Under the December 2015 global Paris Agreement on climate change, African nations have sent a clear signal of their commitment to achieve climate-resilient and low-carbon development through their pledged Intended Nationally Determined Contributions (INDCs). However, a significant number of these African INDCs are conditional, hinged on receipt of support in the form of climate finance - those financial flows from developed to developing countries directed toward climate change mitigation and adaptation activities.
In light of this continuing call for support, as we go into the next global climate change summit in Morocco, it becomes important to better understand the climate finance landscape in Africa. Substantial structures for channeling climate finance in Africa already exist, including the Global Environment Facility, the Adaptation Fund, the Climate Investment Funds, and the Green Climate Fund, among others. How well are these working? To find points of potential greater effectiveness, I suggest we consider African climate finance from three points of view.
Recipient government responsibility
First, to demonstrate ownership of their own climate finance agendas, African governments must ensure that climate change is integrated into all aspects of development planning. Integrating climate change considerations into development planning means ensuring that policies and programs embed, not simply add on, climate-resilient and low-carbon solutions. A clear articulation of these policies and plans, informed by rigorous consideration of sustainability principles, allows those providing climate finance support to more easily engage, align and coordinate their climate finance resources. Indeed, some climate finance sources, such as the Climate Investment Funds (CIF), require these conditions to be in place before a country can even qualify to receive funding.
African countries must also have strong systems in place for sound financial management, monitoring for results, and social and environmental safeguards, all critical prerequisites to effectively accessing and deploying climate finance. This is especially important for fragile states with weak fiduciary capabilities and potential high fiduciary risks. Likewise, an irregular knee-jerk approach to funding also makes sustainable planning difficult. At the African Development Bank, technical assistance and capacity building has increasingly become a major form of support, to help ensure that countries can enter climate finance agreements buoyed by the right sort of systems in place to make good use of contributed funds.
Additionally, recipient governments have to come together with their funding partners to ensure that funded programs can be scaled up commensurate with the problems they are designed to solve. Typically, projects financed by these climate funds are predominantly small-scale especially for adaptation projects with relatively high transaction costs. Large-scale projects, such as Morocco's Noor Concentrated Solar Power Plant and Kenya's Menengai Geothermal Project, stand as good examples of solutions with not only local but broader regional and global impact. For greatest effectiveness, African countries should ensure that funded programs incorporate the means to aggregate interventions for broader impact, at the same time helping reduce their relative transaction costs.
Donor government responsibility
Second, donor countries and partner institutions must align their support to match recipient countries' priorities, flexibly devolving decision-making and making use of existing country systems, informed by the local context and perceptions, as far as possible. This calls for active donor engagement with recipient countries to better understand their context and needs and to build trust. There is also room to support countries in strengthening systems for accountability.
Development partners can also enhance the collective impact of their funding if they improve harmonization and coordination with each other, working towards common sets of objectives built around the recipient country's stated priorities. Harmonization, a key principle for development finance in the Paris Declaration on Aid Effectiveness, is equally applicable to financing adaptation and mitigation. With harmonized support, recipient countries can avoid the onerous burden of having to manage multifaceted labyrinthine expectations presented by various bilateral and multilateral climate finance sources.
Donor governments should not view climate finance and traditional development aid as mutually exclusive but rather as complementary. It has become increasingly clear that climate change threatens the very nature of development; indeed, a substantial amount of development aid currently goes to sectors that are highly vulnerable to climate change. For example, the use of the budget support mechanism can also be applicable for financing climate change activities in a way that further enhances the credibility of national and local institutions in Africa.
Finally, climate finance cannot be used as a tool to influence or engineer governance in developing countries, but must solely serve as a tool to help countries build their programs of resilience and low-carbon growth. Confidence and trust on this point allows for greater buy-in and ownership by the recipient countries.
The increasingly central role of the private sector
Third, the private sector is increasingly crucial to ensuring urgently needed increased finance for climate change. Given the scale of the African INDCs' financial requirements, the finance gap cannot be closed without increased investment from institutional and corporate investors. In addition to capital, the private sector can bring efficiency, the capacity to create commercial viability, workable economic structures, and creation, financing, and distribution of affordable products and technologies, including those that serve the poorest. Private sector participation can also provide a signaling effect, helping to leverage additional investments. To fulfill its potential, though, the private sector needs projects with the right risk-return profiles.
Where to next? New instruments can reshape the financing landscape
Currently, climate finance is primarily provided by developed countries, funneled through multilateral development banks, bilateral finance institutions, and a handful of commercial banks. But given the scale of the climate finance gap, a diverse array of instruments needs to be brought to bear on the challenge, including through public institutions. For example, multilateral agencies like the African Development Bank traditionally provide loans and credits; but they are also promoting a greater use of guarantees, equity products, public-private partnerships, and risk-sharing financing facilities.
The use of emerging finance mobilization instruments like the green bond should also be fostered to deepen engagement with institutional investors that represent a significant pool of funds. As this instrument continues to develop, there will definitely be room for domestic players within the African market. This can easily be a means to deepen the African capital market in such a way that will drive the realization of the INDCs.
Nota Bene:
Several articles of this blog series have already been devoted to INDCs and Africa, as here and here. In late August 2015, the AfDB also published an information note on the importance of INDCs, ahead of COP21.
