Are vertical funds right for climate finance?

5 May 2011 13:00 - 14:15 GMT+01 (BST)
Public event
Streamed live online

Speakers:

Nick Dyer, Director Policy, DFID and UK representative on the transitional committee of the Green ClimateFund

Richard Manning, Vice-chairman of the current replenishment of the Global Fund and ex-Chair of OECD-DAC

Paul Isenman,  Independent consultantand co-author of ‘Global Funds: allocation strategies and aid effectiveness

Chair:

Jonathan Glennie, Research Fellow, Centre for Aid and Public Expenditure (CAPE),ODI

Discussant

Neil Bird, Research Fellow, Climate Change, Environment and Forests Programme, ODI

Description

The aid industry has periodically sought to improve the effectiveness of aid, with the latest attempt, the 2005 Paris Declaration, focusing on five key themes generally agreed to be important (Ownership, Alignment, Harmonisation, Mutual Accountability and Managing for Results). Progress against these five themes has seen mixed results. In particular, vertical funds, such as the proposed Global Climate Fund, have been found to have both positive and negative impacts.  Although the climate finance landscape is highly fragmented, the proposed Global Climate Fund is emerging as a likely major modality for climate finance, channelling significant international public flows for both adaptation and mitigation.

This meeting will draw out the major lessons from the aid effectiveness agenda and examine how relevant these are for climate finance, with discussions focused around the particular example of vertical funds. The successes and failures of the push for aid effectiveness will be charted and parallels will be made with the existing international climate finance architecture. The question is whether climate finance can learn the lessons from development finance quickly, without having to waste valuable years making the same mistakes? 

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Jonathan Glennie opened the session by arguing that climate finance is one of the most important issues in development at present.  However, the debate around climate finance is a relatively new phenomenon, illustrated by the fact the Make Poverty History Campaign did not mention climate finance.  Moreover, the experiences of climate finance in addressing some of the major challenges in vertical and horizontal financing can inform the practice of aid.   

Nick Dyer discussed the UK government’s criteria to assess the design of the Green Fund. The Green Fund arose out of the Copenhagen Accord in CoP15, where a commitment to raise USD 100 bn additional finance for climate change was agreed upon. Then in CoP16 in Mexico it was agreed that a Green Fund would be designed to meet this challenge.  It is currently being designed by 24 developed and developing countries through a transitional committee with support from a Technical Group of international agency members.

The UK government perspective on the Green Fund is that it is ambitious enough in scope to aim for a complete transformation of climate change and its corresponding financing.  The design will be assessed against how climate change is integrated into decision-making and choices over funding  and whether countries can be supported to follow a climate-resilient and low-carbon development path.

Nick Dyer stressed the Green Fund should not be seen as a new finance stream for a distinct ‘climate sector’ but should be seen more as a mechanism to promote climate-resilient development.  There are currently over 20 different climate funds and the Green Fund’s design needs to ensure its architecture meets the challenges that other climate funds do not address.  These include scale to move towards a USD100 billion goal, responsiveness to clients, ensuring global coverage, institutionalising terms to reward results and incentivise action and ensuring leverage of private sector capital.

The UK multi-lateral aid review offers two lessons to ensure quality partnerships and getting the governance structure right. The most productive partnerships are often those where country partners can choose their own implementing partner rather than being told which partners they ought to work with.  However, country level mechanisms are often not adequately monitored nor are there always procedures for remedial action if a partnership is not working.

Nick Dyer concluded that the Green Fund alone is not sufficient to getting the change we need and more needs to be done to support leaders to change the culture around climate change and climate-compatible development. However, it can certainly support more strategic delivery of climate finance by factoring in the lessons we have learnt from the Paris Declaration and Accra.

Richard Manning provided his experiences of working with the Global Fund, GAVI, DAC and DFID to offer some lessons for climate finance.  He explained how some programme funds work better in Middle Income Countries, such as the GEF, the Global Fund and GAVI.  Moreover, they can cause a disproportionate response to some illness, such as HIV or malaria, against others.   During the Accra High Level Forum on Aid Effectiveness in 2008 Sweden expressed caution about creating new vertical approaches and stressed the need to focus more on reforming existing agencies rather than creating new aid channels.

Moreover, Mr. Manning argued that donors should be more consistent in how they operate in the different boards of various institutions and take the Paris Declaration seriously by actively engaging in a learning process to improve the effectiveness of delivery, despite the way some funds are set up. At country level, there also needs to be more negotiation between ministries receiving programmatic funds and finance ministries to ensure a productive dynamic to make best use of the funds.

There needs to be further debate on whether to push for a broader mandate for global programme funds rather than simply looking at the vertical vs. horizontal issue.  For instance, should the Global Fund allocate greater spending to ministries, rely more on the World Bank to deliver more sectoral programmes or focus more on pooling funding for specific objectives, such as vaccinations?  Considering whether donor objectives comply with the realities on the ground and the priorities of Finance ministries is a critical factor to address.

The way funds are structured can impact upon their effectiveness.  For instance, the Global Fund has an American-style governance model with a small secretariat and technical committee but no in-country presence. This limits its capacity to control what happens on the ground.  In contrast, IFAD has a greater country representation but its operational costs are ¼ of its actual spend whereas the Global Fund is only 6%.   Having a greater presence of stakeholders in the board of funds can help promote trust and respect which would be an interesting model for climate change funds.

Paul Isenman referred participants to the paper Global Funds: Allocation Strategies and Aid Effectiveness which he drew from in his discussion. Mr. Isenman argued that what countries do is more important than what donors do and country ownership is a key principle to ensure climate-compatible development, the delivery of investment programmes and mutual accountability.  Lessons from the aid effectiveness agenda stresses the importance of national ownership is paramount and one-off project interventions that are not embedded in national priorities can undermine government.

However, there is a tendency for donors to prefer to support climate-proofing development projects rather than fundamentally alter the nature of projects and supporting countries to strengthen programmes which have a strong climate lens. Donors need to ensure that as climate finance levels rise they are cautious about promoting inter/intra sectoral distortions that unnecessarily set-back achievement of other development objectives, especially in adaptation.  There is the additional challenges that across the globe, donor countries are cutting back on their aid commitments due to domestic budget deficits.

The Horizontal vs. Vertical issue should be seen as how to optimise the portfolio of funds, equalising net benefit and ensuring a margin between overall development and climate finance for the Green Fund and other climate funds.  Vertical funds have strong public and political appeal but there is no one solution-fits-all and country allocations ought to be based on a variety of approaches.  The Challenge Fund with its focus on competitive bids and innovation does not encourage sustainable financing, is often unpredictable and encourages fragmentation. Ex-ante results-based funding such as the GEF and IDA are capable of taking into consideration environmental and poverty dimensions. A hybrid approach could be useful, however it is important to match funding allocations to in-country governance capacity. 

How to leverage private sector capital is addressed in a paper by Brown and Jacobs Leveraging private investment: the role of public sector climate finance.  Fundamental to this is providing a favourable and predictable framework to provide confidence for private sector investment. Please also refer to the recent Transparency International’s Global Corruption Report: Climate Change which examines the potential for major climate-related corruption risks.  In aid-dependent countries, leveraging private sector capital needs to be considered in light of other competing uses for private capital funds.

It is important to remember that it is not only donors who act inconsistently.  Civil society, governments and the private sector are also prone to inconsistency and where you stand on issues depends on your situation within an organisation and which part of your organisation you see as defending.  Governance is also about managing conflict of interest, lack of interest in certain issues as well as ensuring effectiveness and accountability. Donors need to recognise this an ensure they take responsibility for the governance systems they establish within climate funds.  Donors themselves do not yet have an established forum to consider issues on global vertical or horizontal funds.  There is a need for agreed principles on climate change principles; DFID’s Mutil-Lateral Aid review can be a catalyst for this.

Neil Bird summarised the challenge of ensuring responsiveness but also the speed of delivery and direct access in the context of guaranteeing the highest operational standards. While vertical funds are seen to offer good value for money and are good at results-based approaches some vertical funds place demands on national systems.  For example, the Adaptation Fund has not accredited national ministries since they cannot always demonstrate the project management capacity to account for external funding which limits the scope for direct action.   This effectively locks funding into projects, limiting the opportunity to achieve transformational change.

Moving forward, we can consider the GAVI’s approach of classifying countries according to their level of fiduciary risk with the choice of financial mechanisms and audit requirements being country-specific.  Paul Collier’s suggestion of using independent certification of public spending systems to ensure the delivery of climate finance at speed and scale is worth exploring.  It is unlikely that vertical funds can uniformly feed into a range of country settings and a hybrid approach would be appropriate to ensure suitable responses in different national contexts.

Q&A

Key questions raised included:

  • Should we treat adaptation and mitigation separately when considering if a fund should be vertical or not – is there a choice between horizontal and vertical?
  • Should climate finance be treated as aid?
  • How will vertical funds be used in different sectors and how do funds take into consideration that the private sector often prefers fragmentation since this promotes competition?
  • Do we need to reduce emissions in developed countries so as to reduce the levels of climate finance (see also Jonathan Glennie’s blog Climate change bribery won't work)What is the schedule of the transitional committee’s meetings and is there scope for civil society participation in the Green Fund’s design?
  • How will corporate governance be considered when influencing private sector behaviour in climate finance delivery which will be leveraged using public sector funding?
  • Should we try and be more bureaucratic with climate finance as was the case with aid?

Concluding comments

The Green Fund is a certainty and an attempt to regroup existing funds and prevent a proliferation of an excessive number of funds.  However, the automatic assumption a new vertical fund is needed needs analysing. If transformation will occur a change in leadership is necessary and it is not known how the Green Fund will work in practice at this point. Two possibilities are for the Green Fund to provide a supervision function, having its own capital base or a wholesaler or retailer of funds and we should not assume it will be a vertical fund. We need to work out what the problem is we are trying to fix. 

The next Green Fund transitional committee will be held in Japan, Geneva and South Africa the dates of which are publicly available.  The UK government is having debates with domestic civil society to receive as many views as possible and are open to diversity of opinion in debates around its architecture.

Related documentation – draft paper Bird, N and Glennie, J (2011) Going Beyond Aid Effectiveness of Climate Finance. ODI Draft Briefing Paper.