National Policy Dialogue on “Improving Access to Green Finance for Small and Medium-Sized Enterprises in Georgia” → Lessons from commercial banks’ experience with lending to green SME investments in Georgia – Matthew Savage

1. Lessons from commercial banks’ experience
with lending to green SME investments in
Georgia
Matthew Savage
Director
Oxford Consulting Partners
Tbilisi 16-07-19

2. IFI supported environmental finance in EAP
• IFI credit line support for EAP clean energy investment
• EE/clean energy credit lines for local financial institutions since 2005
• EBRD, IFC, EIB, KFW, NEFCO, OeDB, multi-lateral (GGF, GCPF, CTF)
• SME/Industrial energy efficiency, residential, small-scale RE
• c. EUR 2bn in CIS region (50% in in EaP)
• 70+ local banks across CIS, c. 35 in EaP
• Average credit line 10-20m EUR (range of EUR 3m - 150m)
• Normally supported by dedicated IFI TA facility

3. SMEs in Georgia
• Economy has heavy reliance on SMEs (employment, GVA)
• Strong WB ‘Doing Business’ ranking supports SME development
• Established support programmes (e.g. Enterprise Georgia, GITA, AMPA)
• EU definitions of SMEs include many Georgian ‘corporates’
• High level of informality in SME sector means lower levels of regulatory oversight
• SMEs tend to be in lower added value sectors
• ‘Service economy’ has lower carbon intensity vs. regional norms
Category No of employees Annual revenue (EUR) Total assets (EUR)Assets
Single entrepreneur / micro 0-10 <2 000 000 <2 000 000
Small 11-50 <10 000 000 <10,000,000
Medium 51-250 <50 000 000 <43 000 000
Large >250 >50 000 000 >43 000 000
EU SME Definitions

4. SME access to finance
• Credit availability generally in line with other markets
• However
• Banking sector conservative – major banks with international shareholders, high ROE
• Georgian SMEs generally over leveraged with collateral constraints
• Significant collateral (200%) and interest rate (16-23%) lending requirements for micro/SMEs
• Short tenor and maturities make payback periods challenging
• Dollarization and currency risk
• Regional credit assessment is patchy
• Gap in market between microfinance and bank lending portfolios USD 10-30,000
• Limited non-bank financing (e.g. leasing, factoring, private equity)
• GoG provides SME interest rate/collateral support in target sectors
• Produce in Georgia, AMPA, Host in Georgia
0.0%
5.0%
10.0%
15.0%
20.0%
2012 2013 2014 2015 2016 2017
%perannumgrowth
Credit Growth GDP Growth

5. Green finance in Georgia
• Financing needs
• USD 8.3 billion 2017-2030 for energy efficiency (NEEAP)
• USD 10.6 billion 2017-2030 for GHG abatement (LEDS)
• USD 2.4 billion for hydropower 2017-2030 (Third UNFCCC NC)
• USD 1.5-2.0 billion for climate change adaptation 2021-2030 (NDC)
• Approaches to scaling finance
• Dedicated agency for fund raising and blending of financial resources (NEEAP)
• National Green Investment Bank (LEDS)
• Blending budgetary, fiscal and external financing
• Credit guarantees

6. Georgia IFI Environmental Credit Lines
• 8 local banks/MFIs, c. 400m EUR since 2008
• Dedicated environmental products, blended with SME finance
EBRD EIB FMO GCPF GGF KfW OeDB
Bank of Georgia X X X X X
Bank Republic X X X
Basis Bank X
Credo Bank X
Crystal MF X
ProCredit Bank X
TBC Bank X X X X X
VTB Bank X

7. Green finance challenges in Georgia
• IFI credit lines normally targeted at larger SMEs
• Significant financing flows to hydropower development
• IFIs improve availability of capital, but still issued on commercial terms
• Opportunity costs for lenders vs. other less complex products
• Green microfinance available, but high cost of borrowing
• Equity facilities emerging (e.g. Caucasus Clean Energy Fund)

8. Key Barriers
• Demand side (Borrowers)
• Lack of information about energy/resource costs
• Poor energy management systems
• Supply side (Lenders)
• Perceptions of risk (technology)
• Additional costs (appraisal, monitoring, reporting)
• Lack of appreciation of cash flow benefits/project finance
• Green regulation
• Energy pricing, incentives
• Governance, enforcement

9. Key success factors
Financial
Engagement
• Access to longer term finance
• Concessionality
• Technical advisory (pipeline)
• Training and business support
• Minimise resource & reporting
Product
implementation
• Management commitment
• Resources and staffing
• Skills and capacity building
• Tools and methods
Marketing/cross selling
• Standard product structure
Market
Sustainability
• Strong investment climate
• Environmental policy support
• Access to finance
• Awareness
• Energy pricing
FI
Engagement
Product Delivery
Market
Sustainability
Donor/IFI Role Local FI Role Government Role

10. Recommendations: Policy strengthening
• Adopt pending legislation on energy efficiency and renewable energy
• Develop robust sub-regulation (buildings, appliances)
• Strengthen environmental enforcement, ratchet environment standards
• Reduce fossil-fuel subsidies to create market signals
• Green public procurement

11. Recommendations: Consider SME role
• Explicit policy consideration of the role of SMEs in the green transition,
• Understanding opportunities for and barriers to participation
• Consider SME participation in national climate strategies/programmes.

12. Recommendations: Improve access to finance
• Address wider issues of access to finance for SMEs
• Enabling sub-national access to credit
• Building SME financial literacy
• Exploring credit guarantees for SME lending
• Promoting non-bank financing (e.g. leasing)

13. Recommendations: Address barriers to credit
• Lower cost of green credit (interest rates)
• Improve borrowing conditions for SMEs (collateral requirements)
• Partnerships between national funds and banks (e.g. Enterprise Georgia)
• Mainstream environment into SME lending (e.g. EIB)

14. Recommendations: Scaling finance
• Increase scale of available finance at national level
• Green bond markets
• Pooled climate finance vehicles
• Central banking regulation and reporting

15. Recommendations: Raising awareness
• Raise awareness among SMEs around EE/RE
• Support the uptake of small scale energy management systems
• Promote the benefits of green investment and branding (e.g. tourism)

16. Thank you
matthew.savage@oxfordconsult.co.uk