US Consul General James B. Cunningham introduces P2E2 financing scheme in Hong Kong
Citic Ka Wah first bank to sign first Master Agreement
Typical mainland steel plant could finance US$380m equipment on P2E2 savings
HONG KONG, June 6 — CITIC Ka Wah Bank is the first mainland Chinese bank in Hong Kong to offer a US-style environmental financial solution known as P2E2 (after Pollution Prevention, Energy Efficiency), according to US Consul General James B. Cunningham speaking at a joint luncheon hosted by the Hong Kong General Chamber of Commerce and the American Chamber of Commerce here in Hong Kong Tuesday.
According to Cunningham, “CITIC Ka Wah has applied for a Master Guarantee Agreement with the US Export-Import Bank in order to increase its capability to lend to the environmental sector. It intends to offer P2E2-related financial solutions to its end-user customers in textiles, electronics, paper and pulp, and other manufacturing services in the greater China region.”
Cunningham introduced the concept of P2E2 to an audience of Hong Kong’s business leaders.
He said excluding CITIC Ka Wah, nine Hong Kong commercial banks and two investment funds are “interested” in participating so far.
“Our P2E2 model is homegrown for the Hong Kong business environment,” he said. “It requires no upfront capital, paying back investment by others in green technology for your benefit through cost savings from increased energy efficiency and pollution reduction. We think it holds great promise.”
“Hong Kong service companies are already working on the introduction of P2E2 technologies into hospitals, supermarkets, factories, cement plants and mainland coal-fired power plants.
Cunningham cites the example of one projected case, a medium sized steel plant in Guangdong Province with an annual power bill around US$73 million (RMB571 million). “A conservative estimate of annual cost savings from P2E2 applications would be 45%, thus producing US$33 million in cost savings annually. With the help of Hong Kong lease financing, these annual cost savings can pay for the installation and use by the Hong Kong service company in that Guangdong steel plant of P2E2 equipment worth many times that amount, perhaps as much as $380 million,” he says.
The seeds for this model emerged from the US-China Joint Commission on Commerce and Trade. “We adapted the model to take advantage of the Closer Economic Partnership Arrangement between Hong Kong and the mainland. We introduced the concept in Hong Kong in a May 2005 conference organized by my Commercial staff, and have worked hard since then to make it operational,” said Cunningham.
The P2E2 initiative uses loan guarantees from the Asian Development Bank (ADB) or International Finance Corporation, as well as credits from the US Export-Import Bank, to facilitate loans by Hong Kong commercial banks for green equipment.
“There are four main players in any P2E2 arrangement,” said Cunningham. “A Hong Kong-based environment and energy service company; a factory or business in mainland China; the all-important Hong Kong bank; and a body to verify savings from pollution reduction.
“Step one, the Hong Kong service company (player #1) advises the mainland factory, power plant or real estate development (player #2) on how to streamline processes to reduce environmental impact and energy needs. The Hong Kong service company performs a no-cost study and recommends upgrades.
Step two, the Hong Kong service company secures a loan in Hong Kong with the bank (player #3), to lease or purchase equipment necessary for the upgrade. The bank would make this loan based on a performance contract and on mainland commercial credit risk, which would be partially alleviated by loan guarantees from ADB or the Exim Bank.
Step three, the loan is repaid with cost savings at the Chinese plant through reduced energy usage and raw material needs.
Step four, to keep everyone honest about the actual cost savings achieved, an independent technical auditor (player #4) measures and verifies these cost savings.”