FINANCE CLINIC: The Investment & Financial Flows Assessment and its application

1. FINANCE CLINIC: The Investment & Financial Flows Assessment and its application for LEDS & NAMAs

2. Presentation overview • Introduction (25 mins) • Context • I&FF methodology overview • Key results • Clarifications • I&FF Methodology: in depth (25 mins) • Key definitions • Approach • Example: Namibia electricity generation • Discussion (40 mins)

3. $6M global project funded by Norway, Switzerland, Finland, UNDP, UNF Implemented against backdrop of Bali Road Map (2008-12) Objectives Increased national capacity to co-ordinate inter-ministerial views & enhance participation in UNFCCC process Support for long-term climate change planning and priority setting, in order to provide a better understanding of the magnitude and intensity of national efforts required to tackle climate change UNDP project: Capacity Development for Policy Makers to Address Climate Change

4. What does the I&FF assessment seek to answer? From a development perspective, what does my country need to do to address climate change in selected key sectors, and what financial landscape will be required to achieve those needs?

5. Components of UNDP’s climate finance readiness framework I&FF can support

6. I&FF applicability to LEDS & NAMA development Methodological approach is scalable: Can be used to cost out a sectoral LEDS or a single NAMA Provides sense of who are the core investors & what types of policy changes might be required to attract investment • Chile and Costa Rica: I&FF results for transport sector provided inputs to underlying analysis for transport NAMAs • Colombia: I&FF study on panela being scaled up to NAMA • Bangladesh: I&FF provided baseline information for climate public expenditure & investment review • Niger: I&FF results incorporated into National Action Plan for Climate Change and National Development Plan • Paraguay: I&FF results fed into national CC policy and national mitigation plan

7. Presentation overview • Introduction (25 mins) • Context • I&FF methodology overview • Key results • Clarifications • I&FF Methodology: in depth (25 mins) • Key definitions • Approach • Example: Namibia electricity generation • Discussion (40 mins)

8. Methodology development: Investment & Financial Flows Assessment Approach: • I&FF approach adapted from UNFCCC methodology used for estimating global flows  bottom-up approach for national estimates • Sectoral guidance chapters elaborated by five regional centres • Extensive peer review process Applied in: Bangladesh, Colombia, Costa Rica, Dominican Republic, Ecuador, Gambia, Honduras, Liberia, Namibia, Niger, Paraguay, Peru, Togo, Turkmenistan, Uruguay

9. WHAT? What does national I&FF assessment seek to answer? The I&FF assessment considers: What are the adaptation/ mitigation options for key sectors in the next 25 years? Who is currently investing in the sector? Who are the major players & funding sources within government, private sector & households? What shifts/increases in I&FF will be needed in the sector? What will be the overall needs for additional I&FF to address climate change? What policies & incentives are suitable to induce the necessary shifts & changes?

10. For each sector, evaluate investments & financial flows for two policy scenarios: Reference scenario Adaptation or mitigation scenario Cost the additional flows needed to implement new adaptation or mitigation measures: that is, subtract the difference between the two scenarios Disaggregate by: years type of measures, investment entities (government, private sector, households), funding sources (domestic, ODA, …) HOW? I&FF methodology

11. WHO? I&FF assessment requires multi-disciplinary team • For each sector: • Environmental/climate specialists to build scenarios • Planning experts to: • Assess implications of the scenarios on existing development plans in chosen sectors & consider how mitigation or adaptation measures would be implemented • Finance/economics experts to cost the measures • Representatives from all relevant ministries • Academic, NGO, & private sector inputs also useful

13. Example: Costa Rica (biodiversity – adaptation)

14. Presentation overview • Introduction (25 mins) • Context • I&FF methodology overview • Key results • Clarifications • I&FF Methodology: in depth (25 mins) • Key definitions • Approach • Example: Namibia electricity generation • Discussion (40 mins)

15. Key sectors identified for I&FF assessments under UNDP project

16. Overview: Results by sector * M = mitigation; A = adaptation

17. Overview: Results by sector (2) * A = adaptation

18. Key takeaways: view I&FF results in context The I&FF assessments are not a mere costing exercise, but an analysis of the whole financial landscape of a sector All countries used same I&FF methodology, but decided individually what sectors to select & what measures to analyze within each sector  scope (& discount rate) has impact on the results Results comparable with those of World Bank (Economics of Adaptation to Climate Change) & UNFCCC (National Economic, Environment & Development Study (NEEDS))

19. Takeaways: Sectoral considerations Additional costs may seem large, but must be considered within context of planned baseline expenditures, e.g. in Peru, baseline for agriculture was US$5,435 M, while adaptation scenario was US$ 5,759 M additional cost US$324 M (↑ 6%) In many cases, the assessments show shifts in investments are necessary, e.g. from one technology to another, or one subsector to another  policies are key Savings from implementing measures possible: esp. in energy mitigation due to increased energy efficiency, however those savings cannot always be shifted on to other measures in the scenarios because of the “owner” of the savings may differ

20. Examples Some measures result in net savings, e.g. in Namibia, replacing diesel generators with solar power in off-grid communities would generate $US 1,124 M in savings (due to low O&M), but solar has higher upfront cost In Dominican Republic, selected mitigation measures in electricity subsector require $5.82 billion of investments, but generate $16.12 billion in savings (from O&M) what policy/ incentive mix would encourage uptake of these mitigation measures?

21. Lessons learned Creating BAU and climate change scenarios involves complex set of decisions and remains a challenge for many countries – additionally, policy makers may not always agree with proposed measures in the scenarios It is necessary to define very concrete measures for the scenarios so that they can be adequately costed and prioritized The separation of Operation & Maintenance costs from other investment costs (flows) was found to be very useful

22. All I&FF results online More information on the I&FF methodology, country results, & an extensive database: www.undpcc.org  Methodology in 4 languages: English, French, Spanish, Russian

23. Q&A CLARIFICATIONS ? ? ? ? ? ? ? ? ?

24. Presentation overview • Introduction (25 mins) • Context • I&FF methodology overview • Key results • Clarifications • I&FF Methodology: in depth (25 mins) • Key definitions • Approach • Example: Namibia electricity generation • Discussion (40 mins)

25. An investment flow (IF) is the capital cost of a new physical asset with a lifetime of more than 1 year, e.g. capital cost of a new power plant, a new automobile, a new household appliance, or a new agricultural irrigation system. Investment flows are limited to new physical assets because we are considering the climate change implications for the duration of the operating lives of the facilities and equipment purchased. Key definitions: Investment Flow

26. A financial flow (FF) is an ongoing expenditure on programmatic measures. Financial flows encompass expenditures other than those for expansion or installation of physical assets, e.g., agricultural extension program for farmers, a malaria prevention program to distribute mosquito nets. Key definitions: Financial Flow

27. Physical assets purchased with investment flows will have operation & maintenance (O&M) costs associated with them, i.e., ongoing fixed and variable costs such as salaries and raw materials O&M costs need to be included because they can vary considerably among investment flow types & have a significant effect on the total cost of an investment Key definitions: operation & maintenance (O&M)

28. Example: mitigation measures

29. Key definitions: investment entities & financial sources Identification of the entities responsible for the investment decisions, and the sources of the funds that are invested, is an important component of an I&FF assessment because this information is the starting point for the evaluation of policies to change those decisions. B ODA (official development assistance) provided to private corporations is primarily foreign aid that is given to non-governmental organizations (NGOs).

30. Presentation overview • Introduction (25 mins) • Context • I&FF methodology overview • Key results • Clarifications • I&FF Methodology: in depth (25 mins) • Key definitions • Approach • Example: Namibia electricity generation • Discussion (40 mins)

31. Steps in the Sectoral Assessments of I&FF to Address Climate Change

32. 1. Establish key parameters of assessment • Define detailed scope of the sector • Identify preliminary mitigation (or adaptation) measures • I&FF does not quantify co-benefits, however qualitative assessment is recommended • Specify assessment period & base year • Base year 2005 recommended (or latest available) • Assessment period of 2005-2030 recommended • Select analytical approach

33. 2. Compile historical I&FF data and other input data for scenarios • Compile annual I&FF data, disaggregated by investment entity, source, & investment flow versus financial flow • Compile annual historical O&M data, disaggregated by investment entity & source • Compile other input data for scenarios

34. 2. Compile historical I&FF data and other input data for scenarios • Compile historical annual data on investments, financial flows, and operation & maintenance costs • At least 3 to 10 years of historical data should be collected • I&FF data should be • Compiled for each investment type • Annual • Disaggregated by investment entity & source • Divided into investment & financial flows • Compile information about the expected lifetimes of the assets in operation during the historical period

35. Cost accounting issues Constant 2005 US$ are recommended Costs for assets should be reported in the year in which they are expected to be incurred Discounting of costs should be done – it is recommended to apply one public discount rate and one private discount rate 2. Compile historical I&FF data and other input data for scenarios

36. 3. Define reference/baseline scenario Describe: • Socioeconomic trends • Technological change/advances • Business-as-usual investments • Define model/approach to be used for the assessment

37. 4. Derive I&FF for baseline scenario • Derive annual IF & FF estimates, disaggregated by investment entity (households, corporations, government) and source (domestic or external) • Derive annual O&M estimates, disaggregated by investment entity & source

38. Sector is selected for Adaptation • A baseline scenario & an adaptation scenario will be developed for that sector Sector is selected for Mitigation • A baseline scenario & a mitigation scenario will be developed for that sector

39. Derive annual IF & FF estimates, disaggregated by investment entity (households, corporations, government) and source (domestic or external) • Derive annual O&M estimates, disaggregated by investment entity & source

40. Estimate the changes in I&FF needed to implement the mitigation (or adaptation) measures in the sector in order to determine: • How cumulative incremental I&FF will change • How annual investments will change

41. Calculating how the cumulative changes in IF & FF between the baseline scenario & the climate change scenario will change: • First, estimate the total IF & FF needed to implement each investment type in the sector • Second, sum all the values from the first calculation to estimate the total IF & FF needed to implement all the investment types in the sector

42. Examples from Costa Rica Total cumulative sum of investments (2010-2030) in biodiversity sector, by investment type Total cumulative sum of investments (2010-2030) in each sector, by funding source Adaptation scenario Baseline Difference

43. Calculating how annual investments between the baseline scenario & the climate change scenario will change • First, estimate the IF & FF needed to implement each investment type in the sector -- shows how investments in individual investment types would change over time • Second, estimate the IF & FF needed to implement all investment types in the sector, for each source/ investment entity -- shows how investments by each source/investment entitychange over time • Third, estimate IF & FF for all investment types in the sector, & for all sources -- shows how total investments in the sector change over time

44. Costa Rica: Annual additional cost of investments (2010-2030) for biodiversity & water sectors Water Biodiversity

45. 8. Evaluate policy implications • Determine policy instruments & measures to encourage changes in I&FF • Identify the entities that are responsible for the significant incremental changes in I&FF • Determine the predominant sources of their funds, important to distinguish between public & private sources of finance

46. 9. Synthesize results and complete report • Integrate I&FF results, & evaluation of policy instruments & measures, across sectors, & across mitigation & adaptation • Summarize objectives of study, methodology, inputs, & results in report • Complete reporting templates

47. Investment & financial flows example: Namibia (2011) Sub-sector: electricity generation Scope: national

48. Namibia context • Total electricity demand far exceeds local electricity supplies -- total installed electricity generation capacity in mid-2008 was 387 MW, while the peak demand exceeds 500 MW • In 2005, some 50% imported from neighbouring countries such as South Africa and Zimbabwe • Electricity demand expected to triple to about 10 TWh by 2030 • Small population (2 million) over large land area (800,000 km²) • High total annual per capita energy consumption due to: • Energy-dependent sectors of mining and agriculture • Long transport routes • high reliance on imports of fuels, consumer goods and manufactured products

49. Electricity generation – historical IF, FF and O&M (base year 2005) Electricity Base Year IF & FF Data, By Investment Type, Investment Entity, and Funding Source (million 2005 US$)

50. Namibia baseline scenario: electricity generation • According to 2005 Rural Electrification Master Plan, only 1/3 of Namibia’s population had access to electricity (67% of urban areas and 10% of rural areas) • Under the baseline scenario, assumed provision of power to supply electricity to all households is through off-grid diesel generation • Total cost of investments estimated at US$1,147 million between 2005 to 2030 (NPV $US 2005) • BAU based on new hydropower, coal and diesel investments • Hydropower plants in 2012, 2013, 2017 and 2019 • Coal plant in 2015 • Diesel – rural electrification