EBRD is considering to develop jointly with Kreditanstalt für Wiederaufbau (‘KfW’) the Municipal Infrastructure Development Facility (“MIDF”) to provide senior loan finance for projects in municipalities as well as utility companies in Albania, Bosnia and Herzegovina, FYR Macedonia, Montenegro, Kosovo and Serbia, (the "Western Balkans" or the "Region"). The funding will be used for infrastructure investments in water and wastewater, district heating, solid waste management, energy efficiency, public transport and other municipal infrastructure.
MIDF is organised as a variable capital investment company (“SICAV”) under the Luxembourg law on specialised investment funds. MIDF will carry out its operations in the Region through local commercial banks (the “Participating Banks”) by providing funded or unfunded risk-sharing and direct credit lines. The individual projects to be financed by MIDF through the Participating Banks are expected to have a minimum loan size of EUR 100,000 and a maximum of EUR 5 million, and a maximum maturity of 10 years.
Sustainability of municipal infrastructure investments will be ensured through provision of suitable financial instruments combined with the necessary Technical Assistance (“TA”), which is instrumental for the achievement of the transition mandate of MIDF in the Western Balkans.
The management of MIDF will be contracted to a private investment management company ("Investment Manager"), selected through a competitive tender process.
MIDF’s main objectives are to achieve long term sustainability in municipal services in the Western Balkans by providing financing for smaller infrastructure investments, improving cost recovery and municipal creditworthiness in these markets, and building up a commercial banking market for municipal lending by developing the skills of commercial banks to analyse and take municipal risk. MIDF will facilitate the transition from grant and sovereign financing towards long-term commercially viable structures that can be replicated in and by the private sector.
MIDF will facilitate the use of commercial practices in the financing and provision of infrastructure services in several ways:
- by involving the private sector in both the management of MIDF and in co-financing infrastructure projects;
- by developing municipal credit market in the Region by building commercial banks’ capacity to take and manage municipal risk;
- by providing finance for revenue-generating projects with associated programmes for cost-recovery and commercialisation at the level of each municipality and utility; and
- by providing access to commercial banks to projects and municipalities which have no history of borrowing for investment projects.
MIDF will stimulate the growth of the municipal lending market by providing credit enhancement, additional liquidity as well as TA support to Participating Banks to encourage them to assume and manage municipal credit risk.
MIDF was established on 12 December 2012 as a SICAV under the Luxembourg law on specialised investment funds.
MIDF will benefit local commercial banks and municipalities and utility companies in Albania, Bosnia and Herzegovina, FYR Macedonia, Montenegro, Kosovo and Serbia.
EBRD is considering to subscribe in several tranches (each a 'closing') up to EUR 40 million in senior shares with a duration of 10 years for up to 40 per cent of the capital of MIDF at any time.
Senior Shares of EUR 80 million in total will be subscribed by the Investment Manager, EBRD, KfW and other investors.
First loss junior shares for EUR 20 million in total will be subscribed by the German Government, represented by the German Federal Ministry for Economic Cooperation and Development (“BMZ”) and the State Secretariat for Economic Affairs of the Swiss Confederation (“SECO”).
In addition to MIDF resources, the private funding will be mobilised from the Participating Banks in the Western Balkans of minimum 10 per cent as a co-investment on project by project basis.
The target MIDF size is EUR 100 million, expected to be funded in two closings:
(i) first closing at EUR 36 million, scheduled for 28 November 2013; and
(ii) second closing achieving the MIDF’s target size of EUR 100 million expected in 12 months from the date of the first closing.
Categorised FI. MIDF and the Participating Banks will be required to comply with EBRD Performance Requirements PR2 (Labour and Working Conditions) and PR9 (Financial Intermediaries). The MIDF has developed Investment Guidelines that outline the measures, steps and procedures to ensure that
(i) each Participating Bank will undergo a review of their commitment to and capacity in managing social and environmental risks to identify measures for strengthening their environmental and social management systems and capacity; and
(ii) all sub-projects undergo an appropriate environmental and social appraisal to ensure that relevant social and environmental aspects are identified and taken into consideration throughout the investment cycle. MIDF requires all Participating Banks to lend funds in accordance with its Social and Environmental Policy, requiring them, among others, to adhere to the Joint IFC/EBRD Exclusion List.
All MIDF sub-projects will be required to comply with national environmental, health and safety, public consultation and labour regulations and standards as well as to meet the agreed eligibility criteria. Where relevant, sub-projects for which EU funding is applied will be structured to comply with the EU environmental standards. MIDF will also provide technical assistance and training measures to Participating Banks in order to strengthen their capacity to manage and promote social and environmental aspects in the sub-projects.
MIDF will monitor the social and environmental compliance of Participating Banks and sub-projects with its Environmental and Social Policy and environmental and social investment requirements and eligibility criteria. MIDF will provide EBRD with annual social and environmental compliance reports that summarises the fund’s, Participating Banks’ and sub-projects’ environmental and social performance and outcomes.
The following Technical Cooperation (‘TC’) assignments have been put in place to develop MIDF:
1. Initial Market Demand Study, carried out by KPMG with the objective to assess the viability of MIDF through analysing: (i) the current activities of the local banks in the Region with regard to municipal financing and their interest to participate in the Facility; (ii) the investment needs of the potential borrowers, sectors and priorities and demand for financing; and (iii) the relevant regulatory environment in each of the countries regarding municipal borrowing (financed with the Bank’s own resources, completed in 2010).
2. Development and set up of MIDF – the assignment is on-going with the objective to put in place legal, institutional and operational aspects of the Facility under suitable jurisdiction (financed by the Government of Austria and the EBRD Shareholder Special Fund, on-going).
To support the operations of MIDF, a Technical Assistance Facility (“TAF”) will be established. The purpose of the TAF will be to provide technical assistance to the Participating Banks and municipalities and utility companies (the ‘Ultimate Borrowers’) in their development, preparation and implementation of underlying operations. It is envisaged that the TAF will have three sources of funding:
(i) the initial contributions from donors, including SECO (EUR 2 million) and the Government of Austria (EUR 5 million, channelled through the EBRD);
(ii) a proportion of MIDF’s annual income as a contribution with no entitlement to any return; and
(iii) potential further contributions by donor agencies and other contributors. The TAF will provide funding for:
1. Support to Participating Banks – assistance and training with a view to internal capacity development in the area of municipal infrastructure financing (e.g. development of internal systems and methodologies for municipal and infrastructure risk assessment, drafting of finance document templates, social & environmental due diligence preparation, procurement monitoring, etc.). The assistance to the Participating Banks will be provided directly by the Investment Manager as part of its services to MIDF and will be financed from the resources provided by SECO (up to EUR 1 million);
2. Support to Ultimate Borrowers - assistance and training aimed at developing the municipalities and utility companies’ administrative and technical capacity throughout the project development and implementation cycle (e.g. preparation of feasibility studies, project designs, tender documents, procurement, project monitoring and reporting, etc.). The assistance to the Ultimate Borrowers will be provided by a consultant to be selected by the Investment Manager and will be financed from the resources provided by SECO and Government of Austria (up to EUR 6 million).
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