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- Beyond Pledges: Inclusive Partnerships to Move Towards Climate Resilience
Beyond Pledges: Inclusive Partnerships to Move Towards Climate Resilience
The 2050 net zero target date may seem far away. Yet it only represents one investment cycle for many capital-intensive industries.
As the president of COP27 this year Egypt announced that its main objective is to move from pledges to implementation. It is within this context that the Sharm El-Sheikh Guidebook for Just Financing aims to outline the key role of each stakeholder in translating financial commitments into implementable projects and address the critical challenges of leveraging and catalyzing needed finances and investments to support the climate agenda.
As depicted by the Climate Policy Initiative, the tracked global climate finance averaged US$632 billion in 2019/2020, which is significantly lower than the needed annual financing estimated at US$4.13 trillion.
With a share of less than 5.5 percent Africa is among the lowest recipients, while being considered most vulnerable to climate change. Therefore, the guidebook will target developing and emerging economies, with a special focus on Africa to unlock investment opportunities in green projects.
Pledged global commitments, particularly from the private sector, may not make their way to the countries that need them the most. Innovative solutions, such as de-risking instruments and blended finance, are therefore more important than ever.
A deeper analysis of these instruments is crucial to attracting investment for green, sustainable, inclusive and resilient development – particularly within developing countries and emerging economies.
Moreover, concessional financing resources from multilateral development banks (MDBs), in addition to pledges by philanthropic groups, may help the origination of these finances to help achieve the climate ambitions over the longer term.
A multi-stakeholder approach to climate finance
The proposed initiative instigates a consultative multi-stakeholder process that includes governments, multilateral and bilateral partners, the private sector, civil society, philanthropic organizations, research centers, and think tanks to coordinate collective action to foster a green and resilient transition.
It aims to outline a roadmap whereby developing countries and emerging economies can translate international pledges into investable projects.
As an outcome of these consultations, stakeholders will draft a guidebook that incorporates a practical guide for innovative climate financing, leveraging their comparative advantage and strengthening effective inter-coordination mechanisms.
The guidebook will focus on identifying priority sectors that have a direct impact on accelerating climate adaptation and mitigation, with a special emphasis on energy, water, and agriculture sectors; develop clear guidelines to enhance the bankability of adaptation and mitigation projects; clarify strategies to mobilize resources towards climate adaptation projects in developing and emerging countries; and create conducive markets for green projects, aligned with national and international policy frameworks.
According to the World Economic Forum, developing countries need to invest an additional US$800 billion per year on climate mitigation projects by 2025, dwarfing the US$100 billion pledge.
In view of the growing climate finance needs to respond to the climate agenda and the sustainable development goals, the international community needs to drive more focus on mobilizing additional capital, allowing institutional investors to become key players.
This in return calls for promoting long-term partnerships with the business community to collaborate with governments and MDBs. Blended finance is therefore very significant in order to generate the needed funds.
In fact, blended finance, which is centred on combining commercial banks’ resources or bond markets with concessional funds of development partners, has been in discussion since the Addis Ababa Agenda for Action, adopted in 2015.
However, little has been achieved so far as it is estimated that less than 2 percent of total official development assistance is actually raised in the private sector, and almost only 1 percent of that is through blended mechanisms.
The success of catalyzing additional financing through blended mechanisms is dependent on the interplay and complementarity of all stakeholders’ efforts. Governments can be a starting point as they can create a conducive, secure and predictable investment environment through policy and regulatory frameworks and strengthening the role of institutions.
This will, in turn, help create the markets that can accommodate green projects and develop pipelines of bankable projects for the private sector that are aligned with the countries’ nationally determined contributions (NDCs).
Meanwhile, development partners, multilateral development banks and financing institutions have a key role to play. First through providing technical support to upgrade national institutional capacities and advance the investment landscape.
More importantly, they can push forward private sector engagement through concessional funds that are used for blended finance and grant elements to de-risk private sector investments and create first loss positions vehicles to improve portfolio ratings in developing countries. The role of development partners is thus indispensable in supporting projects’ preparation phases to attract needed private capital.
As for foreign investments, they rarely find their way to emerging markets or developing countries due to their weak credit ratings at B or below, which represents a higher level of risk. Similarly, multilateral development banks are keen on keeping safe and high ratings themselves, and therefore avoid supporting investments in low-rated countries. As a result, it is essential to develop mechanisms to encourage MDBs and philanthropies to crowd in foreign investments and technical capacities.
A conducive environment is a well-informed one
When mapping the landscape of climate financing needs for climate action, there is a growing demand for the availability of reliable and updated data. Clear information is a prerequisite for endorsing targeted policies, building trust, and supporting a private sector-led development approach.
It is imperative that all stakeholders have a clear understanding of the opportunities, challenges and risks of investing in developing countries and emerging economies. The guidebook is therefore aimed at deciphering the climate financing ecosystem to allow different stakeholders to engage and collaborate based on reliable information systems.
In order to raise private investments for climate action, clarity is key in providing an overview of the main reasons leading to a significant shortfall of capital in emerging markets, the important techniques that should be adopted in these markets to attract investments and the required policies and reforms for ensuring the mobilization of funded capital in emerging markets.
The complex and multi-faceted dynamic relationship among partners must be sustained through trust and transparency as well as accountability and commitment towards delivering these climate financing targets.
This will be challenging without a robust system to ensure that financial flows are well aligned with the identified targets. Therefore, an efficient governance structure is essential to guide and facilitate the interaction among all stakeholders.
Robust monitoring, learning and development mechanisms need to be in place to gauge the effectiveness of different approaches, pinpoint successful initiatives for replication and scalingup, and taking corrective measures whenever necessary to ensure the achievement of results.
A long journey to climate recovery starts now
At this moment in history, there is little dispute on the importance and urgency of the climate agenda. We are all ambitious for mobilizing collective efforts. Equally, we need to act on exploring, advancing and implementing the means of leveraging finances, developing and transferring technology and building capacities on national and international levels.
As countries set their targets for the NDCs to be achieved by 2050 or beyond, it may be perceived that this is still in the far future. However, this may only represent one investment cycle for many capital-intensive industries. 2022 is, thus, a critical year – to lay the foundation for a more robust climate finance architecture that is mobilized from all sources through stronger coordinated efforts.
In this vein, the US$100 billion target of the Paris Agreement needs to be looked at as a floor – not a ceiling – for the path towards climate resilience.
This article was originally published on the World Economic Forum’s website, as part of the Davos 2022 Annual Meetings.
FACTFILE: RANIA AL-MASHAT
Dr. Rania Al-Mashat has been Egypt’s Minister of International Cooperation since December 2009 and previously served as the country’s first female Minister of Tourism. An economist by training she earlier was Advisor to the Chief Economist of the International Monetary Fund (IMF) in Washington, DC. She represents Egypt as governor in several international financial institutions. Ms. Al-Mashat holds a PhD and MA in Economics from the University of Maryland, College Park, USA, and a BA in Economics from AUC. She completed executive education at the Kennedy School of Government, Harvard University and the Saïd Business School, Oxford University.
Egypt and the OPEC Fund
The OPEC Fund for International Development has supported Egypt since the establishment of the organization in 1976. To date, the Fund has committed more than US$1.3 billion to more than 85 projects in various sectors of the economy in alignment with the country’s sustainable growth strategies and development goals.
Delivering on its goal to bolster energy access close to half of the OPEC Fund’s support to Egypt has been geared towards the energy sector. Strengthening food security, the OPEC Fund has supported several irrigation projects to increase the yield of crops.
“With strong international support, Egypt has made substantial progress in the past decade, implementing an economic reform program to stabilize the economy and address macroeconomic imbalances, while reforming the crucial financial and energy sectors. The OPEC Fund has always supported Egypt’s development priorities in key areas such as energy security and energy transition, food security and infrastructure development,” says Musab Alomar, OPEC Fund Director for MENA, Eastern Europe & Central Asia.
Energy security and green transformation
With a population of more than 100 million and growing, Egypt is the most populous country in the Middle East. Steeply rising energy demand is creating significant challenges in maintaining continuous supply while transitioning towards a sustainable, resilient energy system. Over the past decade Egypt launched an ambitious energy policy reform program with a target to generate 40 percent of its electricity from renewable sources by 2035. Successful reforms have eliminated severe power shortages whilst incentivizing investments in renewables.
Solar energy, for example, has attracted considerable attention from the international community with large-scale development projects. The OPEC Fund invested US$114 million in the 200 MW capacity Kom Ombo solar plant, joining the European Bank for Reconstruction and Development (EBRD), the African Development Bank (AfDB), the Green Climate Fund (GCF) and Arab Bank. The plant will serve 130,000 households.
In 2013, the OPEC Fund joined an international consortium of lenders to finance the Helwan South Power Project, which included the development of a 1,950 MW supercritical steam technology power plant fueled by natural gas and associated gas pipelines. The project will improve the stability of the power system and the reliability of electricity supply.
“The impact of this power plant is very significant for Egypt,” says Mohamed Mokhtar, Chairman of the Board of Directors of the Upper Egypt Electricity Production Company. “It is a mega plant, one of the biggest in the Middle East, consisting of three supercritical units, each with a capacity of 650 MW, amounting to a total of 1,950 MW. In the aftermath of the political upheaval in 2011, the country suffered many power outages and Helwan South was instrumental in ensuring supplies.”
The financing of the US$1.5 billion project brought together a line-up of international investors including the World Bank and members of the Arab Coordination Group such as the Islamic Development Bank, the Arab Fund and the Kuwait Fund. “It is impossible for the government or a single funding entity to undertake such a project alone. Undoubtedly, the role of international finance institutions is key to realize investments of such scale.”
Port Said Grain Facilities will boost food security and reduce agricultural losses
Increasing the capacity of grain storage facilities in Egypt has become an urgent priority, as the war in Ukraine is threatening global food security. Egypt is typically the world’s largest wheat importer, buying more than 60 percent of its wheat from abroad with Russia and Ukraine accounting for some 80 percent of those imports. A US$14 million loan from the OPEC Fund is financing the development of two major grain silos through the Port Said Grain Storage Facilities Project, which will increase storage capacity by 1.5 to 2 million tons of wheat grain each year and help reduce agricultural losses.
Bolstering local businesses and creating employment
Egypt’s rapid population growth represents an urgent challenge of creating sufficient employment. As the engines of economic growth, small and medium-sized enterprises account for over 45 percent of overall employment in Egypt. Following a US$25 million loan in 2009 and a US$40 million loan in 2015, in 2020 the OPEC Fund provided a US$95 million loan to Egypt’s Micro, Small and Medium Enterprise Development Agency (MSMEDA) supporting the creation of thousands of jobs and boosting self-employment, especially for women and youth.
Increasing private sector participation in infrastructure development
Said Taufik Ridha, Director, Private Sector, Portfolio Management, says: “Infrastructure plays a crucial role in achieving multiplier effects towards economic development as it drives productivity and job creation. The role of private sector participation in infrastructure development is key as the government cannot finance this on its own.
The OPEC Fund’s commitment towards Egypt’s infrastructure development through private sector participation is evidenced by our direct lending for the Kom Ombo 200 MW solar photovoltaic power plant and the term loan facility provided to National Bank of Egypt (NBE) which aligns well with Sustainable Development Goals (SDGs), such as SDG 7 (Affordable and Clean Energy), SDG 8 (Decent Work and Economic Growth) and SDG 9 (Industry, Innovation and Infrastructure).”
The OPEC Fund signed a US$200 million loan agreement with the National Bank of Egypt (NBE), Egypt’s largest commercial bank, to finance the development of infrastructure projects. The financing package includes a US$150 million loan from the Asian Infrastructure Investment Bank (AIIB) and a US$50 million loan from the OPEC Fund and will help bridge the infrastructure funding gap in Egypt by leveraging NBE’s broad network. The OPEC Fund’s loan will be provided for on-lending to private sector companies in priority industries including the energy (particularly renewables), health and transportation sectors.