CIFs sunset clause: models for future operations
Following the CIF evaluation’s recommendation that the CIFs consider the CIF ‘sunset clause’, (see box) the November joint CTF-SCF committee meeting will discuss the document Models for the future operations of the CIF. Under the sunset clause the CIFs are due to end once a new climate finance architecture is effective under the United Nations Framework Convention on Climate Change (UNFCCC) through a mechanism, such as the Green Climate Fund (GCF).
In the June joint sub-committee meeting, committee members and pilot countries were asked to submit “their views and comments to guide the preparation of the paper.” In general there was agreement that clear criteria were needed to determine when a new financial architecture is effective, and when financing already approved should be available for implementation. Brazil’s submission stressed that new conditions should not be imposed on countries receiving CIF funds, that there should be increasing climate finance for developing countries and “the decision-making autonomy of different Funds should be acknowledged, and modalities for future operations should not prejudge decisions that are fully outside the governability of the CIF governing bodies.” Civil society observer World Resources Institute covered many of the areas already mentioned by government submissions, and queried: “What set of safeguards will approved and under implementation projects use going forward?” and “Will there be another evaluation of the CIFs, including a summative evaluation? Who will conduct any future evaluation?”
The document proposes four non-mutually exclusive potential models for the future operations of the CIF. Furthermore, it clarifies that the models “have not been discussed with the GCF and do not, in any form, prejudge any discussion or decision by the GCF board on any of these models”:
- Winding down of CIF operations;
- CIFs operating as a sub-fund or a funding mechanism of the GCF;
- Complete integration of the CIF into the GCF;
- CIFs continuing as they are or with modifications, as appropriate.
The document also discusses several approaches to determining when “the new financial architecture is effective”, and thus the point at which CIF operations would sunset, including:
- Receipt of contributions for the purpose of meeting the objectives of GCF;
- Approval or allocation of resources by the GCF;
- Delivery of resources by the GCF.
The document proposes to “continue monitoring the progress of the GCF to make a decision as to when the trustee should stop receiving new contributions, at a future joint meeting, but no later than in two years”, and for the CIF administrative unit to work with the trustee and MDBs to “prepare a paper to set forth further details of the necessary steps and the indicative timeline for implementing” the selected option(s) and for the proposed transitional strategy to be considered by a future joint committee in 2015 or 2016.
A strong recurrent theme in the document is the need to ensure that lessons are learned from the CIFs: “The knowledge, expertise, and experience of the CIF should be preserved, documented, and actively shared by the CIF administrative unit and MDBs with the GCF and other relevant entities.” Moreover, the document notes: “Presently, all CIF resources have been allocated to the existing four programmes. However, there is a funding gap to meet the existing commitments made to date. In addition, over 82 countries have expressed interest in participating in the CIF. To meet this demand and fulfil all commitments made, the CIF will require an allocation of additional resources of around $1.7 billion to meet the demand in the near term.”
Graph 1: Total funding approved by fund (figures up to 30 September 2014)
Graph 2. Total projects approved by fund (figures up to 30 September 2014)
CIF evaluation published
The final version of the CIF evaluation was published shortly before the CIF committee meetings in June, nearly two years after the launch of the process. The evaluation aimed to assess the development and organisational effectiveness of the CIFs and to document lessons learned for “the benefit of the Green Climate Fund” (see CIFs Monitor 9, 8, 7). The evaluation noted that “the CIFs have not yet clarified their interpretation of how and when to exercise the sunset clause, introducing uncertainty in their operations”. Instead: “Amidst this uncertainty, SREP has moved forward with new pilot countries and some contributors have made known their intent to pledge funds, while PPCR, FIP, and CTF have held dialogue regarding expansion, but have elected not to expand to new countries at this time.” The evaluation also raised governance issues, including “tension between trusting MDB systems and ensuring accountability at the CIF-level”, with “no formal process for applying quality control, safeguards, or evaluation at the level of the country investment plan.”
The evaluation found that the CIFs “have not devised a way to explicitly manage the trade-offs between climate and broader development benefits”, highlighting the removal of development benefit indicators from the core national and programme performance indicators for CTF and SREP in an effort to “simplify” the results framework. Moreover, according to the evaluation “only 43 per cent of CTF projects reviewed identified an explicit poverty-related impact.” While confirming that “the SCF consultation process has been more inclusive than that of the CTF”, it raised concerns “about the quality and depth of stakeholder engagement and inclusiveness, particularly with regard to women and indigenous people.” The evaluation also criticised the CIFs’ alleged ability to “leverage” other funds, calling the term misleading. It asked the CIFs for a more “realistic understanding” of what additional funds it has actually mobilised as a consequence of its investment and asked the CIFs “to discontinue the use of the term”.
The CIF draft management response to the evaluation agreed with some findings, but did “not feel that the evaluation adequately recognised some of the key characteristics of accomplishments of the CIF”. On the trade-off between climate and development benefits it “disagree[d] that this is necessary”, arguing that the CIFs are “built on the premise that climate change is a development issue”, and that therefore “all CIF projects deliver development impact.” It expressed particular concerns over the findings on FIP, arguing that “they are not well balanced and do not fully reflect the achievements and challenges of the FIP to date”, including the evaluation conclusion that “FIP investment plans have not addressed the main drivers of deforestation”. On the CIF’s ability to leverage funds, the management disagreed with the findings and confirmed that it will continue to use the term, while ensuring that the “reporting is accurate and clear, and that no claims of causality of leverage are made.” On stakeholder engagement, it noted “expectations should be set adequately in terms of how much can be expected … to ensure effective stakeholder engagement in decision making.”
An action plan was agreed in the joint CTF and SCF committee meeting in June. Out of the 11 actions outlined some referred to activities already in progress, such as to “implement the gender action plan” and a paper on how to enhance national level stakeholder engagement. New actions included the preparation of a paper for the November meeting “exploring issues, options and possible models for the future operations of the CIF”, including consideration of the CIF ‘sunset clause’(see above), and to “retire requirements for independent technical reviews of CTF projects”. In the meeting, the latter was opposed by Canada and the US, which instead proposed improvements.
In the June CIFs meetings, 15 new countries were invited to join the CIFs. Out of these, 14 were invited to join SREP: Bangladesh, Benin, Cambodia, Ghana, Haiti, Kiribati, Lesotho, Madagascar, Malawi, Nicaragua, Rwanda, Sierra Leone, Uganda, and Zambia (see SREP chapter). This more than doubles the number of pilot countries under SREP. One country, Libya, was invited to join the CTF Middle East and North Africa region’s revised investment plan. However, according to the MDBs, joining the regional plan does not make Libya a pilot country (see CTF chapter). An additional 42 countries have expressed interest to join FIP, of which 23 are participating in REDD+ readiness programmes supported by the Forest Carbon Partnership Facility (FCPF) and the UN-REDD Programme (see FIP chapter). Proposals to expand PPCR will be discussed in the November sub-committee meeting, however, a projected funding shortfall has also been noted for projects in current pilot countries (see PPCR chapter).
Private sector set-asides review
The November meeting will consider a review of the private sector set-asides of the Strategic Climate Fund prepared by consultancy Vivid Economics. The review noted that projects worth $200 million of concessional financing have been endorsed since the private sector set-asides were created in 2012-2013. However, it noted that “many pilot countries, have been reluctant to allocate SCF resources to private sector projects” mainly because the “demand for public sector climate investments outweighs the available SCF resources.” This has meant that by end September “less than five per cent of the funding approved by MDBs in each of the three programmes has been for private sector projects.”
According to the review, key challenges for taking forward the private sector set-asides include integrating the set asides into MDB processes due to “uncertainty over whether project concepts would be approved and the limited time available to develop the concepts has been a constraint on quantity, quality and innovation”. The review also concluded that “geographic restrictions on the countries eligible to apply for set-aside resources have limited the number of high quality project concepts submitted and accepted.”
The review presented a number of strategic options for addressing the challenges, including: allowing a “broader range of organisations to submit project concepts”; removing the objective for competitive allocation; and promoting “a less direct form of competition through an open window with annual funding envelopes and quarterly or semi-annual calls for proposals.” The review recommended providing “tiered grant funding for MDBs to develop proposals”, placing “less emphasis on MDB co-finance in evaluating and selecting concepts” and allowing “expansion to other SCF and/or CIF countries on a programme-by-programme basis”.
CIFs risk report
The June joint meeting of the CTF and SCF trust fund committees reviewed the document Risk report on CTF and SCF trust funds. The most common risks identified were on financial management portfolio, credit, market interest rate and foreign exchange, pledge, misuse of funds, impact, operational portfolio, pipeline management, and financing terms. These risks will be discussed again at the November CIFs meetings.
With regard to mitigating risk under the SCF, the meeting requested the CIF administrative unit, MDBs and the trustee to closely manage and monitor the PPCR pipeline, portfolio and contribution schedule. On the CTF the committees requested the CIF administrative unit, the MDBs and the trustee to closely manage the pipeline, portfolio and contribution schedule to manage the declining margin between projected CTF net income and loan losses. The trustee was asked to work with the MDBs to refine loss rates and private sector returns assumptions in the CTF cash flow model; and to manage the potential funding shortage for the CTF.
Update on the Green Climate Fund (GCF)
At the October GCF meetings in Barbados decisions were taken on several issues, including policies on funding contributions, country ownership, eligibility to receive funds from the GCF (accreditation), trustee arrangements, readiness programme, terms and conditions for grants and concessional loans, and direct access. The board also decided that funding proposals will only be considered when they are accompanied by a formal letter from developing countries indicating that they have “no objection” to the investment.
A proposal by developed countries, including the US, UK, Japan and the Netherlands, for GCF board votes to be linked to contributions, rather than consensus decisions, was not approved. Developing countries strongly criticised the proposal, with China stating that the GCF is not a company or bank and therefore as a public good it “should not link the decision-making process with contributions”. South Africa said, “all countries must be valued equally and be treated equally whether they pay or not. We don’t want a headline in the media saying: GCF votes for sale”. The representative for Barbados criticised the proposal saying: “I cannot go home to my wife and say that I contribute the most and hence I have a certain share in decision-making. I will be thrown out. Similarly, it cannot be that as developed countries contribute more, they have more say in the process.” The GCF secretariat will look at other options for decision making in the absence of consensus.
In a significant decision, the board decided that the World Bank will continue in its controversial role as interim trustee (particularly due to its continuing investments in fossil fuels) until a permanent trustee is appointed. In practice this means the World Bank could remain interim trustee until early 2018. Decisions are still outstanding on the investment framework, gender policy and the role of the private sector facility.
In October civil society re-sent a letter to the GCF board, previously sent in May by nearly 300 groups, calling for fossil fuel projects to be excluded from GCF funding. The organisations noted “grave concern and alarm how other international financial institutions include these types of projects in their climate and energy financing, under the logic of ‘lower carbon’ energy and switching to ‘lower emissions’ fuels.” The letter stressed that financing any fossil fuels and harmful energy through the Green Climate Fund is “unacceptable” and is “fundamentally in conflict” with its mandate.
The next GCF board meeting is scheduled for the end of February 2015 in Songdo, South Korea.
Climate Investment Funds (CIFs) explained
The World Bank-housed Climate Investment Funds (CIFs) are financing instruments designed to pilot low-carbon and climate-resilient development through the multilateral development banks (MDBs). They are comprised of two trust funds – the Clean Technology Fund (CTF) and the Strategic Climate Fund (SCF). The SCF is an overarching fund aimed at piloting new development approaches. It consists of three targeted programmes: Pilot Program for Climate Resilience (PPCR), Forest Investment Program (FIP) and Scaling up Renewable Energy Program in Low Income Countries (SREP).
The CIFs operate in 63 countries worldwide. As of end 2013 donors had pledged $5.5 billion to the CTF and nearly $2.5 billion to the SCF ($1.3 billion for PPCR, $639 million for FIP and $551 million for SREP). As of end September a total of $5.3 billion had been approved for funding of 167 programmes and projects from the endorsed investment plans. Projects are executed by multilateral development banks (MDBs): the African Development Bank (AfDB), the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IDB), the World Bank’s middle income arm, the International Bank for Reconstruction and Development (IBRD), and its private sector arm, the International Finance Corporation (IFC). Under the ‘sunset clause’ the CIFs are due to end once a new climate finance architecture is effective under the United Nations Framework Convention on Climate Change (UNFCCC) through a mechanism, such as the Green Climate Fund (GCF).