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COP26 pledges: Can the private sector come through for climate action in emerging economies?

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COP26 pledges: Can the private sector come through for climate action in emerging economies?
The first week of COP26 ended with a loud and clear response from world leaders to the call for greater ambition and urgent climate action. Regardless of whether this enthusiasm is to be received with hope or with skepticism, it is important not to lose focus on the pressing theme of private capital mobilization (PCM) for climate action, without which it will be impossible to meet the Paris Show MoreThe first week of COP26 ended with a loud and clear response from world leaders to the call for greater ambition and urgent climate action. Regardless of whether this enthusiasm is to be received with hope or with skepticism, it is important not to lose focus on the pressing theme of private capital mobilization (PCM) for climate action, without which it will be impossible to meet the Paris Agreement. As US Treasury Secretary, Janet Yellen, noted in her remarks “… as big as the public sector effort is across all our countries, the $100-trillion plus price tag to address climate change globally is far bigger… and the private sector needs to play a bigger role”. In fact, developed economies have not been able to meet the $100 billion a year commitment to finance climate needs in emerging economies. A major announcement at COP26 was the pledge of the Glasgow Financial Alliance for Net Zero (GFANZ) – a global coalition of over 450 finance firms across 45 countries, jointly managing $130 trillion - to align their financing activities to achieve net-zero emissions by 2050. Leaving aside fair questions as to whether it is enough or realistic, this pledge is indicative of the scale and ambition needed.. A similar pledge came earlier this year from the Climate Finance Partnership (CFP), a partnership between BlackRock and the governments of France, Germany, and Japan, as well as a number of leading U.S. impact investing organizations, to align resources towards net-zero emissions. Just as GFANZ and CFP, private sector players are making bolder commitments representing important opportunities. But how much of this financing will reach emerging economies? What can the World Bank Group (WBG) and partner organizations do to facilitate the flow of private capital to developing countries?  IEG recently published an evaluation on the WBG’s approach to capital mobilization which includes lessons that could shed some light on these questions. Coalitions such as GFANZ and CFP seek bankable projects, mostly in the infrastructure and energy sectors, requiring emerging economies to strengthen their policy and regulatory frameworks and raise industry standards in key sectors to attract investors. The WBG can continue to play a major role in addressing institutional barriers to private investment flows at the country level. Examples from Jordan and Ghana illustrate how WBG-supported policy and institutional reforms catalyzed private capital mobilization in the energy sector. In Jordan, the Bank Group’s technical assistance and its support to public sector management reforms strengthened the power utility financially, boosted the development of the wind power market, and facilitated private investments in renewable energy. In Ghana, the WBG supported reforms to strengthen the financial sustainability of the state off-taker in the power sector and promoted the introduction of the Extractive Industries Transparency Initiative standards, which facilitated private investments. With the release of its 2021-25 Climate Change Action Plan (CCAP), the WBG put forward strong commitments to mobilize more private capital for climate action and prioritize adaptation efforts, recognizing that developing countries are bearing the brunt of climate change effects. Avenues to mobilize private capital streams into adaptation are not near as wide and clear as they are for mitigation. In fact, only 2% of tracked adaptation finance comes from the private sector. Turning this around will require a great deal of innovation from the WBG and all other Development Finance Institutions (DFIs) to structure instruments and platforms that yield PCM deals for adaptation in emerging economies. Through its CCAP, the WBG is committing to linking climate and development goals and integrating climate objectives into all its work. Similarly, the Bank Group -and other DFIs – should seek to structurally expand PCM efforts across all sectors and regions by creating more incentives for teams to increase their financial structuring expertise and use of PCM mechanisms, even in sectors where financing is typically done through direct lending. The WBG, and other DFIs, have thus a critical role in ensuring pledges like that of the GFANZ and the CFP represent opportunities for emerging economies. Greater innovation is required to ensure valuable financial structuring expertise is mainstreamed and geared towards all sectors, including those associated with adaptation efforts. As the global development community moves forward with its efforts to mobilize private investment towards climate and development objectives, clarity regarding the standards and taxonomy surrounding climate finance should also be achieved. Avoiding confusion regarding the differences between climate finance, green finance, transformational finance, etc., can prevent these terminologies from becoming another obstacle for the flow of private capital to where its most needed. IEG is committed to building a strong body of evaluation evidence and gathering lessons, identifying what works and what doesn’t, as the WBG advances private capital mobilization towards achieving its green, resilient, and inclusive development objectives. Read: The World Bank Group’s Approach to the Mobilization of Private Capital for Development |  An IEG Evaluation

Guinea: Micro, Small and Medium Enterprises Development Project (PPAR)

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At the time of project appraisal, agriculture and mining were the main sources of economic growth in Guinea. The country’s mining sector contributed 20 to 25 percent of government revenues. However, Guinea’s economic performance was not proportionate with its natural resource endowment, since agriculture and mining performed modestly. After years of instability, Guinea’s first democratically Show MoreAt the time of project appraisal, agriculture and mining were the main sources of economic growth in Guinea. The country’s mining sector contributed 20 to 25 percent of government revenues. However, Guinea’s economic performance was not proportionate with its natural resource endowment, since agriculture and mining performed modestly. After years of instability, Guinea’s first democratically elected president assumed power in December 2010. Although the political transition was difficult, macroeconomic stability was restored, and debt sustainability dramatically improved with the attainment of the highly indebted poor countries completion point in September 2012. However, the private sector in Guinea was not able to contribute enough to growth and help realize the country’s potential because of several underlying constraints: weak legal and regulatory environment for paying taxes and protecting investors; weak access to finance; low human capital; weak governance; and weak infrastructure. The Guinea Micro, Small and Medium Enterprises (MSME) Development Project (P128443) was approved on January 28, 2013, restructured on February 2, 2016, and closed as scheduled on December 31, 2017. The project was financed by a credit from the International Development Association for $10 million. The objective of the project was to support the development of MSMEs in various value chains and to improve business processes of Guinea’s investment climate. Ratings for this project are as follows: Outcome was moderately unsatisfactory, Overall efficacy was modest, Bank performance was unsatisfactory, and Quality of monitoring and evaluation was modest. This assessment offers the following lessons: (i) For effective public-private dialogue it is crucial to have (a) a champion at the highest government level who can bring the public and private sector together to identify and implement business environment reforms; and (b) agreement among various private sector associations to identify a private sector representative who can lead the dialogue on their behalf. (ii) Projects should include measures to ensure sustainability of support centers that provide capacity building to MSMEs after project closing. (iii) Design and implementation of credit registries should be based on international best practice standards. (iv) Integrating a rigorous impact assessment into the design of World Bank projects supporting MSMEs would help discern the causal effects of project interventions on MSME development.

Benin: Ninth and Tenth Poverty Reduction Support Credit (PPAR)

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Benin was a low-income country with a gross domestic product per capita of $1,291 at the time of preparation of the Poverty Reduction Support Credit (PRSC) 9 and 10 series in 2014. Its economy was driven by agricultural production (of cotton in particular) and reexport and transit trade with Nigeria. As a result, Benin’s economy was vulnerable to trade policy changes or economic downturns in Show MoreBenin was a low-income country with a gross domestic product per capita of $1,291 at the time of preparation of the Poverty Reduction Support Credit (PRSC) 9 and 10 series in 2014. Its economy was driven by agricultural production (of cotton in particular) and reexport and transit trade with Nigeria. As a result, Benin’s economy was vulnerable to trade policy changes or economic downturns in Nigeria. The development objectives of this series were to: (i) promote good governance and high-quality public financial management, and (ii) strengthen private sector competitiveness. Ratings for the Ninth and Tenth Poverty Reduction Support Credit project are as follows: Outcome was moderately unsatisfactory, Risk to development outcome was substantial, Bank performance was unsatisfactory, and Borrower performance was not applicable. This assessment offers the following lessons: (i) Relevant lessons from previous operations need to be taken on board when designing new DPF operations. (ii) Prior actions need to be substantive, that is, be critical to reforms with value added. (iii) The World Bank should design projects with a clear understanding of the likely “winners and losers;” failure to do this makes it more likely that projects will not be implemented as planned or sustained over time. (iv) Distributional impact analysis from DPF-supported reforms should inform the design of operations.

The private sector in low income and fragile countries needs more than credit

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Kitabi Tea Processing Facility A worker sorts the green leaf tea before it reaches the main processing floor. The Kitabi Tea Processing Facility in Kitabi, Rwanda has a capacity of 48 000 tons of green leaf per day. The facility employs 200 people during its peak season and about 70 during the rest of the year. Photo: A'Melody Lee / World Bank
Lessons from the early implementation of the IDA Private Sector Window (PSW)Lessons from the early implementation of the IDA Private Sector Window (PSW)

The World Bank Group’s Experience with the IDA Private Sector Window: An Early-Stage Assessment

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Employees of Vita Foam working in Freetown, Sierra Leone on June 19, 2015. Photo © Dominic Chavez/World Bank
This report is an early-stage assessment of the World Bank Group’s experience with the International Development Association (IDA) Private Sector Window (PSW).This report is an early-stage assessment of the World Bank Group’s experience with the International Development Association (IDA) Private Sector Window (PSW).

The Drive for Financial Inclusion: Lessons of World Bank Group Experience – Approach Paper

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Financial inclusion is expected to help address poverty and shared prosperity by improving and smoothing household incomes at the same time as reducing vulnerability to shocks, improving investments in education and health, and encouraging the growth of businesses and related employment. The poor face immense financial challenges. The income of the poor is not only lower but also more volatile. Show MoreFinancial inclusion is expected to help address poverty and shared prosperity by improving and smoothing household incomes at the same time as reducing vulnerability to shocks, improving investments in education and health, and encouraging the growth of businesses and related employment. The poor face immense financial challenges. The income of the poor is not only lower but also more volatile. They often rely on a range of unpredictable jobs or on weather-dependent agriculture. Transforming irregular income flows into a dependable resource to meet daily needs represents a crucial challenge for the poor. Another challenge lies in meeting costs if a major expense arises (such as a home repair, medical service, or funeral) or if a breadwinner falls ill. Savings, credit, insurance, and remittances can each help the poor to smooth volatile incomes and expenses, providing a margin of safety when income drops or expenses rise, or providing the needed funds for children’s education or health care. Additionally, financial inclusion in the form of financial services for microentrepreneurs and very small enterprises has been guided by the intention that it can help them to survive, grow, and generate income for the poor. Nonetheless, evidence that financial inclusion directly takes people out of poverty is mixed. The main objective of this evaluation is to enhance learning from the Bank Group’s experience, including the World Bank, IFC, and MIGA, in supporting client countries in their efforts to advance financial inclusion over the period of FY14–20. It both updates and expands on a 2015 IEG evaluation, which assessed Bank Group activity for FY07–13. It not only updates an evaluation of WBG activity in financial inclusion and in support of national financial inclusion strategies, but also plans for a deep focus on the following: (i) A retrospective look at the drive for universal financial access (the UFA 2020 initiative), including outcomes achieved in its 25 focus countries; (ii) Progress and challenges in women’s access to financial services (gender); (iii) An in-depth examination of digital financial inclusion efforts and the role of digital financial services as vehicles for financial inclusion. This work intends to focus more deeply on outcomes on the ground for poor households and microenterprises. It intends to understand the relevance and effectiveness of these activities, including the outcomes and the mechanisms by which observed outcomes were achieved. The evaluation aims to identify lessons applicable to the World Bank, IFC or MIGA by obtaining evidence-based findings of what works, why, and for whom.

Early-Stage Evaluation of the International Development Association's Sustainable Development Finance Policy (Approach Paper)

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IEG is undertaking an early stage evaluation of Sustainable Development Finance Policy (SDFP) of the International Development Association (IDA), which came into effect on July 1, 2020. The SDFP, adopted in response to concern with mounting external public debt vulnerabilities in IDA-eligible countries, seeks to create incentives to strengthen country-level debt transparency, enhance fiscal Show MoreIEG is undertaking an early stage evaluation of Sustainable Development Finance Policy (SDFP) of the International Development Association (IDA), which came into effect on July 1, 2020. The SDFP, adopted in response to concern with mounting external public debt vulnerabilities in IDA-eligible countries, seeks to create incentives to strengthen country-level debt transparency, enhance fiscal sustainability, and strengthen debt management. In light of significant past efforts to restore debt sustainability to heavily indebted poor countries (HIPCs), including through large scale bilateral and multilateral debt relief, the World Bank Board’s Committee on Development Effectiveness seeks early feedback from implementation of the SFDP to identify lessons to enhance its effectiveness. IEG will assess the relevance of the SDFP in addressing the sharp rise in debt stress in many IDA-eligible countries as well as the early implementation of the policy.

Brazil: Rio State Fiscal Efficiency for Quality of Public Service Delivery Development Policy Loan (DPL III) (PPAR)

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This is a Project Performance Assessment Report (PPAR) by the Independent Evaluation Group (IEG) of the World Bank Group for the Fiscal Efficiency for Quality of Public Service Delivery Development Policy Loan (DPL) III (P126465) to the state of Rio de Janeiro for $300 million. The program covered three policy areas: (i) tax administration, (ii) public financial management, and (iii) education Show MoreThis is a Project Performance Assessment Report (PPAR) by the Independent Evaluation Group (IEG) of the World Bank Group for the Fiscal Efficiency for Quality of Public Service Delivery Development Policy Loan (DPL) III (P126465) to the state of Rio de Janeiro for $300 million. The program covered three policy areas: (i) tax administration, (ii) public financial management, and (iii) education and health. It achieved some of its objectives and targets in the short term (in fiscal years 2013–14), but these achievements were not sustained. Ratings for the Rio State Development Policy Loan III are as follows: Outcome was unsatisfactory, and Bank performance was moderately unsatisfactory. The assessment offers the following lessons: (i) Subnational programs supporting institutional reform in areas such as tax administration, public financial management, education, and health require a long-term strategic vision and sufficient time for implementation. (ii) It was difficult to achieve fiscal sustainability in Rio state by reforming only a few technical aspects of tax administration without accounting for important issues, such as pensions, dependence on unstable oil revenues, weak institutions, and chronic corruption. (iii) An assessment of the Rio state’s fiscal situation, its implementation capacity, and medium-term perspectives could have improved the program’s design since the state was in dire financial situation and lacked the bandwidth to properly prepare and execute the 12 loans it was simultaneously negotiating with multiple lenders.

Malawi CLR Review FY13-17

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This review of the World Bank Group’s (WBG) Completion and Learning Review (CLR) covers the period of the Country Assistance Strategy (CAS), FY13-FY17. Malawi is one of the poorest countries in the world. It is an agrarian landlocked country, with a population of 18.6 million (2019) growing at 3 percent per year. Between 2013 and 2017 real GDP and real per capita GDP grew at 4.0 and 1.2 percent Show MoreThis review of the World Bank Group’s (WBG) Completion and Learning Review (CLR) covers the period of the Country Assistance Strategy (CAS), FY13-FY17. Malawi is one of the poorest countries in the world. It is an agrarian landlocked country, with a population of 18.6 million (2019) growing at 3 percent per year. Between 2013 and 2017 real GDP and real per capita GDP grew at 4.0 and 1.2 percent per year, respectively. The poverty headcount ratio at the national poverty line was 51.5 percent in 2016, slightly above the 50.7 percent in 2010. The Gini index (World Bank estimate) stood at 44.7 in 2016, below its 2010 level of 45.5. The Human Development Index improved from 0.441 in 2010 to 0.47 in 2015 and to 0.477 in 2017. During the review period, Malawi faced several challenges including the governance and public financial management crisis in September 2013 and two natural disasters- the flooding in 2015 which affected half of the country and the drought in 2016. The “cashgate” led to temporary suspension of donor budget support and sharp reduction in disbursement of aid funds through government systems with the consequent impact on the fiscal deficit.

World Bank Group Support for Domestic Revenue Mobilization (Approach Paper)

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Effective domestic revenue mobilization (DRM) is essential for developing countries’ abilities to finance their development goals in a sustainable and equitable manner. DRM—the generation of government revenues from domestic activities (World Bank and IMF 2015)—is relevant to at least 2 of the 17 Sustainable Development Goals (SDGs). This evaluation focuses on the World Bank Group’s support to Show MoreEffective domestic revenue mobilization (DRM) is essential for developing countries’ abilities to finance their development goals in a sustainable and equitable manner. DRM—the generation of government revenues from domestic activities (World Bank and IMF 2015)—is relevant to at least 2 of the 17 Sustainable Development Goals (SDGs). This evaluation focuses on the World Bank Group’s support to its clients to improve central government DRM, which includes revenue from tax (VAT, direct taxes, excises and customs) and nontax collections (including royalties from extractives). Recently, DRM has faced challenges aggravated by the ongoing coronavirus (COVID-19) pandemic and the attendant collapse of economic activity in many countries. The pandemic is expected to affect many aspects of DRM, including tax payments and tax compliance. This evaluation aims to assess the relevance, effectiveness, and coherence of Bank Group–supported strategies and interventions over FY16–19 to help clients improve DRM, as well as assess the extent to which the World Bank identified the distributional implications of its support to DRM in country interventions.