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OPINION: Climate finance options for National Climate Funds


The maturation of the international climate finance landscape is presenting country climate funds with the opportunity to access larger, more transformative capital. Charlotte Ellis and John Ward of Adam Smith International share lessons learned from Rwanda for maximising an national climate fund’s potential to mobilise funds.

 

In recent years, several developing countries as diverse as Indonesia, Bangladesh and Rwanda have established national climate funds (NCFs). These funds have mostly been supported with a combination of direct support from development partners, and from domestic sources. But the maturation of the international climate finance landscape is presenting country climate funds with the opportunity to access larger, more transformative capital.

Rwanda’s climate change and environment fund, FONERWA, became operational in 2013 and is seen by many as a prime example of an effective NCF. It is considered to have achieved a number of important successes, including mobilising more resources than originally anticipated and having quickly allocated funds to a wide range of projects.

Adam Smith International in partnership with Vivid Economics worked with FONERWA and CDKN to identify opportunities to position the fund so that it could become fully Government managed.

FONERWA’s current capitalisation through a combination of support from bilateral development partners and domestic resources is consistent with the pattern of most national climate funds. However, the success of FONERWA to date makes it pertinent to consider the opportunities and challenges this, and other country climate funds, may face in accessing international climate finance in the future – which will be vital to their continued success.

This year saw the full operationalisation of the Green Climate Fund (GCF) which has received pledges of US$ 10.2 billion to finance global climate adaptation and mitigation. In July 2015, the GCF adopted a pilot programme on modalities of a US$ 200 million Enhanced Direct Access pilot: an exciting new opportunity for NCFs to access a new source of capital. [Editor: Ari Huhtala and Christina Elvers of CDKN reported on the GCF’s 11th Board meeting in late October, at which the first funding decisions were made.]

A NCF can apply to become an accredited entity of the GCF, committing to fund projects according to their national country needs and priorities and GCF’s guidelines and priorities. With this Enhanced Direct Access, accredited NCFs do not need approval from the GCF before financing individual projects. Instead, the NCF can spend GCF funds freely, according to national priorities, without the need for prior GCF approval.

In order to attract this new source of finance, NCFs will need to demonstrate effectiveness and efficiency. Although it is not yet known how NCFs will fare in applications, one thing is certain: as opportunities to access international climate finance increases, the competition amongst funds and recipients to receive this will increase.

From our experience in Rwanda, we have identified five considerations for maximising an NCF’s resource mobilisation potential.

Ensuring budgetary autonomy

If a NCF is situated within Government, there is a clear advantage for it to be classed as an extra-budgetary agency. Extra-budgetary agencies do not need to return unused budgets to their national Treasury at the end of each financial year. This fosters accountability, longer-term planning and the possibility of supporting national programmes over the long term.

Ensuring administrative autonomy

A Government owned NCF would ideally retain a degree of operational independence. Though the NCF should be fully aligned with national priorities, it should maintain independence over the execution of its own procedures and operational policy.

Developing effective financial procedures and service delivery mechanisms

A NCF should develop its institutional capacity to ensure high quality service delivery and, and the ability to identify, select and finance high quality, and high impact projects. Developing effective financial controls, monitoring and reporting mechanisms is also key. NCFs must be able to demonstrate high capacity in the preparation, appraisal and review of climate programmes. This latter point will be crucial for accessing the Enhanced Direct Access funds, as a NCF will need to demonstrate clear ability to undertake programme appraisals according to GCF guidelines.

Positioning for diverse resource mobilisation

A successful NCF should be able to mobilise finance from bilateral and multilateral sources, as well as domestic sources. If a NCF can secure regular a funding flow from its own Government, then this enhances its credibility with international donors; it demonstrates a country’s commitment towards tackling climate change issues and improves the NCF’s standing in the world of climate finance.

Impacting government policy

A NCF could advocate holding a mandate for implementing national climate strategies and action plans. This is easier to achieve if the NCF has the capacity to mainstream climate change in the work of other government bodies. Effectively undertaking this role will further enhance the national environment for accessing international finance.

At present, international climate funds have mobilised a relatively small amount of capital; and, as yet, these funds have not made any significant contributions to NCFs. However, with the advent of the Enhanced Direct Access, there is a new opportunity for NCFs to shore up their processes and increase their chances of attracting this source of flexible climate finance.

The more accountable and effective a NCF can demonstrate itself to be in terms of managing capital, ensuring fiduciary strengths, project appraisal and ability to monitor impact, the more attractive it becomes as a recipient of international funds. It will increase its chance of directly accessing GCF funds, while its increased effectivity will make it more attractive as a recipient of funding from various sources.

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