“When Haiyan hit us, we realized how naked we were.”
Cesar Purisima, former secretary of finance of the Philippines, is sitting in his home in a suburb of Manila, recalling one of the most devastating typhoons in his country’s history.
Typhoon Haiyan made landfall in the Philippines on November 7, 2013. By the time it did so, it was the most powerful storm to strike land ever recorded. It killed at least 6,300 people in the Philippines alone and affected 11 million, according to UN estimates.
|November 2013. Typhoon Haiyan killed more than 5,200 people, displaced 4.4 million and destroyed an estimated $274 million worth of crops and infrastructure|
And then, after the death and devastation, came the economic calculation.
“It hit us from various dimensions,” recalls Purisima, who held office in the Benigno Aquino administration at the time. “From the grass roots level – our own people – that region was mainly agricultural and they didn’t have insurance for their crops, their structures, their businesses. Obviously, multilaterals and bilateral friends stepped in, but it opened my eyes to the need to have a sustainable climate insurance mechanism at the grass-roots level.
“It made us realize that the fight against climate change and the fight to eradicate poverty is intertwined.”
All of this was on Purisima’s mind when he became the founding chairman of the Vulnerable Twenty (V20) group of nations. Launched at the IMF annual meeting in Lima, Peru, in October 2015, it was an evolution of an idea that has taken shape over several years: that the most vulnerable nations should speak collectively if they want to be heard.
Purisima does not take credit for the whole idea and in fact it had many forerunners. It grew out of the Costa Rica Action Plan, released in 2013; it came, too, from the Climate Vulnerable Forum (CVF), which has its origins in the Maldives in 2009. But it was Purisima who was there at the IMF meeting in Lima to get the thing under way.
“The CVF was a meeting among climate ministers, mainly, and they realized that if they really wanted to get resources into the programmes, they had to involve the finance ministers, to put it in the mainstream,” he says.
“Without money, nothing really moves.”
|Purisima chairs the inaugural meeting of the V20: "We wanted an opportunity to have our voices heard".|
At the outset there were 20 members, fitting the neat G20/V20 parallel; such is the endemic nature of vulnerability that it quickly outgrew that, with a further 23 countries admitted to bring today’s membership to 43.
The first meetings of the V20 were held under the Philippines’ chairmanship, but Purisima had other, home-grown reasons to be keen to be involved, and that devastating typhoon was chief among them: “We had been hit by Haiyan and by three of the strongest typhoons we’ve had in our history in the last four years.”
Early on during the Aquino administration, Purisima and his team had been working with the World Bank and Asian Development Bank on reducing the Philippines’ fiscal vulnerability to typhoons and other weather events. They had been discussing catastrophe (cat) bonds, risk-linked securities that transfer the risk of a particular event from sponsor to investors for a high yield, and had been trying to work out how to reduce the cost of issuing them.
For example, the Philippines under his watch was negotiating with the World Bank to come up with a programme where it and, say, Mexico would issue a cat bond together, since the risks they face are not correlated: when there is a typhoon in the Philippines, there is unlikely to be a similar weather event in Mexico at the same time. Collectively, the cost of borrowing ought to be lower.
One of the first measures the V20 took, in light of the Philippines’ experience, was an attempt to find a way to institutionalize risk pooling “so that countries can have initiatives that would actually help from the grass roots all the way to the country and regional level,” says Purisima.
The idea of grass roots support, and of climate response as an engine of poverty alleviation, comes through in all of Purisima’s remarks.
“If there’s such a thing as a middle-income trap, I think there is a climate change trap as well,” he says. “There are sections of populations at the very lowest level that just can’t improve their lives, because as they move up, they slide down.” Typhoons are getting worse, as are other abnormal weather patterns, so it is always the poorest who suffer.
But if the people were exposed, they were not the only ones.
“We also realized that at the higher level, the local-government level, they are also naked,” Purisima says.
When Haiyan hit the province of Leyte and the city of Tacloban, washing entire chunks of the city away and flooding the convention centre evacuation shelter to the top of the first floor, “they lost their organization, their revenue base, their ability to function as a local government unit. So, at that level too, we need to come up with a mechanism where they can pool their resources.”
In practice, that happened with Haiyan, he says. “But there is no formal mechanism.”
At the national level, where Purisima operated at the time, he found himself looking at how countries could reduce their fiscal vulnerabilities.
“We allocate up to 5% of our budget to this effort, but sometimes the losses can be bigger,” he says. “When that happens, how do you share resources among countries? It can’t just be through aid, because if you want it to be successful you have to mainstream it.
“Companies have CSR [corporate social responsibility] budgets, but they also have purchasing and marketing budgets. You don’t want to be in CSR: that’s feel-good and nice, but the amount is limited and it’s a cost. It’s better to be on the revenue side, marketing or even purchasing.”
The V20's foundation came just before the COP21 meeting that generated the Paris Agreement in December 2015. This is the landmark pledge within the UN Framework Convention on Climate Change that each of the 195 signatory countries would set targets for its own contribution to the mitigation of global warming and that collectively these pledges would hold increases in global average temperature to “well below two degrees centigrade above preindustrial levels” while doing their best to keep it to 1.5 degrees.
There is money available, both in the public and the private sector, but the ability to make a sustainable pipeline is still a challenge
Perhaps the biggest achievement of the V20 to date was that it provided a better platform for the world’s most-vulnerable countries to be heard in the formation of that agreement.
“We wanted an opportunity to have our voices heard, to have a seat at that main table,” says Purisima.
And it helped.
“All the major multilaterals and bilaterals were at the table with us and that was good,” he says. “This is a journey. We have started the journey, and hopefully at the end we will be able to come up with sustainable financial mechanisms to help some of our members that have existential issues.”
He is not using the term “existential” frivolously. Tuvalu, the Maldives and Kiribati “could disappear at a 1.5 degree increase in temperature,” he says. “And what was agreed to was two degrees.”
The presentations by these Pacific island nations were among the most emotive of the whole event, although they did not get the outright 1.5 degree pledge they wanted.
Purisima shares the frustration expressed by many to Euromoney in this series of articles on climate change finance about getting hold of money that is in theory available. The Paris Agreement pledged $100 billion of climate change funding a year, but it is still not clear where that is going to come from, the more so since Donald Trump withdrew the US from the agreement, “but the challenges about financial resources are institutional,” he says.
“The money is there. There is money available, both in the public and the private sector, but the ability to put together funds to make bankable projects, to make a sustainable pipeline, is still a challenge.”
Another theme Purisima returns to frequently is bringing climate finance out of a niche and into the mainstream.
“Still, when you talk about climate change, it’s like a specialized discussion, and what you need to do really is to mainstream it,” he says. This brings us in to problems of measurement, of accounting standards. “If we can agree to a standard that would, for example, make it automatic to include a cost to the environment in the measurement of financial results, that would help.
“One of the things we have learned is that if something is not measured financially, it won’t get done.”
There needs to be agreement among countries, he says. “There is a need to change the parameters for decision-making. You change the accounting. You change the values upon which decisions are made. For example, power plants: right now, coal is considered cheap because we don’t tax carbon. If you do, economic decisions and feasibility decisions will change.”
In the Philippines, he says, they agreed to a feed-in tariff for solar and wind.
“Without that, it would never have taken off. But the feed-in tariff gave impetus. It made the economic choices more or less competitive.” The Philippines now has over 1,000 megawatts apiece of wind and solar, helping the country towards its own long-term commitment under the Paris Agreement of reducing carbon emissions by 70% by 2030.
“Policy changes behaviour. But these things should be done not just at a country level but across countries.”
He does not mention the fact that the current Philippine president, Rodrigo Duterte, called the deal “stupid” and said he “wanted to kick” an ambassador who talked about the country’s climate obligations – perhaps because Duterte eventually changed his mind and signed it.
Purisima believes in aiming high when it comes to getting the necessary money.
“If we believe these huge numbers that are necessary to keep the COP21 targets, then we must come up with mechanisms that will allow us to raise those kinds of resources,” he says. That is not just a tax on fuel or international shipping or air travel, he says, “but maybe a tax on financial transactions. You have to look for the big-ticket items.”
None of these things are V20 policies as such, but rather Purisima’s own views. The point is that whatever position the V20 ends up adopting, it will at least be louder in the delivery.
“V20,” he says, “is a small step. But given the support, it can become a big tool for smaller countries to make their voices heard.”
It should be said that this ambition depends very much on who is the chair of the V20 at the time. The Philippines and Purisima tried to do a lot with V20; Ethiopia, the current chair, appears to be viewing it with indifference, refusing Euromoney an interview and ignoring all attempts at correspondence, eventually communicating its refusal to speak to us through the UN. There is a sense that V20 only really exists at a couple of meetings a year, although there is something to be said even for that – a voice when it matters.
But Purisma is adamant that there is little hope for small countries achieving what they need without this collective voice. “We have to revisit the way those institutions are set up.”
He joins the chorus of frustration in these articles aimed at the Green Climate Fund, “which was created to be a conduit, can be a bottleneck.” His view for the GCF is that “perhaps it can see itself so they can create mini funds in each of the countries.
“A lot of things need to be re-engineered and revisited.”
In the spirit of re-engineering, Purisima admired former HSBC vice-chairman Spencer Lake’s presentation to the V20 at one of the IMF Spring Meetings, in which Lake explained a structure to create a multi-layered climate finance facility embracing the private sector, donors, insurers and multilaterals.
Purisima thinks this sort of innovation is necessary: “You have to find a way where government public resources can be put where they are actually needed. Perhaps that is also part of a guarantee mechanism, a first-loss facility. If you are able to do that, you can tap the plentiful climate resources.”
He speaks almost wistfully of the $100 trillion of pension, insurance and similar funds around the world.
“That’s the key,” he says. “These are private funds, so obviously risk is an issue and returns are an issue. Protection of capital is an issue. So, how can we put all these guys together at one table?
“I call it the ultimate PPP. It’s doable. But you need a leader. You need a voice. It would have been nice if the president of the US had taken the lead,” he adds. Instead, we discuss, perhaps it will be China.
Asked if the V20 could ever become a funding entity in its own right, he says: “No, not really. I think the best use for the V20 is to be able to advocate; to be able to make sure that all the voices, especially the smaller ones, are heard; to be able to make sure the sense of urgency is installed; and that it becomes a laboratory for the discussion of new ideals.”
Purisima accepts that there are limits to the role private capital is going to play, particularly in adaptation projects. “Obviously the lead in those projects will have to come from the public sector, land that’s where taxes come in to play.”
The Philippines is pushing for an excise tax on fuel for this reason. But he thinks one option is to use government resources for an infrastructure bond that will generate money now, and then fund projects to be executed by the private sector: “You can securitize this flow of funds so that you get it now rather than later.”
He also wants policymakers to simplify bureaucracy, weed out corruption and leverage technology: “But it’s easier said than done, because alignment is hard to achieve in government. The shifting winds of politics can get in the way. That’s where multilateral action is really needed.”
And what should multilaterals be doing?
“They’re still approaching this as if it’s a standard operating procedure, like there’s no difference in them processing a climate change proposal or a general business proposal for investment. They are valuing them the same way.
“I believe that if we are to give a sense of urgency to this, then we must give it an express lane, reduce the return requirements, take bigger risk and think of new mechanisms for delivering it,” he argues.
“The sense of urgency is not necessarily reflected there. There is a difference between the walk and the talk. ”
The politics of insurance
One thing Purisima wants the world, and in particular multilaterals, to understand is that it can be difficult for politicians to get the right long-term measures through parliaments.
This applies particularly to insurance.
“Insuring debt is something that is accepted if you are a risk manager in a corporation or in a more advanced economy,” he says. “But in a country where you are in deficit and there is a fight for resources, paying a substantial sum to an insurer, and then nothing happens, can be political suicide.”
Purisima is actually a big fan of insurance and actively sought it in many ways to reduce national fiscal risk, including catastrophe bonds, debt insurance and infrastructure insurance.
“But I didn’t want to call it insurance,” he says. “The counterparties did. I cannot explain to my political audience why I have to pay insurance. But if you build it in to my cost of borrowing I don’t have to explain it: I just say this debt has a different feature and therefore it is higher cost.”
This sort of creative expression is vital when trying to navigate a political process as deftly as possible.
“When you come up with a national budget, there are numerous programmes; each Congressman has their own pet project. If I come up with a line on insurance, they’ll say: ‘That’s not needed, we won’t do it’. But if it is embedded as part of a whole programme, I don’t have to explain it separately.
“I was trying to explain to multilaterals that their audience is more sophisticated than my audience and therefore they should be more flexible than me.”