Investments that yield energy savings will reward the banks who provide crediting
As Ukrainian banks enter crisis recovery mode, bankers are preoccupied with loan repayments and have little appetite for devising new products. Restructuring, remedial management and workout are the current buzzwords.
It has become a clichй to say that crisis can bring opportunity, but a forced slowdown in operations can also be used – and indeed is used by some banks – as a chance to take stock, think strategically and figure out where new banking opportunities may lie.
Bankers should be asking: “What will make my bank different from its peers beyond the crisis? Are any market niches unfilled?”
One of the most promising and still relatively untapped segments for the Ukrainian banking community is energy efficiency financing: the creation of a dedicated loan product aimed at saving energy, raising efficiency and contributing to long-term competitiveness.
The issue of energy efficiency has been discussed for years by Ukrainian politicians and businessmen. It is a well known fact that Ukraine is one of the most energy inefficient economies in the region. Furthermore, natural gas and electricity prices have been steadily rising for the past few years, oil prices are high and there are few signs that this trend will be reversed in the future.
Due to the combined factors of inefficiency and high energy prices, the global competitiveness of Ukrainian industry is deteriorating. Environmental and health considerations are another reason to introduce energy efficiency to the Ukrainian economy. The issue is so serious that it can be seen as one of national security.
The two potential sources of financing for a company planning to implement energy efficiency measures are internal resources (the company’s cash flow) and external financing. Despite the apparent variety of external sources, the most common one remains the local banking sector.
Surveys conducted by international financial organizations show that a lack of external funds is the main reason why so many companies fail to implement energy-saving measures. They simply lack access to a product dedicated to the goals of efficiency and sustainability.
So the questions are: How advanced are private Ukrainian banks today in the financing of energy efficiency? Is it on their radar screen at all? Are they able to identify energy efficiency projects and offer dedicated financing?
Most banks issuing loans for energy efficiency projects do not see them as such loans.
Bankers usually share common stereotypes when discussing energy efficiency. First, they perceive energy efficiency as large-scale industrial project inancing, such as a hydropower station or steelworks. Second, they consider energy efficiency a highly specialized area beyond the scope of conventional commercial banking. Third, banks are reluctant to change their existing operational structure in order to accommodate a new line of business.
In reality, an energy efficiency component exists in almost every loan provided by a bank to a company for upgrading equipment, regardless of whether it is energy or manufacturing equipment. A recent survey by the International Finance Corporation of 325 Ukrainian industrial companies from five different sectors showed that over a third of the companies were using equipment more than 15 years old. Against this background, any new equipment will both reduce energy costs and help cut high operating costs.
However, to develop targeted energy efficiency financial products, certain efforts from banks are needed. First, banks need to build internal capacity, for example by implementing a focused marketing campaign, establish relations with energy auditors and equipment vendors, and work with existing clients to increase their awareness and understanding of energy efficiency.
Capacity building may also include training for staff, such as marketing specialists, credit officers and risk specialists. All of this may be done within the existing structure of the bank’s corporate department, and it will have long-term benefits.
A banker may wonder why to bother spending money that could be spent on more urgent needs. All these concerns about energy efficiency lending are valid, but they should not be a stumbling block to establishing a dedicated product for energy efficiency financing.
From my time working in Russia, I remember how difficult it was for Russian bankers to start considering energy efficiency financing, especially when oil and gas are abundant and prices are relatively low. But energy efficiency financing in Russia is now practically mainstream. Those who started earliest reaped first mover benefits.
Now is the time to start energy efficiency financing in Ukraine. Ukraine too will reward the first movers.
Georgiy Zvonkov is a senior investment officer for financial markets at the Kyiv office of the International Finance Corporation, part of the World Bank Group that finances and advises on private sector ventures and projects. He can be reached via [email protected].
