World Bank’s Development Policy Finance: still funding fossil fuels and unsustainable energy models

World Bank’s Development Policy Finance: still funding fossil fuels and unsustainable energy models

The World Bank’s budget (or policy) support to key countries in the struggle against climate change continues to support fossil fuels, our new report finds. The report, co-produced by Recourse, Trend Asia (Indonesia) and Alternative Law Collective (Pakistan), shows how the World Bank’s Development Policy Finance in Indonesia and Pakistan is accelerating the use of natural gas and supporting fragile energy sectors that are heavily invested in coal.

The DPF Retrospective is asking how effective DPFs have been in supporting countries to achieve their development goals.

In the last six years, the World Bank has provided $81 billion to countries in DPF[1]. This figure is likely to rise in future as this type of financing becomes increasingly popular for crisis response. DPF differs from project finance as it is non-earmarked budget financing that supports policy and institutional reforms.

Individual DPF loans are in the millions of dollars, and often act as catalysts for investment from regional development banks as well. The result is that DPFs can be part of joint development bank financing of over $1 billion for energy sector reform.

The loans are subject to prior actions, or reforms agreed with a government, so DPF is a very important and influential tool in shaping a country’s macroeconomic policies. At the same time it is not subject to the same checks and balances as more direct project finance in terms of transparency and accountability, or fossil fuel finance restrictions.

According to Zain Moulvi of Alternative Law Collective, Pakistan: “The World Bank’s Development Policy Financing and technical assistance programmes have historically dictated the long-term outlook of Pakistan’s energy landscape to detrimental effect on livelihoods, local ecologies, and national cohesion.”

DPF can influence investment decisions toward either carbon-intensive development, such as gas or coal, or low-carbon development. Worryingly, the World Bank’s 2021 Climate Action Plan still identifies gas as a transition or “bridging fuel” and is proactively promoting gas through its lending instruments and advisory services, including DPF, Project for Results (P4Rs) and Technical Assistance (ASAs).

There is overwhelming international consensus today that natural gas is a significant carbon emitter, due to methane leaks, and emissions created throughout its production, transportation and combustion. In most places, building new gas infrastructure is more expensive than providing power through renewable energy.

Just ten years ago the World Bank was promoting coal in Indonesia. A World Bank’s Infrastructure-DPL (I-DPL) programme was the driver behind the Central Java Coal Power Plant, a 2,000 MW coal-fired plant in Batang built in 2016. Today the World Bank seems to be falling into the same carbon-intensive trap with natural gas.

“Indonesian citizens currently need more access to clean energy that does not harm the environment and is affordable to all. This cannot be achieved by using gas which is destructive, costly, and dependent on subsidies. More importantly, emissions from any future gas extraction facilities in addition to the increase of gas consumption are an undeniable threat to the 1.5 C climate target” says Andri Prasetiyo, Trend Asia, Indonesia

A World Bank $500m Sustainable and Inclusive Energy DPL to Indonesia in 2019 specifically facilitates the expansion of natural gas in the country through its prior actions. This has locked Indonesia into high carbon gas-supportive policy and infrastructure, squeezing out the potential to rapidly expand the share of renewable energy in Indonesia’s energy mix.

The World Bank is also proposing a $200million (of a total project cost of $750 million) Policy Based Guarantee to the state-owned energy company, PT Perusahaan Listrik Negara (PLN). Despite pledges to decarbonise, PLN still intends to build 35 more coal-fired power stations before 2023.

Civil society groups in Indonesia question why the World Bank is still advocating for gas when the opportunity is ripe to support the rapid uptake of sustainable renewable energy. This would be in line with Indonesia’s objective of reaching 23 percent of generation from renewables by 2025.

In Pakistan, DPF has had unintended consequences, even when ostensibly it is seeking to support a renewable energy transition. The $400 million Pakistan Program for Affordable and Clean Energy (PACE) 2021/22, focuses on measures to support the country’s transition to low-carbon energy. This loan disbursement was dependent on a prior action that required a commitment from the Pakistan government to transition to 66 per cent renewable energy by 2030 through the adoption of a least cost generation plan (IGCEP).

This plan slashes targets on renewable energy sources from 30 to 33 per cent of the energy mix to 17 per cent. Today, the energy plan includes the commissioning of a portfolio of new generation projects including many hydropower projects, Thar coal-based projects, K-3 nuclear power plant, and over 4,000MW of solar and wind-based renewable energy projects”. Despite this, the World Bank sought to speed up the approval of this plan as part of its DPF support.

“The nature of recovery efforts from the Covid-19 pandemic that are supported by World Bank DPF policies and embraced by countries will affect their future development, carbon emissions and climate readiness far into the future. The World Bank’s DPF Retrospective must ensure DPF rules out fossil fuel support and instead promotes clean and sustainable choices” says Fran Witt of Recourse.

The World Bank must ensure that its DPF is aligned with the goals of the Paris Agreement. This would mean that the prior actions demanded are consistent with that objective, both in the letter of the prior actions as well as in the political process that accompanies their implementation.

As the World Bank grapples with energy sector stabilisation in countries affected by crisis, it must ensure that all DPF financing explicitly supports the global transition to sustainable renewable energy and does not support the expansion of coal and gas through the backdoor. It is time for the World Bank to add all fossil fuels to the excluded expenditures list for financing.

For further information please contact: Fran Witt, Recourse, email: fran@re-course.org

[1] In the last quarter of 2020 DPf accounted for 47 per cent of IBRD lending and 25 per cent of IDA lending

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