DFID approach through different financing modalities

1. DFID approach through different financing modalities Shailaja Annamraju Lead Economic Adviser, Asia regional climate change Department for International Development Breakout group 6 Modalities for funding: blending international climate finance with domestic climate finance through different funding modalities 2-3 December 2013, Incheon, Korea

2. UK climate finance modalities • UK has an International Climate Fund • £3.8 billion over 5 years • Split between 3 UK Government departments (DFID, DECC, Defra) • 3 themes (50 % for adaptation, mitigation, forestry) • Spent through country regional (30%), through plurilateral (40%), and through multilateral programmes (30%). • Climate finance modalities therefore are dependent on: • Overall objectives of the ICF - reducing numbers of vulnerable, harnessing financing, and getting country to move to low carbon pathways • Political economy factors within the UK government • Centralised versus decentralised financing mechanisms • Models which will bring private, public, and now domestic finance

3. Capacity of delivery partners and respective roles Getting to the rightmodalities . Theory of change Strategic cases/ Business cases Full transparency Challenge Fund and Board Risk, VFM, Pace and Size of investment Right partners – private sector In the right way – central vs decentralised Right places Right instruments – testing new instruments returnable capital Doing the right thing – learning, LCD vs poverty reduction Learning and testing objectives

4. Continuum of decentralised climate financing modalities Projects Non-BS FA Forms of Budget Support National Climate Funds Topped-up Sectoral FA Virtual Climate Funds CC Policy-Based BS Degree of flexibility so potentially greater alignment/effectiveness • Pros: • allow experimentation & learning of what sorts of climate spend are most effective • ease with which UK climate finance can be tracked • fiduciary risk perceived as low • Cons: • extent to which really in line with partner Govt priorities • risk weak allocative efficiency? • Questions: • how closely has partner govt been involved in project design? • is the project on-budget? • Pros: • should lead to greater allocative efficiency than NCF • should help with mainstreaming • Cons: • Many sectors do not have SBS • fungibility means can be hard to prove additionality • greater fiduciary risks • Questions: • does the sector have a clear CC strategy? • Pros: • permit greater govt control and so should lead to greater alignment with national priorities • allow pooling with other donors so lower admin burden for donor • fiduciary risk can be lower than for budget support • ability to track • India MNREGA example • Cons: • requirement to prove spending is on CC can drive sub-optimal spend • capacity demands • time take to set up • Questions: • is the Fund allocated against a clear climate strategy? • is NCF on-budget? • can it fund incremental costs of CC? • Pros: • flexible support so should have high allocative efficiency • encourages mainstreaming • Cons: • assumes we know what is effective climate spend • fungibility Q over additionality • fiduciary risks • Questions: • Is there a national climate strategy • do systems exist to allow tracking of spend? • do credible M&E systems exist? • Pros: • focus on policy dialogue means most strategic • Cons: • may not generate financial data –hard to track additionality? • Questions: • what size of disbursement is justified by a policy reform? Degree of earmarking Source: DFID

5. Some programmatic instruments – in practice • Budget support mechanisms – • World Bank in Vietnam. Accounts for funds solely against agreed policy reforms. • Might need budget codes for tracking purposes as precursor. Bangladesh and Nepal, Vietnam – have them. Needed for counterfactual, additionality of our support, reduce fungibility, and tracking of spend. Would need full fungibility analysis • Opens possibility of virtual funds. • Results based funding. • May work for one donor or for a small country with a limited set of issues. • In Guyana – the EC is trying a results based budget support for their mangrove action plan. Payment is therefore linked to a release triggered by eg an agreed length of mangroves planted. EC does check that their funds flow to the appropriate sector. • Non budget Financial Assistance • Can be harmonised and aligned, going through government systems. • Often uses same mechanisms as budget support but is too tightly earmarked to meet the DAC definition of BS.  Similar to common pool approaches. • Govtputs some of its own funds in (eg Mozambique health sector), identifies ‘projects’ within its budget – or develop them with donors, akin to the Guyanese mangrove action plan • Policy dialogue still possible around the effective projects. • Uganda renewable energy feed-in tariff another example/UN CDFLoCAL programme

6. Continuum of central and regional financing modalities Core contributions GCF/ Climate Investment Funds MDB Trust Funds Plurilateral (multi-country/ multi partner) Multilateral funds in country Pros: Creating new regional/global institutions Develop scaled up models Cons: Can be blunt instruments to achieve objectives Not aligned with country • Pros: • Even more targeted. Can be more specific about results. Good testing ground.UCCRP, SAWI • Cons: • Not core to MDB mandate and still strongly lending modality • Questions: • How do your ensure political will through these prog • Pros: • Core to the mandate of the MDBs and their knowledge role. GEF, GFDRR, IFAD • Cons: • Blunt instrument for achieving cc objectives in country • Questions: • Has not blended well yet with incentives. But IDA 17 cc is core UK ask. • Pros: • Core mandate is achieving climate objectives • Creation of new institutions • Cons: • Longtime to design • and takes long to implement • Question: Have countries been involved in design? • Pros: • MDB administered, multi-sectoral. EgBCCRF, CHIP in Ethiopia • Cons: • Takes long to setup and implement. • Questions: • - Increasing accountability, and legitimacy of these funds

7. Climate Proofing Growth and Development • Problem – All countries trying to integrate cc into planning, investments and budgets. • Programme: Regional learning programme on help 5 countries, £28.5m. Shared regional technical assistance facility, national units, and government steering committees • Potential issues: Need for flexibility, broad scope, establishing Ministry leads, Prioritisation • Climate Public Private Partnerships • Problem: Developing countries lack viable and cost-effective access to capital markets and financial expertise needed to properly invest • Programme: £130 m through 2 private equity funds, 20,000 jobs and clean energy sources expected. The aim of CP3is to demonstrate to the private sector that climate friendly investments in developing countries are financially viable. • Issues - Central lending mechanism can they delivery on CC. Some examples • Adaptation for Small Scale Agriculture Production • Problem – The costs of not adapting agriculture to climate could be about 5% of world's GDP by 2050. Smallholder farmers in developing countries are already at risk from climate variability • Programme – £150m, through IFAD helping 6m farmers. Investing in practices and knowledge and access to markets and information to help smallholder farmers adapt to climate change. Working with governments on policies. • Blending issues • Blending this money with IFAD programmes so need for incremental costs to be identified. • Urban Climate Change Resilience Partnership • Problem: In densely-populated cities with rising populations in Asia, without proactive plans and investments, poor and vulnerable people will struggle to cope with even heavy rainfall, let alone extreme weather events. • Programme: $145m in partnership with ADB, RF, USAID helping 2 m urban poor by improving integrating cc into city planning processes, investing in practical measures and in mobilising domestic/international finance for resilient infrastructure projects in 25 cities in 6 countries in Asia. • Blending issues –Capacity and governance of municipalities, how municipalities are financed and ability to borrow will be key.

8. Blending international/country finance modalities – some observations Objectives • Clear objectives of what you want to achieve and how you can get there. Start with the problem and framing of options. • Portfolio of spend needs to shift from centralised to decentralised mechanisms Governance • Better to have climate finance managed by an autonomous multi-stakeholder government steered body. • Most countries have fragmented climate finance. Choose modality which is channeled through systems to reduce burden on government. Often modality is picked because of lack of donor resources to manage. • Shape of current mechanisms are correlated with donor capacity, government and partner capacity but not if your ability to manage is less. • Level of government coordination and donor coordination is just beginning. Coordination capacity with various line agencies at local level is also needed. Capacity to design and manage new financing mechanisms • MoEF experience of managing international finance, not been their mandate till recently. • Strengthen Ministry of Finance ability to monitor domestic and international climate finance – expenditure coding, tracking etc

9. Blending international and domestic finance At the multilateral level – need to strengthen • The expertise and capacity of even the MDBsto have the right incentivises to deliver climate change are not there Private sector • Bringing in the private sector is not an add on objective • Tensions exist between the constraint of country ownership/political buy-in versus commercial decision making. • Risk sharing: how far should the public sector go to make a project financially viable? • Do we need more decentralised approaches for increased private sector models for eg. to support SMEs? • Procurement co-ordination: a hundred country-level solar buying projects… How to maximise effectiveness, avoid duplication, centralise accessible expertise New instruments for learning, for scale up, for franchising and for regional public goods. • Regional public goods: Role of donors in regional cooperative solutions/ what modalities exist? • Scope for corruption with the rise of so many new climate finance modalities – thinking through the checks and balances. Monitoring and evaluation • Coordinate to reduce unnecessary duplication of effort in measuring results • Improved comparability of results to support better decision making