The tug-of-war over the private sector – time to stop?

Over the past few weeks, and as I mentioned in a previous blog post, I’ve been continuing to help the DFID team in Ethiopia design an exciting new programme focused on supporting new small and medium enterprises and entrepreneurs, including green businesses. So I’ve been surprised to hear that the private sector has started to become a “do-or-die” issue for the agreement of a new Green Fund in the ongoing climate negotiations in Durban. This fund has been in design by a 40-member committee – including a senior UK representative – for just under a year to date. Its “operationalisation” (or, in plain English, its “birth”) has been cited as a key outcome for the Durban negotiations.

But how could the private sector possibly become a do-or-die issue?

In the climate negotiations, the conventional view on the role of the private sector often plays out as a tug-of-war:  it’s as if there is a pot of public finance in the middle, with a team of developed countries on one side pulling hard to recognise the role of the private sector in financing climate change action in developing countries, and a team of developing countries on the other side pulling hard not to recognise it – in the belief that by doing so they might extricate more public funds from developed countries.

Is the tug-of-war on private sector finance helping development? Credit: Joshwept, April 2011

It’s more complex than this of course (this Brookings article provides a lot more detail) but the major problem with this tug-of-war scenario is that it detracts negotiators from the key question of how the fund will deliver impacts and results.  Let me explain why.

First, as I’ve seen in Ethiopia, the private sector is not one entity. It can mean an entrepreneur, a small or medium enterprise or business, a project developer, a multinational company, a philanthropist, or an institutional investor such as a pension fund or a sovereign wealth fund. It’s a phrase that spans the full scale of one poor individual to the owners of trillions of pounds of assets.  Yet negotiators on both sides of the tug-of-war tend to focus on a specific sub-set of the private sector. This is because they tend to be focused on who contributes to the fund. They focus on institutional investors, and occasionally philanthropists and multinational companies, many of whom are based in developed countries. There is, actually, good reason to. These investors or companies do have the potential to effect change on a great scale. It is their decisions, their shareholders and boards that have the power to determine whether new investment in renewable energy will outrun investment in fossil-fuel energy. For the first time in history, according to a new report by Bloomberg New Energy Finance, this very scenario has occurred this year. It’s a great start.

But investors are not the only private sector actors that can effect change. In fact, UN research published in 2007, which suggested that 83% of climate finance flows are dependent on the private sector, in fact covered the full set of private sector actors I listed earlier. In the end, it is people on the ground everywhere that will have to act on climate change – by being energy and resource efficient in their homes, workplaces or industries, paying a bus fare rather than driving to get to the market, or investing in fertiliser to grow and sell a new crop to adapt to the impacts of climate change. Neither governments nor investors – particularly in the poorest and most fragile countries where both governance and investment is weak – can deliver action on climate change alone.

So is it right to have a tug-of-war over the private sector? My view is that the game needs to get more sophisticated. By focusing on the one sub-set of the private sector, and contributions to the fund, negotiators are not talking enough about what the fund does – what kinds of projects it finances, what kinds of financial structures work best to stimulate the growth of new green businesses, to stimulate energy efficiency, drive higher investment in renewable energy, or other green and climate-resilient activities, technologies and infrastructure.

What matters fundamentally is that the Green Fund is not designed to shut down the option for governments, investors or philanthropists across the globe to directly contribute finance to it. The more finance the better, for everyone. But more crucially, the Green Fund also needs to be designed to allow action on climate change to take place through individuals, small businesses, large companies as well as investors. The more actors that can obtain finance from the fund, the more nimble the fund will be in disbursing what’s needed to make real change on the ground.

So in the next few days as the Durban negotiations proceed, and beyond, I’m hoping that negotiators will drop the conventional tug-of-war by focusing less on the private sector’s role, and focusing more on what the fund will do. That’s got to be the priority for the poorest and most fragile countries.

This blog post also appeared on the RTCC (Responding to Climate Change) and DECC (the Department of Energy and Climate Change) websites.

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