• Poorer nations seek to have aid delivered in grants, not loans
  • Richer countries want private investment to count in aid

As the world’s finance ministers convened last week in Lima, one topic divided some lenders and borrowers: If aid money is loaned at market rates, is it still aid?

The issue was discussed at the International Monetary Fund’s annual meetings and will be addressed at the United Nations climate change conference in Paris at the end of the year, according to European development banks. It’s one of the issues dividing the richer nations from the poorer ones, making an agreement more difficult.

The issue stems from a promise industrial nations made in 2009 to boost climate-related aid to $100 billion a year by 2020. The funds are for projects that help developing nations cut greenhouse gases and cope with the impact of global warming. Richer nations always said that only part of the money would come from government, that much would come from private investors. The Group of Seven countries has called on development banks to scale up their climate action financing, and several have responded.

“Developing countries, particularly those trying to address climate adaptation issues, are seeking to have as much as possible of the $100 billion on a fully concessional basis, i.e. grants,” said Josue Tanaka, managing director for energy efficiency and climate change at the European Bank for Reconstruction and Development.

Loans vs Grants

Concessional loans typically have cheaper rates and longer grace periods, while grants are essentially free money. Only a share of the development banks’ funds would count towards towards the $100 billion goal in this case. Projects built solely by private industry would not count at all.

Making all the aid money grants would go against the grain of the way development banks usually work. They rarely fund entire projects, opting instead to partner with private companies and banks. The European Investment Bank almost never takes on more than 50 percent of a project, according to Jonathan Taylor, vice president responsible for climate action and energy. The Luxembourg-based financial institution is owned by European Union member states.

“The private sector should be involved,” Taylor said at a briefing on Oct. 5 in London. “The $100 billion should be from all monies.”

The EBRD lends money with interest rates that are often based on Libor with an additional calculated country risk. It also tends to work with companies rather than public organizations.

“The EBRD is a public institution with a focus on private sector development and operations,” Tanaka said. “Of the roughly 4 billion euros ($4.6 billion) per year we could commit to climate change projects by 2020, around 60 percent would be in the private sector.”

African Bank

The African Development Bank in Abidjan, Ivory Coast, does both concessional and commercial lending depending on whether the country is low-income or middle-income. It provides some grants through its Africa Development Fund.

“Certain countries, especially some of our countries in Africa, would have a difficult time paying back loans at commercial rates,” said Kurt Lonsway, manager in the AfDB’s department of climate change and environment. “Public finance is certainly going to be a part of climate action, but the idea is to use it to leverage private finance as well.”

The EBRD and EIB are among the world’s biggest backers of climate action, particularly in energy efficiency and renewable energy. The AfDB recently said it will triple its green financing to about $5 billion by 2020.

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