Read a pdf version of CIFs Monitor 13

Concerns over resource shortfall

Concerns remain over the shortfall in resources for the CTF (see CIFs Monitor 12, 11). In the November 2015 CTF trust fund committee meeting it was decided that there should not be any over-programming of restricted funds or any additional contributions until otherwise decided. The committee also repeated its calls for the CIF Administrative Unit to work with the MDBs to explore pipeline management, including a potential cancellation policy.

The April CTF semi-annual operational report reconfirmed the concerns, noting that by end of 2015 $4.5 billion (out of $5.6 billion in total pledges), had been committed to 92 projects and programmes. This leaves $709 million available to commit, with a potential addition of $264 million, which includes an expected further contribution from the US. According to the report, this will cover all projects scheduled to be submitted for approval until September 2016, however, when considering all projects in the pipeline there is an expected resource shortfall of $357 million. Since September 2015 the CIF Administrative Unit has conducted several reviews of the pipeline to identify projects that can be dropped, potentially freeing up additional resources to reduce the shortfall. A proposal for pipeline and cancellation policy will be discussed in a forthcoming meeting.

CTF 2.0

The November trust fund committee meeting discussed the paper New financing modalities for the Clean Technology Fund, which set out future options for the CTF. The paper presented the CTF as “an especially unique model” to ground international efforts in tackling climate change and argued that “a modest incremental investment from contributors can put CTF on a self-sustaining basis”. The paper noted that over-programming has “enabled more projects from new and existing countries to enter the CTF pipeline”, but that this also meant that the CTF pipeline “includes more projects than its resources can deliver.” According to the paper, the CTF concept is “straightforward (and compelling)”, in that it provides additional capital to MDBs from sovereign contributors, which expands the scale and would “bring down the cost of key mitigation activities in developing countries”. Furthermore, it argued that “the CIFs – and CTF in particular – offer a continuing and attractive opportunity for the international community: to fully engage the expertise and convening power of the MDBs to attract institutional investment at scale, and at the lowest possible cost, by deploying contributors’ public resources flexibly, efficiently and to the same high fiduciary and safeguard standards as its MDB partners.”

The paper discussed “how to build on [the CTF’s] ‘pure green MDB driven’ business model to increase the scale and broaden the range of capital engaged”, in particular through accessing “the huge pools of savings in the world’s pension funds, insurance companies, sovereign wealth funds, mutual funds and other investment vehicles.” It outlined three options for CTF going forward: to take no action, which would lead to the CTF likely winding down new commitments; to move into a pattern of periodic replenishment; or for the fund to receive a further equity capital infusion by one of more contributors, which would allow it to “leverage the equity position modestly” while it implements “a self-sustaining pricing and financial management regiment and builds out the aspects of the CTF business that can most efficiently deliver”. The paper recommended the latter option with arguments, including that it is “up-and-running”, coupled with an alleged “track record as an effective catalyst for green investments by MDBs in emerging market”, as well as its complementarity with the evolving climate finance architecture. The paper further explored what this option would look like in practice, including portfolio characteristics, capital structure and self-sustainability. It also concluded that no material changes would be necessary to the CTF’s legal framework.

Following the November 2015 discussions, the June trust fund committee meeting will discuss the paper CTF future strategic direction, which presents the case for “CTF 2.0” as “a unique opportunity to ensure most efficient use of limited public resources through the use of reflows from legacy assets in order to mobilise private sector financing and in the process, minimise the need for periodic replenishments from contributor countries.” According to the paper, the “legacy assets” refer to “a substantial asset base attributed to [the CTF’s] portfolio of committed loans to various middle income countries”, expected to increase to $5.6 billion by the end of financial year (FY) 2017. The debt service is proposed to support capital market borrowing, enabling “CTF to sustain a prudent cash reserve while continuing to make additional commitments to finance the projects advancing the objective for which CTF was created.”

The paper proposed that “an enhanced programmatic approach under which both geography focused as well as thematic … focused programmes would be considered for support … [to] harness the benefits and scale of the MDB partnership in support of priority investment areas including new frontier areas, while providing agility and a predictable and strategic framework within which to develop and structure investments.” Suggested themes for frontier areas include energy storage and sustainable transport. Moreover, two new financing modalities are proposed: CTF Green Markets and the Risk Mitigation Facility. Under the CTF Green Markets model “a new legal entity would be established and new securities (‘green bonds’) would be issued in the international capital markets to finance a new generation of CTF projects”, benefiting from the existing CTF structure but also introducing “innovative features”. MDBs would remain the lenders, and CTF would continue to bear any losses on the loans. The Risk Mitigation Facility (RMF) would be set up to “scale up mobilisation of local and international private capital for clean technology projects through provision of risk mitigation guarantees by utilising expected legacy CTF reflows.” It would be established and managed by IBRD on behalf of the CTF, but with inbuilt flexibility to enable other MDBs to offer the products. The paper noted that the RMF would need “substantial capital” to mobilise capital at scale, proposing an initial size of $1 billion through legacy CTF reflows.

For consideration in the December meeting, the paper asked the CIF Administrative Unit, in consultation with the MDBs and the trustee, to “a) explore and propose any modifications required in the current CTF documents to implement the proposed programmatic approach; and b) develop concrete proposals on priority investment areas and new frontiers that could be implemented within 18-24 months.” Moreover, the paper proposed that the CIF Administrative Unit and the trustee “conduct any necessary consultations with the contributors on making available the reflows (and any other available assets in the CTF trust fund)”, as well as any other necessary consultations and research, in preparation for the December meeting. It further estimated the cost for developing the new CTF modalities to $1 million, which has been allocated to the FY17 CIF budget.

Selected project updates

Indonesia: concerns over safeguards for geothermal energy

Project details

The project aims to facilitate investments in geothermal energy, with a focus on the geothermal market in eastern Indonesia, “in order to increase access to electricity in areas with high poverty rates and expensive diesel-fired power generation.” CTF will fund risk mitigation for geothermal exploratory drilling, the first out of three key components of the overall project. The two other components are technical assistance and capacity building; and investment support for geothermal exploitation.

Key donor questions and concerns prior to approval

The UK pointed out that “the vast majority of the revised Indonesian IP [investment plan] is for geothermal development” and asked that “lessons from other projects are learned and incorporated into new projects as they emerge”. It also asked for further details on risks, including corruption/fiduciary risk and for a clarification on how the risks of “land disputes, illegal land uses, damage or loss of natural habitats and forests, and reduced watershed” would be managed. Furthermore, it questioned whether it is fair that the project developer does not have to bear any risk in the project exploration phase, and asked for further details on this.

The US raised issues regarding social and environmental due diligence. Noting that the environmental and social impact assessments will be conducted during project implementation, it asked “how will this allow for consultation with potentially affected persons?” It also asked whether “using new geothermal plants to expand energy access requires building new distribution networks”. Furthermore, it requested further details on “how financially sustainable these geothermal plants will be, particularly in regards to potential market size given that eastern Indonesia has high poverty rates and low electrification rates.”

On social and environmental due diligence, the IBRD explained that the project “is subject to due diligence by the [World Bank] safeguards specialists”, who will prepare “a number of safeguards instruments”, including an environmental and social management framework (ESMF), to be disclosed prior to project appraisal. Moreover, according to the IBRD: “If the present classification as category A is maintained the necessary safeguards document will be reviewed and endorsed by the WB’s [World Bank’s] Regional Safeguards Secretariat and consulted with PAPs [project-affected persons] and stakeholders 120 days in advance of board presentation to comply with US ED [executive director] requirements.” It clarified that the ESMF will also look into whether the new power plants will require strengthening of the transmission/distribution networks.

On the lack of risk for project developers, the IBRD responded that the project appraisal document will be updated to take into account recent directives from the minister of finance, requiring “that developers will have to pay the exploration costs at licensing rather than financial closure”. Finally, it clarified that details on financial sustainability will be clarified in the final project appraisal document.