In advance of COP 17, the Green Climate Fund’s (GCF) Transitional Committee (TC) have passed the Parties a report, recommending it “take note” of the report’s findings. It is worth analysing this report since it brings in to clearer focus the contrast between the expectations that some have for the fund – largely the private sector – and the the emerging picture of the fund.
Specifically, the overarching sentiment from the report is that the GCF will be a vehicle for aid-based disbursement. This is not necessarily consistent with the guiding principle of “catalyzing climate finance.” It is this apparent confliction – between the guiding principle of acting as a catalyst for climate finance, supposedly inclusive of the private sector, and the emerging picture of aid-based finance – that has recently attracted criticism from figures such as Yvo de Boer, and the frame in which we should view the suggested design of the GCF given to Parties at COP 17.
Sourcing the money
The report states that the finance will be delivered at a country level. This means that finance delivered by the GCF could, for example, be delivered to a sovereign-administered fund that lends to projects or programmes that aim to execute a particular objective arising from a national policy.
A natural consequence is that the GCF can be expected to deliver finance in much the same way as existing multilateral funds. Notably, it will place far more importance on public rather than privately sourced finance, since private investors would find it more difficult to contribute to a fund that’s lending criteria focus on promoting a particular national or regional policy, first and foremost, delivering returns as a somewhat more ancillary benefit.
The report, however, does state that the GCF should have a private sector facility that employs the private sector in fund contributions. It is unclear if the reference to a separate “facility” should be interpreted to mean that the privately sourced finance will be disbursed through mechanisms separate to those for public sector finance, nor if such a distinction should emerge, how the private finance will be delivered.
Disbursing the money
Inspecting the financial instruments recommended for disbursement of the funds gives perhaps no clearer demonstration of an aid-based picture. Disbursal will be focussed on grants and concessional lending. The instruments will be used to finance the additionality gap – taking the risky investments that the private won’t take alone in order to get a programme or project off the ground.
Clearly, grant-based disbursal limits the involvement of the private sector in the fund’s capitalisation. This also extends the earlier question: will concessional lending on a country level attract private investors to the fund, and if not, will the private sector facility employ delivery mechanisms that are different to grants and concessional lending.
A stark contrast
In contrast to the emerging picture of the GCF, the Green Climate Finance Framework (GCFF) suggested by BNEF is a manifestation of the expectations of the private sector. In this proposal the public sector contributions make up around 10% of the fund, are delivered by aid-based finance and used to leverage the remaining 90% from the private sector, i.e. fulfilling the mandate of catalysing finance for climate change from the outset.
It could be argued that the difference between the GCF and the GCFF is based largely on the level of the involvement of the private sector, and that both can catalyse finance by funding the additionality gap. This is true, but a design like the GCFF does far more catalysing from the outset, precisely because it is leveraging nine times more private than public sector capital.
The GCF, as it stands now, is the inverse of the GCFF – predominantly aid-based delivery of finance at a country level, with a small, but “non-negligible,” role for the private sector. This set-up, if justified properly, is not in-and-of itself objectionable. It is, however, of concern that the emerging picture of the GCF seems to contrast sharply with the expectations of the private sector, whilst also limiting the fund’s ability to catalyse private sector finance from the outset.