A lack of bankable projects in its core operating area has stifled the water lending activities of the Nordic Investment Bank. Now, it is looking eastwards to diversify its portfolio.
Frustrated by a lack of bankable water projects in its core Baltic Sea franchise area, the Nordic Investment Bank is considering shifting its water funding efforts further to the east.
“We are expanding our operations to neighbouring areas like Russia and China, although the member countries and the area around the Baltic Sea remain the core business of the bank,” explained Anders Alm, senior manager of the Baltic Sea Action Plan (BSAP) Fund, which provides grants to develop suitable investment projects for the bank.
NIB is currently in talks with the Chinese ministry of finance and provincial governments to identify projects which could benefit from NIB loan funding (provided via intermediary Chinese banks), although the bank has yet to sign off on a loan which specifically supports a water or wastewater project in the country.
Environmental lending represented 28% of NIB’s loan commitments in 2010, and although the bank does not have a discrete water pending portfolio, much of its water-related lending is channelled through the Baltic Sea Environment (BASE) lending facility. BASE was established in 2008 with initial capital of €500 million, but while its companion facility on the climate change side (CLEERE) was doubled in size to €2 billion last year, and extended again to €3 billion in June 2011, the BASE facility has so far only allocated €222 million of its original pot.
“A lot of the CLEERE lending is going into energy efficiency projects and wind power, and it’s easy to understand why they are so attractive, because they are concrete investments with defined payback mechanisms,” says Alm. “On the water side, it’s difficult to find projects which pay back in the same way as energy efficiency projects.”
Although protecting the Baltic Sea is one of the bank’s chief mandates, the opportunity to lend to wastewater projects in the Baltic states has diminished as European Union accession has brought with it considerable financial support from the EU. NIB does, however, enjoy good relations with those states which form part of the Baltic littoral – and are thus polluters of the Baltic Sea – but which are not shareholders in the bank, notably Russia and Poland.
In May this year, NIB signed a €30 million environmental loan programme with Poland’s BOS Bank for projects in the fields of renewable energy, energy efficiency and wastewater treatment. The loan programme will help reduce phosphorus and nitrogen discharges into the Baltic Sea (Poland accounts for 25-30% of all discharges of these elements into the Baltic), and is aimed at municipalities, small and medium-sized enterprises, and private households.
It is not the first time that NIB has extended a loan to an intermediary financial institution in an attempt to tackle diffuse pollution at the source. In 2009, NIB lent €15 million to intermediary institution Sparbanken Finn for onlending to smallscale environmental projects in Sweden. In June this year, meanwhile, NIB agreed a €50 million loan programme with Pohjola Bank, which is aimed at addressing wastewater discharges from households, buildings and marinas. It will also fund projects which reduce pollution in watercourses, such as improved fertiliser and manure handling, and the construction of exclusion zones between fields and watercourses.
NIB’s active loan portfolio is the result of a dogged origination effort undertaken by a committed team of task managers within the bank. The establishment of the Baltic Sea Action Plan (BSAP) Fund – which followed the drafting of the Baltic Sea Action Plan in 2007 – has added further project pipeline potential, and around €4 million of the total €11 million committed to the fund by Sweden and Finland has been extended in the form of grants.
“NIB has two major mandates – one is to support the competitiveness of our member countries, and the other is to protect the environment. All projects go to a special mandate committee in order to be approved,” Alm explained to GWI. “The mandates are still the same even if we go outside the region, and both are important for any project, independently of what the client country is.”
The purpose of the BSAP Fund is to develop suitable investment projects which can then benefit from lending by either NIB or NEFCO (Nordic Environment Finance Corporation). “We try to identify projects which support the implementation of the Baltic Sea Action Plan, and our evaluation ultimately has to lead up to an investment proposal,” says Alm.
The pipeline is naturally dynamic, although Alm indicates that there are “a considerable amount of potential project ideas being discussed” at the present time. NIB generally looks to get involved in projects with a total value in excess of €20 million, and can finance up to 100% of an individual project. It is not, however, an equity provider.
By contrast, NIB’s partner institution, NEFCO, is prepared to invest equity, although its operational scope is much narrower. “NEFCO has a very limited geographical mandate – it is basically active in Russia, Belarus and Ukraine,” Alm explains. “They also tend to support smaller projects – the upper limit for NEFCO is about €5 million.”
The next step for NIB will be the development of an environmental strategy (the bank has recently developed strategies for its other two core areas of lending, energy and transport). “Water lending would probably be a considerable part of that strategy, but it may take a year or more before we have a draft in place,” says Alm.