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
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
Slide 2
Getting to the right modalities
.
Theory of change
Strategic cases/ Business
cases
Full transparency
Challenge Fund and Board
Right places
Doing the right
thing – learning,
LCD vs poverty
reduction
Slide 3
Risk, VFM,
Pace and Size
of investment
In the right way
– central vs
decentralised
Learning and
testing
objectives
Capacity of
delivery
partners and
respective
roles
Right partners
– private
sector
Right
instruments –
testing new
instruments
returnable
capital
Continuum of decentralised climate financing modalities
Non-BS FA
National
Climate
Funds
Projects
Topped-up
Sectoral FA
Forms of Budget Support
Virtual
CC
Climate
PolicyFunds
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:
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?
• 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?
Degree of earmarking
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?
Source: DFID
Some programmatic instruments – in practice
1. Budget support mechanisms –
1. World Bank in Vietnam. Accounts for funds solely against agreed policy reforms.
2. 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
3. Opens possibility of virtual funds.
2. Results based funding.
1. May work for one donor or for a small country with a limited set of issues.
2. 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.
3. Non budget Financial Assistance
1. Can be harmonised and aligned, going through government systems.
2. Often uses same mechanisms as budget support but is too tightly earmarked to meet
the DAC definition of BS. Similar to common pool approaches.
3. Govt puts 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
4. Policy dialogue still possible around the effective projects.
5. Uganda renewable energy feed-in tariff another example/UN CDF LoCAL programme
Continuum of central and regional financing modalities
Core
contribut
ions
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.
GCF/
Climate
Investment
Funds
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?
Levels of
MDB
Trust
Funds
Plurilateral
(multicountry/
multi
partner)
Pros:
Pros:
• Even more
targeted. Can be
more specific
about results.
Good testing
ground.UCCRP,
SAWI
Creating new
regional/global
institutions
Cons:
Can be blunt
instruments to
achieve
objectives
•Not core to MDB
mandate and still
strongly lending
modality
Questions:
Develop scaled
up models
Cons:
Not aligned
with country
•How do your
ensure political will
through these
prog
influence,
earmarking
Multilateral
funds in
country
Pros:
•MDB administered,
multi-sectoral. Eg
BCCRF, CHIP in
Ethiopia
Cons:
•Takes long to setup
and implement.
Questions:
- Increasing
accountability, and
legitimacy of these
funds
Some examples
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
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.
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 CP3 is 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.
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.
7
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
Blending international and domestic finance
At the multilateral level – need to strengthen
The expertise and capacity of even the MDBs to 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