2018 FEMM: THE PACIFIC RESILIENCE FACILITY (ATTACHMENT 1

A.    INTRODUCTION

  1. Building Resilience to climate change and managing and mitigating disasters from natural hazard risks are real and present challenges for Forum Island Countries (FICs). The recent disasters from tropical cyclones, droughts and earthquakes that have occurred in the region have exposed the affected countries and communities to extreme economic, social and environmental impacts. Similarly, a series of disasters experienced in the Caribbean region in 2017, which resulted in damage losses as high as 200% to 300% of affected countries’ Gross Domestic Product (GDP), also provide stark evidence of the vicious cycle of disaster response, recovery and reconstruction coupled with the challenges of macroeconomic stabilisation suffered by the small, open economies of the affected countries.
  2. These shocks and stressors challenge the traditional thinking and approaches for sustainable economic development of Small Island Developing States (SIDS), including FICs, as the significant cumulative value of direct and indirect losses from these extreme natural hazard risk and climate change events tend to outstrip the expansion in national and regional GDP. Collective impacts of climate change (coupled with disasters) tend also to compound the economic fragility of SIDS through either temporary and/or permanent losses to the productive economic (and export) sectors, and to national public and private infrastructure and assets.
  3. These losses deepen the supply-side constraints to a country, which is more often than not an already vulnerable SIDS, to achieving sustained economic growth and development. For instance, while noting the deep-rooted role of tourism in driving most FICs’ economies, related economic assets and infrastructure, and associated economic sectors for tourism are often highly exposed to adverse impacts of climate change and natural disasters. Such shocks and stressors also tend to disproportionately affect the relatively poor and vulnerable in the society than people with higher income and wealth, which can exacerbate the income and wealth inequality within country and across the region.
  4. Therefore, such imputed costs cannot only be accommodated or cushioned by allocating national budget contingencies and shifting sovereign or non-sovereign risks to the market (i.e. sovereign insurance). Rather there is a need to have an array of instruments and options to finance and support recurrent recoveries.
  5. For FICs, the need to invest upfront in building economic, social and environmental resilience for their sustainable growth and development, is required. Such an initiative by FICs would need to be complemented by their development partners. Innovative action and mobilisation of international public and private finance would need to be mobilised for maximum impact and “resilience dividends” to be felt.
  6. Global research shows that for every $1 spent on building resilience to catastrophic events $7 is saved in response and recovery. Similarly, $1 in $3 spent on development assistance is wasted, due to limited focus on resilience investment (Global Resilience Partnership, 2018). As a result, the resilience dividends tend to be higher if investments are made in upfront preparedness and risk prevention.
  7. Therefore, the proposed Pacific Resilience Facility (PRF) seeks to provide an integrated regional financing solution for FICs that would address, to the extent possible, the following:
  8. Ease of accessibility to finance for ex-ante resilient development, that seeks to focus on preparedness to disasters from natural hazard risks and to assist in climate change adaptation;
  9. Fragmented nature of financing flows in building ex-ante resilience in the region through consolidating regional finance for preparedness initiatives that consider multi-faceted approaches through governments, private sector and communities;
  10. Mobilisation of international private and public finance to leverage additional financing for FICs to cover the risk resilience component of new projects and/or retro-fitting existing infrastructure to make these risk resilient; and,
  11. Effective management of stochastic shocks and stressors for better economic management of the economy and associated risks for resilient and sustainable development.
  12. It is important and critical to understand the nature, purpose and role of the proposed Pacific Resilience Facility (PRF) in comparison to other bilateral, regional and international climate and disaster resilience initiatives and platforms available to the region and to FICs.
  13. This proposed PRF will complement other regional and national initiatives, such as the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) facility and the proposed household insurance, being developed by Fiji and, which aims to increase the fiscal resilience of Pacific Island countries and their capacity to meet immediate funding needs post-disaster, without compromising domestic budgets.
  14. While the proposed PRF will not be a silver bullet for addressing all of the challenges faced by FICs it will be a new and focused facility for investing in ex-ante resilience in the Pacific and, will:
  15. Enhance coordination and provision of regional public goods through a regional financing mechanism which is innately Pacific – that is, from the determination of the governance structure, to decisions on investment priorities, to implementation at country or multi-country levels;
  16. Scale-up innovative and “home-grown” solutions, which might not fit the traditional norms of commercial financing yet, but which could have profound impact on the lives of Pacific peoples and on Pacific economies;
  17. Better respond to the unique challenges of the SIDS, noting the persistent economic stresses of global food and fuel prices are compounded by other shocks and stressors, including coping with natural hazards risks and needing to adapt to climate change; and,
  18. Provide another avenue to leverage additional finance, through blending and/or co-financing with other sources of finance and risk guarantee mechanisms, including from local/national, regional and international sources for FICs’ governments, the private sector and communities.
  19. In addition, the set-up of the PRF does not guarantee in any way that FICs will be totally protected from the impacts of shocks and stressors, although, it does provide assurances that FICs can:
  20. better absorb disturbances (that is from shocks and stresses);
  21. prevent unacceptable levels of human suffering, and economic losses and damage to the economy;
  22. reduce the costs of emergency response/relief, recovery and reconstruction through building better and stronger infrastructure and creating larger economic benefits from upfront resilience investment through an economic multiplier effect;
  23. encourage forward thinking, forward policy guidance and implementation and, simulate economic activity through ex ante investment in resilience; and,
  24. build an integrated economic management approach by holistically accounting for imminent shocks and stressors within mainstream development practice.
  25. It is envisaged that PRF will be sustainable and further strengthen in the foreseeable future and in the long-term the PRF could act as a vehicle for the FICs to raise funds in the international markets at competitive rates.

 

B.        STRATEGIC OBJECTIVES

  1. The proposed PRF is strategically aligned to the Framework for Resilient Development in the Pacific (FRDP) endorsed by the Pacific Islands Forum in 2016. More specifically, the proposed PRF seeks to empower FICs to strengthen their ownership of the region’s resilient development agenda with a specific focus on disaster preparedness and climate and disaster risk resilient infrastructure.
  2. The strategic objectives of the proposed PRF are to:
  3. Strengthen the collective financial resilience of FICs against natural hazard risks in the Pacific region;
  4. Provide cost-efficient and contextualised financing options for resilient development projects in the Pacific, including through national governments, private sector and community-based organisations;
  5. Strengthen strategic partnerships with key development partners to harness collective support for disaster preparedness in the FICs; and,
  6. Encourage capacity development in national climate and disaster risk budgeting and financing, through strengthened public financial management in the Pacific region.

 

C.        GUIDING PRINCIPLES

  1. The PRF is designed on the basis of four key principles:
  2. Regional ownership: The PRF proposes establishment of a regional body that is accountable to Members. The proposal allows Members the opportunity to control and influence the region’s resilient development agenda, by pooling its economic and political capital to shift and transform the region’s development paradigm, and take ownership to ensure that its development is both resilient and sustainable.
  3. Affordable and contextualised Financing: The PRF is designed to ensure that both the country and regional context is taken into specific consideration, noting in particular that the absorption of any disbursement is dependent upon the public financial management capacity of the FICs. As such, contextualised financing will also recognise existing national governance and transparency mechanisms that have been assessed through the ongoing work on national Public Financial Management (PFM) Roadmaps, associated Public Expenditure and Financial Accountability (PEFA) Assessments, and their links to national development plans and strategies such as national Green Growth Frameworks and Joint National Action Plans (JNAPs) for climate change and disasters;
  4. Additionality and Complementarity: The proposed PRF must seek additional funding and must not divert funds away from bilateral arrangements between FICs and their development partners. The PRF must complement existing regional initiatives such as, the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) and Fiji’s Household Insurance Programme, and should be used as additional financial leverage for FICs.
  5. Investment in preparedness: Through the FRDP, Leaders and Economic Ministers recognise the importance of strengthening resilience to climate change and disaster risk management through integrating risk management considerations into resilient development and as a consequence mitigating the economic costs and impacts of climate and disaster risks.

 

D.        GOVERNANCE ARRANGEMENTS

  1. The collective governance of the proposed PRF is at regional level with respect to oversight and direction. The proposed governance structure of the facility is designed to be lean and effective, with a clear separation between strategic oversight and operational implementation. The distinction provides the opportunity for clear monitoring of the effectiveness of the operational component of the PRF, against the strategic guidance of the management component of the PRF’s governance structure.
  2. Drawing on the endorsed structure of the PCRAFI facility, the following structure is proposed:

Figure 1: Proposed Governance Structure

 

  1. The PRF’s governance structure covers three discrete, yet linked functions:
  2. Long-term (5 – 10 years) strategic guidance aligned to the agreed principles;
  3. Medium-term (2 – 3 years) strategic oversight and goal-setting, including monitoring alignment and effectiveness; and,
  4. Annual operational implementation.
  5. The structure proposes to deliver on the above functions in an integrated manner. Key responsibilities are outlined below:
    1. The Council of Members:
      1. Membership composition: All Member States; key development partners; 1 private sector representative; and 1 civil society representative.
      2. Role: The Council will meet annually at Ministerial-level, to consider the progress of the PRF against its founding principles and long-term strategy.
  • Frequency of Meetings: The Council will meet at least once annually, on the margins of the annual Forum Economic Ministers Meeting, and any other relevant regional meeting(s).
  1. Responsibilities:
  1. Establish governance principles and ensure adherence to the governance principles by the various levels;
  2. Ensure ongoing complementarity of the proposed Facility with existing and new financing mechanisms in the region; and,
  3. Advocate for strengthened political and economic support for the PRF through Forum Dialogue Partners and other relevant or contributing donors to the Facility.
    1. The Board of Directors
      1. Membership composition: 5-member board appointed through a competitive recruitment process and to include the Chief Executive Officer, who will act as Secretary to the Board.
      2. Role: The Board of Directors will provide medium-term strategic oversight to the PRF; provide independent advice and recommendations on the assessment of proposals; and be accountable to the Council of Members. It is proposed that the Board comprises five (5) members of sound technical and financial background, and who have extensive Pacific islands experience.
  • Frequency: The Board will meet at least bi-annually to consider and review the technical assessments of the proposal put forward by the operational team.
  1. Responsibilities:
  1. Evaluate the technical assessments of each proposal as put forward by the operational team;
  2. Agree and recommend proposals for the consideration of the Council of Members at their annual meeting(s);
  3. The Board of Directors will meet bi-annually before and after the Council of Members; and
  4. Monitor financing levels of the PRF and broker additional international financing resources, as required.
    1. Operational Component
      1. Membership composition: The operational component will be headed by the Chief Executive Officer (CEO) who is accountable to the Board of Directors. The CEO will be supported by a Fund Manager; three technical analysts and a pool of regional experts from which the CEO can draw on to provide specific advice on the financing proposals.
      2. Fund Manager: is responsible for the investment of the fund’s investments and ensuring that the fund’s strategy is aligned to the PRF’s objectives. In addition, the fund manager is also responsible for the overall operation of the facility, including ensuring adequate risk management measures and flexibilities are in place.
  • Technical Analysts: are responsible for undertaking the assessments of the financing proposals, including providing the requisite technical assistance and delivering capacity building support programmes in the Member States.
  1. Regional pool of experts: a pre-approved list of technical experts in various sectors who have proven practice experience in the Pacific and who are familiar with its specific context and are readily available to undertake sectoral assessments, as required.

 

F.         SOURCE OF FUNDING AND MINIMUM CAPITAL REQUIREMENTS

  1. As discussed in the guiding principles of the PRF, the key source of funding for the PRF has to be from additional development funds to complement ongoing and new regional resilience initiatives, and especially with respect to investment in disaster preparedness. Based on the recent experience of the Caribbean countries (in late 2017, wherein they successfully raised pledges of almost US$2 billion, of which US$1billion was in grants and US$1 billion in concessional loans), it is envisaged that the bulk of the funds for the proposed Facility has to be fund-raised through and from development partners. The FICs will also need to contribute to the seed funding, to ensure member country ownership of the initiative. Once the PRF concept is approved by the FEMM and endorsed by the Forum Leaders, a detailed funding strategy can be worked on under the guidance of the FEMM Troika of Ministers and TWG. This political support and approval of the Forum Economic Ministers and Forum Leaders is a critical and crucial foundation upon which to progress the next phase of work on establishing the proposed Facility.
  2. The minimum capitalisation of the proposed PRF, ranges from a minimum capital requirement of US$300 million to US$500 million (equivalent to around 1% to 1.7% of the regional Nominal GDP), with periodic replenishment needed to ensure sustainability of the PRF. This is further discussed in the following sections on Proposed Financing Products and Financial Scenarios, as the sustainability of the proposed Facility is intricately linked to the financing structure and products to be offered to FICs, such as the type of instruments (whether to be grants, or loans, or a combination of grants and loans), volume of, and size of transactions, and appropriate structuring of the capital (that is, portion of liquid and fixed capital investment, associated investment returns, transactions costs and management fees, allowance for specific period to build financial capital stock, etc.).

 

 

 

G.        PROPOSED OPERATIONAL FRAMEWORK AND FINANCING PRODUCTS

  1. The guidance from the FEMM TWG and from extensive member country consultations yielded three specific areas where there are gaps, and hence the following financing products for building resilience are being proposed for:
    1. Government: To support governments (either through grants, concessional loans or a combination of these) to finance the resilience component of new projects (e.g. providing funds to disaster/climate proof new infrastructure such as public buildings) and/or to retro-fit existing infrastructure such as existing schools, hospitals and physical assets of power and water utilities – to build appropriate levels of resilience to climate change and natural hazard risks). Consultations with Members’ and Multi-lateral Development Banks (MDBs) also highlighted the need to consider the varying demands and needs of FICs, and especially those that receive significant grants from MDBs and member countries with relatively high debt ratios compared to their regional peers. On the other hand, non-grant based FICs indicated their need for concessional financing which is either similar to or better than their current arrangements with MDBs, so as to provide them with viable options to co-finance and leverage additional finance for their investments to build resilience to climate and disaster risk.
    2. Private Sector: To support, encourage and entice private sector investment in resilience by crowding-in investment through concessional loans. Based on information gathered during recent consultations in member countries, most financial intermediaries such as regional commercial banks/financial entities do not provide commercial and/or subsidised support to the private sector that seek to invest in the resilience sector or resilience-related activity in the region. This is largely attributed to their limited knowledge of resilient development initiatives and the internal capacity of financial intermediaries’ to deal with managing financial risks associated with resilient investments, against the backdrop of envisaged limited, or no financial returns. Therefore, a concerted policy intervention may be needed in the initial stages of setting up of the PRF, to provide subsidised financial products, which could be progressively withdrawn – depending on crowding-in of commercial finance and investment from financial intermediaries to the private sector. Such policy interventions have been shown to be very successful in the micro-finance and SMEs sector in the region, wherein the national governments with the support of development partners had initially provided a subsidised policy intervention to support, encourage and entice commercial interest and investments. Therefore, it is proposed that a concessional loan facility should be established for the private sector through the PRF, to support, encourage and entice private sector investment in resilience in the region.
    3. Communities: Recent regional experience with catastrophic and disaster events has shown that building communities’ resilience is as important as it is for the public and private sectors, as this can be a significant and unanticipated downside risk to national budget and fiscal balances, as well as risk to overall national economic activity which invariably impacts the private sector. It is therefore as imperative to support and build the resilience of the region’s communities, through (1) lowering anticipated fiscal drain to support communities in the aftermath of disaster events; (2) ensuring resilience of national economic activity and multiplier benefits that accrue to the private sector (through stable conditions for national demand) and the public sector (through stability in taxes to finance expenditures); and, (3) to save lives of people through better investment in preparedness in community infrastructure such as resilient housing, community halls for evacuation centres and shelter, and consistent access to clean water and sanitation, to depend on during climate and disaster risk events. To this end, the proposed PRF will need to allocate small-scale community grants to fund resilience initiatives in communities across the region. This niche product will meet the small quantum financial needs of communities, which is currently underserved in the region by local and international financial institutions, due to high administration costs associated with limited scale and value of transactions.

 

H.        SIMULATED FINANCIAL SCENARIOS

  1. The simulated financial scenarios presented in this section of the paper are based on some heuristic assumptions and guidance from the FEMM TWG, and aligned to FICs’ experiences with MDBs and international financing arrangements, to provide some clarity on the sustainability of the proposed PRF and sensitivity analyses of proposed financial products.
  2. These simulated scenarios are assumed to be a guide for the FEMM, to highlight sensitivity analyses with respect to changes in the base capitalisation amount and changes in structure financial products (for governments):
    1. Three Scenarios with different assumptions for capitalisation of the proposed PRF, are provided, starting from:
      1. Scenario 1 with US$0.6 billion accumulated over 5 years;
      2. Scenario 2 with US$0.8 billion accumulated over 5 years; and,
  • Scenario 3 with US$1.5 billion accumulated capital over 5 years.

 

  1. Each Scenario provides three options for changing structure of the financial contracts for governments. That is, grant only, to concessional loan only, to a combination of grants and concessional loans (with a split of 30%-70%, respectively).
  1. These financial scenarios are subject to change and adjustments based on assumptions, and are used as preliminary indicative analyses to assist FEMM in their decision for the proposed PRF. These scenarios are by no means prescriptive and further detailed work on financial modelling would need to be carried out once the proposed PRF is approved and endorsed by the Forum Economic Ministers and Forum Leaders.
  2. Basic common assumptions applied to all the financial scenarios are:
    1. Capital base accumulation and replenishment is assumed to be within a 5 year period;
    2. Establishment Costs of set-up of the PRF: US$2.0 million;
    3. PRF Administration Costs (as percentage of the available Capital):
      1. Management Fees (for management of the PRF Capital) per year: 2.0%
      2. General Expenses (of the PRF) per year: 0.5%;
    4. Transaction fees (as percentage of transactions for loans/grants provided by the PRF): 0%;
    5. Investment Returns on PRF’s Capital base per year: 0%:
      1. This return excludes the earning from concessional loans to Government and/or Private Sector, discussed in the financial scenarios.

 

 

Scenario 1: US$0.6 billion (US$300 million initial capital plus Triennial Replenishment of US$300m)

  1. US$300 million in First year (Year 1) with replenishment of US$300 million triennially (i.e. new capital injection in Year 2 =0; Year 3=0; Year 4=US$300m)
  2. Option 1: GRANTS ONLY FACILITY FOR GOVERNMENTS

Table 1 provides Specific Assumptions for Scenario 1 – Option 1:

Table 1: Assumptions for Scenario 1 – Option 1
Financial Product

·         Resilience Investment

Government Investment Fund Private Sector Investment Fund Community Investment Fund
Allocated Range from the Facility

·         Lowest(%) to Highest(%)

50% to 70% 15% to 25% 10% to 20%
Type of Financial Contract

·         Grants or Loan or Combination

Grants Concessional Loan Grants
Average Tenure of Financial Contract

·         In months

n.a. 24 n.a.
Expected Returns from Financial Contract 0% 5.0% 0%
Expected Drawdown

·         Average Size in US dollars

$10.0m $5.0m $1.0m
Number of Drawdowns

·         Transactions per year

16 16 16

 

  1. Option 2: CONCESSIONAL LOAN ONLY FACILITY FOR GOVERNMENTS

Table 2 provides Specific Assumptions for Scenario 1 – Option 2:

Table 2: Assumptions for Scenario 1 – Option 2
Financial Product

·         Resilience Investment

Government Investment Fund Private Sector Investment Fund Community Investment Fund
Allocated Range from the Facility

·         Lowest(%) to Highest(%)

50% to 70% 15% to 25% 10% to 20%
Type of Financial Contract

·         Grants or Loan or Combination

Concessional Loan Concessional Loan Grants
Average Tenure of Financial Contract

·         In months

180 (with first 36 months of interest payments only) 24 n.a.
Expected Returns from Financial Contract 2.5% 5.0% 0%
Expected Drawdown

·         Average Size in US dollars

$10.0m $5.0m $1.0m
Number of Drawdowns

·         Transactions per year

16 16 16

 

  1. Option 3: COMBINATION OF GRANTS (30%) & CONCESSIONAL LOAN (70%) FACILITY FOR GOVERNMENTS

Table 3 provides Specific Assumptions for Scenario 1 – Option 3:

Table 3: Assumptions for Scenario 1 – Option 3
Financial Product

·         Resilience Investment

Government Investment Fund Private Sector Investment Fund Community Investment Fund
Allocated Range from the Facility

·         Lowest(%) to Highest(%)

50% to 70% 15% to 25% 10% to 20%
Type of Financial Contract

·         Grants or Loan or Combination

Grants (30%) + Concessional Loan (70%) Concessional Loan Grants
Average Tenure of Financial Contract

·         In months

180 on Loan (with first 36 months of interest payments only) 24 n.a.
Expected Returns from Financial Contract 2.5% 5.0% 0%
Expected Drawdown per year

·         Average Size in US dollars

$10.0m $5.0m $1.0m
Number of Drawdowns

·         Transactions per year

16 16 16

 

 

 

Scenario 2: US$0.8 billion (US$500 million initial capital plus Triennial Replenishment of US$300m)

  1. US$500 million in First year (Year 1) with replenishment of US$300 million triennially (i.e. new capital injection in Year 2 =0; Year 3=0; Year 4=US$300m😉
  2. Option 1: GRANTS ONLY FACILITY FOR GOVERNMENTS

Table 4 provides Specific Assumptions for Scenario 2 – Option 1:

Table 4: Assumptions for Scenario 2 – Option 1
Financial Product

·         Resilience Investment

Government Investment Fund Private Sector Investment Fund Community Investment Fund
Allocated Range from the Facility

·         Lowest(%) to Highest(%)

50% to 70% 15% to 25% 10% to 20%
Type of Financial Contract

·         Grants or Loan or Combination

Grants Concessional Loan Grants
Average Tenure of Financial Contract

·         In months

n.a. 24 n.a.
Expected Returns from Financial Contract 0% 5.0% 0%
Expected Drawdown

·         Average Size in US dollars

$10.0m $5.0m $1.0m
Number of Drawdowns

·         Transactions per year

16 16 16

 

  1. Option 2: CONCESSIONAL LOAN ONLY FACILITY FOR GOVERNMENTS

Table 5 provides Specific Assumptions for Scenario 2 – Option 2:

Table 5: Assumptions for Scenario 2 – Option 2
Financial Product

·         Resilience Investment

Government Investment Fund Private Sector Investment Fund Community Investment Fund
Allocated Range from the Facility

·         Lowest(%) to Highest(%)

50% to 70% 15% to 25% 10% to 20%
Type of Financial Contract

·         Grants or Loan or Combination

Concessional Loan Concessional Loan Grants
Average Tenure of Financial Contract

·         In months

180 (with first 36 months of interest payments only) 24 n.a.
Expected Returns from Financial Contract 2.5% 5.0% 0%
Expected Drawdown

·         Average Size in US dollars

$10.0m $5.0m $1.0m
Number of Drawdowns

·         Transactions per year

16 16 16

 

  1. Option 3: COMBINATION OF GRANTS (30%) & CONCESSIONAL LOAN (70%) FACILITY FOR GOVERNMENTS

Table 6 provides Specific Assumptions for Scenario 2 – Option 3:

Table 6: Assumptions for Scenario 2 – Option 3
Financial Product

·         Resilience Investment

Government Investment Fund Private Sector Investment Fund Community Investment Fund
Allocated Range from the Facility

·         Lowest(%) to Highest(%)

50% to 70% 15% to 25% 10% to 20%
Type of Financial Contract

·         Grants or Loan or Combination

Grants (30%) + Concessional Loan (70%) Concessional Loan Grants
Average Tenure of Financial Contract

·         In months

180 on Loan (with first 36 months of interest payments only) 24 n.a.
Expected Returns from Financial Contract 2.5% 5.0% 0%
Expected Drawdown

·         Average Size in US dollars

$10.0m $5.0m $1.0m
Number of Drawdowns

·         Transactions per year

16 16 16

 

 

 

Scenario 3: US$1.5 billion (US$300 million per year for 5 years)

  1. US$300 million in First year (Year 1) with replenishment of US$300 million per year for next four (4) years (i.e. Year 2 =US$300m; Year 3=US$300m; Year 4=US$300m; Year 5=US$300m)
  2. Option 1: GRANTS ONLY FACILITY FOR GOVERNMENTS

Table 7 provides Specific Assumptions for Scenario 3 – Option 1:

Table 7: Assumptions for Scenario 3 – Option 1
Financial Product

·         Resilience Investment

Government Investment Fund Private Sector Investment Fund Community Investment Fund
Allocated Range from the Facility

·         Lowest(%) to Highest(%)

50% to 70% 15% to 25% 10% to 20%
Type of Financial Contract

·         Grants or Loan or Combination

Grants Concessional Loan Grants
Average Tenure of Financial Contract

·         In months

n.a. 24 n.a.
Expected Returns from Financial Contract 0% 5.0% 0%
Expected Drawdown

·         Average Size in US dollars

$10.0m $5.0m $1.0m
Number of Drawdowns

·         Transactions per year

16 16 16

 

  1. Option 2: CONCESSIONAL LOAN ONLY FACILITY FOR GOVERNMENTS

Table 8 provides Specific Assumptions for Scenario 3 – Option 2:

Table 8: Assumptions for Scenario 3 – Option 2
Financial Product

·         Resilience Investment

Government Investment Fund Private Sector Investment Fund Community Investment Fund
Allocated Range from the Facility

·         Lowest(%) to Highest(%)

50% to 70% 15% to 25% 10% to 20%
Type of Financial Contract

·         Grants or Loan or Combination

Concessional Loan Concessional Loan Grants
Average Tenure of Financial Contract

·         In months

180 (with first 36 months of interest payments only) 24 n.a.
Expected Returns from Financial Contract 2.5% 5.0% 0%
Expected Drawdown

·         Average Size in US dollars

$10.0m $5.0m $1.0m
Number of Drawdowns

·         Transactions per year

16 16 16

 

  1. Option 3: COMBINATION OF GRANTS (30%) & CONCESSIONAL LOAN (70%) FACILITY FOR GOVERNMENTS

Table 9 provides Specific Assumptions for Scenario 3 – Option 3:

Table 9: Assumptions for Scenario 3 – Option 3
Financial Product

·         Resilience Investment

Government Investment Fund Private Sector Investment Fund Community Investment Fund
Allocated Range from the Facility

·         Lowest(%) to Highest(%)

50% to 70% 15% to 25% 10% to 20%
Type of Financial Contract

·         Grants or Loan or Combination

Grants (30%) + Concessional Loan (70%) Concessional Loan Grants
Average Tenure of Financial Contract

·         In months

180 on Loan (with first 36 months of interest payments only) 24 n.a.
Expected Returns from Financial Contract 2.5% 5.0% 0%
Expected Drawdown

·         Average Size in US dollars

$10.0m $5.0m $1.0m
Number of Drawdowns

·         Transactions per year

16 16 16

 

  1. The underlying position of the Simulated Financial Scenarios 1 through to 3 as presented in Graph 1 indicate that in order to increase the value and longevity of the proposed PRF:
    1. The initial capitalisation of the proposed PRF needs to be as large as possible (at minimum US$300 million), with periodic replenishment to support sustainability of the Facility;
    2. A combination of loan and grants could and should be used for the Government Investment Fund for building resilience;
    3. The average transaction size currently reflects an equal distribution of funds for governments, private sector and communities across the FICs. However, FICs’ varying degrees of absorptive capacity would mean that part of the allocated yearly funds may not always be utilised and this could either be reallocated to other member countries or be invested for returns for the Facility. Another consideration could be to allocate investment funds to FICs based on some underlying capacity measures to expend development funds.
    4. The interest rate and charges in loan amounts are assumed to be similar or lower than the cost of financing from international sources, which could support FICs resilience agenda without adding a significant debt burden. This would also provide an opportunity for FICs to seek co-financing and co-leveraging projects for investment in disaster preparedness and disaster risk prevention.
  2. Given that the financial market in the Pacific is quite premature and underdeveloped, the ability to raise finance for major capital outlays is always a challenge. The proposed PRF provides a source of readily available liquidity for eligible resilience component of public sector projects and programmes. Moreover, in lieu of the underlying scope to also allow private sector to access the PRF, this will greatly assist in crowding-in the much needed private sector investments for FICs.
  3. In addition, PRF could act as a vehicle for the FICs to raise funds in the international markets at competitive rates, if the Council of Members take a policy decision to use the PRF to leverage additional international finance. This is on the premise that PRF will be established on a very robust governance and risk framework with a healthy capital stock position. In other words, the credit rating for PRF would be relatively favourable which would entice investors to invest in the debt instruments issued by PRF to its member countries.
  4. In terms of the continuity of PRF, the formation of PRF is based on a going concern principle and it is envisaged that PRF will further strengthen in the foreseeable future and would become a key financer of the FICs. Both the volume of transactions and the overall value can increase exponentially, prima facie that the objectives and the implementation objectives as set out in the PRF framework is accomplished.

 

 

Figure 2: Analysis of Financial Scenarios 1 to 3

 

  • Scenario 1 – Capitalisation of US$0.6bn (~ 2% of Regional Nominal GDP over 3 years)

 

  • Scenario 2 – Capitalisation of US$0.8bn (~ 2.7% of Regional Nominal GDP over 3 years)

 

  • Scenario 3 – Capitalisation of US$1.5bn (~ 5% of Regional Nominal GDP over 5 years)

 

 

 

I.          RECOMMENDATIONS 

  1. Based on detailed analyses of the PRF and country consultations, it is recommended that Forum Economic Ministers:
    1. Commend the FEMM Troika and Technical Working Group, FICs that supported the in-country consultations, and PIFS for their effort in developing this proposal on the Pacific Resilience Facility;
    2. Endorse the proposal for a Pacific Resilience Facility and put it forward for Forum Leaders consideration at the 2018 Forum Leaders meeting in Nauru;
    3. Formalise the Technical Working Group on the Pacific Resilience Facility to comprise the existing members: Cook Islands, Samoa, Palau, Fiji and New Zealand and agree that the TWG work under the close guidance of the FEMM Troika;
    4. Support the next phase of technical analyses and assessments for establishing and operationalising the Pacific Resilience Facility with close oversight and guidance from the FEMM Troika and Technical Working Group, and provide relevant, regular feedback to the FICs; and
    5. Task the Technical Working Group, in collaboration with Forum Secretariat to develop a funding strategy for the capitalisation of the Pacific Resilience Facility noting that the first two opportunities for fundraising are the 2018 United Nations General Assembly and the 2018 Annual Meetings of the International Monetary Fund and World Bank Group.

 

 

 

Pacific Islands Forum Secretariat

Suva

3 April 2018

Annex 1: Economic, Social and Environmental Costs

  1. In a recent report[1] on the economic impact of climate change in the Pacific, the Asian Development Bank (ADB) projects that economic loss suffered by the Pacific region could range from9% to as high as 12.7% of annual GDP by 2100. This report further highlights the significant decreases in rainfed agriculture, reduced fish catches (that is, over 20 percent decline skipjack tuna in the western pacific and a 7.5 percent decline in total fish catch across the region), widespread coral bleaching, and falling tourism numbers (with around 27-34 percent reduction in tourism revenues) while simultaneously increasing the climate change induced health costs (such as respiratory disorders, high incidence of malaria, and death & injury from tropical storms).
  2. These projections by ADB are closely supported by another global report by the World Bank Group[2] (WBG), which notes the impact of climate change related shocks on poverty reduction alone could result in more than 100 million additional people living in poverty by All Pacific economies will be at high risk, as the impacts of climate change will be disproportionately large for the Pacific, noting the extreme exposure, vulnerability and fragility of the PICTs.
  3. Given these envisaged impacts of climate induced vulnerability and fragility, development efforts in the PICTs can become less sustainable (via raising poverty levels and poverty of opportunity to adapt to climate change, natural disasters and global economic shocks, increasing social instability, negative impacts on key economic sectors, income and income inequality, health and quality of life of the people of the Pacific) if no proactive concerted policy action is taken by the region and its’ Leaders to build resilience.
  4. While the PICTs at the forefront of these adverse impacts, developed and larger developing countries continue to invest in unsustainable climate practices (such as, subsidising coal generated energy) which further exacerbates the negative impact of climate change across the globe and its associated adaptation and mitigation costs. For instance, Overseas Development Institute (ODI) notes in their latest report[3] that around ten[4] (10) European countries are spending around3 billion Euros (equivalent to around US$6.9 billion) per year on coal subsidies.
  5. These harmful subsidies can be used for transformative investment in resilience, through technologies for better mitigation, funding adaptation and building resilience to inevitable long-term adverse impact to economic, social and environmental fabric in countries, especially in PICTs.

To this end, the ADB estimates that the Pacific region could require around $447 million (to up to $775 million in the worst case scenario) until 2050 per year for financing resilience to impacts of climate change. Similarly, the WBG’s global estimated costs for implementing International Development Association[5] (IDA) Nationally Determined Contributions’ (NDCs’) actions are between US$800-900 billion by 2030, or up to US$60

[1] https://www.adb.org/publications/economics-climate-change-pacific

[2] The World Bank Group’s Shock Waves Report: http://www.worldbank.org/en/topic/climatechange/brief/shock-waves-managing-the-impacts-of-climate-change-on-poverty-background-papers

[3] https://www.odi.org/publications/10788-cutting-europes-lifelines-coal-tracking-subsidies-10-countries

[4] Britain, France, Czech Republic, Germany, Greece, Italy, Hungary, Netherlands, Poland and Spain.

[5] Except for Cook Islands, Fiji, French Polynesia, Nauru, New Caledonia, Niue and Palau, all other Pacific Islands countries are classified as IDA countries. Note that Papua New Guinea is blend country, that is, they are classified as both IDA and IBRD under the WBG definition. Fiji, Nauru and Palau are classified as IBRD countries. Cook Islands, French Polynesia, New Caledonia and Niue are not WBG members.