Engaging private sector in financing local climate adaptation: What lessons can we learn from Africa and how to scale them up?
By Luc Gnacadja (GPS-Dev) and Louise Brown (AfDB), with contributions from Fakri Karim (UNCDF), Peter Malika (UNCDF) and Nele Buenner (GIZ)
“I nearly lost everything this year, when my rice farm almost collapsed during an unprecedented drought.” Mrs. Sacca has been farming rice for the past seven years on her two one-hectare plots of lowland near N’Dali, north-east of Benin. The rice she grows is the main source of subsistence for her family. On a good year, she can generate enough revenue from her rice sales to pay her children’s school fees and to keep her family clothed, fed and housed. “It was a close call! The rains were late on one of my two rice furrows, which are 5km apart. With the help of two young people from the village, we had to hastily dig a bore hole and water the young shoots that were already drying up, while waiting for the rains to arrive”.
Mrs. Sacca and farmers like her depend on predictable rainfall for their livelihoods. However, over the past decade she has observed rainfall patterns become increasingly erratic, with more frequent periods of drought as a result of climate change. Although rarely consulted on policy decisions that affect them, small scale farmers and micro business owners like Mrs. Sacca make up 90% of Benin’s private sector and are responsible for 80% of the country’s food production. They are best placed to identify the solutions that could help them prepare for the unavoidable impacts of climate change, but they often lack the awareness, information and tools to undertake climate-informed planning, and the financial means to make the investments that would render their livelihoods more resilient.
Inclusive national adaptation planning
Recently, the government of Benin, in collaboration with the German development agency GIZ GmbH, has begun to engage local private sector actors in the national adaptation planning process (NAP) – a participatory approach by which countries identify strategies and measures that will enable them to strengthen their resilience to climate change across all major economic sectors. By engaging local farmers and business owners and local governments in dialogue with national policy makers, NGOs, technical experts on climate change, development partners, and financial institutions, the aim is to share information and experiences and foster partnerships that will lead to effective adaptation solutions. During a NAP workshop in Cotonou, Mrs. Sacca identifies two simple solutions that could help shield her rice farm from the worst effects of climate change: access to weather forecasts for her locality, which would help her to plan ahead; and upgrading of local water infrastructure to provide a source of water during drought. However, both of these interventions will require some financial and technical support to farmers, necessitating partnerships at the local and the national levels.
Partnerships for resilience at the local level
Although adaptation planning at the national level is important, many of the solutions, as well as the mandate to implement them lie at the local level. Local authorities, in collaboration with communities, farmers and businesses, are in a unique position to identify the climate change adaptation responses that best meet local needs, and typically have the mandate to undertake the small to medium-sized adaptation investments required for building climate resilience.
In the Karimama commune of Benin – a semi-arid zone on the northern border with Niger, where the local economy is based on agricultural production - the local government is working to integrate climate change adaptation in its planning and budgeting systems, with the support of the Local Climate Adaptive Living (LoCAL) programme. The commune carried out a vulnerability assessment of the region, and then identified, in consultation with local farmers, members of local elected bodies, women’s associations, ministry extension services, civil society organisations and local enterprises, a set of actions to ensure that local development is climate resilient. One priority action is to adapt the agricultural cycle and choice of crop varieties in response to the changing climate, for example, by using short cycle seeds of rice that enable early and multiple harvest before the onset of increasingly frequent floods and drought. Through a contract with a private company, the Karimama local authority procured and distributed the improved rice seeds to over 1000 farmers and provided them with training on adapting their farming practices to cope with climate change. Under the coordination of the local rice farmers’ cooperatives, the rice stocks were partially sold and redistributed to other farmers in the region, thereby reaching a larger number.
Funding for these activities comes through the local government budget, which is topped up with a small, performance-based grant from the UN’s Capital Development Fund (UNCDF). The grant amount – approximately 8% of the discretionary budget for local development – is sufficient to incentivize and cover additional costs of climate-resilient investments, while remaining within the absorptive capacity of the local government. The LoCAL programme also provides technical support to local governments to strengthen fiduciary and technical capacity to manage funding and to plan, implement and monitor climate-adaptive activities.
The LoCAL programme has enabled local governments to mobilize an additional USD360,000 from the national government budget through the National Environment Fund, FNEC, for local climate adaptation measures in 9 communes in Benin, an amount that represents approximately 5-8% of the annual capital expenditure budget for these communes. This investment in climate resilient planning will ensure that households and livelihoods in those communes are resilient to the climate-induced changes in rainfall and temperature that are already being observed, and are projected to worsen over the next 20-50 years. It has also supported the local government to transparently deliver climate resilient development results for the local community, thereby building trust and accountability, and ultimately making the commune a more attractive beneficiary of investment by other potential funders.
Attracting private sector investment in local adaptation
Although the LoCAL programme is engaging the private sector in planning and carrying out adaptation activities, one of the challenges it has faced is attracting private investment in some of the identified adaptation activities, especially those that do not fall within the mandate of local government. In Karimama and other communes in Benin, the planning process revealed a number of activities needed to build climate resilience that would ideally attract private investment and be led by private actors - such as providing renewable energy solutions for cooking, provision of sanitation and distribution of water to farmers. The opportunities for private sector to invest in these areas are significant, however, a number of barriers prevent private companies from investing. Often, small enterprises lack the financing to cover the upfront costs of investment. While local banks could offer a solution, they may lack the knowledge and experience of climate resilient technologies and approaches for an informed risk assessment and may be reluctant to invest due to high perceived risks. The LoCAL mechanism is now being adjusted to explore opportunities for local authorities to work with private sector actors by providing seed finance to incentivize and de-risk climate resilient investments.
Public funding to address risk
In the Same District in northern Tanzania, the district government is partnering with the private sector in an innovative partnership to bring climate resilient development solutions to the local community of the Ruvu Ward, working with local farmers. The ward, whose population of 14,261 is primarily dependent on irrigated vegetable farming and livestock production, has experienced increasingly frequent droughts and shorter rainy periods over the last decade. Farmers rely on water canals from the Ruvu river to irrigate their crops during dry periods, however the infrastructure - which was built over 20 years ago – is dilapidated – the canals are prone to silting and up to 60% percent of water is lost to leakage.
A pilot project offers the opportunity to local communities to build a climate resilient future. With financing from the UNCDF and a local bank, Beth Equisolutions Ltd (BECL), a local horticulture value chain small enterprise, is expanding its business– which includes production, trading and distribution of fruits and vegetables – by investing in storage infrastructure and cold chain logistics that allow perishable produce to be kept fresh and transported to local markets in neighbouring districts as well as to the main city of Dar es salaam, and some exports to Kenya.
Through a horticulture smallholder inclusive business model, the enterprise works directly with local farmers who supply the produce and as a result get a wider market access for their crops. BECL has mitigated the water risk at their own farm by establishing a dam for water catchment, making improvements to the main canal, drilling two water wells and applying water efficient drip irrigation technology. With these efforts the farm will be able to grow at least two crop cycles a year for each crop and hope to see a significant increase in output. The local government is providing an enabling environment for the initiative. It is funding the technical feasibility study to improve the water infrastructure and plans to renovate the main irrigation canal, which will significantly increase the production capacity of farmers and reduce their vulnerability to drought. It is also providing extension officers from the Ministry of Agriculture to provide knowledge and support to small holder farmers.
For this project to come to fruition, a small amount of public funding from UNCDF (US$25,000 grant combined with a US$94,000 loan) played a catalytic role, unlocking a loan of US$111,000 from a local private sector bank (that would not have made the investment alone), while the SME invested US$37,000 of its own funds. More public-sector investment in critical public infrastructure will enable small scale farmers to scale up their own production, thus incentivizing private sector actors to invest in climate adaptation related businesses and reducing vulnerability of the community to climate impacts. The UNCDF is engaging with four other districts along the Pangani river to expand the Same district model.
The figure above illustrates the BECL business model that has integrated in its planning and implementation, an achievement of climate adaptive benefits for their business; benefits to small holder farmers such as adequate water access to improve production and immediate market for their produce; and benefits at system level where reduced vulnerability to climate change is achieved at community wide level.
Scaling up private sector investment in adaptation
The above example from Tanzania shows that with the right enabling conditions and some modest financial and technical support, local private sector actors such as SMEs and farmers are well positioned to invest in climate resilient solutions. Local financial institutions often have funding to invest, but may be constrained by perceived risk of investing in adaptation, lack of long term source of funding needed for these investments, and lack of capacity or knowledge to assess the creditworthiness of the SME or viability of the proposed investment. In many cases some public sector climate finance is needed to address these barriers and bring the private sector to the table. How can models such as this one be scaled up to achieve similar investments across all Tanzanian districts facing similar challenges?
One potential approach that could enable such scale-up is a results-based payment model, such as the adaptation benefit mechanism. In such a model, a donor such as UNCDF could provide funding for investments by private actors such as BECL and other SMEs in activities that build the resilience of communities, households or ecosystems. By signing a legally-binding agreement with the enterprise, the donor commits to providing funding for the investment, once certain milestones or results are achieved. In order to secure the upfront financing to make the investment, the enterprise takes a loan from a local bank, using the legal agreement with the donor as an assurance of repayment.
The adaptation benefit mechanism has the potential to create opportunities to channel international climate finance in an efficient and decentralized manner to invest in solutions identified by local actors to build climate resilience at the local level. Once operational, it has the potential to facilitate investment at a scale far beyond the current funding flows for adaptation, to incentivize and reward innovation and investment in climate adaptation by SMEs, farmers and other non-state actors at local level.
After attending the national adaptation planning workshop in Cotonou, Benin, Mrs. Sacca returned to her two small plots of farmland near N’Dali, with a better understanding of how to reduce the vulnerability of her community to the negative impacts of climate change. She learned that the national meteorological service could provide accurate weather forecasts for all districts of Benin, which would enable her to plan ahead for periods of drought. Further, she identified the need to upgrade local water infrastructure to provide a reliable and adequate source of water during drought. However, responding to these needs will require coordinated effort by stakeholders.
Local government needs to integrate climate change considerations into planning and budgeting at local level, and ensure that critical investments to strengthen the climate resilience of the community, such as in water infrastructure for irrigation during drought, are made. It also needs to work with local communities, farmers and businesses to raise awareness on climate change and jointly identify solutions. Programmes such as LoCAL can support local governments to develop the capacities required to effectively plan and fund climate –resilient investments, while also providing results-based funding to supplement the local budget.
National government has a role to play in creating an enabling environment for public and private climate action at the local level, by raising awareness – for example through the inclusion of local actors including local governments, SMEs, and local banks in the national adaptation planning process - creating a business-friendly investment climate, and ensuring that local governments have the necessary mandate and budget to take action for their communities.
Private sector actors, such as small enterprises and local financial institutions, have huge potential to drive and finance climate adaptation action through their expertise and investment, and can benefit from making their businesses climate resilient. By actively engaging with government and other stakeholders, they can identify risks and opportunities and position themselves to contribute to a more resilient local economy.
Public sector funders, such national or international climate funds and development banks, need to provide the technical support and seed financing needed to bring in private sector actors to be part of the solution. For example, the provision of weather forecasts to farmers might best be taken on by a local SME, who could provide this information through a mobile application with messages sent directly to farmers for a small fee. With a small grant from a public funder such as UNCDF, which may be structured as a results-based payment, this SME could get a loan from a local bank to fund the technology investment needed to provide this service. In order to overcome the barriers faced by the local bank, UNCDF may also need to support it to develop the expertise needed to assess climate-related investments and clients.
Finally, bilateral and international development and climate institutions, such as the multilateral development banks, UN agencies, and the Green Climate Fund, need to support scaling up of solutions that have successfully brought public and private actors together at the local level and secured private sector investment in climate solutions. Using results-based payment models such as adaptation benefit mechanism, these solutions should be scaled up and replicated widely so that Mrs. Sacca and millions of rural, climate-vulnerable farmers like her in Benin, Tanzania, and beyond, can be incentivized and supported to invest in innovative solutions that will make her community and her livelihood more resilient in the face of a changing climate.
To learn more on this subject, join our panel discussions at the African Development Bank’s Pavilion at COP24:
- on Tuesday, 11th December at 14 :30 on local adaptation finance
- on Wednesday, 12th December at 16 :30 on scaling up finance for adaptation
Environment and Climate Change Expert, Benin
Luc Gnacadja, founder and president of Governance and Policies for Sustainable Development (GPS-Dev), is a former Minister of Environment of Benin and the previous Executive Secretary of the United Nations Convention to Combat Desertification (UNCCD).