Proposed Equity Investment in Asian Clean Energy Private Equity by rub18840

VIEWS: 39 PAGES: 15

									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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