DEFINING COMPONENTS OF NATIONAL REDD+ FINANCIAL PLANNING WORKSHOP ON BUILDING MULTI- SOURCE REDD+ FINANCING STRATEGIES Antigua, Guatemala July 17 and 18, 2014
Objec'ves of REDD+ Financial Planning Financial Planning cri'cal to REDD+ Program implementa'on Provides valuable feedback on evalua'ng the different strategic op'ons as a way to improve to the overall REDD+ Na=onal Strategy The Financial Planning Process will iden'fy and quan'fy: Financial Implica?ons for Implemen?ng REDD+ Strategy Addi=onal budgetary expenditures that the REDD+ Na=onal Strategy will need to incur from an administra've, policy, and program level Financial projec'ons for each component of the REDD+ Program implementa=on Expenditures that a country and its land managers must incur to effec'vely implementa'on land use change Profitable and sustainable land use change ac'vi'es that produce emission reduc=ons/removals and generate agricultural and forest related revenue Addi'onal funding required and suitability of mul'ple sources to create long- term financial sustainability The financial planning process represents an opportunity to perform a competitive analysis of the land use sector, as well as, a practical and realistic financial evaluation of strategic options to be promoted by the REDD+ National Program Page 2
Terms used in for financial planning Speaking a Common Language Na'onal REDD+ Program refers to the implementa=on of the policies, programs and ac=vi=es that deliver on the Na=onal REDD+ Strategy. Strategic op'ons is a common term used, we use this term to refer to those polices, programs and ac=vi=es that have been priori=zed within the Na=onal REDD+ Strategy. These strategic op'ons could change over =me as the financial and opera=onal feasibility of different op=ons is accessed A four level framework was developed to disaggregate REDD+ Programs into units that can be properly modeled Disaggrega?on Key to Managing Financial Planning Groups common types of ac=vi=es and implementers Support component based modeling with ability to aggregate projec=ons at the Na=onal Program level Model stress tes=ng and scenarios can be performed on components Viable funding sources iden=fied, amracted and effec=vely nego=ated Page 3
Level 1 REDD+ Administra'on Programs Need to be Unbundled Incremental/marginal expenditures that the REDD+ Na=onal Strategy leading ins=tu=ons will need to incur to administrator the REDD+ Program Level 2 REDD+ Na'onal Policies Expenditures that the country must incurred to design, develop, communicate and implement policies that effec=vely support implementa=on of REDD+ Program Level 3 REDD+ Subprograms Expected costs of implementa=on of the programma=c framework of ac=ons that Governments provide directly to promote field level implementa=on of land use change Subprogram is used to avoid the confusion with the use of Na=onal REDD + Program which includes all levels Level 4 REDD+ Ac'vi'es The Complexity of REDD+ Programs Requires Applying a Financial Planning Framework REDD+ land use ac=ons, which are the strategically iden=fied to promote emission reduc=ons and whose the technical and financial feasible can be assessed Page 4
Mapping REDD+ Components to Levels Financial is Planning Performed at Each Level for Each Scale, Scope and Type of Interven?on and then Aggregated by Implementer and for the Na?onal REDD+ Program Illustrative Interventions REDD Program Components Financial Planning Level REDD+ Administration REDD+ Strategy, Finance and Legal Framework REDD+ Intervention Types Policy Reform Land Use Planning Commodity / Extractive Policy REDD+ PROGRAM Administratio POLICY AND SUBPROGRAM LEVELS LEVEL 1 REDD+ Program Administration LEVEL 2 REDD+ Policies FINANCIAL PLANNING REDD+ Intervention Types Governance Capacity Increases Management Plans Tenure Recognition Sectorial incentives, subsidies, guarantees, insurances PES Supply Chain Improvements REDD+ Intervention Types Forest Patrolling Agriculture Productivity Rural Energy/ Cook Stoves NTF Development POLICY AND SUBPROGRAM LEVELS LAND USE ACTIVITIES TO PRODUCE EMISSION REDUCTIONS/ REMOVALS LEVEL 3 - REDD+ Programs Programs that impact land managers to implement REDD+ LEVEL 4 - REDD+ Activities FINANCIAL PLANNING Fire Control Page 5
Level 1 REDD+ Administra'on Examples of Costs Startup Readiness prepara=on process design Administra=on and management of the prepara=on process Staffing REDD+ focal point office and personnel at key government ins=tu=ons func=oning as implemen=ng partners Na=onal REDD+ Strategy development Fundraising management for readiness and startup process Reference level study and development (na=onal, subna=onal, mul=ple jurisdic=ons) MRV system and protocol design and implementa=on Safeguards REDD+ na=onal framework development Stakeholder communica=on and engagement Framework law and/or norms that support REDD+ Program administra=ve func=ons Design, communica=on and engagement to ins=tu=onal and benefit sharing arrangements for technical, administra=ve and financial management of REDD+ na=onal program Development of ER- PIN and ER- PD Ac=vity registra=on and ER registry system setup Crea=ng new ins=tu=ons, programs or departments within government agencies On- going Ins=tu=onal arrangements advisory and legal management Benefit sharing arrangements Transac=onal and Fundraising management Communica=ons of REDD+ Program at the na=onal and interna=onal level with key stakeholders of the REDD+ na=onal program Na=onal Strategy monitoring and repor=ng Establishment of emission accoun=ng processes, data collec=on and technology plavorm Safeguards accomplishment, guidance, advisory and monitoring, On- going stakeholder consulta=on, guidance, advisory and monitoring, Na=onal emission reduc=ons repor=ng and verifica=on Registra=on and issuance of emission reduc=ons Coordina=on with na=onal registry and REDD+ projects nested on issuances Page 6
Policies are: Level 2 REDD+ Na'onal Policies New or improved and related to land use sectors and reducing emissions and/or removals Created in concordance with na=onal/subna=onal condi=ons and basic condi=ons for economic development Iden=fied through REDD+ Na=onal Strategy development Are promoted through REDD+ Subprogram and Ac=vi=es Policies may have: Direct link to producing emission reduc=ons Opportunity costs Relate to specific Subprograms that promote land use change Ac=vi=es Financial Planning includes REDD+ Policy Budgets Created by Scale/Scope Costs for implementa=on and enforcement for leading na=onal implementa=on government agency at the central na=onal office, their regional offices and local agencies Modeling performed at na=onal and subna=onal scales Modeling for different sectoral scopes Page 7
Level 3 REDD+ Subprograms REDD+ Subprograms are the main components of the REDD+ strategy Consistent to the REDD+ Policies considered in the REDD+ Na=onal Strategy Not policies, nor administra=ve processes, rather all government support provided directly to promote field based REDD+ Ac=vi=es Support priority produc=ve sectors to create locally appropriate produc=ve/ market condi=ons and facilita=ng finance Financial Planning, main cost components Government Programs to Drive Land Use Change Technical assistance to improve capacity of government field staff to promote REDD+ Ac=vi=es Inputs, technical assistance, finance provided to land managers for REDD+ Ac=vi=es Resources for enforcement of forest management laws and conserva=on REDD+ specific field support (e.g. technology transfer services, communica=ons, stakeholder consulta=on, safeguard monitoring, and implementa=on support) Page 8
Level 4 REDD+ Ac'vi'es Priori'zed REDD+ Ac'vi'es iden'fied through defined process The country should focuses its Na=onal Strategy on land use Ac=vi=es that are financially feasible to ensure adop=on Financial results of REDD+ Ac=vi=es should have a posi=ve impact in terms of sustainable economic development to the country Analysis of financial feasibility provides the strategic opportunity to improve design of REDD+ Na=onal Strategy Financial Planning Feasibility Assessment of REDD+ Ac'vi'es The Cornerstone of Delivering Emission Reduc?ons Evaluated in accordance to na=onal and global metrics, since countries depend on local, regional and interna=onal capital to invest in REDD+ Ac=vi=es Key metrics Annual net cash flow of the land use ac=vity/npv of cash flow Land use ac=vity rate of return (IRR) Breakeven for land manager Investors rate of return Payback period for investors Page 9
Making Ac'vi'es Financially Feasible Government may need to increase financial results of land use Ac'vi'es, so they are investable and/or equal cost of opportunity of land managers: Financial condi=ons and cash flow shows need of access to structured finance, using for example special funds for equity, debt finance, upfront payments, Addi=onal Policies that allow for improved financial performance of REDD+ Ac=vi=es Incen=ves, tax exemp=ons, etc. Government Support May be Necessary Change in emission reduc=on benefit sharing New Subprograms to establish collateral funds and/or specific propose facili=es as, guarantee collaterals, insurances, technical assistance, specific technology transfer, etc. Improvements in value chain condi=ons such as transport (roads or other transport system), licensing, or other investment needed that can be done by governments Governments should create strategic alliances with specialized private enterprises, private investors, local financial institutions, NDBs, and multilateral/bilateral banks to create investable entities and new transaction structures that maximize the available funding for REDD+ Page 10
Informa'on Required for Financial Planning ü Clear defini'on of REDD+ Na'onal Strategy ü Opera'onal plan for the strategic op'ons ü Incremental costs for government of building and administering REDD+ Program ü The list of policy reforms, na'onal plans and new ins'tu'ons (if any) ü Incremental interagency costs for government ins'tu'ons providing support to REDD+ Program Administra'on and Policies ü The list of priori'zed REDD+ Ac'vi'es (and any associated Subprograms) that make up the strategic op'ons iden'fied in the REDD+ Na'onal Strategy ü Iden'fica'on of costs and revenue of REDD+ Subprograms ü Iden'fica'on of costs and revenue of REDD+ Ac'vi'es Es?mates will Improve Over?me ü Bundles of REDD+ land use Ac'vi'es with es'ma'on of scale of adop'on Page 11
Cost of Emission Reduc'ons Es'ma'ng Emission Reduc'ons Most effec=vely be es=mated for the specific REDD+ Subprograms (level 3) and REDD+ Ac=vi=es (level 4) given granularity and geographic defini=on Follow best prac=ces in accordance to accepted interna=onal methodologies, methodological framework principles and IPCC guidelines Largest variables are scale of adop=on and implementa=on effec=veness Iden=fy any other related agricultural, forest and NTFP income Abatement Cost Calcula'ons Cost to produce an emission reduc=on (total cost/emission reduc=ons) By Ac=vity, with and without Subprogram costs With and without incremental revenue Carbon Finance the Filler or the Glue? The Filler! If robust set of op=ons under UNFCCC are promoted and agreed and domes=c programs are developed In addi'on to Ac'vi'es, carbon revenue can be used to fund Funding na=onal REDD+ administra=on budget Funding na=onal policy implementa=on Do You Know Your Abatement Costs Curve? Funding budgets for REDD+ Subprogram implementa=on Page 12
Handling Emission Reduc'ons Benefit Sharing in Financial Modeling Mone'za'on Mechanics Government sells/ receives results payments on all emission reduc?ons generated in the country Government sells/ receives results payments on a por?on of the reduc?ons generated in the country and land managers may mone?ze emission reduc?ons independently Financial A`ribu'on Op'ons % of ER revenue allocated to administra=on of the REDD+ Program $ from emission reduc=on revenue used to cover short- fall in government income from taxes and permit fees due to opportunity costs $ from emission reduc=on revenue used fund REDD+ priori=zed Subprograms No payments are made to land managers Government PES types payments made to land managers with direct or indirect link to producing emission reduc=ons and/or Government payments linked directly to the produc=on of a verified emission reduc=on and the mone=za=on price is paid to land managers % of ER revenue from both government sales and independent land owners sales $ from emission reduc=on revenue used to cover short- fall in government income from taxes and permit fees due to opportunity costs $ from emission reduc=on revenue used fund REDD+ priori=zed Subprograms No payments are made to land managers Land owners WITHOUT emission reduc=on tenure Government PES types payments made to land managers with direct or indirect link to producing emission reduc=ons and/or Government payments linked directly to the produc=on of a verified emission reduc=on and the mone=za=on price is paid to land managers (level 4) Land owners WITH emission reduc=on tenure REDD+ ac=vity land managers can elect to sell emission reduc=ons to government REDD+ ac=vity land managers can elect to sell emission reduc=ons to markets independent of the government programs Page 13
Puang it all Together and Stress Tes'ng Apply Stress Tests on Main Financial Drivers to Base Case Model to Access Impact on Financial Metrics Financial Modeling level Component Level 1 REDD + Administra'on Main Financial Drivers Staffing Costs Technical provider costs 3 rd Party verifica=on costs Modeling Risks Level of effort (LOE) for government agencies to administer the REDD+ program under es=mated Stakeholder engagement more =me intensive Level 2 Policies Level 3 Subprograms Level 4 REDD + Ac'vi'es Opportunity costs to government of adopted policies Enforcement costs Revenue sources from taxes, mi=ga=on fees and others Costs for subprogram implementa=on Emission reduc=on revenue Revenue from ag, =mber and NTPFs Emission reduc=on revenue Implementa=on costs budgets Opportunity costs under/over es=mated Resources required for enforcement Variable cost to communica=on and consulta=on ac=vi=es Scale of adop=on Tons of emission reduc=ons produced Quan=ty and prices of emission reduc=ons that can be sold/delivered into results- based programs Quan=ty and market price of agricultural commodi=es, crops, =mber or NTFP prices Tons / price of emission reduc=ons produced Market price of inputs and labor Page 14
Benefits of Comprehensive REDD+ Financial Planning The four level approach allows for granular and itera've REDD+ Program Financial Planning Compe''ve analysis is performed on different land use sectors Policy efficiency is determined for each scale/scope as well as bundled at the na=onal level Financial feasible is validated for REDD+ Ac=vi=es, Subprograms and Policies Funding needs for the Program are profiled in accordance with main financial drivers that are uniquely relevant Effec've nego'a'on can be achieved for carbon finance related transac=ons Viable funding sources iden'fied/a`racted through crea=ng metrics from perspec=ve of government, land manager and financiers Page 15
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