OPEC Fund Quarterly - 2022 4
The OPEC Fund for International Development OPEC FUND QUARTERLY 4 2022
Financing climate action How to bridge the funding gap
PLUS
OPEC Fund Climate Action Plan That was COP27
The OPEC Fund Quarterly is published four times a year by the OPEC Fund for International Development. The OPEC Fund works in cooperation with developing country partners and the international development community to stimulate economic growth and social progress in low- and middle-income countries around the world. The organization was established by the member countries of OPEC in 1976 with a distinct purpose: to drive development, strengthen communities and empower people. The OPEC Fund Quarterly is available free. If you wish to be included on the distribution list, please contact us via opecfund.org . Back issues of the magazine can be found on our website. The contents of this publication do not necessarily reflect the official views of the OPEC Fund or its Member Countries. Any maps are for illustration purposes only and are not to be taken as accurate representations of borders. Editorial material may be freely reproduced, providing the OPEC Fund Quarterly is credited.
EXECUTIVE EDITOR Nadia Benamara EDITOR Axel Reiserer EDITORIAL TEAM Howard Hudson, Carlos Opitz, Basak Pamir, Nicholas K. Smith, Julia Zacharenkova PHOTOGRAPHS Abdullah Alipour Jeddi, Carlos Opitz (unless otherwise credited) PRODUCTION Iris Vittini Encarnacion
PUBLISHERS The OPEC Fund for International Development Parkring 8, A-1010 Vienna, Austria Tel: (+43-1) 51564-0 Fax: (+43-1) 51392-38 www.opecfund.org
DESIGN Robin Turton, More Tea Design Ltd PRINTED IN AUSTRIA Druckerei Odysseus This publication is printed on paper produced from responsibly managed forests.
FRONT COVER/SPECIAL FEATURE ILLUSTRATIONS: Egret77 – stock.adobe.com; elenabsl – stock.adobe.com; Kareemov – stock.adobe.com; Kudryavtsev – stock.adobe.com; petovarga – stock.adobe.com; scharfsinn86 – stock.adobe.com; venimo – stock.adobe.com
CONTENTS 4/2022
EDITORIAL 4-5 Climate Finance: How to bridge the gap in funding SPECIAL FEATURE 6-33 New Approaches to Climate Action 6-13 The OPEC Fund and climate action: An ambitious, yet realistic plan 14-15 Interview Tarek Sherlala: “If your
DEVELOPMENT NEWS 36-41 36 Supporting small businesses in Uzbekistan 37 Improving food security and agricultural resilience in Jordan
6-13
The OPEC Fund's Climate Action Plan
Closing the inequality gap in Ghana
38
Promoting private sector develop- ment and international trade Building a development pipeline in Latin America Joint trade finance facility for food security in Uzbekistan
39
PHOTO: Media Lens King – stock.adobe.com
40
20-21
Microfinance in the developing world
41
focus is development, everything now has to be climate-focused”
SPOTLIGHT 42-53 42-47 The OPEC Fund @ COP27:
16-17 Giving quickly to give twice: The OPEC Fund Grant Program 18-19 “What's in a container?”: Trade Finance and Climate Action 20-21 “Money is the oxygen for entrepreneurship”: How microfinance can help those otherwise left behind 22-25 Interview Preeti Sinha: Decade of action... or lost decade? 26-29 Defining “Game changer”: New approaches to finance 30-31 Interview Shonali Pachauri: “In short, the polluter pays” 32-33 In search of a silver lining: Latest reports highlight opportunities and action IN THE FIELD 34-35 How the OPEC Fund
Doubling climate funding while meeting the world halfway 48-49 Interview Ibrahim Matola: “Storms
PHOTO: VG Foto/Shutterstock.com
cost lives – but so do blackouts”: The case for early warning systems
41
Supporting SMEs in Uzbekistan
50-53 Fountain of youth: The world’s youngest citizens make a critical plea on the UN’s biggest climate stage EVENTS 54-55 The OPEC Fund in Washington Director-General Dr. Alkhalifa leads a delegation to the World Bank/IMF Annual Meetings OPEC FUND 56-58 56-57 New development funding 58
PHOTO: MehmetO/Shutterstock.com
50-53
Young citizens at COP27
is helping farmers in Latin America to boost
sustainable agriculture
“Our business is development cooperation”: The OPEC Fund featured in Frankfurter Allgemeine Zeitung
PHOTO: UNFCCC
3
EDITORIAL
CLIMATE FINANCE: HOW TO BRIDGE THE GAP IN FUNDING
Dear reader,
The outcome of the COP27 climate change conference was widely criticized as too little, too late. While the establishment of a “loss and damage fund” particularly for nations most vulnerable to the climate crisis was welcomed, details remain sketchy and yet to be negotiated. Despite the (more or less) universal acceptance that climate action is necessary and urgent, the summit made little progress on the question of who will be financing this action, to what extent and in what ways. The COP27 closing statement merely says, “US$4 to $6 trillion a year needs to be invested in renewable energy until 2030 – including investments in technology and infrastructure – to allow us to reach net-zero emissions by 2050.” This contrasts starkly with current levels of annual investments of just over US$800 billion, according to a report by the UN climate watchdog UNFCCC published in November 2022. But it is not for want of trying: Governments around the world are stepping up ambitions and efforts, while the multilateral development banks (MDBs) recently hit their 2025 climate finance goal of US$65 billion, four years ahead of schedule.
However, to move from “billions to trillions”, as the international community pledged when proclaiming the Sustainable Development Goals, will require greater involvement from the private sector along with a shift in mindset from sharing burdens to embracing opportunities. “The key thing that has to be communicated is that climate action is a business opportunity for the private sector,” says Shonali Pachauri, who leads the Transformative Institutional and Social Solutions Research Group at the International Institute for Applied Systems Analysis (IIASA) in Laxenburg, Austria. Together with her team, Ms. Pachauri has developed a web tool that allows users to establish “fair contributions” to climate action in line with the equity principles of the Paris Agreement. This is critical to success: “People like to think about the costs of climate action, but there are also benefits, huge benefits, and nobody’s talking about the cost of inaction,” she tells us in an interview (see pages 30-31). Successful financing must be tailored to the needs of clients. As micro, small and medium-sized enterprises represent by far the largest segment of the
global economy, including this group is of increasing importance to climate financing. Yet, given the regulatory requirements of sound banking, this is easier said than done. MDBs play a crucial role in offering the necessary stability with their capital and risk capacity. No less importantly, they can also, as Tareq Alnassar, OPEC Fund Assistant Director- General Private Sector and Trade Finance Operations, tells us (see pages 20-21), “act counter-cyclical in direct response to our partners’ urgent needs.” Another model, used by the UN Capital Development Fund (UNCDF), unlocks “last mile” public and private financing to cut poverty and support local economic development. UNCDF Executive Secretary Preeti Sinha says in an interview: “This decade will be remembered in one of two ways – either as the decade of action where we delivered on the Sustainable Development Goals for the world’s least developed countries, or the lost decade of development.” (see pages 22-25) In other words: The choice is stark – and it is ours. New approaches (see pages 26-29) are needed, but ironically some are based on the rediscovery or repurposing of traditional methods,
4
To move from ‘billions to trillions’ will require greater involvement from the private sector along with a shift in mindset from sharing burdens to embracing opportunities.
PHOTO: Javaman/Shutterstock.com
which in turn help us “to see the wood for the trees”. Shuan Sadreghazi, one of the authors of the UNESCO Science Report 2021, warns: “What we need to identify and understand is the bottleneck: the lag between starting climate-friendly initiatives and seeing the impact on the ground.” Impact in the field was very much the goal the OPEC Fund set itself during its first full participation at the COP27 conference in Sharm El-Sheikh in November 2022. Addressing the question of how to mobilize climate financing the OPEC Fund played a key role in putting together the US$24 billion climate facility launched at the event by the Arab Coordination Group (see pages 42-47). Echoing the results of the IIASA research project, OPEC Fund Director- General Dr. Abdulhamid Alkhalifa said:
Climate Action Plan in September 2022 with the “ambitious, yet realistic” target of increasing the share of climate financing to 40 percent of all new financing by 2030. This does not mean the end of financing energy projects, of course. Energy has long been and remains the key driver of growth and development. Instead, it means financing different projects such as renewables and massively strengthening energy efficiency and savings. After all, the greenest – and cheapest – form of energy is the one that stays in the tank, or indeed, the battery.
“The energy transition will only succeed if it is also just, inclusive and sustainable.” The OPEC Fund is playing its part with an increasingly pro-active approach. “If your focus is development, everything now has to be climate-focused,” its Assistant Director-General Financial Operations Tarek Sherlala states (see page 14). The Fund adopted its first
We wish you a successful new year and an interesting read.
Axel Reiserer, Editor
5
SPECIAL FEATURE
NEW APPROACHES TO CLIMATE ACTION
6
T he US journalist H.L. Mencken once said: “There is a solution to every problem: simple, quick, and wrong.” But climate change is too serious a challenge to get it wrong. So in this edition of the OPEC Fund Quarterly we are exploring approaches that are complex, lengthy – but do actually work.
7
THE OPEC FUND AND AN AMBITIOUS, YET
Active development work means finding a balance between seemingly conflicting needs. For this all hands on deck are needed By Axel Reiserer, OPEC Fund W hen OPEC Fund Director-General Dr. Abdulhamid Alkhalifa visited Madagascar last year, he woke up one morning in the capital Antananarivo and what he smelled was not the coffee. “From everywhere came the strong smell of burning wood and the whole city was covered in heavy fog. Only after a while I figured out that this was not a weather event, but in fact smoke rising from hundreds of thousands of households,” he recalls. Cooking with wood, charcoal and other polluting biomass is still prevalent in large parts of the world. These fuels release plumes of smoke and soot with significant health impacts that contribute to millions of premature deaths each year. Burning these fuels during the cooking process emits carbon dioxide, methane and other pollutants. In addition, unsustainable harvesting of fuel drives forest degradation and prevents reforestation. Despite these well-known and well-documented impacts, 2.4 billion people in Africa alone still rely on
cooking with these traditional practices, says the UN-affiliated organization Sustainable Energy for All (SEforALL). The environmental think tank Project Drawdown estimates that around 40 percent of families in low- and middle- income countries globally are primarily using cookstoves fuelled by wood or coal. Madagascar is a prime example of the hazards associated with these practices: Illness from household air pollution is the second leading cause of death in the country. Moreover, between 1953
and 2014, the country lost 44 percent of its natural forest cover. If deforestation continues at its current rate, all of Madagascar’s forests will be lost within 40 years, the World Wildlife Fund warns. Much of the island’s unique biodiversity, formed over 165 million years and including species found nowhere else on earth, is in acute danger of extinction. The environmental damage also has a severe impact on socio-economic development. With many unspoiled beaches, untouched rainforests and average temperatures not exceeding
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SPECIAL FEATURE
CLIMATE ACTION: REALISTIC PLAN
30°C during the hottest period of the year, the potential for tourism in Madagascar is huge. But in contrast to the neighboring Seychelles, which are only a two-hour flight away, Madagascar still only earns a fraction of its GDP from tourism. It demonstrates how the responsible treatment of the environment and the careful use of resources have become an integral part of development. The Seychelles, one of the small island nations in existential danger because of rising sea levels, are taking decisive action to lessen their dependence on fossil fuels with massive
International private investment in the SDGs T he United Nations Sustainable Development Group estimates an additional US$2.5 trillion per year will be needed for developing countries to achieve the SDGs. Though the COVID-19 pandemic had affected global levels of foreign direct investment, international investment in SDG-relevant sectors in developing countries increased substantially in 2021, by 70 percent, according to the United Nations Conference on Trade and Development World Investment Report 2022. Renewable energy
accounted for much of that growth. Throughout this article we highlight the disparity between pre- and post-pandemic levels in international private investment across six SDG- relevant sectors.
investments to unlock their potential for solar power. The OPEC Fund’s Climate Action Plan takes account of this duality. Energy is one of the most powerful
The energy transition will only succeed if it is also just, inclusive and sustainable.
Dr. Abdulhamid Alkhalifa, OPEC Fund Director-General
9
Education: International private investment, 2021
• Investment
in education infrastructure,
e.g. new schools
+17%
Infrastructure: International private investment, 2021 project numbers compared to pre-pandemic levels
drivers of development. Without energy, it is impossible to provide
we need comprehensive answers and multidimensional approaches. The first one is energy efficiency, with measures from insulation to smart meters offering the potential of achieving more than 40 percent of energy-related emissions cuts, according to the International Energy Agency (IEA). This still leaves us with almost 60 percent, and – due to a growing world population – rising demand for energy. Alternative sources exist and there is progress with their utilization, but it comes at a price: A recent IMF paper identifies financing needs between US$3 to $6 trillion per year until 2050 to reach the Paris goals. To put this into context: global climate finance currently amounts to about US$630 billion annually – “and very little goes to developing countries,” as the IMF notes. The OPEC Fund’s Climate Action Plan aims to make a sizeable contribution
healthcare, education or clean water. It is impossible to strengthen food security and eliminate hunger. Ultimately, it is impossible to eradicate poverty without energy. The fight against energy poverty and climate action are not opposites, but two sides of the same coin called development. These are the challenges we have to address: According to the World Bank, an estimated 750 million people around the world do not have access to electricity. At the same time, the world's population is expected to increase by about 2 billion in the next 30 years, from 8 billion today to 9.7 billion in 2050. Coincidentally, 2050 is also the year when the world must achieve net zero in greenhouse gas emissions to reach the 1.5°C target of the Paris Agreement. This means: We are in a bind. More people = more energy = more emissions. This is a vicious circle that must be broken. For this,
-11%
• Transport
infrastructure • Power generation • Power distribution (except renewables) • Telecommunication
Source for all table figures: UNCTAD
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PHOTO: OPEC Fund/Julia Zacharenkova
SPECIAL FEATURE
PHOTO: Media Lens King – stock.adobe.com
WASH: International private investment, 2021
• Provision of water and sanitation to industry and households
-9%
US$3.3 billion OPEC Fund commitments to the energy sector to date
from the Fund’s own resources and leverage its high mobilization rate. Roughly four out of five OPEC Fund projects are co-financed with partners. In the energy sector the OPEC Fund has committed nearly US$3.3 billion to date, with renewables by now accounting for nearly a third of public and private sector operations. Based on the OPEC Fund’s traditional engagement the Climate Action Plan sets ambitious, yet realistic goals. It will raise the share of climate finance to 25 percent of all new financing by 2025 and to 40 percent by 2030. Projects will include investments in climate adaptation (to reduce the risk posed by climate change and increase resilience) as well as climate mitigation (to reduce or limit greenhouse gas emissions). OPEC Fund climate financing will be available in the public and private sectors. The Climate Action Plan will be complemented by a commitment to
consider climate change throughout the project cycle. This ensures that by 2025 climate action will be mainstreamed across all projects the OPEC Fund is considering for approval. In addition, the OPEC Fund will join international initiatives such as the climate finance working group of the multilateral development banks (MDBs). To facilitate cooperation, the OPEC Fund also commits from 2023 to measure climate finance and greenhouse gas emissions based on agreed methodologies and best practice. The recent US$24 billion
Renewables now account for nearly one-third of public and private sector operations
climate package by the Arab Coordination Group launched at the UN climate change conference COP27 (pictured opposite) has demonstrated the OPEC Fund’s ability to
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Food and agriculture: International private investment, 2021
Investment in: • Agriculture • Research • Rural development
-35%
Renewable energy: International private investment, 2021
• Installations
for renewable energy
generation, all sources
+2%
Source for all table figures: UNCTAD
leverage its own commitments by joining forces with other development partners. The MDBs are leading the effort to provide climate financing. According to the latest joint report (see page 33), published in October 2022, international financial institutions provided US$51 billion in climate finance to low- and middle-income economies last year, while mobilizing US$40 billion private sector funding globally. This exceeded the 2025 climate finance goals. However, compared with global needs this was merely the proverbial drop
in the ocean. The IEA estimates that US$4.2 trillion are needed in global investment by 2030 to achieve the 1.5°C Paris climate target. No less than US$3 trillion would have to come from the private sector, “mobilized by public policies that create incentives, set appropriate regulatory frameworks and send market signals,” the IEA says. So far, this is not sufficiently happening. This means that we have to revisit our approach. The successful proliferation of solar photovoltaic power can serve as an example: The
combination of prudent regulatory reforms and technological advances turned solar into a highly competitive source of energy. The OPEC Fund supported, for example, the Kom Ombo solar plant in Egypt and the “Seven Sisters” project in Jordan. Both projects demonstrate that if the right incentives are in place and provide investors with sufficient confidence that their investments will generate a satisfactory return, the private sector can be mobilized. Given the enormous needs, climate investments are a
12
SPECIAL FEATURE
Health: International private investment, 2021
• Investment in health
infrastructure, e.g. new hospitals
-25%
rapidly growing global market and a huge potential business opportunity, as OPEC Fund Assistant Director-General Financial Operations Tarek Sherlala says: “If we look into climate financing in 15 years and it becomes mainstream and profitable, the private sector will take it.” (see pages 14-15) The multilateral development banks can also deepen their impact by moving beyond debt financing. Private investors seek risk-sharing facilities, guarantees and blended finance. MDBs are key players in facilitating international trade in green technologies and services. The IMF, in a recent paper, also advocates the introduction of carbon pricing to ensure well-functioning markets and prices. Transforming its climate ambitions into reality the OPEC Fund launched a Climate Finance and Energy Innovation Hub together with the United Nations Capital Development Fund and SEforALL at COP27 (pictured right). It will be a global platform to provide support on the delivery of Sustainable Development Goal 7, “clean and affordable energy”, in developing countries. The goal is to leverage each US$1 of sovereign finance to attract US$4 of green and sustainable capital from public and private sector investors for projects. The OPEC Fund has earmarked US$100 million for concrete projects and a first clean cooking pilot is about to
be launched in Madagascar. When the Director-General visits Antananarivo the next time, he should indeed be able to wake up to the smell of coffee.
PHOTO: OPEC Fund/Julia Zacharenkova
13
INTERVIEW
“IF YOUR FOCUS IS DEVELOPMENT, EVERYTHING NOW HAS TO BE CLIMATE-FOCUSED”
OPEC Fund Assistant Director-General Financial Operations Tarek Sherlala talks about the impact, implications and immediacy of the institution’s Climate Action Plan By Howard Hudson and Axel Reiserer, OPEC Fund
OPEC Fund Quarterly : How do you position our Climate Action Plan to stakeholders? Tarek Sherlala: Climate change has been impacting all countries, regions and sectors, so adopting a Climate Action Plan is a natural progression for us. Our development mandate requires us to respond to the enormous needs triggered by climate change and to also address the underlying issues that are holding countries back. Committing and allocating funds specifically to climate action is intrinsic to our focus on sustainable development and our engagement with partner countries. It is also very much in line with our member countries’ priorities. OFQ : How are we going to deliver on this commitment? TS: Our Climate Action Plan was designed based on the enormous needs communicated to us by our partner countries. We’re seeing more and more climate-based projects going into the pipeline of operations and are increasingly asked to provide support on energy transition. Our country managers have ongoing conversations with partner countries to better understand the particular issues they’re dealing with. We will provide more financing in support of climate mitigation, adaptation and resilience, and invest in transformational technologies that contribute to flattening
emission curves and improve across-the- board energy efficiencies. Our business model will incorporate joint investments with other multilateral development banks (MDBs) as well as standalone initiatives with national governments. OFQ : Are we considering a different approach or different criteria when it comes to assessing climate projects? TS: Development impact is front and center of everything we do. Environment and climate are of course increasingly key considerations in assessing development impact. Social impact, institutional capacity and governance are other key criteria. We rely heavily on our Environment, Social and Governance (ESG) Policy and Results Framework, and assess underlying needs to come up with the best financing solutions. Our solutions will continue to be tailored to the specific needs of our partner countries. OFQ : Moving from 20 to 40 percent in a rather short period of time is ambitious. How have we prepared for this challenge? TS: The business ecosystem has evolved considerably over the past years and climate financing is a cross-cutting theme that will involve all of us in everything we do. Climate financing opportunities already exist in abundance. As part of our Strategic Framework
2030 we have a clear growth agenda, and are already implementing important milestones such as an enhanced ESG policy and, most recently, a Development Effectiveness Framework. Our growth agenda, and the additional resources that will be made available in the coming years, will also allow us to sharpen our focus on climate action. Our Climate Action Plan sets out an equally clear roadmap to achieve the target of 40 percent climate financing by 2030, based on current investment trends. Helping vulnerable countries strengthen their climate policies and reinforce their Intended Nationally Determined Contributions and climate regulations is a particular focus. Promoting transformative climate investments to drive progress on adaptation and mitigation, as well as mobilizing private capital are equally important focus areas. OFQ : The Asian Development Bank (ADB) has developed the SDG Accelerator Bond as a de-risking tool. Is this something we also might consider? And more broadly, what can we learn from our partner institutions’ experiences? TS: We’ve been engaging with lots of different stakeholders as part of the launch of our Strategic Framework 2030 and are planning an SDG bond for our first issuance. Our plans are similar to those of other MDBs and we align
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SPECIAL FEATURE
The OPEC Fund Climate Action Plan target: 40% climate financing by 2030
OFQ : A recent report from the International Energy Agency says that US$4.2 trillion is needed to achieve the net zero target, and that US$3 trillion of that will have to come from the private sector. What can MDBs do better to attract private investors? TS: Opportunities to attract private sector investment have opened up in recent years. The demand to finance projects that involve climate risks is only growing, so we fully expect to mobilize private capital. Private capital will be especially instrumental to promote innovations in climate mitigation technologies. In addition to financing, one important point is risk mitigation. This can be risk sharing or de-risking. Looking at it more broadly, we need to create conditions where these investors come in and start doing business. No matter how big a pool the MDBs have, it’s dwarfed by private capital. If we look into climate financing in 15 years and it becomes mainstream and profitable, the private sector will take it. That’s perfect. Our partners will likely have other pressing priorities by then. Development is a journey and we aim to meet our partner countries’ needs every step of the way.
with the best practices of counterparts such as the ADB in terms of providing the transparency and impact investors expect. Getting there we have certainly benefitted from others’ experiences and will continue doing so. OFQ : Can you give us any ideas how we will be tightening up the evaluation criteria for projects? TS: It is essential that we track our projects comprehensively and to have really robust monitoring and reporting, not only in regards to financials but, as mentioned earlier, the full ESG and development impact. This is the standard we are aiming for and we want to make sure that we have tracked, processed and – finally – evaluated everything, from the very beginning of a project to its completion, and that we integrate lessons learned into the design of future projects. This is important for our own business, and also for transparency vis-à-vis our board and investors. OFQ : We said that 40 percent climate financing by 2030 would be ambitious. But it surely is not the end of the road? Do you envisage a future where the majority of OPEC Fund projects are in climate financing? TS: I think climate finance is and will become the development agenda by definition. If your focus is on development, everything now has to be not only climate-related, but climate-focused. The Maldives are being inundated by rising seas. Least developed countries in Africa, which are most affected by climate adversity, are realizing that climate financing can be an opportunity that may well enable them to produce the food and generate income needed to feed their people. We all realize that if we continue on the current trajectory, we’re not going to meet the 1.5°C climate target, and achieving the Sustainable Development Goals will slip out of reach. The consensus is that we all have to do more climate-focused financing, turn this challenge into an opportunity, and make it part
I think climate finance is and will become the development agenda by definition. If your focus is on development, everything now has to be not only climate-related, but climate-focused.
Tarek Sherlala, OPEC Fund, Assistant Director-General, Financial Operations
of all our mainstream activity. The groundwork is laid. It is now up to all of us to deliver.
15
GRANTS
GIVING QUICKLY TO GIVE TWICE When devastating floods hit Pakistan this summer, the revamped
OPEC Fund Grant Program faced its first serious test By Axel Reiserer and Nicholas K. Smith, OPEC Fund
T his summer Pakistan became the latest country to experience how climate change is now an existential threat to humankind. Massive floods, caused by heavier than usual monsoon rains and melting glaciers that followed a severe heat wave, all linked to climate change, left behind a trail of destruction: According to official accounts, more than 1,700 people died, well over 2 million people were left homeless and 33 million people were affected, as a third of the country lay under water. The international community rushed to the scene and promised its support. A joint assessment by the government, World Bank, UN and others estimated reconstruction costs and economic damage to be at least US$30 billion, equivalent to about 10 percent of GDP. Overcoming the catastrophe and building back better will take decades. This made rapid and powerful help all the more important. As the saying goes: “He gives twice who gives quickly.” Thanks to a recent revamp of its Grant Program the OPEC Fund was able to join the international donor community instantly and already in September approved a US$1 million emergency grant for immediate aid to victims of the natural disaster. “We were able to act swiftly and decisively,” says Dr. Walid Mehalaine, who heads the Grants and Technical Assistance Unit at the OPEC Fund. “In an emergency, this is crucial.” Charting a new approach This agility owes much to the reorganization of the OPEC Fund’s grant
operations, one of the many financial instruments in the Fund’s toolbox. The new organization serves two purposes: increase the value proposition and achieve greater development impact and effectiveness through a more unified approach. “In the past, grants were not always linked clearly to operations funded through our other facilities,” Dr. Mehalaine adds. “Also, the environment has changed. Most multilateral development banks are now working in a more integrated manner, offering different types of products and services to their clients.” The Grant Program was reorganized as part of the OPEC Fund’s Strategic Framework 2030, an institutional enhancement with the goal of expanding operations and deepening impact. “We are focusing on interventions and activities which support, add value and complement OPEC Fund operations,” Dr. Mehalaine explains.
In line with this approach, the OPEC Fund recently approved a new Emergency and Disaster Management (EDM) Grants Policy aimed to help partner countries effectively manage natural and human-made crisis and pave the way for a timely resumption of normal cooperation with the Fund. It also has the goal to ensure that EDM grant assistance is better linked to the provision of long-term development assistance by the OPEC Fund and enhance the capacity of partner countries in disaster prevention and preparedness. This also provides the necessary space for emergency support as was the case with Pakistan. Grants play an important role in Official Development Assistance (ODA). According to the Organisation for Economic Co-operation and
We were able to act swiftly and decisively. In an emergency, this is crucial.
Dr. Walid Mehalaine, OPEC Fund, Head of the Grants and Technical Assistance Unit
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SPECIAL FEATURE
Development (OECD), a think tank, ODA from official donors rose to an all-time high of US$178.9 billion in 2021. Bilateral sovereign loans by donor countries on a grant equivalent basis represented 10 percent of ODA. OPEC Fund grants can finance technical assistance, feasibility studies as well as advisory and consultancy services. Eligible purposes include, for instance, assistance for project preparation, institutional capacity building, project evaluation, impact assessment and support of relevant institutions of partner countries. Examples of grants provided recently include technical support for rural infrastructure projects in Colombia and a program empowering Liberian women in the fishing sector. Since inception, the OPEC Fund has extended more than US$600 million in grants, with about two-thirds going to health, agriculture and humanitarian aid.
OPEC Fund grant commitments by sector since inception
3%
4%
Health
7%
Agriculture
24%
Humanitarian aid
9%
Education
Social infrastructure and services
12%
Energy
Water and sanitation
18%
23%
Other
Mzuzu City is Malawi’s third largest city and the capital of the country’s Northern Region. Yet planes can only land at the city’s small and outdated airport during good weather in daylight and its location within the city limits poses safety concerns to citizens and air traffic. A technical assistance grant from the OPEC Fund will pay for a technical and economic feasibility study for the construction of a modern regional airport. The study may spur additional financing from the Fund and international development partners for the required infrastructure investment, while unlocking further inward investment in related sectors such as tourism. Feeding a pipeline of Latin American projects to support water and sanitation,
energy and transportation facilities, the OPEC Fund is teaming up with CAF-Development Bank of Latin America to establish a joint project preparation facility. Each organization will contribute US$1 million in grants to support infrastructure projects over the first three years to be funded by the two organizations. Such an agreement is critical to the development of projects in the infrastructure sector, which require long-term resources, complex designs and carry significant economic and social implications. Given the growing demand for climate finance toward adaptation, mitigation and green transition, this joint project preparation facility aims to catalyze additional funding from other donors.
Scaled-up solutions One feature of the new grants
framework is a focus on projects that can be scaled-up and supported through the OPEC Fund’s other financing facilities. Similarly, grants that spur broader action are well-featured under the new framework. Two recent examples include an airport feasibility study and new joint technical assistance facilities with other development finance institutions. In June 2022, the OPEC Fund and the Asian Development Bank launched a US$3 million trust fund to improve project preparation and implementation in developing countries.
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TRADE FINANCE AND CLIMATE ACTION
WHAT’S IN A
Financial institutions are promoting green economies and sustainable trade through green trade finance mechanisms By Başak Pamir, OPEC Fund CONTAINER?
F inance, transportation and commodity trading collectively play an essential role in helping countries reduce emissions and tackle climate change. By increasing the availability and affordability of climate-friendly goods, services and technologies through trade finance, banks and multilaterals are collectively driving sustainability in global trade and supply chains. The World Trade Organization’s (WTO) World Trade Report 2022 argues that trade is a force for good for climate and part of the solution for achieving a low-carbon, resilient and just energy transition. “While trade itself does generate emissions from production and transport, trade and trade policies can accelerate the dissemination of cutting-edge technologies and best practices, and enhance incentives for further innovation,” says WTO Director- General Ngozi Okonjo-Iweala. “Trade is instrumental for investments in clean
energy to have the greatest reach and impacts, at lowest cost and where they are needed the most.” This is where green trade finance comes in. Yunus Energy, a Pakistan- based renewable energy company, was able to obtain blades, generators and turbines for the development of the country’s first wind farm in the village of Jhampir, 100km from the capital Karachi, from Germany with the support of a green trade finance line from the International Finance Corporation (IFC) and Deutsche Bank. IFC issued a guarantee to Deutsche Bank to back a letter of credit issued by the local Bank Al Habib, which allowed Yunus Energy to import the equipment. “Through our Climate-Smart Trade Finance initiative we use our existing trade finance facilities to support the financing of imports, exports and the local distribution of imported green technologies and materials,” says Nathalie Louat, IFC Director, Trade
Trade is instrumental for investments in clean energy to have the greatest reach and impacts.
Ngozi Okonjo-Iweala, WTO, Director-General
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SPECIAL FEATURE
EXAMPLES OF ELIGIBLE RENEWABLE PROJECTS EQUIPMENT Source: IFC
Solar PV, Solar Heat: Solar panels, cells, glass tubes, inverters, water heaters and tanks Wind Power: Blades and poles, construction bases, control systems, power transformers, transmission Hydropower: Turbines, control systems, power generators, power transformers, transmission
Geothermal: Heat pumps, compressors, heat exchangers
Our goal is to support industries and companies to ensure sustainability, cut emissions and adopt energy-efficient technologies.
Biomass and Biogas: Biodigesters, biomass heating systems, combustion boilers, cogeneration units, dryers Ocean Power: Turbines, barrages, power generators, hydraulic pumps, oscillating water columns
Nathalie Louat, IFC, Director, Trade and Supply Chain
Safeguards for eligibility The global trade finance gap increased during the COVID-19 pandemic. According to the Asian Development Bank, the gulf between trade finance supply and demand reached US$1.7 trillion in 2020, with rejection rates for small and medium-sized enterprises reaching 40 percent. Now, with soaring inflation, the war in Ukraine and supply chain pressures the difference is even larger. In order to meet high demand and create an efficient, transparent and interoperable global structure, the trade finance ecosystem is focusing efforts on standardization, according to a McKinsey report. The paper warns that differences between the development and application of standards pose multi-level challenges from trade documentation to product definition, specifically the definition of sustainable trade products. In order to ensure that their trade is actually “green”, traders and banks need to cooperate closely and ensure that certain criteria are met. IFC, for example, has a clearly defined list for eligible green trade products. The institution is also asking for international accreditations and certifications such as Fair Trade, Better Cotton Initiative or Rainforest Alliance to promote the sustainability of agro-trade. “We have a responsibility to safeguard these standards and ensure that climate- smart trade finance products are offered to corporates and partner banks which operate with similar criteria and values,” says IFC’s Nathalie Louat. “This way we can have a material and meaningful impact on climate change through trade finance.”
corporate clients to promote sustainable trade. The Green Trade Facilitation Programme of the European Bank for Reconstruction and Development (EBRD) is an award-winning facility that has supported almost 1,300 foreign trade transactions involving trade in higher performance technologies and sustainably-sourced materials with a total volume of almost €1.5 billion across 26 countries to date. According to the EBRD, these transactions resulted in annual energy savings of over 6,000 GWh, water savings of almost 1.7 million cubic meters and CO 2 -equivalent emission reductions of more than 3,000 kilotons.
and Supply Chain at IFC, which has supported transactions with 108 partner banks in 37 countries under this initiative since 2013. “This way we are promoting the sustainability of investments, projects, traded goods and the whole supply chain. Our goal is to support industries and companies to ensure sustainability, cut emissions and adopt energy-efficient technologies.” Similar to IFC, several leading multilateral development financial institutions as well as commercial banks are increasingly adopting green trade finance programs and initiatives offering specialized terms and incentives to their
THE PILOT SUSTAINABILITY PERFORMANCE FRAMEWORK
At the UN climate change conference COP27 in November, the International Chamber of Commerce (ICC) launched a pilot of the first-ever industry framework to assess the sustainability performance of trade transactions. Trade banks, corporations, technology players and a consultancy worked together to create the Wave 1 framework, which is intended to move the industry toward standardized international reporting and assessment of sustainable supply chains. At the summit, ICC Secretary General John W.H. Denton AO
announced that more than 20 banks and corporates have pledged to pilot the application of the Wave 1 framework for transactions in the textile sector. These include BNP Paribas, Commerzbank, Lloyds Bank, Commonwealth Bank of Australia, DNB, Santander Bank, Société Générale, Wells Fargo and India’s Yes Bank. More banks already announced their intention to join the scheme. The ICC will publish the findings from these pilots and set out how it will use the results to enhance the framework by mid-2023.
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MONEY IS THE OXYGEN FOR ENTREPRENEURSHIP” How microfinance can help those otherwise left behind By Nicholas K. Smith, OPEC Fund MICROFINANCE “
A welder in Colombia, a baker in Kenya and a carpenter in the Philippines – people use their skills in different ways to support their communities with goods and services, satisfying basic needs and creating room for growth. One man’s or woman’s talent can quickly develop into a lifeline for others: “Entrepreneurship”, it has been said, “knows no borders”. Access to finance, however, unfortunately does. Micro-sized enterprises, which can have fewer than 10 employees, have very different financing needs than a company many times their size. They may borrow smaller amounts, but servicing micro- enterprises takes no less groundwork, risk appetite and regulatory clarity. Micro, small and medium-sized enterprises (MSMEs) are by far the most frequent form of businesses in developing countries. In Peru, for example, they account for 98 percent of all private enterprises, contributing 42 percent of GDP and accounting for 60 percent of employment. The International Finance Corporation (IFC), the private sector arm of the World Bank, estimates the total of MSMEs in developing countries to be more than 165 million. The demand for financing is huge. According to IFC, 65 million MSMEs have unmet needs of US$5.2 trillion. In different terms, that amount is 1.4 times the present amount of global lending to small businesses. The financing gap varies from region
to region: East Asia and the Pacific region have a greater need to catch up than Europe and Central Asia, for example. Worldwide, significantly more than half of all registered MSMEs, along with informal enterprises, do not have access to traditional forms of credit. Microfinance offers a pathway into credit access for MSMEs by providing lending types usually not offered by traditional banking such as smaller, short-term loans that sometimes do not offer collateral or are group-based. Banking the “unbanked” started as a charitable effort. Muhammad Yunus is considered the father of microfinance. In the 1970s, a drought in Bangladesh and its devastating aftermath prompted the economist to think of ways to lift his country out of poverty. A US$27 pilot loan to a group of 42 families led him to later found Grameen Bank, the world’s premier microfinance institution. In 2006, Yunus won the Nobel Peace Prize for his efforts. “In 1974, I found it difficult to teach elegant theories of economics in the university classroom in the backdrop of a terrible famine in Bangladesh,” Yunus said in his Nobel Prize acceptance speech. “Suddenly, I felt the emptiness of those theories in the face of crushing hunger and poverty.” The Grameen model showed that microcredit can yield more than merely micro results. Recognizing the work that the “Banker of the Poor” had sparked, the United Nations designated 2005 as the International Year of Microcredit.
The OPEC Fund strongly supported and quickly adopted the concept of microfinancing. Over the years numerous loans to microfinance institutions for on-lending to local clients were provided. The OPEC Fund also entered into a long-term engagement when it signed a US$20 million investment in the Microfinance Enhancement Facility (see box) in 2009 and committed a further US$20 million in 2014. Launched in the aftermath of the global financial crisis the facility provided much-needed liquidity and affordable credit at a crucial time for the world economy. Tareq Alnassar, OPEC Fund, Assistant Director-General, Private Sector and Trade Finance Operations, says: “This engagement demonstrates how we can act counter-cyclical in direct response to our partners’ urgent needs. The facility was also a great example of international cooperation as we joined forces with IFC
and Germany’s Kreditanstalt fuer Wiederaufbau as well as the Austrian development bank OeEB and its Swedish peer SIDA. It shows that also in microfinance the saying is true: ‘The whole is greater than the sum of its parts.’” The World Bank’s
Global Findex Database 2021 report presented
Mohammad Yunus, the father of microfinance
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SPECIAL FEATURE
THE MICROFINANCE ENHANCEMENT FACILITY The Microfinance Enhancement Facility was initiated in 2009 to support economic development and prosperity globally through the provision of short and medium-term financing to financial institutions which support microfinance and micro-enterprises. The Fund observes principles of sustainability and additionality, combining development and market orientations. Since inception, the Fund has invested US$2.7 billion in 63 countries, financing 300 institutions with 838 loans.
PHOTO: Shutterstock.com
several clear cases of microfinance’s impact. “In Chile, low-income women who were members of microfinance institutions and received free savings accounts were able to reduce their reliance on debt and improve their ability to make ends meet during an economic emergency,” according to the report. But, just as offering microfinancing services can lead to benefits, taking them away removes that positive impact. In India, a reduction in microfinance options was associated with “significant decreases in wages, income and consumption.” Narrowing credit gaps for the unbanked is one of the aims of Sustainable Development Goal (SDG) 9.3, which seeks to increase the access of small enterprises to financial services. In addition, SDG targets 8.3 and 8.10 aim to boost formal employment and broaden general financial services, respectively. In some areas, entrepreneurs are faced with only two options: predatory lenders – who charge high interest rates, or traditional banks that often do not cater
to small businesses with their relatively small loan volumes. However, small businesses drive the global economy. Most countries’ GDPs rely heavily on the MSME sector. By not offering small businesses the chance to grow, or at least sustain themselves, a lack of financial access amounts to tying a lead weight on a country’s general growth. Besides, microfinance doesn’t just encompass microcredit, but also savings accounts and insurance. Broadening financial inclusion isn’t just another box to check to ensure all the SDGs are achieved. Providing access to credit is an enabler to achieving many other goals: For instance, supporting agricultural enterprises also strengthens food security. For all its potential, microfinance does have its limitations. First, there is the matter of regulation. Many places do not have strong legal protections for borrowers, leaving them vulnerable to aggressive collection tactics or shady institutions taking advantage of a lack of financial literacy.
As many microfinance institutions are not part of large, established banks, they often find it difficult to attract credit from international development finance institutions, whose loan sizes often do not fit. The World Bank’s Findex report pointed out several instances in Uganda, Ghana, Mexico and Peru where customers were not always provided with consistent product information or account costs, or told about the most affordable options. There is also microfinance institutions’ limited capacity to fulfil businesses demand for loans. MSMEs often need larger credit volumes, but also supporting services such as insurance, savings accounts or knowledge-transfer, for instance in the field of financial literacy. Still the success of the Grameen model shows what is possible, especially in ensuring financial inclusion among rural and women-owned MSMEs. As Mohammad Yunus said: “Money is the oxygen for entrepreneurship”. 21
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