Through an analysis of projected energy finance flows and key financiers’ financing strategies, this paper shows a shift from grant-based climate finance to financial instruments with clear return profiles, such as concessional loans and private capital. It finds that the choice of financial instrument does impact the provision of complementary social services in rural electrification schemes. While grants are associated with higher investments in complementary social services, private financiers are focused on innovation and scale. Electrification projects that are financed purely privately were found to negatively impact social cohesion by increasing the inequality in access to energy.
The authors identify that apart from the financing gap of USD13 billion identified in the national plan as the main roadblock to successful implementation, there exist a whole set of interrelated, mutually reinforcing barriers to successful electrification, such as low institutional capacity, a lack of human capital and technical knowledge, corruption, and a dysfunctional utility. The authors use stakeholder maps and case studies from three rural electrification projects as part of the analysis.
The study concludes that, if only commercially viable energy projects were to be financed going forward, up to 19 million Madagascans might be excluded from future electrification efforts. Thus the paper recommends the need to promote climate finance literacy and the use of multiple electrification pathways. The author provides some examples, such as “grid extensions” through concessional loans, “scalable innovation” using private capital and risk guarantees, or grant-based “social mission” programs. The author suggests that the findings are relevant not only to Madagascar, but to most, if not all, least-developed countries (LDCs) aiming to decarbonize their economies.
This paper suggests that rules and norms governing the finance system must be changed in order for it to respond to climate and sustainable development imperatives.
Economic diversification/restructuring > Economic development plans, Infrastructure investment
Government intervention > Public finance
Investment > Private finance
Organization & Environment
Academic/research institution or journal
“This short paper outlines why the financial system has been unresponsive to climate and sustainable development imperatives. The author suggests that climate change is the ultimate market failure and outlines the toll in terms of climate-related displacement and migration, the cost of climate catastrophes, and the cost of adaptations. The author also points out the small amount of funding already committed to climate mitigation relative to the scale of this challenge, suggesting that finance needs a new “purpose” before it can align with climate finance needs.
Some positive steps have included the issuance of carbon-linked bonds, green bonds, and sustainable bonds, but the author argues that direct intervention in finance is required in order to account for negative externalities, encourage innovation, account for systemic risks, and ensure policy coherence.
Private sector-led interventions include the Task Force on Climate-Related Financial Disclosures (TFCD). But public, non-market interventions should include financial regulations, including requiring greater disclosure; judicial interventions, including shifts in fiduciary responsibility; direct financing for joint ventures and subsidies; and stronger public procurement rules that would account for climate risks and liabilities. The author argues these more forceful interventions are required in order to incentivize the finance system to fund sustainable development.”