TWN Info Service on Climate Change (Jul15/03)
14 July 2015
Third World Network  

Lively exchange on whether GCF should give out mainly grants or loans

Penang, 14 July (Meena Raman) – A major discussion took place at the recently concluded Board meeting of the Green Climate Fund (GCF) Board on whether the Fund should deploy mainly grants or concessional loans to developing countries.

The 10th Board meeting of the GCF took place at its headquarters in Songdo, South Korea. The meeting which began on 6 July was supposed to end on 9 July actually spilled over to end early morning of 10 July, in part, due to discussions on the issue of ‘level of concessional terms for the public sector’. 

The Secretariat, in a document for the Board’s consideration, was advocating the use of low-level concessional loans as the main instrument, as opposed to grants, with grants to be used sparingly and on a case by case basis.

After long and protracted exchanges among members in this regard, the Board could not agree on a decision to guide the Secretariat further, despite a push by developing countries to have a decision.

The developing countries were supportive of a draft decision that would affirm that each recipient country would, through their national designated authority (NDA), indicate its preferred financial instrument, based on the country’s need and priorities. It was then for the Board to decide the terms and conditions of the concessional financial instruments that will be determined and agreed to on a case by case basis, taking into consideration the country’s preference as well as previous Board decisions. Developed country Board members were opposed to the proposed decision. Given a lack of consensus on the issue, the Board did not adopt any further decision on the matter.

The Board had previously in its 5th meeting, decided that the Fund will use grants and concessional loans to the public sector. At the 9th Board meeting, it was further decided that for the public sector, highly concessional terms include a maturity period of 40 years for the loan repayment, with a 10-year grace period and with no interest rate charged. For the lower concessional terms, the maturity period is 20 years, with a 5-year grace period and an interest charge of 0.75%.    

The 10th Board meeting was supposed to consider cases in which the high level concessional terms and the low level concessional terms would apply.

In the document for the current meeting in July, the Secretariat proposed 3 options for determining the level of concessionality for the consideration of the Board as follows: Option 1 to be project based, with grants to be provided only for projects/programmes that are non-revenue generating, and delivered through direct access and for small grants for technical assistance; Option 2 to be project and income level based, with grants for projects/programmes that are non-revenue generating, in Low-Income Economies (LIEs) and delivered through direct access and with small grants for technical assistance; and Option 3 to be project, income-level and vulnerability based, with grants for projects/programmes that are non-revenue generating, in LIEs, targeting vulnerable communities, and delivered through direct access, including small grants for technical assistance. LIEs were defined based on the World Bank classification of countries with a gross national income per capita of US$1,045 or less in 2013, that are mostly a subset of LDCs with the lowest per capita income.

The document  also proposed high level concessional loans for projects/programmes that are revenue-generating with low economic viability, or all projects/programmes in LIEs, and non-revenue generating in other countries or that target vulnerable communities in all other countries. 

Below are highlights of some of the exchanges that took place during the Board meeting.

Ewen McDonald (Australia): “We support some of the elements from the paper. We support that for projects which are not revenue-generating that the Fund should provide grants, especially for adaptation. When revenue generation is an option, concessional loans should be the norm. We do not see the relevance of limiting the access modality (referring to the direct access modality)”.

Referring to the document prepared by the Secretariat Jorge Ferrer Rodriguez (Cuba) said as follows:  “I disagree that this is a good paper. The LIE language is inconsistent with our previous decisions. This paper will restrict the accessibility of grants to the countries that need them most.  There are many vulnerable countries who are not LDCs, Small Island Developing States (SIDs) or LIEs... The GCF is not a bank; it’s a Fund which was established to meet the needs of developing countries. We know there is a problem of the scarcity of resources. This paper is not consistent with the agreed 50:50 breakdown between mitigation and adaptation.”  (The Board had in 2014 agreed that as regards the allocation of resources, it will aim for a 50:50 balance between mitigation and adaptation over time).

Nojibur Rahman (Bangladesh): “The (document) is not acceptable to us in its current form. It follows a straitjacket approach. There needs to be an option which recognizes the needs of LDCs to access grant finance…There should be an element which assures grants with no required levels of co-finance.”

Zaheer Fakir (South Africa): “On behalf of the African Group, our position is that there should be no loans for adaptation.”

Angel Valverde (Ecuador): “This paper is not consistent with the United Nations Framework Convention on Climate Change. This is not consistent with the goal for country-driven approaches…Co-financing that has not been agreed by the Board and is being forced on accredited entities. This will require countries to depend on international accredited entities to access finance…The focus is too much on leveraging, financial returns and impact. Using income levels of countries in order to access grants prejudges the potential of paradigm shift. We would like to erase the LIE list. Regarding vulnerability, this term refers to different things under the Convention. This term should not be linked to income level.”

Nauman Bhatti (Pakistan): “The Fund needs to maximize climate action and actions in developing countries. Adaptation projects should be fundamentally based on grants… Regarding national income levels, this is not linked to climate vulnerability as defined under the Convention…The paper should also address full costs, not only incremental costs.”

George Zedginidze (Georgia): “This paper has a clear bias for mitigation projects, which is inappropriate. The characterization of vulnerability should be based on climate impacts, not income levels.”

Ingrid-Gabriela Hoven (Germany): “This paper needs a serious revision…We need a clearer definition of the ‘public sector’ and this should be aligned with international definitions…We need to think about what accredited entities can bring to the Fund in order to operate at scale. This may not be a model for every country.”

Ali’ioaigi Feturi Elisaia (Samoa): “We want comfort for level of grant finance available for SIDS…Regarding the three options, they will disadvantage SIDS. This is a climate change Fund, and SIDS have increased vulnerability and needs. Many of them are highly indebted. They will not have national implementing entities accredited for a while; so this paper would exclude them from accessing grants.” 

Yingming Yang (China): “We oppose using income level as a consideration for concessionality. There should not be differentiation between developing countries within the GCF. This is against the spirit of the GCF. We are sympathetic to the needs and concerns of developing countries, particularly LDCs. This is covered in great detail in the Convention.”

Omar El-Arini (Egypt): “We agreed that the Fund will focus on grants and concessional lending. Technology needs to be adopted and adapted and reach market penetration. This takes time and includes risks. Many countries are in debt…Adaptation affects lives and should be (addressed) on a grant basis. I think it would be useful to see a list of project concepts received (by the Secretariat), including the estimated costs and instruments requested. The preparation of a new document needs to address the issue of incremental costs.”

Leo Martinez (US): “I think we need to be careful in developing further guidance. We may not need more detailed guidance at this stage. We trust the Secretariat to look after the interests of the Board. We demand that the Secretariat ask difficult questions (of countries). We need a definition of what ‘public’ and ‘private’ mean. In an effort to avoid crowding out the private sector, we need to take into consideration what else is happening in the sector. For example, if other similar projects in the country are receiving commercial finance, this could give us a clue as to an appropriate level of concessionality. The direct access modality provision is unfair to countries that then would not have access (to grants)”.

Marcin Korolec (Poland): “The GCF should distribute grants but also have renewable flows of finance. SIDS and LDCs should have privileged access to this Fund.”

Arnaud Buisse (France): “This loan/grant issue is a very important question, especially if the Fund runs out of money quickly. We want to avoid allowing accredited entities to do business-as-usual projects. We also don’t want to put unsustainable debt on countries.”

Andrea Ledward (UK): “The Fund should blend concessionality. The restrictive use of grants is problematic. We agree on the need for leveraging third-party finance. I propose that we proceed on a case-by-case basis. That we do not be too rigid but develop some general norms and principles to be reviewed annually.”

Atsuyuki Oike (Japan): “We can support a mixed approach depending on the project type and country circumstances. We need to expand access modalities beyond direct access.”.

Mariana Micozzi (Argentina): “We are not comfortable with the focus on income levels… The effects of climate change should be taken into consideration, especially for adaptation projects and programmes.”

Ayman Shasly (Saudi Arabia): “We have different mindsets. Some see this Fund as an investment arm. We see it as a Fund. I do not want to see this Fund become another MDB. We are not in the business of giving loans. We are in the business of giving grants. The (Secretariat) paper has many redlines. Who says that the characterization of eligibility should be based on income? This is a red line. We will not accept any reference based on the level of income. We abide by science and not the characterization of countries. Countries in the UNFCCC are being misled about the direction of this Fund.”

Stefan Schwager (Switzerland): “Why are we beating a dead horse to say grants only? How do we balance mitigation and adaptation? If we give too much grant finance to mitigation for revenue-generating projects, this will leave less finance for adaptation.”

Jacob Waslander (Netherlands): “I’m concerned about the clarity of the document. In assisting on emergency preparedness may likely require predominantly grant elements. We need to also look at the revenue aspect of a given project.”

Henrik Harboe (Norway) who is Co-chair of the Board: “This is an important paper and decision. This is a Fund. This Fund should provide finance in the form of grants and concessional loans. The needs are greater than the available resources. The Fund needs to spend the scarce funds as wisely as possible. We need some guidance beyond case-by-case basis. There needs to be a balance between guidance and flexibility. In defining guidance, we respect earlier decisions and papers, including the 50/50 split between mitigation and adaptation. The special needs of LDCs, SIDS and Africa should be reflected.”

Zaheer Fakir (South Africa): “Countries should determine grant versus loan, not the Secretariat. The Secretariat is king in this fog of confusion, as there’s no clarity on the application of this paper. We are determining how much loans versus how much grants we give.” 

Andrea Ledward (UK): “I don’t think there is a fog of confusion across the Board. I am happy for the co-chairs to develop some core principles. If it’s not possible, then we proceed with the existing guidance which is the use of the various instruments on a case-by-case basis.”

Ayman Shasly (Saudi Arabia): “I do not agree with case-by-case basis. The Secretariat is charging itself with the sustainability of the Fund, but this is the role of the Board.  We should be taking these decisions not the Secretariat.”

Zaheer Fakir (South Africa): “I need the certainty that countries would have the choice of choosing grants or loans. I want the country to have the power to choose a grant; if they choose a grant to cover incremental costs or a loan with greater finance. The country needs to be the one to decide. Adaptation should be grants only and on full cost, not incremental cost”. 

Hela Cheikhrourou, (Executive Director): “It is helpful for the NDAs and the Accredited Entities to get further guidance. If you ask which option they will choose, either grant or loan, the answer will always be grant. The existing rules are enough for a case-by-case basis consideration.”

David Kaluba (Zambia): “Dealing with the impact of climate change is a primary concern and is not about whether it is revenue generating or not. Let’s be careful about this issue…  We need to increase the coping capacity of countries, which may take many years to achieve.”

Leo Martinez (US): “On the issue of revenue generation, in general I do not see the Board approving revenue-generating projects receiving grants. We want to avoid crowding out the private sector. Perhaps the way forward is a decision for this process to continue, with a provision to revisit it in the near future… Country ownership is important for designing the programe but the choice of the financial instruments cannot be left to the NDAs. The Secretariat can help with that and the Board then decides.”

Jorge Ferrer Rodriguez (Cuba): “Nobody goes to a bank and says give me what you want. We indicate what the preferred financial instrument is and the bank says yes or no, taking into account the request.”

Arnaud Buisse (France): “We need data. We will discuss this, project by project in the next session,” (referring to the Board approving funding proposals at the next meeting).+