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Is the Green Climate Fund Private Sector Facility effective?

24 October 2014
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Author: Charlotte P. Ellis


The Private Sector Facility (PSF) of the Green Climate Fund (GCF) was created to encourage private investment in projects that support both mitigation and adaptation to climate change - this is very much in keeping with the GCF’s decision to focus equally on both themes.  The Facility will facilitate direct and indirect financing for private sector activities and is mandated to finance small and medium sized enterprises - and support private sector activities in Small Island Developing States (SIDS), Least Developed and Developing countries.
 
According to its Governing Instrument, the purpose of the GCF is to promote a “paradigm shift towards low carbon and climate resilient development pathways by providing support to developing countries whilst taking into account the needs of developing countries particularly vulnerable to climate change”[1]. But how likely is it that this paradigm shift will translate into practice? But how useful can the PSF be for developing countries, with particular reference to Africa.

Developed countries have committed themselves to providing up to $100 billion each year from 2020 to support developing countries in tackling climate change. They see the PSF as an opportunity to use GCF support to leverage and crowd-in private sector investments with funds coming predominantly from the private sector and leveraged from limited public sector funds. However, developing countries expect that GCF support will primarily focus on public finance with the private sector playing a supplementary role, particularly for SME’s in developing countries[2]. But can the PSF actually deliver on its promise to create the necessary investment in climate resilient development at scale?
 
African countries are particularly vulnerable to the impacts of climate change and climate variability. These impacts periodically destroy socioeconomic livelihoods of the most vulnerable populations, and diminish the progress and potential of African economies to thrive. The adaptation finance needs of African countries are particularly high compared to funding for mitigation, yet the capital required for adaptation investment has not been forthcoming at the desired rate. Furthermore, the key challenge remains that investments in adaptation are not optimal for the private sector. By nature private sector actors are risk averse, profit-seeking entities - and by nature, adaptation projects are less likely to generate profits or returns when compared to investments in mitigation activities. This combined with the risks associated with low carbon infrastructure projects complicates the prospects of private sector investment in adaptation.
 
Barriers to private sector investment in adaptation include among other things, high up-front costs, limited capital market instruments and absence of adequate institutional capacity[3].  Buchner et.al (2013) in particular highlights gaps in the coverage of two key risks; namely policy and financing risks. Of particular importance for African countries are the risks associated with the immaturity of financial markets in emerging countries.[4] These risks are especially high in the countries most vulnerable to climate change, and where the private sector is still in its infancy. Private sector actors seek the type of profits found in large-scale mitigation projects run by well-capitalised companies in middle income countries.[5]

Another key factor in scaling finance is the readiness at the country level to receive and deploy climate funding. Whilst the GCF Board appreciates that private sector investment relies on readiness and enabling environments, whether or not it appreciates the extent to which developing countries in Africa have the necessary enabling environment deserves some attention. In most developing countries the private sector is not well established and in no position to support large-scale investments. Siebert and Dzebo (2013) find little evidence of foreign investment in Africa (only 1.5% of total global Foreign Development Investment [FDI] flows) and more importantly, of these few investments very few coincide with national adaptation priorities.[6]  More importantly, the public and private sector in most African countries are typically disjointed, and typically operate separately. As a consequence, private sector investments will always be centered on activities that are considered to be profitable as opposed to those that are aligned with national adaptation needs. How then can the PSF fulfill its intended purpose in developing countries?
 
In reality private sector investments in adaptation are likely to be limited and developing countries will continue to rely on the public sector to fund adaptation. This leads to the question as to whether this could exacerbate inequalities in access not only between developing and developed countries, but also between developing countries themselves. And is the 50:50 split between adaptation and mitigation realistic given the absence of clear private sector incentive mechanisms? And how can this opportunity be maximized so that the Facility fulfils its mandate to constructively support developing countries?
 
Firstly the Facility should support the necessary enabling environment for private sector development in vulnerable countries by de-risking climate change investment. Secondly it should be structured in such a way as to provide a resource to support the establishment of public-private partnerships in developing countries. This will create an enabling environment that supports private sector investment in adaptation projects. Whilst public –private partnerships are not the panacea for guaranteeing the effectiveness of the PSF in Africa, it at least provides a basis for ensuring that private sector investments can be directed to the theme where the key vulnerabilities lay, specifically adaptation.
 
What African countries need is support from the GCF with a focus on risk mitigation instruments, particularly financing risk. In addition, African countries need to focus on promoting the participation of SMMEs and industries, as well as local financial intermediaries (e.g. national development banks) in vulnerable countries as recipients of funding rather than as contributors to climate financing. It is hoped that with these considerations, the PSF can avoid becoming another fund that lends itself to further disparities in access climate finance for developing (African) countries.


[1] Green Climate Fund (2011) “Governing instrument for the Green Climate Fund”, accessed online at www.news.gcfund.org
[2] Schalatek, L., Nakhooda, S. and Bird, N. (2012), The Green Climate Fund, accessed online at www.climatefundsupdate.org
[3] Green Climate Fund “Business Model Framework: Private Sector Facility”, GCF/B.04/07, accessed online at www.news.gcfund.org
[4] Buchner, B., Stadelmann, M. and Wilkinson, J. (2014) “Operationalising the Private Sector Facility of the Green Climate Fund: Addressing investor risk”, Climate Policy Initiative, A CPI Brief
[5] Institute for Policy Studies (2014) “What should the Green Climate Funds Private Sector Facility should look like”, accessed online at www.news.gcf.org
[6] Siebert, C.K and Dzebo, A. (2013) “Private Sector Finance for Adaptation; Perceivable, potential or improbable?”, Stockholm Environment Institute (SEI)



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