Between June 22-23 2023, in Paris, the heads of Government from around 100 countries – featuring big hitters like China, Brazil, Indonesia, together with a number of African nations including Kenya, Zambia, and Senegal— have gathered for the Summit for a “New Global Financing Pact”.
The event, attended by the heads of the IMF and World Bank, was instigated at last year’s COP27 by Barbados Prime Minister, Mia Mottley and French President, Emmanuel Macron, acting as co-hosts. Its aim is to reform the global financial architecture, in order to “build a new contract between the countries of the North and the South.”
Or to put it another way, to increase the amount spent on emission-reducing projects in developing nations.
We’ve been here before. The Bridgetown Initiative of 2022 was designed to reform the world of development finance, particularly how rich countries help poor countries adapt to climate change. But progress has stalled, primarily due to the reluctance of giant institutions to change their policies.
EMEA has covered this subject in quite some detail. In its June 2022 policy paper ‘A Proposal to fund a Resilient and Sustainable Recovery for the Mediterranean and Africa’, we reviewed the main achievements by the international organisations in responding to the challenges facing low and middle-income countries, with a particular focus on the African continent. The paper proposed an innovative financing mechanism to put the continent back on the road to economic recovery and resilience. See link:
In August 2022, we revisited the topic in our policy paper ‘A proposal for a blended financing framework for recovery and accelerated sustainable transition’. This paper proposed a public-private sustainable finance fund/plan as part of the global economic recovery plan to accelerate the sustainable transition. See link: A proposal for a blended financing framework for recovery and accelerated sustainable transition – EMEA (euromed-economists.org)
And in September 2022, EMEA published a further policy brief ‘Infrastructure financing to enhance transparency, liquidity and sustainability: A policy and regulatory framework’. This paper outlined the pillars of the regulatory framework (policy, tools and institutions) that would be necessary to regulate a new market for financing infrastructure development with enhanced transparency, liquidity and sustainability. See link: Infrastructure financing to enhance transparency, liquidity and sustainability: A policy and regulatory framework – EMEA (euromed-economists.org)
Fresh Impetus in Paris
Paris provides the opportunity to revisit this on-going narrative, this time under fresh proposals – dubbed Bridgetown 2.0 – being spearheaded by Ms Mottley’s financial envoy, Avinash Persaud, a development economist and former City of London banker.
His target for spending by developing countries on emission-reducing projects alone is about $1.5 trillion per year. That’s seven times the amount rich countries currently allocate in overseas development aid for all causes, including health and poverty reduction.
Persaud’s latest plan, however, includes minimal additional spending by rich countries. “If you focus only on grants, only on people transferring money to you, you’re never gonna get the scale we need to save the planet,” he was recently quoted by Bloomberg Green.
He said the challenge wasn’t so much a lack of money but the need to tweak the rules of global capitalism, in order to break existing climate finance – once and for all. “The problem is that everyone believes someone else should be doing more. Why? Because it’s a cost to them to do it,” Persaud says. “So, if we can reduce the cost for them, they won’t spend their time pointing their finger at someone else — they will get it done.”
His Bridgetown 2.0 agenda faces significant obstacles which, it is hoped can be positively addressed at the Summit, that will also tackle weighty topics such as how to reform the World Bank, the International Monetary Fund and other multilateral lenders. But Persaud has warned: “The system is broken. If it’s not fixed, it will just be brushed away as irrelevant.”
History repeating itself?
Back in 2009, developed nations first agreed to allocate $100 billion per year in climate finance payments to developing countries. That goal remains unfulfilled and similar financial commitments on climate talks have subsequently been met with resistance, the latest being the preliminary UN meeting that concluded recently in Germany without significant progress.
From Persaud’s point of view, fixes for climate finance need to be allocated into three buckets, the smallest of which should contain $100 billion per year in grants. This would be used to cover accumulating damage to life and property, brought about by climate change.
By far the largest of the Bridgetown 2.0 buckets, however, is required for clean-energy investments, like solar farms, that generate real returns and are considered attractive to private investors because they are profitable. But despite all the evidence that solar and wind are the cheapest sources of power, there’s still insufficient capital flowing into these green transition projects in developing countries. Although $1 trillion is already in the coffers, an extra $1.5 trillion is still required, according to a group of UN-backed experts.
Connected to this, investors often overpay for hedging, whilst currency risk adds a further layer of cost and complication, acting as a deterrent to otherwise willing backers. For this reason, Bridgetown 2.0 calls for the World Bank and IMF to offer a solution, by backing a separate agency to help offset hedging costs for investors.
In Persaud’s view, making currency exchange guarantees available to multilateral lenders would overcome open market overpayments, thus increasing returns on clean energy projects and making them more bankable.
To this end, his new Bridgetown plan aims to create currency exchange guarantees, as well as adding disaster clauses to debt deals and tweaking the rules to enable much greater lending from multilateral lenders. It’s been described as “comprehensive and very ambitious,” by Frank Schroeder, senior policy advisor on global finance and economics at E3G, an environmental think tank.
Persaud believes that a $100 billion facility offering this type of guarantee would be sufficient to unlock an additional $1.5 trillion in annual spending on clean energy across the developing world.