Speaker 1: Welcome to zero. I'm akshatrati this week canaries, coal mines
Speaker 1: and a call for cash. Every now and then I
Speaker 1: get to hear an idea that, if it's pulled off,
Speaker 1: will be truly transformational. This episode is about one of
Speaker 1: those ideas. At COP twenty seven last year, there was
Speaker 1: a moment that took the conference by storm. Mia Motley,
Speaker 1: the Prime Minister of Barbados, took to the stage in
Speaker 1: front of world leaders and in a blistering speech, gave
Speaker 1: her vision to fix the climate crisis.
Speaker 2: I come from a small island state that has high ambition,
Speaker 2: but that is not able to deliver on that high
Speaker 2: ambition because the global industrial strategy that we have has
Speaker 2: fault lines in it.
Speaker 1: Typically at these meetings, poor countries ask for money from
Speaker 1: rich countries and don't get it. It's a reasonable demand
Speaker 1: because poor countries didn't cause the problem, but need to
Speaker 1: be a part of the solution. So to break the deadlock,
Speaker 1: Motley had a different idea.
Speaker 3: She proposed a.
Speaker 1: Plan to unlock trillions of dollars in private investments that
Speaker 1: could turbocharge the buildout of climate solutions like solar and
Speaker 1: wind power in developing countries.
Speaker 2: The global North borrows interest rates of between one to
Speaker 2: four percent, the global South of fourteen percent. This is
Speaker 2: the ball reality, and we have come here to ask
Speaker 2: us to open our minds to different possibilities. We believe
Speaker 2: that we have a plan.
Speaker 1: That plan is known as the Bridgetown Initiative, and it
Speaker 1: calls for the reform of the current global financial system
Speaker 1: that was built in the aftermath of World War Two.
Speaker 1: At that time, half of today's countries didn't exist. The
Speaker 1: country I was born in, India, was still a British colony.
Speaker 1: And yet that system, made up of institutions like the
Speaker 1: World Bank and the International Monetary Fund, continue to be
Speaker 1: crucial to helping developing countries develop further. In twenty twenty one,
Speaker 1: these so called multilateral development banks spend fifty one billion
Speaker 1: dollars on climate finance, which sounds like a lot of money,
Speaker 1: but it's nowhere near enough to meet climate goals. My
Speaker 1: guest today hopes to hugely increase that figure and is
Speaker 1: the architect of the Bridgetown Initiative. Avinage Persode. He's the
Speaker 1: Special Envoy on Investment and Financial Services for Barbados and
Speaker 1: a key advisor to Mia Motley.
Speaker 3: Where Canaries in the mind, and you could either think, well,
Speaker 3: how do I get some little bit of air for me?
Speaker 3: I'm watching these other canaries in the mind being severely
Speaker 3: starved of oxygen, or you could try and fix the mind.
Speaker 3: And that's the only fundamental way of solving this problem.
Speaker 1: In its simplest form, Bridgetown asks for one big thing,
Speaker 1: using the power of these giant financial institutions to make
Speaker 1: it far less risky to invest money in climate solutions
Speaker 1: in developing countries, turning a trickle of billions into a
Speaker 1: flood of trillions. Together with Prime Minister Motley, Avinash will
Speaker 1: be presenting an updated version of the Bridgetown plan at
Speaker 1: a big summit in Paris being hosted by French President
Speaker 1: Emmanuel Macron next week. The global financial system is complicated
Speaker 1: and so are the solutions to fix it. However, without
Speaker 1: those fixes, there is little chance of meeting climate goals.
Speaker 1: So it's great to get a chance to question one
Speaker 1: of the smartest people working on these solutions. I sat
Speaker 1: down with Avinash ahead of the summit to discuss some
Speaker 1: of his fixes and why he thinks now is the
Speaker 1: time these aging financial institutions will be finally reformed. Avinash
Speaker 1: welcome to the show.
Speaker 3: Thank you.
Speaker 1: How did you go from being born in Barbados to
Speaker 1: trying to fix the global financial architecture for the climate era.
Speaker 3: Well, I left Barbados when I was seven years old,
Speaker 3: but I do think that it left a lasting impression
Speaker 3: on me. My father used to when we arrived in
Speaker 3: Northwest London. This is in the nineteen seventies, there weren't
Speaker 3: many people of color, and he said to me, you
Speaker 3: are the ambassador to Barbadis for Northwest London. So I'd
Speaker 3: been going around the place being very proud of Barbados,
Speaker 3: saying good morning to all these Brits who were startled
Speaker 3: that some stranger in the street would say good morning
Speaker 3: to them at aged seven. So it had a lasting
Speaker 3: impression on me, but I ended up. My dad was
Speaker 3: a development economist. He was involved in a lot of
Speaker 3: the big struggles of the nineteen eighties, like anti apartheid.
Speaker 3: He helped write the sanctions against South Africa, some of
Speaker 3: the first commissions on the environment, the Brutland Commission. That
Speaker 3: excited me. So I wanted to be a development economist,
Speaker 3: and he said to me he'd fund my first degree,
Speaker 3: but not my second. So I got a job in
Speaker 3: the city of London, and I was quite good at
Speaker 3: it and quite enjoyed the fact that people were listening
Speaker 3: to me. And if I development economists, people began listening
Speaker 3: to me because finance is the rub of most problems.
Speaker 1: Now Mia and Motley is the Prime Minister of Barbados
Speaker 1: and has become a star in climate circles as a
Speaker 1: voice that is giving importance to finance and how to
Speaker 1: move billions to trillions. She gave this defining speech at
Speaker 1: both COP twenty six in Glasgow and then COP twenty
Speaker 1: seven in Shammel Shaken, Egypt, about the vulnerability of small
Speaker 1: island states to climate change. Now, how did you end
Speaker 1: up working with Mia Motley on these issues?
Speaker 3: Well, Prime Minister Motley and I met at college aged eighteen,
Speaker 3: here at the London School Economics. She was studying law,
Speaker 3: I was doing economics, and so that's how I ended
Speaker 3: up getting to know her. Years years later, I'm back
Speaker 3: in Barbados advising her on her finance and budgets. And
Speaker 3: we have the most horrific hurricane season. It's twenty seventeen,
Speaker 3: two category five monster hurricanes. I mean, when you see
Speaker 3: the satellite pictures, these hurricanes are bigger than the entire
Speaker 3: chain of islands, and it crashes Dominica. They lose two
Speaker 3: hundred and twenty six percent of GDP in four hours.
Speaker 3: So anyway, she sends me off and says, this is
Speaker 3: the time U economists need to step up. Here's a
Speaker 3: country that needs some support. And so I was involved
Speaker 3: in helping them and develop their plants after the hurricane.
Speaker 3: And that was really, to be honest with you, and
Speaker 3: I'm not particularly proud of it, but it was only
Speaker 3: that point that I really began understanding climate change and
Speaker 3: the impact on countries who were climate vulnerable. What were
Speaker 3: the financial and economic consequences of this, and what the
Speaker 3: global system. How everyone said that they cared, but how
Speaker 3: there was actually the end of the day, very little money.
Speaker 1: And just so we have the contexts because you go
Speaker 1: from meeting her in university to then working for her,
Speaker 1: advising her on her budgets. What were the intervening years, like,
Speaker 1: you know, how was she as a person you knew
Speaker 1: in university and now you know as a colleague.
Speaker 3: Well we would connect from time to time, but she
Speaker 3: moved back to Barbados. She was always committed to being
Speaker 3: involved in the development of her country, our country. I
Speaker 3: went off with a career in finance and ended up
Speaker 3: being one of the architects of the new international financial
Speaker 3: regulation Basil III macroprudential regulation. And she was observing this
Speaker 3: and observing my work in this area. So when she
Speaker 3: was asked to give a budget in Barbados, she asked
Speaker 3: me to come along and help her with that budget.
Speaker 3: And I came back, and she's a very effective politician,
Speaker 3: And I thought I was coming back to write one speech,
Speaker 3: and I've ended up living there and changing my entire
Speaker 3: career and everything.
Speaker 1: So you visit Dominica and you realize that climate change
Speaker 1: is going to be a massive problem for countries like Barbados.
Speaker 1: But then the solutions that you ended up developing is
Speaker 1: not just addressing the problems of climate vulnerable countries, but
Speaker 1: trying to fix the entire global financial architecture, which is great,
Speaker 1: But how do you go from that problem, which is
Speaker 1: local caused by a global crisis, to trying to address
Speaker 1: a global crisis of another sort.
Speaker 3: Well, we're sitting there thinking about why is it that
Speaker 3: we're in this situation. Small island states in the tropics,
Speaker 3: I mean, climate funderable countries are not just small states
Speaker 3: or island states. There really any country between the tropics
Speaker 3: of Cancer and the Tropic of Capricorn. Within that band,
Speaker 3: that's where temperatures are rising to some of the highest
Speaker 3: levels and where sea levels are increasing to the highest levels.
Speaker 3: I mean, I'm an economist, so I know no science.
Speaker 3: I have to be explained to me that when the
Speaker 3: glaciers melt at the poles, that the water doesn't stay
Speaker 3: there because of the spinning of the earth. The water
Speaker 3: ends up on the equator, and so our sea levels
Speaker 3: will rise by three quarters of meter or more. So
Speaker 3: low lying areas in the tropics are very vulnerable. So
Speaker 3: we're sitting there where canaries in the mine, and you
Speaker 3: could either think, well, how do I get some little
Speaker 3: bit of air for me I'm watching these other canaries
Speaker 3: in the mine being severely starved of oxygen, or you
Speaker 3: can try and fix the mine. And that's the only
Speaker 3: fundamental way of solving this problem. And that's about not
Speaker 3: just our loss and damage and climate adaptation and resilience.
Speaker 3: The biggest story is climate mitigation. There we see the
Speaker 3: countries who could do something about it looking at each
Speaker 3: other across the table and pointing each other and all
Speaker 3: of them saying that this is very important, this is
Speaker 3: very urgent, and you, pointing across the table, need to
Speaker 3: do more about it, and we're stuck.
Speaker 1: And you wrote a paper that defined the problem as
Speaker 1: a deadlock. And it's really precisely the word to be
Speaker 1: used in this case, because I've been to COP meetings before.
Speaker 1: These are places where rich countries and poor countries come
Speaker 1: together and the finger pointing gets really problematic. Rich countries
Speaker 1: would say to poor country as well, we understand we
Speaker 1: cause this problem, but you now need to reduce emissions too,
Speaker 1: because otherwise we don't have the carbon space available to
Speaker 1: deal with this problem. And then poor countries would go,
Speaker 1: we can do that if you give us money. Where
Speaker 1: is the money? And that money never comes. And so
Speaker 1: one way to think about the climate problem is really
Speaker 1: it's a finance problem, and so it's understandable that trying
Speaker 1: to address it through the finance lens is crucial. So
Speaker 1: what is it that you think will unlock it.
Speaker 3: Well, I think it's important to say that two years ago,
Speaker 3: the prevailing view was it was an ignorance problem. It
Speaker 3: was a science problem. People didn't believe the science. They
Speaker 3: were in denial they just didn't believe it, and we
Speaker 3: were listening to people were thinking, that's not the problem.
Speaker 3: The problem is that that everyone believes someone else should
Speaker 3: be doing more. And our issue was the only way
Speaker 3: we could get around that problem is finance. Why do
Speaker 3: they believe someone else should do more because it's a
Speaker 3: cost to them to do it. So if we can
Speaker 3: make it easy for them to do it, we can
Speaker 3: reduce the cost for them, we can finance it. They
Speaker 3: won't spend their time pointing their finger to someone else.
Speaker 3: They will get it done.
Speaker 1: And so Dominica happens. You go back and you start
Speaker 1: working on trying to solve this problem. This is back
Speaker 1: in twenty seventeen eighteen nineteen period. You put out what
Speaker 1: is called a Bridgetown Agenda, named after the capital of
Speaker 1: Barbados last year, and you're now this month coming out
Speaker 1: with an update to that agenda. Let's go through the
Speaker 1: broad strokes of what that agenda does and how it
Speaker 1: addresses this finance problem.
Speaker 3: So the experts say that developing countries need two point
Speaker 3: four trillion dollars every year to deal with climate. So
Speaker 3: that's mitigating the climate, preventing it getting worse. That's resilience
Speaker 3: and adapting to the existing change in the climate, and
Speaker 3: that's also addressing the loss and damage. So you add
Speaker 3: all that together two point four trillion dollars. Now, of
Speaker 3: course few people can imagine two point four trillion dollars.
Speaker 3: So I think the way to think about this is
Speaker 3: that all of the aid in the world add up
Speaker 3: everything for everything is two hundred billion dollars per year.
Speaker 3: So we're talking about something that is twelve times more
Speaker 3: than what's currently happening every year. Twelve times, and so
Speaker 3: you know you've got a problem because you know they
Speaker 3: might be ab to increase it by ten percent, no
Speaker 3: one's increasing it by twelve times. So bridge down is
Speaker 3: the solution to get to the twelve times. So we
Speaker 3: say we can't do it, but it needs three different
Speaker 3: buckets of financing. The first bucket the biggest bucket. It's
Speaker 3: stuff you have to do which has a revenue stream attached.
Speaker 3: You can do it and it makes money. So you know,
Speaker 3: building a solar farm makes money, a wind turbine makes money,
Speaker 3: a hydroelectric power makes money. So inside this bucket is
Speaker 3: a lot of things that make money but will mitigate
Speaker 3: the climate, will prevent it getting worse will help us
Speaker 3: in the green transformation. What we need to do to
Speaker 3: fill that bucket is we need to find a way
Speaker 3: of catalyzing the private sector to get them into doing
Speaker 3: this in developing countries. They're doing this in the rich countries.
Speaker 3: Eighty one percent of all time mitigation green transformation stuff
Speaker 3: is financed by the private sector in rich countries, but
Speaker 3: only fourteen percent in the poor countries. So we've got
Speaker 3: to change that equation. And we've got a solution to it.
Speaker 3: It's around guaranteeing the foreign exchange risk that the private
Speaker 3: investor has when they go to development countries. But we
Speaker 3: can come back to that.
Speaker 1: Yes, I mean, that's the hardest solution to get your
Speaker 1: head around, but it also is the biggest problem to address.
Speaker 1: And then the two other buckets.
Speaker 3: So the second bucket, second biggest, This is for things
Speaker 3: which they are no revenues, but they are savings. And
Speaker 3: so if there are no revenues but savings, you can
Speaker 3: borrow to fill this bucket. Now, what's in this bucket.
Speaker 3: This is stuff like a sea wall. You don't make
Speaker 3: money from having a sea wall, but you save money
Speaker 3: from all the times that the capital city is not
Speaker 3: flooded because you've got this new sea wall. All very
Speaker 3: unglamorous stuff, but very very important and saves a lot
Speaker 3: of money. So this bucket is about resilience, adaptation. We
Speaker 3: can fund a lot of those things. The third bucket
Speaker 3: is the smallest bucket, addressing the loss and damage.
Speaker 1: Right, if you don't reduce emissions and you don't adapt
Speaker 1: to warming, then you will get damages from climate impacts.
Speaker 3: That's right, and there's a fair amount of those damages
Speaker 3: in which you have to respond. All of your low
Speaker 3: income homes have lost their roof, they've washed away, and
Speaker 3: these are people who do not have any resources, do
Speaker 3: not have any ability to ensure. Insurance companies are not
Speaker 3: going to ensure them. So they're no revenues and they're
Speaker 3: no savings. So we can't borrow for this, so we
Speaker 3: need grants. So the grand bit we've made the smallest
Speaker 3: bit possible. We've shrunk it. It's not a two point
Speaker 3: four trillion dollar task, but it's one hundred billion dollar task.
Speaker 3: And we recognize that governments don't have one hundred billion
Speaker 3: dollars stuff behind the sofa EID budgets are not going
Speaker 3: to double, they're not going to increase from two hundred
Speaker 3: billion to three hundred billion, So we need new revenue streams.
Speaker 3: That's something like an emissions tax in the shipping industry.
Speaker 3: Shipping is a significant part of emissions increases. There's a
Speaker 3: proposal for a one hundred dollars per ton of carbon
Speaker 3: as a result of emissions in the shipping industry. That
Speaker 3: would fund the third of that bucket. Oil and coal exports.
Speaker 3: If there was a small levee on those exports, a
Speaker 3: one percent levee, that would fund the other two thirds.
Speaker 3: So that's how we deal with that third bucket.
Speaker 1: And you're going to bring these solution sets under the
Speaker 1: Bridgetown Agenda two point zero to a summit in Paris
Speaker 1: this month, which is aimed at using the solution set
Speaker 1: to try and fix the global financial architecture and not
Speaker 1: just address climate change, but other crises like inequality and
Speaker 1: loss of biodiversity. But sticking to the climate solution, let's
Speaker 1: walk through the most complicated and the largest bucket, which
Speaker 1: is to try and make private capital move to poor
Speaker 1: countries at a much faster rate, at a bigger volume
Speaker 1: every year for the rest of this century. Why is
Speaker 1: it not already happening? Because you get to hear these things,
Speaker 1: which is solar is the cheapest form of electricity you
Speaker 1: can get anywhere in the world, especially in countries like
Speaker 1: India and other developing countries within the tropics, the places
Speaker 1: that have the impact. If that's the case, why does
Speaker 1: the money not flow?
Speaker 3: So there are two problems of the idea that renewable
Speaker 3: energy is free and easy and cheap. There are two problems. Firstly,
Speaker 3: they're very capital intensive, so I've got to buy the land,
Speaker 3: I've got to buy the panels, I've got to erect
Speaker 3: them and connect them, and that's very cap intensive. Most
Speaker 3: of that is foreign currency required for that. And then
Speaker 3: I'm getting revenues for the solar farm in local currency.
Speaker 3: So I have a big bill that's a foreign currency
Speaker 3: bill and paying for it through local currencies. So foreign
Speaker 3: investors need to be involved because they're the ones with
Speaker 3: the foreign currency and they look at this country and
Speaker 3: they say, well, you know, there's risks of the project,
Speaker 3: But the solar farms are pretty standard tech today, win farms, hydroelectric.
Speaker 3: There isn't really a tech problem. The problem is that
Speaker 3: the country may have a currency risk, there may be
Speaker 3: a credit risk, and if you unpack the risks involved
Speaker 3: in that investment. It's not tech, it's not the project,
Speaker 3: it is currency in credit.
Speaker 1: So these risks, which we can understand as macro risks,
Speaker 1: come in different from one that is easy to understand.
Speaker 3: Is political risk.
Speaker 1: The country may be a democracy, but may have a
Speaker 1: military dictatorship just sitting in the back, which comes in
Speaker 1: and there is a problem. There could be regulatory changes
Speaker 1: made because there's been a change in the party that
Speaker 1: rules the country. Those are political risks that you can
Speaker 1: kind of understand. But what does currency risk mean? Currency
Speaker 1: risks are an interesting basket which collects almost all of
Speaker 1: those other country type risks. So if the change your
Speaker 1: government creates uncertainty, your currency tends to fall. If people
Speaker 1: are uncertain whether you could pay your debts, your currency falls,
Speaker 1: and so currencies are very volatile. And when institutional investors
Speaker 1: in America in Europe invest, they want to hedge themselves
Speaker 1: from these kinds of risks that they're unfamiliar with. Hedging
Speaker 1: involves one company paying another company for a risk they
Speaker 1: don't want to take. For example, if you're an American
Speaker 1: investor with assets in India and you're worried that the
Speaker 1: Indian rupee could fall in value, you would ask a
Speaker 1: bank to take care of that risk for you. If
Speaker 1: the rupee does fall, the bank will deal with the
Speaker 1: losses and you'll still get the exchange rate you agreed
Speaker 1: with the bank. If the rupee rises in value, the
Speaker 1: bank makes money, but you still get the same exchange rate.
Speaker 1: You the investor, don't have to be worried about currency risk,
Speaker 1: and the bank has a service it can make money.
Speaker 3: Off institutional investors in America in Europe, they'll say, I'm
Speaker 3: in the energy sector, and I understand energy. I'm in
Speaker 3: the tech sector. I understand tech. I don't understand the
Speaker 3: South African rand. I'm not an expert in that or
Speaker 3: the Indonesian rupea and so I want to hedge myself
Speaker 3: from those risks. And the hedging costs basically eat up
Speaker 3: about two thirds to three quarters of the return, and
Speaker 3: so what they're left with the hedged return is measly
Speaker 3: like a three to four percentage point return. And if
Speaker 3: you're an institutional investor, you're thinking, why add that to
Speaker 3: my portfolio. I want a seven or eight percent return
Speaker 3: at least.
Speaker 1: Let's take an example of a project to be able
Speaker 1: to understand these numbers, because it gets easier if we focus,
Speaker 1: say on a solar plant in South Africa, a developing
Speaker 1: country that has a very coal heavy electricity sector, but
Speaker 1: is willing and is big participant in the global system
Speaker 1: to try and address this problem through finance. So say
Speaker 1: you were building a solar plant in South Africa, give
Speaker 1: it ten million dollars. Now what is it that I,
Speaker 1: the private investor who would like to invest in your
Speaker 1: solar plant, need to think about? And why would I
Speaker 1: choose you over a solar plant I could build in
Speaker 1: the UK.
Speaker 3: So you're not so much worried about solar. But the
Speaker 3: problem is that you, the investor, are only prepared to
Speaker 3: go if the return not only gives you the same
Speaker 3: return you'd get for solar farm in Germany, say, but
Speaker 3: an additional return for all of the additional risks, the
Speaker 3: currency risk, the credit risk, the political risk. And when
Speaker 3: you take all of those risks out, it's hard for
Speaker 3: those projects to give you the return that you want.
Speaker 3: So we need to find a way of hedging those
Speaker 3: risks cheaper to make the returns more attractive. And there's
Speaker 3: a way we can do it. Because if you observe
Speaker 3: in a case of so Africa is a good one.
Speaker 3: You know, the cost to hedge the currency risk that
Speaker 3: the South African currency is called the rand. The rand
Speaker 3: is a fairly volatile currency and it costs you, you know,
Speaker 3: eight to nine percent to eliminate the risk of loss
Speaker 3: from the currency eight to nine percent per.
Speaker 1: Year, which means that if I were making say a
Speaker 1: profit of five percent on my German solar farm, I
Speaker 1: would need to make a profit of fourteen percent in
Speaker 1: South Africa for those projects to be comparable for the
Speaker 1: financial written that I, the investor is getting from the
Speaker 1: solar plant. Is that right?
Speaker 3: Exactly, same tech, same project. It can make five percent
Speaker 3: in Germany. The equivalent deman it needs to make in
Speaker 3: South Africa to attract me is fourteen percent. Because I
Speaker 3: got to take out nine percentage points of that fourteen
Speaker 3: And why do you have to take out nine because that's
Speaker 3: all the currency risk and the credit risks for me
Speaker 3: investing in South Africa. The thing is that when we
Speaker 3: look back in time, the actual risk, so how much
Speaker 3: did the currency fall? It wasn't nine percent. It was
Speaker 3: in a case of South Africa, it was like four percent.
Speaker 3: So I'm over paying for that risk by five percentage
Speaker 3: points per year. If I didn't overpay for that risk,
Speaker 3: that project could have yielded me not a five percent return,
Speaker 3: but a ten percent return.
Speaker 1: That sounds like somebody left money on the table, which
Speaker 1: is to say markets usually the whole idea of them
Speaker 1: is through their functioning, will find the most efficient way
Speaker 1: to make these hedges possible, which is to say, there
Speaker 1: should not be a gap between what happened in reality
Speaker 1: and what kind of risk they hedged. So why is
Speaker 1: it that they are overpaying for these hedges if the
Speaker 1: reality of the currency risk is not appearing.
Speaker 3: I think it's a couple reasons. You might argue that
Speaker 3: there's an uncertainty premiere that South Africa's one of one
Speaker 3: hundred and ninety two countries, and people aren't investing heavily
Speaker 3: to be experts in so Africa because they've got other
Speaker 3: countries to look at, and so they feel that there
Speaker 3: are risks out there which they don't fully understand, and
Speaker 3: there's uncertainty. Then also the investment may make a return
Speaker 3: in the long run, but in the intervening period it
Speaker 3: could be quite volatile, and investors tend to be risk averse.
Speaker 3: They don't like to use a lot of capital money
Speaker 3: that they can absorb a loss, and so they don't
Speaker 3: like even if you offer them a nice return at
Speaker 3: the end, they don't like the fact that they would
Speaker 3: have had a few loss or few heartbeats along the way,
Speaker 3: and that they had to carry a lot of this
Speaker 3: loss absorbing amount of spare cash, if you like, in
Speaker 3: the intervening period, they can do more with that money.
Speaker 3: It is what economists we call it a market failure
Speaker 3: because this thing, this activity will make money and will
Speaker 3: have a huge social benefit, could save the planet. Right,
Speaker 3: you can't get bigger than that. But there's other things
Speaker 3: the private sector could do with their money, right, and
Speaker 3: they could make more.
Speaker 1: Money, and that's doing some of the short term versus
Speaker 1: the long term. In the short term and on a
Speaker 1: year to year basis or even five year basis, they
Speaker 1: don't want to be seen as making losses, even though
Speaker 1: overall in the thirty year life of this solar planet
Speaker 1: they will make more money.
Speaker 3: You're right, But it's also the fact that it may
Speaker 3: make money, but it may not make enough money because
Speaker 3: they can do other things with their money. So simply
Speaker 3: saying it's profitable isn't enough. If there are other things
Speaker 3: that are more profitable. Well, the reason why we call
Speaker 3: it a market failure is a it's profitable privately, there's
Speaker 3: a private return to be had, but socially there's a
Speaker 3: huge return to be had. So there's a social return
Speaker 3: that's being lost because the private sector is finding that
Speaker 3: there are other things which there's a better private return.
Speaker 3: So that's a classic example of where we need to
Speaker 3: kind of align the social return and the private return
Speaker 3: to get private savings invested in this.
Speaker 1: So we're talking here about getting investors from abroad to
Speaker 1: come into countries like South Africa. But what is it
Speaker 1: with countries like India, which are large economies which could
Speaker 1: just have their own central banks, create their own money,
Speaker 1: lend it out to their own private players. Why do
Speaker 1: they have to rely on foreign investors, especially if it's
Speaker 1: a large economy.
Speaker 3: Well, I think that a couple of reasons. Firstly, even
Speaker 3: though it's a large country, there's a large need and
Speaker 3: savings are good in India, but they're not bountiful the
Speaker 3: other things that those sigments could do. And if you
Speaker 3: remember earlier, we talked about the fact that there's a
Speaker 3: foreign currency requirement because they may need to import the
Speaker 3: tech and the panels and a range of things. I mean,
Speaker 3: India is investing. Our issue isn't that some countries aren't investing.
Speaker 3: They're just not investing fast enough. They may feel the
Speaker 3: investing in the right pace for them, and it may
Speaker 3: be the right pace for their economy is just not
Speaker 3: the right pace for the planet. So we need to
Speaker 3: turbo charge that investment by making it cheaper and easier
Speaker 3: and more profitable.
Speaker 1: So far, we've talked about the problem Avinash is trying
Speaker 1: to solve, and with the Bridgedown initiative, he thinks he
Speaker 1: has a solution that's coming up right after the break
Speaker 1: through the Bridgedown agenda to point out, you say that
Speaker 1: with this currency hedge risk solution, and let's talk about
Speaker 1: the solution, you could move as much as one point
Speaker 1: five trillion dollars of private capital into climate oriented solutions
Speaker 1: that would be profit making on an annual basis. So
Speaker 1: what is the solution.
Speaker 3: The solution is that we have an agency that that
Speaker 3: sits in the WARL Bank and the IMF. The agency
Speaker 3: is a not for profit. It is not trying to
Speaker 3: make money. It is trying to make sure there's no
Speaker 3: overpayment to hedge these risks. It's not saying they're no risks.
Speaker 3: It's not saying there's a cost for the risk. It's
Speaker 3: eliminating the over payment. The overpayment will substantially cut the
Speaker 3: cost of hedging and significantly boost the rate of return.
Speaker 3: The rate of return of these projects now will jump
Speaker 3: from say a four percent rate of return, which is
Speaker 3: uninteresting for investors, to more like a nine percent rate
Speaker 3: of return, which is suddenly a classic kind of return
Speaker 3: to fit into international portfolios of investment FRO an investor
Speaker 3: point of view, You suddenly got something as interesting to
Speaker 3: ignite the excitement of the private sector today. The rate
Speaker 3: of return is too low, too uncertain, too risky.
Speaker 1: But there is already an organization, as I understand, called
Speaker 1: TTHX you're in Europe, that was funded by development agencies.
Speaker 1: These are agencies that give money to developing countries for projects,
Speaker 1: and it does currency risk hedging and it makes a
Speaker 1: small profit. Why do you think you need a different institution?
Speaker 1: Couldn't DCX just be made bigger and solve the problem.
Speaker 1: TCX finds you the market hedging price. We're saying the
Speaker 1: market hedging price is wrong. The market hedging price is
Speaker 1: an over payment for the risk, an over payment by
Speaker 1: half t SX doesn't have the capital or liquidity to
Speaker 1: basically say the market you're wrong. I'm going to hang
Speaker 1: out here and offer you a different exchange rate for
Speaker 1: billions of dollars of types of projects that is four
Speaker 1: or five percentage points per year different than the market rate,
Speaker 1: because I know that in the long run I'll be okay,
Speaker 1: and you're taking this risk. The IMF and will Bank
Speaker 1: can do it because if they get it right, they
Speaker 1: may even make a little bit of money. They get
Speaker 1: it wrong, it's had a huge social benefit and that
Speaker 1: is their actual remit and their mandate. So if you succeeded,
Speaker 1: you create this institution within the World Bank and the
Speaker 1: International Monetary Fund that's a not for profit that does
Speaker 1: the currency hedge risk. So now you're saying, suddenly, my
Speaker 1: investment in the solar farm in South Africa becomes attractive
Speaker 1: compared to my investment in a German solar farm, just
Speaker 1: because that five percent has now been absorbed by this
Speaker 1: new body that you've created. How much money does that
Speaker 1: body need to have to be able to manage this
Speaker 1: kind of currency hedge risk in one hundred and fifty countries,
Speaker 1: which your class is developing countries in the world today.
Speaker 3: So if what we were suggesting was a subsidy, that
Speaker 3: would limit its scale, because subsidies mean actually it's a
Speaker 3: code word for grants, and grants are not unlimited. But
Speaker 3: what we're saying is this is not a subsidy. This
Speaker 3: is removing the over payment. This is saying we want
Speaker 3: the price of the risk to ex post after the
Speaker 3: event to be equal to the actual cost of the risk.
Speaker 3: At the moment, the price of the risk is substantially
Speaker 3: bigger than the actual risk. And so if I'm not
Speaker 3: doing something that is a subsidy, it's not a grant,
Speaker 3: it actually is something in the long run is profitable,
Speaker 3: then I can be unlimited in my scale. I can
Speaker 3: scale up to the amount of the investment the world needs,
Speaker 3: which is about one point five trillion dollars per year
Speaker 3: of investment. They're not going to need one point five
Speaker 3: trillion of hedging. But this is a key point because
Speaker 3: there's always people out there saying we want grants, we
Speaker 3: want subsidies. And one of the messages we're saying, and
Speaker 3: it's a typical bridge down, is saying yes, that will
Speaker 3: be nice, but don't we want scale needs scale, and
Speaker 3: if you focused only on grants, only on people transferring
Speaker 3: money to you, you're never going to get the scale
Speaker 3: we need to save the planet.
Speaker 1: Let's look at a few other solutions in the set
Speaker 1: we talked about the three buckets, and so you'll move
Speaker 1: money through currency risk hedging that will allow private investors
Speaker 1: to invest more money. You'll, for adaptation, increase the amount
Speaker 1: that could be lent and enable that lending to be
Speaker 1: paid for through the savings that the countries will make.
Speaker 1: And there may be some form of emissions tax to
Speaker 1: be able to actually have a smaller amount of grants
Speaker 1: given for damages. But there are other things that you're
Speaker 1: proposing that could also be very beneficial for countries. So
Speaker 1: one thing is, for example, in Barbados, you introduce their
Speaker 1: unnatural Disaster clause in some of your loans or debts
Speaker 1: that you've taken on, and those trigger when a big
Speaker 1: catastrophe happens and then you don't have to make those
Speaker 1: repayments for a period of time. You know, how does
Speaker 1: that help Barbados? And can this be applied to other countries?
Speaker 3: So you know, let's recap we've got a world now
Speaker 3: of that's facing these bigger, more frequent shocks. So we've
Speaker 3: never had before climate related sharks, pandemic shocks, and that
Speaker 3: was the mother of all shocks, right, the last pandemic.
Speaker 3: So the world is now facing more shocks. We've come
Speaker 3: up with a way of trying to mitigate some of
Speaker 3: those shocks, to reduce them, to adapt for them, and
Speaker 3: to come up with loss and damage. But the system
Speaker 3: just needs to be more shock absorbing because of this
Speaker 3: changed world we're in. And shock absorbing doesn't sound very exciting.
Speaker 1: But shock absorbing. Tried driving a car without a shock
Speaker 1: absorber and you know what happened. So it's very important.
Speaker 3: It's very important, but it's particularly important for poor countries
Speaker 3: and poor people. Poor people often live on the edge.
Speaker 3: They may appear to be fine, but it's weeks without
Speaker 3: a job and suddenly they're plunged into poverty. Same with countries.
Speaker 3: So if you're a rich country and you have a shock,
Speaker 3: I mean, you can do quantitative easing, print some cash,
Speaker 3: you can borrow some money. Poor countries can't really do that.
Speaker 3: They don't have reserve currencies either, so in a crisis,
Speaker 3: their currency plunges in a crisis, American and the European
Speaker 3: currencies go up, so they need shock absorbers. So there
Speaker 3: are two types of shock absorbers. There is the public
Speaker 3: sector shock absorber. The international multi fund should behave a
Speaker 3: little bit like a lender of last resort, the way
Speaker 3: a central bank behaves for its local banks. We need
Speaker 3: the IMF to be like a central bank for the
Speaker 3: world and it should offer when is a crisis, a
Speaker 3: facility where you can get emergency cheap quick money. It's limited,
Speaker 3: but it's quick. Secondly, because international capital markets are bigger
Speaker 3: than the IMF could ever be, we need to look
Speaker 3: at the financial instruments that the world has, especially the
Speaker 3: debt instruments.
Speaker 1: So we have.
Speaker 3: We weren't the first. The Caribbean has pioneered natural disaster
Speaker 3: clauses in bonds. Grenadians and Kits were the first. We
Speaker 3: are the world's largest issuer of sovereign bonds with natural
Speaker 3: disaster clauses in them. So these are clauses which says,
Speaker 3: if an independent entity has declared that you have had
Speaker 3: a major national disaster, a hurricane or something else, then
Speaker 3: for two years all of your debt servicing. That means
Speaker 3: your interest payments, your repayment of the debt that's suspended
Speaker 3: for two years. You get this breathing space for which
Speaker 3: you can focus on the disaster. And then all of
Speaker 3: that debt service that was suspended is added back on.
Speaker 3: At the end of the instruments, the instrument becomes automatically
Speaker 3: two years longer, and you've got to pay some interest
Speaker 3: for that period of time, which was the same as
Speaker 3: the interest beforehand. And so it provides you liquidity. It's
Speaker 3: not free money, it's liquidity. It's reshuffling the payments to
Speaker 3: give you the breathing space when you need it. The creditor,
Speaker 3: the person who lent you the money, is no worse off.
Speaker 3: They get all their payments back plus interest, but they
Speaker 3: just have they've allowed a different shift in the timing,
Speaker 3: and that's so important for dealing with the crisis. Nobody
Speaker 3: gives us the amount of liquidity that we would get
Speaker 3: from these instruments. If a disaster hits Barbados. This this
Speaker 3: saves us eighteen percent of our GDP one eight percent
Speaker 3: of our GDP. All the other multilateral development banks put
Speaker 3: together offer us all kinds of contingency lending. They come
Speaker 3: up to about two percent. So this really is a
Speaker 3: life changer. If every developing country had them during the pandemic,
Speaker 3: for example, it would have given them one trillion dollars
Speaker 3: of liquidity to deal with the pandemic. In the end,
Speaker 3: development countries, because they had no liquidity and no ability
Speaker 3: to get extra cash, they only spent all of them
Speaker 3: half a trillion on a health crisis. This would have
Speaker 3: given them one trillion. They could have spent twice as much.
Speaker 1: You're going to take this idea bridged on Agenda two
Speaker 1: point zero to Paris in front of world leaders and
Speaker 1: you're trying to get them to agree.
Speaker 3: That this is the solution. Said they should back who
Speaker 3: is on your side. Bridgetown is about setting the pace
Speaker 3: of ambition. It's not about gathering signatures. We came up
Speaker 3: with a global plan. We thought it would trigger other
Speaker 3: people coming up with global plans, and we would nick
Speaker 3: the best ideas of all the other plans and make
Speaker 3: our plan better. But we've still remain principally the only
Speaker 3: plan because too many countries are already focused on their interests.
Speaker 3: They find it very hard to come up with a
Speaker 3: global plan the world. It's easy for us, being the
Speaker 3: canaries of the mind to say well, we've got a
Speaker 3: plan to save the mind, because that's important for us.
Speaker 3: So we're not looking for people to sign up. We're
Speaker 3: looking to push people on their ambition to normalize socialized ideas,
Speaker 3: to discuss them and debate them, and to make them
Speaker 3: think deeply on why not If you really do think
Speaker 3: this is important? Why not?
Speaker 1: But these institutions, the World Bank and the IMF were
Speaker 1: created decades ago at a time that was very, very
Speaker 1: different from today. You've said, in effect that from the
Speaker 1: conception there were fundamental problems with these institutions. There have
Speaker 1: been many attempts to try and reform them, and small
Speaker 1: changes have been made, But why do you think this
Speaker 1: time around they will change.
Speaker 3: I think we have a moment today. I'm not sure
Speaker 3: exactly why that is. I think Bridge Down has helped
Speaker 3: to create that moment, but many other have. The enormous
Speaker 3: tragedy of Pakistan last year, thirty million people homeless, twenty
Speaker 3: seven thousand schools underwater. I think the heat waves and
Speaker 3: the flooding in Europe and America has helped to create
Speaker 3: that moment. I think the nature of the current US administration,
Speaker 3: European governments, we've had a US Treasury secretary saying we
Speaker 3: need to go from billions to trillions. Well, to be
Speaker 3: quite frank, we've never had a US Treasury secretary say
Speaker 3: that before. I think also, the system is broken and
Speaker 3: it's clear that if we don't fix it, somebody else
Speaker 3: will replace it. You know, we've fumbled along with a
Speaker 3: forty system for a long time. But now they're alternatives,
Speaker 3: and people are presenting alternatives, and we are seeing that
Speaker 3: what was previously in open trading system, governments are championing
Speaker 3: an alternative trading system. You're seeing that happening with debt.
Speaker 3: We've got a global debt restructuring process that is being changed.
Speaker 3: It's different. So I think people realized that the stakes
Speaker 3: are bigger than ever before, which is that this system,
Speaker 3: if it's not fixed, will just be brushed away as irrelevant.
Speaker 3: And at the core of the system our institutions established
Speaker 3: around nineteen forty five now the world. In nineteen forty five,
Speaker 3: the European Empires were still largely intact. India doesn't get
Speaker 3: its independence until a few years later, so the vast
Speaker 3: majority of countries today did not exist back in nineteen
Speaker 3: forty five, and in nineteen forty five. The problem was
Speaker 3: rebuilding Europe after the war, the idea of climate change,
Speaker 3: of pandemics, of inequality, those things were not forefront in
Speaker 3: their agenda. They've evolved over time and they've become much
Speaker 3: more focused on poverty in the poorest countries. But the
Speaker 3: world is also evolved. We need to fix the system,
Speaker 3: and we need to change its focus and its remit
Speaker 3: and most importantly, we need to scale it up. It
Speaker 3: is so tiny it is irrelevant. It is irrelevant today.
Speaker 3: We need to say, the total all of the multilateral
Speaker 3: debump banks put together lend about one hundred billion dollars.
Speaker 3: Remember the figure we used at the beginning. We need
Speaker 3: two point four trillion dollars. We need to get that
Speaker 3: lending up from one hundred billion to four hundred or
Speaker 3: five hundred billion. We need to scale it up.
Speaker 1: Who is presenting alternatives to the World Bank and IMF
Speaker 1: that could brush these institutions aside.
Speaker 3: The international system is being replaced, not by a grand plan,
Speaker 3: but being chipped away. So today it's irrelevant. Today when
Speaker 3: people want investment, you've got the World Bank, but you've
Speaker 3: got a number of other people coming to you offering money,
Speaker 3: offering money on good terms.
Speaker 1: I meanash doesn't say it, but the elephant in the
Speaker 1: room is China. Since twenty fifteen, China has offered one
Speaker 1: hundred and eighty five billion dollars in assistance to countries
Speaker 1: in debt distress, including Argentina, Pakistan and Nigeria. That's according
Speaker 1: to a study by AID Data. Over the past decade,
Speaker 1: China's overseas bailouts are more than twenty percent of the
Speaker 1: total lending of the IMF, and the amounts are growing,
Speaker 1: providing an alternative source of money to countries that need it.
Speaker 3: You've got a so called Paris Club system of debt
Speaker 3: rescheduling and restructuring, but you've got other people offering debt
Speaker 3: and restructuring it.
Speaker 2: You have a.
Speaker 3: System that is being chipped away because it's irrelevant. So
Speaker 3: if we want to have an international system with international rules,
Speaker 3: there's multilateral it has to work. If developing countries feel
Speaker 3: it's irrelevant to them, that they don't have a voice,
Speaker 3: that it is not suited to their challenges and issues,
Speaker 3: they will listen to anybody else.
Speaker 1: What do the leaders of the World Bank. We have
Speaker 1: a new one in Ajabanga and the IMF Crystallina Georgieva
Speaker 1: think of the Bridgetown to point zero agenda.
Speaker 3: Both of it have expressed support for the Bridgetown initiative.
Speaker 3: Our job is to make their job easier. They'll say
Speaker 3: that they lead institutions that have shareholders who drive policy,
Speaker 3: and we've been focused on influencing the shareholders.
Speaker 1: And those shareholders are essentially the largest economies with the
Speaker 1: largest amount of shareholding.
Speaker 3: Roughly speaking. Yes, the shareholding framework was set back in
Speaker 3: nineteen forty five and it is based it's heavily skewed
Speaker 3: towards the Europe and the United States, and they're quite
Speaker 3: protective of their shareholdings and don't wish them to form.
Speaker 3: But I think it's important to say that one of
Speaker 3: the reasons why we have a moment today is we
Speaker 3: have a leadership of the two main institutions who I
Speaker 3: think want to make sure their institutions are more relevant
Speaker 3: and more relevant to today's new problems.
Speaker 1: Thank you so much. This is a very important topic,
Speaker 1: very complicated topic, but without it you cannot break the deadlock,
Speaker 1: and I'm really glad to have explored those solution sets
Speaker 1: with you today.
Speaker 3: Thank you.
Speaker 1: I'll be heading to Paris next week with my colleagues
Speaker 1: from Bloombergreen to report on the summit, including the reception
Speaker 1: to Avinash's plan. For all the latest visit Bloomberg dot
Speaker 1: com Slash Green. Thanks for listening to Zero. If you
Speaker 1: like the show, please rate, review, and subscribe on Apple
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Speaker 1: Bloomberg dot Net. Zero's producer is Oscar Boyd and senior
Speaker 1: producer is Christine Riskell. Our theme music is by Wondering.
Speaker 1: Special thanks this week to Kate McKenzie and Kira Bindram.
Speaker 1: I'm Akshatrati back next week. By the way, your name
Speaker 1: and my name mean the same thing.
Speaker 3: The soul I always having to tell people it's not sol
Speaker 3: at the bottom of your feet soul. Yeah, immortal instructions
Speaker 3: or indestructible. Yeah, well, let's not test