Harnessing the private sector: learning the lessons from the Climate Investment Funds experience

15 November 2011
Smita Nakhooda and Shelagh Whitley
Comment
By Smita Nakhooda and Shelagh Whitley

How do we harness the expertise, competencies, and capital of the private sector in a response to climate change?  This question is central to global efforts to mobilise finance to help developing countries reduce emissions and adapt to the impacts of climate change. It will also be a key issue in the design of the Green Climate Fund at the upcoming UN climate conference in Durban.

Exploring the role of public finance in harnessing the capacity of the private sector has been a focus of the Climate Investment Funds (CIFs), a $6.5 billion public fund administered by the Multilateral Development Banks (MDBs). This has supported programmes to deploy clean technologies, enhance resilience to the impacts of climate change, and reduce emissions from deforestation since 2008. The CIFs have been one of the largest sources of public finance for climate change programmes in developing countries, but have encountered many challenges in working with the private sector. 

As the developing and developed country governments that participate in the governing committees of the CIFs met in Washington DC last week for their bi-annual meetings, the MDBs released a paper analysing the lessons learned from this experience

The paper highlighted the need to make financing available on more flexible terms -- for example, lending in local currency to address exchange rate risk, flexibility on levels of subordination, and minimum pricing --  with the funds taking on some of the additional risks and constraints associated with investment in developing countries, particularly in least developed countries. It suggested that funds may need to be explicitly allocated for private sector interventions, noting that recipient governments are not always supportive of public finance going to the private sector.

These are important insights, but there is a need for greater critical reflection on the experience of the CIF in working with the private sector.

Working with the private sector is far from simple

The private sector contains a multitude of actors including multi-national corporations (from developed countries as well as emerging giants such as India and China), international banks, large domestic enterprises in recipient countries, small and medium enterprises (SMEs), and local financial institutions.

These actors have a variety of different attitudes, approaches, and needs, and the nature of the private sector varies widely across developing countries. In the race to move quickly to develop investment plans in developing countries, there has been only limited engagement with private sector representatives to understand the particular constraints and opportunities that they confront.

At the local and country level, there has often been limited awareness amongst private sector actors of the existence or role of the CIFs. The vast majority of private sector projects have been implemented through financial intermediaries – local banks based in developing countries—who lend this money on to local companies and projects. Most of the financing leveraged to date has been from the MDBs themselves, and other development finance institutions. Talking to the private sector and tailoring responses to their needs through collaborative engagement is essential, including for lesson learning.

What impact has CIF finance really had on the private sector?

 There is a need for more critical reflection on whether – and how – CIF resources have helped private sector actors in developing countries do more to address climate change than they were planning to do anyway. Are these resources competing with or ‘crowding out’ the private sector? In other words, there is a need to better understand the ‘additionality’ of the deployment of CIF resources.

For example, the EBRD has used CIF resources in Turkey to build on a longstanding programme of engagement with local financial institutions to help them support energy efficiency and renewable energy projects. What difference has the concessional money channelled through the CIFs really made in this regard?  In the case of CIF investments in wind farms in Mexico, only two projects required concessional finance prior to the private sector entering the market (en masse) on fully commercial terms. How can lessons learned in this case help other programmes plan similar successful ‘exit strategies’ for public resources?

In most cases, CIF money has been used to co-finance projects with the private sector through concessional loans:  the focus of the lessons learned paper.  There are a variety of additional instruments that can be used to ‘crowd in’ the private sector, including guarantees, insurance, and currency facilities. The use of some of these instruments has begun recently through the CIFs. And there has been a significant amount of funding channelled to technical assistance and capacity building.

We need to also understand how effective these initiatives have been, so that more successful interventions can be designed going forward. 

How to meet private sector needs, while ensuring transparency about environmental and social impact?  

Finally, there is the issue of ensuring transparency and accountability for how public money is spent on private sector projects. Certainly there is a need to ensure that reporting requirements are clear, and aligned with private sector processes to keep transaction costs as low as possible and encourage the private sector to engage with the CIFs. But while there is a need to respect business confidentiality, it is also imperative to have transparency about how scarce public resources are being channelled to projects and programmes, and accountability for investing in projects that deliver real environmental and developmental benefits.

If there is inadequate transparency about what is being done with CIF resources, it will be rather difficult to learn from its experience.  The CIFs need to find innovative reporting methods for its private sector programmes that do not compromise accountability. The sharing of lessons from efforts to innovate around reporting requirements would be a useful contribution to the international community.

Towards constructive criticism for lesson learning

There is a general consensus that the private sector has a significant role to play in a response to climate change. Recent reports suggest that its role may already be much greater than realised in many developing countries. But there remains a significant role for public finance in harnessing the capacity of the private sector.

Critical reflection on both the strengths and weaknesses of the CIF experience must inform the international community’s efforts to improve practice. The inclusion of more independent expertise and diverse perspectives from the private sector and from civil society in the process of analysing the CIF experience could help achieve this.

Smita Nakhooda and Shelagh Whitley