European Capacity Building Initiative

Engaging Micro, Small, and Medium Enterprises in developing countries

On 5 March, the Green Climate Fund (GCF) Secretariat published a Board Paper and Draft Decision on ‘Additional Modalities that Further Enhance Direct Access: Terms of Reference for a Pilot Phase,’ putting forward recommendations to the GCF Board on how to operationalise the ‘Enhanced Direct Access Pilot Phase’, which was agreed during the last Board meeting that took place in Barbados in October 2014.

The Draft Decision is ‘to launch a Request for Proposal to countries through their national designated authority or focal point and public media to competitively select subnational, national, public and private entities for the implementation of 5 pilots with a total of US$ 100 million, including at least 2 pilots to be implemented in small island developing States, the least developed countries and African States’.

Given that engaging local Micro, Small, and Medium Enterprises (MSMEs) at scale is critical to achieving sustainable low carbon growth in developing countries, this OCP/ecbi Working Paper puts forward a proposal for testing different nationally determined models of an in-country nationally consolidated and guided, but domestically devolved funding architecture for MSMEs under the Pilot Phase.

The key elements of this proposal are:

(i) to consolidate foreign and national public sector finance in a national gateway (‘National Funding Entity’), such as a national climate fund or, in the absence thereof, the Ministry of Finance to serve, inter alia, as GCF Intermediary;

(ii) to select a national body (e.g. the national climate committee) representing all key stakeholders – the relevant line ministries, the NDA, civil society, private sector etc. – to give strategic guidance to the national EDAPP programme.

(iii) to use existing channels (such as local branch networks of national development banks) to disperse the funding through local intermediation, where local intermediaries (branches) are given the power to approve eligible MSME projects under the national EDAPP programme.
In addition to discussing these key elements in some detail, the Working Paper illustrates how the GCF Private Sector Facility could use the EDAPP to fulfil one of its core mandate, viz. to ‘promote the participation of private sector actors in developing countries, in particular local actors, including small- and medium-sized enterprises and local financial intermediaries.’[GCF Governing Instrument, paragraph 43]

The Working Paper also presents two examples of how local banks are currently used as intermediaries for funding developing country MSME mitigation projects:

• The Sustainable Use of Natural Resources and Energy Financing framework, funded and managed by the French development agency AFD, under which local banks are used as intermediaries for the provision of concessional loans and (ex ante) investment grants to MSME renewable energy and energy efficiency projects (in industry, agriculture and buildings).

• The GEF funded Indian MSME Energy Efficiency Project, managed by the Indian Bureau of Energy Efficiency (BEE), and the Small Industries Development Bank of India (SIDBI). The project provides (ex post) performance linked grants through local SIDBI branches to incentivize energy efficiency improvements in (energy intensive) MSMEs.

These examples not only demonstrate in practical terms how a local intermediation can be done, but also that it very efficient and effective and most likely the only way to mobilise local MSMEs at the required scale.

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