The support of Multilateral Development Banks to renewable energy projects in developing countries

Abstract

AbstractMultilateral Development Banks (MDBs) are extensively involved in the Paris Climate Agreement and play a key role in climate finance. However, the amounts recently channeled to carbon-based projects may raise doubts about this involvement. This empirical approach seeks to explore whether MDB participation actually favors renewable energy projects in developing countries, aligning with their commitment to this Agreement. An empirical analysis is conducted to explore the determinants of MDBs’ participation in energy infrastructure projects developed in 64 countries using data from 2011 to 2018 obtained from the World Bank’s Private Participation in Infrastructure Database. The results reveal that MDBs’ participation is higher in renewable energy projects, confirming their commitment to clean energy; however, this is not confirmed by the amount of financial support provided.Keywords: climate financelimited dependent variable modelsMultilateral Development Banksrenewable energy projectsJEL classification codes: H54Q54F35 Disclosure statementNo potential conflict of interest was reported by the author.Supplemental dataSupplemental data for this article can be accessed online at https://doi.org/10.1080/09640568.2023.2263904.Notes1 MDBs are international financial institutions that assist developing countries in reducing poverty, fostering economic growth, and tackling global challenges. MDBs operate as cooperative entities owned and funded by member countries. Their development finance activities include concessional and non-concessional loans, leveraging capital, risk mitigation, co-financing, technical assistance and policy advise.2 The MDBs included in this analysis are the World Bank Group, the European Investment Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the Islamic Development Bank, the Inter-American Development Bank, the African Development Bank and the new MDBs established in 2015: the Asian Infrastructure Investment Bank (initiated by China) and the New Development Bank (BRICS bank).3 We follow the International Renewable Energy Agency (IRENA) and classify hydropower as a renewable source. The largest sources of GHG emissions for hydropower are the construction of the facilities, and biomass decomposition from reservoir flooding (Steinhurst, Knight, and Schultz Citation2012) but large hydropower plants produce fewer greenhouse gas emissions when compared with fossil fuel-based plants.4 In the PPI database, government support may be Direct support - capital subsidy, revenue subsidy or in-kind (lands, for instance); Or Indirect support, in the form of guarantees (e.g., payment guarantee, debt guarantee, revenue guarantee, exchange-rate guarantee).5 Because only the percentage of private participation in each project is available on the database, it is not possible to use the financial amounts provided by the private sector.6 Variables such as “control of corruption” and “government effectiveness” from the WGI dataset were also tested, but due to collinearity issues these variables were dropped from the analysis.7 Differences in the number of projects, between Table 2 and Table A.4 or Table A.5 (online supplementary material), are due to projects that are being classified in the database with MDBs' support but without the information on the financial amount (not available).8 VIF is an indicator of how much of the inflation of the standard error could be caused by collinearity. As a rule of thumb, values above 10 should be a cause for concern and must be corrected.9 With annual data, the number of lags is typically small in order not to lose degrees of freedom (Wooldridge Citation2013).10 Another possibility is to use a Tobit model, that estimates the financial support provided by MDBs in only one step, taking directly into account its censored nature. Nevertheless, because it relies on strong assumptions of normality and homoscedasticity of the error term, better results are often provided by more general models, used here.11 To enrich the analysis, several interaction terms between the “renewable” dummy variable and other macroeconomic, financial, and institutional controls were tested but without statistical significance achieved (results not presented).12 MDBs’ participation in energy projects, besides funding, can encompass several distinct possibilities: operational assistance, technical and professional advice, political assistance, risk mitigation instruments (e.g., guarantees and insurance against political risks).Additional informationFundingThe author declares that no funds, grants, or other support was received during the preparation of this manuscript.