Securing climate finance through national development banks

Griffith-Jones, Stephany; Attridge, Samantha; Gouett, Matthew Research Report Securing climate finance through national development banks ODI Report Provided in Cooperation with: ODI Global, London Suggested Citation: Griffith-Jones, Stephany; Attridge, Samantha; Gouett, Matthew (2020) : Securing climate finance through national development banks, ODI Report, Overseas Development Institute (ODI), London This Version is available at: https://hdl.handle.net/10419/216988 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/4.0/ Securing climate finance through national development banks Stephany Griffith-Jones, Samantha Attridge andMatthew Gouett January 2020 Report Readers are encouraged to reproduce material for their own publications, as long as they are not being sold commercially. ODI requests due acknowledgement and a copy of the publication. For online use, we ask readers to link to the original resource on the ODI website. The views presented in this paper are those of the author(s) and do not necessarily represent the views of ODI or our partners. This work is licensed under CC BY-NC-ND 4.0. Cover photo: Muara Laboh geothermal power project in Indonesia. Credit: Gerhard Joren/ADB © 2017. 3 Acknowledgements The authors would like to thank the peer reviewers who kindly gave their time to provide very helpful critique and comments: Neil Bird, Charlene Watson and Jesse Griffiths from the Overseas Development Institute (ODI); and Alexis Bonnel, Hubert de Milly, Regis Marodon, Alice Sutra del Galy, Audrey Rojkoff and Julie Vaille from the Agence Française de Développement (AFD). The authors would also like to thank colleagues from the following institutions for engaging in this research and for providing comment and information: the Association of African Development Finance Institutions (AADFI), the Association of Development Financing Institutions in Asia and the Pacific (ADFIAP), the Brookings Institution, Climate Funds Update, Corporación de Fomento dela Producción (CORFO), Convergence, the Development Bank of South Africa (DBSA), theGreenClimate Fund (GCF), the Inter-American Development Bank (IADB), International Financial Consulting, Nacional Financiera (NAFIN), the Organisation for Economic Co-operation and Development (OECD), ODI and the Uganda Development Bank (UDB). The authors gratefully acknowledge the generous financial support of AFD and the Bill and Melinda Gates Foundation, which made this research possible. All views expressed are those of the authors alone and do not reflect those of the funders, ODIorthe institutions discussed in this report. 4 Contents Acknowledgements 3 List of boxes, tables and figures 6 Acronyms 8 Executive summary 9 1 Introduction andoverview 15 1.1 Introduction 15 1.2 Methodology 16 1.3 Overview 18 2 The current climate-finance architecture 19 2.1 NDBs and international climatefunds 19 2.2 Private providers of global climate finance 19 2.3 Public global finance actors 20 2.4 Multilateral climate funds 21 3 Role of NDBs in supporting the transition to low-carbon, climate-resilient economies 24 3.1 The argument for NDB involvement in LCCR investment 24 3.2 NDBs as traditional financiers of infrastructure investment 26 3.3 NDBs as blenders and dynamic mobilisers 28 3.4 NDBs as green investment-policy influencers and investment innovators 34 4 Realising the potential of national development banks as key enablers 39 4.1 Good governance 40 4.2 A clear mandate and a seat atthe policy table 40 4.3 Sufficient scale and the right modalities 42 4.4 Development of capital markets to better leverage private savings 43 4.5 International support 45 5 Policy recommendations 46 5.1 Clear ‘green’ mandate 46 5 5.2 Policy integration 46 5.3 The shift from mere financier to dual financier and mobiliser 49 6 Policy conclusions andsuggestions for further research 51 6.1 Policy conclusions 51 6.2 Suggestions for further research 52 References 54 Annex 1 Institutions interviewed 60 Annex 2 Author of classification of Green Climate Fund-accredited entities 61 6 List of boxes, tables and figures Boxes Box 1 Market failure and NDBs: thetheoretical basis for NDB intervention 25 Box 2 Innovative direct loan repayments inSouth Africa 27 Box 3 Innovative intermediated loans inSouth America 28 Box 4 Development Bank of South Africa – from financier to mobiliser 29 Box 5 SDG Indonesia One 31 Box 6 National Investment and Infrastructure Fund (NIIF) of India 33 Box 7 Shadow carbon pricing and the European Investment Bank’s experience 37 Box 8 Green an existing national development bank or create a new green investment bank? 39 Box 9 Uganda Development Bank: a case study in better governance and better policy integration 41 Box 10 AADFI’s Prudential Standards, Guidelines and Rating System 41 Box 11 China Development Bank and China’s bond market 44 Box 12 The VERT-Infra Initiative 47 Box 13 Green Climate Fund accreditation levels 49 Tables Table 1 Countries with National Development Finance Institutions 17 Table 2 Business models of four multilateral climate funds 21 Figures Figure 1 Average annual public and private climate flows, 2017–2018 20 Figure 2 Cumulative disbursements from major multilateral climate funds to 2018 22 Figure 3 Top five instruments cited by climate funds 23 Figure 4 Investment in infrastructure projects with private participation, 2010–2017 24 7 Figure 5 International Development Finance Club member share of green finance commitments by instrument, 2015–2017 27 Figure 6 Amounts mobilised to the energy sector, 2012–2017 32 Figure 7 Total issuance by national development banks, 2014–2019 35 Figure 8 Total national development bank issuance in 2014–2019, by development bank 36 Figure 9 Total Green Climate Fund commitments to date 48 8 Acronyms AADFI Association of African Development Finance Institutions ADB Asian Development Bank ADFIAP Association of Development Financing Institutions in Asia and the Pacific AFD Agence Française de Développement (Frenchinternational development agency) AfDB African Development Bank ALCB African Local Currency Bond (Fund) ALIDE Latin American Association of Development Finance Institutions BNDES Banco Nacional de Desenvolvimento Econômico e Social (Brazilian development bank) BPI Banque Publique d’Investissement CDB China Development Bank CDG Caisse de Dépôt et de Gestion (Moroccan development bank) CFF Climate Finance Facility CIF Climate Investment Funds COFIDE Corporación Financiera de Desarrollo (Peruvian development bank) CORFO Corporación de Fomento de la Producción (Chilean development agency) CPI Climate Policy Initiative CTF Clean Technology Fund DBSA Development Bank of South Africa DFI development finance institution EBRD European Bank for Reconstruction and Development EIB European Investment Bank FSD Financial Sector Deepening (Africa) GCF Green Climate Fund GEF Global Environment Facility GIB green investment bank GIZ Gesellschaft für Internationale Zusammenarbeit IADB Inter-American Development Bank IDC Industrial Development Corporation (South African development bank) IDFC International Development Finance Club IFC International Finance Corporation IMF International Monetary Fund JICA Japan International Cooperation Agency KfW Kreditanstalt für Wiederaufbau (German development bank) LCCR low-carbon, climate-resilient LIC low-income country MDB multilateral development bank NABARD National Bank for Agriculture & Rural Development of India NAFIN Nacional Financiera (Mexican development bank) NDB National development bank NDC Nationally Determined Contribution NDFI National Development Finance Institution NIIF National Investment and Infrastructure Fund (India) ODA official development assistance ODI Overseas Development Institute OECD Organisation for Economic Co-operation and Development PSGRS Prudential Standards, Guidelines and Rating System PT SMI PT Sarana Multi Infrastruktur (Indonesian development bank) RDB regional development bank REIPPP Renewable Energy Independent Power Producer Procurement Programme SDG Sustainable Development Goal SIDS small island developing states SPV special purpose vehicle UDB Uganda Development Bank UNDP United Nations Development Programme UNFCCC United Nations Framework Convention onClimate Change US United States 15 1 Introduction andoverview 3 The financial risks of climate change are twofold: ‘Physical risks can arise from climate and weather-related events, such as heatwaves, droughts, floods, storms and sea level rise. They can potentially result in large financial losses, impairing asset values and the creditworthiness of borrowers… Transition risks can arise from the process of adjustment towards a low-carbon economy. Changes in policy, technology and sentiment could prompt a reassessment of the value of a large range of assets and create credit exposures for banks and other lenders as costs and opportunities become apparent.’ Bank of England (2018). 4 For a more detailed discussion of the broader role of NDBs in supporting the realignment of all financial flows and their alignment with the Paris Agreement, see CPI and I4CE (2019). 1.1 Introduction The global community is at a crossroads. InNovember 2019, 11,000 scientists from around the world stated clearly and unequivocally that the world was now facing a climate emergency (Ripple et al., 2019). We must urgently make fundamental changes to current consumption and growth patterns if we are to stand a chance of tackling this crisis. Pursuing economic prosperity cannot come at the expense of the environment; we must act now. Together, we need to transform our societies and our way of life and move to a trajectory of LCCR global growth. A key challenge in this collective endeavour is the urgent need to transform the investment and financing flows that underpin current and future growth. This recognised challenge is one of the three long-term goals of the 2015 Paris Agreement of the UNFCCC. In Article 2.1c, signatories to the Agreement committed to ‘making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’ (United Nations, 2015). NDBs, together with their governments, arewell placed to support this transformational change and a realignment of all financing flows to ensure they contribute to the goals of the Paris Agreement. Furthermore, it is very much in the interest of the NDBs to understand and manage the financial risks to their investment portfolios associated with the physical effects of climate change and the transition to an LCCR economy (Bank of England, 2018).3 This study focuses on just one aspect of this agenda, however: the need to invest in LCCR infrastructure to lock in LCCR growth trajectories and the role of NDBs in supporting this investment through their financing and the mobilisation of private finance to fund the huge investment required.4 Given the exigence of the situation, attention must now turn to who is best placed to lead the charge. We urgently need to attract additional private and public finance to climate-smart investment, specifically infrastructure, and to determine the public actors that will play key roles in the process. While there has been much focus on the role of MDBs, RDBs and DFIs in catalysing public and private investment, there has been far less attention on NDBs. Thisoversight means there is a major gap in the general understanding of and emphasis placed on their role, not least because the collective scale of NDB assets is significant, far exceeding that of the core multilateral system. Estimates place the total cumulative assets of NDBs at $5 trillion, well in excess of the assets held by MDBs 16 (Studart and Gallagher, 2016) or the amount of annual official development assistance (ODA) provided by OECD donor countries (OECD, 2019b). Moreover, NDBs have non-financial advantages that could be beneficial in locking in a climate-smart growth pathway. They have local expertise and the potential to integrate their operations into broader government mandates, which increasingly include giving priority to amandate for the structural transformation to a low-carbon economy. NDBs have demonstrated their capacity to support the development of a pipeline of bankable projects and underpinned the development of domestic financial sectors to channel potentially huge institutional-investor assets into infrastructure investment. They are uniquely placed to intermediate both domestic and international finance from public and private sources into long-term finance for projects and programmes that require patient capital. As we will discuss, it is in this role as a mobiliser of finance for LCCR economic development where NDBs can be incredibly influential, in addition to their more traditional role of financier. More broadly, development banks are best placed to channel private and public finance into meeting the SDGs. In many of the emerging and developing countries in which NDBs operate, the need for long-term public finance is particularly acute, due to the shallowness of their domestic financial markets, the prevalence of short-term financial assets and liabilities, and the volatile nature of private investment in such markets. These problems are more pronounced during and after financial crises, when investors become decidedly risk averse and unwilling to provide long-term finance – a key requirement of infrastructure investment (Griffith-Jones et al., 2018b). Traditionally, this situation has meant that the capacity to finance long-term investments, such as infrastructure, is limited, forcing firms to rely on short-term loans or the reinvestment of retained profits. Moreover, a lack of long-term finance implies even more serious constraints on new firms and activities associated with structural change, such as the major overhaul needed to create LCCR economies. Here, the key roles for NDBs are clear, as we will discuss. Fortunately, in most regions, the scale and importance of development banks has increased in recent years. In Asia, the creation of the Asian Infrastructure Investment Bank and the New Development Bank (formerly the BRICS Development Bank), along with the asset growth of the China Development Bank (CDB), have highlighted the potential for these institutions to be market leaders in the transition to an LCCR economy. In Europe, the ambitious Juncker plan, which greatly expands the role of the European Investment Bank (EIB) and leverages its impact on European economies, has made the EIB an even more important partner for European NDBs. NDBs’ role has also been increased and new development banks have been created. Governments in Africa have formed new NDBs in countries such as Nigeria and Ghana, while significant improvements in NDB governance and operations have been made elsewhere on the continent, according to the Association of African Development Finance Institutions, (AADFI)’s Prudential Standards, Guidelines and Rating System (AADFI, 2019). However, the world’s NDBs have been largely neglected in the academic and policy literature, despite their great value and increased scale. There is therefore a need to explore the key issues associated with NDBs: how they operate, what instruments and governance structures are more effective, how they tie in with broader government policies, how NDB scale influences their impact and, importantly, how they are linked to private financial agents and the private sector in general, as an important objective should be to promote private investment. It is particularly important to apply this in-depth analysis to the most urgent task at hand, to rapidly and radically transform economies to an LCCR model. This study constitutes an attempt to contribute to that undertaking. 1.2 Methodology We chose a combination of qualitative and quantitative methodological approaches for this research. First, we conducted a desk-based review and analysis of relevant literature on NDBs, infrastructure finance, green finance and the financial instruments employed by MDBs, 17 DFIsand sovereign wealth funds. Wealso reviewed the annual reports of the major NDBs to better understand their operations. Second, weanalysed publicly available data oninternational climate funds and NDB-issued green bonds. Third, we interviewed 15 NDB stakeholders, including representatives from NDBs, NDB associations and consultancies that have advised NDBs, along with RDBs, international climate funds, international organisations and international think tanks (seeAnnex 1 for afulllist). 1.2.1 NDBs as the unit of analysis NDBs are heterogeneous. They vary in numerous aspects, including size, mandate and integration into government policy-making. The World Bank’s 2017 Survey of National Development Banks notes that NDBs are also often referred to as policy banks, DFIs, public banks or promotional banks, depending on the country inquestion. Itobserves that ‘development banks’ can refer to ‘any type of financial institution that a national government fully or partially owns or controls and has been given an explicit legal mandate to reach socioeconomic goals in a region, sector, ormarket segment’ (de LunaMartinez et al., 2018: 12). In their mapping of DFIs worldwide, Xu, Renand Wu used the term ‘national development finance institutions’ (NDFIs), defining these as ‘legally independent and government-supported financial institutions in pursuit of public policy objectives’ (Xu et al., 2019: 14). Based on this classification, their research identifies 442 NDFIs in 147 countries, spread across various income groups and largely concentrated in Latin America and the Caribbean and sub-Saharan Africa (see Table 1). Both the World Bank and Xu, Ren and Wu agree that most of these institutions have either general or multi-sector mandates. Among those with single-sector mandates, both studies found prevalent support for agriculture and small and medium-sized enterprises. The World Bank survey showed that 13% of the 64 respondents were narrowly focused on infrastructure (de Luna-Martinez et al., 2018), compared with only1.4% of NDFIs in the Xu, Ren and Wu (2019) study. For the purposes of this report, there are two important points about the NDB universe to consider. First, the size and scale of NDBs vary significantly. In their analysis of NDBs, Studart and Gallagher (2016) estimated that there were more than 250 NDBs at the time of their study and that these entities held total assets in excess of $5 trillion. However, they also revealed that around 10 NDBs operating in China, Germany, Brazil, India and South Africa accounted for $2.9 trillion, or almost 60%, of those assets. This finding is corroborated by the World Bank survey, which found that 38% of NDBs had assets of less than $1 billion and that 47% of the surveyed NDBs held less than 10% of the total assets of their national banking systems (deLuna-Martinez etal., 2018). Thus, the role that different NDBs can play in the transition to an LCCR economy varies significantly. Some will have the funding and internal capacity to take the lead on investments in LCCR infrastructure, but these are the exception rather than the rule. Infrastructure investment is costly. NDBs interested in supporting this transition must assess their balance sheets and find their niche. For some, thismay be as a lead lender or arranger, but for many smaller NDBs, project preparation and pipeline development may be more aligned with their capacity to support the LCCR transition agenda. It is also crucial that NDBs’ mandates are transformed over time and that a specific mandate does not preclude an NDB from investing in LCCR infrastructure in the pursuit of fulfilling another mandate. For example, the Table 1 Countries with National Development Finance Institutions Income group Countries with NDFIs Total number of countries High-income countries 47 (59.5%) 79 Upper-middle-income countries 22 (64.7%) 34 Lower-middle-income countries 37 (80.4%) 46 Low-income countries 39 (69.6%) 56 Source: Xu et al., (2019) 18 Uganda Development Bank (UDB) cites part of its mandate as being in line with the Government of Uganda’s development priorities, which direct much of the bank’s investment to agriculture. Nonetheless, UDB has indicated that some of these investments in agriculture could be classified as investments in infrastructure and that it is hoping to ‘green’ those investments further in the future (author interviews, 2019). 1.2.2 LCCR development We refer to ‘LCCR’ throughout this report. The term has several definitions and can be understood in different ways, but the concept essentially speaks to a policy and action agenda that seeks to simultaneously tackle climate mitigation, adaptation and development issues inan integrated way. Much of our focus has been on the mitigation aspect (for example, renewable energy investment) rather than adaptation issues, which build climate resilience. Further study of NDBs and adaptation investment is necessary, asthe challenges, approaches and instruments are likely to vary by sector (for instance, between smaller-ticket and high-risk investments,oragriculture and infrastructure). 1.3 Overview To ground our analysis, chapter 2 highlights thecurrent state of the climate-finance architecture and how NDBs, among a field of actors, areparticipating in the global transition to anLCCReconomy. Chapter 3 sets out the argument underpinning the necessary role of NDBs, discussing five key roles NDBs play in supporting LCCR investments and how they have comparative advantages that enable them to perform these roles well: (1) as financiers, providing both non-concessional and concessional finance; (2) as mobilisers of private finance; (3) asintermediaries in blending finance; (4) as shapers of policy frameworks; and (5) as supporters of innovative projects and by helping in the transition of one-off projects to more replicable and scalable ones. This section highlights how NDBs are becoming ever more focused on mobilising funds and employing strategic innovations that complement their traditional role as financiers. Chapter 4 examines the prerequisites to NDBs realising their potential to support the transition to an LCCR economy. These include good governance, a clear mandate and seat at the policy table, sufficient capitalisation, wellfunctioning and fairly developed local capital markets to leverage domestic private savings, andinternational support. Chapter 5 outlines a number of high-level policy recommendations for action at the national and international level based on theprerequisites identified in chapter 4. Chapter 6 presents our policy conclusions andsuggestions for future research. 19 2 The current climatefinance architecture 5 Alternative investors include private equity, venture capital and private infrastructure funds. 2.1 NDBs and international climatefunds The UNFCCC Standing Committee on Finance (2018) uses the term ‘climate finance’ to refer to financial resources dedicated to adapting to and mitigating climate change globally, including in the context of financial flows to developing countries. Therefore, while the term may evoke climate funds, such as the GEF and GCF, it also encompasses domestic government investments, ODA, commercial investments and green project development costs. Because of the multitude of actors, it can be difficult to ascertain where NDBs fit into the landscape and where they stand in relation to the other international institutions created to tackle issues associated with climate change. Well-governed, well-capitalised NDBs shouldbe an important partner of international institutions, as many are involved in the development plans of their governments and have on-the-ground expertise that international actors cannot match. NDBs know local sectoral needs, local projects, local actors and local sources of capital that can be tapped to leverage the funds provided by international sources. Moreover, thanks to this local presence, NDBs are attuned to market trends and among the first to detect when private investment is ebbing and when counter-cyclical investment is needed. While there is potential for NDB and climatefund collaboration, this has been slow, despite mutual best efforts. Finance from multilateral climate funds largely flows through MDBs, RDBs and agencies of the United Nations. There are several reasons for this, largely down to the funds’ differing business models. Oneexplanation, often raised in our interviews, was that NDBs lack the capacity to meet the funds’ rigorous fiduciary standards and the requirements of their environmental and social policies. Another explanation put forward was that the international climate funds do not understand NDBs and how they operate (author interviews, 2019). Essentially, there appears to be a disconnect between climate-fund requirements and the importance of having well-placed local actors involved in deploying the funds. 2.2 Private providers of global climate finance The Climate Policy Initiative (CPI) has estimated that in 2018, just over half of global climate finance originated from private actors, ofwhich 32% was invested by corporate actors – including project developers (see Figure 1) (Buchner et al., 2019). While this may reflect the potential revenue corporate actors expect to reap, it is surprising that institutional and alternative investors5 account for such a small proportion of climate investment. The lower figures may be a function of the secrecy of alternative investors or the difficulty CPI faced in securing accurate data in 2018. Institutional investors’ green investments, meanwhile, can be channelled through green bonds and not directly to projects, leading to under-reporting. Regardless, institutional investors should take on a greater 20 future role ifinitiatives such as the Climate Action in Financial Institutions Initiative6 and the One Planet Sovereign Wealth Fund Framework are tobe successful.7 2.3 Public global finance actors According to CPI, the largest share of climate finance from public actors comes from what it describes as national development financial institutions; for the purposes of this analysis, these are largely NDBs.8 CPI estimates that average annual flows from these entities in 2017 and 2018 totalled $132 billion, or 23% of the annual average total of $579 billion from all actors. This is more than twice that from 6 The Climate Action in Financial Institutions Initiative is a coalition of 38 public and private financial institutions that aim to adopt a pathway that systematically integrates climate-change considerations into their strategies, programmes and operations. For more, see (Climate Action in Financial Institutions, 2017). 7 The One Planet Sovereign Wealth Fund Working Group was established in 2017 to accelerate efforts to integrate financial risks and opportunities related to climate change into the management of large, long-term asset pools. The six founding members are the Abu Dhabi Investment Authority, Kuwait Investment Authority, New Zealand Super Fund, Norges Bank Investment Management, Public Investment Fund of Saudi Arabia and the Qatar Investment Authority. Collectively, these sovereign wealth funds own assets totalling $3 trillion (One Planet Sovereign Wealth Fund, 2019). 8 The flows captured by CPI (2019) are those from national development finance institutions where a single country owns the institution and the finance is directed domestically. 9 The difference between IDFC and CPI’s figures is likely down to the fact that CPI classifies some IDFC members asbilateral and multilateral development finance institutions rather than NDFIs. 10 For example, 45% of GCF commitments were made in the form of grants (GCF, 2019c). multilateral development banks ($57 billion) and utterly dwarfs the $3 billion in flows from international climate funds (CPI, 2019). The International Development Finance Club (IDFC) provides further guidance, stating that its members actually made $150 billion in annual climate finance commitments between 2014 and 2018 (IDFC, 2019).9 Note that the majority of climate finance from NDBs is considered marketlevel debt, while flows from international climate funds have a larger grant element,10 which can carry a higher risk on investment and so be used to be fund the highest-risk demonstration or transformational projects. Data on domestic government spending on climate initiatives is sparse. From the Figure 1 Average annual public and private climate flows, 2017–2018 Source: CPI (2019) Private sources $326 Public sources $253 0 Climate funds Corporate actors Commerical financial institutions Institutional investors Household Alternative investors Bilateral development finance institutions Governments Multilateral development finance institutions National development finance institutions 20 40 60 80 100 US$ billions 120 140 160 180 200 21 most recent UNFCCC Biennial Assessment, the annualised expenditure by countries that reported such figures for 2015 and 2016 was $67 billion (UNFCCC, 2018). However, figures were only reported by 16 developing countries, theEuropean Commission, France and one province of China. Countries are probably spending far more on activities that could be classified as mitigation or adaptation, but simply not reporting it. Without such important data, itis impossible to completely understand how much climate finance is flowing. 2.4 Multilateral climate funds As we will discuss, some NDBs are working with climate funds to develop their green portfolios. Thus, even though climate fund flows remain small compared to NDB flows, understanding the landscape of climate funds is important, as they can play a valuable role in helping NDBs to develop their green investment portfolio, for reasons we discuss in chapter 4. It is also worth bearing in mind that climate funds may be more important to NDBs that are not well capitalised, or in countries where the impact of climate change is an existential threat, such as small island developing states (SIDS). The defining feature of climate funds is their diversity, as reflected in their disparate business models (seeTable 2). Not only are the sponsors of Table 2 Business models of four multilateral climate funds Fund Implementing entities NDB implementing entities GEF Established in 1991 18 agencies that create project proposals and then manage these projects on the ground; predominately multilateral development banks (MDBs) and United Nations agencies • Development Bank of South Africa (DBSA) Climate Investment Funds (CIF) Established in 2008 5 MDBs – the African Development Bank (AfDB), Asian Development Bank (ADB), European Bank for Reconstruction and Development (EBRD), Inter-American Development Bank (IADB) and World Bank Group – implement CIF-funded projects and programmes • None Adaptation Fund Established in 2009 47 implementing entities receive direct financial transfers from the fund to carry out adaptation projects and programmes Implementing entities are categorised into three groups: National entities = 29 Regional entities = 6 Multilateral entities = 12 • Banque Agricole du Niger • National Bank for Agriculture & Rural Development ofIndia (NABARD) Green Climate Fund (GCF) Established in 2010 88 accredited entities develop funding proposals to be considered by the fund and then oversee, supervise, manage and monitor their respective GCF-approved projects and programmes AEs are categorised into three groups: National entities = 38 Regional entities = 13 Multilateral entities = 37 • AFD • Banco Nacional de Desenvolvimento Econômico eSocial (BNDES) • CDG Capital, Morocco • DBSA • Fiji Development Bank • Financiera del Desarrollo, Colombia (COFIDE) • Korea Development Bank • Kreditanstalt für Wiederaufbau (KfW) • NABARD • PT Sarana Multi Infrastruktur, Indonesia (PT SMI) • Small Industries Development Bank of India Source: Authors’ compilation, as of 1 November 2019 22 climate funds numerous (whether multilateral, bilateral, private or some combination thereof), but the means by which they invest climate finance are also varied, offering broad scope for NDB interaction. Grants, equity, loans, guarantees and technical assistance are among the most popular mechanisms, but are by no means the only ones. 2.4.1 Sponsors of climate funds The OECD’s 2015 study of climate funds classifies 91 funds by source of funding (OECD, 2015a). While the inventory does not capture all of the funding being channelled to climate initiatives, it does provide one main insight: there are myriad channels funded by multilateral partnerships into which NDBs and other entities can tap. 11 The CIF consists of the Clean Technology Fund, the Pilot Program for Climate Resilience, the Forest Investment Program and the Scaling Up of Renewable Energy in Low Income Countries Program. 12 Figure 2 shows that, based upon disbursements, CIF has been most active. However, the Green Climate Fund (GCF) has approved the most funding to date. If these promised funds are disbursed as intended, GCF is likely to lead in terms of disbursements in the near future. Among the multilateral climate funds, there is an increasing amount of funding being disbursed, but also a growing concentration of the entities controlling these funds. The CIF11 has been the largest disburser of multilateral climate funds todate, followed by the longer-standing GEF (seeFigure 2).12 Recently announced donor contributions to the GCF are likely to see it become the largest global climate fund in the future. In October 2019, 27 countries announced $9.7 billion in pledges to the GCF in a first replenishment of the Fund (Kosolapova, 2019). However, the United States (US), the largest funder of the GEF, CIFand GCF, has now announced the start of its formal withdrawal from the Paris Agreement. Aside from its failure to pledge to replenish the GCF, the impact of this about-turn in the US Figure 2 Cumulative disbursements from major multilateral climate funds to 2018 Source: Climate Funds Update, 2019 0 US$ million 2,500 2,000 1,500 1,000 500 Climate Investment Funds (CIF) Global Environment Facility (GEF) Least Developed Countries Fund Forest Carbon Partnership Facility Amazon Fund Green Climate Fund (GCF) Adaption Fund (AF) UN-REDD Programme Special Climate Change Fund Global Climate Change Alliance (GCCA) Others 23 position on global climate funding has yet to beascertained.13 2.4.2 Targeting of climate funds Climate funds seek to address diverse issues. TheOECD’s climate fund inventory (OECD, 2015a) lists nine different purposes and more than 75 different terms to describe the sectors these climate funds invest in. Unsurprisingly, mitigation and adaptation are listed as the purpose of most, with capacity development cited by a third. Among the most prevalent sectors in the OECD classification are renewable energy, energy efficiency and energy in general; each is listed as a sector of interest for more than 20funds. Forestry and agriculture also feature heavily.14 While this points to diversity among climate funds, it also suggests opportunity for NDBs in the variety of potential funding partners that could support the sectors they wish to focus on. Of the climate funds listed, onlyeight indicated support for infrastructure. This low number may reflect the classification methodology, as climate funds may undertake infrastructure investments that are categorised ashaving a different purpose. 13 It is important to note that the US pledged $3 billion under the initial resource mobilisation of the GCF under the Obama administration; it actually contributed $1 billion. Under the Trump administration, it is unclear whether the remaining $2billion will be forthcoming (Climate Transparency, 2019). 14 Note that many funds had multiple purposes and multiple sectors of interest. 15 The OECD Climate Fund Inventory (OECD, 2015a) does not disaggregate between funds that provide concessional loans and funds that provide non-concessional market-rate loans. 2.4.3 Instruments These 91 climate funds also use different types of investment instruments to maximise impact. Unsurprisingly, most funds use grants and loans in tandem to support investees; with loans either at market or concessional rates (OECD, 2015a).15 As we discuss in later sections, it is notable that guarantees and contingent financing (notillustrated in Figure 3) were only offered by 10 of the 91 funds. Guarantees offer great potential to crowd in private investment to climate-finance projects and programmes, yet are rarely used (Lee et al., 2018; IDFC, 2018). Thismay partly be because there are also problems associated with them, such as a reduced ability to steer investment to genuine LCCR projects and sectors, as well as the creation of large contingent liabilities (GriffithJones and Naqvi, forthcoming). At the other end of the spectrum, the use of grants has proven effective in mobilising capital, but requires significant outlay. Maximising the sustainable development impact of grants is key, as these resources are scarce and therefore need to be allocatedefficiently. Figure 3 Top five instruments cited by climate funds Source: OECD (2015a) 0 Number of climate funds 60 50 40 30 20 10 Grants Loans/Debit Technical asistance Equity Co-financing 24 3 Role of NDBs in supporting the transition to low-carbon, climateresilient economies 3.1 The argument for NDB involvement in LCCR investment There is no question that the global economy urgently needs to shift to an LCCR growth trajectory if the world is to stand a chance of meeting the Paris Agreement target of keeping the rise in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the increase to 1.5 °C. Among other things, tackling this dire situation will necessitate all forms of finance to be redirected and aligned with the Paris Agreement to fund extraordinary levels of public and private investment in alternative infrastructure inadvanced and developing nations. The transformational change needs to be immediate. The investment in new LCCR infrastructure is far beyond what public finance can meet based on current levels of taxation, andprivate investment is not flowing at the scale or speed required to support the transformation. Private investors have failed to provide stable and sufficient levels of long-term, affordable financing. Evidence over the past 15 years Figure 4 Investment in infrastructure projects with private participation, 2010–2017 Source: Saha et al. (2019) 0 10 Total investment (US$ billions) 70 90 80 60 50 40 30 20 2000 Low incomeLow middle incomeUpper middle income 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 31 especially in light of post-2008 Basel banking regulatory changes, which discourage long-tenor commercial bank debt. With longer tenors and correspondingly longer payback periods, infrastructure projects have a better chance of being launched and becoming successful (author interviews, 2019). It is easier for NDBs than commercial banks to combine loans or guarantees with subsidies, asthey are closer to policy-makers, who can better help design and monitor such schemes ifthey are channelled via NDBs. Lastly, grants can be used to provide projectequity. Equity Some NDBs have a mandate to provide equity. They invest in technology companies and projects directly or via private equity and venture capital funds. NDBs can be in a first-loss position (junior equity) in relation to other investors (senior/ normal equity) or they can invest alongside other investors (normal equity). Some NDBs, such as Banque Publique d’Investissement (BPIFrance), CORFO and Colombia’s Bancóldex, invest indirectly by investing in or creating private equity or venture capital funds rather than investing directly in companies or projects. Direct investment seems to be a growing trend. Often, the NDB investment catalyses additional local and international private capital. Equity investment means the NDB is able to capture the upside potential of any project, although it is riskier. These profits can help finance further NDB investments, asthey add to retained earnings. Furthermore, taking equity positions, especially directly in specific companies, may increase an NDB’s influence, encouraging a company to respond to government priorities, especially the needs oftheLCCR transition. Guarantees In its survey on green finance, IDFC (2018) reported that the commitments made by its members to green energy and the mitigation of greenhouse gases in 2017 came from the following: 81% from loans, 17% from grants and less than 1% from guarantees. What is Box 5 SDG Indonesia One In October 2018, the Government of Indonesia, through the Ministry of Finance and PT SMI, created SDG Indonesia One, aplatform comprising four distinct facilities and funds to channel resources to projects that support the achievement of the SDGs. The facilities and funds are tailored to donor and investor appetite. This specifically covers development facilities, de-risking and financing, and anequity fund (PT SMI, n.d.). The platform is designed to ensure the development of the infrastructure sector from end to end. The development facilities, for example, are aimed at encouraging the preparation of infrastructure projects both at the national and regional government level. The derisking facilities aim to increase the bankability of infrastructure projects to make them attractive to the private sector. The financing facilities aim to encourage and stimulate greater infrastructure financing. The equity fund is intended to encourage the participation of private investors in infrastructure projects, to strengthen capital capacity for new (greenfield) projects and to act as an asset recycler for projects that are already operational (brownfield). In December 2018, PT SMI had raised $2.46 billion for the four facilities and funds from 25 different partners, including donors such as AFD, the Canadian government and the United States Agency for International Development (USAID); DFIs such as the Netherlands Development Finance Company (FMO) and the Danish Development Finance Institution (IFU); commercial banks, such as Standard Chartered and the United Overseas Bank; and multinational project developers, such as China Communications Construction and ENGIE (PT SMI, 2019). 32 striking is the limited use of guarantees, despite their leverage potential. Sangare and Hos (2019), for instance, report that 44% of the $41 billion mobilised in the energy sector between 2012 and 2017 was in the form of guarantees (Figure 6). So, while effective, NDBs are not availing of guarantees as a tool. This may be because they have disadvantages, as well as being complex to set up and monitor. Guarantees involve an NDB providing credit enhancement to a financial intermediary that is providing a loan to project or programme. The NDB assumes some or all of the project’s credit risk, which might otherwise dissuade lenders. There are different types of guarantee, butthose related to credit risk are the simplest. Traditional credit guarantees provide assurance to third-party lenders that principal and interest will be paid when due in the event that the borrower is unable or unwilling to pay. Such guarantees normally cover less than 100% of the borrower’s payment obligations. Full credit guarantees can cover up to 95% of payment obligations, while partial credit guarantees typically cover far less. There appears to be a growing trend among some NDBs, most notably in Latin America, to opt for guarantees rather than direct or indirect lending. CORFO and Mexico’s NAFIN are leaders in this respect, with NAFIN seeing guarantees as a share of total operations increase dramatically (Griffith-Jones et al., 2018a). Thetrend is not universal, however; guarantees only form a small part of DBSA’s operations, for example. It will only provide 18–24-month project construction guarantees to cover building risk. These are used in concert with guarantees from RDBs, such as the AfDB, which provide the bulk of construction risk guarantees. However, asDBSA’s investments in renewable energy projects increase, staff believe more guarantees may be used (author interview, 2019). While the mobilisation of private capital via mechanisms such as guarantees may, and often does, bring benefits of additional leverage, italso generates risks in the form of contingent liabilities that need to be properly accounted and sufficiently provisioned for. There is also a risk that growing loan volumes and more indirect operations will make it harder for NDBs to impose conditions. This principal-agent issue is particularly problematic if the NDB is tasked with implementing national development strategies or projects to transition to an LCCR economy: goals that may or may not fall under aprivate capital provider’s mandate. Other instruments Certain instruments combine different subinstruments to help catalyse private finance. In Box 4, we cite the example of the Climate Finance Facility (CFF), created by DBSA to promote LCCR infrastructure with DBSA and GCF financing – the first scheme of its kind on the African continent. CFF aims to crowd in private finance by improving the risk–return profile in the local currency of LCCR projects that cannot get finance in the market. Figure 6 Amounts mobilised to the energy sector, 2012–2017 Source: Sangare and Hos (2019) Credit lines, $2.6 billion 6% Direct investment in companies and Special purpose vehicles (SPVs), $8.1 billion 20% Guarantees, $18.2 billion 44% Share in collective investments vehicles (CIVs), $3.8 billion 10% Simple co-financing, $0.4 billion 1% Syndication loans, $7.9 billion 19% 33 3.3.3 Operational phase Similar instruments are used in the operational phase. In general, investment risks are lower during this phase and there is greater potential toattract additional lenders and/or investors. There are, in fact, institutions that specialise in funding projects once they are up and running and that focus on crowding in institutional investors – the Indian National Investment and Infrastructure Fund (NIIF) being a prime example (see Box 6). This is usually done through take-out finance agreements where NDBs or similar institutions provide long-term financing to a project to replace previous financing that might have been provided by commercial banks and/or another NDB. This transaction frees up the previous lender’s capital for investment in other projects. Many NDBs provide long-term loans and keep them on their balance sheets until the very end of the term. It could be argued, however, that NDBs provide most of their value to a transaction at the front end of a loan, during the pre-investment and construction stages. Thereafter, NDBs may add less value. This would potentially underpin the case for using securitisation: grouping assets with lower risk than in the earlier stages and selling off tranches to private investors. This suggests such lenders should not lend or invest together, but sequentially (author interviews, 2019). This would allow capital tobe recycled and support local capital-market development. In the post-construction phase, the risk is significantly lower and the asset is generating revenue. The approach would involve pooling and transferring LCCR infrastructure assets into an SPV to diversify risk and achieve scale. The SPV would then sell the associated pooled revenue cash flows by issuing securities (such as bonds) in tranches, releasing capital for the NDB to reinvest. These instruments are potentially interesting, as they would meet the need of institutional investors to finance already-built, revenuegenerating projects that generate long-term cash flows to match their long-term liabilities, thus potentially attracting significant additional and long-term finance into LCCR infrastructure. They could even package revenue streams from the NDBs of different countries, offering diversification benefits. However, they need to be structured very carefully, so as not to lead to excessive NDB risk-taking in the initial phase (as they are ultimately funded by governments Box 6 National Investment and Infrastructure Fund (NIIF) of India In 2015, the Government of India created the NIIF as an investor-owned fund manager, underpinned by government investment. The NIIF has three funds: a master fund, a fund of funds and a strategic fund. Each has its own distinct investment strategy. The master fund focuses on creating sectoral platforms. Its first is a $3 billion fund dedicated to ports and logistics, whichit co-founded with Hindustan Infralog Private Limited in partnership with DP World. The fund of funds invests in third-party managers, which then invest in various infrastructure services and allied sectors (traditional infrastructure, green energy, social infrastructure, manufacturing and services), using diverse products (equity, mezzanine, debt) and investment styles (early stage, growth and control). The strategic fund is ‘aimed at growth and development stage investments in projects/companies in a broad range of sectors that are of economic and commercial importance’ (NIIF, 2018). In 2018, NIIF acquired IDFCs infrastructure debt fund, a loan book worth around $650 million, which had lent to operating infrastructure projects, helping original project financiers to recycle their capital following the start of operations (Ray, 2018). In 2019, the State Bank of India, India’s largest lender, and NIIF signed a memorandum of understanding to collaborate on equity investments, project funding, bond financing, renewable energy support and take-out finance for operating assets (NIIF, 2019). 34 and taxpayers) or excessive profits for private investors. Although this technique is not particularly prevalent in development banking to date, there are a few examples where it has been used, such as AfDB’s recent ‘Room2Run’ transaction, which is asynthetic securitisation. BNDES also created the Sustainable Energy Fund in 2017 to support the development of the green bond market, expand the LCCR infrastructure investor base and increase liquidity of infrastructure securities in Brazil (BNDES, 2016). The fund is set up in such a way that BNDES finances the construction phase of the LCCR infrastructure project, then securitises the operational phase (Morgado et al., 2019). BNDES took an equity stake of around $144 million in the fund and hopes it will issue bonds worth $1 billion or so in its first 18 months of operation. Since its launch, ithas secured the investment of ‘11 institutional investors, allowing BNDES to limit its capital allocation to the fund to 43%’ (Morgado et al., 2019: 36). 3.4 NDBs as green investmentpolicy influencers and investment innovators As NDBs transition from their traditional role of financier to that of dynamic mobilisers, they are simultaneously garnering greater influence in national and international policy circles. While we discuss later how NDBs can capitalise on this influence in the transition to an LCCR economy, it is important to acknowledge that the process is already underway. Many NDBs are already green investment leaders in their own economies, issuing green bonds to expand sustainable portfolios, advocating for further green investment and alignment with the Paris Agreement, and are at the forefront of innovative LCCR investment. 17 Information on green bonds has been provided by the Climate Bonds Initiative (CBI). This has offered information on green bond issuance by all of the institutions it classified as NDBs from 2014 to 2019. CBI has only included green debt instruments whose use of proceeds has complied with the categories listed under its Climate Bonds Taxonomy. CBI’s database lists 12 NDBs as issuing green bonds. It is possible that issuance captured by CBI has included refinancing. 3.4.1 NDBs as green leaders The two globally largest NDBs are among the most prominent supporters of major new LCCR energy technologies, especially solar power. In Germany, KfW was initially the sole lender to private companies investing in solar energy. By demonstrating that these technologies were commercially viable, KfW was able to catalyse private bank investment (Griffith-Jones, 2016). Moslener et al. (2018) detail how KfW has met challenges associated with Germany’s shift to a green economy (the energy transition) through its broad economic objectives (which include supplying public goods, such as environmentally beneficial investment), government financing of its capital, its proximity to policy-makers and its extensive technical expertise. This expertise is not just in finance but, equally in specific sectors and technologies – deep expertise that many commercial banks do not have. In China, CDB has helped to design policies to encourage investment in renewable energy, particularly solar, and provided significant initial funding. As a result, Germany and China have been influential early global promoters of solar power, helping to develop the technology and make it increasingly cost-competitive relative to fossil-fuel energy, not just in their own countries, but around the world. In both cases, the NDBs played crucial roles in promoting the importance of new technology, helping their governments design appropriate policies to facilitate investment and make it commercially viable and provide initial finance at significant scale to foster significant, timely investment. This clearly illustrates the type of valuable contribution NDBs can make to finance the transition to anLCCR economy. 3.4.2 NDBs as issuers of green bonds NDBs can encourage investors to participate in green projects by issuing green bonds, which also helps to develop local capital markets. As we can see from Figure 7, the number of bond issues by NDBs17 and the proceeds of those issues in dollar 35 terms have been fairly steady over the past six years, with the exception of 2017, when CDB issued eight green bonds worth $4.6 billion.18 Otherwise, most of the green bonds have been issued by KfW (CBI, 2019)19 (see Figure 8). Any further increase in the number of green bond issues is likely to stem from the larger NDBs, as issuers of green bonds experience similar challenges to those faced by all infrastructure investors. In their report on greenbonds, Cochuet al. (2016) note that green bond issuance is undermined by a lack of green projects that are bankable or in need of financing or refinancing. Also, issuance is constrained by a lack of mechanisms and capacity to aggregate smaller projects to justifylarger issuance. While evidence is anecdotal, oversubscription to green bond offerings is common, as they are usually issued by well-established companies or governments, echoing the dynamics seen when these entities issue regular bonds (Weber and Saravade, 2019). These supply issues, combined with the inability of some NDBs to get a good credit rating to issue debt on the capital markets, act as impediments to increasing green bond issuance by many NDBs. Moreover, this 18 Two of the eight green bonds issued by CDB were international green bonds. One was a five-year $500 million bond and the other was a four-year €1 billion bond (CDB, 2018). 19 KfW accounted for almost 68% of green bond volumes from NDBs between 2014 and 2019 and 49% of overall green bond issuance during that period (CBI, 2019). imbalance of supply and demand demarcates a clear path where NDBs could help build a pipeline of green projects, aggregate them and issue green bonds to finance their continued development and/or operation. While this is probably a more attractive and feasible option for larger NDBs, smaller ones could collaborate on aggregate regional projects, perhaps diversifying country and currency risk, thereby making an issue more attractive to investors. In terms of KfW bond issuance up to 2016, there is mixed evidence as to whether issuing green bonds gave the bank lower coupon payments, currency flexibility or issuance size (KfW, 2016). The green bonds issued by KfW were similar in structure to its non-green issuance, corroborating what World Bank officials have noted, that green bonds are not actually cheaper and may have the unintended consequence of limiting issuer flexibility (Giugale, 2018). Consequently, it may be advisable for smaller NDBs (most of them) to issue traditional bonds to fulfil a green mandate rather than smaller green bonds with higher transaction costs for the same purpose. This is an area that seems to require further research. Figure 7 Total issuance by national development banks, 2014–2019 Source: CBI (2019) 0 Amounts (US$ million) 12,000 10,000 8,000 6,000 4,000 2,000 2014 2015 Number of issuances 2016 2017 2018 2019 0 4 8 12 16 20 24 36 3.4.3 NDBs as green investment advocates NDBs have a significant role to play in the dissemination of knowledge on climate finance; they can learn lessons from similar institutions and assist smaller institutions that may not have the required internal capacity. For example, DBSA management is actively engaged with other NDBs in southern Africa to build their capacities to support green investment (author interviews, 2019). Many NDBs are also quite involved in wider organisations, such as IDFC, or regional national development bank associations, such as the Association of Development Financing Institutions in Asia and the Pacific (ADFIAP), theAADFI and the Latin American Association of Development Finance Institutions (ALIDE). This sometimes leads to financial relationships, but can also lead to technical assistance and advice. For example, AADFI has worked with member institutions to improve the bankability of their projects and has developed a toolkit that allows members to assess governance best practices (see section 4.1 on Good governance). One such policy tool that could be disseminated among NDBs and be effective in the transition to an LCCR economy is the shadow pricing of carbon emissions during preinvestment project evaluation. This methodology has been extensively used by the EIB since the mid-1990s (see Box 7) and more recently adopted by the World Bank. While there seems to be a strong case for NDBs embracing such methodology, none of the NDBs and experts we interviewed were yet using it for evaluation (author interviews, 2019). The use of shadow carbon pricing by NDBs would appear to be a useful and necessary tool, especially when renewables are not fully commercially attractive, as is still the case in many countries and for various technologies. Where shadow carbon pricing is not enough to restrict the use of fossil fuels, limits or a ban on lending by NDBs for new fossil-fuel plants may be called for (like KfW and, more recently, the EIB). The use of shadow carbon pricing, regulations and/or restrictions on lending by NDBs also needs to be supported by clear government mandates, as for Germany’s KfW (author interviews, 2019). Trade-offs may need to be considered for very poor countries or Figure 8 Total national development bank issuance in 2014–2019, by development bank Source: CBI (2019) 0 US$ million 25,000 20,000 15,000 10,000 5,000 KfW CDB KDB BNDES Nafin CAF CABEI Bancoldex Cofide 37 regions where, for example, fossil fuel is the only source of energy or the cheapest option by some margin. In such cases, it may be necessary for the international community to subsidise the use of low-carbon fuel, so that the transition to non-fossil fuel is just and fair and does not place an overwhelming burden on poor people or governments. Furthermore, the implementation of shadow carbon pricing could prove an important role for climate-finance funds. The CIF, GEF and GCF, as the largest multilateral climate funds, Box 7 Shadow carbon pricing and the European Investment Bank’s experience The Stiglitz Stern Commission estimates that the explicit carbon price level consistent with achieving the Paris temperature target is at least $40–$80/tCO2 by 2020 and $50–$100/tCO2 by 2030, provided a supportive policy environment is in place (Carbon Pricing Leadership Coalition, 2017). It is encouraging that these shadow carbon price estimates are not very different to those used by the EIB. In 2017, for low, central and high price scenarios (in 2015 € prices), these were: €16/tCO2e ($19), €37/tCO2e ($44) and €62/tCO2e ($73). Furthermore, these will increase significantly by 2030. They are also relatively similar to the shadow prices theWorld Bank has started to apply more recently (European Investment Bank, 2015). The EIB was the first development bank to use shadow carbon pricing in the mid-1990s. Its experience offers positive and negative lessons for NDBs. Because cost–benefit analysis ‘is in the EIB’s DNA’, it was a natural progression to incorporate the shadow price of carbon into its analysis. Doing so reduces the relative cost of renewables and penalizes carbon-intensive energy (author interviews, 2019). In the 1990s, this raised two key questions for the EIB, however: (1) What is the right shadow carbon price to use? (2) What will the approach mean in practice for project evaluation and, in particular, thechoice of projects to finance? The EIB continues to calculate the shadow value of carbon by using a central estimate for the damage associated with an emission, plus a high and a low estimate. Annual ‘adders’ are applied to reflect a common finding that the marginal damage of emissions increases as a function of the atmospheric concentrations of carbon (European Investment Bank, 2013). Regarding the impact this has had on the projects, EIB has chosen to finance, it has funded no new lignite projects in recent years. It approved its last coal project in 2006. In short, the approach has meant a major shift in EIB policy to renewable energy since the mid-2000s. However, even with high carbon prices in the shadow carbon pricing approach, some highcarbon activities have proved borderline profitable for the EIB. To be able to reject them, in 2019, the EIB (2019) added an extra safeguard in the form of an emission performance standard (GHG emissions above 250g of CO2 per kWh of electricity generated). As a result, borderline projects, such as coal, became ineligible. Thus, the cost–benefit analysis overlaid by an administrative restriction had even greater traction for the energy sector (author interviews,2019). We should emphasise that shadow carbon pricing is not a miracle mitigator of climate change; that may require a ban on the financing of new fossil-fuel plants. By not funding new fossil-fuel generating capacity, NDBs could prove an interesting means for governments dependent on fossil fuels to transition away from them. This is clearly more difficult for countries that have an abundance of fossil fuels or can buy them far more cheaply than renewables, especially less developed ones. There will need to be trade-offs in some cases: one drastic example is Mongolia, where people reportedly freeze in winter without heat, for which they mainly rely on coal-fuelled generation (author interviews, 2019). 38 could develop common methodologies for NDBs to evaluate projects, including shadow carbon prices. Using this methodology could belinked to the provision of finance, with more finance channelled to certain LCCR projects or even subsidies, when necessary (author interview, 2019). If the multilateral funds do notwant to lead on this issue, major coordinating institutions, such as IDFC and/or the RDBs, could step in. The introduction of shadow carbon pricing could be complemented by the adoption of other tools, such as the evaluation of physical and transition risk in NDB portfolios due to climate change and climate policy – anissue being increasingly discussed by central banksandfinancial regulators. 3.4.4 NDBs as innovators NDBs have proven themselves to be market innovators and able to overcome the information asymmetries that undermine private investment. Private funders have difficulty investing in new technologies where risks are less known and payoffs are uncertain. For these types of investment, NDBs play an important role in fostering innovation and proving investment viability. A good example is the involvement of development finance in Mexico’s wind industry. During the global financial crisis of 2008, project developers in Mexico’s nascent wind sector lost private financing due to banks’ apprehension about supporting unproven business or product lines amid market turbulence and commercial investors’ general lack of capacity to analyse and structure energy projects with an unfamiliar risk profile (BloombergNEF, 2019). The InterAmerican Development Bank (IADB), the International Finance Corporation (IFC) and the Clean Technology Fund (CTF) worked with project developers to finish these projects, with the IADB and NAFIN channelling $70 million of CTF funds to five wind projects and a utilityscale solar investment. The concessional interest rates and long-term nature of the financing provided to these projects filled a significant gap in the market at the time and proved crucial in demonstrating the viability of Mexico’s renewables market. Commercial investors accounted for 23% of the $11.8 billion in new-build wind investment in Mexico between 2011 and 2017 while development banks accounted for 26% (BloombergNEF, 2019). Discussions with NAFIN suggest that it will scale back its involvement in the wind sector as commercial investors now have a better understanding of the market and itspayoffs. As private finance normalises, NAFIN plans to turn its renewable-energy attentions to exploratory investments in geothermal and solar projects in the hope of creating a similar investment path forthose technologies (author interview, 2019). Meanwhile, to buttress Chile’s work in renewables, CORFO is moving into ‘green hydrogen’, particularly in the copper-mining industry. In 2017, it invested $5.9 million in an $18.4 million technological consortium focused on developing a mining-truck prototype where 60–70% of the diesel is replaced by hydrogen. It has also supported the development of solar energy in the Atacama desert to help power thearea’s large copper mines (author interview, 2019). CORFO is also the principal funder of another project exploring the use of hydrogen fuel cells in smaller machines (Litzbarski and Bischof, 2019). The former chief executive of CORFO told us that these technological consortia to develop new technologies were modelled after similar examples of government support in Finland and Israel and that using quasi-equity instruments to support new ventures had been important to technological developments (author interview, 2019). CORFO has demonstrated that by working with local public and private actors, NDBs can use their experience, resources and convening power to fuel and bring such major initiatives tofruition. 39 4 Realising the potential of national development banks as key enablers NDBs could undoubtedly play a major role in supporting the transition to an LCCR economy, as we discuss in chapter 3. From our research and interviews, it is evident that some NDBs are already engaged in various initiatives that are contributing to this transition, notably in renewable energy markets, the promotion of energy-efficient investments and the development of green technology. The urgency of the climate crisis suggests NDBs need to do far more, however, including better understanding and management of the financial risks that climate change poses to their investment portfolios. Some are re-orientating their focus accordingly, while some countries have created green investment banks (GIBs) – mostly advanced economies, such as Australia, Japan and the UK, but also a number of US states. Box 8 presents two studies exploring the issues governments should consider when deciding whether to ‘green’ an existing NDB orcreate a GIB. Our research and interviews underscore the need to promote ‘good’ development banks and reveal a number of common bottlenecks holding them back. We therefore identify five interlinked prerequisites to NDBs reaching their potential as supporters of the transition to an LCCR Box 8 Green an existing national development bank or create a new green investment bank? In March 2019, delegations of senior finance and development policy officials from 21 emerging markets and developing countries attended the Green Bank Design Summit in Paris. Eleven of them indicated that they were within two years of launching a green bank, even though many already had an NDB (Green Bank Design Platform, 2019). So, what would prompt a country tocreate a new green bank rather than ‘green’ an existing NDB? In its 2015 study of GIBs, the OECD noted that GIBs are characterised by a narrow mandate, largely to mobilise private LCCR investment through interventions to mitigate risk and enable transactions; their independent authority and degree of latitude in designing and implementing interventions; and their focus on cost-effectiveness and performance reporting (OECD, 2015b). These characteristics give GIBs greater flexibility to experiment, innovate and quickly adapt to the dynamics of market development. In their research into whether governments should green their NDBs or create GIBs, Smallridge et al. (2019) provide a balanced analysis of the competencies and independence of existing NDBs. If an NDB has governance challenges and/or a mandate that is limited in scope, building a new bank may be more advantageous than attempting to overhaul the NDB’s structure. However, ifthe NDB is well established, has reliable systems in place, interacts with the relevant stakeholders and receives the required green mandate from the government, it is far more efficient to use the NDB structures already in place and avoid duplication. 40 economy, most of which are equally applicable to GIBs.20 We discuss each in turn. 4.1 Good governance A recurring theme throughout our research and interviews has been the importance of good governance. This underpins the willingness of shareholders to capitalise NDBs, the willingness of private actors, MDBs, RDBs, DFIs and international climate funds to engage and partner with them, and the inclination of domestic and international policy makers to engage, support and work with them. This is a challenge for NDBs, however, as they need to collaborate closely with government, private capital markets and companies, as well as international institutions, and help implement government policy while maintaining independence from vested publicand private-sector interests. Features shared by the best-performing NDBs include a strong mandate, clear rules of cooperation with the private sector and some mutual understanding between the NDB and government on the expected return on capital (Rudolph, 2009). The best way to ensure such clarity is to have a qualified and empowered board of directors. Political appointments to a board do not make political capture a fait accompli, but they can help align government priorities with an NDB’s operations. The desired outcome is a qualified board and staff that is adequately independent of narrow political and private interests, with a clear commitment to ensuring that the NDB contributes to the achievement of equitable and sustainable development. Some NDBs are wrestling with past burdens, both real and perceived. Some of the literature suggests that state financial institutions (which would include NDBs) have tended to lack managerial skill, have mismanaged resources, been subject to political interference and been hampered by weak boards of directors (Dinç, 2005). However, there are many NDBs that have avoided such pitfalls for much of their existence or were once mismanaged and have now turned 20 An exception to this is the need for a clear mandate. This is because GIBs are, by definition, development banks with aclear mandate to focus on LCCR investment. around. A good example of the latter is UDB (seeBox 9). Further research would be helpful, possibly with inputs from non-economists, on how to best ensure good governance. These could include indepth case studies, both of NDBs that have been ‘good’ banks all or most of the time, and those that have turned from poor performers into fairly good ones, such as UDB. Internal efforts by development banks can be supported by external stakeholders. AADFI, the regional association of African NDBs, has been working hard to promote good governance and support reform to strengthen the governance capacity of many African NDBs. As part of this endeavour, in collaboration with the AfDB and the World Bank, AADFI has developed the Prudential Standards, Guideline and Rating System (AADFI, 2019), based on the international financial and banking standards against which African NDBs assess themselves (see Box 10). 4.2 A clear mandate and a seat atthe policy table Effective management is very important. This intertwines with strong mandates in the planning and implementation stages of an NDB’s mission. NDBs are integrated into the policy process of national governments to different degrees. How NDBs are involved in a government’s climate and environmental planning is key to ascertaining how much influence an NDB will have on the transition toaLCCR economy. Best practices have NDBs involved in the policy process, with clear lines of communication to government. This allows for greater alignment of policy priorities and NDB results. For betterperforming NDBs, this evolves into a virtuous circle: the NDBs are clear on the policies and sectors being prioritised by government and can manage and deliver on government expectations, while governments view NDBs as facilitating their agenda and NDBs gain influence in government processes. 47 theredoesseem to be a thawing of relations, after they were strained following calls for the privatisation of the NDBs in the 1980s and early 1990s (Williamson, 1990). Aprominent example is IADB’s work with NAFIN to fund wind projects with resources from the CTF. Thiscooperation saved a number of wind projects that had lost commercial financing following Mexico’s financial crisis in 2008 and 2009. Relationships have continued to strengthen since then and NAFIN considers both RDBs and MDBs to be important partners in building the project pipeline and facilitating NAFIN’s capacity (author interviews, 2019). Another promising example of collaboration is the VERT-Infra initiative, outlined in Box 12, which works across the three stages of infrastructure investment and draws on the comparative advantages of NDBs, MDBs, RDBsand DFIs. These examples are illustrative of the way NDBs, RDBs and MDBs can collaborate on specific goals. The transition to an LCCR economy with green infrastructure will require significant resources; many NDBs simply do not have these because their investments are already tied up in other economic sectors. The ability of RDBs and MDBs to access funding on capital markets is rivalled only by the most financially strong sovereigns. This presents a mutually beneficial opportunity. Smaller NDBs can play to their non-financial strengths – local knowledge and networks to source and develop investible or close-to-investible projects to which RDBs and MDBs can target their financial wherewithal. RDBs and MDBs could act as co-financiers orpartners for larger, more established NDBs, togenerate sufficient concessional financing to incentivise private investors. Either way, greater integration among NDBs and their international counterparts has little downside, aslong as each entity is valued for the advantages it brings to a transaction. 5.2.3 Increase integration with international climate funds As discussed, even though international climate funds are but a small part of the total climatefinance architecture, they have played a valuable role in helping some NDBs to develop their green investment portfolios, especially in terms of building investible pipelines and bolstering the capacity of some NDBs to undertake LCCR investment. Regardless, and although these funds are targeted at developing countries, the involvement of NDBs has been quite limited. As can be seen in Table 2, there are no NDBs directly accessing the CIF. The DBSA is the only NDB partner agency of the GEF, although NDBs can access GEF funds Box 12 The VERT-Infra Initiative Developed for the One Planet Lab by IFC, CPI, HSBC, the Institute for Climate Economics, the GCF, OECD and the French government, the Vision for an Environmentally Responsible Transition – Infrastructure (VERT-Infra) aims to systemically scale up global climate finance, with a focus on three key but under-developed sustainable infrastructure sectors: energy storage, transport and buildings (OECD, 2019a). The intention is that VERT-Infra will work across three phases of a project. In the preparation phase, project preparation funds, financed by MDBs and philanthropic organisations, will provide resources for technical assistance to make green projects bankable. In the construction phase, sustainable financing conduits (SFCs) will lend to NDBs and other local financial institutions. SFCs will be funded by MDBs and DFIs, while raising additional debt on capital markets. In the operational phase, sustainable infrastructure funds will provide an opportunity for NDBs to offload their participation to asset managers looking for sustainable infrastructure assets, thereby allowing NDBs to free up capital and capacity for new projects (Déséglise and Freijido, 2019). There is no official launch date for VERT-Infra, but its focus on integrating NDBs into multinational funding structure looks promising. 48 indirectly through RDBs, such as the IADB, AfDB or ADB. The GCF isnotably different in this regard. Its mandate promotes country ownership and national authorities can directly access its funds. AsTable2 shows, 11 NDBs have been accredited for direct access, but as Figure 9 illustrates, most GCF commitments are channelled through multilateral accredited entities, either RDBs, MDBs or UN agencies, and the actual disbursement of funds to date through these multilateral channels has been very low (GCF,2019c). For the GCF, NDAs’ lack of capacity and the potential involvement by NDBs were issues raised on numerous occasions over the course of our research. The consensus was that many NDBs did not have the capacity to meet the accreditation requirements and that the monetary incentive to undergo the onerous process involved was not enough of an incentive, given the size of the GCF relative to the loan books of the NDBs. Take, for example, the Development Bank of the Philippines, a relatively small development bank that still has over $13 billion in total assets. What is the point in meeting the rigours of GCF accreditation to get access to a fund that has only disbursed $700 million since its inception – 60% of that through two organisations (GCF, 2019c)? Some NDBs can transition their portfolios to support the LCCR economy without the international climate funds; they just need to be proactive in doing so. The GCF (2019a) reports that $155.7 million has been committed through its Readiness and Preparatory Support Programmes, aimed towards helping ‘strengthen the institutional capacities of NDAs or focal points and Direct Access Entities to efficiently engage with the Fund. Resources may be provided in the form of grants or technical assistance’ (GCF, n.d.b). While this is a large sum, it is split between 127 different countries. It also doesn’t directly address some of the qualitative hurdles to accreditation mentioned by our interviewees, including the need for all documentation to be submitted in English and the sheer number of documents involved. One accredited entity told us that theysent over 10,000 pages of documents to theGCF during the accreditation process (authorinterview, 2019). Leaving aside the capacity issue, evidence suggests that engaging with the GCF is difficult for all entities. According to documents released at its latest board meeting, the GCF had 93 Figure 9 Total Green Climate Fund commitments to date Source: GCF (2019c) 0 US$ million 10,000 12,000 8,000 6,000 4,000 2,000 NDB Government agencies RDB/ MDB GCF commitments total project value Bilateral BFIs/NDBs Donor/ donorlinked UN Private Other Actual disbursements 49 actively approved projects; of these, only 32 weredisbursing funds and only one involved an NDB. Of the 32 projects disbursing funds, 15 involved the United Nations Development Programme (UNDP) (GCF, 2019c). As the GCF is likely to become the largest global climate fund in light of recent replenishment announcements, the GCF needs to recognise the current flaws in its accreditation process (see Box 13) and the important roles that NDBs can play in helping unlock private and public finance. While its statement of partnership with the IDFC is a good first step (GCF, 2019b), further outreach and work with other convening NDB organisations, such as AADFI, ADFIAP and ALIDE, would actually enable greater feedback from NDBs and allow the GCF to tackle broader structural issues in its processes. 5.3 The shift from mere financier to dual financier and mobiliser If private finance is to be mobilised at scale, NDBs will have to increasingly shift their focus from merely (or mostly) providing long-term public investment in infrastructure to mobilising private investment in LCCR infrastructure. Thiswill require NDBs to adopt a more strategic and dynamic approach to market development, shifting from direct, ad hoc investments to strategic pipeline development focused on market creation, gradually exiting investments and markets that become commercial. Among other things, this shift will require a change in business model and the more effective use of NDB balance sheets, drawing on more catalytic techniques and instruments. 5.3.1 A cautious increase in the useofguarantees Our interviewees cited guarantees as an under-utilised instrument. This chimes with their limited use more broadly throughout development banking. On the face of it, the limited use of guarantees is surprising, given their leveraging potential, but there are reasons for it. In a recent review of the topic, the Milken Institute and the OECD outlined strategic, operational and financial constraints affecting theuse of guarantees (Lee et al., 2018). First, from a strategic perspective, guarantees are evaluated differently by development organisations and the private investors they hope to crowd into a project. They are viewed by development organisations as a way to share risk with private investors, but these risks may be in markets where private investors want no risk. Moreover, private investors may look to Box 13 Green Climate Fund accreditation levels Though the accreditation process for the GCF may be onerous, it also has positive reputational effects for NDBs. The GCF offers tiered accreditation through its ‘fit-for-purpose accreditation approach’ (GCF, n.d.a), where entities are accredited in one of four categories based on the proposed scale of their intended activities. •Micro: maximum GCF contribution of$10 million. •Small: maximum GCF contribution of between $10 million and $50 million. •Medium: maximum GCF contribution ofbetween $10 million and $250 million. •Large: GCF contribution of more than $250 million. Of the 88 accredited entities, 16 are accredited for micro-sized projects, 25 for small-sized projects, 19 for medium-sized projects and 28 for large-sized projects. The GCF indicates that all potential accredited entities are assessed against basic fiduciary standards, the presence of environmental and social safeguards drawn from the IFC’s Performance Standards, and whether gender considerations are translated into entity operations (GCF, n.d.a). The GCF does not disclose on its website whether the assessment against these standards are scaled according to the level of accreditation sought by an entity and, if so, by how much. 50 refinance or sell their exposure prior to maturity, so there needs to be a liquid market for the guarantee. This is not something that concerns development organisations, as their objective isthe development impact, not the financial return. Thus, the two parties are not aligned. It may also be that there is little motivation for guarantees within NDBs. Loans are more profitable than guarantees due to their higher spreads, while guarantees are more complex (sometimes too complex, so risks are opaque) and require greater capacity than loans and/ or grants. For the NDB, guarantees mean less compensation for more work. Moreover, depending on accounting rules, the guarantee may be carried on the balance sheet as if it were a loan (Venugopal et al., 2012). How guarantees are included on the balance sheet of the private investor can further undermine their utility. Under Basel III, loan amounts guaranteed by private investors are subject to a risk-weighting formula that acts as an input to private investors’ risk ratios. Tosome, this is the promise of guarantees: that an MDB with a AAA credit rating will fully or partially guarantee the investment at the zero risk weighting prescribed by Basel III (Lee et al., 2018). However, most NDBs (and their sovereigns) do not have an AAA rating and the amount de-risked under Basel III is less than the amount of the guarantee, rendering that inherent promise moot. The allure of guarantees lies in the possibility that, if the constraints can be relaxed, they could be used in lieu of loans on certain projects, leaving NDBs’ capital untouched. NDBs should therefore explore using guarantees, but be mindful of the risks. 5.3.2 Securitisation where possible As discussed in chapter 3, the technique ofsecuritising assets enables the recycling ofNDB capital, can support local capital-market development and can give NDBs access to local institutional investment. It will generally have greater potential in countries where local capital markets are developed, so will probably be of more limited use in low-income and lowermiddle-income countries where local capital markets are underdeveloped and NDBs may notbe well capitalised. That said, where capital-market development and NDB balance sheets allow, NDBs could explore how securitisation and other techniques, such as those employed by the BNDES Sustainable Energy Fund, could be adapted, replicated and scaled (while being mindful of the risks). It is important to research such instruments carefully, as they can potentially be rather complex, risks may be opaque and risk management may be costly. Above all, securitisations need to be properly structured and the risks priced correctly, so as not to generate excessive contingent liabilities. The problems caused by securitisation during the financial crisis of 2007–2009 suggest caution is warranted. 51 6 Policy conclusions andsuggestions for further research There is growing recognition that NDBs have huge untapped potential to further support the achievement of the SDGs, especially the critical transition to a sustainable LCCR economy. NDBs are an important part of the financing architecture, but are often overlooked and do not feature in the international and domestic policy debate. There is a disproportionate focus on the core MDBs in the developmentand climate-financing discourse and this is a huge oversight, as the firepower of the NDBs far exceeds that of the multilateral system. This lack of focus on NDBs means there is a huge gap in understanding and emphasis, which ultimately undermines the effectiveness of policy and financing at the international, regional and national level. NDBs are complementary to the multilateral system and have a number of distinct comparative advantages. They can have extensive knowledge of opportunities for and barriers to investment in their countries, long-standing relationships with the local private and public sectors and a development mandate. They can also work closely with national authorities to support economic development plans. NDBs can help support the creation of a pipeline of bankable projects and the development of domestic financial sectors to channel institutional investment to LCCR investment. The crucial role of NDBs is increasingly accepted, but far more needs to be done to see them fully recognised as key actors in the developmentand climate-finance architecture at the international, regional and national level. They need to be enabled to realise their potential, by improving their own performance through better governance and new business models and by helping to shape national policy so they can operate more efficiently and support the transition to an LCCR economy – for example, through broader macroeconomic and regulatory frameworks and deeper domestic capital markets. It is also clear that most international climate finance is captured by the multilateral system, bypassing these national institutions, which are uniquely placed to leverage it to maximum effect. This needs to change. 6.1 Policy conclusions We identify a number of key policy recommendations that need to be actioned atthe national and international level to unleash thetrue potential of NDBs. At the national level, governments need to: •give NDBs a clear and stable ‘green’ mandate that includes supporting national development strategies and helping to meet the SDGs more broadly. This could include not just funding and encouraging investment in low-carbon activities, but also restricting – or even eliminating – the funding of investment in high-carbon activities, suchasfossil-fuel electricity generation; •integrate NDBs into their policy framework and design and ensure that supportive policy and regulatory frameworks are in place. This will facilitate NDBs’ direct lending and investment in long-term activities to support 52 green transformation and help catalyse private flows to those activities; •ensure NDBs are well resourced and have sufficient capital. NDBs should therefore be able to help facilitate greater leverage of private resources, especially in countries with deep private capital markets. Where these do not exist, governments and NDBs should help to develop and deepen them; •help to develop not just the financial, but also the valuable non-financial roles of NDBs. NDBs need to: •strengthen their governance and management; •shift their business model from that of mere financier to a dual role of financier and mobiliser, adopting a more strategic and dynamic approach to market development and the mobilisation of private investment forLCCR; •adapt and choose a mix of instruments to maximise impact on LCCR investment whilelimiting contingent liabilities; •seek to understand and manage the transitional and physical risks of climate change to their investment portfolios. At the international level, MDBs, DFIs, donors and the international community needto engage with these institutions: •to support and build the capacity of NDBs, ease excessively burdensome access hurdles to climate finance funds and channel the majority of international climate finance directly through national institutions, particularly NDBs, rather than the multilateral system; •to help international climate funds understand how NDBs operate, which will help facilitate their access to such finance. 6.2 Suggestions for further research Over the course of the study, we indentify several areas requiring further research. 6.2.1 The role of NDBs NDBs’ increased role as dynamic mobilisers of additional private resources raises the important issue of how to measure their performance and how to build an accountability framework for their new role. This framework must be carefully designed not only to measure the level of additional private flows they generate, but also their impact in terms of meeting the SDGs – more specifically, their effect on achieving greener, fairer and more dynamic development. This methodological challenge requires further research, especially as NDBs’ influence may be more limited when it comes to the additional private flows they can catalyse indirectly. Indeed, one of the challenges may be to design mechanisms that help maximise, or at least increase, the policy steer that NDBs can exercise over private flows, so they are more SDG consistent. Our interviewees noted that the non-financial services provided by NDBs, such as helping governments design appropriate renewable energy policies or supporting the preparation of scalable projects, are very valuable functions. Further research is required on this understudied non-financial role and how to capitalise on it. Much emphasis is placed on mitigation rather than adaptation investment, which builds climate resilience. Further study of NDBs and adaptation investment is necessary, as the challenges, approaches and instruments are likely to varybysector. 6.2.2 Instruments used Several different instruments are available to NDBs, both traditional (such as direct loans) and newer ones (for example, guarantees and securitisation). A careful evaluation of the advantages and disadvantages of different instruments is required, including their positive impact (or otherwise) on greening the economy and other objectives of national development strategies. Research on the effective allocation of grants to ensure clear SDG impacts is important. This type of work is crucial for grants allocated to private financial intermediaries and investors, to better understand the dynamics of any moral 53 hazard that may exist and to prevent grants from creating windfall gains for these private actors. 6.2.3 Conditions required for ‘good’ NDBs There are many instances of NDBs having broadly good governance or improving their governance significantly. Further research on how best to ensure good governance and subsequent impact would help inform reform efforts. This research could include case studies of NDBs that have been recognised as ‘good’ development banks for all or most of their existence and those that have successfully transitioned from poor governance structures to stronger ones. Scale is a clear issue, as NDBs need sufficient scope and size to have a significant impact on meeting the SDGs and supporting the transition to an LCCR economy. There may, however, be limits to how fast they can grow. This suggests two potential areas for research. First, what are the criteria for determining the appropriate (optimal) size of an NDB’s total capital and how does this vary according to a country’s level of development, development challenges, capital development, private banking markets and other factors? Second, how is the speed of operational scale-up determined and what are the risks of scaling up too rapidly? Operationally, there are interesting research questions, too, in whether it is better for NDBs to be centralised or to have regional branches/ offices of significant size, and whether it is better for a country to have one very large NDB that benefits from portfolio diversification or several NDBs that specialise in certain sectors, such as agriculture, infrastructure or industry. 54 References AADFI – Association of African Development Finance Institutions (2019) Prudential Standards, Guidelines and Rating System for African Development Banks and Financial Institutions. 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