and JACKIE BOTTS
May 22, 2024
Source: Reuters
Photo Source: Unsplash,
Big needs, limited funding
Reuters and Big Local News reviewed 44,539 records of climate finance contributions reported to the U.N. Framework Convention on Climate Change (UNFCCC), the entity in charge of keeping track of the pledge. The contributions, from 34 countries and the European Union, spanned 2015 through 2020, the most recent year for which data are available.
The UNFCCC does not require countries to report key details of their financing. So reporters also reviewed 133,568 records collected by the Organisation for Economic Cooperation and Development (OECD) to identify hiring conditions tied to climate-related finance over the same period.
The review confirmed that developed countries counted some conditional aid toward their $100 billion climate finance commitment. Because the UNFCCC records lack detail, Reuters could not determine if all such aid was counted.
To better understand the funding patterns revealed by the data, reporters consulted 38 climate and development finance analysts and scholars, climate activists, former and current climate officials and negotiators for developing nations, and representatives of development agencies for wealthy nations.
The Reuters findings come as countries try to negotiate a new, higher climate financing target by the year’s end. The U.N. has estimated that at least $2.4 trillion a year is needed to meet the targets of the Paris climate agreement, which included keeping the average global temperature from rising more than 2 degrees Celsius (3.6 degrees Fahrenheit) above pre-industrial levels.
Recent spending pales in comparison. Wealthy countries likely met the $100 billion annual goal for the first time in 2022 through direct contributions from country to country as well as multilateral funding from development banks and climate funds. The OECD estimates that wealthy nations funneled at least $164 billion toward the climate finance pledge via multilateral institutions – about 80% of it loaned – between 2015 and 2020, in addition to countries’ direct contributions.
Reuters was unable to determine the percentage of those loans that carried market interest rates or hiring conditions, due to uneven reporting by multilateral groups.
At least $3 billion of the direct spending went to projects that did little to help countries reduce emissions or guard against the harms of climate change, a June 2023 Reuters investigation found. Large sums went to a coal plant, a hotel, chocolate shops and other projects with little or no connection to climate initiatives.
A deepening hole
Heavily indebted countries face a vicious cycle: Debt payments limit their ability to invest in climate solutions, while extreme weather causes severe economic losses, often leading them to borrow more. A 2022 report by the United Nations Development Program found that more than half of the 54 most severely indebted developing nations also ranked among the most vulnerable to the effects of climate change.
With the amount of financing for climate projects still far from what’s needed, however, some analysts argue that lending needs to be part of the climate finance equation.
Development aid representatives from the U.S., Japan, France, Germany and the European Commission say loans enable them to funnel far more money to significant projects than they could if they relied solely on grants.
In interviews with Reuters, eight representatives who have worked on climate issues in developing nations said they consider loans to be necessary to fund ambitious projects given the limited funding wealthy nations have allocated for climate finance. But they said future pledges should require that rich nations and multilateral institutions be more transparent about the lending terms and offer guardrails against loans that create suffocating debt.
“The way the international financial system works at the moment… is to dig even deeper a hole,” said Kyte, the former World Bank climate envoy who recently advised Britain in climate negotiations. “We have to say, ‘no, no more digging, we’re going to fill the hole and lift you up.’”
The municipal government of Guayaquil, Ecuador, borrowed $118.6 million from France to build a tramway in hopes of easing traffic in the crowded city.
‘A bad loan’
Echoing years of pleas from developing nations, UNFCCC Executive Secretary Simon Stiell has publicly urged wealthy nations to offer so-called concessional loans, with very low interest rates and long repayment periods. This makes them less costly than those sold on the open market. UNFCCC and OECD had no comment for this report. UNFCCC instead referred Reuters to Stiell’s past remarks.
About 18% of climate loans from wealthy countries, or $18 billion, were not concessional, the U.N. reports from 2015 through 2020 show, including more than half of the loans that the United States and Spain each reported. These totals are likely underestimated, given that it is voluntary for wealthy nations to report to the U.N. whether their loans were concessional.
France gave a $118.6 million non-concessional loan to Ecuador’s port city Guayaquil in 2017 to build an aerial tramway. The loan, which France counted as part of its climate finance pledge, shows how the global program can create expensive debt in developing countries in exchange for few environmental gains, while lending nations benefit.
Dubbed the Aerovia, the cabled gondolas were billed as a climate-friendly alternative to the congested bridges connecting industrial Guayaquil to a neighboring city where workers live. Four years after its inauguration, the Aerovia transported roughly 8,300 passengers a day. That was one-fifth of the ridership projected in early planning documents – resulting in lower-than-expected revenue and environmental benefit.
The Aerovia cabled gondola, built in Guayaquil, Ecuador, with a loan from France, carries far fewer passengers than projected.
Debt from the loan has added to Guayaquil’s $124 million budget deficit. Guayaquil expected to pay 5.88% interest, according to early planning documents. France was projected to earn $76 million in interest over the 20-year repayment period. That interest rate would be unusually high for a climate-related loan, finance analysts said. A 2023 OECD analysis of concessional loans from 12 developed nations and the European Union found they offered an average interest rate of 0.7% in 2020. Guayaquil and France declined to disclose the interest rate of the final loan agreement for the tramway.
“This is a classic example where a bad loan, which has been given to a country in the garb of climate finance, will create further … financial stress,” said Bharadwaj, the climate researcher from the International Institute for Environment and Development.
The loan agreement did not require Guayaquil to hire a French company. Nonetheless, French transportation company Poma won the contract to build the tramway, along with Panamanian company SOFRATESA, founded by a French citizen. The companies also operate the tramway, so the municipality collects no revenue from passenger fares to help repay the loan. Neither company responded to questions from Reuters.
Nearly all of the Aerovia’s components – including its cabins, electrical control panels and cables – were manufactured in France and Switzerland and then shipped to Guayaquil, according to a slide presentation prepared by the local government before the tramway’s launch.
To Euan Ritchie, senior policy adviser at Development Initiatives, an international policy organization, the project amounted to a “transfer of wealth from Ecuador to France.”
Contesting that claim, a spokesperson for the French development agency said that the tramway belongs to the city and that the agency assessed the risk of financial stress before approving the loan. The aerial tramway has already resulted in a “significant greenhouse gas reduction,” despite low ridership, said the spokesperson, who provided no estimates. The spokesperson said the agency does not participate in selecting contractors.
Still, France’s development agency trumpeted the successes of French companies in landing such contracts. The agency’s 2022 annual report said that more than 71% of its projects that year involved “at least one French economic actor,” garnering them 2 billion euros in “economic benefits.” The spokesperson declined to provide estimates of how French suppliers benefit from climate-related funding. French companies often win bids because they have “in-depth knowledge and local presence” in regions where AFD sends significant aid, the spokesperson said, adding that it “in no way favors any entities based on their nationality.”
Strings attached
Almost 32% of all Japanese climate loans required borrowers to use at least some of the money to hire Japanese companies, OECD records show. Those loans have funneled at least $10.8 billion back to the Japanese economy, the Reuters review found.
The loan requirements helped Sumitomo Corp and Japan Transport Engineering Co win three contracts worth more than $1.3 billion to supply 648 train cars for electrified railway and subway projects in the Philippines. A Sumitomo sister company, Sumitomo Mitsui Construction Co, won two contracts worth more than $1 billion to build rail expansion and station buildings.
A Sumitomo Corp spokesperson said that though the loans required the main contractor to be Japanese, they did not require the use of Japanese subcontractors. The spokesperson did not reply when asked if the company used local subcontractors for the Philippine rail project.
Japan Transport Engineering Co did not respond to questions.
Aid with hiring conditions robs local companies of business opportunities and eliminates chances for developing countries to build expertise in sustainable technologies, said Erika Lennon, senior attorney at the Center for International Environmental Law. Eleven sources said the requirements contradict Paris Agreement clauses that urge parties to prioritize “technology transfer and capacity-building” for developing countries.
Asked by Reuters about Japan’s conditional loans, Kiyofumi Takashima, a spokesperson for the Japan International Cooperation Agency (JICA), said they carry very favorable terms for borrowers and usually involve local consultants, contractors and workers. Japanese consultants and contractors make “full efforts to transfer technology and skill” to local actors, he said.
Japanese climate loans are helping to fund a new electrified public transport system in the Philippines. The project is replacing sections of this railway, which passes by a market in Paranaque City, Metro Manila.
JICA policy during the time period Reuters reviewed required that this type of loan carry an interest rate of 0.1% and a 40-year repayment period.
Conditional aid can carry additional costs because recipients can’t consider cheaper contractors. The OECD in 2001 recommended a halt to such requirements, citing its own 1991 study that found they can increase costs for recipient nations by up to 30%.
Saori Katada, a Japan foreign policy expert at the University of Southern California, cited academic research that has found that Japanese companies usually charge more than their counterparts from neighboring countries, like China, Korea or Taiwan.
“Maybe it’s a good quality, but it’s always very expensive,” Katada said.
Other countries frequently impose similar hiring requirements on grants. Reporters found that 18% of all climate-related grants reported to the OECD between 2015 and 2020 carried such requirements for all or part of the grant.
The European Union extended $4 billion in grants that required recipients to hire companies or agencies from specific countries. The United States reported $3 billion and Germany $2.7 billion in grants with similar strings attached.
A spokesperson from Germany’s Ministry for Economic Cooperation and Development said that their grants do not require hiring German companies and that there is no policy to favor national suppliers. However, they frequently require recipient countries to pay Germany’s international development agency, GIZ, for consulting and other technical services, the spokesperson said.
Nearly all of the European Union’s aid since 2021 has been free of such hiring requirements, an EU spokesperson said.
All aid, regardless of who gets the contracts to do the work, benefits recipient countries, a U.S. State Department spokesperson said. The spokesperson contested the notion that the U.S. had imposed grant conditions that funneled $3 billion back to its own economy. The aid might have required hiring of companies or agencies from other countries – not just the U.S. – said the spokesperson, who did not offer any specific examples.
OECD data lists U.S. companies, nonprofits or governmental agencies as the main entities receiving money from at least 80% of the U.S. conditional climate grants, totaling $2.4 billion.
This is “part of the same story of the financing going in the wrong direction,” Kyte said.
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