WRI Stories Feed: International Financial Flows and the Environment (IFFE)

Transparency of Climate Finance: Did Durban Show Us the Money?

Kirsten Stasio — Fri, 27 Jan 2012 10:36:08 -0500

In the recent UN climate negotiations (COP 17) in Durban, South Africa, the issue of transparency of climate finance appeared in a variety of contexts…

Climate Finance at COP17 Durban

Clifford Polycarp — Fri, 18 Nov 2011 09:46:19 -0500

From November 28 to December 9, negotiators will gather in Durban, South Africa, for the United Nations Framework Convention on Climate Change (UNFCCC) COP17 meeting. An outcome on climate finance – funds to support climate change mitigation and…

Cape Town Meeting Must Get Details of Green Climate Fund Right Before Durban

Athena Ballesteros — Fri, 14 Oct 2011 15:30:49 -0400

The Transitional Committee (TC) for the design of the Green Climate Fund (GCF) will convene in Cape Town this weekend for its fourth and…

The Open Government Partnership: Will Brazil Promote Green Transparency?

Athena Ballesteros — Mon, 19 Sep 2011 12:51:40 -0400

This piece was written with Catarina Freitas, a Brazilian legal intern with WRI’s Institutions and Governance Program.

On September 20, eight governments will gather in New York to launch the…

"Looking for the Radical:" Clean Energy Game-Changers in Asia

Jennifer Morgan — Mon, 27 Jun 2011 13:53:21 -0400

Jennifer Morgan delivered the following speech on June 24, 2011 at the closing plenary of the 6th Annual Asian Clean Energy Forum in Manila, Philippines.

Asian Development Bank (ADB) President Haruhiko Kuroda really set the bar for our Forum this year when he opened the meeting with a call for Asian nations to “take radical steps” to increase energy efficiency and invest in renewable energy.

We couldn’t agree more!

Asia is particularly vulnerable to climate change, and for some countries in this region, how the world responds to the climate crisis is an issue of survival. At current emissions rates we are racing towards critical tipping points from which there is no return – ocean acidification and warmer oceans are bleaching corals and impacting fisheries dramatically; in addition the stability of glaciers that provide millions of Asians with water supplies is at risk; once predictable weather patterns such as the annual monsoon cycle, are no longer predictable.

It is therefore essential that Asia is moving towards a clean energy economy, faster than many other regions in the world. This week, we’ve learned that countries are already making this shift. However, we all know that it is not yet at the scale or speed necessary to avoid the very dangerous impacts.

Indeed we all know at a deep level that Asia’s choices will have a great impact on the future of the planet.

This week’s Forum has brought to life many of the solutions that are underway in the region and provided inspiring examples of innovation and change. Specifically, here are a four take home messages I heard:

The level of sophistication in domestic discussions is impressive, whether it be how to develop a domestic carbon market or implement a national feed in tariff. Yes of course there is more to do, but the region is clearly in the midst of grappling with how to respond to this challenge, each country choosing the path that works best for its citizens. Promoting lesson learning between countries is vital. We also learned that without these kinds of enabling conditions in place, all the new available climate technology finance will find no projects.
We know conclusively that clean energy is not just about installing solar panels but that governance conditions will fundamentally determine whether clean energy succeeds or fails. As Asian countries scale up clean energy investments and markets mature, the governance challenges similarly increase in scale and complexity. There are important lessons being learned about managing financial and social impacts.
In tackling the challenge of energy access, we heard that the role of small and medium enterprises (SMEs) and working with them to build their capacity to deliver access is essential and that current mechanisms are not suitable to support those small scale enterprises. More decentralized solutions, such as current investments in venture capital (VC) on a decentralized level are needed - investing not only in clean energy but enabling last mile access.
Mainstreaming energy efficiency investment is still a challenging task for Asia and the rest of the world. It requires strong and deep political and social commitment as well as innovative business and financing mechanisms. We learned that countries need to treat energy efficiency as a resource just like other energy resources, in energy and electricity planning and strategies.

I am still looking, however, for the radical, which is a strong and provocative word to use.

WRI never shies from a challenge, so we wanted to leave you with three radical ideas that we think could be game changers in Asia, and globally, if the ADB moved in this direction.

First, the International Energy Agency finds that if the world wants to have a medium probability of staying below 2 degrees C, 75% of the capacity to be built in developing countries between now and 2035 needs to be renewable. It also finds that two-thirds of the CO2 reductions will need to result from energy efficiency. So, in ADB terms, instead of a $2 billion, i.e. 20%, clean energy target, why not a 75% renewable energy and energy efficiency target? This would certainly position the Bank to be a major channel and administrator of climate finance in the coming years and drive investment into the region bringing multiple benefits with it.
Second, we have learned this week that there are a number of countries in the region that would like to have more ambitious feed-in tariffs (FITs) but are facing significant financing barriers. The ADB has been providing important technical and capacity support but perhaps this is the moment to go further. Why not have the ADB provide the additional finance needed to offer the FIT to more or larger projects and allow countries to increase the share of renewables? By piloting this mechanism in a few Asian countries, the ADB would drive a new innovative financing model, serving as an example for other countries and regions around the world.
Finally, we know that success in clean energy must be anchored on systems of good governance guided by transparency, participation and accountability. We are on the road to scaling up renewable energy investments, and markets are rapidly maturing. Why not ensure that we make a similar quantum leap in developing good governance frameworks for building social and political support? This can be done by developing transparent processes for deciding how to allocate the costs of renewable energy until the prices come down, and by developing partnerships to share the benefits of renewable energy investments with communities who own land and water resources. If this becomes the norm rather than the exception we will have succeeded in effecting transformative change.

These are just a few ideas that we at WRI think could make a big difference:

driving investments in clean energy;
piloting an innovative financing mechanism in a world where proof of concept is desperately needed; and
paying strong attention to the underlying governance factors that are essential for success.

We look forward to working with you on these and other ideas as we each strive to make radical change in the region.

WRI Experts on Asia's Clean Energy Future

Maggie Barron — Thu, 16 Jun 2011 10:44:50 -0400

Why is Asia such an important region for clean energy deployment? WRI experts respond.

From June 22-24, the Asian Development Bank (ADB), the U.S. Agency for International Development (USAID) and the World Resources Institute (WRI) will co-host the premiere knowledge-sharing platform for clean energy investment in Asia, the 6th Asia Clean Energy Forum (ACEF). Taking place in Manila, Philippines, the event brings together energy leaders from around the world to discuss clean energy policy, regulation, financing and innovative business models.

I sat down with WRI experts who will attend the events in Manila and asked each of them, what is unique about Asia’s path to low-carbon development?

Opportunities of a Low-Carbon Economy

Large and small countries in Asia understand the opportunities of a low-carbon economy. We’re seeing these countries transition rapidly to renewable energy, and in doing so driving global markets. China, for instance, is leading the world in renewable energy investment, and others are looking to follow its lead. These successes may help drive even greater ambition among Asian countries, allowing countries to reap the economic, environmental and development benefits of a low-carbon economy.

— Jennifer Morgan, Director, Climate and Energy Program

Global Leadership and Innovation

The low-carbon transformation will be very different from technological transformations of the past because many of the innovations will come from developing countries, in particular countries from Asia.

These are the countries making large scale investments in energy infrastructure. They are transforming their economies to be competitive participants in the global clean energy value chain, as they make the transition from low cost, low skill manufacturing to high skill, high value-added manufacturing. They see the potential to become global leaders in the clean energy sector while meeting domestic energy challenges.

— Letha Tawney, Senior Associate, Two Degrees of Innovation

The Meaning of “Clean” Energy

Asia is home to a large proportion of the world’s poor, who either have no or very limited access to energy. And it’s also home to some serious gaps in governance. That’s why when we say “clean energy” we need to make sure we’re talking about both a type of fuel and an absence of corruption. There is no reason why vested interests will not become entrenched in the clean energy space, just as they have in the energy sector in the past.

So governments need to strive for more transparency, inclusive decision-making, and accountability. Business as usual will allow inefficiencies to continue, with little if any regulatory oversight.

Countries that exclude people from decisions about clean energy deployment run serious governance risks. To a farmer whose land is taken over without due process, it’s of very little consequence whether it’s for coal or for a solar PV plant. The governance challenges in the energy sector don’t go away just by calling it “clean.”

— Bharath Jairaj, Senior Associate, Electricity Governance Initiative

Scaling Up Smart Renewable Energy Policies

Asian countries are providing more and more examples of smart policies that lead to increased deployment of renewable energy in line with their broader development objectives. And they are learning from each other, instead of looking only to developed countries or international institutions for advice.

These countries can develop good models of what we refer to as “smart renewable energy policy”, but if they want to scale them up to the level that is necessary to meet the huge energy challenge Asia faces, they will need international financial support. For example, both India and Thailand pay guaranteed prices to renewable energy producers, paid for with a surcharge on electricity. They are supporting renewable energy with their own resources. Yet their resources are limited, so their support for renewables can only go so far. Donors need to step in, build on existing successes and help bring them to scale. A meeting like ACEF brings donor institutions and in-country experts together and provides an opportunity to form the partnerships necessary to expand on countries’ successes so far.

— Lutz Weischer, Research Analyst, Two Degrees of Innovation

A Role for Entrepreneurs

Entrepreneurs in Asia are taking on the issue of energy access. There’s a lot of talk about large solar installations, but those come with their own storage and distribution challenges – how are you going to expand the grid to get that solar energy to a remote village? That’s why there is so much potential for decentralized clean energy, like solar lanterns, microhydro plants, and biomass gasification.

For the first time we’re starting to see a critical mass of companies that are selling these kinds of electricity products, and prices keep coming down. So it’s no longer an issue of technology, or price. It’s now about getting these technologies to consumers. That’s a really important shift, and entrepreneurs are coming up with creative solutions to tap into this very significant rural market.

— Saurabh Lall, Research Officer, New Ventures

Energy Efficiency Brings a Competitive Advantage

In Asia, there’s very real pressure for companies to invest in energy efficiency, both from governments and from large customers who want to squeeze carbon out of their supply chains.

So there’s this confluence of very strong policy drivers, very strong demand drivers, and industries that recognize the opportunity to gain a competitive advantage. These all create the conditions for a good market for energy efficiency technology.

The challenge now is that a lot of the low-hanging fruit for energy efficiency projects has already been achieved. The next step is for companies to make longer term investments, and for that many of them need external financing. If Asian countries can help companies address some of the financing and capacity barriers, they can jumpstart a lot of new technology and continue to drive costs down.

— Xiaoyu Shi, Associate, Climate & Energy Program

An Urgent Necessity

Right now Asia is at a crossroads. Energy demand in the region continues to grow rapidly and is expected to rise at a rate well above the global average. Asia must decide whether to meet this demand using traditional carbon-intensive technologies or switch to clean energy and enable the transition to a low-carbon economy.

Asian countries face serious threats from the potential impacts of climate change on their economies, their ecosystems and their people. This combined with rising prices for food and fossil fuels make the case for low-carbon future. This is no longer a matter of choice - it’s an urgent necessity. With Asia leading the charge on massive investments in wind, solar, biomass and geothermal, it has the opportunity to become a major hub for clean energy investments.

— Athena Ballesteros, Project Manager, International Financial Flows and Environment

The New Frontier in Environmental Finance

Tue, 07 Jun 2011 12:49:55 -0400

China’s overseas presence has brought a new way of doing business to the world.

Chinese/中文 (PDF, 3 pages, 452 Kb)

By 2030, China may become the largest economy in the world. Less than one decade from now, emerging markets including Brazil, China, India, Mexico and Russia, will comprise half of world’s top 10 GDP list.

The global remapping of economic power presents significant opportunities and challenges to U.S. and European policymakers and companies operating in emerging markets, especially as businesses strive to operate amidst growing populations, resource scarcity and environmental degradation.

Emerging Actors in Development Finance

WRI’s work on emerging actors in development finance is led by the International Financial Flows and the Environment initiative. The goal of this research is to improve the environmental, social, and climate change policies that govern emerging actors’ investments, and to ensure that local communities and civil society organizations impacted by the investments are able to engage with “emerging actors” more effectively. A preliminary aggregation of existing and original data and figures are available online.

As the founder and Chief Investment Officer at Caravel Management, an emerging and frontier markets investment fund, former chair of the U.S. Export Import Bank, and current chair of the board of the World Resources Institute (WRI), I have watched the emergence of new financial actors from several perspectives. China’s overseas investments have been of particular interest, especially given the marked success of the country’s “go global” strategy and the strengthening of U.S.-China trade relations.

New Opportunities

U.S. investors in emerging markets have seen opportunities in Chinese companies’ growing presence overseas. For instance, China has made significant advances in clean energy technologies in areas such as solar, wind energy and electric cars. These investments and achievements are helping to shape markets and set the direction for future industry standards. As Chinese companies bring these technologies and standards overseas, there are increasing opportunities for partnerships and cooperative ventures between U.S. and Chinese enterprises with similar interests.

New Challenges

At the same time, Western governments’ export credit agencies have begun to see China as a formidable competitor. For several years, developed countries’ export credit agencies have come together at the Organisation for Economic Co-operation and Development (OECD) to ensure that cooperation and competition take place on a level playing field, and to develop mutually acceptable standards that promote environmental protection. As China’s presence grows, these same institutions are reaching out to China’s agencies as well as those of other non-OECD member states. Greater participation of China in the OECD—even if not as a member obligated to OECD standards—would generate positive economic and environmental benefits.

New Risks

Similarly, U.S. environmental groups that have monitored the environmental and social impacts of Western overseas investors have begun to turn their attention to Chinese investors, in an effort to ensure that local communities have a voice in projects that affect them. China is now among the world’s top five largest investors. Naturally, with $50bn per year in overseas investment and a particular appetite for natural resources and infrastructure, China draws inevitable scrutiny of its operational standards in emerging and frontier countries.

New Partnerships

From all of these perspectives, China’s overseas presence has brought a new way of doing business to the world. China’s investments have brought much-needed capital and infrastructure to sub-Saharan Africa and other regions. Yet in many cases, a lack of information and understanding of the culture of China’s investors and financial institutions can lead to fear in the United States and other Western countries.

This is now changing. The Global Environmental Institute (GEI), a Chinese nongovernmental organization, produced a book entitled Environmental Policies on China’s Investment Overseas which examines the political and economic contexts in which China’s overseas investments operate. GEI’s book provides greater clarity on how the Chinese government is seeking to promote and regulate overseas investments.

WRI supported the English translation of the book and is hosting GEI and a delegation of Chinese government officials in Washington, DC on June 8th and New York City on June 10th. The purpose of the launch is to encourage a dialogue among Chinese, U.S. and international policymakers and stakeholders on emerging environmental and social standards for China’s overseas investments.

This publication will help to build awareness among U.S. and other English-speaking audiences. GEI’s book speaks frankly about the progress and challenges that the Chinese government, companies, and financial institutions have faced in going global. Most importantly, it signals the possibility for engagement and partnership between U.S. and Chinese companies under terms that reduce risk and enhance the returns for both investors and the countries and communities in which they invest.

Mr. Harmon is the Chairman of WRI’s Board of Directors.

Emerging Actors in Development Finance: A Closer Look at Chinese and Brazilian Overseas Investments

Xiaomei Tan — Tue, 07 Jun 2011 11:33:33 -0400

The landscape of development finance is changing rapidly. Traditionally, international financial flows moved from developed countries to developing countries. In the last decade, however, major emerging economies such as China and Brazil have fueled a growing trend of South-South development flows by increasingly channeling their overseas investments to other developing countries.

China and Brazil are surfacing as major international investors through nationally owned financial institutions such as the Export-Import Bank of China, the China Development Bank and the Brazilian Development Bank (BNDES). These “emerging actors” are financing major initiatives to acquire natural resources, open markets, and forge strategic political ties. They are increasingly financing large-scale, high impact projects beyond their borders—such as hydropower plants and gas pipelines—which may pose new challenges for environmental and social sustainability.

This preliminary research focuses on Chinese and Brazilian overseas investments and begins to look at the growth drivers and geographic trends of those investments.

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Introduction

South-South financial flows are changing the nature of development finance and assistance. Between 2009 and 2010, two Chinese state-owned banks lent more money to other developing countries than the World Bank.¹ During the recent financial crisis, Brazil invested $10 billion in International Monetary Fund bonds, a striking example of the country’s transformation from a debtor to creditor.²

Expanding South-South trade and investment provides welcome and needed sources of capital for countries in Africa, Asia, and Latin America. At the same time, these financial flows – coupled with the emergence of powerful financial actors from China, India, Brazil, and other economies – may pose new challenges for environmental and social sustainability.

A New Geography of Growth

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Relative shifts in economic power and political influence are reconfiguring the global context for sustainable development policy. We are currently witnessing what the Organisation for Economic Co-operation and Development (OECD) terms “the new geography of growth” – “a 20-year structural transformation of the global economy in which the world’s economic centre of gravity has moved towards the East and South.”

Trends indicate that developing economies will “account for 57% of world GDP [Gross Domestic Product] by 2030.”³ Despite sharp differences among members, the G-20 is supplanting the G-8 as the primary vehicle for global economic policy coordination.⁴ Large emerging market economies are defining their own approaches to development cooperation, governance issues, and environmental and social sustainability outside of many existing normative frameworks.

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Expanding South-South Trade

South-South trade is clearly a dynamic force in the global economy. While world trade expanded four-fold between 1990-2008, South-South trade grew more than ten times. Developing countries now account for around 37% of global trade, with South-South flows making up about half of that total (19% of global trade).⁵ In 2009, for example, China surpassed the U.S. as Africa’s largest trading partner. Sino-Africa trade volumes exceeded $91 billion in 2009.⁶

China Goes Global

China’s decades-long rapid growth has made it the second largest economy in the world, surpassing Japan in mid-2010.⁷ A major factor contributing to China’s growth has been its integration into the global economy. China’s transformation from “isolated” to “globalized” is a direct result of the government’s desire to spur and maintain lasting growth of its economy.⁸

In 2001, China’s tenth Five-Year Plan (2001-2005) formalized the directive for Chinese companies to “Go Global,” a strategy to gain access to needed resources, stimulate the export of goods, and grow China’s multinational businesses and brands. Beijing has provided diplomatic support, favorable tax exemptions, insurance, and, critically, access to low-cost finance.

The “Go Global” strategy delivered quick results – China’s outward foreign direct investment (OFDI) flows increased from under $1 billion in 2000 to $57.9 billion in 2010, while its stock of OFDI grew from nearly $27 billion in 2000 to over $296 billion in 2010.⁹

As reported by the Chinese Ministry of Commerce (MOFCOM), China’s OFDI stock is largely concentrated in Asia, although investment has increased significantly in Latin America and Africa over the past five years. However, this figure assigns flows through the offshore centers solely to the corresponding region, leading to an overestimation of OFDI in Asia and Latin America. An assessment by the U.S.-based Heritage Foundation investigates these discrepancies. Whereas MOFCOM reports $7.8 billion in African OFDI, Heritage records $37.9 billion. Whereas MOFCOM designates Latin America as the second leading OFDI destination in 2008, Heritage ranks it behind all other regions, with significant investments in Europe, Oceania, the Middle East, and North America.¹⁰

Chinese Overseas Investment Banks

Chinese authorities have simplified regulations to facilitate investment abroad. Three governmental bodies – MOFCOM, SAFE, and the NDRC – have primary but not sole oversight of China’s overseas investment (separate from foreign assistance) regime. MOFCOM is responsible for developing regulations for outbound investment and for coordinating activities with commercial counselors posted at Chinese embassies. SAFE issued new regulations in 2009 that reduced qualification requirements for offshore foreign currency lending and expanded the sources of funds for lending (including access to government foreign exchange reserves).¹¹ The NDRC reviews large outbound investments to ensure they align with the country’s political interest and overall economic development policy.

In addition, CBRC and SASAC also play an oversight role. Risk management guidelines issued by the CBRC in 2008 opened the door for Chinese banks to provide loans for merger and acquisition purposes (previously forbidden under a 1996 regulation.) They require “banks to perform due diligence regarding compliance, operational, and commercial risks relating to the parties and the transaction.”¹² There is no mention of social and environmental risks.

Rather than seeking financing primarily through the capital markets, Chinese companies obtain 80-90% of their funding from Chinese banks.¹³ As part of the Go Global strategy, China’s state-owned policy banks, largely the Export-Import Bank of China (China Exim) and the China Development Bank (CDB), were mobilized to facilitate international capital flows and support mergers and acquisitions of foreign companies. Although not the largest in terms of total assets and domestic investment, China Exim Bank and CDB play the leading role in overseas investment. Other state-owned banks, such as the export and credit insurance company (Sinosure), have also contributed on a lesser scale.

China Export Import Bank

The Export-Import Bank of China (China Exim) was formed in 1994 along with two other “policy banks,” the China Development Bank and the Agricultural Development Bank of China, “as tools of the government, allowing Beijing to allocate preferential or targeted finance through a hybrid of planning and market means.”¹⁴ As a policy bank, China Exim finances and implements the government’s trade and overseas investment policies.¹⁵ The Bank is under the direct leadership of the State Council.

China Exim has exhibited phenomenal growth over the past decade. It has increased lending volumes by 30% to 40% year-on-year – an indicator of the accelerating nature of the “Go Global” strategy. China Exim is by far the largest export credit agency in the world. It approved over $70 billion in new lending in 2009, more than U.S. Exim, JBIC, and BNDES Exim combined.

Why is China Going Global?

Increasing demand for energy and natural resources is a major driver behind China’s foreign direct investments. In 2010, China was the world’s leading consumer of several major commodities including copper, steel, coal, lead and iron ore. As China’s economy experiences unprecedented growth, there is a growing need for new markets, technology, and brands.

Growing Investment in Africa

China’s investment position in Africa is accelerating rapidly, rising from an OFDI stock of less than $500 million in 2003 to $9.3 billion in 2009.¹⁶ Reportedly more than 7,900 Chinese enterprises are now established in Africa, with businesses ranging from home appliances, textiles, clothing, infrastructure, power generation, and natural resource extraction.¹⁷ Returns on investment by Chinese companies in Africa are reportedly higher than in other developing countries: from 24%-30% compared to between 16%-18%, according to the Ministry of Foreign Affairs.¹⁸

Africa as a region has increased its rather minor share of China’s total trade from 2% in 2001 to 4% in 2009.¹⁹ While China’s volume of trade with other regions is far more significant, the opposite is true for many African countries: China has become Africa’s largest export destination and the second largest source of imported goods. South Africa recently announced that it would prioritize China and India as these countries are now its biggest export markets.²⁰

Imports from Africa

The bulk of China’s imports from Africa originate from relatively few countries. While investments are spread across 48 African countries, over 70% of Chinese OFDI stock in 2008 was concentrated in five resource rich countries: South Africa, Nigeria, Zambia, Sudan, and Algeria.

However, by international comparison, China’s investments in Africa’s natural resources match well-established patterns. 50%-80% percent of all FDI to Africa goes to natural resource exploitation.²¹ Despite the rapid scale-up in Chinese investment in Africa, most foreign direct investment (FDI) in Africa originates from OECD countries – 91.6% of total inward FDI stock in Africa in 2008.²² Similarly, the bulk of U.S. imports from Africa are sourced from relatively few resource rich countries; 77% of total imports in 2009 came from five countries: Nigeria (30.5%), Algeria (17.3%), Angola (15%,) South Africa (9.2%), and Congo-B. (4.9%).²³ The top three African oil exporters – Nigeria, Angola, Algeria for the U.S. and Angola, Sudan, Libya for China – provided a quarter of each country’s total imports (27.6% or the U.S., 25.1% for China).

Resources-for-Infrastructure Deals

China has executed a number of resources-for-infrastructure deals in Africa in recent years, backed not just by oil but also bauxite, chromium, iron ore, and even cocoa. In these deals, China provides loans for infrastructure development, which are repaid by delivery or sales of the borrowing country’s natural resources. This structure is used most commonly when a country does not have the financial capacity to guarantee and/or service a loan commitment but has a natural resource (such as oil) to offer as repayment. This approach follows a long history of natural resource-based transactions and is far from unique to China.

Brazil Takes Off

Once the largest debtor among developing countries, Brazil has transformed its economy over the past two decades into a regional and, increasingly, global powerhouse. With the largest economy in South America, Brazil ranks ninth in the world in terms of GDP. In 2006 it became a net foreign investor (while still attracting significant inward flows).²⁴ It is a world leader in biofuels technology and a major agricultural producer.²⁵

Role of Brazilian Financial Institutions

BNDES – originally Banco Nacional de Desenvolvimento Economico e Social (National Bank for Economic and Social Development) but rebranded as “El banco de desarrollo de Brasil,” (“The Brazilian Development Bank”) – is a wholly owned federal government company.²⁶ It is the largest provider of funding for capital investment in Brazil. As a key source for long-term financing and subsidized interest rates, the bank is normally responsible for almost 20% of total credit granted by Brazilian banks to the private sector.

In 2009, BNDES estimates that it provided nearly 40% of financing for all investments in Brazilian manufacturing and infrastructure.²⁷ BNDES provides direct credit, fund distribution through financial intermediaries, and equity investment. It also provides grants for social, cultural, and technological development. With total assets of $285 billion (as of September 2010), BNDES is Brazil’s fourth largest bank.

While Brazilian firms began to invest abroad in the 1980s, the “internationalization of Brazilian companies is a relatively recent phenomenon. From 2000 to 2003, OFDI averaged $0.7 billion a year. Over the four-year period 2004-2008, this average jumped to nearly $14 billion. In 2008, when global FDI inflows were estimated to have fallen by 15%, OFDI from Brazil almost tripled, increasing from just over $7 billion in 2007 to nearly $21 billion in 2008. An estimated 887 Brazilian companies have invested abroad in 78 countries.”²⁸

Not only did China displace the U.S. as Brazil’s biggest trade partner in 2009, but it was also Brazil’s largest foreign investor, investing in a wide range of areas, from iron ore mines to vast tracts of farmland and the electricity grid.

China and Brazil: A Strategic Partnership?

In April 2010 Brazil and China pledged to foster their “strategic partnership,” signing a range of agreements including a 2010-2014 Joint Action Plan to deepen bilateral relations.²⁹ President Lula stated that the agreements come on top of “spectacular” growth in bilateral trade of “780 percent since the beginning of my administration” in 2003, reaching $36 billion in 2009 in spite of the global economic crisis, making China Brazil’s largest trading partner.³⁰ However, this trade is highly asymmetric. “Whereas Brazilian exports are concentrated mostly on soy and iron ore, Chinese sales cover a wide range of industrial goods, from electronic equipment, machinery, shoes, textile and garments. Moreover, Brazil accounts for less than one percent of the total Chinese exports, whereas the Asian country is the destination of around 10 percent of Brazilian exports. The Chinese state company Sinopec is now the largest buyer of Brazilian oil, importing 200,000 barrels per day.”³¹

China and Brazil seek similar relationships with Africa, sharing a strong proclivity to oil and mining activities. China’s trade and investment relationship with Africa, however, is far more diverse than Brazil’s, encompassing energy, manufacturing, retail and agriculture in addition to oil and mining. This makes it less likely that the two countries will compete over investment opportunities. A key challenge is to ensure these trade flows result in clear benefits to the host government and local communities, and safeguard the environment.

WRI’s Work

With our record of independent research, our experience convening a wide range of stakeholders, and our close partnerships with organizations in China, Brazil, and several host countries in Africa and Asia, WRI’s International Financial Flows and the Environment (IFFE) initiative supports efforts by both investors and host countries to move towards environmentally and socially responsible development.

IFFE works to help these countries to apply the highest climate change, environmental and social standards to their investment overseas, report publicly on these standards, and respond to the concerns of NGOs and local communities.

For additional information on WRI’s Emerging Actors in Development Finance work, contact WRI Senior Associate Xiaomei Tan xtan@wri.org.

Note: All currencies are quotes in U.S. dollars unless otherwise stated.

This collection of figures and charts is based on preliminary research conducted by Bruce Jenkins, WRI consultant, and Xiaomei Tan, WRI Senior Associate. The scoping research concluded in April 2011 and includes data from various sources that are updated frequently. The data is circulated to stimulate timely discussion and critical feedback and to influence ongoing debate on emerging issues. WRI has not verified the data, and figures and charts are meant to be used for illustrative purposes. WRI will continue to update the data as our research moves forward.

CDB and China Exim “signed loans of at least $110bn (£70bn) to other developing country governments and companies in 2009 and 2010, according to Financial Times research. The equivalent arms of the World Bank [IBRD and IFC, not IDA] made loan commitments of $100.3bn from mid-2008 to mid-2010, itself a record amount of lending in response to the financial crisis.” Dyer, Geoff, Jamil Anderlini, and Henny Sender, “China’s lending hits new heights,” Financial Times, January 17, 2010. See also, http://www.bbc.co.uk/news/world-asia-pacific-12212936. ↩
BBC, “Brazil to make $10bn loan to IMF,” June 11, 2009, at http://news.bbc.co.uk/2/hi/8094402.stm, and IMF, “IMF Signs $10 Billion Note Purchase Agreement with Brazil,” January 22, 2010, at http://www.imf.org/external/np/sec/pr/2010/pr1014.htm. ↩
OECD Development Centre, Perspectives on Global Development 2010 – Shifting Wealth (Paris: OECD, 2010), pp. 3, 13, 15, at http://www.oecd.org/document/8/0,3343,en_2649_33959_45462088_1_1_1_1,00.html. ↩
Formed in 1999, the G-20 is comprised of 19 countries plus the European Union: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Republic of Korea, Turkey, the UK, and the US (http://www.g20.org.) For critiques of recent G-20 meetings, see Jeffery Garten, “The G-20 and the Future of Capitalism – Part 1,” Jonathan Fenby, “The G-20’s Uncertain Roadmap,” and David Shaumbaugh, “Beijing: A Global Leader with a ‘China First’ Policy,” at http://yaleglobal.yale.edu. ↩
OECD, Shifting Wealth, pp. 18, 71. ↩
Ministry of Commerce. 2010. China-Africa Trade and Economic Relationship Annual Report. ↩
Barboza, David, “China passes Japan as Second-Largest Economy,” The New York Times, August 15, 2010, at http://www.nytimes.com/2010/08/16/business/global/16yuan.html?scp=18&sq=china&st=cse. ↩
Zhang, Yongjin, “China Goes Global,” (London: Foreign Policy Centre, 2005), p. xi, at http://fpc.org.uk/fsblob/449.pdf. ↩
Ministry of Commerce People’s Republic of China (MOFCOM). Statistics on China’s Overseas Investment. At http://www.mofcom.gov.cn/tongjiziliao/tongjiziliao.html. April 2011. ↩
Heritage Foundation, “China Global Investment Tracker,” at http://www.heritage.org/research/reports/2010/02/china-global-investment-tracker-2010. ↩
SAFE issued the Notice on Certain Issues Relating to Foreign Exchange Administration on Offshore Lending by Domestic Enterprises in June 2009. See “China Insights,” p. 3. ↩
“China Insights,” p. 4. ↩
Motoko Aizawa presentation, “China’s Green Credit Policy: Building Sustainability in the Financial Sector China Environment Forum” February 24, 2011, Woodrow Wilson International Center for Scholars, available online: http://www.wilsoncenter.org/events/docs/Motoko%20Aizawa.pdf ↩
Brautigam, The Dragon’s Gift, pp. 79-80. ↩
The Export-Import Bank of China website, at http://english.eximbank.gov.cn/profile/intro.shtml. ↩
OECD. Chinese FDI into Africa – major dynamics and trends. April 29th 2011. ↩
21st Century Business Herald, “China to Explore Credit Rating in Africa,” June 13, 2010, at http://www.focac.org/eng/zfgx/dfzc/t710365.htm. ↩
Noted in article in People’s Daily, “Sinohydro Group boosts African stakes,” October 21, 2010, at http://english.peopledaily.com.cn/90001/90778/90860/7172393.html. ↩
Calculated from COMTRADE data compiled by Trade Law Center for Southern Africa (TRALAC) China-Africa trade data 2010 at http://www.tralac.org/cgi-bin/giga.cgi?cmd=cause_dir_news&cat=1044&cause_id=1694#china. ↩
“SA to focus on its new biggest export markets China, India,” Business Day, September 15, 2010, posted at http://www.tralac.org/cgi-bin/giga.cgi?cmd=cause_dir_news_item&news_id=92926&cause_id=1694. ↩
OECD, China – Encouraging Responsible Business conduct, OECD Investment Policy Review (Paris: OECD, 2008), p. 110. ↩
UNCTAD, Economic Development in Africa Report 2010, p. 79 ↩
Author’s calculations from COMTRADE data provided by International Trade Centre, Trade Map. ↩
Casas-Zamora, Kevin, “Brazil: Poster Boy of Globalization Charts Own Course,” YaleGlobal, April 9, 2010, at http://yaleglobal.yale.edu/content/brazil-charts-own-course. ↩
Freemantle, Simon and Jeremy Stevens, “Brazil weds itself to Africa’s latent agricultural potential,” Standard Bank, Economics: BRIC and Africa, February 1, 2010, p. 2, at www.standardbank.com/research (search function keyword “BRIC in Africa”) ↩
In 2008 “the BNDES brand was redesigned to enable better communication with society,” changing its name (but not its initials) to “El banco de desarrollo de Brasil” (The Brazilian Development Bank). BNDES, “Annual Report 2008,” pp. 6, 10, at http://www.bndes.gov.br/SiteBNDES/bndes/bndes_en/Institucional/The_BNDES_in_Numbers/Annual_Report/annual_report2008.html. ↩
Coutinho, Luciano (BNDES President), “Challenges for Industrial Policy, Innovation and Competitiveness in Brazil,” Presentation at Woodrow Wilson Center for Scholars, July 2010, at http://www.wilsoncenter.org/index.cfm?topic_id=1425&fuseaction=topics.event_summary&event_id=626193. ↩
Lima, Luis Afonso Lima and Octavio De Barros, “The Growth of Brazil’s direct investment abroad and the challenges it faces,” Columbia FDI Perspectives, no. 13, August 17, 2009, at http://www.vcc.columbia.edu/content/growth-brazils-direct-investment-abroad-and-challenges-it-faces. ↩
Xinhua, “China, Brazil pledge to promote strategic partnership, strengthen cooperation,” April 16, 2010, at http://news.xinhuanet.com/english2010/china/2010-04/16/c_13253390.htm ↩
Osavo, Mario, “Brazil-China: An Asymmetric Trading Partnership,” IPSD, April 16, 2010, at http://ipsnews.net/news.asp?idnews=51077. ↩
Barbosa, Alexandre de Freitas, “Brazil: Dances with Dragon,” December 1, 2009, Yale Global, http://yaleglobal.yale.edu/content/brazil-dances-dragon. ↩

Have Countries Delivered on Fast-Start Climate Finance?

Clifford Polycarp — Fri, 20 May 2011 16:31:37 -0400

As the reporting deadline for 2010 looms, developed countries will need to prove that they are honestly meeting their modest $30 billion commitment.

Today, WRI releases an updated summary of developed countries’ “fast start” climate finance pledges. These funds are intended to help developing countries reduce emissions and adapt to climate change from 2010-2012.

To date, 21 developed countries and the European Commission have publicly announced individual fast-start finance pledges totaling nearly USD 28 billion to meet the USD 30 billion commitment in the 2009 Copenhagen Accord.

In last year’s Cancun Agreements, developed countries reaffirmed their commitment and also agreed to provide greater transparency on the delivery of their pledges – in other words, information not just on what the pledge is, but on how the country plans on meeting it.

The timing of this information is crucial as developing countries await progress in this area before moving other pieces of the Cancun Agreements forward. For example, major developing countries – Brazil, China, India and South Africa – have explicitly linked progress in the Green Climate Funds discussions to the sizeable flows of fast start funds.

Developed countries are invited to voluntarily provide this information in annual reports to the UNFCCC Secretariat in May 2011, 2012, 2013. Unfortunately, the Cancun Agreements contain no specifics on what format the reports should follow.

With the May deadline looming, what do we already know about what developed countries are providing? Our updated summary presents the most up-to-date information available. The summary reveals that most developed countries are making tentative progress towards delivering their commitments. However, the information available is neither complete nor consistent, and developed countries should provide comprehensive and comparable information on the delivery of fast start finance in 2010 in the reports they submit this month.

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The May Deadline

Some news reports have suggested that developed countries have “missed” the May deadline for reporting. This is based on the May 1 deadline specified by the secretariat. However, since the Cancun Agreements do not actually specify a particular date in May, countries are not obliged to provide information by May 1, and could reasonably be expected to submit their information by the end of May.

WRI is aware of several countries that are working on preparing these reports and we expect to see submissions fairly soon. It is important that they all meet the May deadline in the Cancun Agreement, and submit comprehensive and comparable reports and be completely transparent about underlying assumptions behind the numbers. The summary of pledges we are releasing today provides the most up-to-date information available, and will be updated once all country reports are formally submitted.

Changes in Pledges

While there have been no significant changes to the overall pledges, further details are emerging on how the pledged resources are being mobilized and allocated. There have been some concerns over the impact of Japan’s aid cuts and U.S. budget cuts on their respective fast start commitments. These events may have an impact on 2011 and 2012 allocations of these countries, but there have been no formal announcements by either country since these events.

The United States, in particular, has never made specific numerical commitments as part of their overall fast start pledge for the period 2010-12, always maintaining that it will contribute its “fair share.” The ambiguity in the overall pledge makes it hard to assess changes resulting from the budget cuts. Moreover, the budget documents do not allow us to accurately estimate the total fast start finance available for 2011. However, it is quite likely to be lower than the USD 1.9 billion that the administration had requested for FY2011 in early 2010 from the previous Congress, and some unofficial estimates indicate that it will be under USD 1 billion.

Did Countries Meet their 2010 Pledges?

Since many countries have not yet made public the resources that they have actually delivered for 2010, it is not possible to provide an accurate overall estimate. However, the updated summary does contain information on actions taken by the executive bodies of some countries. The amount requested and/or budgeted by these bodies totals roughly USD 12 billion.

Some countries have reported more specific information. For example, in November 2010, Germany indicated that it would disburse 356 million Euros in 2010, while the UK indicated that it had approved GBP 568 million for specific programs in 2010-11. This means that Germany and the UK will still need to allocate 904 million Euros and GBP 932 million, respectively, in fast start funds by 2012 in order to meet their pledges.

Better Reporting Standards Going Forward

Since we started tracking fast start pledges over a year ago, voluntary reports by each developed country have been quite varied, making it very difficult to track and monitor progress against the pledges.

To ensure clarity, WRI recommends that countries include the following elements in their submissions: the scale of finance provided, the method for determining that the resources provided are indeed ‘new and additional’, the institutions through which they are channeling resources, the objectives, geographic distribution, whether the amount pledged has been allocated or delivered, and the types of financial instruments used.

The uncertainty in estimating the exact amount of funds clearly underscores the need for greater transparency and consistency in reporting. Yet what is more important is that the finance is actually delivered at the pace and scale needed to address the growing threat from climate change. We are yet to see this sense of urgency as developed countries continue to teeter in honoring even their modest commitments.

World Bank vs. World Bank: Protecting Safeguards in a “Modern” International Institution

Kirk Herbertson — Mon, 16 May 2011 14:52:32 -0400

The World Bank has begun an effort to strengthen its environmental and social safeguards. But how relevant will these safeguards be after the Bank’s parallel proposals to “modernize” the way it does business?

As an institution of 10,000+ staff, owned by 187 governments, the World Bank invests in a wide range of development activities to help meet the needs of a wide range of borrowers. The bank’s environmental and social safeguards have emerged as a consistent approach to ensure, across these diverse contexts, that its investments “do no harm,” particularly when investments do not go as planned.

Last year, the World Bank began a series of reforms to “modernize” the way it does business, in order to revisit the bank’s strategic vision, strengthen overall financial performance, and adopt “21st century governance” that gives greater voice to developing countries (See Table 1). As part of this effort, World Bank management has publicly expressed a clear commitment to strengthen rather than dilute the safeguards. But because the safeguard reforms are taking place within the shadow of larger structural reforms at the Bank—with pieces of safeguards scattered across various reforms—the final outlook remains unclear.

What are safeguards?

In the 1980s and 90s, in response to strong public criticism of its involvement in controversial projects—such as the Narmada Dam in India, which displaced over 300,000 people—the World Bank developed safeguard policies to help identify, avoid, and minimize harms to people and the environment. These safeguards require borrowing governments to address certain risks in order to receive Bank financing. Examples include conducting an environmental impact assessment, consulting with affected communities, and restoring the livelihoods of displaced people. The safeguards are not perfect by any means, but have nevertheless been the primary way of linking community voices with World Bank decision-makers.

For example, our analysis of current proposals¹ suggests that the bank’s traditional safeguards could cover as little as 16% of its total portfolio by volume of lending. (See below). Will the combination of changing priorities, changing leadership, and changing financial instruments weaken the bank’s commitment and capacity to shield local people and ecosystems from unintended harm?

Changing world, changing bank

The World Bank formally kicked off its safeguard review in 2011, after an internal audit found “substantial challenges in supervision, monitoring, and follow-up.” But the actual safeguard reforms are well underway as part of a wider process to remodel the Bank. These reforms reflect the changing global dynamics in which the World Bank is learning to operate:

Greater voice of developing countries. Since 2008, many developing countries that sit on the Bank’s board of directors have begun to occasionally take public, joint positions on complex issues such as climate change. This is in sharp contrast to board discussions of the past several decades, which were dominated by developed countries. As a result, Bank staffers are becoming more responsive to the development priorities of borrowing governments.
Greater competition from emerging economies. At the same time, the World Bank is facing new competition from banks in emerging economies. In 2009 and 2010, China’s Export Import Bank and its Development Bank lent more to developing countries than the World Bank did. Financial institutions from emerging economies are providing governments with low cost alternatives to the Bank. This has led to a sense of competition and uncertainty over the World Bank’s role as a leader in development finance.
Aftershocks of the financial crisis. As many donor governments continue to struggle with their economies, the Bank’s own budget has become more restricted. Bank management has reduced the budget for several operations (including safeguards), and urged investments to go forward more cheaply and quickly. This has led to pressure to streamline policies as a way to cut costs.
New types of lending. The Bank has gradually shifted its portfolio away from its traditional lending for specific projects. Now, in the majority of investments, the exact use of funds is not specified ahead of time. Instead, borrowers pool Bank funds with other donors, channel funds to broad government programs (“programmatic lending”), and use funds as general budget support for the treasury (“development policy loans”). These financing approaches allow the Bank to leverage a wider range of development activities, but their performance is more difficult to track.

Of course, these trends will bring both benefits and challenges for development. Yet early indications suggest that the Bank could respond to these trends by stepping away (sometimes unintentionally) from environmental and social responsibility in its investments. It is becoming more difficult for the public to monitor and hold the Bank accountable for its use of public funds.

A sneak-peek at the ‘modern’ Bank

A variety of reforms are underway (see Table 1). Beginning in late 2011, for example, the Bank will lend in three basic ways, where it once lent through two. Previously, governments could borrow for: (1) investment lending—for specific projects; or (2) development policy loans—for broader policy and institutional reforms. The new lending instrument, programming for results (P4R) will finance governments in tranches based on their ability to demonstrate results. This instrument will primarily apply to programmatic lending such as improving access to healthcare or electricity. The purpose is to provide borrowers with more options to suit their needs and build country ownership.

Different Bank departments are charged with updating each type of lending instrument. Perhaps for this reason, each lending instrument will have its own approach to safeguards. Each reform is also occurring along different timelines.

Table 1: The World Bank’s “modernization” process
Greater voting power for emerging economies	2010
Addition of a new lending instrument (P4R)	2011
Review of independent review mechanisms such as World Bank Inspection Panel	2011
Replenishment of capital funds from government donors	2011
Streamlining of staff’s operational manual	2011-2012
Update of safeguards and procurement policies	2011-2012

Will local voices be lost in the Bank’s broader agenda?

The safeguards reforms will occur in bits and pieces throughout the broader structural reforms. In fact, the actual “safeguards review” as labeled by the Bank could apply to as little as 16% of the Bank’s total portfolio. Fortunately, the World Bank is still designing the safeguards review process. Time still exists to address key concerns:

Limited scope of the safeguards review. The World Bank has not indicated how its new portfolio will be distributed among the three instruments. Based on data from the FY2010 portfolio, investment lending could be 16% of the portfolio, P4R could be 46%, and development policy loans could be 38%. If this is the case, traditional safeguards would apply only to 16% of the Bank’s total portfolio. P4R would have its own approach to safeguards, and development policy loans would continue not to apply safeguards. (Recognizing that these are only rough estimates, we invite the Bank to publish its latest projections.)
Timeline(s) for the safeguards review. The various safeguard reforms are operating according to different timelines. Currently, the P4R safeguards approach is scheduled to be completed in late 2011. The investment lending safeguards approach will be completed in late 2012. Safeguards for development policy loans are not under consideration at all. By the time the “safeguards review” begins, many key decisions about safeguards will have already been made.
Staff incentives. Under the Bank’s current proposals, the Bank will provide less guidance on environmental and social safeguards in the bulk of its investments. Effective due diligence, then, will depend on the skills and interests of each operational team. Yet, as the Bank’s internal audit suggests, few World Bank staffers have an incentive to conduct a robust environmental and social due diligence process. Instead, staff members are rewarded and promoted for the volume of lending that is moved out the door. Environmental and social specialists exist but are not well integrated into operational decision-making. The Bank also rotates team leaders, and as such, staff members are not held accountable for the outcomes of their investment decisions. However, these underlying “staff incentive” challenges are not part of the safeguards review.
Ambivalence of civil society organizations and other stakeholders. In recent years, the World Bank has been diligent about conducting broad public consultations before making major policy changes. Yet among civil society organizations (CSOs) that have historically engaged the World Bank, many remain concerned that the safeguards review will not be a worthwhile process, particular if it only affects a small percentage of the Bank’s portfolio. Other CSOs are concerned about the overall legitimacy of safeguards—this is particularly true among Southern CSOs. Many view the safeguards as a weaker alternative to the international human rights framework, and others view the safeguards (like any World Bank policy conditions) as an infringement on country ownership. This ambivalence may deter CSOs and other Bank stakeholders from participating in the review. It remains unclear how the World Bank will generate enough interest for a broad and legitimate public consultation.
Accountability in flux. Since 1993, when communities feel that the World Bank has not followed the safeguards, they can bring claims directly to the Bank’s Inspection Panel. But it is unclear whether the Bank’s reforms will narrow the Panel’s jurisdiction. Will the Inspection Panel, for example, be able to hear complaints about P4R investments? If so, how will the Panel determine if the Bank has “complied” when there is not a specific set of safeguards to follow? The Bank has already hired staff for a separate grievance system, independent of the Panel, where communities can raise concerns directly with Bank management. While important for Bank management to respond more effectively to communities’ concerns, this new grievance system could easily block access to the Inspection Panel. (According to Bank policy, communities are required to engage management before bringing a claim to the Panel.) Despite the relevance of these reforms to the Bank’s new safeguards system, many of the decisions on how to resolve grievances over safeguards will not be a part of the “safeguards review.”

Recommendations for the World Bank

How will we know if the safeguards reforms are a success? No matter what system emerges, the Bank should be able to consistently conduct due diligence to avoid supporting activities that would cause environmental damage or human rights violations. Communities will need to be aware when a World Bank investment impacts them, and must be able to voice their concerns directly with the Bank (in the absence of local remedies). If communities are unable to point to specific violations of Bank policy, then they need another, concrete way to hold decision-makers accountable.

The current proposal for safeguards reforms, however, could leave major gaps. In the past, the Bank has relied on robust consultations before charting a path forward. As an initial first step, we recommend that the World Bank facilitate a stronger consultation process:

Within a single review process, reform the approaches to safeguards across all lending instruments during a single timeframe and in a coordinated fashion.
Include safeguards for development policy loans as part of the review.
Continue to review and update the “country systems” approach that allows some governments to apply their own environmental and human rights laws instead of safeguards, as it overlaps with all of the other proposals;
As part of the review, make the design of the Bank’s new grievance mechanisms and the role of the Inspection Panel open for public consultations.

Conclusion

As the World Bank adapts to changing global dynamics, opportunities (and threats) exist for environmental and social sustainability. The safeguards review will become a key part of this opportunity or threat. The greatest challenge for the Bank will be demonstrating that its commitment to strengthen safeguards comes from the entire institution—including the governments that own it—and not just from a small team of dedicated staff.

For more information, contact Kirk Herbertson or Athena Ballesteros.

Proposals are available on the World Bank website: Consultations on the Program-for-Results (PR4) Lending Instrument; Investment Lending Reform; Updating and Consolidation of the Environmental and Social Safeguard Policies; Application of Bank Policies to Carbon Finance Activities ↩