Is the Paris Agreement entering into ‘Actual Force’?

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The news from Indian Prime Minister came today evening as a surprise- that India will ratify the Paris Agreement on October 2 and submit its NDC. This submission of India will push the Paris Agreement nearer to ‘’force into implementation’’. India accounts for 4.5 percent of the global emission.  However, the big question is: Will the Paris Agreement and its supporting NDCs are having sufficient clarity on its ambition and resources necessity (financing, technical and institutional) to implement the NDCs? The answer of this question is again very confusing (yes and no).

In an analysis based on the synthesis report of UNFCCC and other analysis, it is found that most of the INDCs are national in scope; they address all major national GHG emissions or at least the most significant sources such as Co2, and CH4. Approximately, 129 Parties included in their INDCs sectoral or sub-sectoral quantified targets. These Parties included targets for the energy and land use, land-use change and forestry (LULUCF) sectors together with their economy-wide targets. 78 Parties identified targets for renewable energy as part of the information to facilitate the clarity, transparency and understanding of their INDCs.

A few Parties referred to the need to respect human rights and gender equality. Over half of the communicated INDCs indicate that Parties plan to use or are considering the use of market-based instruments from international, regional or domestic schemes, including the clean development mechanism (CDM). Support needs for the implementation of INDCs were highlighted by several Parties. Those Parties identified in their INDCs needs for targeted investment and finance, capacity-building and technology, with some providing quantitative estimates of the support required for the implementation of their INDCs and for achieving the upper level of their mitigation contributions.  158 Parties noted the importance of enhanced international support in the context of the new global agreement, including its scaling-up, and the strengthening of the role of and linkages between the existing operating entities of the Financial Mechanism, including the Green Climate Fund (GCF) and the Global Environment Facility (GEF), and the Technology Mechanism under the Convention.

Information contained in the INDCs shows a clear and increasing trend towards introducing national policies and related instruments for low-emission and climate-resilient development. Information provided by Parties highlights the trend towards an increasing prominence of climate change on national political agendas, driven in many cases by inter-ministerial coordination arrangements as well as by an increasing trend towards the mainstreaming of climate change in national and sectoral development priorities. The INDCs show an increasing interest of Parties in enhanced cooperation to achieve climate change goals collectively through a multilateral response and to raise ambition in the future. In particular, Parties stressed the need for strengthening finance, technology transfer and capacity-building support for climate action in general as a means of creating an enabling environment and scaling up action.

Inclusion of adaptation in INDC: One hundred Parties included an adaptation component in their INDCs. The secretariat received adaptation components from 46 African States, 26 Asia-Pacific States, 19 Latin American and Caribbean States, 7 Eastern European States and 2 Western European and other States.

Parties highlighted their common determination to strengthen national adaptation efforts in the context of the 2015 agreement. Loss and damage associated with past and projected impacts of climate variability and change were reported by several Parties, some of which have quantified projected loss and damage. Regarding the monitoring and evaluation (M&E) of adaptation action, Parties highlighted that they have established or will establish quantitative and qualitative indicators for adaptation and vulnerability to measure progress.

The above mentioned facts are very much encouraging. However, there are critical concerns about majority of INDCs and even in case of submitted NDCs, mainly related to their BAU and the reference level. Defining the baseline level of emissions against which country’s reductions will be achieved (i.e., emissions associated with the BAU scenario) is imperative for transparency and accountability. Absent this information, tracking progress towards INDC goals is impossible for countries. This applicable for majority of the INDCs. Similarly, INDCs are not yet clear on financial allocation and resource mobilization strategies. INDCs are not yet owned by sectoral ministries in countries, rather, it has been considered as an initiative only of Ministry of Environment and Climate Change. In some case, INDCs are merely developed as ‘’wish list’’. The actual prioritization has not yet been conceived by national government. Institutional arrangement for implementing NDCs is yet to be done. Securing financing for implementation of NDC is a key challenge. Lack of quantitative indicators/tools to measure the adequacy and effectiveness of planning and implementation. Hence, still there are a ‘wishy-washy’ picture of global commitments on NDCs.  Perhaps, this can be overcome with strategic supports of international development agencies as well as strong commitments of national government. In addition, public participation is also key to make a transformational change in the INDC context.

Keshav C Das

Berlin, September 26, 2016

 

Climate Resilient Economic Growth

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Climate change creates a new context for policy-making in developing countries. The economic costs of climate change can put their economic growth prospects at risk and endanger the achievement of their development objectives. At the same time, development can inadvertently increase vulnerability to climate change. Building “climate resilience” into development policies can help to reduce the costs of climate change and sustain economic growth and social well-being over time. Climate-resilient development includes climate change in the baseline for development planning.

The cross-sectoral nature of climate impacts calls for a co-ordinated approach by the public sector, civil society and development partners across levels of governance. Climate-resilient development needs to go beyond individual programmes and projects and consider systemic aspects and linkages between economic development, climate change and resilience. This need has been acknowledged in international discussions that have recently shifted from project- and programme-based approaches for adaptation to promoting national, strategic responses to the effects of climate change. This includes the call for Least Developed Countries to develop National Adaptation Plans (NAPs) in the framework of the United Nations Framework Convention on Climate Change (UNFCCC).

There is a strong link between socio-economic development and resilience to the effects of climate and climate change. Extreme climate events can reduce economic growth(McDermott et al., 2013; UNISDR, 2013). This slowdown, which can affect a country for several years, is in marked contrast with developed countries, where disasters have the potential to act as an economic stimulus (Cavallo and Noy, 2010; Loayza et al., 2009). Developing countries also bear the heaviest human burden. Between 1970 and 2008, 95% of deaths due to natural disasters occurred in developing countries(IPCC, 2012). This vulnerability is due to a combination of factors, including a lack of coping capacity, low levels of disaster preparedness and high dependence on the agricultural sector for development and livelihoods.

Development itself is one of the most effective means to increase the capacity to cope with disasters. Higher disposable income, better education and healthcare, and improved transport infrastructure are some of the characteristics of development progress that also strengthen resilience. But this is not automatic. Development choices can lead to a concentration of economic activities and assets along rivers and coastlines; places which are vulnerable to flooding, storm surges and sea-level rise. There is also evidence that certain characteristics of middle-income countries, such as a high reliance on physical infrastructure for GDP creation and a high interconnectedness between economic sectors, can increase their vulnerability to extreme events (Benson and Clay, 2004; Ghesquiere and Mahul, 2010; Okuyama, 2009; Cummins and Mahul, 2009).

Climate change adds a new dimension to this relationship between development and resilience. Development as usual – and even development that strengthens resilience against current variability – might not be a sufficient strategy to prepare for future climate challenges. Gradual changes in climate can reduce labour productivity and give rise to additional costs for climate-proofing infrastructure and productive activities. This can even lead to shifts in countries’ comparative advantages. Disaster risk is likely to increase, as certain phenomena such as temperature extremes, heavy precipitation and extreme coastal high water levels become more frequent (IPCC, 2012). The parallel developments of economic and population growth and climate change can have significant consequences.

To get benefitted from the growth model of economic growth with the climate resilient development, countries need to adopt the below recommendations:

Sustain leadership and high-level political commitment: climate resilience efforts need to be driven by strong and visible leadership. This will help to establish and maintain high-level political support across the government.

Formalise national development visions and defining key climate resilience objectives: The formulation of a national vision for climate-resilient development helps raise awareness of the benefits and opportunities of enhanced resilience, thereby building momentum for institutional and policy change.

Create institutional mechanisms that encourage cross-sectoral co-ordination and high-level political commitment:

The institutional system needs to be explicitly designed to facilitate and encourage co-ordination across ministries.

Secure dedicated financing for resilience investments: Financing for resilient activities needs to be leveraged and it should support coherence in investments for climate change resilience and economic growth projects. Alignment with the national budget should help to ensure that domestic resources complement international financing.

Keshav C Das

May 28, 2016

 

Growth and energy: Reflections on Ethiopian Context

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 finance in Energy

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

Financing INDCs’ implementation?

unfccc_indcIntended Nationally Determined Contributions (INDCs) were intended to be a way to clarify how each Party to the United Nations Framework Convention on Climate Change (UNFCCC) could contribute to averting dangerous climate change and demonstrate progress from their current position. To date, much analysis of INDCs has understandably focused on the ambition and, in the case of mitigation, the likelihood of achieving goals in the context of current policy and economic trends.

An impressive numbers of INDCs are now submitted to the UNFCCC during the Paris Summit and now the most relevant question, faced by the parties is- how to implement it? Indeed, finance, technology and capacity can be the difference between achieving – or perhaps even exceeding – commitments, or failing to meet them. Therefore, a critical gap assessment is necessary within the countries on availability of resources, technologies and capacities to implement.

One of the key concern and gaps on implementation of INDCs is financing. This is a contested issue, both from the perspectives of ‘source of financing’ and lack of coherent information on mobilizing and utilization of resources. It is unlikely that GCF’s target of US$100 billion of finance by 2020 from a variety of sources (as agreed in Copenhagen), will be enough to meet the full cost of INDCs implementation, including low-emission climate-resilient development in developing countries. In addition, there is little point in pumping international money into climate-compatible development, if wider investment in recipient countries continues to support a ‘business as usual’ (BAU) trajectory. The final outcome text of the 2015 Financing for Development conference recognized, that funding from all sources – public and private, bilateral and multilateral, as well as alternative sources – will need to be increased for investment in many areas, including low-carbon and climate-resilient development[1].

Therefore, a standalone climate financing model to fund INDCs’ implementation may not be logical. Rather, countries need to strengthen its domestic financing instruments as well as engage private sectors. A clear and practical resourcing strategy to achieve these development ambitions is needed. One ideal approach for developing this resourcing strategy for INDCs implementation could be to map out the financial situation of countries, as well as detailed mapping of the financing situation in the priorities sectors of INDCs, both public and private:

  • Financial needs for growth and development– based on the macro and sector objectives, and focus on types and magnitudes of capital required over time. This should include estimates of CAPEX and OPEX.
  • Financing gaps and constraints – what current levels of capital, what are the limits to sources of existing capital sources such as regional block grants, federal grants or borrowing and what is the estimated financial gap for implementation of plans
  • Financing options – what public and private financial mechanisms are available for these plans, how much capital could they generate and what are the major risks?
  • Financing sources – for each mechanism, what sources are available and how much (by transaction and in total) can they reasonably supply? Which types and sources of finance are most suitable for the specific countries?

There are also issues of capacity gaps for managing the financing and implementation of INDCs. The development partners and in particular the UNFCCC needs to provide these supports to the parties to bridge up this gap.

Keshav C Das

Feb 9, 2016

[1] From para. 60 of the final text of the outcome document adopted at the Third International Conference on Financing for Development, Addis Ababa, 13–16 July 2015, and endorsed by the General Assembly in its resolution 69/313 of 27 July 2015

Picture source: UNFCCC

Why and how to increase accountability and transparency in climate finance management?

pic_lp_fundsAt 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.

Integrating Climate Finance Governance System to National Budget

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

Climate Change Firms: Are these Collapsing?

'They don't build 'em like they used to!'
‘They don’t build ’em like they used to!’

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

Aid Effectiveness- The Paradox

Image.Blog.SeptIn a fantastic news reporting on perennial flood problems of Assam; a north eastern state of India, the NDTV 24×7 news channel has reported today that since 1970, the Government of India has invested more than 2 Billion USD to manage the flood problems of Assam, but, even after 55 years of continuous investment, it is found that the problem is further aggravated. The successive waves of devastating floods in almost every year have virtually destroyed the economy of Assam, more particularly, the rural economy of the State.

Where has the money gone? The obvious answers to this questions could be- corruption, poor state of administration. But, I believe there is a necessity to diagnose the flow of this aid and its effectiveness . It is pertinent to highlight here that waste of aid fund is a universal phenomenon and it has been reported by the Organisation for Economic Co-operation and Development (OECD) in its recent report on Assessing Progress towards Effective Aid .
After several years of the endorsement of the Paris Declaration on Aid Effectiveness – a landmark agreement to improve the quality and, in turn, impact of aid – it is found that there have not been significant progresses in implementing the Paris Declaration and the subsequent Accra Agenda for Action. The donor’s money is not actually making any impact on solving the problems (including, poverty, health, food security etc.).

The reasons for this aid-ineffectiveness can be many; a few of those globally acknowledged impediments are provided below-

Ownership of development is about leadership at the political level. Unfortunately, such political leadership and accountability is grossly missing at various level, while planning, resourcing and implementing development programmes. There is also disconnect between strategies and budget allocations and very often aid decisions are politically motivated.

In many instances, civil society (non-state actors) is not part of the planning and implementation process. Although, in some isolated cases, there are involvement of non-state actors in national development processes, challenges persist in providing an enabling environment for civil society in some partner countries. This situation creates mutual antagonistic relationship between state and non-statement actors, and eventually that hampers on aid and development.

The gap between policy and practice in promoting demand-driven capacity development is also a challenge. There is no systemic capacity development efforts, which could ensure efficient management of the fund and programmes.
Alignment – one of the five principles of the Paris Declaration on Aid Effectiveness – refers to the provision of aid by donors in ways that respond to partner countries’ development priorities, supporting and using partner countries’ own systems and institutions. The Accra Agenda for Action placed greater emphasis on the systematic use of country systems by donors and the provision of support to partner countries in strengthening these systems. Unfortunately, most of the development programmes are disconnected with national development priorities and programmes which are created as ‘Individual Island’.

Donors are not systematically making greater use of country systems in countries where these systems are more reliable. This also includes fiduciary risks, public finance management etc. Reasons for donors’ limited use of country systems are more political than technical and include fear of financial misuse and lack of faith in partner country systems. This arrangement again creates mis-trust between donors and recipients.
Another key challenge of aid is that most aids are ‘technical co-operation heavy’ and more than 30-40% funds go into the staffs cost, administrative and other cost of the development partners. That means, it reality only less than 60% aid fund is available for actual works.

In few cases, it is found that there are very little coordination among donors. The Paris Declaration on Aid Effectiveness recognised that the multitude of donor approaches to providing and managing aid could result in unnecessary duplication of efforts and a greater burden on partner countries that have to deal with a wide range of policies and procedures. The Accra Agenda for Action went further by committing donors and developing countries to work together to reduce aid fragmentation both within and across developing countries. Unfortunately, this has not been practiced religiously.

Indeed, there are also issues related to aid transparency, predictability, and Donors need to commit to improve the availability of information on aid flows to support medium-term planning and increase the transparency around conditions attached to aid. However, recording aid more accurately and comprehensively in partner country budgets and public accounts has proven to be a greater challenge. With respect to aid predictability, most donors require to address structural constraints in their own planning and budgeting systems in order for them to be able to provide reliable indications of forward expenditure.

Lastly, we also need high quality results-oriented frameworks to put in place for efficient programme implementation. We also need to improve on quality of data, with SDG-related statistics and frameworks. There is also an urgent need for establishing of aid effectiveness targets for both partner countries and individual donors and broad-based dialogue to assess progress towards these targets are critical elements for effective mutual accountability.

Keshav C Das
September 15, 2015

Building a competitive Market for Micro-Scale Renewable Energy technologies

Source: www.greentechmedia.com
Source of picture: http://www.greentechmedia.com

Developing a competitive supply and distribution chain for deployment of off grid solutions such as solar Pico PV is always a challenge. This challenge is further aggravated with socio-economic, human induced problems as well as through market distortions, caused by sub-standard products. How can we overcome this challenge?

Indeed, several remedies can be applicable to these problems; however, a systemic cure can be achieved by creating a competitive business environment for deployment of micro-scale renewable energy solutions like solar lantern, which would be promoted by providing ex post financial incentive to manufacturing companies and entrepreneurs through result based finance fund (RBF).

It is expected that RBF can be linked to manufacturing companies and eventually to retailers and distributors. These retailers and distributors will have access to the financial incentive system of RBF fund, which could be received by them on completing pre-determined sales targets of stoves/solar lanterns. It is expected that these retailers and distributors will also facilitate post installation care and support the end-users (customers) for ensuring timely repair and maintenance of solar lanterns.

In this whole supply chain, one shall ensure a healthy competition amongst the companies, manufacturers, distributors and retailers which will eventually ensure long term sustainability of micro-scale renewable energy technologies such as lighting solutions.

There is an urgent need to breakdown the currently prevailing ‘subsidy driven, grant or aid linked inertia’ of project developers in the renewable energy sector and will eventually yield a truly commercial lighting sub-sector, which attracts private investment and debt or credit from financial institutions after the completion of this RBF funding.

For this blog posting, an indicative, generic design on RBF incentive and its effect on market is proposed. It is visualized that the RBF funds can be used to carry out key activities and to establish a business model that is: (a) profitable: at each level, the margins and incentives are clear and sufficient; (b) commercially viable: self-sustaining without requiring continuous external support or  subsidy; (c) environmentally sensitive: recycling of batteries will be developed and addressed in partnership with the solar PV central distributors, and; (d). scalable: the model can be expanded to new areas and the product range can grow as new products and product innovations and improvements become available.

The RBF design shall lead to the creation of commercial partnerships between manufacturers, local wholesalers, distributors, retailers and financial institutions. (a). private sector funding to manufacturers and central distributors is key, which can be disbursed as ex-post based on achieving pre-determined sales targets. Private sector actors invest their own funds upfront for manufacturing, market development and promotional activities; (b). an ex post premium to project promoters (e.g., PicoPV distributors and retailers) on completing pre-determined volume of sales of solar lanterns (maximum up to 20 % of the monetary value of the stoves and Solar Lanterns sold, which exceeds the pre-determined target. The sales target will be determined based on actual baseline and market study in the project areas.). This premium will be paid at two levels of the supply chain, viz., (i). at the central distributor level This fund will cover as ex-post payment to distributors, for establishing a working capital system for pre-financing the retailers with its own funds. and; (ii), at the last-mile entrepreneur retailers level ( which will enhance their demand and ability to buy higher volume of solar lanterns) upon meeting sales target and creating more demands. Most individual retailers cannot shoulder first move costs and risks associated with penetrating undeveloped lighting markets. The RBF progarmme will work to significantly reduce these risks and build industry confidence. , Lastly, (c). a ‘voucher’ finance mechanism, which will be provided to households upon fulfilling pre-agreed conditions like taking responsibility for maintenance of their solar lantern (battery recovery) as well as completing a successful operational lifetime of the appliance and to be used for either replacement of the existing lantern or for the purchase of an extra lantern. The monetary value of the redeemed vouchers would be transferred to the bank accounts of the retailers and distributors.

The theory of change of this proposed business model is built upon five key inputs: mobilize private sector funding with RBF as an incentive instrument; catalyze the RE sector and broker partnerships between private sector, development agencies, retailers, distributors and government; promote quality solar lanterns; develop an enabling business environment for private sector actors at national and sub-national level and create/share knowledge in the region and globally. By means of this approach, the RBF business model will promote market-based learning amongst micro-scale RETs manufactures, distributors, retailers and local NGOs in the supply chain as their participation in the program will require for (i) formalizing business to business relations amongst manufacturers, distributors and retailers (contracting, record based billing), (ii) initiating sales strategies based on higher turnover and attaining premium (iii), ensuring better use of solar and other micro-scale RETs at domestic level by users and redeeming the voucher, and (iv) profit management for investment amongst retailers and distributors. This way, RBF contributes to building up distribution lines for both products, reducing transaction costs and bringing structural change in the local market by paving the way for the private sector to further penetrate the household cooking and lighting market.

Keshav C Das

August 24, 2015