How to play in the big leagues – Overcoming climate finance barriers in El Salvador

While the complex negotiations to launch the Green Climate Fund are still underway, many developing countries are reviewing their possibilities to access and manage large-scale climate finance. Among the major challenges governments need to design national and sector plans that are both costed and geared toward results. In addition, climate change needs to be reflected in public finance, particularly in national budgets.

As a highly vulnerable country that has suffered the painful human and economic impact of three tropical storms in the past two years, El Salvador is investing intensively in its capacities. One of the key inputs is a study on national barriers to climate finance. As part of this government-led analytical effort, a recent workshop gathered 60 officials from 26 government institutions in order to identify the political, institutional, and operational challenges, as well as the way forward for the country to 'play in the big leagues' of climate finance.

The meeting, held on 15 August 2012 in the Salvadoran Ministry of Foreign Affairs (MFA), brought together a wider range of government stakeholders, including the Minister of Environment, Herman Rosa Chavez, and the Deputy Minister of Development Cooperation of the MFA, Jaime Miranda. Providing a space for practice-based mutual learning, the event intended to explore ways to access the funding needed to meet the serious economic consequences of climate change (i.e. adaptation), and to take advantage of the opportunities for low emission growth (i.e. mitigation).

According to internal MFA estimates comparing data from countries in similar situations and actual available international financing, El Salvador has suffered a deficit in external support roughly equivalent to 80 million USD annually in 2010 and 2011 (compared to about 14 million captured in each year). Until 2015, this gap is expected to amount to up to 150-200 million USD per year. Beyond the lack of international commitment, the deficit is rooted mostly in internal barriers. These limit the access to available funds and are framed by a national financial architecture still lacking instruments to manage large-scale financing.

With this in mind, the participants highlighted ways to translate the strong political efforts of the Salvadoran government into stronger institutional capacity, consistency in the climate finance cycle management, and interagency coordination around climate finance. In particular, the workshop highlighted the following critical factors for El Salvador to access large-scale finance in the future:

• Budgetary planning and management should be included into national and sector climate change public policies, both in existing policies and those currently in preparation. Prioritizing and costing strategies and plans in the short and medium term would help complete the logic of public financial management. Under this premise, budgetary codes and tags could be designed so that the state budget adequately reflects the country’s climate finance, whether it comes from external contributions or domestic allocations.

• The current focus on projects might be overcome with financial instruments and mechanisms for large-scale climate finance, which are aligned to national priorities and able to interact with international mechanisms, including the Green Climate Fund. The government is already pursuing the redesign of the National Environmental Fund of El Salvador (FONAES, Spanish abbreviation), while programmatic approaches, such as the National Program for the Restoration of Ecosystems and Landscapes (PREP), with a strong focus on mitigation, and the Ministry of Agriculture’s Environmental Strategy for Climate Change Mitigation and Adaptation entail great potential to attract and guide substantial financial flows. In addition, in the context of Official Development Assistance, El Salvador has gained valuable experiences with budget support since 2009. Finally, considering the processes in countries like Brazil, Colombia, and Mexico, there might be options for creating climate finance vehicles and windows at the National Development Bank (BANDESAL), constituted in early 2012.

• Investing in institutional and operational capacities of the ministries and government institutions involved could consolidate a stronger focus on the budgetary and financial dimensions. Climate Change Units have been created in various ministries (including Environment, Foreign Affairs, Infrastructure, Agriculture, and, still underway, Finance), which could take a key role in climate finance access and management. Based on the National Environment Act, all government agencies in El Salvador also have Environment Units, and in the case of smaller institutions, these existing Units could generate capacity to interact swiftly with new large-scale instruments (which might include adapted expertise, resources for pre-investment, etc.).

• In El Salvador, since late 2011, government coordination has advanced substantially through the Inter-Agency Climate Finance Committee (CIFC), bringing together 18 ministries and official institutions and leading the efforts to improve institutional and operational capacities. In late August, the Climate Change Committee (CCC) was launched as a political mechanism for the core group of vanguard ministries in the area (Environment, Finance, Agriculture and Public Works). Beyond the already ongoing exchange, the role of the CIFC could be extended towards a concerted investment in the institutional and operational capacities of different government branches. Furthermore, under the CIFC, the Ministries of Environment, Finance, and Foreign Affairs, as well as the Technical Secretariat of the Presidency, could further complement each other in their roles in public policy, financial management, international cooperation and national planning, respectively.

Among the next steps, MultiPolar, the network commissioned for the study by the CIFC, will present the results of the barriers study in late September 2012. These will be translated into a roadmap to further enhance national capabilities to access and manage large-scale climate finance. In parallel, the national debate has begun to explore public expenditure on climate change, not only with a view to damage caused by natural disasters, but also to understand the continuous role climate change has in the design and execution of national budgets, in particular in the area of public investment.

One possible route would be a Climate Public Expenditure and Institutional Review (CPEIR), a methodology developed by UNDP and the World Bank (see pdf), which eight countries in Asia and the Pacific are already using. As an example, based on its CPEIR, the government of Bangladesh, a country with a level of climate vulnerability similar to El Salvador, discovered that the annual expenditure on climate change was 4% of its Gross Domestic Product (GDP) in 2010 and 2011 (see report in pdf). Of this amount, the national budget funds 78% (nearly one billion dollars per year) through public expenditure, while the contribution of the international community only represents 22% (of which the majority, 80%, was loans). The figures for El Salvador, a tiny country very exposed in terms of economic impact and with limited fiscal space, are likely to be even more alarming: the damage of just the three tropical storms since late 2009 has already amounted to 6% of GDP.

Don't miss the workshop's key contents (in Spanish only, all pdf)

• Financiamiento Climático: Contexto Global y Nacional (Minister Herman Rosa, MARN)
• El Salvador: El Contexto Actual del Financiamiento para el Clima (DG Claudia Aguilar Garza, RREE)
• Entendiendo los Desafíos de las Finanzas para el Clima (Nils-Sjard Schulz, MultiPolar)
• Resultados Preliminares del Estudio de Barreras en El Salvador (Julio Flores, MultiPolar)
• Resumen de mesas de trabajo del taller

For more info, check out the Community of Practice at ClimateFinance.info.