 years ago, Tsing Capital was the industry pioneer in the PRC, and is now a dominant clean energy investor in the country. Tsing Capital manages two previously small clean energy funds, which have collectively invested in nine companies, across industries such as wastewater treatment, energy efficiency, solar photovoltaic cells and wafers, and solid waste recycling. Over its 7-year history, Tsing Capital, as a leader in clean energy investment in the PRC, has built up an impressive reputation in the industry and an extensive network of contacts in business, central and provincial government, the Ministry of Science, and Tsinghua University. CEF III is run by an experienced team with a background in technology investment and operations in the PRC and abroad. With a target size of $200 million–$250 million, CEF III will invest in a portfolio of companies working to improve the global environment by reducing, reusing, and recycling natural resources in the PRC. D. GEF South Asia Clean Energy Fund (GEF-SA) / Global Environment Fund (GEF) 22. GEF-SA is sponsored by GEF Management Corporation (GEF), a globally recognized clean energy investor, and YES Bank, a well-respected and fast-growing local Indian bank. With $800 million under management, GEF has been active in clean energy investing since 1990, and has over 15 years of experience investing in clean energy projects in South Asia. GEF has managed six funds and completed 26 private equity investments since 1998. YES Bank has extensive industry and government contacts in India and the region, and a strong track record in clean energy investing, having financed and advised clean energy transactions totaling $3.1 billion over the past 4 years. The investment team is made up of individuals from both institutions with professional experience in international and local private equity, including energy and renewable energy investing. With a target size of $200 million, GEF-SA will invest in companies and projects that promote the use of efficient, reliable, and cleaner forms of energy in South Asia. E. MAP Clean Energy Fund (MAP) / Middle East and Asia Capital Partners (MAP Capital) 23. MAP Capital was established by Mumtaz Khan, the former CEO of EMP Bahrain and manager of te Islamic Development Bank’s (IDB) Global Infrastructure Fund. This fund has committed $684 million to 11 projects in IDB member countries, all of which were led by Mr. Khan, who thus has a demonstrated track record of finding high-caliber companies, creating deals, and adding value to generate strong returns. To complement his own experience in 8 emerging markets investing, Mr. Khan has put together a fund team of international and local staff with a deep background in private equity, corporate restructuring, corporate valuation, the energy sector (including renewable energy and energy efficiency), and engineering. MAP Capital seeks to be a platform for accelerating investment flows between Gulf Cooperation Countries looking for large-scale energy projects and Asian countries looking for Middle Eastern funding. With a target size of $400 million, MAP Capital will invest in a portfolio of clean energy sector projects across Asia, with a geographic focus on Indonesia and Southeast Asia. IV. INVESTMENT BENEFITS, IMPACT, AND RISKS A. Social and Environmental Safeguard Policies 24. ADB’s investments in the funds are classified as category FI (financial intermediary) under ADB’s Environment Policy (2002). The fund manager of each fund will be required to adopt an environmental management system. ADB’s investments in the funds are classified as category B/C under ADB’s Involuntary Resettlement Policy (1995) and Policy on Indigenous Peoples (1998). None of the funds’ investments are foreseen to lead to involuntary settlement. But the funds will adopt a resettlement framework that defines the policies, procedures, roles, and responsibilities of the funds for screening and managing any involuntary resettlement by portfolio companies. Likewise, no investments by the funds are expected to affect indigenous peoples. The funds will not invest in activities falling within ADB’s list of exclusions. B. Anticorruption Policy, and Policy of Combating Money Laundering and Financing of Terrorism 25. The fund managers were advised of ADB’s Anticorruption Policy (1998, as amended to date) and the Combating Money Laundering and the Financing of Terrorism Policy (2003). Consistent with its commitment to good governance, accountability, and transparency, ADB will require the fund managers to institute, maintain, and comply with internal procedures and controls that conform to international best practice standards to prevent corruption or money laundering activities or the financing of terrorism, and covenant with ADB to refrain from engaging in such activities. The investment documentation between ADB and the funds will allow ADB to investigate any violation or potential violation of these undertakings. C. Exposure Limits and Waiver V. ASSURANCES 26. Following the approval of the proposed investments by ADB’s Board of Directors, ADB will enter into suitable investment documentation, and ensure that such documentation and other principal agreements relating to each fund (including the management agreement between the fund and the fund manager) will be on terms and conditions acceptable to ADB and are consistent with all relevant ADB policies. VI. RECOMMENDATION 27. I am satisfied that the proposed equity investments in the funds would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the equity investments of up to $20,000,000 in each of the following funds (with a total aggregate investment of up to $100,000,000): (i) Asia Clean Energy Fund, (ii) China Clean 9 Energy Capital, (iii) China Environment Fund III, (iv) GEF South Asia Clean Energy Fund, and (v) MAP Clean Energy Fund, from ADB’s ordinary capital resources and on terms and conditions as are substantially in accordance with those set forth in this report, and as may be reported to the Board. Haruhiko Kuroda President March 2008 Appendix 10 DESIGN AND MONITORING FRAMEWORK Design Summary Performance Data Sources/Reporting Assumptions Targets/Indicators Mechanisms and Risks Impact Assumptions • Increased use of • PRC produces • DMC government • GHG emissions and clean energy 16% of primary reports climate change remain a (renewable energy energy and 20% of • Reports of significant priority, and and energy power generation independent their effects are measured efficiency) in ADB’s capacity from third-party and reported DMCs renewable sources organizations • ADB’s DMC governments by 2020 • United Nations are proactive in developing • Countries meet Framework targets for clean energy targets to be set Convention on use, implementing (over the next Climate Change adequate legislation, and three to five years) • Annual reports of enforcing standards for for reduction of fund managers GHG emission reduction, carbon dioxide clean energy, and the emissions environment Outcome Assumptions • Funding for clean • 60–80 clean energy • Journals and databases • Demand for equity energy projects in projects are funded of clean energy sector investment exists and ADB’s DMCs, from by the clean energy projects continues in the clean the five clean energy funds by 2014 • Each fund’s quarterly energy sector funds • The funds return and annual reports • The funds attract strong investors’ committed • Reporting specifically deal flow of high-quality capital plus a requested by ADB projects commercial return by • The funds succeed in 2020 beating out competition for good projects • The funds do not breach investment policy • No adverse regulatory or other changes in DMCs Outputs Assumptions • ADB investments in • The funds attract • Documents requested • DMC governments agree the clean energy enough investment by ADB (legal to ADB’s investment in the funds from other investors documents, funds as needed • Five clean energy to achieve their condition-precedent • Agreement is reached with funds, set up as target sizes (about documents, etc.) regard to legal planned $1 billion in total documentation additional commitments by 2009) • ADB’s committed capital is drawn down by 2014 11 Appendix Activities with Milestones Inputs 1.1 Make available equity capital for the five clean energy private equity funds • ADB: $100 million starting in 2008 • Five funds: about $1.1 • ADB and each fund enter into limited partnership agreement billion • ADB and each fund enter into subscription agreement 1.2 Set up funds as planned • Funds attract additional financing from outside sources to reach target fund sizes • Incorporation, registration, and other activities needed to establish the funds are completed 1.3 Put the equity commitments into operation (by the five clean energy funds) • (New) investment opportunities are originated • Investment opportunities are screened, undergo due diligence, and are approved • Investment agreements are completed with clients • Request to fund investment opportunity is submitted to ADB • ADB disburses funding to fund • Fund disburses funding to investee company 1.4 Reap value from fund investments of the five clean energy private equity funds starting in 2008 • Funds work with portfolio companies to build value, expand businesses, increase revenues, and increase abilities of the funds to meet business objectives ADB = Asian Development Bank, DMC = developing member country, GHG = greenhouse gas, PRC = People’s Republic of China.
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