Speaker 1: Hi.
Speaker 2: I'm Olivia Rudgaard, a reporter for Bloomberg Green. I'm currently
Speaker 2: working on a piece about climate anxiety, and I have
Speaker 2: request for zero listeners.
Speaker 3: Climate change can.
Speaker 2: Cause stress, both of people directly affected by it and
Speaker 2: for those concerned about its effects on others and their future.
Speaker 2: If you're okay to share your experience of this, we
Speaker 2: would love to hear from you. Tell us what makes
Speaker 2: you worry, how your worries affect your life, and what
Speaker 2: helps you feel better. Take our short survey. There's a
Speaker 2: link in the show notes.
Speaker 3: Thank you, Hi. It suckshot. One of the most important
Speaker 3: discussion points at COP twenty eight will be how to
Speaker 3: get money for climate projects in developing countries that maybe
Speaker 3: to reduce emissions, help adapt to impacts, or compensate for
Speaker 3: the damages caused. It's what COPS need to solve if
Speaker 3: there are to be future agreements among all countries. Earlier
Speaker 3: this year, I spoke with avinash Pursod, who is Barbados's
Speaker 3: Climate Envoy and the brains behind the Bridgetown Agenda. It's
Speaker 3: a wide ranging set of ideas that could help move
Speaker 3: trillions of dollars into developing countries. Ahead of COP twenty eight.
Speaker 3: We are replaying that episode for anyone who might have
Speaker 3: missed it. Welcome to Zero. I'm Akshatrati. This week canaries,
Speaker 3: coal mines, and a call for cash. Every now and
Speaker 3: then I get to hear an idea that, if it's
Speaker 3: pulled off, will be truly transformational. This episode is about
Speaker 3: one of those ideas. At COP twenty seven last year,
Speaker 3: there was a moment that took the conference by storm.
Speaker 3: Mia Motley, the Prime Minister Barbados, took to the stage
Speaker 3: in front of world leaders and in a blistering speech,
Speaker 3: gave her vision to fix the climate crisis.
Speaker 4: I come from a small island state that has high ambition,
Speaker 4: but that is not able to deliver on that high
Speaker 4: ambition because the global industrial strategy that we have has
Speaker 4: fault lines in it.
Speaker 3: Typically at these meetings, poor countries ask for money from
Speaker 3: rich countries and don't get it. It's a reasonable demand
Speaker 3: because poor countries didn't cause the problem, but need to
Speaker 3: be a part of the solution. So to break the deadlock,
Speaker 3: Motley had a different idea. She proposed a plan to
Speaker 3: unlock trillions of dollars in private investments that could turbocharge
Speaker 3: the buildout of climate solutions like solar and wind power
Speaker 3: in developing countries.
Speaker 4: The global North borrows interest rates of between one to
Speaker 4: four percent, the global South of fourteen percent. This is
Speaker 4: the ball reality, and we have come here to ask
Speaker 4: us to open our minds to different possibilities. We believe
Speaker 4: that we have a plan.
Speaker 3: That plan is known as the Brigachdown Initiative, and it
Speaker 3: calls for the reform of the current global financial system
Speaker 3: that was built in the aftermath of World War Two.
Speaker 3: At that time, half of today's countries didn't exist. The
Speaker 3: country I was born in, India, was still a British colony,
Speaker 3: and yet that system, made up of institutions like the
Speaker 3: World Bank and the International Monetary Fund, continued to be
Speaker 3: crucial to helping developing countries develop further. In twenty twenty one,
Speaker 3: these so called multilateral development banks spent fifty one billion
Speaker 3: dollars on climate finance, which sounds like a lot of money,
Speaker 3: but it's nowhere near enough to meet climate goals. My
Speaker 3: guest today hopes to hugely increase that figure and is
Speaker 3: the architect of the Bridgetown Initiative, Avinache Persoud. He's the
Speaker 3: Special Envoy on investment and financial services for Barbados and
Speaker 3: a key advisor to Mia Motley.
Speaker 1: Where canaries in the mind and you could either think, well,
Speaker 1: how do I get some little bit of air for me,
Speaker 1: I'm watching these other canaries in the mine being severely
Speaker 1: starved oxygen. Or you could try and fix the mind.
Speaker 1: And that's the only fundamental way of solving this problem.
Speaker 3: In its simplest form, Bridgetown asks for one big thing,
Speaker 3: using the power of these giant financial institutions to make
Speaker 3: it far less risky to invest money in climate solutions
Speaker 3: in developing countries, turning a trickle of billions into a
Speaker 3: flood of trillions. The global financial system is complicated, and
Speaker 3: so are the solutions to fix it. However, without those fixes,
Speaker 3: there is little chance of meeting climate goals. So it's
Speaker 3: great to get a chance to question one of the
Speaker 3: smartest people working on these solutions. I sat down with
Speaker 3: Avinash ahead of the summit to discuss some of his
Speaker 3: fixes and why he thinks now is the time these
Speaker 3: aging financial institutions will be finally reformed. Avinash, Welcome to
Speaker 3: the show.
Speaker 1: Oh thank you.
Speaker 3: How did you go from being born in Barbados to
Speaker 3: trying to fix the global financial architecture for the climate.
Speaker 1: Hera Well. I left Barbados when I was seven years old,
Speaker 1: but I do think that it left a lasting impression
Speaker 1: on me. I my father used to when we arrived
Speaker 1: in Northwest London. This is in the nineteen seventies, there
Speaker 1: weren't many people of color, and he said to me,
Speaker 1: you are the ambassador to Barbadis for Northwest London. So
Speaker 1: I'd been going around the place being very proud of Barbados,
Speaker 1: saying good morning to all these Brits who were startled
Speaker 1: that some stranger in the street would say good morning
Speaker 1: to them at aged seven. So it had a lasting
Speaker 1: impression on me. My dad was a development economist. He
Speaker 1: was involved in a lot of the big struggles of
Speaker 1: the nineteen eighties, like anti apartheid. He helped write the
Speaker 1: sanctions against South Africa, some of the first commissions on
Speaker 1: the environment, the Brutland Commission. That excited me. So I
Speaker 1: wanted to be a development economist, and he said to
Speaker 1: me he'd fund my first degree, but not my second.
Speaker 1: So I got a job in the city of London,
Speaker 1: and I was quite good at it and quite enjoyed
Speaker 1: the fact that people were listening to me, and if
Speaker 1: I developed economist, people began listening to me because finance
Speaker 1: is the rub of most problems.
Speaker 3: Now Mia Motley is the Prime Minister of Barbados and
Speaker 3: has become a star in climate circles as a voice
Speaker 3: that is giving importance to finance and how to move
Speaker 3: billions to trillions. She gave this defining speech at both
Speaker 3: COP twenty six in Glasgow and then COP twenty seven
Speaker 3: in Sharammel Shaken, Egypt about the vulnerability of small island
Speaker 3: states to climate change. Now, how did you end up
Speaker 3: working with Mia Motley on these issues?
Speaker 1: Well, Prime Minister to Motley and I met at college
Speaker 1: aged eighteen here at the London School Economics. She was
Speaker 1: studying law, I was doing economics, and so that's how
Speaker 1: I ended up getting to know her. Years years later,
Speaker 1: I'm back in Barbados advising her on her finance and budgets.
Speaker 1: And we have the most horrific hurricane season. It's twenty seventeen,
Speaker 1: two category five monster hurricanes. I mean, when you see
Speaker 1: the satellite pictures, these hurricanes are bigger than the entire
Speaker 1: chain of islands, and it crashes Dominica. They lose two
Speaker 1: hundred and twenty six percent of GDP in four hours.
Speaker 1: So anyway, she sends me off and says, this is
Speaker 1: the time U economists need to step up. Here's a
Speaker 1: country that needs some support. And so I was involved
Speaker 1: in helping them and develop their plans after the hurricane.
Speaker 1: And that was really, to be honest with you, and
Speaker 1: I'm not particularly proud of it, but it was only
Speaker 1: that point that I really began understanding climate change and
Speaker 1: the impact on countries who were climate vulnerable. What were
Speaker 1: the financial and economic consequences of this, and what the
Speaker 1: global system. Howeveryone said that they cared, but how there
Speaker 1: was actually the end of the day, very little money.
Speaker 3: So you visit Dominica and you realize that climate change
Speaker 3: is going to be a massive problem for countries like Barbados.
Speaker 3: But then the solution set you ended up developing is
Speaker 3: not just addressing the problems of climate vulnerable countries, but
Speaker 3: trying to fix the entire global financial architecture, which is great,
Speaker 3: But how do you go from that problem, which is
Speaker 3: local caused by a global crisis, to try to address
Speaker 3: a global crisis of another sort.
Speaker 1: Well, we're sitting there thinking about why is it that
Speaker 1: we're in this situation, small island states in the tropics,
Speaker 1: I mean, climate vulnerable countries are not just small states
Speaker 1: or island states. There really any country between the Tropics
Speaker 1: of Cancer and the Tropic of Capricorn. Within that band,
Speaker 1: that's where temperatures are rising to some of the highest
Speaker 1: levels and where sea levels are increasing to the highest levels.
Speaker 1: I mean, I'm an economist, so I know no science.
Speaker 1: I have to be explained to me that when the
Speaker 1: glaciers melt at the poles, that the water doesn't stay
Speaker 1: there because of the spinning of the earth. The water
Speaker 1: ends up on the equator, and so our sea levels
Speaker 1: will rise by three quarters of meter or more. So
Speaker 1: low lying areas in the tropics are very vulnerable. So
Speaker 1: we're sitting there where canaries in the mine, and you
Speaker 1: could either think, well, how do I get some little
Speaker 1: bit of air for me I'm watching these other canaries
Speaker 1: in the mine being severely starved of oxygen, or you
Speaker 1: can try and fix the mine. And that's the only
Speaker 1: fundamental way of solving this problem. And that's about not
Speaker 1: just our loss and damage and climate adaptation and resilience.
Speaker 1: The biggest story is climate mitigation. There we see the
Speaker 1: countries who could do something about looking at each other
Speaker 1: across the table and pointing each other, and all of
Speaker 1: them saying that this is very important, this is very urgent,
Speaker 1: and you, pointing across the table, need to do more
Speaker 1: about it, and we're stuck.
Speaker 3: You wrote a paper that defined the problem as a deadlock,
Speaker 3: and it's really precisely the word to be used in
Speaker 3: this case, because I've been to cop meetings before. These
Speaker 3: are places where rich countries and poor countries come together
Speaker 3: and the finger pointing gets really problematic. Rich countries would
Speaker 3: say to poor country as well, we understand we cause
Speaker 3: this problem, but you now need to reduce emissions too,
Speaker 3: because otherwise we don't have the carbon space available to
Speaker 3: deal with this problem. And then poor countries would go,
Speaker 3: we can do that if you give us money. Where
Speaker 3: is the money? And that money never comes. And so
Speaker 3: one way to think about the climate problem is really
Speaker 3: it's a finance problem, and so it's understandable that trying
Speaker 3: to address it through the finance lens is crucial. So
Speaker 3: what is it that you think will unlock it.
Speaker 1: Well, I think it's important to say that two years ago,
Speaker 1: the prevailing view was it was an ignorance problem. It
Speaker 1: was a science problem. People didn't believe the science. They
Speaker 1: were in denial. They just didn't believe it. And we
Speaker 1: were listening to people were thinking, that's not the problem.
Speaker 1: The problem is that that everyone believes someone else should
Speaker 1: be doing more. And our issue was the only way
Speaker 1: we could get around that problem is finance. Why do
Speaker 1: they believe someone else should do more because it's a
Speaker 1: cost to them to do it. So if we can
Speaker 1: make it easy for them to do it, we can
Speaker 1: reduce the cost for them, we can finance it. They
Speaker 1: won't spend their time pointing their finger to someone else.
Speaker 1: They will get it done.
Speaker 3: And so Dominica happens. You go back and you start
Speaker 3: working on trying to solve this problem. This is back
Speaker 3: in twenty seventeen eighteen nineteen period. You put out what
Speaker 3: is called a Bridgetown Agenda, named after the capital of
Speaker 3: Barbados last year, and you're now this month coming out
Speaker 3: with an update to that agenda. Let's go through the
Speaker 3: broad strokes of what that agenda does and how it
Speaker 3: addresses this finance problem.
Speaker 1: So the experts say that developing countries need two point
Speaker 1: four trillion dollars every year to deal with climate. So
Speaker 1: that's mitigating the climate, preventing it getting worse. That's resilience
Speaker 1: and adapting to the existing change in the climate, and
Speaker 1: that's also addressing the loss and damage. So you add
Speaker 1: all that together two point four trillion dollars. Now, of
Speaker 1: course few people can imagine two point four trillion dollars.
Speaker 1: So I think the way to think about this is
Speaker 1: that all of the aid in the world add up
Speaker 1: everything for everything is two hundred billion dollars per year.
Speaker 1: So we're talking about something that is twelve times more
Speaker 1: than what's currently happening every year, twelve times, and so
Speaker 1: you know you've got a problem because they might be
Speaker 1: able to increase it by ten percent, no one's increasing
Speaker 1: it by twelve times. So bridge down is the solution
Speaker 1: to get to the twelve times. So we say we
Speaker 1: can't do it, but it needs three different buckets of financing.
Speaker 1: The first bucket the biggest bucket. It's stuff you have
Speaker 1: to do which has a revenue stream attached. You can
Speaker 1: do it and it makes money. So you know, building
Speaker 1: a farm makes money, a wind turbine makes money, a
Speaker 1: hydroelectric power makes money. So inside this bucket is a
Speaker 1: lot of things that make money but will mitigate the climate,
Speaker 1: will prevent it getting worse, will help us in the
Speaker 1: green transformation. What we need to do to fill that
Speaker 1: bucket is we need to find a way of catalyzing
Speaker 1: the private sector to get them into doing this in
Speaker 1: developing countries. They're doing this in the rich countries. Eighty
Speaker 1: one percent of all climate mitigation green transformation stuff is
Speaker 1: financed by the private sector in rich countries, but only
Speaker 1: fourteen percent in the poor countries. So we've got to
Speaker 1: change that equation. And we've got a solution to it.
Speaker 1: It's around guaranteeing the foreign exchange risk that the private
Speaker 1: investor has when they go to developing countries. But we
Speaker 1: can come back to that.
Speaker 3: Yes, I mean, that's the hardest solution to get your
Speaker 3: head around, but it also is the biggest problem to address.
Speaker 3: And then the two other buckets.
Speaker 1: So the second bucket, second biggest, This is for things
Speaker 1: which they are no revenues, but they are savings. And
Speaker 1: so if there are no revenues but savings, you can
Speaker 1: borrow to fill this bucket. Now, what's in this bucket,
Speaker 1: This is stuff like a sea wall. You don't make
Speaker 1: money from having a sea wall, but you save money
Speaker 1: from all the times that the capital city is not
Speaker 1: flooded because you've got this new sea wall. All very
Speaker 1: unglamorous stuff, but very very important and saves a lot
Speaker 1: of money. So this bucket is about resilience, adaptation. We
Speaker 1: can fund a lot of those things. The third bucket
Speaker 1: is the smallest bucket, addressing the loss and damage.
Speaker 3: Right, if you don't reduce emissions and you don't adapt
Speaker 3: to warming, then you will get damages from climate impacts.
Speaker 1: That's right, and there's a fair amount of those damages
Speaker 1: in which you have to respond. All of your low
Speaker 1: income homes have lost their roof, they've washed away, and
Speaker 1: these are people who do not have any resources, do
Speaker 1: not have any ability to ensure. Insurance companies are not
Speaker 1: going to ensure them, so they're no revenues and they're
Speaker 1: no savings. So we can't borrow for this, so we
Speaker 1: need grants. So the grand bit we've made the smallest
Speaker 1: bit possible. We've shrunk it. It's not a two point
Speaker 1: four trillion dollar task, but it's one hundred billion dollar task,
Speaker 1: and we recognize that governments don't have one hundred billion
Speaker 1: dollars stuff behind the sofa EID budgets are not going
Speaker 1: to double. They're not going to increase from two hundred
Speaker 1: billion to three hundred billion, So we need new revenue streams.
Speaker 1: That's something like an emissions tax in the shipping industry.
Speaker 1: Shipping is a significant part of emissions increases. There's a
Speaker 1: proposal for a one hundred dollars per ton of carbon
Speaker 1: as a result of emissions in the shipping industry. That
Speaker 1: would fund the third of that bucket. Oil and coal exports.
Speaker 1: If there was a small levee on those exports, a
Speaker 1: one percent levee, that would fund the other two thirds.
Speaker 1: So that's how we deal with that third bucket.
Speaker 3: Let's walk through the most complicated and the largest bucket,
Speaker 3: which is to try and make private capital move to
Speaker 3: poor countries at a much faster rate, at a bigger
Speaker 3: volume every year for the rest of this century. Why
Speaker 3: is it not already happening? Because you get to hear
Speaker 3: these things, which is, solar is the cheapest form of
Speaker 3: electricity you can get anywhere in the world, especially in
Speaker 3: countries like India and other developing countries within the tropics,
Speaker 3: the places that have the impact. If that's the case,
Speaker 3: why does the money not flow. So there are two
Speaker 3: problems of.
Speaker 1: The idea that renewable energy is free and easy and cheap.
Speaker 1: There are two problems. Firstly, they're very capital intensive, so
Speaker 1: I've got to buy the land, I've got to buy
Speaker 1: the panels, I've got to erect them and connect them,
Speaker 1: and that's very capital intensive. Most of that is foreign
Speaker 1: currency required for that. And then I'm getting revenues for
Speaker 1: the solar farm in local currency, so I have a
Speaker 1: big bill that's a foreign currency bill and paying for
Speaker 1: it through local currencies. Foreign investors need to be involved
Speaker 1: because they're the ones with the foreign currency and they
Speaker 1: look at this country and they say, well, you know,
Speaker 1: there's risks of the project, but the solar farms are
Speaker 1: pretty standard tech today, win farms, hydroelectric. There isn't really
Speaker 1: a tech problem. The problem is that the country may
Speaker 1: have a currency risk. There may be a credit risk.
Speaker 1: And if you unpack the risks involved in that investment,
Speaker 1: it's not tech, it's not the project, it is currency
Speaker 1: in credit.
Speaker 3: So these risks, which we can understand as macro risks,
Speaker 3: come in different from one that is easy to understand
Speaker 3: is political risk. The country may be a democracy, but
Speaker 3: may have a military dictatorship just sitting in the back,
Speaker 3: which comes in and there's a problem. There could be
Speaker 3: regulatory changes made because there's been a change in the
Speaker 3: party that rules the country. Those are political risks that
Speaker 3: you can kind of understand. But what does currency risk mean?
Speaker 3: Currency risks are an interesting basket which collects almost all
Speaker 3: of those other country type risks. So if the change
Speaker 3: your government creates uncertainty, your currency tends to fall. If
Speaker 3: people are uncertain whether you could pay your debts, your
Speaker 3: currency falls. And so currencies are very volatile, and when
Speaker 3: institutional investors in America in Europe invest, they want to
Speaker 3: hedge themselves from these kinds of risks that they're unfamiliar with.
Speaker 3: Hedging involves one company paying another company for a risk
Speaker 3: they don't want to take. For example, if you're an
Speaker 3: American investor with assets in India and you're worried that
Speaker 3: the Indian rupee could fall in value, you would ask
Speaker 3: a bank to take care of that risk for you.
Speaker 3: If the rupee does fall, the bank will deal with
Speaker 3: the losses and you'll still get the exchange rate read
Speaker 3: with the bank. If the ruby rises in value, the
Speaker 3: bank makes money, but you still get the same exchange rate.
Speaker 3: You the investor don't have to be worried about currency risk,
Speaker 3: and the bank has a service it can make money off.
Speaker 1: Institutional investors in America in Europe, they'll say, I'm in
Speaker 1: the energy sector and I understand energy. I'm in the
Speaker 1: tech sector. I understand tech. I don't understand the South
Speaker 1: African rand. I'm not an expert in that or the
Speaker 1: Indonesian rupia, and so I want to hedge myself from
Speaker 1: those risks. And the hedging costs basically eat up about
Speaker 1: two thirds to three quarters of the return, and so
Speaker 1: what they're left with the hedged return is measly like
Speaker 1: a three to four percentage point return. And if you're
Speaker 1: an institutional investor, you're thinking, why add that to my portfolio.
Speaker 1: I want a seven or eight percent return.
Speaker 3: And at least let's take an example of a project
Speaker 3: to be able to understand these numbers, because it gets
Speaker 3: easier if we focus on a solar plant in South Africa,
Speaker 3: a developing country that has a very coal heavy electricity sector,
Speaker 3: but is willing and is big participant in the global
Speaker 3: system to try and address this problem through finance. So
Speaker 3: say you were building a solar plant in South Africa.
Speaker 3: Give it ten million dollars. Now what is it that I,
Speaker 3: the private investor who would like to invest in your
Speaker 3: solar plant, need to think about? And why would I
Speaker 3: choose you over a solar plant I could build in
Speaker 3: the UK.
Speaker 1: So you're not so much worried about solar But the
Speaker 1: problem is that you, the investor, are only prepared to
Speaker 1: go if the return not only gives you the same
Speaker 1: return you'd get for solar farm in Germany, say, but
Speaker 1: an additional return for all of the additional risks the
Speaker 1: currency risk, the credit risk, the political risk, And when
Speaker 1: you take all of those risks out, it's hard for
Speaker 1: those projects to give you the return that you want.
Speaker 1: So we need to find a way of hedging those
Speaker 1: risks cheaper to make the returns more attractive. And there's
Speaker 1: a way we can do it, because if you observe
Speaker 1: in the case of South Africa is a good one.
Speaker 1: You know, the cost to hedge the currency risk that
Speaker 1: the South African currency is called the rand. The rand
Speaker 1: is a fairly volatile currency and it costs you, you know,
Speaker 1: eight to nine percent to eliminate the risk of loss
Speaker 1: from the currency eight to nine percent per year.
Speaker 3: Which means that if I were making say a profit
Speaker 3: of five percent on my German solar farm, I would
Speaker 3: need to make a profit of fourteen percent in South
Speaker 3: Africa for those projects to be comparable. For the financial
Speaker 3: written that I, the investor, is getting from the solar plant.
Speaker 3: Is that right?
Speaker 1: Exactly, same tech, same project. It can make five percent
Speaker 1: in Germany, the equivalent demand it needs to make in
Speaker 1: South Africa to attract me is fourteen percent. Because I
Speaker 1: got to take out nine percentage points of that fourteen
Speaker 1: And why do you have to take out nine because
Speaker 1: that's all the currency risk and the credit risks for
Speaker 1: me investing in South Africa. The thing is that when
Speaker 1: we look back in time, the actual risk, so how
Speaker 1: much did the currency fall? It wasn't nine percent. It
Speaker 1: was in a case of South Africa, it was like
Speaker 1: four percent. So I'm over paying for that risk by
Speaker 1: five percentage points per year. If I didn't overpay for
Speaker 1: that risk, that project could have yielded me not a
Speaker 1: five percent return, but a ten percent return.
Speaker 3: That sounds like somebody left money on the table, which
Speaker 3: is to say markets usually the whole idea of them
Speaker 3: is through their functioning will find the most efficient way
Speaker 3: to make these hedges possible. There should not be a
Speaker 3: gap between what happened in reality and what kind of
Speaker 3: risk they hedge. So why is it that they are
Speaker 3: overpaying for these hedges if the reality of the currency
Speaker 3: risk is not appearing.
Speaker 1: I think it's a couple reasons. You might argue that
Speaker 1: there's an uncertainty premiere that South Africa's one of one
Speaker 1: hundred and ninety two countries, and people aren't investing heavily
Speaker 1: to be experts in so Africa because they've got other
Speaker 1: countries to look at, and so they feel that there
Speaker 1: are risks out there which they don't fully understand, and
Speaker 1: there's some uncertainty. Then also, the investment may make a
Speaker 1: return in the long run, but in the intervening period
Speaker 1: it could be quite volatile, and investors tend to be
Speaker 1: risk averse. They don't like to use a lot of
Speaker 1: capital money that they can absorb a loss, and so
Speaker 1: they don't like even if you offer them a nice
Speaker 1: return at the end, they don't like the fact that
Speaker 1: they would have had a few loss, a few heartbeats
Speaker 1: along the way, and that they had to carry a
Speaker 1: lot of this loss absorbing amount of spare cash, if
Speaker 1: you like in the indiveniing perid, they can do more
Speaker 1: with that money. It is what economists we call it
Speaker 1: a market failure because this thing, this activity will make
Speaker 1: money and will have a huge social benefit, could save
Speaker 1: the planet. Right, you can't get bigger than that. But
Speaker 1: there's other things the private sector could do with their money, right,
Speaker 1: and they could make more money, and that's doing some
Speaker 1: of the short term versus the long term. In the
Speaker 1: short term and on a year to year basis or
Speaker 1: even five year basis, they don't want to be seen
Speaker 1: as making losses even though overall in the thirty year
Speaker 1: life of this solar planet they will make more money.
Speaker 1: You're right, But it's also the fact that it may
Speaker 1: make money, but it may not make enough money because
Speaker 1: they can do other things with their money. So simply
Speaker 1: saying it's profitable isn't enough if there other things that
Speaker 1: are more profitable. Well, the reason why we call it
Speaker 1: a market failure is a it's profitable privately, there's a
Speaker 1: private return to be had, but socially there's a huge
Speaker 1: return to be had. So there's a social return that's
Speaker 1: being lost because the private sector is finding that there
Speaker 1: are other things which there's a better private return. So
Speaker 1: that's a classic example of where we need to kind
Speaker 1: of align the social return and the private return to
Speaker 1: get private savings invested in this thing.
Speaker 3: So we're talking here about getting investors from abroad to
Speaker 3: come into countries like South Africa. But what is it
Speaker 3: with countries like India, which are large economies which could
Speaker 3: just have their own central banks, create their own money,
Speaker 3: lend it out to their own private players. Why do
Speaker 3: they have to rely on foreign investors, especially if it's
Speaker 3: a large economy.
Speaker 1: Well, I think that a couple of reasons. Firstly, even
Speaker 1: though it's a large country, there's a large need and
Speaker 1: savings are good in India, but they're not bountiful the
Speaker 1: other things that those segments could do. And if you
Speaker 1: remember earlier, we talked about the fact that there's a
Speaker 1: foreign currency requirement because they may need to import the
Speaker 1: tech and the panels and a range of things. I mean,
Speaker 1: India is investing. Our issue isn't that some countries aren't investing.
Speaker 1: They're just not investing fast enough. They may feel they're
Speaker 1: investing at the right pace for them, and it may
Speaker 1: be the right pace for their economy. It's just not
Speaker 1: the right pace for the planet. So we need to
Speaker 1: turbocharge that investment by making it cheaper and easier and
Speaker 1: more profitable.
Speaker 3: So far, we've talked about the problem Avinash is trying
Speaker 3: to solve, and with the bridge Doown initiative, he thinks
Speaker 3: he has a solution that's coming up right after the
Speaker 3: break through the Bridgetown agenda too. Point Zho, you say
Speaker 3: that with this currency hedge risk solution, and let's talk
Speaker 3: about the solution, you could move as much as one
Speaker 3: point five trillion dollars of private capital into climate oriented
Speaker 3: solutions that would be profit making on an annual basis.
Speaker 3: So what is the solution.
Speaker 1: The solution is that we have an agency that sits
Speaker 1: in the War Bank and the IMF. The agency is
Speaker 1: a not for profit. It is not trying to make money.
Speaker 1: It is trying to make sure there's no overpayment to
Speaker 1: hedge these risks. It's not saying they're no risks. It's
Speaker 1: not saying there's a cost for the risk. It's eliminating
Speaker 1: the over payment. The over payment will substantially cut the
Speaker 1: cost of hedging and significantly boost the rate of return.
Speaker 1: The rate of return of these projects now will jump
Speaker 1: from say a four percent rate of return, which is
Speaker 1: uninteresting for investors, to more like a nine percent radio return,
Speaker 1: which is suddenly a classic kind of return to fit
Speaker 1: into international portfolios of investment. From ive'st the point of view,
Speaker 1: you've suddenly got something as interesting to ignite the excitement
Speaker 1: of the private sector today. The rate of return is
Speaker 1: too low, too uncertain, too risky.
Speaker 3: But there is already an organization, as I understand, called
Speaker 3: TCX here in Europe that was funded by development agencies.
Speaker 3: These are agencies that give money to developing countries for projects,
Speaker 3: and it does currency risk hedging. Why do you think
Speaker 3: you need a different institution? Couldn't DCX just be made
Speaker 3: bigger and solve the problem. TCX finds you the market
Speaker 3: hedging price. We're saying the market hedging price is wrong.
Speaker 3: The market hedging price is an over payment for the risk,
Speaker 3: an over payment by half. T six doesn't have the
Speaker 3: capital or liquidity to basically say the market you're wrong.
Speaker 3: I'm going to hang out here and offer you a
Speaker 3: different exchange rate for billions of dollars of types of
Speaker 3: projects that is four or five percent points per year
Speaker 3: different than the market rate because I know that in
Speaker 3: the long run, I'll be okay, And you're taking this risk.
Speaker 3: The IMF and World Bank can do it because if
Speaker 3: they get it right, they may even make a little
Speaker 3: bit of money. They get it wrong, they've had a
Speaker 3: huge social benefit and that is their actual remit and
Speaker 3: their mandate. So if you succeed that, you create this
Speaker 3: institution within the World Bank and the International Monetary Fund
Speaker 3: that's a not for profit that does the currency has risk.
Speaker 3: So now you're saying, suddenly, my investment in the solar
Speaker 3: farm in South Africa becomes attractive compared to my investment
Speaker 3: in a German solar farm, just because that five percent
Speaker 3: has now been absorbed by this the embody that you've created.
Speaker 3: How much money does that body need to have to
Speaker 3: be able to manage this kind of currency hedge risk
Speaker 3: in one hundred and fifty countries, which your class is
Speaker 3: developing countries in the world today.
Speaker 1: So if what we were suggesting was a subsidy, that
Speaker 1: would limit its scale, because subsidies mean actually it's a
Speaker 1: code word for grants, and grants are not unlimited. But
Speaker 1: what we're saying is this is not a subsidy. This
Speaker 1: is removing the overpayment. This is saying we want the
Speaker 1: price of the risk to be equal to the actual
Speaker 1: cost of the risk. At the moment, the price of
Speaker 1: the risk is substantially bigger than the actual risk. And
Speaker 1: so if I'm not doing something that is a subsidy,
Speaker 1: it's not a grant, it actually is something in the
Speaker 1: long run is profitable, then I can be unlimited in
Speaker 1: my scale. I can scale up to the amount of
Speaker 1: the investment the world needs, which is about one point
Speaker 1: five trillion dollars per year of investment. They're not going
Speaker 1: to need one point five trillion of hedging. But this
Speaker 1: is a key point because there's always people out there
Speaker 1: saying we want grants, we want subsidies, and one of
Speaker 1: the messages we're saying, it's a typical bridge down is saying, yes,
Speaker 1: that will be nice, but don't we want scale. We
Speaker 1: need scale, And if you focus only on grants, only
Speaker 1: on people transferring money to you, you're never going to
Speaker 1: get the scale we need to save the planet. Let's
Speaker 1: look at a few other solutions. In the set we
Speaker 1: talked about the three buckets, and so you'll move money
Speaker 1: through currency risk hedging that will allow private investors to.
Speaker 3: Invest more money. You'll for adaptation, increase the amount that
Speaker 3: could be lent and enable that lending to be paid
Speaker 3: for through the savings that the countries will make, and
Speaker 3: there may be some form of emissions tax to be
Speaker 3: will do actually have a smaller amount of grunts given
Speaker 3: for damages. But there are other things that you're proposing
Speaker 3: that could also be very beneficial for countries. So one
Speaker 3: thing is, for example, in Barbados, you introduce their unnatural
Speaker 3: Disaster clause in some of your loans or debts that
Speaker 3: you've taken on, and those trigger when a big catastrophe happens,
Speaker 3: and then you don't have to make those repayments for
Speaker 3: a period of time. You know, how does that help Barbados?
Speaker 3: And can this be applied to other countries?
Speaker 1: So you know, let's recap. We've got a world now
Speaker 1: of that's facing these bigger, more frequent shocks. So we've
Speaker 1: never had before climate related shocks, pandemic shocks, and that
Speaker 1: was the mother of old shocks, right the last pandemic.
Speaker 1: So the world is now facing more shocks. We've come
Speaker 1: up with a way of trying to mitigate some of
Speaker 1: those shocks, to reduce them, to adapt for them. And
Speaker 1: to come up with lots of damage. But the system
Speaker 1: just needs to be more shock absorbing because of this
Speaker 1: changed world we're in and shock absorbing doesn't sound very exciting.
Speaker 3: But yeah, well shock absorbing. Tried driving a car without
Speaker 3: a shock absorber and you know what happens. So it's
Speaker 3: very important.
Speaker 1: It's very important. But it's particularly important for poor countries
Speaker 1: and poor people. Poor people that often live on the edge.
Speaker 1: They may appear to be fine, but it's one week's
Speaker 1: without a job and suddenly they're plunged into poverty. Same
Speaker 1: with countries. So if you're a rich country and you
Speaker 1: have a shock, I mean, you can do quantitative easing,
Speaker 1: print some cash, you can borrow some money. Poor countries
Speaker 1: can't really do that. They don't have reserve currencies either,
Speaker 1: so in a crisis, their currency plunges. In a crisis,
Speaker 1: American and the European currencies go up, so they need
Speaker 1: shock absorbers. So there are two types of shock absorbers.
Speaker 1: There is the public sector shock absorber. The International multi
Speaker 1: Fund should behave a little bit like a lender of
Speaker 1: last resort, the way a center bank behaves for its
Speaker 1: local banks. We need the IMF to be like a
Speaker 1: center bank for the world, and it should offer when
Speaker 1: as a crisis, a facility where you can get emergency, cheap,
Speaker 1: quick money. It's limited, but it's quick. Secondly, because international
Speaker 1: capital markets are bigger than the IMF could ever be,
Speaker 1: we need to look at the financial instruments that the
Speaker 1: world has, especially the debt instruments. So we have. We
Speaker 1: weren't the first. The Caribbean has pioneered natural disaster clauses
Speaker 1: in bonds. Grenadians and Kits were the first. We are
Speaker 1: the world's largest issuer of sovereign bonds with natural disaster
Speaker 1: clauses in them. So these are clauses which says, if
Speaker 1: an independent entity has declared that you have had a
Speaker 1: major national disaster, a hurricane or something else, then for
Speaker 1: two years, all of your debt servicing that means your
Speaker 1: interest payments, your repayment of the debt that's suspended for
Speaker 1: two years. You get this breathing space for which you
Speaker 1: can focus on the disaster, and then all of that
Speaker 1: debt service that was suspended is added back on. At
Speaker 1: the end of the instruments. The instrument becomes automatically two
Speaker 1: years longer, and you've got to pay some interest that
Speaker 1: for that period of time, which was the same as
Speaker 1: the interest beforehand, And so it provides you liquidity. It's
Speaker 1: not free money, it's liquidity. It's reshuffling the payments to
Speaker 1: give you the breathing space when you need it. The creditor,
Speaker 1: the person who lent you the money, is no worse off.
Speaker 1: They get all their payments back plus interest, but they
Speaker 1: just have they've allowed a different shift in the timing,
Speaker 1: and that's so important for dealing with the crisis. Nobody
Speaker 1: gives us the amount of liquidity that we would get
Speaker 1: from these instrums. If a disaster hit s Barbados. This
Speaker 1: saves us eighteen percent of our GDP one eight percent
Speaker 1: of our GDP. All the other multilateral development banks put
Speaker 1: together offer us all kinds of contingency lending. They come
Speaker 1: up to about two percent. So this really is a
Speaker 1: life changer. If every developing country had them during the pandemic,
Speaker 1: for example, it would have given them one trillion dollars
Speaker 1: of liquidity to deal with the pandemic. In the end,
Speaker 1: development countries, because they had no liquidity and no ability
Speaker 1: to get extra cash, they only spent all of them
Speaker 1: half a trillion on the health crisis. This would have
Speaker 1: given them one trillion. They could have spent twice as much.
Speaker 3: These institutions, the World Bank and the IMF, were created
Speaker 3: decades ago at a time that was very, very different
Speaker 3: from today. You've said, in effect that from the conception
Speaker 3: there were fundamental problems with these institutions. There have been
Speaker 3: many attempts to try and reform them, and small changes
Speaker 3: have been made. But why do you think this time
Speaker 3: around they will change.
Speaker 1: I think we have a moment today. I'm not sure
Speaker 1: exactly why that is. I think Bridgetown has helped to
Speaker 1: create that moment, but many other things have. The enormous
Speaker 1: tragedy of Pakistan last year, thirty million people homeless, twenty
Speaker 1: seven thousand schools underwater. I think the heat waves and
Speaker 1: the flooding in Europe and America has helped to create
Speaker 1: that moment. I think the nature of the current US
Speaker 1: administration European governments. We've had a US Treasury secretary saying
Speaker 1: we need to go from billions to trillions. Well, to
Speaker 1: be quite frank, we've never had a US Treasury secretary
Speaker 1: say that before. I think also, the system is broken,
Speaker 1: and it's clear that if we don't fix it, somebody
Speaker 1: else will replace it. You know, we've fumbled along with
Speaker 1: a forty system for a long time. But now they're alternatives,
Speaker 1: and people are presenting alternatives, and we are seeing that
Speaker 1: what was previously an open trading system, governments are championing
Speaker 1: an alternative trading system. You're seeing that happening with debt.
Speaker 1: We've got a global debt restructuring process that is being changed.
Speaker 1: It's different. So I think people realized that the stakes
Speaker 1: are bigger than ever before, which is that this system,
Speaker 1: if it's not fixed, will just be brushed away as irrelevant.
Speaker 1: And at the core of the system our institutions established
Speaker 1: around nineteen forty five now the world. In nineteen forty five,
Speaker 1: the European Empires were still largely intact. India and get
Speaker 1: its independence until a few years later, So the vast
Speaker 1: majority of countries today did not exist back in nineteen
Speaker 1: forty five. And in nineteen forty five, the problem was
Speaker 1: rebuilding Europe after the war, the idea of climate change,
Speaker 1: of pandemics, of inequality, those things were not forefront in
Speaker 1: their agenda. They've evolved over time and they've become much
Speaker 1: more focused on poverty in the poorest countries. But the
Speaker 1: world is also evolved. We need to fix the system,
Speaker 1: and we need to change its focus and its remit
Speaker 1: and most importantly, we need to scale it up. It
Speaker 1: is so tiny it is irrelevant. It is irrelevant today.
Speaker 1: We need to say, the total all of the multilateral
Speaker 1: debump banks put together lend about one hundred billion dollars.
Speaker 1: Remember the figure we used at the beginning. We need
Speaker 1: two point four trillion dollars. We need to get that
Speaker 1: lending up from one hundred billion to four hundred or
Speaker 1: five hundred billion. We need to scale it up.
Speaker 3: Who is presenting alternatives to the World Bank and IMF
Speaker 3: that could brush these institutions aside.
Speaker 1: The international system is being replaced, not by a grand plan,
Speaker 1: but being chipped away. So today it's irrelevant. Today when
Speaker 1: people want investment, you've got the War Bank, but you've
Speaker 1: got a number of other people coming to you offering money,
Speaker 1: offering money on good terms.
Speaker 3: I mean, Ash doesn't say it, but the elephant in
Speaker 3: the room is China. Since twenty fifteen, China has offered
Speaker 3: one hundred and eighty five billion dollars in assistance to
Speaker 3: countries in debt distress, including Argentina, Pakistan and Nigeria. That's
Speaker 3: according to a study by AID Data. Over the past decade,
Speaker 3: China's overseas bailouts are more than twenty percent of the
Speaker 3: total lending of the IMF, and the amounts are growing,
Speaker 3: providing an alternative so of money to countries that need it.
Speaker 1: You've got a so called Paris Club system of debt
Speaker 1: rescheduling and restructuring, but you've got other people offering debt
Speaker 1: and restructuring it.
Speaker 4: You have a.
Speaker 1: System that is being chipped away because it's irrelevant. So
Speaker 1: if we want to have an international system with international
Speaker 1: rules that is multilateral, it has to work. If developing
Speaker 1: countries feel it's irrelevant to them, that they don't have
Speaker 1: a voice, that it is not suited to their challenges
Speaker 1: and issues, they will listen to anybody else.
Speaker 3: What do the leaders of the World Bank we have
Speaker 3: a new one in Ajabanga, and the IMF Crystallina Georgieva
Speaker 3: think off the bridge down to point zero a gender.
Speaker 1: Both of it have expressed support for the Bridgetown initiative.
Speaker 1: Our job is to make their job easier. They will
Speaker 1: say that they lead institutions that have shareholders who drive policy,
Speaker 1: and we've been focused on influencing the shareholders.
Speaker 3: And other shareholders are essentially the largest economies with the
Speaker 3: largest amount of shareholding. Roughly speaking, Yes.
Speaker 1: The shareholding framework was set back in nineteen forty five
Speaker 1: and it is based as heavily skewed towards the Europe
Speaker 1: and the United States, and they're quite protective of their
Speaker 1: shareholdings and don't wish them to form. But I think
Speaker 1: it's important to say that one of the reasons why
Speaker 1: we have a moment today is we have a leadership
Speaker 1: of the two main institutions who I think want to
Speaker 1: make sure their institutions are more relevant and more relevant
Speaker 1: to today's new problems.
Speaker 3: Thank you so much. This is a very important topic,
Speaker 3: very complicated topic, but without it you cannot break the deadlock.
Speaker 3: And I'm really glad to have explored those solution sets
Speaker 3: with you today.
Speaker 1: Thank you.
Speaker 3: Thanks for listening to Zero. If you like the show,
Speaker 3: please rate, review, and subscribe on Apple Podcasts or Spotify.
Speaker 3: If you enjoyed this week's episode, please share it with
Speaker 3: a friend or someone who's planning a trip to the Caribbean.
Speaker 3: If you've got a suggestion for a guest or topic,
Speaker 3: or something you just want us to look into. Get
Speaker 3: in touch at zero Pod at Bloomberg dot Net. Zero's
Speaker 3: producer is Oscar Boyd and senior producer is Christine Driskell.
Speaker 3: Our theme music is by Wondering. Special thanks this week
Speaker 3: to Kate McKenzie and Kira Bindram. I'm Makshatrati back next
Speaker 3: week