ADB's IF-CAP [UPSC Notes]

The Asian Development Bank (ADB) jointly with many government partners have created a funding mechanism that will mobilise billions of dollars in financing to address climate change in the region—the Innovative Finance Facility for Climate in Asia and the Pacific Financing Partnership Facility (IF-CAP). In this article, we discuss the ADB’s IF-CAP, its structure, working mechanism and its significance from the IAS exam perspective.

ADB’s IF-CAP

• IF-CAP will pilot a guarantee mechanism, where every US$1 guarantee from financing partners can generate up to US$5 in new loans for climate adaptation and mitigation projects across Asia.
• IF-CAP operates as an umbrella mechanism for mobilising resources for climate adaptation and mitigation projects. 
• IF-CAP Guarantee Trust Fund: Under this umbrella is the IF-CAP Guarantee Trust Fund, which will provide guarantees to ADB covering payment defaults. 
  • The guarantee of a portfolio of ADB’s sovereign lending exposure will release parts of ADB’s capital currently allocated to that portfolio. 
  • The released capital will then allow ADB to enter into new sovereign and non-sovereign (private sector) climate loans. 
  • The facility will finance projects over a five-year investment period, but guarantees will remain effective for 25 years.
• Multi-donor Grant Trust Fund: IF-CAP also encompasses a multi-donor grant trust fund that supports technical assistance and grant components of projects. 
  • Financing partners will contribute cash grants to the IF-CAP Grant Trust Fund to finance project preparation, capacity building, and knowledge solutions through technical assistance. 
  • Grants can also be utilised to finance projects or reduce the cost and risk of high-impact climate projects.

ADB IF-CAP Structure and Working Mechanism

• All developing countries that are eligible to receive assistance from ADB are also eligible for support from IF-CAP. 
• ADB will select project proposals based on criteria agreed with the Donor Committee.
• In general, projects will be aligned with the Paris Agreement and the key objectives of relevant ADB strategies and policies.
• Both sovereign and non-sovereign projects will have access to IF-CAP funding unless otherwise decided by the Donor Committee. 
• IF-CAP support can be combined with other ADB resources and forms of bilateral or multilateral assistance and made available to central and sub-national governments, government agencies, the private sector, and other entities eligible to receive assistance from ADB.
• A Strategic Partners Forum will gather representatives of developing countries, financing partners and other stakeholders on an annual basis to provide strategic guidance on IF-CAP operations with a view to aligning climate and development needs with available funding. 
  • The Strategic Partners Forum will be co-chaired by a developing country representative and a representative from the financing partners.
• IF-CAP support can be combined with other ADB resources and forms of bilateral or multilateral assistance and made available to central and sub-national governments, government agencies, the private sector, and other entities eligible to receive assistance from ADB.
• Donor Committee: 
  • IF-CAP’s structure also includes a committee of financial contributors (Donor Committee), which will take decisions on matters including specific guarantee and grant fund considerations, IF-CAP structure, and governance. 
  • The Donor Committee will set the general framework for operating IF-CAP but will not get involved in areas of implementation, such as the selection or processing of individual projects. 
  • It will take the guidance of the Strategic Partners Forum into consideration in carrying out its responsibilities. 
  • ADB will chair the Donor Committee together with a co-chair from one of IF-CAP’s financing partners. 
  • The remaining financing partners will be Donor Committee members or observers.
• Upon completion of IF-CAP’s 5-year investment period, the Donor Committee will decide on whether to continue or wind up IF-CAP investments. Notwithstanding the Donor Committee’s decision, guarantees issued by financing partners bilaterally or through the IF-CAP Guarantee Trust Fund will remain effective until the completion of the stipulated 25-year term, unless otherwise agreed.

Significance of ADB’s IF-CAP

• IF-CAP substantially boosts ADB’s ability to financially support Asia’s developing economies in addressing the climate challenge. 
• The creation of the facility also means that ADB is among the first international financial institutions to respond to the recommendation of the G20 expert panel on MDB investing capacity to expand the use of financial innovations.

Conclusion

• IF-CAP is expected to be one of the key financing vehicles with which ADB can meet, and possibly exceed, its previously declared ambition to achieve US$100 billion in cumulative climate financing between 2019–2030. 
• It could also inspire and inform the creation of similar climate finance facilities at other international finance institutions.

ADB’s IF-CAP [UPSC Notes]:- Download PDF Here