TWN Info Service on Climate Change (July12/03)
16 July 2012
Third World Network

Lessons learnt from fast-start finance
Published in SUNS #7411 dated 16 July 2012

Geneva, 13 Jul (Majorie Williams*) - Divergent views among developed and developing countries were apparent over the delivery of finance under the "fast-start initiative", with developed countries contending that fast-start finance delivery was on track and developing countries unsure about what has been received.

This was evident from the first UN Framework Convention on Climate Change (UNFCCC) workshop on "Long term finance" held in Bonn, which concluded on 11 July, with a final session on "Lessons learnt from fast-start finance (FSF)".

Under the FSF (which was conceived in 2009 under the Copenhagen Accord and later taken note of in Cancun by the UNFCCC), developed countries committed to deliver $30 billion of funds to developing countries for their mitigation and adaptation activities for the period 2010-2012.

However, despite developed countries' insistence that fast-start finance was on track, at every successive UNFCCC meeting, including this workshop, many developing countries reported that though the funds may be earmarked by developed countries, those funds were not being "eye-marked" on the ground in developing countries.

The Bonn session aimed to identify important lessons learnt from fast-start finance in the context of mobilisation of financial resources for climate change, including tracking and reporting climate finance, transparency and country ownership in implementing projects and programmes and measures.

Participants heard many contrasting ways of tracking funds and various definitional and methodological issues but no new ground was broken in the discussion, especially with regard to tighter and more rigorous way of assessing and accounting for climate financial flows under the Convention.

In fact, developed countries represented by the European Commission seemed to shy away from such a movement, by saying that a simple uncomplicated framework was sufficient for measuring, verification and support (MRV) of climate finance.

Developing countries, on the other hand, sought more rigorous and uniform definition of new and additional climate finance and called for a common reporting format or framework to assess the flow of funding. They said that this was important for long-term finance beyond the fast-start period which ends this year.

The session on FSF was moderated by Athena Ronguillo-Ballesteros of the World Resources Institute with presentations by Derek Gibbs of Barbados, representing AOSIS (Alliance of Small Island States), Jean Touchette, Organisation for Economic Co-operation and Development (OECD) and Stefan Agne, European Commission (EC).

Following the presentations, a lively discussion ensued among discussion leaders, Rodrigo Sanchez Mujica, Latin American Association of Development Financing Institutions (ALIDE), Isabel Cavelier from Colombia, and Marina Olshanskaya of the United Nations Development Programme (UNDP), the presenters and the workshop participants.

Mr. Gibbs, in his initial remarks as to "why fast start", said that it was a confidence building effort. He assessed fast-start based on the Copenhagen and Cancun criteria which included issues of volume, balance between adaptation and mitigation, priorities for SIDS (Small Island Developing States) and LDCs (Least Developed Countries), access to funding and new and additional.

He noted that even with these criteria, it was difficult to determine what FSF was. The developed countries' collection of summaries and reports to the UNFCCC was posted on the dedicated fast-start websites up to July 2012.

However, Gibbs said that it was difficult to have judgment on newness or additionally or to make clear distinction between public and private or loan or grants. He noted that there was no agreed formula and that Parties self determined own pledges for the three-year period.

Gibbs' historical analysis of the distribution of finance comparing the period 2004-2012 with the fast-start period 2010-2012, showed that the historical imbalance between adaptation and mitigation continued. In the earlier period, adaptation accounted for 10% of flows while mitigation was 81%. In the latter period of the FSF, adaptation gained some momentum with 22% and mitigation 67%.

Gibbs concluded that with regard to the thematic balance, there was not much of a change, as there was no major readjustment of funding in favour of adaptation.

Gibbs noted that the transparency of information was hampered by mixed funding. Some developed countries used different categories, which may include both adaptation and mitigation so it was difficult to separate out these elements.

With regard to the prioritisation of financing for SIDS, LDCs and Africa, he noted that this was difficult to determine due to diverse levels of detail. However, some countries directed some proportion of finance to vulnerable countries such as SIDS and LDCs, as in the case of Australia, Iceland, New Zealand and the US.

However, he also noted that it was difficult to determine what is meant by prioritisation in terms of the volume, direct access and instruments (whether grants and loans).

Gibbs noted that 0.4% of fast-start finance was made available through the Adaptation Fund compared to 8.65% from the Climate Investment Funds (CIF) of the World Bank. This, he said, was a missed opportunity to scale up direct access. Direct access is a key modality of the Green Climate Fund (GCF).

Gibbs also noted that according to the CIFs' sunset clause, it will be necessary to conclude that operation once a new financial architecture has been developed.

He said that some funds were channelled through multilateral banks as well as bilateral, and that this was a challenge to some SIDS due to capacity constraints and other challenges such as lack of diplomatic presence in some countries.

With regard to lessons learned from FSF, Gibbs remarked that it demonstrated the capacity to scale up public finance in a short amount of time (3 years) and that it is possible to achieve thematic balance between adaptation and mitigation in funding allocations, most notably in this respect were Australia (48%/52%), UK (50%/50%) and Iceland (30%/40% ).

Gibbs remarked that public finance will be required for adaptation in developing countries. He also stressed the importance of dealing with definition issues, accounting and common reporting framework.

In his conclusion, he said that at the end of the day, it is how we make a difference at the country level. These viewpoints were echoed throughout the three-day workshop and most prominently in this session.

From the vantage point of the fund providers, developed countries, such as the EC, noted that delivery of fast- start finance was on track. In particular, Stefan Agne said the EU was on track to deliver up to 65% of its 2011 fast-start finance.

With regard to lessons learned, Agne noted that ideally all public climate finance should be reported in a single format, increasing transparency.

He said that with different systems it was unclear what FSF is or is not and there was need to agree on how to track and report new flows and account for them including private flows. However, said Agne, very complex MRV processes should be avoided.

He also noted that country ownership, donor coordination and harmonisation was important. Specifically, programme designs must be country specific and country owned and in a realistic timeframe so that the local stakeholders can be involved.

Agne also stressed that time was needed to establish contact between donor and host countries. This was not clear to everyone at the beginning of the FSF commitment.

Jean Touchette of the OECD said that the organization has tracked climate change finance, including mitigation finance for twenty years and adaptation finance since 2010.

In his presentation of the "Rio marker system", he noted that definitional issues have still not been resolved and that in crafting of commitments, it was important that the G8 and OECD Development Assistance Committee (DAC) recommendations on good pledging practice are observed. These include criteria such as time-bound, defined base year and indicators for measuring progress.

He also flagged uncertainty with tracking private investment and the challenges of the complexity of the funding architecture which include risk of overlap and pose difficulties for developing countries to navigate.

Touchette highlighted that 60 years of development cooperation experience showed the importance of country-led and owned processes and that funds are channelled into recipient countries' existing system. Funders must ensure coherence among themselves to reduce transaction costs and administrative burdens for developing countries.

Rodrigo Sanchez Mujica of ALIDE said that national development banks (NDBs) could be champions of climate finance and key for mobilising funds. The NDBs in Latin America, in particular, were channels that had the greatest impact on mitigation and adaptation.

Isabel Cavelier from Colombia said that her country was challenged in obtaining funding for adaptation and to climate proof actions. She said that with regard to the balance between adaptation and mitigation, fast-start finance for national low emission development strategy was now being implemented but that there was no funding for national adaptation.

Underscoring the importance of adaptation, Cavelier said that if countries did not adapt today, they could not mitigate in the future. The imbalance has created difficulty in moving forward. She noted that predictability was important and that with public funds which were fundamental for adaptation, there was predictability.

She noted the need for better information and more transparency on donor flows. There is need to improve communications and track easily the flows of funds. This was difficult with no common MRV system from different channels of finance. Projects were also not identified as coming from fast-start finance and there are no standardised systems for recording how projects are implemented at the local level.

Marina Olshanskaya from UNDP said that it was important to build on what investments already existed in countries and to deploy grant resources to make these investments climate smart. She said that while private actors such as institutional investors are important, what was more important is to work with public agencies to help them lead by example.

She pointed out that large scale electrification program in the US was publicly funded for 30 years before private actors entered that arena. It is unrealistic to expect that Wall Street will go and fund projects in LDCs, she added.

In designing programmes, it was important to know who the clients are, whether they were local or foreign and what their motivations are for the investment.

She also reinforced the complexity of the climate financing architecture when it involved the carbon markets. It is important to ensure that there is no double counting and there was need for accountability and adequate reporting, she added further.

In the discussion involving participants, Manuel Montes of the South Centre, pointed out that with regard to the persistent complaint that the public sector in developed countries had no resources, it was interesting to see that Iceland, which suffered the deepest financial crisis was still able to contribute to fast-start finance and noted that the EU had just given $100 billion to rescue banks in Spain.

Montes noted that from the presentations by private sector during the workshop, it was clear that the financing was only for about 5 years. So, reliance on the private sector for long-term finance was an illusion. He reminded the gathering that the private sector panellists in previous sessions had different perspectives on the capability and role of the private sector with regard to energy efficiency. The representative from the Standard Bank from South Africa had said that there was no business model for energy efficiency.

Montes noted that energy efficiency involved changing products and there was indeed no business model for that as success required that the whole industry changed. The private sector could not therefore scale this up. Thus, there is a clear limitation on what the private sector could do and there should not be "romantic illusions" about its role.

Uganda pointed to the importance of "eye marking" funds as many in his government including the climate change focal point were not aware of FSF flows. He said that mechanisms in the countries and national entry points mattered and was important for channelling fast-start financing. It said that under the current arrangements (fast start) finance is not country driven.

Saudi Arabia raised concerns about the delivery mechanisms and how to ensure fair and equitable distribution of the funds (especially with bilateral flows) and how to ensure direct access. There was need for accountability in climate financing for a structured and systematic mechanism for monitoring public flows of funds from developed countries.

Both Canada and Japan noted that a lesson learned is that it takes time to have project approval, financing and assessing project efficiency in relation to climate change. Japan further noted that information flow is an issue.

India said that it is important that climate finance flows follow the Convention. Hence, it must have national ownership and be channelled through the national designated authority in order to ensure alignment with national priority. The capitalization of the GCF was also stressed by India.

The US said that it was important to recognize that FSF is largely an experiment for both developed and developing countries and that the issue was how to better communicate fast-start finance support and it was counterproductive to hear that developing countries are not acknowledging the support.

The Philippines said that a fundamental issue is that climate finance is not development finance. It questioned if just any climate change related aid would be counted as meeting the commitments under the Convention. Long term adaptation finance requires predictable sources.

It noted that part of the challenge and the divergences between developed countries in terms of one side believing that fast track finance was flowing and developing countries not seeing that corresponding flow are that some of the same resources are given different names and it was difficult to verify or quantify that amount. It asked if the contributions to the Global Environment Facility (GEF) replenishment and the Consultative Group on International Agricultural Research (CGIAR) would be regarded as part of FSF.

It was noted by many participants and a few panellists that project funding must match local needs and prioritisation. Everyone agreed on the critical importance of country driven and country ownership on the delivery of fast-start finance, the need for improvement in reporting and building capacity in developing countries to manage, track and monitor climate finance and these were important lessons for long term finance.

Zaheer Fakir (South Africa) and George Boersting (Norway), the co-chairs of the work programme on long-term finance, also co-chaired the workshop. In their concluding remarks, they said that there would be no written summary of the workshop from the co-chairs.

Fakir said that the aim of the workshop was to make a contribution to the work programme for scaling up financing. The co-chairs said that there would be a second workshop held in Capetown, South Africa from 1-3 October. There will also be a webinar (web-based seminar) organised in between the first and second workshops sometime in August or September this year.

(* With additional inputs from Meena Raman.)