VIPA’s Pricing Tool: Tailored Terms and Conditions and Faster Decision Making
Public Investment Development Agency (VIPA) has been using the Pricing Tool for financial services and products for a year now. The Pricing Tool was developed with the substantial financial support of the European Union through the European Investment Advisory Hub (EIAH) following the EIAH call for proposals for delivery of investment advisory services by National Promotional Banks (NPBs). VIPA submitted the project proposal for the development of pricing tools that are necessary for VIPA’s energy efficiency investment platform’s successful operation and growth. The project was approved and officially kicked-off in 2019.
In 2018 VIPA experienced a 65 % growth of funds under management and launched several new financial products and services, including the establishment of the investment platform TIPS (Promotion of Sustainable Resource Development) to finance energy efficiency and other sustainable projects. This caused the need for the acquisition of pricing tools for energy efficiency loans, which would be used to set the pricing independently for projects financed by the TIPS investment platform without relying on reference prices on the market.
“As a National promotional bank, it is our role to fill the market gaps for sustainable investments, hence VIPA supports investments for which financing on the market is unavailable. Therefore, in most cases prevailing market conditions for such projects are not a suitable reference point for setting the terms of financing,” Kristina Vaskelienė, VIPA’s Business Development Director, explained.
Enables Effective Credit Portfolio Risk Management
The Pricing tool has been developed in cooperation with Ernst & Young consultancy company, and it encompassed various elements such as development of the pricing methodology for loans and guarantees, the methodology for assessing the creditworthiness of clients, and the development of their models. The tool allows VIPA to independently price and reasonably set the price for its borrowings, both from the investment platform TIPS and VIPA’s own funds. Besides, after the development and testing of the Pricing tools VIPA’s staff were trained how to use the tool and learnt more about the pricing principles. This allowed all VIPA employees, even those that do not use the tool on an everyday basis, to improve or acquire new knowledge.
“This tool helps us save time in assessing potential investments, allows us to offer tailor-made terms and conditions and manage the risk of the entire credit portfolio more efficiently. The assessment takes into account VIPA’s financing options, the client’s risk, the business segment, the sustainability and energy efficiency of the project,” Ms Vaskelienė said.
Investment in Renewable Energy Sources
Financing provided to AB Panevėžio Stiklas is a great example of a successfully implemented project using the Pricing tool. The project is worth EUR 1.06 million, including a 10-year TIPS loan of EUR 847,000. The project will result in a ~1.5 MW solar power plant on the roofs of five production buildings of the glass production factory. It is expected to generate around 1,500 MWh of electricity per year. At current electricity prices, the project’s payback period is estimated to be 3-4 years.
“We financed an energy efficiency project of AB Panevėžio Stiklas, so we are very happy that the client came back to us. In 2018, VIPA provided a loan at 6% interest for the lighting upgrade and the installation of waste heat recovery measures for the heating of the building. The new loan for the solar power plant has been granted at a significantly lower interest rate of 4.5%,” Ms Vaskelienė noted.
Gintaras Petrauskas, CEO of AB Panevėžio Stiklas, says that TIPS loan was significant in the implementation of the solar power plant project. “VIPA has financed 80% of the total project amount. Without this financing, the implementation of the project would have been complicated. With gas prices rising disproportionately since the third quarter of 2021, our financial year 2021 ended with a loss. Banks operating in Lithuania are very conservative in providing financing when your profit and loss account is negative for even a single year. Therefore, the funding provided by TIPS is very important to us,” Mr Petrauskas revealed.
The Pricing tool has enabled a quicker adoption of the decision to finance the project and to set the right financing terms, including the interest rate. The project evaluation also considered the ‘greenness’ criterion. AB Panevėžio Stiklas is the largest glass producer in the region and 45% of glass used as raw material comes from recycled clear glass debris. The glass industry is particularly energy intensive. The solar power plant financed by TIPS will supply around 10% of the company’s total annual electricity consumption.
Another energy efficiency project for the Kaunas district street lighting is planned to sign the loan agreement in December. This project is a public and private partnership (PPP), and it proves that the Pricing tool can be effectively used for a variety of different projects pricing, including small and medium enterprises, PPPs or projects implemented via SPVs.
“European Investment Bank is a long-standing partner of VIPA, and it brings real and important impact for our activities. We are grateful that the EIAH support has allowed us to implement a much-needed project for Pricing tool development,” Ms Vaskelienė said.
About the European Investment Advisory Hub:
The European Investment Advisory Hub was launched in 2015 by the European Investment Bank Group and the European Commission as part of the Investment Plan for Europe. The Hub provided advisory and technical assistance services to support the identification, preparation and development of investment projects across the European Union. Building on the success of the EIAH and other advisory programmes, the EIB and the European Commission agreed to provide technical, financial and strategic expertise to project promoters, regional and national authorities, and financial intermediaries under the InvestEU Advisory Hub.