2018 FEMM: Climate Change And Disaster Risk Finance

FORUM ECONOMIC MINISTERS MEETING

 

AND

 

FORUM ECONOMIC OFFICIALS MEETING

 

25-27 April  2018

Koror, Palau

CLIMATE CHANGE AND DISASTER RISK FINANCE

 

Summary of Issue
The paper discusses the region’s accessibility and management of climate change and disaster risk finance (paras 4 – 14), and opportunities for strengthening private sector investment in low-carbon, climate resilient development (paras 15 – 21). Key issues being addressed include: scale of financing required by FICs, status of the region’s accessibility to international climate change and disaster funds, ensuring the effectiveness of funds being accessed by FICs, status of private sector engagement, key barriers to private sector engagement, and options for strengthening private sector engagement.
  1. Background

At the meeting in 2017, Economic Ministers tasked the Forum Secretariat, in collaboration with CROP and partners, to support FICs in strengthening their access to, and management of, international climate change and disaster risk finance, as well as explore options to strengthen private sector engagement. Ministers also supported the role of the FRDP as the overarching strategy that guides regional support on climate change and disaster risk financing.

 

  1. Accessibility and Management of Climate Change and Disaster Risk Finance

 

Scale of financing that will be required by Forum Island Countries (FICs)

 

  1. Globally, developed countries have committed to jointly mobilise up to USD 100 billion of climate change finance per year by 2020, for developing countries. Currently it is estimated that just over 60 billion has been mobilised globally. However, it is estimated that developing countries (including SIDS and LDCs) will require USD 349 billion a year to implement their Nationally Determined Contributions (NDCs) for the next 15 years[1] alone. Currently the collective NDC commitments will lead to a greater than 3 degree Celsius pathway by end of this century. Therefore, if greenhouse gas emissions are to be reduced to ‘well below 2 degree Celsius and pursue efforts to achieve 1.5 degree Celsius’ as stipulated in the Paris Agreement more financial resources, technology transfer and capacity building will be required.

 

  1. A significant portion of NDC targets[2] by FICs is ‘conditional’ on the provision of international climate change finance. For example, Fiji’s conditional NDC will require at least USD 500 million, Vanuatu USD 400 million, Solomon Islands USD 200 million and Nauru USD 50 million. According to the World Bank’s 2017 Pacific Possible Report, on a best case scenario PICs will require up to USD 234 million per year by 2020 and USD 285 million per year by 2040 for adaptation costs related to coastal protection. Against this backdrop, and given the limitations on public, bilateral, and multilateral funding sources, it becomes imperative for FICs to consider attracting and leveraging different types of climate change investment, including from private investors.

 

  1. In terms of disaster costs, the region has already experienced several extreme events since the last FEMM. In February 2018, the cost of damage to electricity infrastructure alone by Tropical Cyclone Gita was NZD 20 million in Tonga and SAT 10 million in Samoa. Extreme events can reverse decades of development gain such as the recent examples of, Cyclone Winston in 2016 which caused damage in Fiji amounting to around USD 1.48 billion, and Cyclone Pam in 2015 in Vanuatu which resulted in around USD 450 million of damage costs.

 

Status of the region’s accessibility to international Climate Change and Disaster Risk Finance

 

  1. Between 2010 and 2014, a total of USD 645 million was approved as climate change finance for FICs. Most of these were grants from bilateral partners and largely project-based funding. Around 59% was allocated towards adaptation[3]. To get a more accurate and improved understanding of the financial flows to the region, the Forum Secretariat, in collaboration with a number of partners[4] have to date, completed national climate change and disaster risk finance assessments in ten[5] FICs. The findings have shown that FICs are accessing climate change and disaster risk financing from a range of donors, but the support is scattered and more than 50% is not tracked nor reported in national budgets. There are also gaps in the public financial management systems to be able to effectively absorb funding and utilise country systems. FICs need to continue to advocate for more flexible modalities such as budget support and programmatic approaches, to ensure long-term strategies for adaptation, mitigation and reconstruction are undertaken. Ministers might wish to note that the FEMM paper (PIFS(18)FEOM/FEMM.4) on the Pacific Resilience Facility is one option that could be developed to support more flexibility and provide longer-term funding.

 

  1. The Green Climate Fund, a high profile fund but not the only source of climate change finance has been the focus of much attention by FICs in the last few years. In terms of accessibility to the Green Climate Fund (GCF), a total of nine FICs have had projects approved from November 2015 to the present, amounting to USD 297 million. This equates to 8% of the total GCF approved project portfolio globally. Additional project proposals are expected to be submitted by FICs in 2018. While more projects from the region are being approved, there remains significant delays in the actual disbursement of funding. This has implications for and affects budget planning and aid predictability. Ministers may wish to advocate for timely disbursement of GCF resources for approved projects. A summary of the approved projects is presented below.
Country Project focus GCF funding Accredited Entity
Fiji Water & Sanitation USD 31m grant ADB
Tuvalu Coastal Protection USD 36m grant UNDP
Samoa Flood Management USD 57.7m grant UNDP
Vanuatu Climate Info Services USD 23m grant SPREP
Cook Islands Renewable Energy USD 17m grant ADB
Solomon Islands Tina River Hydro Power USD 86m (70m loan & 16m grant) World Bank
Papua New Guinea (part of global multi-country) Energy generation & access Specific national allocation for Papua New Guinea is yet to be quantified. EIB
Nauru Climate Resilient Port USD 26.91m grant ADB
Republic of Marshall Islands Early warning systems, climate resilient shoreline protection and disaster response USD 25m grant World Bank

 

  1. Regarding direct access, the Fiji Development Bank is the only FIC with national implementing entity (NIE) for the GCF but a number of partners are working with other FICs to submit NIE applications. The Secretariat of the Pacific Regional Environment Programme (SPREP) and the Micronesian Conservation Trust (MCT) are regional implementing entities under the GCF. This is complemented by a number of GCF multilateral implementing entities working in the Pacific, including World Bank, ADB, UNDP, UNEP, Conservation International, IUCN, WWF, GIZ, JICA, FAO, WMO and EIB. Noting that accredited entities have different levels of accreditation and the risks and instruments they could administer, it is important for FICs to work with the right accredited entity, noting the conditionalities placed on them by the GCF in meeting its fiduciary standards and environment and social safeguards.

 

  1. At present ten FICs have accessed readiness grants[6] from the GCF. FICs are eligible to access up to USD 1 million per year in readiness grants from the GCF and up to USD 3 million as a one off grant to support the development of their National Adaptation Plans. Recently, the GCF Board adopted a ‘Simplified Approval Procedure (SAP)” for projects up to USD 10 million, perceived as low risk, with the potential to be scaled up and to contribute to transformative and paradigm shift toward low emission and climate-resilient development. Project proposals (not readiness proposals) that fulfil these criteria will be considered under the SAP. SPREP is working on a SAP concept for climate information services.

 

  1. In relation to disaster risk finance (particularly in the response phase), the most recent example is the USD 7 million payout to Tonga following Cyclone Gita in February. USD 6 million of the amount was contingent financing under ADB’s Disaster Resilience Program- established in December 2017 to help strengthen Samoa, Tonga, and Tuvalu’s resilience to disasters. An additional USD 1 million was a grant under the Asia Pacific Disaster Response Fund. In addition, Tonga received a USD 3.5 million payout from the Pacific Catastrophe Risk Insurance Company (PCRIC), based on its insurance cover against tropical cyclones. PCRIC is a company under the PCRAFI that is supporting five FICs[7].

 

  1. There is an increasing need to increase the range and variety of disaster risk finance products available to FICs. In addition to PCRAFI, the ADB Disaster Resilience Program, and existing contingency funds by the World Bank and IMF, there are a range of other, new instruments for insurance and risk transfer including micro credit and catastrophe bonds. FEMM paper (PIFS(18)FEOM/FEMM.5) provides a proposal for the development of a Pacific Islands Climate Change Insurance Facility. The paper also includes a background paper on the various disaster risk finance insurance instruments mentioned above. Ministers might wish to consider that with additional instruments becoming available, they remain abreast of these developments and how they may best be coordinated, to ensure that adequate funds are available appropriate instruments for ex-ante risk reduction, ex-post-disaster recovery and reconstruction.

 

Ensuring the effectiveness of funds being accessed by Forum Island Countries

 

  1. While it is important for FICs to pursue more funding through flexible and simplified approaches, the onus is also on members to demonstrate their absorptive capacity. This is critical recognising that the scale of climate finance FICs are accessing will continue to increase. If countries are to effectively implement these large-scale projects, it will require sound public financial management systems. Success will allow FICs to leverage additional international climate finance to address resilient development objectives and ensure infrastructure is climate-proofed. To track climate finance flows to the national level and address the significant amount of funding that flows off-budget, the Forum Secretariat is working with the SPC/USAID ISACC Project to develop a national climate finance tracking tool. The tool will be piloted this year in Vanuatu with an update on its utility provided to the next FEMM.

 

  1. To improve the absorptive capacity of FICs, the Forum Secretariat is working with PFTAC, GIZ/DFAT Climate Finance Readiness in the Pacific project and ADB, to strengthen national public financial management systems. One key initiative that the Forum Secretariat, with support from GIZ/DFAT Climate Finance Readiness in the Pacific project, has undertaken is the consolidation of a PFM issues matrix to assist with identifying specific areas within the country’s PFM machinery that needs to be strengthened, and of equal importance, to assist donors prioritise their support accordingly. This is being piloted in five FICs (Samoa, Tuvalu, Kiribati, Solomon Islands and Vanuatu) and validation missions have been completed with respective central agencies, in particular the Ministries of Finance. Subject to funding, for TA and validation missions, there is scope to expand this initiative to remaining FICs. A detailed report could be developed for the next FEMM.

 

  1. Strengthening Private Sector Engagement

 

Status of Private Sector Engagement in Climate Change and Disaster Risk Finance

 

  1. Despite government’s increasing access to global climate funds, in particular the GCF, private sector access to these resources is limited. Nevertheless a number of private companies are already investing in low-carbon, climate resilient development initiatives such as renewable energy (such as Sunergise Fiji) and transport sectors (such as sustainable sea transport in RMI).

 

  1. The GCF has a dedicated private sector facility that private sector stakeholders in the Pacific could access for mitigation and adaptation activities at all levels targeting activities in renewable energy, transportation, energy efficiency, agriculture and water efficiency, forestry and land use, waste management and urban planning. Currently no FIC private sector entity has accessed this facility. The only proposal focusing on FICs, which was shortlisted by GCF in August 2017 was from an Australian company known as ITP Renewables[8] for a ‘Frontier Fund’ to work with FICs to develop reliable and affordable renewable energy and energy infrastructure solutions. The fund will leverage credit enhancement and equity investment from the GCF to attract private sector investment, targeting an aggregate fund size of USD 250 million.

 

  1. The Forum Secretariat, in collaboration with a number of partners is undertaking a range of initiatives to identify key challenges and recommendations for strengthening private sector investment in low-carbon, climate resilient development activities in the region. One key initiative is a Sub-regional Private Sector Workshop for Melanesia on accessing climate finance and improving public-private partnerships – jointly organised by the Forum Secretariat, USAID Climate Ready and Papua New Guinea’s Climate Change and Development Authority from 9 – 10 April in Port Moresby. About 50 participants from Papua New Guinea, Solomon Islands, Vanuatu and Fiji attended. With additional funding, the Forum Secretariat is planning to convene two sub-regional workshops for Micronesia and Polynesia, and fund at least three participants per country (GCF NDA, chamber of commerce and private sector practitioner), TA support, and meeting venue hire. Based on the first workshop for Melanesia, it is estimated that each workshop will cost approximately FJD 80,000.

 

  1. Another initiative is mapping of the private sector for Vanuatu, supported by the GIZ/DFAT Climate Finance Readiness in the Pacific project and completed in early 2018. This was. The final report identifies key private sector entities actively engaged in climate change related initiatives, and a donor database. Two GCF concepts for tourism and agriculture were also developed. Being the delivery partner for Nauru’s GCF readiness grant, the Forum Secretariat will also undertake a private sector mapping for Nauru in 2018. The Forum Secretariat also supported a recent Private Sector Climate Finance Tradeshow in Vanuatu on 5 April 2018 and a regional private sector meeting in French Polynesia in late March.

 

  1. Furthermore the Secretariat has convened and coordinated a regular meeting (three in 2017) of climate change finance technical providers to ensure improved communication and coordination in various activities being undertaken in the Pacific. There were also two coordination meetings of GCF Accredited Entities to again improve information amongst AEs of upcoming projects and reduce overlaps in related projects and Readiness support. Also though coordination with GIZ/DFAT, SPC/USAID ISACC and USAID Climate Ready, technical support was provided to FICs to build national capacity to access climate change funds directly. Also convened the PICCIF Taskforce to review and consider current disaster risk finance in the Pacific (see separate paper). Lastly, support for FICs negotiations at COP23 through the one CROP Team was provided, to ensure that commitments made in the Paris Agreement are implemented by all parties.

 

Key Barriers to Private Sector Engagement

 

  1. From these consultations and meetings, some of the identified key barriers to private sector engagement in low-emission, climate resilient development projects include:

 

  1. Lack of appropriate strategic and regulatory framework at the national level that addresses both the demand and supply sides is a major deficiency and a risk source for private sector investments in a given country. Classic examples are the monopoly of a sole public utility company and ingrained reliance on subsidised fossil fuels and lack of renewable energy purchase obligation on consumers/utilities.

 

  1. Absence of explicit incentive systems often hinder the engagement of the private sector and the investor’s appetite for risk.

 

  • Demand-Supply mismatch – on the demand side, the absence of consumer awareness and knowledge, lack of fiscal incentives and financial schemes will limit consumers’ demand for renewable. On the supply side, local banks and investors lack knowledge of climate related businesses to be able to undertake due diligence and risk assessment to approve funding requests of project developers.

 

  1. Businesses and particularly SMEs have difficulties articulating the business case to investors and financiers due to lack of adequate training to assess returns on investment and to measure the risks and their implications on the business. Many project developers lack financial strength, technical expertise and collateral to borrow locally.

 

  1. Private sector being disconnected from the national discourse on financing opportunities because the engagement with them by governments is often minimal.

 

Options for Strengthening Private Sector Engagement

 

  1. Potential options for strengthening private sector investment in low-carbon, climate resilient development projects include:

 

  1. Governments to consider tax incentives and rebates for businesses that invest in green projects and net metering policies.

 

  1. Legislative reforms in sectors such as energy and transport, in particular to encourage businesses and consumers to invest in renewable energy and sustainable land and maritime transport options.

 

  • FICs with high liquidity could consider green bonds as a potential option to attract private sector support for climate change finance. Other FICs may also wish to explore the establishment of national green energy funds.

 

  1. Interested countries could learn from Fiji’s experience with the green bonds issued in November 2017, valued at FJD 100 million (USD 50 million).
  2. Vanuatu is establishing a national green energy fund to support “green energy investments” with the objective to incentivize investments in “green energy,” particularly small-scale investments by households, communities, MSMEs and public facilities in rural areas. This could be a possible model to support private sector engagement in other FICs.

 

  1. Governments to ensure information on funding opportunities is shared with the private sector in a transparent and timely manner.

 

  1. To be able to access the scale of funding in the GCF, private sector entities may need to forge a consortium to pool resources and expertise and work closely with the GCF National Designated Authority.

 

  1. Support the efforts of the Pacific Business Disaster Resilience Network (PBDRN), including national networks such as the Fiji Business Disaster Resilience Council and the Vanuatu Business Resilience Committee.

 

 

Pacific Islands Forum Secretariat, Suva
5 April 2018

[1] German watch, “Investing in Ambition: Analysis of the financial aspects in (Intended) Nationally Determined Contributions”, May 2016.

[2] NDC commitments for the Pacific are primarily mitigation targets (renewable energy and reduction in fossil fuel, with few countries including adaptation measures and extending to include land and maritime transportation). This is the benchmark for country Parties taking action under the Paris Agreement.

[3] Stockholm Environment Institute Report 2017.

[4] SPC/USAID Institutional Strengthening in PICs to Adapt to Climate Change (ISACC) Project, GIZ/DFAT Climate Finance Readiness in the Pacific Project, USAID Climate Ready Project, UNDP, UNDP/DFAT Pacific Risk Resilience Program, SPC, ADB, PFTAC and SPREP.

[5] Nauru, Samoa, Fiji, Vanuatu, Republic of Marshall Islands, Palau, Solomon Islands, Federated States of Micronesia, Tonga and Kiribati.

[6] Readiness grants are intended to assist countries strengthen the capacity and function of their national designated authority, develop country strategic framework for engaging with the GCF, build the capacity of potential national implementing entity and project pipeline development.

[7] Cook Islands, Tonga, Vanuatu, RMI and Samoa.

[8] www.itpau.com.au – has done previous work in FICs such as Tonga, Fiji, Tuvalu, Vanuatu, Palau, Nauru and Solomon Islands