The case was promising right from the start. In 2016, the project came knocking at IDB Invest’s door: a Chilean company in the field of telecommunications and information technology offered a solution to provide sustainable public lighting working inclusively. Could it also be profitable?
The proposal by Inversiones y Asesorías en Telecomunicaciones e Informática SpA (Itelecom) was risky for commercial banking. When looking for funds, the main issue was return. Itelecom’s proposal was to provide public lighting to nine municipalities in Chile‒Melipilla, Cartagena, San Javier, Villa Alemana, Coyhaique, Til Til, Negrete, San Joaquin, and Recoleta‒for a total cost of US$28 million and a financing package of US$18.5 million. Other discouraging factors were the limited scope of individual municipal projects and the commercial bank’s limited experience evaluating risks associated with LED technology and municipal service contracts.
Alfredo Idiarte, Business Development Director at Itelecom, explains that requesting this type of loan required restructuring the company itself. “We used to be just one legal entity,” he says. “Now we are five (companies), in order to finance each line of business with a more adequate type of financing. We had to change our accounting auditor and hire risk-assessment services to independently assess risk in each municipality.”
Itelecom and IDB Invest, with help from Blended Finance resources, decided to tackle the issue of poor lighting in these nine districts together and, in the process, reduce the gender gap in the supply of energy services.
“In order to access this type of financing–which is more sophisticated because it’s not based on the company’s balance sheet, but rather on long-term contract flows–we had to undergo substantial changes,” Idiarte says.
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In Chile, some 350 municipalities are responsible for public lighting throughout the country. Itelecom, established in 2001, estimates there are about 2.5 million lighting posts across Chile, which consume 373 MW. The vast majority are high pressure sodium lamps.
Over time, Itelecom expanded operations to the lighting sector with a program called GO+, in line with the “lighting as a service” model. What is it about? In short, it provides better lighting, safer urban spaces and savings for taxpayers by using sustainable technology.
As for the project in question, on top of the initial reluctance from the commercial banks there were two key obstacles to getting the project underway: risk perceptions associated with the municipalities’ credit history–since work was only envisaged in small and medium jurisdictions–, and the absence of a track record financing projects without financial backing and whose only source of income were long-term municipal service contracts.
Shedding light on the results
The path was to combine strategies. To manage municipal credit risk, financing was provided by IDB Invest’s own resources and concessional resources, defining its use based on:
- A credit assessment of the municipalities, showing investment grade ratings under local standards for the initial group of participating municipalities.
- Diversifying Itelecom’s portfolio in various municipalities.
- Defining adequate structuring parameters for project financing transactions, and the coverage ratio of the debt service and reserve accounts.
Capital was built around a loan from IDB Invest, a loan from the Canadian Climate Fund for the Private Sector (C2F), a loan from the Clean Technology Fund (CTF), and a partial credit guarantee from the CTF for the IDB Invest loan, based on a financial structure of US$18.5 million. The use of Blended Finance resources was introduced, completing the financial package and providing extra collateral to increase the operation’s credit if conditions became complicated and risk mitigation was required.
To date, 62,200 public lights have been replaced, and Itelecom plans to reduce CO2 emissions to more than 11,000 tons per year–reducing energy consumption by more than 23,200 MWh per year, 64% of the total consumption of the 9 municipalities in the previous period.
“The project is finished in terms of installation, everything is working fine,” says Idiarte. “What’s next? Regarding this project, we need to comply with the obligations of the supply and installation contracts for these new municipalities (the installation is already completed), and carry out maintenance for ten years. We are basically responsible for the effective lighting operation.”
In Melipilla, a city of 100 thousand inhabitants, crime has dropped and activity on the streets has increased thanks to the implementation of 15 thousand new LED lights. A further positive effect has been the reinvestment of municipal energy savings, to provide better access to drinking water.
But that’s another story.