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THIRD WORLD RESURGENCE

Work programme on long-term finance concludes activities

Finance is crucial to the success of international efforts to counter climate change as developing countries will require financial assistance to undertake adaptation and mitigation measures. To secure the provision of long-term financing for developing countries, governments decided to establish a Green Climate Fund (GCF) within the framework of the UNFCCC as a mechanism to transfer money from the developed to the developing world for this purpose. To kickstart environmental projects, 'fast-start' funding of the GCF has also been agreed, encompassing $30 billion for the period 2010-12.

The first of the following two articles focuses on the continuing efforts to scale up long-term financing, while the second highlights the progress made to institutionalise the operations of the Green Climate Fund.

Marjorie Williams

THE 'work programme on long-term finance' under the United Nations Framework Convention on Climate Change (UNFCCC) concluded its activities with the holding of a workshop in Cape Town, South Africa from 1-3 October.

The Cape Town meeting was the second and final workshop which was co-chaired by Zaheer Fakir (South Africa) and Georg Borsting (Norway), who are also Co-chairs of the work programme for 2012. The workshop's focus was on 'Scaling up of climate finance and enhancing enabling conditions (policies and instruments), and delivery and access'.

According to the Co-chairs in their closing remarks at the workshop, the long-term finance work programme contributed to 'ongoing efforts to scale up the mobilisation of climate change finance after 2012 through: enhanced collective understanding of options for mobilising climate finance and related work on financing needs; increased institutional knowledge on climate finance issues; and valuable knowledge-sharing experience and engagement with policy and climate finance expertise outside UNFCCC negotiations process for possible consideration in the future'.

At the wrap-up of the workshop, the Co-chairs recalled their mandate from the Durban meeting of the Conference of Parties (COP 17) in December last year, where Parties decided to undertake a work programme on long-term finance in 2012, including workshops, to progress on long-term finance.

According to that decision, 'the work programme aims to contribute to the ongoing efforts to scale up the mobilisation of climate change finance after 2012; analyse options for the mobilisation of resources from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources and relevant analytical work on the climate-related financing needs of developing countries. It will draw its analysis from relevant reports including that of the High-level Advisory Group on Climate Financing and the report on mobilising climate finance for the G20 and the assessment criteria in the reports, and will also take into account lessons learned from fast-start finance'.

The Co-chairs also informed participants about the previous activities undertaken under the work programme, which began with a first workshop on long-term finance that took place in Bonn, Germany from 9-11 July, and focused on the climate-related finance needs of developing countries and considered emerging early insights from lessons learned from fast-start finance.

They also informed participants that two webinars (web-based seminars) were also held this year - one on 13 September and the other on 21 September. The first webinar dealt with 'Various approaches applied to assessment of climate-related financing needs in developing countries in the longer term', while the second webinar dealt with 'a range of important issues related to adaptation finance, including sources and options for adaptation finance; elements of design of multilateral funds that exhibit scalability and direct access features; the potential role of private sector in adaptation finance in developing countries, including [the] insurance industry'.

As mandated by COP 17, the Co-chairs said that they would submit a report to COP 18 following a review, analysis and digestion of information generated from analytical and technical discussions.

The second workshop was organised with interactive discussions (in the form of breakout groups and outreach to social media) involving climate finance experts from outside the UNFCCC.

Sizwe Nxasana, the CEO of FirstRand Limited, and Trevor Manuel, Minister in the South African Cabinet in charge of the National Planning Commission, set the scene for the three-day workshop with key-note addresses (through video link).

Minister Manuel set the political context for the discussions. He said that the issue of long-term finance cannot be deferred to 2020. He added that the commitment to fast-start finance of $30 billion and the $100 billion per year by 2020 are targets and that the $100 billion target needs to be broken down into bite-size targets.

Manuel noted that additionality (of climate finance) is important and cannot be gotten rid of. The Green Climate Fund has additional responsibility to secure the funds and a mechanism must be found to avoid the voluntary pathways that drove the fast-start finance (the initiative to provide $30 billion for 2010-12) and which will enhance predictability, certainty and clarity of funding of the Fund. He commented that there was a moral imperative, the backing of science, and certainty of existing decisions on the issue of financing for climate change.˙ The Minister said that, in part, the solution is beyond the UNFCCC, where the right people, at the level of heads of state, must become involved and that no one can escape the responsibility.

Six principles

Mattia Romani of the London School of Economics and the Global Green Growth Institute and Nick Robins of Hong Kong and Shanghai Bank (HSBC) kicked off the first session of the workshop, which focused on the scaling up of climate finance on 'Sources'.

In his presentation, Romani, who also presented at the first workshop, cited six principles of the UN Secretary-General's High-level Advisory Group on Climate Change Financing: (1) taxing the bad: source of finance from generating externalities; (2) 'additionality' as newness or innovative finance; (3) all incidence must be only on rich countries; (4) public sources are needed for adaptation and market failure; (5) scalability, robustness and credibility; and (6) raising domestic revenues in developed countries.

Robins addressed the workshop through video link. He said that a major barrier to climate finance was the lack of credible market data which is linked to the lack of a common definition of 'climate finance'. He said that private flows are not a substitute for public commitments but are going to be the largest flow to the developing countries in aggregate for climate finance. He further noted that it was important not to muddle these two areas together and stressed the need to improve the transparency and accountability of private sector investment and financing, including consistent reporting and disclosure of climate impacts and climate actions by investors.

Session two on the theme of 'enhancing enabling conditions: policies and instruments' was kicked off by Amal-Lee Amin from E3G (Third Generation Environmentalism). She addressed the issue of barriers to mobilising, scaling up and catalysing low-carbon and climate-resilient investment including the role of public policy.

She said that the investment challenge by 2030 included: $10 trillion in additional energy investment (to limit temperature rise to 2oC); shifting $26 trillion from high- to low-carbon energy investment; $145 trillion in infrastructure investment in 2030 needs to be in low-carbon climate resiliency; planning investment under uncertainty of the costs of adaptation and investment in major economies mainly in low carbon from 2020.

Amin identified policy, market and technology, and financial barriers which increase the risk and costs of investment, therefore inhibiting investment. Policy barriers, which are seen by investors as the greatest barriers, because they are out of their control, include: policy uncertainty and complexity; transaction cost to comply with policy/licensing/reporting etc.; and existing subsidies and policy support for high-carbon alternative. Market and technology barriers to investment include: relatively high upfront cost of technology; limitations of support infrastructure (e.g. Grid infrastructure - a capital-intensive investment); and immature supply chain and limited capacity of project developers. Financial barriers to investment include: traditional country risk; currency risk; and climate-specific financial risk such as deal flow problems (for example, insufficient number of commercially attractive deals, making diversification of investment portfolio difficult).

The third session of the workshop focused on the theme of 'enhancing enabling conditions: delivery and access' and was addressed by Josue Tanaka from the European Bank for Reconstruction and Development (EBRD) and Mafalda Duarte of the African Development Bank (AfDB). Tanaka presented on the theme of the private sector and discussed this in relationship with the EBRD work in Central Europe.

Duarte focused on the closing of the infrastructure gap in Africa and identified lessons to learn from the AfDB projects such as in the water sector. A portfolio approach that mixes all forms of resources and financing instruments, including official development assistance, multilateral development banks, carbon finance and private sector, in different combinations is needed. Governments have a role to play and public-private partnerships are important as a high level of concessional finance is needed especially for large-scale infrastructual projects and early-stage technology investments that are necessary for climate-related actions in Africa. This must be rooted in development (aligned with mitigation and adaptation). Duarte also added that investment in the water sector in Africa is critical and must be integrated to provide energy, food and water supply security.                                    

Majorie Williams is an international economist and climate change researcher with over 20 years' experience on issues of economic development and advocacy for women's rights.

South Korea to host Green Climate Fund 

Marjorie Williams

SONGDO, Incheon City, in the Republic of Korea has been selected to be the home of the Green Climate Fund (GCF) by the latter's Board.

This decision was taken at the second meeting of the Board, which was held in Songdo from 18-20 October, and is expected to be endorsed by the 18th meeting of the Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC) to be held in Doha, Qatar in late November.

Six countries had offered to host the GCF: Germany (Bonn), Mexico (Mexico City), Namibia (Windhoek), Poland (Warsaw), Switzerland (Geneva) and South Korea (Songdo).

The GCF was established at COP 16 in Cancun in 2010 and its governing instrument was approved in Durban in 2011 at COP 17. The selection of a host country brings the GCF one step closer to its operationalisation to help disburse climate funds to support mitigation and adaptation efforts of developing countries.

At its first meeting in Geneva in August, the GCF Board set in place a host country Evaluation Committee to conduct an open and transparent process to assess the proposals received, based on the evaluation criteria. The Committee was chaired by Audrey Joy Grant (Belize).

At its second meeting in Songdo, the Committee reported on the outcome of the evaluation. Then, through a series of confidential balloting (with ballots cast only by Board members) supervised by representatives of the Global Environment Facility (GEF) and the UNFCCC  secretariat, the options were narrowed down to one candidate. During each round of balloting, the country with the least support was eliminated, with the final selection based on the country with the majority support of the Board members. 

On 20 October, the Board by consensus agreed on Songdo as the permanent home of the GCF.  The outcomes of the initial balloting rounds were not made public.

During the course of the three-day meeting, the Board discussed a wide range of issues including additional rules of procedure, its work plan and priorities, arrangements for the interim trustee, arrangements for an independent secretariat and the selection of its Executive Director, the status of the resources and administrative budget of the GCF, and arrangements between the COP and the Fund.

The work plan and priorities of the Board

The Board agreed to work with a listing of 25 indicative priority matters in the work plan until the end of 2013. The top five of these were: the business model framework, private sector facility-related matters, resource mobilisation, results management framework and the establishment of the independent secretariat. These items also are the key agenda items proposed for discussion at the first Board meeting of 2013.

The work plan and priorities of the Board were hotly debated.

Many developing countries wanted to focus on the structural and institutional issues they saw as critical to fully operationalising the GCF, such as the arrangements for the establishment of the independent secretariat, including hiring of the Executive Director and host country arrangements and resource mobilisation (all items which were initially set to be discussed in the later part of 2013), with other members placing emphasis on the private sector facility and business model in the first meeting.  Small Island Developing States also wanted the issue of readiness and preparatory support to have priority.

In the end, agreement was reached in principle on the elements of the Board's work plan and the indicative priority matters. The interim secretariat, working with a six-member board team, was requested to prepare a set of five documents for the first Board meeting in 2013, viz.:

(1) Business model framework, covering the issue of structure and organisation of the Fund  (including structural options for the business model, models for the delivery of the Fund's resources, structural options and financial instruments in terms of leveraging potential of additional public and private sector finance, complementarity of the Fund with other channels of climate finance and linkages with thematic bodies of the Convention); private sector facility and related matters; access modalities and result management framework;

(2) Resource mobilisation, including policies and procedures for public contributions and other contributions, including from alternative sources; process and policies, participants and timeframes for resource mobilisation and subsequent replenishments;

(3) Modalities for readiness and preparatory support, including priority areas for readiness and preparatory support, mechanisms for allocation, delivery and simplified approval process for readiness and complementarity of modalities for readiness and preparatory support with other channels of climate finance;

(4) Establishment of the independent secretariat, including selection of the Executive Director, review of staffing of the interim secretariat and guidance on administrative policies; and

(5) Host country agreement - relating to provisional legal arrangements for privileges and immunities for the establishment of the independent secretariat.

As regards the document on the business model framework, a six-member committee/team is to facilitate its preparation. The interim secretariat will also solicit input from consultants, experts and stakeholders, including private sector and civil society organisations on specific matters.

Board member Dipak Dasgupta (India) proposed the  sponsoring of  three  standalone papers that will offer independent views in support of what the Board team will be doing on the vision of the GCF, resource mobilisation and how instruments can be matched with outcomes on the ground. He was of the view that these papers would complement and help to deepen the discussions.

Additional rules of procedure of the Board

Under this agenda item, three challenges confronted the Board.

First was the issue of funding the participation of advisers, in particular, for developing-country representatives. Developing countries argued for funding for the participation of advisers from developing countries and flexibility for the participation of more than one adviser per member and for alternate members to be present in the Board meeting room in the case of multi-country seats. [Presently observers, including some advisers, are sequestered in a separate meeting room from where the Board members meet. Four 'active observers' (two from civil society organisations and two from the private sector) are allowed in the Board meeting room.] There was no final decision on this matter.

A second issue raised was the matter of the working language of the Board. Many developing countries argued that effective representation and transparency dictate the use of the UN languages, or at a minimum, the provision of interpretation on an individual or request basis, in particular for French speakers. There was no consensus on this matter as some Board members were concerned about the cost implications of interpretation and translation of documents.

A third issue was the role and nature of participation of observers in the GCF Board meetings, which was an important topic of discussion. The matter of 'active observers' was well debated, in particular, whether funding should be provided for active observers. The Board agreed that funding for active observers should not go beyond funding travel and daily subsistence. There was no consensus as to whether active observers could sit at the table with Board members. This issue was particularly contentious as it was linked to the question of the parity of alternate Board members and their effective participation in the Board meetings.

On the issue of accreditation of observers to the meetings of the Board, it was proposed that provisional accreditation of accredited UNFCCC and GEF observers be agreed to until the Board approves its own process. There was some discussion to expand the list of potential observers to include national development financial institutions.

As regards the process for selection of active observers, there was a general understanding that civil society and private sector organisations would decide themselves who would represent their constituencies.

A team of six Board members was established to further deliberate on the additional rules of procedure with a view to seeking consensus and reporting back to the Board.

Arrangements for the interim trustee

The representative of the World Bank (which is the interim trustee of the GCF), in presenting its report to the Board, questioned whether the interim trustee could enter into legal arrangements with the GCF or the Board as this related to the juridical personality and legal capacity of the GCF.  

In response, while not questioning the legal status of the GCF (which was conferred juridical personality by the Durban COP), Omar El-Arini (Egypt) raised the issue of consistency of practice by the World Bank. He said that he had forwarded a document to the Bank that verified that the Bank had in fact signed an agreement with another entity before that entity had  legal personality conferred upon it or had concluded a host country agreement.

El Arini wondered why this should not be the same with the GCF.  He said that the President of the World Bank had signed a similar agreement with the Multilateral Fund under the Montreal Protocol (on ozone-depleting substances) prior to the conclusion of it attaining juridical personality and the host country agreement. In this case, he said, the Bank did not see any impediment to finalising the agreement with the Multilateral Fund and it was very odd that the Bank was adopting a different posture on the same arrangements with the GCF. El Arini expressed concern over the insistence by the Bank that it could not conclude arrangements with the Board until the Bank had evidence of the host country agreement that verified the GCF's legal status, as this could delay the operationalisation of the Fund. He pointed out that having a different approach to the matter would save the GCF time as it was not yet clear when the host country agreement (which in some cases could take up to a year) would be concluded. Hence, the current posture of the World Bank, as the interim trustee regarding an interim agreement with the GCF and the Board, raised a question mark. El Arini argued that based on past precedent, such an agreement could be concluded now.

Gilbert Metcalf (US) was of the view that the host country will have to confer legal personality under domestic law for ensuring the GCF is on sound legal footing in that country.  He argued that legal clarity is important and if there is legal uncertainty, it raises legal risks and puts at risk contributions to the GCF.  Hence, the need for a solid approach to the legal arrangements under domestic law is critical, he said.

El Arini requested that questionable references to the legal personality of the GCF be removed from the document presented for approval to the Board by the interim trustee.  This was accepted.

Arrangements for independent secretariat

There was consensus on the need to look for a highly qualified Executive Director for the GCF.

Zou Jiayi (China) argued that the candidate should have experience working in developing countries.  This point was supported by other developing-country Board members, who noted that the person should have experience working on development issues and/or working in developing countries.

There was some tension over whether or not to hire a search firm to participate in the selection process for the Executive Director, given an anticipated cost of about $200,000. Most developed countries were in support of engaging a search firm. Many developing countries, on the other hand, were of the opinion that the process could be managed internally and be cost-effective.

In addition, there were concerns that the interim secretariat (without instructions from the Board or oversight and knowledge of the Co-chairs) had already initiated and concluded a request-for-proposal process involving  the identification of 14 search firms and submission of six proposals, apparently culminating in a shortlist of one search firm. This action had been undertaken even before the first Board meeting but was not communicated to the Board or the Co-chairs until this meeting.

Many developing-country members of the Board queried the basis for the proposal for the search firm when the terms of reference for the Executive Director had not been established by the Board. Developed countries on the whole, however, were supportive of the actions taken by the interim secretariat as a 'proactive' step to be welcomed.

The Board proceeded to establish an Executive Search Committee of six of its members to explore these issues, including the terms of reference for the Executive Director, to decide on whether or not a search firm should be contracted as part of the selection process and if so, to develop terms of reference for contracting such a firm. The Committee would ultimately recommend a shortlist (not ranked) of three names to be considered for the Executive Director position. Up to $200,000, including the potential cost of a search firm, was allotted for this selection process.

The budget of the interim secretariat and interim trustee

The budget issue was also a hotly debated agenda item on two grounds: (1) the limited amount of resources currently available to the GCF Trust Fund (established by the interim trustee under its Financial Intermediary Fund arrangement, to receive and disburse contributions for the GCF) and (2) the financial gap between resources available and the proposed expenditures in the budget.

Board members especially from developing countries had a great deal of difficulty with the presentation of the budget, which they said lacked clear explanations of the assumptions behind the proposed budget lines for items such as staff travel (especially the relative costs for GEF staff versus UNFCCC staff), information technology, Board meetings and consultants (over 200 hours budgeted for this item).

Many developing-country members such as El Arini, Dasgupta, Zou and Paul Gomes (Guinea Bissau) raised issues over the request to approve a budget with a large resource gap and which was primarily based on pledges.  While developed-country members such as Metcalf, Kjetil Lund (Norway) and Rod Hilton (Australia) expressed their comfort with this practice, several developing-country members raised the issue of principles and best practices used by international organisations and multilateral funding institutions.

Gomes said that approving a budget based on pledges goes against the best practice at multilateral level.  He highlighted that with the international financial institutions, a developing country will not have its programme approved unless its resource gap is closed. He further argued that for the GCF to be driven on pledges to close its budget gap will not look good and said that the Board should seek to adopt what is the current best practice.

Dasgupta said the GCF needed valid resources and that pledges are not resources, given all that is known about pledges in practice. He said that approving the present 14-month budget was not prudent fiscal management.

The budget and related documents were revised to reflect the input and requests made by Board members.

Given that approval of the budget was also necessary in order for the trustee to approve and disburse funding, including to the interim secretariat, the budget was approved with the recording of funds available for disbursement at $2.7 million; previous pledges amounting to $2.5 million;  pledges made at the meeting of $1.5 million and strong commitments for additional pledges. The administrative budget of $7,481,000 was approved for 1 November 2012 to 31 December 2013.

Arrangements between the COP and the GCF

There were differences of opinion among Board members as to whether or not the Board should initiate the arrangements between the COP and the GCF or if this was the prerogative of the COP.

Developing-country members on the Board such as David Kaluba (Zambia), Zou, El Arini and Dasgupta  strongly argued that based on the provisions of the Convention as well as the GCF's governing instrument, and the Durban COP decision, the arrangements should be determined by the COP.

Kaluba pointed out that the COP is the superior organ or body that gives the guidance and it should be left to form its mandate and its role. He said that the Board should not assume the role of the COP on how the arrangements should be handled. Zou agreed that the Fund is a mechanism under the guidance of the COP and as such, the arrangements should be initiated by the COP not the Board.

On the other hand, Metcalf, Hilton, Nick Dyer (UK) and Arnaud Buisse (France) were of the opinion that the Board should take the initiative and undertake the draft arrangements.

Given the disagreements, the Co-chairs concluded that there was no consensus on the issue.

The Board also established the practice of subcommittees or teams as useful working modalities.

Thus far there have been four operational  six-member teams: (1)  the Evaluation Committee for  the selection process for the host country; (2) a team for working on additional rules of procedure [consisting of Per Callesen (Denmark), Dasgupta (chair), El Arini, Beata  Jaczewska (Poland), Metcalf and George Zedginidze (Georgia)]; (3) a team to deliberate on the work plan [consisting of Buisse, Dyer, Derek Gibbs (Barbados), Lund, Tosi Mpanu Mpanu (Democratic Republic of Congo) and Adriana Soto (Colombia, chair)]; (4) an Executive Director Selection Committee (also with six Board members  whose names are to be announced) to oversee the selection process and make recommendations to the Board.

The next meeting of the Board of the GCF will take place in Berlin, Germany, on 12-15 March 2013. 

*Third World Resurgence No. 264/265, August/September 2012, pp 31-37
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