Category: Reports and Papers
If You Want Clients to Borrow from the World Bank for Net Zero Investments, Make It Easier
High-income countries trying to reach net-zero targets are confronting the fact that existing environmental regulations make it harder to build low-carbon infrastructure. Lobbying groups in the US, for example, are using regulatory tools to block geothermal, solar, and wind facilities. Providing subsidies and incentives for low carbon isn’t enough: revisiting, rewriting, and in some cases retiring these regulations is going to be a vital part of faster progress toward the green economy.
The issue isn’t unique to high-income countries, and it is perhaps particularly important when it comes to climate finance. That’s because multilateral development banks including the World Bank are being asked to do more on climate, but they are constrained by their own bureaucracy, including a set of environmental regulations that add costs and delays to investments that could support global mitigation goals.
Look at answers to World Bank client surveys in some of the countries where you might hope the institution would have a big role to play in financing mitigation projects. When asked what the World Bank’s greatest weakness is, the top answer in Brazil: “processes too slow and complex.” That’s the same top answer as Indonesia and Vietnam. Complex and slow processes rank second out of sixteen and in India and Argentina, and fourth in South Africa and Türkiye. Good project preparation takes time, and rushed projects tend to have worse development outcomes. Nonetheless, there clearly can be too much of a good thing in terms of bureaucracy.
The bureaucratic hassles of borrowing from the World Bank are surely one factor behind seemingly low demand from clients for IBRD lending outside of times of crisis. (Dated) survey evidence suggests that client countries view the Bank as a lender of last resort with infrastructure in particular because of the costs of doing business, something also reported by World Bank staff in a 2010 Independent Evaluation Group survey. The response shouldn’t be to take scarce grant resources and use them to fund inefficient subsidies to drum up demand for climate lending in IBRD countries, it should be to reform lending processes and approaches to make borrowing from the IBRD for climate mitigation at the institution’s unsubsidized (but below-market) rates more attractive.
Part of that process should involve looking at lending instruments and safeguards. The World Bank has two main financing instruments: broad policy lending and specific investment financing. It also divides potential projects into four main categories based on potential environmental impacts: Category A; where the potential impact is large and borrowers and the bank need to undertake assessments and agree mitigation measures; Category B which is lower risk but still requires assessment and mitigation; and Category C which is likely to have minimal or no adverse environmental impacts. A separate category, F, involves projects where funds flow through a financial intermediary.
We can look at the impact of project type and environmental assessments on the bureaucratic burden of project preparation by comparing the length of time it takes to get a project from initial idea to World Bank board approval. Analysis by Christopher Kilby suggests that project preparation times are primarily a function of World Bank processes rather than recipient country characteristics, down to factors including loan type and amount (and US interest in the client country). Kilby’s results suggest Structural Adjustment Programs and Development Policy Loans take 240 days shorter to prepare than investment projects, while a project in a country directly represented by an Executive Director on the World Bank’s board is associated with a 52 day reduction in preparation time. In a later paper with Kevin Gallagher, Kilby looks at the impact of Environmental safeguard categorization and suggests projects have a typical preparation time of 293 days with no safeguards and 416 days with safeguards, though there is some evidence of convergence in preparation times with more recent projects.
We use the database examined by Kilby to look at the impact of environmental assessments in particular, updated through 2021. One missing element in that database (as reported by Kilby) is the date when the project was conceived, but luckily World Bank project ID numbers, which are in the database, are issued sequentially. That means we know project 134156 was greenlighted for preparation by World Bank management just after project 134155 and just before project 134157, for example. We exclude projects prior to 1994 and project IDs below 20,000 (which do not follow a fully sequential numbering system) as well as recent projects (project number above 175,000), because the slower projects won’t have reached the Board yet. We drop earlier loans without an approval date (themselves dropped from the project pipeline). And we drop loans without an IBRD or IDA commitment amount, in order to focus on traditional World Bank projects. We then run the following regression:
[Approval date] – [average approval date of 100 closest below and above projects by ID]
=
[Total IBRD + IDA commitment] + [(Exclusive) IDA financing dummy] + [IDA/IBRD blend dummy] + [Instrument (structural adjustment/policy lending dummy)] + [Sector/theme of infrastructure] + [Environmental assessment category dummy (one each for A, B, F, and other)].
The sector/theme dummy is a 1 if the project theme/sector codes mention any of the words energy, power, water, road/roads, transport, irrigation, port/ports, airport/airports, infrastructure, construction, or housing, and 0 otherwise.
The regression results report how many days, more or less, a project with particular features takes to make it to the World Bank board for approval than the average of projects initially conceived at around the same time. The first column reports results for the whole sample, the second column for the second half of the sample (with the earliest Board approval in 2008), and the third column for the last quarter of the sample (with earliest board approval in 2015).
The results suggest that:
- Project size (commitment amount) is not a major factor in length of project preparation (a $100 million project will take about nine more days than a $10 million project).
- Compared to projects initiated at about the same time, those projects that are purely finance by IDA as compared to IBRD projects take 71 fewer days to reach Board approval, although that effect is not apparent more recently (when IDA/IBRD blend projects appear to take longer).
- Policy lending takes 107 fewer days to reach the board than investment lending (72 days less in the most recent sample).
- Projects that involve infrastructure do not take longer to be approved—this allowing for other features included in the regression.
- Environment category F and B add about 100 days to project preparation while category A projects take nearly a year longer to reach the board, although delays have declined over time (to 43 days in the last quarter of the sample for Category B and 189 days for Category A). Perhaps this is related to World Bank bureaucratic reforms initiated after 2016.
It may be that category A and B projects look different for more reasons than environmental impact. Certainly, policy lending projects are meant to look different. Nonetheless, the results are at least suggestive. And more evidence for that comes from looking at the share of projects rated each category over time, presented in the figure below. It is very clear that Bank staff and borrowers are not keen to put forward projects that might be rated Category A: projects that involve considerable construction, for example. That’s going to be an issue if the World Bank wants to play a bigger role in creating low-carbon economies in middle income countries.
And the dramatic drop in category B projects in 2020-21 is also revealing: it reflects the World Bank’s efforts to get financing to countries suffering from the global pandemic. The Bank reports that the average gap between completion of a project concept document and Board approval dropped from 10.6 months in 2019 to 7.8 months in 2021 (at a period during which annual IBRD and IDA commitments climbed from $45 billion to $67 billion). Clearly, World Bank staff and management appear to believe that if you want to get financing delivered fast, don’t trigger safeguards.
The results suggest the Bank should embrace large scale policy lending for climate. It is unlikely to trigger safeguards and is comparatively bureaucracy-free. That will make it more attractive to client countries, but also is likely to have a larger impact. Supporting policy change on issues such as carbon subsidies and pricing will have a larger effect on global emissions than financing the marginal infrastructure investment that may or may not have been low carbon without the World Bank’s financing.
Still, when it comes to the bureaucracy of environmental review, it is time for a reassessment. The World Bank Group should meet standards for environmental protection and social safeguards—it has financed some damaging projects with far too little in the way of remediation in the past. But the cost of the existing regime in terms of global climate and development outcomes may be too high. And that involves not just the review process but additional constraints including the ban on finance for nuclear power. If the Bank and other multilateral institutions are to play a greater role in climate finance, reforming their overly-bureaucratic investment approach through greater policy lending and a reformed safeguards regime needs to be part of the package—and that needs shareholder support.
Aftermath of War in Europe The West VS. the Global South?
This publication provides an insight into the lens through which countries of the Global South view the current period of successive crises, brought about by an ongoing global pandemic and a war in Europe. It highlights how the combined weight of history, culture, and geography has shaped the Global South’s interests and is influencing its foreign policy stance during one of the most dangerous periods of Great-Power competition in recent times—one that could see the fracturing of the world into different blocs.
Russia’s invasion of Ukraine on February 24, 2022, and the Western sanctions imposed in retaliation, have unleashed a domino-like sequencing of effects and consequences, not only for the two countries at war, but for the world. The war has come on the heels of more than two years of a pandemic that has affected global supply chains and output, and has impacted the world’s poorest countries even more severely. The World Bank estimates that developing countries added at least 45% of new debt to already unsustainable burdens, in an effort to manage the health crisis and deal with its most egregious economic and social effects. Millions have been pushed back into poverty. Debt repayments, suspended for a short period at the height of the pandemic, resumed in 2022 with stark warnings from the International Monetary Fund (IMF) about the debt-distressed situation of several countries. Zambia and Mali have defaulted on their sovereign debts, so has Sri Lanka, for the first time in its history. Others are on the brink.
The consequences of default are significant. Default affects a country’s ability to access capital markets. It increases the cost of borrowing, undermines investor confidence, exerts downward pressure on the local currency and can lead to the roll back of years of working towards gains in the delivery of social goods and services. Egypt has devalued its currency as a precursor to its recent request for standby facilities from the IMF. This will impact prices, inflaming already heightened social tensions. Tunisia has reached preliminary agreement with the IMF for a $1.9 billion loan. Inflationary pressures, and soaring food and energy prices associated with the effects of the war, have exacerbated an ongoing crisis first precipitated by the COVID-19 pandemic. These two crises and their combined effects have dimmed, even further, prospects for global economic recovery, with no end in sight.
Russia’s invasion of Ukraine has united the western world more swiftly and robustly than expected, and has strengthened the resolve of the transatlantic partners to stay the course in a relationship that, even under the Biden Administration has proven to be challenging. There is a sense of fierce reaffirmation of the ideals that bind Atlantic partners to each other, to NATO, and to their allies. Yet there is also a sense that the world order in place since the Second World War is being upended, and trends that were emerging at the beginning of the pandemic have now coalesced and are accelerating.
Countries of the Global South and some others have mostly declined to implement Western sanctions against Russia. They represent more than half of the world’s population and their shares of global economic resources and output are significant, and growing. In this conflict they have adopted a neutral stance. Interests are intertwined and too complex. They seek an end to the war and yearn for conditions of stability to allow global economic recovery to take place, and issues of global governance to be addressed. The level of sanctions deployed against Russia is unprecedented in modern history, and many of these countries ponder a future in which seats at the table of global governance and rule-making shrink, rather than expand, reducing the options available to them. Such a world does not promote their interests and they are pursuing various modalities to secure the future they need and want. Deepening and enlarging distinctly non-Western alliances is one such option. This only enhances the view that a two-bloc world is in the making.
At the same time, the European Union’s (EU) drive to wean itself from Russian oil and gas, while promoting opportunities for greater exports from Africa and other countries of the Global South, raises awkward and vexing questions. So too does the EU’s renewed efforts to enact carbon taxes on the border of the single market—with significant implications for countries of the Global South. This not only raises new issues at the World Trade Organization (WTO), but its timing comes at the very moment when these countries need to trade their way out of poverty and relieve the burden of significant debt, which has accrued during the pandemic and the war. This publication frames the voices of the Global South and their pronouncement on the multiplicity of issues arising from this period of disruption and Great-Power rivalry. The very act of their neutrality and the deepening of alliances with ‘like-minded’ others is accelerating a period of change in the international structure. For all countries, for the West and the rest of the world, the stakes are high.
Energy Trends and Outlook Through 2023: Surviving the Energy Crisis While Building a Greener Future
The volatility in energy markets since the outbreak of the Covid-19 pandemic in 2019/2020 has continued, with unprecedented uncertainty about global energy supply developing over the course of 2022 in the wake of Russia’s invasion of Ukraine, against a backdrop of weakening macroeconomic conditions and high inflation. While some perceived this as a potential setback for the energy transition, others saw it as an opportunity to move away from fossil fuels and accelerate the development of clean technologies. This Policy Brief explores five recent trends that are likely to shape the transformation of the energy system in 2023 and highlights clean technology challenges to accelerate the transition to a greener future.
INTRODUCTION
2022 was a tumultuous year for global energy systems. The world experienced its worst energy crisis in decades this year, fueled by a range of economic and geopolitical disruptions, with ripple effects on countries worldwide. The success of COP27, in Sharm el-Sheikh, Egypt, in November 2022, highlighted by an agreement on establishing a “loss and damage” fund, was tempered by many missed opportunities, ranging from stronger language on emissions reductions, a push to reduce the use of all fossil fuels, or clear signals to developing countries that adaptation funding will effectively double by 2025.
Yet despite all the headwinds, 2022 brought a remarkable acceleration of the energy transition, driven in part by the energy crisis, with record renewable energy capacity installations and electric vehicles (EVs) sales worldwide. This was despite a global context of soaring energy and commodity prices, shortages of critical minerals, semiconductors and other components.
As the energy crisis continues, 2023 will be critical to accelerating a just energy transition. While it is never easy to predict the future, with 2023 energy forecasts being no exception, as conflicting factors are at play, this Policy Brief examines five recent trends that are likely to shape this energy system transformation in 2023 and highlights the clean technology imperatives needed to accelerate the transition to a greener future.
The World Needs a Green Bank
Humanity is losing the climate battle, and existing international institutions are not delivering on climate change. Hence, there is a need for a new international institution that would be a repository for global knowledge on climate change, and would advise governments on climate policies, develop green projects across the Global South, mobilize financing for those projects, and support project implementation. The proposed Green Bank would be different from existing multilateral development banks: (1) it would include private shareholders as well as governments; (2) voting rights would be organized so that countries of the Global South would have the same voice as countries of the Global North and private shareholders; and (3) it would only finance green projects which could be national, regional, or global. The Green Bank would primarily support private green investments through equity contributions, loans, and guarantees. It could also support public investments by using grants to buy-down the interest on other multilateral development bank loans that finance projects that support adaptation to climate change. The Loss and Damage Fund agreed at COP27 could be the source of those grants. This proposal builds on the Bridgetown Initiative, with the aim of mobilizing private funding, in addition to the public trust fund that the initiative proposes. The Green Bank would partner with other institutions and complement the work of existing multilateral development banks, and of specialized funds.
Climate change is an existential threat facing all of humanity, and all of humanity needs to unite to face it. But a major share of humanity, referred to here as the Global South, lacks the necessary resources. There are many international meetings and summits at which resources are pledged, but the pledges are for much less than what is needed to deal with climate change. Moreover, not all pledges materialize as actual commitments and disbursements. The governments of the Global North face tight budget constraints, which limit their ability to finance climate projects in the South. If this cycle of insufficient promises that do not materialize and lead to inaction continues, climate change will quickly turn from threat to nightmare. A new approach is needed.
Countries of the Global South have been actively seeking solutions. A proposal from those countries, known as the Bridgetown Initiative, could prove significant1. At the heart of this initiative is the creation of a $500 billion trust fund that would be used to finance mitigation projects in the Global South. The fund would lend to private projects so that the costs would not lead to increases in sovereign debt. The Bridgetown Initiative is well thought through and its implementation would have a real impact. However, the $500 billion is yet to materialize, even though it is suggested that this financing could take the form of Special Drawing Rights (SDR) allocations.
The creation of a Loss and Damage Fund, which would be financed by countries of the North to compensate countries of the South for the impacts of climate change, was approved at the 2022 United Nations Climate meeting, COP272. It is an excellent initiative. But so far it is an empty box with no financing. The idea is to reach agreement on financing and the workings of this fund in time for COP28 at the end of 2023. If history is any guide, the amount of financing will end up being seriously inadequate.
Countries of the Global North are also looking for solutions. The United States Treasury requested the World Bank to make proposals to increase its financing of global public goods, and especially climate change. The World Bank has prepared a ‘Roadmap’ to respond to this request. This roadmap is unlikely to yield satisfactory results. It requires a significant increase in the World Bank’s capital, which will have to be paid in by governments that are already facing budgetary issues. Moreover, the World Bank’s mission to fight poverty, and its country-focused operating model, are not always compatible with the financing of climate-mitigation projects.
In this policy brief I propose a new approach to climate financing: the creation of an International Green Bank, which would be a global public-private partnership. This approach would make it easier to raise the $500 billion requested by the Bridgetown Initiative, because in addition to sovereign contributions, the Green Bank’s financing will include contributions to capital by the private sector, and the proceeds of sales of green bonds. Those resources would be used to provide equity, loans, and guarantees to private- sector mitigation projects in the Global South. The Green Bank could also leverage any resources committed to the Loss and Damage Fund by using the grants to buy down the interest on loans to public-sector adaptation projects.
The remainder of this brief is divided into four sections. Section A describes the need for climate financing, section B explains why the current international financial system has been unable to adequately respond to the climate crisis, section C describes the proposed Green Bank, and section D concludes by highlighting the conditions for the success of this proposal.