The future of international finance for development: Development assistance or climate finance?
Saleemul Huq

  • National institutions can access funds directly from the Green Climate Fund for adaptation projects like this coastal embankment in Southern Bangladesh 
    Photo- Helena Wright

As a developing country and member of the Least Developed Countries (LDC) Group, Bangladesh is used to receiving development assistance from rich countries since our independence over four decades ago. This development assistance is received under what is commonly called Official Development Assistance (ODA). This has amounted to the tune of several billion dollars a year as a mixture of grants and low interest loans delivered through multilateral development banks (such as the World Bank and Asian Development Bank) , United Nations agencies (such as UNDP, FAO, etc) and bilateral aid agencies (such as the UK’s DFID, Germany’s GIZ, Japan’s JICA, among others).

Generally the development banks offered low interest loans while the UN and bilateral agencies offered grants. In the initial couple of decades, such ODA would constitute a significant part of the national development budget (in some years the entire development budget would be based on ODA).

Over the last few decades, we have successfully brought down the proportion of ODA in the country’s annual development budgets, which is a significant success for the government, private sector and indeed people of the country.

International governance of ODA

As ODA is given by rich countries voluntarily to poor countries under the paradigm of charity (or at best solidarity) the decision of who to give, how much to give, who is receiving funds, how to monitor, etc is decided by the “donors” through their club called OECD. The rich countries had made non-binding pledges over three decades ago to allocate 0.7 % of each country’s Gross National Income (GNI), which only a handful of them have met. As the donations are made by each individual rich country, they choose which developing countries to give to. They also use ODA as an instrument of foreign policy. Thus the UK and France tend to favour their former colonies while the US give the biggest chunk of their ODA to Israel and Egypt. This results in some countries becoming “darlings” and others becoming “orphans.”

The donor countries occasionally meet with developing countries to discuss and agree on some principles, but everything is purely voluntary on their part with no accountability to the recipients. The most recent such meeting was called Finance for Development (FfD), which was held in Addis Ababa, Ethiopia in July this year with nothing much coming out of it.

International governance of climate change

In the last two decades, a new menace called global climate change has become a significant risk, which is particularly problematic for Bangladesh which happens to be extremely vulnerable to the adverse impacts of climate change.

The cause of this human induced climate change is the pollution caused by the emissions of Greenhouse Gases (GHGs) mainly from the burning of fossil fuels such as coal, petroleum and natural gas. As this is a global problem, it is being tackled under a global treaty called the United Nations Framework Convention on Climate Change (UNFCCC). The UNFCCC is a pollution (not a development) treaty and has been ratified by all 195 countries of the world, including all the major historic polluters.

The major historic polluters are listed in Annex 1 of the UNFCCC (and hence sometimes called Annex 1 parties) and they have accepted obligations under the treaty to provide financial support to the most vulnerable developing countries.

The definition of most vulnerable developing countries has been agreed under the treaty and consists of three groups of countries, namely the LDCs (which include Bangladesh), the small island developing states (SIDS such as Maldives) and Africa. Taking into account the overlap between these three groups (eg many African countries are also LDCs) there are 95 named countries who are supposed to be prioritised for receiving finance for adaptation. At the 7th conference of Parties (COP7) held in Marrakech, Morocco, two funds for adaptation were set up, one called the LDC Fund exclusively for LDCs and the Special Climate Change Fund (SCCF) for non-LDCs.

More recently, at COP15 in Cancun, Mexico, the Annex 1 Parties agreed to provide up to $100bn a year starting from 2020 to all developing countries for both mitigation as well as adaptation.

Green Climate Fund

To manage and channel these funds, the parties also agreed to set up a new entity called the Green Climate Fund (GCF) with its own Executive Board and Secretariat, located in South Korea. Bangladesh was selected as one of the two board members from the LDC Group.

The GCF board has already made two important decisions (in response to our lobbying), namely to allocate 50% of their funds for adaptation and secondly to prioritise the most vulnerable developing countries for the adaptation funds. At its most recent meeting, the board has just approved funding of $40m for Climate Resilient Infrastructure Mainstreaming project with KfW in Bangladesh.

The GCF has also established a system for each developing country to appoint a National Designated Authority (NDA) to be the focal point in the country. The Senior Secretary of the Economic Relations Division (ERD) of the Ministry of Finance serves as the NDA for Bangladesh. The NDA nominates National Implementing Entities (NIEs) to be accredited with the GCF. Once a national organisation is accredited, the organisation can directly access the funding from the GCF and start to implement climate resilient and mitigation projects on its own or decide to fund other projects. There is also a special private sector facility in the GCF where private sector companies can apply for funding directly (after they get accredited with GCF). This process of accreditation helps national institutions build their capacity, strengthen national systems and access international funding that ultimately leads a nation to greater climate resilience and a low-emissions pathway.

ERD has already identified a number of public sector entities who are in the process of applying for accreditation with GCF and are now reaching out to private sector companies to help them do the same.

Climate finance vs ODA

There is a significant difference between receiving ODA and c for Bangladesh and LDCs generally. ODA depends entirely on the whims of the leaders of the rich countries and their economic policies. Often, in times of economic hardship at home, the ODA budget is the easiest to cut.

In contrast, providing finance to tackle climate change is an obligation of the polluters under an international pollution treaty to provide financial support to the victims of their pollution.

So, when Bangladesh (or any LDC) discusses ODA from a rich country as a recipient, we don’t have much say, as beggars can’t be choosers. However, when we meet the same countries under the UNFCCC, they are no longer “donors” (who can choose who to give and how much to give) but rather “polluters” (who have an obligation to compensate the victims of their pollution).

Also, in terms of total quantum of ODA which has historically been around $100bn a year, it always fluctuates depending on political situations in the donor countries. However, for climate finance the polluting countries have an obligation under international law to provide $100bn a year.

Conclusion

It is good to see the Government of Bangladesh, through ERD, taking the initiative to enable and capacitate both public as well as private sector entities to access the climate finance through GCF.

However, in the long run, the prospects for Bangladesh receiving significant amounts of climate finance will depend on how effectively we use the finances we get. If we get $5m and spend it effectively (and are able to demonstrate that transparently, credibly and with accountability) then we will get $50m and we spend that effectively and transparently, we will get $500m and so forth. In other words, international climate finance to developing countries will increasingly be awarded on the basis of demonstrated results rather than on showcasing vulnerability.

In my view, Bangladesh has a much brighter prospect of receiving much greater international climate finance than ODA, provided it is able to put in place transparent and well monitored outputs from the early climate finance from GCF. 

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Saleemul Huq

Saleemul Huq is Director, International Centre for Climate Change and Development at the Independent, University, Bangladesh and Senior Fellow, International Institute for Environment and Development based in London, UK. [email protected]