IMPLICATIONS OF THE CIF PROGRAMMING PROCESS FOR PRIVATE SECTOR ENGAGEMENT

The CIF’s country- and government-led programmatic approach to investment planning has resulted in most funding being directed at public sector interventions (Exhibit 5.2). Interviews and fieldwork suggest strong incentives for public agencies to capture CIF resources. In retrospect, greater foresight in the design of the CIF, based on the GEF’s similar experience with diminishing private sector engagement following the implementation of a new resource allocation system, could have avoided this capture.129

The Joint CTF-SCF TFC has not articulated a preferred division of funding, although it has urged countries and MDBs to allocate an increased share to direct private sector investments. On one hand, this strategy supports greater engagement of private capital in CTF; at the time of investment plan endorsement, the anticipated ratio of CTF funding to private sector co-financing is nearly 1:5 for private-led interventions, versus 1:3 for public- led interventions. On the other hand, in PPCR, no public sector projects and only two private sector programs are anticipated to attract private sector co-financing (one of which has faced significant challenges in identifying a private sector partner). This broad directive has also not been reconciled with the relative capacities of the private sector across the CIF Programs, or country-level assessments of the barriers to private sector engagement.

Source: CIF Project Database, as provided by the CIF AU on December 3, 2013.

EXHIBIT 5.2

|

Endorsed Funding Directed at Public and Private Sector Interventions

0 20 40 60 80 100 90 70 50 30 10

PERCENT OF ENDORSED FUNDING

CTF PPCR FIP SREP

Private Public

Public sector interventions can lay the groundwork for future private investment by addressing the regulatory framework or investing in complementary infrastructure. For example, in the Maldives, SREP public-channeled technical assistance to develop the feed-in tariff regime and standardized power purchase agreements will address key market failures dampening private investment. In Morocco, CTF-financed electricity transmission infrastructure will allow private power producers to sell wind power into the grid. And in many FIP countries, indirect support for private sector engagement, including through policy and legal and land-tenure related reforms, will be important building blocks. Some of these public sector investments may ultimately catalyze more private sector involvement than direct private sector investments.

The lengthy investment plan approach has undermined private sector engagement. Some private sector clients engaged at the planning stage were not willing to wait and walked away. In other cases, market conditions changed dramatically resulting in the loss of the originally anticipated projects. In addition, having solid assurance that funds will be available is important when approaching potential clients and beginning to structure financial packages; getting TFC approval provides the necessary assurance but takes more time, presenting difficulties for engaging private clients.

The CIF have reacted to the perceived under-allocation of private sector funds in the investment plans, as well as the timing issue, by setting up a dedicated private sector program for CTF and private sector set-asides for the three SCF Programs. The intent is that these programs have a complementary approach to the investment plan development process, which offers on-demand financing for private sector programs that align with countries’ existing investment plans and priorities. While still nascent, the set-asides already have proven to be faster. However, the set-asides do not address some of the fundamental issues related to risk tolerances that have contributed to limiting the use of innovative instruments. 5.2.3 IMPLICATIONS OF THE CIF OPERATIONAL GUIDELINES The specifics of CIF operational procedures for private

sector deal structuring, as well as differing risk sensitivities of CTF TFC members stemming from different methods of fund capitalization, have contributed to a limited use of innovative financial instruments.130 _{For example, allowing}

the use of subordinated positions vis-à-vis MDB loans and commercial lenders was seen as a particular improvement for the CIF among global climate funds in terms of private sector engagement,131 _{but CIF operational procedures and differing risk} sensitivities have made it more difficult in practice to subordinate CTF funds to MDB funds.

Some incremental improvements for deal structuring have been made. The CTF and SCF TFCs approved proposals for the use of local currency lending,132 _{which is seen by many as} essential to engaging with the private sector, and in particular with small- and medium-sized enterprises. These approvals should help move forward five private sector projects that had been approved by the CIF committees but not as of yet by the MDB boards. Negotiation of the use of local currency has been complex and protracted in the CTF, due to concerns that potential losses on local currency loans because of exchange rate fluctuations could impact the CTF Trust Fund’s ability to repay donors that contribute loan.

5.3 Leverage

KE Y FINDINGS

• The CIF generally have expressed “leverage” as a ratio of CIF funding to non-CIF project funding, often using language that misleadingly implies that the CIF funding attracted or catalyzed the rest of the project funding. The CIF should develop a realistic understanding of when and why it has actually mobilized other finance as a consequence of its investments.

• It is difficult to precisely determine whether the CIF have in fact mobilized additional financing, but for many projects, fieldwork raised questions about the CIF’s role in mobilizing additional project finance, as well as whether projects would or would not have happened without CIF funding.

The CIF generally have expressed “leverage” as a ratio of CIF funding to non-CIF project funding, often using language that implies that the CIF funding attracted or catalyzed the rest of the project funding, without substantiating those implications.133 The implication that CIF funding has “leveraged” all non-CIF

52

CLIMATE INVESTMENT FUNDS

project funding is misleading. CTF and SCF both have key objectives to leverage financing, but the term “leveraging” has cross-pollinated with the concept of “co-financing” in the CIF vernacular, without the Joint CTF-SCF TFC adopting an official definition of either term.

The CIF may play an important role in financing a project, regardless of whether it leverages additional financing. However, for learning purposes—and to maximize future leverage— it is important for the CIF to have a robust and realistic

understanding of when and why it has actually mobilized private sector and other finance as a consequence of its strategic investments.

It is difficult to precisely determine what contribution the CIF have made to securing or catalyzing additional project financing. For many projects investigated through fieldwork, questions were raised about the CIF’s role in mobilizing additional project finance, as well as whether those projects would or would not have happened without CIF funding. In some projects, the CIF seem to have effectively leveraged financing; for example, in Turkey, approximately $150 million of CTF and $800 million in MDB funds have helped leverage over $500 million in private funds for renewable energy and energy efficiency investment by supporting financial institutions in building sustainable energy lending businesses. In other projects, CTF concessionality appears to have been an important factor in leveraging private sector funds, but the role of CTF in mobilizing other project financing, including from governments and MDBs, is less clear. Fieldwork, interviews, and the project lead survey emphasized the importance of CIF funding for moving projects forward. Nearly three-quarters of CIF project leads believed that their project would not have proceeded without the addition of CIF funding. In Morocco, CTF concessionality was critical for attracting and securing private sector involvement in the Ouarzazate CSP project. Fieldwork did identify cases in which it was difficult to firmly establish the additionality of CTF funds.134 For example, CTF financing for the Mexican Urban Transport Transformation Program has been redirected to finance the purchase of natural gas buses and ancillary investments, which is also done by public and private Mexican banks (although the transport program represents a new project finance modality for bus rapid transit in Mexico).

EXHIBIT 5.3

|

Defining Leverage, Co-finance, and Additionality

The terms “leverage” and “additionality” are commonly used in climate finance discussions. Different actors use these terms differently, and no standard definition or methodology exists (Brown et al. 2011; OECD 2013). The CIF have not adopted an official definition of “leverage,” nor has the UNFCCC.

Leverage. The evaluation adopts the definition that resources are leveraged when a CIF investment contributes to crowding-in or catalyzing the investment of new and additional funds. While the evaluation primarily looks at leverage during the lifetime of a project, it should also be acknowledged that some projects might leverage private co-financing only after a project has been completed. For example, an infrastructure project such as the construction of transmission lines for wind power in Egypt might reasonably be expected to catalyze private finance after the lines are built.

Co-finance. The CIF often uses the term “leverage” interchangeably with “co-financing.” For the purposes of this evaluation, leveraged resources are not necessarily equated with co-financing. While the CIF have not adopted an official definition of co-financing, this evaluation understands co-financing to mean project resources that are committed by associated non-CIF sources, including public and private sector sources, carbon finance, and bilateral and multilateral development partners, to meet the broader project objective (i.e., not only the objective of the CIF funding). Additionality. In this evaluation, the concept of “additionality” is related to leverage, but is distinguished as supporting public and private activities that likely would not otherwise have taken place.

Sources: Brown, J., B. Buchner, G. Wagner, and K. Sierra, 2011.

Improving the Effectiveness of Climate Finance: A Survey of Leveraging Methodologies; OECD, May 2013. Comparing Definitions and Methods to Estimate Mobilised Climate Finance. Climate Change Expert Group Paper No. 2013(2). Authored by Randy Caruso and Jane Ellis (OECD).

In FIP, evidence suggests limited leverage and potentially some crowding out of recipient country funding (which may partially reflect strong competition for domestic funds). Fieldwork found some hesitancy among development partners to commit co-financing to FIP, and little evidence of attracting major investments from the private sector. The recently endorsed FIP private sector set-aside projects represent an opportunity for improved engagement. A survey of FIP MDB project leads found varied opinions; about half of those surveyed felt that CIF funds catalyzed additional contributions from recipient country governments and private sector, while half did not. About a quarter of FIP project leads surveyed believe that CIF funds crowded out recipient country funding.

5.4 Balancing Direct Climate Benefits and

In document Independent Evaluation of the Climate Investment Funds. VOLUME 1 Evaluation Report (Page 85-88)