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GCF in Meltdown

07/07/2018

With acrimonious eddies washing around from the outset, the latest GCF Board meeting was brought to a halt after four days with no agreement on $1 billion of funding proposals and other key agenda items, and with the resignation of its Executive Director Howard Bamsey “with immediate effect”.

Bamsey had already, it seemed, made clear that he would need to leave some time before the end of 2019 (when replenishment of the Fund is due) “for personal reasons”,  but contrary to some reports that wasn’t the reason given for his decision to go now, either in his statement to the Board or in the GCF’s official comment.  Rather, it must be a fair assumption that the very public implosion of governance arrangements over which he has no control was a reputational risk too far for him to want to continue any longer.

The meeting had begun with the non-appearance of the co-Chair representing the developing country “constituency,”* Paul Oquist, citing difficult political circumstances in his native Nicaragua as the reason for not being able to travel to Songdo.

Oquist and Bage had got off to a good start, so what went wrong?

GCF Board meetings are typically rather fraught affairs, with tensions between developed and developing country members exacerbated by some fairly voluminous egos on what’s still an overwhelmingly male body – only 3 of the 24 members are female, presumably in complete contravention of the Fund’s own gender and diversity policies. Oquist and his Swedish co-Chair Lennart Bage had, however, seemed to get off to a good start at the previous Board meeting, their first as co-Chairs.

Why did this one, then, descend so rapidly into chaos?  There was probably a mix of reasons.

One was procedural – there were vociferous complaints from developing country members about a lack of consultation over the agenda by the co-Chairs ahead of the meeting, accompanied by mutterings about them exceeding their powers by confirming the appointment of three heads of GCF “independent units” themselves rather than seeking the Board’s approval.

Another was probably a spill-over from the bad-tempered intersessional meetings in Bonn in May, when developing countries tried to tie climate finance to support for the finalisation of the  Paris rule-book. (The GCF is a UNFCCC ‘mechanism’, so it’s a convenient place to carry on war by other means.)  A third was probably the Trump administration decision to withdraw a promised $2 billion contribution to the Fund, combined with the arrival of a new US delegate, Jeffrey Okamoto, a considerably less emollient presence than his predecessor.

The view from the live video feed for much of the proceedings

Whatever the mix of personality and agendas, the wrangling just to get the Chairing and agenda of the meeting agreed took no less than two full days. By this time, language like “dysfunctional” and “toxic” was being heard, as even the iciest of diplomatic facades on this Board of diplomats and civil servants began to crack and melt.

Once the meeting finally got going, late in the afternoon of the second day, there were no less than 26 agenda items still to address in the remaining two days.  These included important discussions on policy, financial planning and the upcoming replenishment of the Fund.

There were 11 projects, worth $1 billion, awaiting approval

More important still, of course, for most participants and observers, there were 11 projects, worth $1 billion, awaiting approval, in anticipation of which hundreds of project sponsors, country representatives and advisers had travelled into Korea from all over the world, only to cool their collective heels in the Observers room.  (Since the principal object of the GCF is to channel money to these projects, one might in any case expect the agenda item to approve them to be found a bit higher up than in 21st spot.  But there it was, and there, despite the lost two days, it remained.  In the end, the meeting never got past item 15.)

We now report a number of technical items from the Board.  If you want a shorter read, on the outcomes, resume here.

For a time after proceedings had formally started, there was some progress with various report-backs. These included one from Executive Director Howard Bamsey, a man for whom the word equanimity might have been invented, and who at this point was still displaying it in spades. It was noticeable during these reports that the Board – for the first time and for reasons later to become clear – seemed to be paying attention to issues such as the lack of progress on disbursement of funds and the number of projects that had been approved (some ages ago) but still hadn’t fulfilled the rafts of conditions attached to them.  (This latter problem was to feature in the final denouement of the meeting.)  Bamsey was also forthright on the problems caused by the accreditation system, saying that it affected the “credibility of the Fund” and that “we need a real breakthrough” to speed the system up.

Permanently Interim

Next up for discussion was the perennial lack of progress on the permanent Trustee for the Fund (basically the back-office function looking after the mechanics of the GCF’s finances).  The World Bank has possibly re-defined the word by being the “Interim” Trustee for several years, and it’s been a bugbear for some members all along to get it replaced. It turns out that the queue to become this replacement is not, however, a long one – an advert placed in the Economist repeatedly had elicited no responses whatever.  This cued one of the more bizarre interchanges of the meeting, as the Board heard that the Secretariat would now be sending a formal letter inviting a bid to 11 major financial institutions it had identified as capable of providing the necessary services – none of which, it can only be assumed, subscribe to the Economist.  The notion of speaking to one or two of them directly, to enquire why what should be one of the most prestigious gigs in the Trustee world appeared to be a complete turn-off, did not appear to be an option for the Secretariat to follow.

Direct Access Entities

A debate then ensued over progress on upping the number of “Direct Access Entities” (DAEs), rightly a focus for many Board members across the ‘constituencies’, as these are the national or local organisations closest to the end users of GCF finance, especially for adaptation.  The Secretariat had carried out a survey to discover why it continued to be so hard to get these DAEs accredited and submitting projects – only 14% of GCF funding presently goes through these channels, when in the view of many members the long-term ambition for the GCF should be for 100% of its funding to do so.

The conclusions of the survey exercise were that DAEs face three major problems, all of them wholly unsurprising. First, DAEs lack understanding of GCF requirements on concessionality (for example the complex concept of ‘additionality’ in adaptation projects) and the need for projects to be ‘transformational’. Second, the Fund’s complex processes for accreditation and project submissions are off-putting. And last, they lack technical capacity – a problem the survey found affected all DAEs, both accredited and in the pipeline.

Various members of the Board drew the equally unsurprising conclusion that the survey represented, as one of them expressed it, “a clear call to simplify GCF procedures and make policy clearer.” Constituency tensions then re-emerged as the discussion turned to the need for quotas for DAE funding, which the developed countries generally oppose, and the item drifted to an inconclusive adjournment.

“Complementarity” is now on the radar

Next up was a report on what the GCF has been doing about what in its parlance is termed “complementarity” – the harmonisation of policies and procedures between different public climate funds. As regular readers will know,  there are dozens of these, all with their own agendas and ways of doing things.  This lack of coherence creates many practical difficulties for applicants, especially when they need to marry funding from two or more sources, so it’s good to see this now on the radar of the UNFCCC and its funds, though what’s under discussion is little more than tinkering, when a radical overhaul of the entire architecture of the climate funds is what’s needed to really unlock concessionary assistance to developing countries at scale.

Portfolio and Pipeline

Discussion then moved to the GCF portfolio and pipeline, where the Secretariat reported that $364 million would soon have been disbursed – still less than 10% of the $3.7 billion approved to date.  The projection for the year-end was $667 million.  The average time from approval to first disbursement had come down, we heard, but still remains at 7 months – a lifetime by comparison with commercial disbursement timescales. Some projects, though, are now well over a year from their initial approval. There were no questions from the Board, so it was left to the Civil Society Observer (CSO) to point out that a few very large international intermediaries (mainly DFIs) were still getting 2/3rds of GCF funding, and that most of it was still going to mitigation when the target is a 50/50 split with adaptation.  The CSO also pointed out the transparency gaps over Secretariat reporting of the fulfilment of conditions, which affect its ability to predict resource availability, as we were about to find out.

The GCF’s co-financing ratio is low and lacks transparency

On the pipeline, the Board member from Japan pointed out that the co-financing ratio the GCF is achieving is low at 3x its finance being matched from other sources.  It emerged from the discussion that the GCF doesn’t have a target for co-financing, as in many cases it is pathfinding in new territories and structures where other sources of finance wouldn’t at first go.  This is a fair enough point, and it was encouraging to hear the Board discussing the issue, but a problem remains in the way that the GCF reports – or rather doesn’t report – it’s co-financing performance.  The reporting is presently done at an aggregate level (covering entirely public / grant-based projects as well as public / private structures).  This need to be separated out, because it would be entirely reasonable for the Board to insist on targets for co-financing in the second type of project, for which there are clear best-practice benchmarks.

Hostilities were now set to be re-commenced

It was now mid-afternoon on Day 3 of 4, and item 13 of 28 on the Agenda had been reached. Rather as in a helter-skelter football match there are periods when both sides take a breather, a few sessions had now passed with only the odd niggling foul to disrupt quite a lot of routine if rather side-to-side passing of the ball.  Hostilities were, however, now set to be re-commenced, and the trigger was the issue of the GCF’s remaining resources.

These, as is well known, have been reduced in prospect by $2 billion as a result of the Trump administration’s decision to pull out of the Paris agreement.  Buried obscurely in the Secretariat’s report on resources, however, was a new landmine:  close to a further $1 billion had been wiped from the Fund’s value by exchange movements since donor countries had originally made their commitments to the GCF in late 2014.

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Instead of a $10 billion Fund, the GCF had suddenly become a $7 billion fund which, with project approvals expected to be made at the present Board meeting, would have run through some $5.5 billion of its resources.  This in turn could mean, assuming a further $1.5 billion in costs and project approvals by the time of the next Board meeting, the GCF would have run out of funds well ahead of the due date for replenishment of its coffers at the end of 2019.

This realisation certainly concentrated minds, and it was notable that two new members of the Board picked up on the fact that, because of the massive conditionality of many GCF approvals, the Fund didn’t really know what it had committed itself to at all.  Instead of just $2 billion left in the coffers it might in fact  have $4 billion still at its disposal, if some of these these projects never in fact proceeded.

When debate then moved on to how the Fund was to go about its replenishment process – on which it was vital the Board took a decision at this meeting, especially in light of the resource issues –  the gloves finally came off again, and this time for keeps.

There is a fundamental split on the Board between developed country (i.e. donor) hardliners, who insist that all aspects of replenishment – amounts, conditions and timing – are to be determined by the donors, and hardliners in the developing country constituency who insist on the opposite –  that the GCF was set up as a ‘Fund of equals’ and that these decisions lie in the hands of the Fund.  (Some donor countries, interestingly, seem to have sympathy with this view.) 

Things have to change

The immediate cause of hostilities was an apparent failure of the Secretariat and co-Chairs to consult on the conditions proposed to be attached to the draft replenishment decision before the Board.  These included a review of the Fund’s performance and the completion of a number of long-overdue policies, including the policy on gender, a particular red rag to certain of the Board bulls.  As tempers frayed, Day 4 ended with one long-serving member – and usually one of the most emollient – visibly close to losing control of his emotions as he told the Board he couldn’t possibly make a recommendation to his country that it contribute more to a fund where “a governance crisis is turning into a reputational crisis” and that “things have to change”.

The fourth and final day of the meeting didn’t get under way until past 4 PM.   Overnight and during the day, an informal sub-committee had sought to create a new text for the replenishment decision, but  a brief discussion of this text only served to quickly re-surface the divide over who controlled the process.  With the US delegate in particular refusing to extend the meeting beyond the planned close at 6PM, Chair Lennart Bage was forced to admit defeat, saying “we can’t agree on agendas, we can’t agree on ways of working.  This is not a Board that is working”. 

At a closing session an hour later, Bage read out a statement from Executive Director Howard Bamsey, announcing his resignation with immediate effect.  

What Next?

So, if this is “a Board that’s not working” and “things have to change”, what next at and for the GCF?  

We would suggest that the search for a new Executive Director offers an opportunity to instigate the necessary change, and we would suggest three practical steps that would allow the Fund to concentrate in its key goal, which is to channel climate finance at scale to the most appropriate recipients.  Let’s not forget, after all, that the biggest losers at this meeting were the project developers who had brought nearly $1 billion in proposals, all of them the product of months or even years of work.

First, the new ED should be an experienced fund manager, not a diplomat or civil servant.  This would send a clear signal that the GCF’s priority is shifting money, not fighting UNFCCC battles by proxy.

Second, investment decisions should be made by a proper investment committee, made up in clear majority by independent and expert financiers.  The Board would then be responsible for what Boards are traditionally there to do, namely establish investment criteria and policy and set forward strategy from time to time. Such a divide (normal in other funds) would ensure there as never a repeat of last week’s failure to even get round to funding decisions.

Third, the Board itself should be professionalised. This blog has been arguing for some time that, because there is no performance “dashboard” before the Board at its meetings, it has effectively been driving the GCF blind.  The consequences of the lack of basic information and controls became  all too clear this week.  It beggars belief that no one on the Board apparently noticed  the exchange issues that saw the GCF’s deployable resources reduced by $1 billion, when its own risk policy specifically covers this danger, and when arranging to hedge the various hard currency movements involved would have been simple and cheap.  It’s surely equally  untenable that the Fund has no real idea of whether projects it has agreed to fund will ever actually materialise.  These are matters that would not have escaped Board members with some level of financial experience, and the Secretariat could have been guided appropriately to fix the problems in good time.  Some number of people with such experience need to be drafted in.

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*The GCF has two co-Chairs who normally share duties running the Board meetings, one representing the developed countries (who are the main donors to the Fund) and one the developing countries (who are the recipients from it)

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