29 July 2014

Passing the bucks: the Green Climate Fund, country ownership and the role of international financial institutions

What role will international financial institutions like the World Bank play in channelling the resources of the UN’s Green Climate Fund? And what does that mean for the concept of “country ownership”? This is the second of a series of three blogs on critical issues facing the GCF. The first looked at how much money the fund is likely to contain and who is likely to provide it. The third in the series considers whether the fund is likely to support fossil fuels and other forms of “dirty energy”.
The Green Climate Fund is intended to be “country-owned and driven”, with national governments playing a key role in setting priorities and overseeing how funds are deployed. But the emerging structure is increasingly at odds with this commitment, and it looks increasingly likely that a majority of its funding would be channeled via international financial institutions (IFIs) rather than local and national ones. That’s a significant reversal for a fund that was conceived as an alternative to the current system, which is built around a mix of multilateral financing passed through the World Bank and other multilateral banks, and bilateral financing. The shift in favour of IFIs is a blow to attempts to take climate finance out of the hands of institutions that invest heavily in fossil fuels and other forms of ‘dirty energy’ (see more here). It also risks taking decision-making power away from the people most affected by climate change.

In part, the turn to IFIs reflects ambiguities in the definition of “country ownership”, a concept borrowed from the development aid field. According to the 2011 Busan Partnership for Effective Development Cooperation, developing countries should be responsible for defining their own development model, with approaches “tailored to country-specific situations and needs”, and national institutions playing a leading role. The World Bank has adopted a similar-sounding definition, claiming that “Country ownership means that there is sufficient political support within a country to implement its developmental strategy, including the projects, programs, and policies for which external partners provide assistance.” In practice, though, there are key differences between a process that allows national actors to define their needs, with resources channeled directly via accountable national institutions, and “external partners” assisting in the creation, and shaping of, a strategy, which is then sold to the recipient country after the fact.

The GCF Governing Instrument, a constitution-like document that sets out principles for how it will operate, veers towards the stronger definition of country ownership. It states that GCF financing should be consistent with national climate strategies, and support the creation of such strategies where none exist, and suggests that a “national designated authority” (NDA), typically an environment ministry, should be a key channel for advancing proposals and ensuring consistency with such strategies. Beyond this, recipient countries should be able to nominate institutions that can directly access GCF financing, including those at sub-national and national levels.

The primacy of national institutions has been chipped away by successive decisions of the GCF Board, however. In June 2013, the insistence on countries appointing an NDA was relaxed, and it was decided that a “focal point” (often just a single person) would suffice. This option has been the springboard for arguments that the role assumed by the NDA or focal point should be minimal, restricted to little more than providing written consent that a country does not object to a particular project or program taking place within its territory.

The importance of a national approval process – dubbed a “no-objection” procedure – has also been watered down as over time. When the GCF was formally established at the UN Climate Change Conference in Durban in December 2012, the creation of a no-objection procedure was set out as a per-requisite for financing to commence. In October 2013, a proposal was tabled to establish such a procedure, which would give NDAs or focal points a key role in appointing and approving “implementing entities and intermediaries” through which funding would pass, and making formal written approval a condition for GCF financing. This approval should also have contained confirmation that “appropriate consultation processes” had taken place. But no agreement was reached, mainly due to concerns raised by the USA that it would be too time-consuming.

Subsequent iterations have proposed only a “tacit approval” process, with consent assumed after a period of as little as three weeks if no objection is raised, but the final decision will not be taken before October 2014. A possible compromise suggests that countries could choose a “tacit” procedure if they prefer. As with the designation of “focal points,” this is sold in part as providing countries with maximum flexibility – but in order to allow for this, the overall importance of the procedure is diminished.

In place of national governments, other intermediaries are gearing up to take an increasingly central role. The Governing Instrument mentions “financial intermediaries” just once, in the context of local actors supporting private sector activities. But the funding structure agreed in Songdo gives intermediaries a central role. In the “initial” phases of the GCF, at least, financing will pass through “implementing entities”(which could be national bodies or UN agencies) that can provide grant-support, and “intermediaries” that can provide concessional loans and, potentially, other financial instruments if (as many Board members, and the Fund’s Private Sector Advisory Group, advocate) those are subsequently approved. Beyond this, intermediaries will be allowed to “blend” financing with their own resources – a means that institutions like the IFC have used to combine concessional funds with their own non-concessional lending products.

Two issues dominated the debate on intermediaries at the GCF’s Songdo Board meeting. Significant concerns were raised (by the Board member for Zambia, amongst others) that the proposed bar for accrediting as an intermediary was being set so high that only IFIs (and commercial banks) would be able to qualify. This concern was recognized, to some extent, in the final decision in Songdo, which calls for an approach that would more closely tailor the financial management capabilities of the intermediary with the scope and complexity of the onward lending they would engage in.

Second, there was controversy over a proposed “fast track” procedure for accreditation, which the USA suggested should be extended to Equator Principles banks, a grouping of 79 commercial banks. Signatories to this voluntary code, which is based on IFC standards, include Bank of America, Citigroup and many of the world’s largest fossil fuel financiers, a number of which have backed projects with well-documented human rights abuses. The “fast tracking” of Equator Principles banks was blocked in Songdo, but their potential to be a major channel for GCF financing remains.

Some key questions in the design of the GCF remain to be addressed at the next meeting of its board – notably, the extent to which grants will be used compared to concessional lending, the financial terms on which these will be offered, and whether other financial instruments will be brought into the mix. Much also depends on how the sometimes-vague Board agreements are applied in practice – including how generously the “fit-for-purpose” rules on accrediting “implementing entities and intermediaries” will be interpreted, which should shape how accessible financing is to national governments and specialist agencies, regional and city governments. A narrow application could favor IFIs – but the emerging pipeline of intermediaries seeking accreditation and potential projects is also likely to see the GCF channeling funds via bilateral institutions like the UK’s Green Investment Bank, national development banks like BNDES (the Brazilian Development Bank) and second-tier regional institutions regional institutions such as the West African Development Bank.

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