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Ethiopia has experienced rapid growth over the past decade. The government’s strategy of Agricultural-Development Led Industrialisation (ADLI) aims to stimulate development in the agriculture sector and thereby improve living conditions for the rural poor; the next phase is to rapidly shift the agricultural workforce to more productive sectors. They have succeeded in the first phase with strong agricultural performance, which has in turn stimulated growth in the service sector.

Growth and transformation from agriculture to the industrial sector is the next phase of ADLI. Therefore the emphasis for the next phase of the GTP should be on the ‘right’ growth – i.e. growing light manufacturing by shifting the workforce to sectors with low skill entry points but high productivity. This will be supported by rapid urbanisation, linked to employment opportunities.

There is also a necessity to focus on a growth model which is explicitly linked to the poverty eradication THROUGH growth, rather than growth through poverty reduction. This might consist of three elements:

1. Sustained rapid growth through shifting to industrialisation
2. But not growth at any cost. This growth should be as equally distributed as possible
3. Ensure that economic gains are translated into social gains via progressive social policies

Influences on energy domain-

Assuming this framework –then what is the role of the energy sector in this growth story?

Energy constraints can inform strategic choices. Energy exports are an opportunity to improve balance of payments position $1.9bn a year by 2030. 2013 exports were $2.8bn around 2/3 of existing exports. Prioritise industrial sectors based on several factors, including energy demand.

Lack of energy can be a drag on growth, particularly in energy intensive sectors. The strategy of developing Special Economic Zones is heavily dependent on a reliable energy supply. In addition, sustainable urbanisation requires reliable energy supply – both electricity and fuels.

Energy sector development can stimulate economic gains for the poorest. The development of the energy sector in Ethiopia is also an opportunity to stimulate jobs and incomes. This is directly through the energy sector, but also by enabling local enterprises.

Three policy objectives can be identified for the role of the energy sector in Ethiopia’s growth:

• Getting a fair deal on electricity exports – Ethiopia could export up to 32,018 GWh per year – at 0.06/kWh this would equate to around $1.9bn of foreign exchange income. However, some countries or industries could be willing to pay significantly more than this, so there is need to be strategic in targeting export partners. Secondly, contracts need to be structured to fairly share risk between partners. Ethiopia should aim to maximise returns without compromising domestic supply. Potential indicator: export price per kWh.
• Meeting electricity demand from Special Economic Zones – accurately forecasting demand and ensure generation and transmission are matched to demand. Potential indicator: unserved demand in SEZs
• Sharing the benefits – ensuring that the poorest also benefit from the growth of the energy sector. This is through developing SMEs enabled by the energy sector as well as within the energy sector. In addition, redistributive policies to improve access to modern energy services. Potential indicators: Gross Fixed Capital Formation. Energy productivity. Use of modern energy services (electricity + clean cooking fuels)

Development priorities for the sector-

Under-pinning these objectives is the need for a reliable energy supply and a reduction in unserved demand. Ultimately this is achieved by scaling up the energy supply infrastructure and improving demand management.

• Generation planning, financing and construction – The government has clear and viable objectives for generation and transmission, however it lacks the strategic planning required to ensure delivery.
• Distribution management – Expanding the supply infrastructure will take time, in the meantime, the Government needs to improve load management to reduce unserved demand. Ethiopian Energy Services (EES) is responsible for handling this and the current contractors (PGIL) have been set targets to achieve over the next 2 years – but ongoing management of the energy supply infrastructure is critical to long-term growth.
• Fair and predictable pricing – Finally, the long-term pricing structure needs to be defined. As with most countries, tariff economics is a major and sensitive political challenge. There are three objectives within tariff setting:
  • Financing ongoing maintenance and expansion of infrastructure
  • Ensure domestic affordability to consumers across the income spectrum
  • Provide long-term certainty to businesses – evidence shows that businesses prioritise certainty over price when it comes to energy supply.

Potential engagement strategies for development partners-

The energy sector is a crowded but inefficient space. Development partners shall identify its core comparative value additions which could add value to the sector if developed in the right way. Firstly, it is crucial to engage with the right Government actors from the start to build trust and understanding – this is a long process requiring patience, political sensitivity and continuous conversation. The ‘right’ actors will depend on the particular areas of intervention. Secondly, any engagement should be co-ordinated with other actors to avoid duplication and build common activities.

Rather than adopt a general capacity building approach that tries to cover the entire sector, a specific focus on the ‘pinch-points’ for growth (i.e. where sector priorities are critical to the growth-related objectives) will help improve impact.  There is also an urgent need to look at supporting donor co-ordination and supporting to Government to take a stronger lead in setting the agenda.

Keshav C Das

April 19, 2016

Innovative financing has not been widely applied in the energy sector. However, of late, international energy initiatives like Sustainable Energy for All [SE4ALL] has highlighted the importance of innovative financing for achieving Sustainable Energy for All’s objectives.  The SE4ALL estimated that approximately $500 to $1200 billion of additional capital per year will be required to meet the objectives of the SE4ALL and hence resourceful solutions that promote the use of innovative finance to mobilize and leverage public and private capital are needed in order to positively transform the world’s energy systems.

The International Energy Agency (IEA) has reported in its recent Global Energy Demand Report that the world requires $48 trillion investment till 2035 in order to meet the growing need for energy. To meet this increasing energy demand, countries need to diversify sources of energy production and means of energy distribution and countries must invest $40 trillion in energy supplies over the next 21 years, according to the same report of IEA. Economic growth and rising living standards have been fuelling the global energy demand, forcing governments to find ways and money to increase supplies. The world has invested $1.6 trillion in 2013 for energy supply, more than double the amount in 2000. Until 2035, the annual investment figure is expected to reach $2 trillion, report says.

In the recently published Global Status Report on Renewable 2014 it is stated that that total investment in renewable power and fuels (excluding large hydro-electric projects) fell for the second year running in 2013, reaching $214 billion worldwide, some 14% lower than in 2012 and 23% below the 2011 record. That means, there is a significant gap between financing need and the existing financing, which is more than $50 billion investment gap (23% of the $214 billion).

In this context, the key question is- where from such a big investment can be generated to meet the growing needs of financing, while the global economy is affected with financial crisis? Indeed, this difficult situation has stimulated increased interest in innovative financing to help deliver more and better aid.

Therefore, there is a need of analysis on innovating financing, which could be linked to the renewable energy sector, a critical review of existing and possible mechanisms and a proposed selection of avenues for the development of such mechanisms on the basis of literature review, meetings with relevant professional actors.  We need to focus on two large categories of innovative financing mechanisms namely 1) Mechanisms for generating new resources 2) Mechanisms for catalyzing private investment. Countries and development partners may consider to take up this work to support the development of innovative finance in the energy sector.

Keshav C Das

March 26, 2016

At the UN Climate Conference in Paris, donors, private sectors and parties announced more than 10,000 new commitments and initiatives for contributing to mitigate the negative impact of climate change. Similar announcements had also made during previous COPs and other relevant global events.  This implies that Climate finance is getting bigger, through new commitments of multilateral, bi-laterals and of late private sector commitments.

However, there are serious complaints from ‘beneficiaries of climate funds’ and key stakeholders, involved in the management and channeling climate funds, that there are no clearly defined accountability in managing and utilizing the funds as well as a desired level of transparency is absolutely missing!  This has become now a major concern for donors and parties as climate financing needs to be coupled with the nationally determined contributions (NDCs) and in absence of a transparent and effective management structures (starting from planning to implementation and periodic monitoring, reporting and verification) there is danger of not meeting the basic objectives of the Paris Agreement.

A fundamental challenge in monitoring climate finance is that there is no agreed definition of what counts as ‘climate finance’.  In light of these controversies, more encompassing definitions of climate finance have been proposed. For example, Buchner et al., (2011) propose that ‘climate finance flows include both international (bilateral Official Development Assistance, Other Official Flows, export credits, and multilateral concessional and non-concessional flows) and private finance (carbon market finance, REDD+, Foreign Direct Investment and other private flows)[1].’

Irrespective of this definition issue, there are conflicting information/double counting on climate finance commitments. For instance, distinguishing the status of finance delivery is crucial for transparency as it provides information on whether pledges are being met, and whether finance is reaching recipients. Climate funds, however, do not use consistent terminology, and where they do, terms are not always interpreted the same way. This makes it difficult to accurately assess the delivery stage of climate finance both within and across the funds. A careful distinction between what countries pledge and what is actually deposited is essential to avoid over representing contributions.

Similarly, once funds are deposited, it may take time to develop a credible portfolio of projects worthy of funding. In turn, there is a crucial distinction between approving a project, and actually disbursing funding to allow its execution and realisation. There can often be long lags between the two stages. Reporting on disbursement is important to allow accurate accounting for how much funding has actually been spent[2].

Many developing countries lack systems to account for existing spend on climate change, making it difficult to track investments in climate change related activities and monitor financial flows at the local level.  National budgeting systems are ill-equipped to perform this basic function. The lack of information on budget flows makes it hard for citizens and independent monitoring groups to know whether funds are being used for their intended effect and reaching poor people.

Hence, there needs to be an effective Monitoring, Reporting and Verification (MRV) system that is applied to the public funding of climate actions, and this must draw on a list of specific information that allows the data to be classified and compared.

Any MRV system is incomplete if it is only based on reporting from countries providing finance. There needs to be cross-referencing with data from the countries or institutions that receive it. The UNFCCC therefore asks developing countries to add onto their national communications a report on the international aid they have received. As this financing can be attributed to multilateral funds, the same reporting requirements also have to be applied to them in order to monitor the whole flows. Multilateral institutions must therefore communicate twice, once as an institution receiving finance and one as a financing institution.

Institutions outside of the UNFCCC are not legally bound to communicate this information at present, but could be encouraged to use the UNFCCC notification formats in the future to allow data to be cross-referenced. It is notably the role of the Standing Committee created in Cancun (para. 112, Cancun Agreements, 2010) and operationalized in Durban.

The effectiveness of public expenditures depends heavily on broader participation and oversight mechanisms.  Independent data initiatives like the Open Budget Survey sponsored by the International Budget Partnership (IBP) can play a critical role in pursuing this goal.  Covering 102 countries, the 2015 Open Budget Survey (OBS) is the fifth round of a global assessment of budget transparency, public participation, and oversight institutions for national governments.   While 19 countries score well on budget transparency, the survey finds that a number of governments are backtracking on budget transparency commitments.  Nevertheless, we will need simplified ‘usable’ tools and systems for ensuring effective MRV on climate finance.

Keshav C Das

December 24, 2015

[1] http://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/7665.pdf

[2] Romani, M. and Stern, N. (2011). Delivering climate finance: principles and practice for funding the Fund. Grantham Institute, London UK.

Climate change is a cross-sectoral cutting issue with serious economic, social and environmental impact. To mitigate climate change and/or adapt to it, countries need to adopt a whole of government approach that seeks to integrate climate change development activities and climate change finance into the national planning and budgeting processes. And this exhibits the importance of climate finance governance.

Climate finance governance system can be developed based on integrating climate financing accounting system into the national planning and budgeting mechanism of governments.  Below are the distinctive success factors, which could help in this process of integration.

1. Identifying the development priorities of the government from the perspective of climate change mitigation/adaptation aspects. The process of identification of development priorities can also be validated with scenario establishment as well as should be aligned to the Intended Nationally Determined Contributions [INDCs] and its emission and climate resilience targets.
2. This prioritization process will enable the government in preparing a long and shortlist of appropriate interventions for climate change mitigation and climate resilience measures.
3. At the stage, a critical gap analysis of the shortlisted development interventions is important, which will provide a detailed analysis on the current capacities of the respective government agencies, who will be directly involved in program designs, implementation and monitoring and evaluations. During this gap analysis, it is also pertinent to evaluate about the current ‘enabling environment’ in the country, which could positively accelerate the development and implementation of the projects. Such evaluation on ‘enabling environment’ will help to develop supportive policies and strategies [for instance, National Adaption Plan, or Policies on Green Economy etc.] which will eventually be used by the national implementing agencies.
4. It is expected that the gap analysis will provide further clarity on (i). ‘Effectiveness of program planning at national and sub-national level, (ii). Availability of financial resources and its effective use, (iii). Effective delivery of national plans and programs on climate change mitigation and adaptation and (iv). Gaps in institutional development across the sectors and regions of the country.
5. Based on the outcomes of the gap analysis and selection of prioritized climate change interventions, the government needs to explore for potential source of financing and technical assistance, so that the capacity gaps can be bridged up with appropriate package of technical assistance and climate change interventions can be funded with climate change financing.
6. Indeed, it is important to transform the selected climate change interventions into bankable projects/programs so that the government can attract investment from both public and private sector. In addition, these bankable projects/programs can also be used for attracting innovative financing sources such as green bonds, result based financing, Nationally Appropriate Mitigation Actions, foreign direct investment etc.
7. One critical aspect to be considered during the financial allocation and budgeting is that the government needs to coordinate the resource mobilization efforts, particularly the climate finance and ODA. It is also important to integrate itself with the public financial management systems of the government.
8. The government should develop a pipeline of investable programs and matching funds and available funding instruments with investment needs. There is also a need to complement the existing financing mechanisms such as national development banks etc. to leverage funds and maximise impacts.
9. There will also be instances of program financing which were not conceived and developed as climate change program, rather such programs are currently in implementation as general development programs. In such case, the government can introduce the climate proofing tools so that the current and next phase of the program can be climate proofed as well as the climate change financing can also be streamlined in the forthcoming phase of the programs.
10. One critical aspect is also developing appropriate partnerships with international development agencies, government agencies [both at national and sub-national level], civil societies and other relevant stakeholders so that climate change programs are planned and developed with inclusive thinking as well as contributes to the recently endorsed sustainable development goals.
11. It is also critical to put in place a robust and easy to use monitoring and evaluation system for keeping track on progress of climate change programs as well as utilization of climate change financing. There should be periodic strategic reviews [preferably multi-stakeholder platform] of the programs and climate finance spending in the national budget system.
12. Indeed, it is ideal to put in place a well-defined fiduciary risk management system as an integral part of the public finance management.

Keshav C Das

Immediately after the emergence of the regime of climate change as a new sector for development during 2005, several institutions and enterprises had been established; starting from carbon finance consultancies to green economy institutions, clean development mechanism consulting firms to validators. This new set of institutions were recognized as innovators and highly influential in low emission policy making. However, after 10 years, majority of these firms are closed down and in the processing closing down. For instance, the record from the CDM Bazaar site of UNFCCC [http://www.cdmbazaar.net/] depicts that there were more than 10919 registered institutions in the carbon finance sector until 2014, and it is estimated on October 2015 that approximately only 2% of these registered firms are still active. Similarly, there was boom to set up institutions around green economy in 2012, immediately after the Earth Summit in Brazil; but after three years, many of those organizations are struggling to maintain its relevance and value propositions.

The burning question: why do these institutions fail? Is it an internal matter – a failure of leadership, poor management, or inadequate resources? If those factors play a part, do they merely reflect structural flaws in systems of regulation and accountability? Or should we be looking more to the external context: a hostile economic or political climate perhaps, or inflated expectations of stakeholders, which mean that the institution operates in an environment in which will inevitably and unfairly be seen to fail?

After working in this sector, since 2005, I am confident to say that this collapse can be reasoned based on three key conditions; (i). Market failure and political differences in the overall climate change market-mainly carbon market collapse (iii). Introducing vague ideas of development without clear value proposition (e.g, green economy) and (iv). Poor organizational design and management which leads to systemic failure within institutions. It is also important to mention that the financial crisis reduced the number of firms, but also led to an increase in the size of the remaining firms, through a series of mergers and acquisitions, and this represents the ‘2% firms’.

Reader’s views on this initial analysis will be highly appreciated and I am sure this will create a healthy debate.

Keshav C Das

October 16, 2015

In the development domain, there are numerous confusions over capacity development, advisory services and aid. It is a common understanding that for development we need problem solvers [consultants] which are cost effective, efficient and swift. Consultants excel at developing and selling ideas, and are the simplifiers and implementers. Hence, the argument is that advisory and capacity development aspect is ‘ambiguous’.

In spite of these confusions, one thing becomes clearer: capacity development and advisory services are keys for transformational change; and aid effectiveness with capacity development system is more penetrating and sustainable for making systemic change. Capacity development supports are to identify the pros and cons of proposed courses of action and developing capacities of stakeholders to develop and implement themselves. Hence, the aid effectiveness in capacity development is more sustainable then merely consulting.

On this subject, an interesting publication just came out: Capacity Development Beyond Aid, which is a must read. The book outlines an agenda for future research and practice based on the substantive body of capacity development theory and praxis accumulated over the past few decades. It aims to contribute to the “what next” debate by synthesizing some key insights derived from a rapidly changing international development landscape.

Among the questions raised in the book are:

• What does the changing knowledge landscape mean for the body of capacity development knowledge and praxis that has been built up in the aid sector over the past decades?
• Is there indeed a role for capacity development beyond aid?
• How can good practice be harnessed and further developed by those actors and stakeholders who are becoming less aid dependent, but who continue to face capacity challenges?
• What contribution can capacity development play in the difficult circumstances of fragility and instability, where the role of the international community will remain important for the foreseeable future?

The book highlighted that for development, donors need to realise that they needed to work and act differently. The task of capacity development was not just about what countries needed, it was also about how donors  engaged.  It  was  generally  acknowledged  that  uneven  power relations,  the  imposition  of  policy  conditionalities  premised  on  financial  leverage, was undermining local leadership and ownership. Too much doing and not enough facilitation easily resulted in substitution and a plethora of uncoordinated projects. Partnership and later aid effectiveness emerged as new concepts during the course of the 1990s and 2000s.

At the most fundamental level, the Chinese proverb ’Give a man a fish… teach a man to fish’ continues to encapsulate the essence of donor-funded capacity development and  highlights  the  perennial  challenge  of  reconciling  the  pressure  to  solve  today’s needs through capacity substitution while keeping an eye on promoting long-term capacity development. Concerns about sustainability and exit strategies remain pre-occupations in the  aid  community.  The  solution,  it  is  generally  recognized,  lies  in the ability of countries to drive their own change processes so they can find ways of building and sustaining human, organizational and institutional capacities.

The complete book is available in the below weblink:

http://www.snvworld.org/download/publications/capacity_booklet_eng_web_new.pdf

Keshav C Das