Category: Blog

In a recent note, Zack Gehan and I used a database of World Bank projects to examine the association between World Bank project types and environmental review procedures and project preparation times. We found that policy lending projects are significantly faster to design, while projects that undergo the stricter forms of environmental and social screening are slower (these are “Category A” projects where borrowers and the bank need to undertake assessments and agree mitigation measures and “Category B,” which still requires some assessment and mitigation measures). Policy lending takes 107 fewer days to reach the board than investment lending, while category A loans take 189 days longer than non-category A/B loans and Category B projects take 43 days longer.

This blog uses the same dataset to explore how long projects take to complete: to disburse funds and finish the project program. Unsurprisingly, the picture is similar with regard to what takes more time to complete as what takes more time to begin. 

I take all board projects from the database approved 2010-2017 that involve an IDA or IBRD commitment, report a lending instrument, and have a closing date where that date is reported as before the end of 2022. I divide the sample into development policy lending, program for results projects (a small subset of projects that pay on the achievement of agreed development outcomes and do not undergo environmental screening), and all other (including investment projects, adaptable program loans, technical assistance, financial intermediary and sectoral investment loans). This “other” group of loans I divide into category A, B and other or no environmental screening categories. The figure below reports the average length of time reported from project approval to closure for each of these groups.

World Bank projects: Days from approval to close

Reported Category A projects take an average of 2,689 days (7.4 years) to close. Category B projects take 287 days less to close, while other projects that aren’t policy or program for results loans take 195 fewer days again. Program for results projects close in about 5.8 years, while policy loans close out in less than 15 months, or about one-sixth the time of a category A project. In fact, because my sample of projects runs up to those approved in 2017 (only six years ago), this is probably an underestimate of the difference between policy lending project lengths and other projects, as it will only include the more rapidly closing investment and program for result projects in recent years.   

The difference in bureaucratic overhead suggested by those numbers is considerable. Seven or eight years of World Bank task team missions, often multiple times a year, with procurement reviews and financial and technical oversight, carries a considerable cost to both borrowers and the World Bank. That will be a major factor behind client complaints about the hassle of borrowing from the bank, and a deterrent to borrow for zero carbon investments. But it also speaks to the question of what’s a good tool to respond to climate crises. A recent TED Talk suggested we have seven years to save the planet. If that were true, it would be about equal to one World Bank investment project cycle. Even if it is an irresponsible exaggeration, maybe other tools are more appropriate?

The World Bank’s Evolution Roadmap suggests the institution could provide more grants and subsidies to activities that support the provision of global public goods (GPGs), particularly in richer developing countries. Provision of those public goods is surely a priority: avoiding future pandemics and limiting climate change benefits everyone. At the same time, and especially in an environment where finance for international subsidies and grants is extremely limited, it is important that the mechanisms are efficient. That isn’t at all true of existing funding, and there is no agreed pathway to fix that problem. Donors have already spent $48 billion on climate and environment funds housed at the World Bank alone.  Before ramping up that spending, it is a financial and moral imperative to find an investment model that is fit for purpose.

The World Bank Group’s largest existing grant and subsidy mechanism has a simple but highly effective strategy for maximizing the potential impact of cheap or free money: deliver it to countries that don’t have very much money of their own. The World Bank’s IDA arm provides financing almost exclusively to countries with a GNI per capita of below $1,255. Giving aid to poorer countries maximizes the impact of each dollar spent in terms of impact on potential economic growth, lifting people out of poverty or improving health outcomes. World Bank oversight helps reassure donors that the resources are used relatively effectively towards those ends.

We lack a similar simple but effective filtering mechanism to ensure GPG financing is spent well.  In theory, there is a straightforward approach with climate mitigation, at least: use a carbon market. Indeed, if there was a global carbon trading scheme, we wouldn’t need the World Bank to be involved in climate mitigation financing at all. Sadly, however, we’re some way from trading carbon credits like we trade copper or iPhones.

In the absence of a global carbon market, the World Bank has supported ersatz equivalents.  The results have not been reassuring.  The (incomplete) failure of the Clean Development Mechanism as a carbon credit trading system came alongside considerable doubts about its certification mechanism when it comes to demonstrating additionality (that carbon credits were really associated with reduced greenhouse gas output). Perhaps the World Bank could agree to purchase carbon credits from one of the increasing number of national and regional carbon credit markets, if they passed certain standards. But, as with global carbon markets, it is questionable why donors would need the World Bank at all to support such purchases.

Meanwhile, the Green Climate Fund and Clean Technology Fund both apparently back projects that (potentially) reduce greenhouse gas (GHG) emissions at a cost per tonne that varies over two orders of magnitude, and that leaves aside many additionality concerns. Bespoke project-level mechanisms that try to provide the minimum subsidy to generate maximum GHG reduction are not only bureaucratically immensely complex, it isn’t clear they work (something we’ve seen with efforts to subsidize private sector projects in low income countries, as well).  The proliferation of climate funds is itself a further measure of the lack of consensus over how to efficiently allocate grants to reduce emissions. Before expanding such funds, the Bank should at least try to develop the knowledge base and methods that ensure grantmaking is cost effective (low-dollar investment cost per ton of greenhouse gasses averted, which is comparatively straightforward) and additional (evidence that the investment would not have taken place without the financing, which is considerably less straightforward).

Perhaps there is a role for the World Bank to support the interventions identified through its Country Climate and Development Reports, providing more generous terms as part of policy-based lending in support of the priority actions identified in those studies. While that wouldn’t maximize global GHG reductions per dollar spent, at least it would provide some level of reassurance that projects would be beneficial for both climate and development.  But simply providing a lower rate of interest to any World Bank loan that looks to be in support of a lower carbon development path raises considerable issues: available subsidy finance will be a drop in the bucket compared to the total investments required in client countries, and this approach will be poorly targeted to support the investments that actually need a subsidy to go ahead.  It will provide cheap money to some emissions reduction investments that don’t need it and zero cash to a huge amount more that might. A similar set of problems applies to limiting funding to particular technologies, given efficiency and subsidy requirements will differ by country and investment. (There might, however, be a role for the Bank to help develop and pilot new low-carbon technologies and approaches specific to the challenges of developing countries).

An alternate, and considerably more scalable, approach would be to use the greater lending power of an IBRD capital increase combined with more aggressive use of existing equity to support projects broadly in line with country Nationally Determined Contributions agreed at United Nations Framework Convention on Climate Change (UNFCCC) Conferences. If these loans were predominantly low-transaction-cost policy-based lending, they would be more attractive to clients. While such an approach would not be able to demonstrate additionality, and might back some comparatively cost-ineffective mitigation projects, it would provide considerably more resources toward the $100 billion global climate financing target without the challenge of efficient subsidy allocation. And my colleague Nancy Lee suggests that donor guarantees could help expand financing further by taking the additional exposure off multilateral development bank balance sheets.

The World Bank’s new pandemic fund appears to be facing some of the same issues regarding targeting, with the additional challenge that there is not a measure akin to tons of CO2 equivalent around which even a theoretical market could be delivered. On the plus side, however, the amounts required to simply provide subsidized funds to all lower-income countries to help meet country-level capacities in health security is far more manageable than the investment costs of climate mitigation. Furthermore, the World Bank client countries where the global public good of pandemic preparedness is least supplied are the poorest countries (as opposed to upper-middle-income economies in the case of low CO2 emissions). Most of the grants from the pandemic fund should therefore flow to countries where grants will have their greatest impact, all else equal.  

Still, the lack of progress around efficient subsidy financing of global public goods as a whole is a concern: the idea of global public goods has been around for a half century or more, financing their provision in developing countries has been a concern since at least the 1980s and with climate in particular since the 1990s. And yet we don’t appear to have figured out a replicable model or a robust second-best approach to using subsidies efficiently.

In a world of infinite international grant finance, inefficiency of allocation would be irrelevant. In a world where international grant finance for global public goods was truly additional to existing finance, it would be of lesser concern. But we’re not in those worlds. Figuring how to spend this money well, especially given the high risk that it will be financing that would otherwise flow to IDA (currently providing grants and credits worth about $20 per capita per year to its client countries, with plenty of space to do more), should come before the money starts flowing, not after. If relatively efficient development finance is replaced by considerably inefficient finance supposedly helping achieve global public goods, it is a loss for the planet.

Climate financial intermediary funds (FIFs) represent one of the largest sources of multilateral grant and other concessional finance for climate, including for middle-income countries (MICs). Together, they have received more than $50 billion in cumulative grant funds from donors. They have collectively allocated $48 billion for projects and $2 billion in administrative overhead. 

In a new paper, we look at the structure, size, and performance of the three major climate FIFs: the Global Environment Facility Trust Fund (GEF TF), the Climate Investment Funds (CIF), and the Green Climate Fund (GCF). Together, these funds account for more than 80 percent of FIF financing. At a time when grant and concessional climate finance is scarce, the critical question is whether donor resources are going to projects and countries where they are most needed, most impactful, and most catalytic.

Our analysis reveals significant challenges at the systemic level and differing performance across FIFs. Mitigation finance has generally gone to the countries and sectors with the highest emissions, but country mitigation finance volumes are generally not correlated with the size of country emissions. For adaptation finance, the system does not target the world’s most climate-vulnerable countries. None of them is among the top 10 recipients of FIF adaptation finance.

FIFs provide most of their grant and concessional climate finance to MICs, which receive 84 percent of climate FIF commitments. But LICs receive a larger share of their climate commitments in the form of grants (rather than loans, equity, or guarantees). Most FIF financing is in the form of grants (80 percent), and nearly three-quarters go to public sector recipients.

Figure 1. Climate FIF commitment volumes by instrument and country income group (billion USD)

Note: Only includes data from the CIF, GCF, and GEF; estimates are cumulative.
Source: CIF, GCF, and GEF project databases.
Author’s calculations based on project databases.

FIF funding is not allocated according to consistent criteria measuring results and impact, nor are there consistent results and impact reporting standards. Some FIFs report ex ante impact targets; others do not. There is no uniform ex post reporting standard across FIFs based on a common set of core indicators, making it impossible to compare value for money across FIFs. This makes it hard for donors to assess where best to put their scarce grant resources. The evidence, in fact, does not suggest that donors look closely at FIF performance when deciding where to put their funds. For instance, donor contributions to the GCF have grown most rapidly in recent years, though it has been the weakest performer based on the criteria laid out in this analysis.

Unsurprisingly, financing volumes remain very low compared to needs. Overall, FIF commitments of $4 billion per year remain far below levels needed, especially given calls for more concessional lending terms to incentivize more MIC mitigation investment. This volume is clearly also small in relation to overall World Bank Group climate-related finance of $28 billion in 2021 and combined MDB climate-related finance of $50 billion.

The country composition of the FIF donor base is mostly the same as IDA’s and has not changed very much over the past decade. Emerging donors have not stepped up as major contributors. China, for example, could be a significantly larger contributor to climate FIFs, given its importance as an emerging donor and its stake in global GHG emissions reduction.

Finally, climate FIFs vary widely in administrative costs relative to commitments and relative to project numbers. Some ratios of cumulative administrative expenses relative to commitments range up to 20 percent, while others are in the low single digits.

Making the climate FIFs work better

Clearly this is a system ripe for reform, and in our paper, we lay out a series of options. There is opportunity to capitalize on the MDB reform agenda. We propose consolidating the FIF architecture and merging some of the stronger performers into a single independent climate entity. We think that this could better service recipient countries and implementing agencies, strengthen finance allocation, consolidate administrative expenses, rationalize and simplify fundraising, and combine and scale complementary projects.

But key to getting climate finance right is establishing efficient models for allocating concessional resources and grants—especially if middle-income countries are to obtain a larger share for mitigation. We recommend that FIFs adopt common allocation criteria covering:  

• projected mitigation and adaptation impact
• the scale of impact relative to country goals and challenges
• the country’s need for concessionality
• for mitigation projects, the project’s contribution to global emissions reduction
• for adaptation projects, the country’s global vulnerability ranking

Allocation methodologies should aim to both maximize ex ante mitigation and adaptation impact and maximize impact per dollar committed. This would require agreement across the FIFs and entire MDB sector on a common methodology for projecting and reporting emissions and adaptation impact and for assessing the need for concessional finance.

And finally, donors and FIFs alike should take issues of financial efficiency seriously. There is a clear tradeoff between terms and volumes which will vary across recipient countries, and getting that equilibrium right will require flexibility and new tools. Except for the CIF’s Capital Market Mechanism, the climate FIFs have not sought to innovate their financial model.

There is strong merit to exploring other ways to deploy FIF financing. For instances, FIFs could consider pooling some of their funds to issue guarantees of some share of climate-related MDB portfolios. That would free up MDB capital and allow use of leverage to generate multiples of that additional capital in more climate lending capacity. Such guarantees at the portfolio level are a more efficient way to expand the impact of donor resources than a cash-in/cash-out approach or a transaction-by-transaction approach. And donor contributions can also be used at the portfolio level to make MDB lending more concessional by blending MDB hard loan resources with grants.

Donors and recipient countries alike need an efficient system that allocates finance faster and evaluates value for money more consistently, so that climate financing is put to optimal use in the countries that need it most. To see our analysis and full set of proposals, please read our paper here.