Info Service on Climate Change (Jul13/03)
moves forward on Private Sector Facility
Beijing, 3 Jul (Meena Raman) - The recently concluded fourth meeting of the Board of the UNFCCC's Green Climate Fund (GCF) made advances on having a Private Sector Facility (PSF), by agreeing to set up three new structures to determine the terms of engagement with the private sector, exert due diligence and manage risks, as well as to review investment proposals and instruments.
A decision on the PSF was adopted on the final day of the meeting on 28 June in Songdo, South Korea.
There was a ‘battle' during the Board meeting on the PSF. Several developing country Board members wanted a more cautious approach in adopting decisions in this regard, while some developed country members preferred quick operationalisation of the PSF.
Several Board members from developing and developed countries were opposed to an option in the co-chairs/Interim Secretariat's paper to have a separate governance structure for the facility, detached from the GCF.
The Indian Board member of the GCF was adamant that there be a careful consideration of risks when deciding on what financial instruments to use and which projects to fund, especially if investment banks and funds are used. This was supported by other Board members.
There was a very lengthy discussion and as a result, the proposal for a totally independent governing structure was defeated. However, the Board decided to set up a Private Sector Advisory Group and an Investment Committee. As a response to India and other Board members, it also decided to set up a Risk Management Committee.
The question now is who will be on the Private Sector Advisory Group (PSAG). The private sector will have 8 representatives (4 from developed and 4 from developing countries) and 4 Board members who are government representatives (2 from developed and 2 from developing countries) and up to 2 civil society representatives.
Hence, the government and the CSO representatives will be in the minority. The terms of reference and criteria for its composition will be determined at the Board's September meeting.
There was also a controversy about whether civil society groups (CSOs) should be represented in the PSAG, with some Board members from developed countries, especially from the United States, Australia and Norway, arguing against CSO participation. They were of the view that CSOs may not have the financial expertise needed.
This was countered by several members from developing countries who were surprised by the stance of developed country members in this regard.
The Board member from the Democratic Republic of Congo (DRC) in particular, expressed surprise over the US response against CSO participation in the PSAG, especially when the US, during the discussions of the Transitional Committee responsible for the design of the GCF, pushed for CSO participation on the grounds of ensuring transparency.
In general, several Board members from developing countries were very concerned that there would be continued big pressure on the part of developed countries to push for big companies and financial institutions to have a big say in the development of the PSF and also in the entire GCF.
Another very pertinent point raised by the Board member from India was about the proportion of funds in the GCF that will go to the PSF and what will go to developing countries. In addition, of the funds that go to the PSF, he was concerned about what proportion of this will go to the international private sector as contrasted with the domestic private sector.
A further concern expressed was about the extent that international private companies will be directed by the developing countries themselves or if these companies would have their own autonomous plans on what and where they will invest in.
During the meeting, some of the developing country Board members raised the issue of the danger that the PSF may become a conduit for subsidisation of international companies; lead to the creation of moral hazard and a source of windfall profits for the private sector.
There was some support generally from the Board members including from developed country members that this was not the purpose of the PSF. However, there was no discussion on how these problems can be prevented and other negative effects be prevented too.
Concerns were also raised by developing country Board members about the credibility and reputation of the GCF which would be affected if the PSF is not well handled. This prompted the creation of a Risk Management Committee.
Several observers from CSOs expressed concerns in the corridors of the meeting as to whether the Board will be able to control and regulate financial instruments and corporate institutions as well as the risks involved, given the financial crisis of the last few years had given rise to many questions as to whether regulation is able to keep pace with financial instruments and activities.
Highlights of the final decision of the Board on the PSF are as follows:
"The Board: decided that the PSF will operate efficiently and effectively under the guidance and authority of the Board as an integral component of the Fund;
"- the PSF will address barriers to private sector investment in adaptation and mitigation activities ; this will include facilitating and enhancing the participation of national, regional and international private sector in developing countries;
"- the PSF will promote the participation of private sector actors in developing countries, in particular local actors, including small and medium sized enterprises and local financial intermediaries;
"- acknowledged the need to mobilise funds at scale from, inter alia, institutional investors, such as pension funds and sovereign wealth funds, and to design modalities to that end;
"- decided that the PSF will seek efficient solutions that minimize market distortions and moral hazard in the use of the Fund's resources by using, inter alia, competitive processes;
"- decided that the PSF will initially focus on grants and concessional lending and will also draw on a broad range of other financial instruments and modalities to achieve its objectives;
"- decided to establish a PSAG that will make recommendations to the Board on Fund-wide engagement with the private sector and modalities to that end;
"- decided that an appropriate risk management framework will be developed, enabling the Fund to exert due diligence and manage its risks prudently. For this purpose, the Board decided to establish a Risk Management Committee;
"- decided to establish an Investment Committee that will review investment proposals and instruments and recommend their approval in accordance with social and environmental safeguards and the Fund's objectives and the risk management framework;
"- decided that the PSF, in accordance with non-objection procedures and in order to ensure consistency with national climate strategies and plans and a country-driven approach: (i) will commence its operations through accredited national, regional and international implementing entities and intermediaries, and (ii) may over time, work directly with private sector adaptation and mitigation actors at the national, regional and international levels, subject to consideration by the Board of a phased approach."
Some highlights of interventions by Board members is set out below in response to the paper on the PSF by the co-chairs/Interim Secretariat as well as the draft decision placed before the Board by the co-chairs.
Dipak Dasgupta (India) said that the paper was "extra-ordinary" given the option for the PSF to have its own governance, which would hire senior management from banks and investment companies, without accountability and even to out-source some of its functions. He questioned what the GCF was getting into.
Zou Jiayi (China) said the PSF cannot operate in an independent way. It has to be completely integrated in the GCF.
Alexander Severens (the United States) said the PSF is inherent to the GCF and it should have the flexibility to have a wide range of financial instruments other than loan and grant instruments. He suggested the need for a credit committee to consider the creditworthiness of proposals. The PSF is an entity within the GCF with the ability to attract capital.
Manfred Konukiewitz (Germany) was also not in support of a separate governance structure for the PSF and wanted it to be integrated in the Fund. It could have features that could be unique to the facility such as a credit committee, an advisory board etc.
He said the limited availability of public funds is not the rationale for private sector involvement. If we want to have the transformation, we need to have different kind of investment decisions by millions of investors in many areas that require private actors to do things differently.
Arnaud Buisse (France) did not support the PSF with a separate governing body. He also supported the creation of an advisory group and a credit committee. He did not want the PSF to subsidise the private sector.
Anton Hilber (Switzerland) said it is not enough to begin with just grants and concessional lending for the PSF and there is need to go beyond them.
Rod Hilton (Australia) said the PSF is a transformational part of the GCF, and was supportive of the facility having its own governing body to which the Board delegates authority. This, he said, was important for the credibility of the Fund on how best to utilise private sector expertise.
Kjetil Lund (Norway) was also in favour of having a separate governance structure for the PSF.
Jorger Ferrer (Cuba) said that consistent with the principle of country-ownership, the GCF needs to be country-driven and not private-sector driven. He was opposed to having a separate governance structure for the PSF.
On the use of the financial instruments, he said the Convention only allows grants and concessional lending and not other financial instruments.
Omar El-Arini (Egypt) said the PSF is meant as an enabling unit or sub-structure within the Fund and there cannot be the creation of another separate fund for the PSF. He said there was no information in the paper on how the PSF is financed or how the funds will flow into the facility.
He was against creating something new that will compete with the public money in the GCF which is yet to come.
Ana Fornells de Frutos (Spain) said that expertise was needed to ensure that the GCF is not subsidising the private sector. The PSF should comply with the objectives of the Fund and must also be open and transparent.
Tosi Mpanu-Mpanu (DRC) did not support a separate governance structure for the PSF and said that it should not be a subsidy scheme for companies from abroad.
Dipak Dasgupta (India) said that risks come in many sizes and shapes. The problem in financial institutions relates to that of governance and no credit committee can take care of this. He asked who was going to bear the risk of dealing with financial instruments and how to prevent moral hazard.
He also raised the issue of the allocation of resources between mitigation and adaptation; between country- driven programmes and international/regional institutions; the allocation to the private sector and within the private sector, the allocation between the small and medium sized enterprises and international corporations.
He stressed the need for strategic discussion in this regard and said there was a deep disquiet "out there" on what the intention of the GCF is.
Alexander Severens (the United States) said that with the PSF, risks in projects can be identified and it could mobilise finance (from institutional investors). It was not about giving subsidies to the private sector. There is also need to do risk analysis.
Jan Cedergren (Sweden) also supported Dasgputa's call in addressing risks as well as to be clear about the terms and conditions of the PSF. Nick Dyer (the United Kingdom) also agreed on the need to address risks.
Per Callesen (Denmark) stressed that risk management was extremely important and there was need to have persons on the Risk Management Committee with substantial knowledge about this matter. An Investment Committee is needed to deal with the issue of how to use or apply a financial instrument, which the Board need not deal with.
The representative from the private sector said that the PSF can be the bridge between the GCF and institutional investors. On the issue of governance, the PSF needs to have credibility and expertise. On the issue of risks in terms of the use of new financial instruments, the private sector needs to have expertise to manage that.
Brandon Wu of ActionAid USA, speaking as a CSO observer, said that the PSF should not have a separate governance structure and that the PSF paper is overly biased towards international capital markets.
He said there is need for an exploration of what private sector interventions can support the efforts of small and medium enterprises in developing countries, taking into account the gender differences in the current access to financing options.