Responsibilities for managing portfolio risk and conflicts (including conflicts of interest and dispute resolution) were not originally designed into the CIF governance frameworks (based
on the evaluation’s RACI analysis; see Exhibit 3.3 and Annex C.1).66 The foundational documents similarly do not identify a process for managing potential or apparent conflicts of interest, or for resolving disputes. In contrast, other comparator funds have addressed some aspects of conflict of interest.67
Risk management has been problematic for the CTF. Unlike the SCF, the CTF financial architecture comingled loan contributions with grant and capital funds.68, 69 The original CTF Principles provide that all CTF contributors have to share losses due to defaults in the CTF portfolio in accordance with an agreed formula; consequently loan contributors are more risk averse because of expectations of principal and interest repayment. In particular, for loan contributors, if losses due to defaults in the CTF portfolio exceed CTF net income, principal repayments of their loan contributions will be reduced accordingly. Thus, there is a higher sensitivity to approving subordinated loans, equity investments, or more risky projects. These capitalization issues have resulted in unresolved issues in risk management and limited the flexibility to tailor financing to private sector needs (see section 5.2).
Based on these concerns, the joint CTF SCF Trust Fund Committee, asked the CIF AU, in consultation with the MDBs, to prepare a Proposal for Additional Tools and Instruments to Enhance Private Sector Investment in the CIF. The CTF
Dedicated Private Sector Program (DPSP) and the SCF Private Sector Set-Asides that came out of this decision were designed to address these risk management issues and the associated slow engagement of the private sector within the CIF and to allow for a broader range of instruments that were not being fully utilized in the CIF. The types of concerns ranged from limited offerings of debt, equity, subordinated structure, and guarantee instruments to private sector clients, low demand for such instruments from clients, and risk aversion of some CTF TFC members to approve funding for such instruments.
Although the DPSP process is moving forward (with DPSP I approved in October 2013 with the idea that new financial instruments could be used for private sector engagement), the CTF TFC is not in unison as to the level of risk appetite for the CTF Trust Fund. Certain donors are concerned about the overall private sector risk being taken up by the CTF and the impact this could have on reflows to the CTF and ultimately to those donors that provide loan contributions to CTF.
With regards to portfolio management, while MDBs have managed project risks, risk management at the CIF level has been suboptimal.70 Risks include credit risk, portfolio risk, pipeline management risk, impact risk, pledge risk, asset liability risk, and other operational and strategic risks. An assessment of CIF’s risk management framework found that information about risks was highly fragmented, not aggregated at the portfolio level, and not always effectively communicated to the Committees in a timely manner.71 The CIF are now in the process of developing an enterprise risk management (ERM) system to identify potential events and risks that may affect the CIF, support risk-informed decisions, and manage risks within the CIF’s risk tolerances. According to many committee members, designing the ERM system after a significant portion of CIF funding has been endorsed and approved is challenging and a highly political process, especially because it is not clear that this system will resolve the underlying tension stemming from different risk sensitivities and expectations about repayment among contributors.
3.3.3 SAFEGUARDS
The CIF chose to utilize the established fiduciary standards and safeguard systems of the MDBs, but it is beyond the scope of this evaluation to review the individual safeguards. Reliance on trusted MDB systems is part of the appeal of the CIF for contributor countries, who expressed trust in these safeguards at the onset. MDBs have taken steps to update and
harmonize their safeguards policies to further this (see Annex D.1).72 In interviews, MDBs indicated that when multiple MDBs co-finance a project, the most stringent safeguards prevail. MDB consultations undertaken for this evaluation found that a process was engaged in to incorporate multiple institutions’ safeguards, relying on stricter measures where differences occur. For example, a World Bank and AfDB co-financed SREP project in Kenya relied on a fusion of AfDB and World Bank policies to ensure the stricter standard was in place across a number of safeguard areas, including gender, stakeholder consultation, and environmental and social parameters. Safeguards at the investment plan level. MDB safeguards do not apply at the investment plan level, nor are project-level safeguards necessarily appropriate at the plan level, given the early stage of project planning. However, the process of drawing up investment plans, although preliminary, involves priority setting and may include discussions of policies with broader social and environmental consequences. CIF investment plans aim to have a strategic construct—beyond simply identifying individual projects—which justifies consideration of possible far-reaching impacts at a plan level. And while each CIF Program has developed guidance on stakeholder consultations during investment plan preparation, fieldwork in nearly all of the countries visited raised significant concerns about the quality of consultation (as discussed in section 5.1.2). The CIF might learn, for instance, from the example of the Forest Carbon Partnership Facility (FCPF), which faced an analogous issue in financing Readiness Plans for REDD+. The FCPF concluded that, while these readiness plans “entail no investment projects on the ground,” they have “potentially far-reaching impacts—hopefully positive—but, unless properly addressed, possibly negative.”73 Consequently the FCPF has adopted a requirement that its Delivery Partners apply a Strategic Environmental and Social Assessment and follow specified stakeholder consultation guidelines during the Readiness Preparation phase.
Free, prior, and informed consent. The CIF lack operational guidance on how to navigate ambiguities in the FIP guidelines related to free, prior, and informed consent (FPIC) in those cases where FIP would potentially impact indigenous peoples. FIP guidelines state that “FIP programming, approval, and supervision processes will follow the MDB’s policies and procedures” and also require that its activities be designed consistent with relevant international instruments, obligations and domestic laws.74 Whether “international instruments” could be interpreted to mean the U.N. Declaration on the Rights
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CLIMATE INVESTMENT FUNDSof Indigenous Peoples (which requires FPIC) is ambiguous, although in practice, the MDBs have not interpreted this clause as such. Most MDB safeguard requirements are along the lines of informed consultation, rather than consent (see Annex D.2). FIP’s requirements contrast with UN-REDD, which has guidelines for stakeholder engagement that require FPIC.75 In FIP fieldwork, civil society and indigenous peoples raised concerns on the inconsistency of FIP consultation processes with FPIC.