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BR Research

Interview with Navid Goraya — Chief Investment Officer (CIO), Karandaaz Pakistan

‘Green investments are not only positive for climate, but also for commercial returns’ Navid Goraya brings with...
23 May, 2022

‘Green investments are not only positive for climate, but also for commercial returns’

Navid Goraya brings with himself over 25 years of global experience in asset management, investment strategy, product development and corporate finance. Before joining Karandaaz as the CIO, he was leading a strategic advisory firm, White Oak Advisors Inc., in New York where he was involved in serving private equity funds, family offices, banks and insurance companies in support of global investments in the US, Middle East, South East Asia and South Asia.

Earlier, at HSBC USA, Navid advised approximately $6 billion in specialized funds of HSBC and led a global wealth team covering North America, the GCC, and Southeast Asia. He has also led specializedinvestment banking teams at the Royal Bank of Scotland and Qatar National Bank. At IICG Bahrain, he led a capital markets group managing proprietary funds and endowment portfolios.

In Pakistan, Navid has led an award-winning research team at a leading brokerage house in the Karachi Stock Exchange. Navid has an MBA from IBA and has also attended the High-Performance Leadership Programs at INSEAD, Fontainebleau, and London Business School. He also serves on the advisory boards of firms in life sciences and financial services in New York.

Following are the edited excerpts of a recent conversation BR Research had with Mr. Navid Goraya:

BR Research: What drives Karandaaz’s investment strategy and what are the focus areas for Karandaaz to invest in and finance SMEs?

Navid Goraya: Karandaaz Pakistan is a not-for-profit impact fund established under Section 42 in August 2014. KARANDAAZ is the implementation partner of UK’s Foreign, Commonwealth & Development Office (FCDO)’s Enterprise and Asset Growth (EAGR), Sustainable Energy and Economic Development (SEED), and International Climate Fund (ICF) Programs.

The primary objective of KARANDAAZinvestments is topromote access to finance for micro, small and medium-sized enterprises (MSMEs) through a double bottom line investment approach,fostering economic growth, job creation, and environmental preservation through financial inclusion of unserved SMEs. KARANDAAZ’s investment thesis revolves arounddevelopingthe financial infrastructure of Pakistan by strategically bridging gaps in the financial landscape of the country. In addition, the company’s investment strategy focuses on the application of additionality to crowdin private sector financing to develop profitable and sustainable investment programs, creating a demonstration effect in the market so that these programs can be replicated and scaled up. Lastly, KARANDAAZ’s programmatic interventions have a development impact by contributing to equitable economic growth through job creation and revenue growth for MSMEs.

As an impact investment vehicle, KARANDAAZ’s financial interventions are based on fourmajor verticals. The first verticalis Strategic Investments i.e., investments to set up platforms with the purpose of creating or deepening the MSME finance market, such as PMIC for microfinance, PFSL for SMEs and InfraZamin for infrastructure guarantees. The second vertical is Private Equity Investments i.e., investments made directly in an SME. The third is Credit Financing i.e., financing made by KARANDAAZ in unserved SME through a third-party financial institution, development finance institution, and non-banking financial corporation or corporate, usually in the form of risk participation agreements or direct loans. And the fourth is Green Investments, i.e. investments to decrease carbon footprints throughrenewable generation and energy conservation through both equity and credit solutions. KARANDAAZ has also established a dedicated team for green investments having expertise in renewable energy and energy efficiency.

Currently,KARANDAAZ’s investments are segregated in four major sectors that include healthcare, agriculture, manufacturing, and greeninvestments. KARANDAAZ’s overall investments currently stand at Rs23 billion.

BRR:How would you define what classifies as green investments: What’s the scope and objective of Karandaaz in green investment?

NG: KARANDAAZ defines climate financing as MWs/energy generated from clean, green sources and MWs/energy conserved, which ultimately reduces carbon emissions and primarily fall into the following segments:energyefficiency, renewable energy,green buildings, and greentransportation.

Such green investments are an imperative step towards climate change adaptation and mitigation that create awareness in the public. Through green investments, KARANDAAZ wants to have a demonstration effect on the market that green investments not only have a positive climate impact, but also generate higher commercial returns and product outreach in international markets. Taking the textile industry in Pakistan as an example, the industry’s move towards eco-friendly products such as those with “Made in Green” certification has resulted in greater competitiveness, world demand and acceptability since consumers nowadays notice when businesses make an effort to adopt green practices to conserve the environment.

KARANDAAZ is targeting energy-intensive industries like cement, textile, fertilizer, and paper industries for energy efficiency initiatives. In these industries, energy costs make up to 60 percent of total production costs. According to studies by ENERCON, energy conservation potential of 25 percent exists in the industry; 22-25 percent in buildings; 20-23 percent in transport and 25 percent in agriculture. As an energy conservation/efficiency initiative, KARANDAAZ has provided funding to Al-Bario Engineering, an energy-efficient transformer manufacturing facility, which will significantly reduce energy losses of national grid.

In renewable energy, KARANDAAZ’sobjective is in line with the Government of Pakistan, which has set aggressive targets to increase the existing share of renewable energy in the energy mix from 5 percent to 20 percent by 2025 and 30 percent by 2030, an addition of around 24,000 – 27,000 MW of RE (solar & wind) into the system (As per World Bank Variable Renewable Energy Integration & Planning study (Nov 2020)).In this segment, KARANDAAZ is providing funding to small / mid–size projects that include, but are not limited to,wind, hydro, and solar projects. For example, in solar distributed energy generation segment, KARANDAAZ has been able to supplement the targets set by GOP by providing bridge financing to the leading solar engineering, procurement, and construction (EPC) contractors such as EBR, Nizam and REON energy to support development of renewable energy projects in energy-intensive commercial and industrial sectors for their in-house consumption.

KARANDAAZ is also pursuing investment opportunities in developing commercial green buildings. KARANDAAZis currently providing funding to construct IOT-based smartgreen buildings that is certified by platinum standard LEED/BREEAM certification.

In future, KARANDAAZaims to provide support to the investors in the electric vehicle segment that will largely contribute to the reduction of carbon emission.

So far, KARANDAAZ has supported 10.6 MWs capacity of clean energy in textile, SME and household segments through its investments in renewable energy.

BRR:What is the significance of Karandaaz’s renewable financing product offered to different EPC contractors?

NG: KARANDAAZ has identified significant funding gaps in the market for EPC contractors to import solar equipment. Commercial banks are bound by the prudential regulations and cannot offer any financing without hard collaterals. Additionally, if the contractor opts to finance the project through State Bank’s RF scheme, there is a timing mismatch in the disbursement of the facility that affects project timelines. Equipment cost is a major component of the overall project cost – approx. 70 percent, and since the contractors usually receive 10-15 percent of the contract amount as advance payments, this creates the need for financing for EPC Contractors. KARANDAAZ intervention has bridged the gap and created adequate financing options/products for EPC contractors to import such equipment.

KARANDAAZ ‘bridge finance scheme’ has enabled multiple EPC contractors to undertake large-scale solar commercial projects for example. EBR is the first KARANDAAZ investment in distributed solar generation segment of PKR 75M facility to the company to facilitate the import of solar equipment to be utilized in a 3.86MW Interloop solar project, which is the largest rooftop solar power project in Pakistan. The project will generate 5.042 MWh of clean energy/year and reduce 3,750 TCO2e emissions annually. The project would have been a great challenge for the contractor if KARANDAAZ intervention did not take place.

Similar facilities have been provided by KARANDAAZ to other renowned EPC contractors such as Reon Energy (Pvt) Limited and Nizam Energy (Pvt) Limited.

BRR: What kind of energy challenges are faced by Pakistan and what are Karandaaz’s plans especially in terms of green investments to cope with these challenges?

NG: I believe the continuous energy challenges in Pakistan pertaintoenergy transmission and distributionas well as energy generation.Currently, Pakistan has installed energy generation capacity of roughly 37,000 MWs since there have been huge capital investments done by private investors and DFIs in setting up IPP plants over the last two decades as a result of incentives given under the Power Policy of 2002. Peak demand in summers can be catered by the installed capacity of around 29,000 MWs, but this demand plummets to around only 8,000 MWs in winters. However, despite having greater installed capacity,Pakistan is unable to fully operationalize its plants to generate energy due to higher fuel prices and currency devaluation. These factors have resulted in payment issues due to circular debts from Central Power Purchasing Agency and higher per unit basket price for the consumers.

37percent of Pakistan’s energy base load is dependent on thermal energy generation running on residual furnace oil and re-gasified liquefied natural gas. These plants have been set up under the Power Policy of 2002 and are mainly must-run projects. Considering globally high prices of furnace oil and Rupee devaluation, government is facing immense challenges in keeping these plants operational and, hence, which has led towards circular debt. As such, there is a need to enhance renewable energy generation capacity, which will help to reduce per basket unit price as renewable energy operational cost is significantly less than thermal generation source.

The bigger challenges, however, lie in the energy transmission and distribution sector, which is government-owned, and hence faces a lack of investment by private investors.Consequently, the capacity of the transmission and distribution lineshas not been upgraded in line withgeneration capacity and the national grid is unable to support the efficient transmission of energy, resulting in higher transmission losses and tripping of overloaded transformers. In this regard,KARANDAAZ has made an investment of Rs250 million in an energy efficient transformer manufacturing facility, that will be providing latest generation energy efficient transformers to DISCOs including, but not limited to,GEPCO, MEPCO, andPESCO.

KARANDAAZ aims to continue supporting private companies to contribute towards the upgradation of the transmission and distribution system along with enabling energy generation through renewable sources such as wind, solar, hydro and waste etc.

BRR: Are smaller stakeholders like women-led SMEs, and startups a consideration for Karandaaz in green financing?

NG: Women-led SMEs are definitely a priority segment for KARANDAAZ as far as green financing is concerned. KARANDAAZ, through its Women Ventures (WV) department,has provided financing to SMEs that have the major shareholding of women. WV has made a green investment inInsta-energy, with the mission of sustainability.

Insta-energy provides efficient solar power systems that deliver lower levelized cost of electricity with its advanced and efficient solar technology. A single project is capable of offsetting carbon footprint by 30 tons of CO2 over the 25 years span, equivalent to planting 50 acres of trees. The deployed technology helps in achieving 21 percent higher efficiency and relatively lower degradation when compared to the competition, with projected annual savings of up to Rs1.4 million on a 10kW system. As of December 2021, the company’s aggregated installed capacity stood at 2,385 kW, equivalent to generation ofapproximately 3,000 metric tons of CO2 savings annually.

Additionally, WV also launched the Green Challenge Fund in 2021, which aims to disrupt the inertia on Green transition projects and expand the spectrum of technologically driven solutions and players engaged in combating climate change in Pakistan. Currently, KARANDAAZ is supporting 5 such businesses through grants and debt financing that are providing commercially viable and sustainable solutions to address plastic waste management, and efficient water management in Pakistan.

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