IISD s Sustainable Asset Valuation tool (SAVi) Delivering insight for investing in sustainable infrastructure

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1 IISD s Sustainable Asset Valuation tool (SAVi) Delivering insight for investing in sustainable infrastructure

2 2018 The International Institute for Sustainable Development (IISD) The IISD Public Procurement and Infrastructure Finance Program is a multidisciplinary team of experts on procurement, public-private partnerships, project finance, laws and policies, infrastructure finance, tender cycle advisory, project preparation, environmental and social safeguards, among others. Our core focus is to increase value for money for the public purse in procurement of goods, services and infrastructure. SAVi was developed with the financial support of the MAVA Foundation. For more information on the SAVi tool please visit: For more information contact Oshani Perera: operera@iisd.org 2 IISD.org

3 The Case for Sustainable Infrastructure Infrastructure investment is a powerful driver of economic activity. Done right, it holds enormous potential for alleviating poverty, improving access to basic services, creating employment and business, and ultimately contributing to the well-being of people and the planet. Emerging markets and developing economies need vast investments for new infrastructure to spur growth. At the same time, advanced economies need equally large amounts to replace or upgrade aging public assets. The global infrastructure investment need is estimated at USD 6.3 trillion per year between 2016 and 2030, according to the Organisation for Economic Cooperation and Development (OECD). 1 Yet more investment is not all that is needed. When funding the roads, bridges, power plants, water supplies and ports that power economic growth, investors must also consider carbon and environmental footprints, social cohesion, stewardship of natural ecosystems and the financial viability of projects. In short, they must plan and build infrastructure that is sustainable. Sustainable infrastructure is critical if the world is going to meet the goals, targets and recommendations set out in the Paris Agreement, the 17 UN Sustainable Development Goals and the Financial Stability Board s Task Force on Climate-related Financial Disclosures. Set against this imperative, investors and governments need highly sophisticated instruments to enable better decision-making, mitigate risks, generate returns and optimize value for money across the life cycle of an asset. IISD s Sustainable Asset Valuation tool (SAVi) was created to meet this demand. SAVi assesses the extent to which environmental, social and economic risks and externalities affect the financial performance of infrastructure assets. It also calculates the societal and economic benefits of sustainable infrastructure, such as employment, productivity, income and contributions to GDP. 1 IISD.org 3

4 How SAVi Works SAVi puts a financial value on risks and externalities that are not well understood and therefore ignored in traditional investment assessments. These can include legal and environmental risks, resource and revenue risks, and climate-changerelated risks. SAVi assesses the impact of these risks on the financial performance of an infrastructure project or portfolio. We customize SAVi to the needs of our clients, whether they are looking at a single project, a portfolio of projects, or an economic or industrial policy. We identify externalities and risks on a case-by-case basis in collaboration with the client. SAVi combines the outputs of system dynamics simulation and project finance models. SAVi can currently be applied to several asset types: energy, roads, buildings, irrigation, sewerage treatment and nature-based infrastructure. Models on railways and waste management are in the pipeline. IISD is developing a SAVi scorecard to report on how infrastructure projects contribute to achieving the UN Sustainable Development Goals. SAVi calculates the impacts of various risks and externalities on levelized costs, gross margins, net present value, internal rates of return and credit risk ratios. 4 IISD.org

5 Examples of Potential Risks and Externalities Physical/Environmental Higher global temperatures, rising sea levels, water shortages, water and air pollution, land degradation, extreme weather, increasing need to protect biodiversity. Social/Political Currency inconvertibility, wage fluctuations, industrial action, war, terrorism, civil disturbance. Technological/Legal Environmental and social safeguards, troubleshooting experimental or emerging technologies. Consumer/Reputational Changing public opinion, industrial action, environmental disasters, allegations of human rights abuses. Economic Contribution to GDP, household incomes, carbon taxes, changes in feed-in tariffs, fluctuations in resources, access to land. IISD.org 5

6 SAVi in Use Wetland and dam Canada Offshore wind farm the Netherlands Toll road Morocco Wind farm, tourism infrastructure & buildings Senegal 6 IISD.org

7 Some of the clients of SAVi assessments include: the Ministry of Infrastructure and Water Management of the Netherlands, the Directorate of Tourism of Jammu & Kashmir in India, UN Environment, WWF, the Moroccan Road Agency, and the Senegalese Government Agency for the Implementation of the Plan for an Emerging Senegal. Hydropower dam Energy infrastructure and buildings Albania Georgia Portfolio of infrastructure for restoration & conservation of Dal Lake Ports and marinas India Greece Energy infrastructure Cambodia Natural infrastructure at the Beira Lake Sri Lanka Irrigation infrastructure Tanzania IISD.org 7

8 SNAPSHOT A 9.5 GW North Sea Wind Farm In 2017, the Dutch Ministry of Infrastructure and Environment (Rijkswaterstaat) requested a SAVi analysis on a planned 9.5 gigawatt (GW) offshore wind farm in the North Sea. The project is expected to be one of the largest in the world when it is fully operational. 8 IISD.org

9 IISD used SAVi to compare the financial performance of the offshore wind farm to seven other energy technologies, using four different scenarios. 1. Business as usual. 2. Business as usual with a correction for the externalities identified by Rijkswaterstaat. These ranged from impacts on fisheries, sand mining, tourism and cultivation of seaweed to effects on household income, employment, productivity and emissions. 3. Business as usual with a correction for the above externalities, plus a climate-change-induced increase in air temperature of 1.5 degrees Celsius. 4. Business-as-usual correction, correction for externalities, a 1.5 degree Celsius increase in air temperature, plus the imposition of a EUR 16.27/MWh carbon tax. Under the business-as-usual scenario, coal emerged as the most profitable technology, with a lower levelized cost of electricity, higher internal rate of return and a more attractive debt service coverage ratio and loan life coverage ratio. When correcting the levelized costs of electricity by adding the costs of the externalities, offshore wind came in at a lower cost, at EUR 65 per MWh, with coal at EUR 171 per MWh. Similarly, the internal rate of return for wind increased to 17 per cent, with coal at 4 per cent. Adding the impacts of a higher temperature, offshore wind came out as the clear winner, with an internal rate of return at a steady 17 per cent, while coal fell to zero. The debt life coverage ratio and the loan life coverage ratio of coal followed suit and ended up below the lock-up ratio of 1.15x and 1.10x respectively. Rijkwaterstaat was particularly attentive to the SAVi estimations on employment creation and greenhouse gas emissions. The offshore wind farm would create more jobs more than 2,780 full time equivalent per year. In terms of emissions, calculated over the life cycle of the project, SAVi estimated that the offshore wind project would emit 19.6 million tonnes of carbon dioxide, compared to 1,661.5 million tonnes of carbon dioxide in the case of coal and million tonnes in the case of natural gas. IISD.org 9

10 Typical Workflow for a SAVi Assessment STEP 1: Engage with client to understand and record asset characteristics STEP 2: Determine risk scenarios and externalities most relevant to the asset and asset owners STEP 3: Obtain and verify data. Build in assumptions using robust international data sets STEP 4: Customize SAVi and run models STEP 5: Analyze results and write up results STEP 6: Present results and explore how values change under different risk scenarios STEP 7: Deliver results 10 IISD.org

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12 2018 The International Institute for Sustainable Development Published by the International Institute for Sustainable Development. INTERNATIONAL INSTITUTE FOR SUSTAINABLE DEVELOPMENT The International Institute for Sustainable Development (IISD) is an independent think tank championing sustainable solutions to 21st century problems. Our mission is to promote human development and environmental sustainability. We do this through research, analysis and knowledge products that support sound policy-making. Our big-picture view allows us to address the root causes of some of the greatest challenges facing our planet today: ecological destruction, social exclusion, unfair laws and economic rules, a changing climate. IISD s staff of over 120 people, plus over 50 associates and 100 consultants, come from across the globe and from many disciplines. Our work affects lives in nearly 100 countries. Part scientist, part strategist IISD delivers the knowledge to act. IISD is registered as a charitable organization in Canada and has 501(c)(3) status in the United States. IISD receives core operating support from the Government of Canada, provided through the International Development Research Centre (IDRC) and from the Province of Manitoba. The Institute receives project funding from numerous governments inside and outside Canada, United Nations agencies, foundations, the private sector and individuals. Head Office 111 Lombard Avenue, Suite 325 Winnipeg, Manitoba Canada R3B 0T4 Tel: +1 (204) Website: Geneva Office International Environment House 2 9 chemin de Balexert, 1219 Châtelaine Geneva, Switzerland Tel: Website: 12 IISD.org