Climate and Disaster Resilience Financing in Small Island Developing States

EXECUTIVE SUMMARY

Relevance of climate and disaster resilience to Small Island Developing States (SIDS)

Natural disasters and climate change severely affect the growth trajectory of SIDS1 and their ability to achieve sustainable development. SIDS are located in some of the most disaster-prone regions in the world and comprise two-thirds of countries with the highest relative annual losses due to disasters. With the effects of climate change compounding the intensity of these disasters, this trend is set to continue, creating new developmental challenges for SIDS. Natural disasters and climate variability severely impact major economic sectors in SIDS, hinder economic growth and affect the most vulnerable populations. Lacking relatively stable and strong fiscal revenues and domestic savings, SIDS governments often need to divert scarce public resources from essential social and economic development investments to address disaster-related needs, compromising the pace and scope of future growth. Development in SIDS, therefore, is subject to a range of interconnected and mutually reinforcing economic, social and environmental challenges.

Building resilience at individual, institutional, and private sector levels is essential to achieve sustainable development in SIDS, but available financing for this purpose is limited and difficult to access. The responsibility, expertise and funding for climate and disaster resilient development is scattered across a large number of actors, creating a complex global architecture of funds and providers. While several market-based financing mechanisms have become available globally, they are not equally and easily accessible to all SIDS, and concessional finance from the international community remains a key source of financing to foster climate and disaster resilient development. Understanding how much SIDS are actually receiving and in what ways becomes, therefore, pivotal to help the international community more effectively support SIDS in building climate and disaster resilience.

Quantifying concessional finance trends for climate and disaster resilience in SIDS

Resources for resilience have grown significantly, but they still represent a small share of concessional finance. Between 2011 and 2014 (the timeframe used for this report), the volume of concessional finance in support of climate and disaster resilience to SIDS nearly doubled, reaching USD 1.01 billion in 2014. However, this represented only 14% of the total concessional finance directed to SIDS during this period. Bilateral providers gave the bulk of concessional finance for climate and disaster resilience - 71% for the 2011-14 period - with annual funding levels remaining fairly stable. Although multilateral organisations provided a much smaller share of this financing (29% of the total), multilateral commitments to SIDS increased rapidly, nearly doubling from 2011 (USD 226 million) to 2014 (USD 443 million). In addition to these direct contributions, multilaterals channelled close to a fifth of bilateral contributions, in effect serving as a conduit to 44% of the total resilience funding received by SIDS during the 2011-14 period.

Climate and disaster resilience financing was mostly provided as grants (73% during the period 2011-14), but recent growth was largely due to increases in concessional loans to Upper Middle-Income Countries. Concessional loans increased substantially from USD 69 million in 2011 (11%) to USD 415 million in 2014 (41%), largely because of greater concessional lending from multilateral development banks to a limited number of SIDS. While Upper Middle-Income SIDS were able to access more concessional loans – bringing their share of concessional financing to 51% in 2014 (up from 33% in 2011) – funding for Least Developed Countries (LDCs) remained fairly constant, bringing the share of concessional financing to LDCs to 24% of the total in 2014, down from 37% in 2011.

In terms of access to finance, striking differences across individual SIDS are prevalent. The smallest nations tend to receive the highest per capita annual financing allocations, largely because of the high fixed administrative costs involved.

Geographic and income patterns mask the disproportionate weight of a few countries and a few large and isolated commitments.

Resilience finance is dominated by investments in resilient infrastructure in a few countries. Investments in resilient public infrastructure accounted for USD 335 million on average per year from 2011-2014, or 43% of total climate and disaster resilience financing for this period in part due to the higher cost of these investments.
Large one-off commitments also skewed geographic and income patterns.

Access to greater and more effective financing is constrained by a number of challenges

SIDS are taking positive steps to address some of the challenges of mainstreaming climate and disaster resilience into development. This includes setting up coordination units within key ministries and developing strategic policy documents. However, challenges remain in identifying the risks and impacts of natural disasters, securing adequate resources in national budgets, and reducing inefficiencies and institutional fragmentation caused, in part, by some international processes and funding sources.

Many SIDS depend on a single provider for the bulk of resilience financing, exacerbating financial vulnerability. For 14 of the 35 SIDS considered in this report, across all regions, the top provider accounted for over half of the climate and disaster resilience financing during 2011-14, with this percentage increasing over time. This trend is concerning as SIDS could become overly reliant on the shifting priorities of the dominant donor(s).

The remaining resilience financing is fragmented across a large number of projects, which leads to high transaction costs and places additional stress on the capacity of SIDS. While a few large projects accounted for the bulk of resilience funding to SIDS – mostly directed to Upper-Middle Income SIDS – the vast majority of commitments were provided through smaller sized projects. During the 2011-14 period, more than half of all resilience projects were below USD 200,000 and80% were below USD 1.5 million, yet together, these small projects accounted for only 2% and 10% of the total resilience financing to SIDS. This proliferation of small projects was widespread across all SIDS, with climate and disaster resilience financed through a total of 1,715 projects in 2011-14. Most countries were receiving an average of 10 individual projects per year with commitments of less than USD 1.5 million each. SIDS with the largest number of projects were receiving more than 30 resilience projects in a given year.

Sector-wide approaches and budget support remain limited, as does the implementation of resilience funds by recipient countries. Only 8% (USD 239 million) of the concessional finance for climate and disaster resilient development was provided as sectoral budget support from 2011-14, and financing executed by SIDS governments represented less than 35% of total funding for 20 out of the 35 SIDS examined in this report. The relatively low use of national systems and government budget execution can create an unfortunate cycle, whereby the limited use of these financing modalities by itself contributes to perpetuating low capacity, with implications for the effectiveness and sustainability of investments.

Resilience funding tends to follow large disasters, but predictable, longterm financing is still scarce. Larger disasters are prone to receive larger funding streams than smaller, more recurrent ones. Greater concessional resources for climate and disaster resilience tend to be provided in the wake of major disasters and then progressively fade away, while countries that have not recently experienced large disasters may struggle to receive resilience funding. This low predictability of funding can constrain the ability of SIDS to take more comprehensive and forward-looking steps to reduce vulnerabilities and increase resilience over the long term.

Country access to global climate funds is constrained by complex – and variable – requirements. A multiplicity of special climate funds has been established over the past decade to increase developing countries’ access to financing. For SIDS, however, tapping into these funds remains a challenge due to the complex processes and procedures to access the funds, which, for the most part, exceed the limited administrative and technical capacities of SIDS.

The international community could do more to help SIDS enhance climate and disaster resilient development by:

• Supporting SIDS to create an enabling policy environment for climate and disaster resilience. This includes public policies and regulations, which can promote climate resilience by influencing the choices of private actors in various sectors.

• Enhancing information on resilience and information management systems. This can be done through multi-country and regional partnerships and the innovative use of technology, which could prove cost-effective and increase impact.

• Supporting SIDS to integrate climate and disaster risk into national planning and budgeting. This will require supporting collaboration across a large set of ministries and departments to identify and integrate priorities, and highlight linkages and synergies across sector-level policy objectives. It may also require the adoption of contingency funds or financing buffers to allow for better preparedness and immediate response following disasters.

• Supporting public administration systems and institutions responsible for managing natural disasters, climate finance and risk. This includes supporting SIDS to further develop their public financial management systems and capacities to access and manage concessional funds – for example, by reinforcing central units as a one-stop shop for all incoming funding proposals – thus enabling investments to be prioritized and channelled more efficiently.

• Increasing the use of financing mechanisms that enhance capacity and coordination. Donors should consider further ways to pool resources to reduce SIDS reliance on a single source of concessional funds, while avoiding the high level of project fragmentation currently experienced.

• Providing predictable and more programmatic funding. Investing in preemptive measures to build resilience requires access to more reliable financing.
Funding that is more programmatic and long term (typically 10-15 years) could also help foster the policy, institutional and behavioural change needed to help build resilience to climate and disaster impacts.

• Facilitating access to funding from global climate funds through simplified application and management procedures for SIDS. Development partners should use their influence to support adoption, by the global climate funds, of proportionate and streamlined approaches to encourage greater direct access and project implementation and greater national ownership.

• Facilitating access to innovative financing and risk transfer mechanisms.
Development partners can, for example, support SIDS access to insurance and other forms of risk transfer and risk sharing mechanisms, as well as encourage the use of contingency funds or contingent credit lines.

• Using financing instruments that can help SIDS at risk of debt distress improve their debt situation and avoid using financing mechanisms that can undermine debt sustainability. In recent years, a number of instruments to deal with the debt situation of SIDS have emerged, which could be further scaled up and replicated. While some can provide temporary relief, the international community should also help SIDS address the drivers of debt accumulation. Furthermore, while greater concessional lending to Upper Middle-Income SIDS in recent years has increased the financing available for resilience, care should be taken to avoid endangering their debt sustainability

• Facilitating an international dialogue on the eligibility criteria for concessional finance with the aim of ensuring that SIDS are able to access the finance they need at terms and conditions most suited to their specific circumstances. Currently, SIDS face a complex web of eligibility requirements that must be met in order to access different sources of concessional financing for resilience. With eligibility to several multilateral and bilateral funding sources relying heavily on per capita classification, SIDS have called for a coordinated effort by development partners to review the rules governing access to concessional finance. Acknowledging the multi-faceted nature of vulnerability along with increasing adverse climate-related impacts on SIDS, it may be timely to explore if and how vulnerability to climate change could be included in concessional finance eligibility criteria and allocations.
This effort will require multi-partner research and consideration of all aspects of vulnerability – socio-economic and biophysical.

• Investing to build national capacities and expertise. The sustainability and ownership of resilience programmes depends on striking the right balance between temporary solutions to fill human resource gaps and longer-term investments in national capacities across the full spectrum of institutional needs. Innovative approaches and the use of new technologies could help tailor capacity-building approaches to the specific context of SIDS.