An International Climate Finance Extension Business Case ...

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An International Climate Finance Extension Business Case for Investment in the REDD for Early Movers (REM) Programme

Project Purpose:

Support transformation to sustainable forest and land use and improved

rural livelihoods in developing countries

Programme Value:

£42.9m

New/ extension:

Extension

Country/ Region:

Existing project in Colombia;

extension to Brazil

Senior Responsible Owner:

Pete Betts, Director, International Climate & Energy

Start Date:

10 November 2017

End Date:

31 December 2022

25 September 2017

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Intervention Summary

What support will the UK provide?

1. BEIS will invest £42.9m of our International Climate Finance (ICF) to extend our partnership

with KfW’s REDD for Early Movers (REM) initiative. This will enable the implementation of

programmes to reduce deforestation in two Brazilian States: Acre and Mato Grosso. REM

will provide results-based payments to the States if greenhouse gas emissions from

deforestation in their territories reduce compared to historic levels.

2. The States, and their delivery partners, will use the money they receive to tackle remaining

deforestation, increase the productivity of sustainable industries and improve rural

livelihoods in these areas. By accelerating some of the world’s most ambitious programmes

to address deforestation, REM aims to demonstrate rewards and lessons that encourage

ambition and better delivery in less advanced initiatives that follow behind.

3. This builds on BEIS’ initial £30.4m investment in REM in 2015, which has enabled Colombia

to accelerate a programme to address deforestation in its Amazon region.

Why is UK support required?

Benefits of addressing deforestation

Deforestation accounts for between 6 and 12% of annual carbon dioxide emissions.

Because forests have the potential to capture carbon they could play a bigger role in climate

solutions than this suggests, providing up to one third of mitigation required by 2030. An

estimated 1.2bn of the world’s poorest people depend on forests for subsistence and

deforestation strikes disproportionately at the extreme poor, indigenous peoples, women and

girls.

How REM will help address it

Compelling business models to improve the livelihoods of people in forested regions, without

losing more forest, do exist. However communities and businesses need help with the

significant upfront investment in technical capacity, infrastructure and market building

needed to kick start new sustainable forms of production. They also need stronger

governance to level the playing field so that unsustainable enterprises do not profit at their

expense.

In most emerging economies addressing deforestation will require the concerted application

of many different interventions, over many years, as there is no one single driver or solution.

Providing results-based finance to governments and stakeholders that are making progress

can be an effective way to incentivise this work while still affording them some flexibility and

scope to adapt.

The leading recent example of addressing deforestation is Brazil’s. In just seven years,

emissions from tropical deforestation in the Brazilian Amazon declined by 75%, a total of 2.6

billion tonnes of CO2 (below a 1995-2005 average). Global emissions were 1.6% lower

because of Brazil’s achievement.i Brazil has made world-leading progress to tackle drivers of

deforestation but it is now working to get to grips with a challenging tail of more difficult

governance and market failures, in difficult economic and political times. Many less

advanced initiatives around the world are watching Brazil’s example, hoping to draw

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inspiration and lessons from the progress that is being made.

Brazil’s success has been achieved by intensifying and relocating beef and soy production

and enforcing stringent environmental standards for these industries.ii Illegal deforestation

became riskier with expansion of protected areas, improved law enforcement, fines and

embargos and with market exclusion through the beef and soy ‘moratoria’. Within Brazil’s

federal system, where many relevant powers are devolved to the State level, some State

governments have made particularly strong contributions. Acre and Mato Grosso are

regularly identified as the most committed and ‘ready’ to go further.iii

Though results-based finance can provide incentives and flexibility for recipient governments

to deploy an array of remedies such as these, traditional results-based payment systems

can leave partners waiting a long time to receive a first payment. This is particularly

challenging in the forest and land use sector as government budgets are often limited and

private capital difficult to raise. REM’s approach is to move quickly and opportunistically,

providing support to governments that have already started to make significant progress to

reduce emissions from deforestation but need funding to go further, which significantly

reduces the waiting time and enables partners to respond to deforestation challenges faster.

The States of Acre and Mato Grosso have begun transitions to sustainable land use with

relatively little international support. Though Brazil famously secured a $1bn donor finance

agreement with Norway, its share of international climate finance for forests is small

compared to its land mass and deforestation challenges, averaging just $1.6 donor finance

per hectare of forest per year. This is ten times lower than Mexico; twenty times lower than

Indonesia and Ghana.iv REM’s support is needed to consolidate progress, tackle more

difficult reforms and increase the visibility of this leading work to demonstrate the rewards

and lessons of addressing deforestation to less advanced initaitves following behind.

Action at the State level

4. Acre is potentially the most advanced jurisdiction in the Amazon basin because of years of

investment to engage local indigenous communities, foresters and farmers in its low-

deforestation development model. Acre made significant progress in the last decade,

reducing deforestation by more than 60% while growing its economy at more than twice the

Brazilian average. It has reached a point where it has strong potential to demonstrate the

rewards and lessons of achieving ‘zero deforestation’ but with some substantial barriers to

overcome to get there. Particularly to get productive industries (including rubber, other non-

timber forest product and fish farming cooperatives) to the point where they are fully

competitive, as well as establish stronger command-and-control systems against illegal

deforestation.

5. Mato Grosso has made substantial progress to reduce deforestation and has ambitious

plans agreed for how the State will go further in partnership with the private sector. It faces

some different drivers of deforestation compared to Acre e.g. the soy industry (dominated by

larger private sector stakeholders) plays a key role. The State’s Government is partnering

with major companies in the soy and beef industries to help them meet zero-deforestation

standards. This has the potential to increase the supply of sustainable soy to companies

such as Marks and Spencer and Unilever that are committed to achieving zero-deforestation

supply chains but coming under increasing civil society and consumer pressure as these

prove difficult to implement.

6. Both States occupy strategically important positions at Brazil’s deforestation frontier, offering

the potential to stabilise it before it encroaches further into the heart of the Amazon. Rural

areas of the States where the programme will be working are home to some of Brazil’s

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poorest municipalities with Human Development Index scores comparable to the national

averages of the Republic of Congo and Namibia.v The States are arguably the most

committed and ready jurisdictions working to address deforestation in Brazil, and among the

leading group globally.vi

Investing in REM will reinforce the approach of the UK’s Embassies in Brazil which are

increasingly focussed on reaching the biggest possible audience with action at the State

level across international trade, Newton Fund, Chevening and other initiatives. In Brazil’s

federal system this is the level where a lot critical activity is devolved. The Embassy is

working to put these local efforts at the centre of the UK’s bilateral relationship with Brazil.

The Embassy teams are keen to work with BEIS to help deliver the best impact for our

investment in Mato Grosso and Acre.

In particular work in Mato Grosso will associate the UK with a major public-private

programme to reduce deforestation for beef and soy production, in partnership with large

Brazilian and international companies. This Produce, Conserve and Include (PCI) initiative is

highly visible within Brazil and increasingly of interest to international stakeholders. Mato

Grosso is a major source of UK soy bean imports. Companies such as Unilever and Marks

and Spencer are coming under increasing civil society and consumer pressure – and

activelty working – to reduce the deforestation risks associated with the soy they use. BEIS

funding to accelerate the delivery of PCI could make a significant contribution to this aim.

Because the programmes in Acre and Mato Grosso are highly advanced and ambitious by

global standards we expect our partnerships to engage a global audience, including

because the States are playing a prominent role in the group of 38 Governors from forested

states across the world that meets regularly under the Governors’ Climate and Forests Task

Force.vii

What are the expected results?

The extension of BEIS’ investment in REM would enable Acre and Mato Grosso to:

- increase the capacity of local environmental protection authorities, at a time when

Brazil’s national Government is cutting budgets, including to implement new rules that

require farmers to restore recently-deforested land;

- build the capacity and track record of new deforestation-friendly industries that require

substantial investment to get started but struggle to attract traditional private lending;

- particularly in the case of Acre, help these industries reach production volumes and

standards that attract market prices and capital investment which will allow businesses to

become independent of donor support;

- significantly reduce emissions from deforestation, increase the intensity of agricultural

and forest-based production to produce more on less land, as well as strengthen the

livelihoods and resilience of some of Brazil’s poorest communities; and

- move their programmes further, faster, generating valuable experience and sharing

lessons with less-advanced jurisdictions.

BEIS has conducted a cost-benefit analysis that focuses on a portion of 36% of the £42.9m

investment, which will go to the most direct interventions to establish new farming systems.

This partial analysis estimates BEIS’ investment will lead to (attributed figures):

- 12 thousand hectares of avoided deforestation;

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- 5.6 Megatonnes of emissions of carbon dioxide equivalent avoided or captured;

- improvement in the livelihoods of 2500 people living in some of Brazil’s poorest areas;

and

- £7.1m private finance leveraged

We also expect this work, which aligns well with the UK Embassy’s increasing focus on

State-level action that reaches a wider stakeholder group across the country, to help

strengthen the UK’s bilateral relationship with Brazil. Also beyond that, because the

programmes in Acre and Mato Grosso are advanced and ambitious by global standards, and

because the States are playing a prominent role in global fora e.g. the Governors Climate

and Forests Task Force, we expect the initiative to have a global audience and

demonstration effect.

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Contents

Intervention Summary................................................................................................................................................................. 2

Contents ..................................................................................................................................................................................... 6

Strategic Case ............................................................................................................................................................................ 7

What support will the UK provide? ............................................................................................................................................................................................. 7

Why is UK support required?...................................................................................................................................................................................................... 7

Theory of Change ..................................................................................................................................................................................................................... 17

Risks ......................................................................................................................................................................................................................................... 18

Appraisal Case ......................................................................................................................................................................... 20

‘Fast-initiation’ REDD+ finance ................................................................................................................................................................................................. 20

Options for delivering fast-initiation finance ............................................................................................................................................................................. 21

UK Visibility ............................................................................................................................................................................................................................... 24

Assessment of the Green Climate Fund option ....................................................................................................................................................................... 24

Assessment of the visibility of the different delivery options .................................................................................................................................................... 25

Summary of options appraisal results ...................................................................................................................................................................................... 27

How REM payments work ........................................................................................................................................................................................................ 28

BEIS’ scale of funding appraisal ............................................................................................................................................................................................... 29

Value for money appraisal ........................................................................................................................................................................................................ 34

Modelling................................................................................................................................................................................................................................... 35

Expected results ....................................................................................................................................................................................................................... 39

Commercial Case ..................................................................................................................................................................... 43

Selection of KfW ....................................................................................................................................................................................................................... 43

Safeguards and due diligence .................................................................................................................................................................................................. 43

Negotiating a value-for-money contract ................................................................................................................................................................................... 44

Appointment of subcontractors ................................................................................................................................................................................................. 46

Financial Case .......................................................................................................................................................................... 48

Nature and value of the expected costs ................................................................................................................................................................................... 48

Financial accounting considerations for BEIS .......................................................................................................................................................................... 52

Contingent factors ..................................................................................................................................................................................................................... 52

Handling interest accrued ......................................................................................................................................................................................................... 52

Financial planning and forecasting ........................................................................................................................................................................................... 52

Monitoring, reporting and accounting for expenditure .............................................................................................................................................................. 53

Management of assets ............................................................................................................................................................................................................. 53

Financial and fraud risk assessment and provisions to withdraw funding ............................................................................................................................... 53

Management Case ................................................................................................................................................................... 55

What are the management arrangements for implementing the intervention? ........................................................................................................................ 55

Local governance of Acre and Mato Grosso REM Programmes ............................................................................................................................................. 55

Donor participation and BEIS’s influence ................................................................................................................................................................................. 56

HM Government staffing ........................................................................................................................................................................................................... 57

How will progress and results be monitored, measured and evaluated? ................................................................................................................................ 57

Monitoring, evaluation and learning plan.................................................................................................................................................................................. 58

Lessons learned from the Colombia partnership ..................................................................................................................................................................... 59

What are the risks and how will they be managed? ................................................................................................................................................................. 60

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Strategic Case

1. This Extension Business Case proposes to increase funding for the REDD for Early Movers (REM)

Programme, an initiative the Department for Business, Energy and Industrial Strategy (BEIS)

invested £30.4m in at the end of 2015. A more detailed Strategic Case for investing in the

Programme was set out in the original Business Case available online here. Therefore this

document summarises the main points of the original Business Case and provides updates if things

have changed significantly or where the increase in funding will be used in a different way.

What support will the UK provide?

2. BEIS will invest £42.9m (£15m RDEL and £27.9m CDEL)1 of our International Climate Finance

(ICF) in REM to support implementation of REDD+2 programmes in two Brazilian States: Acre and

Mato Grosso. The Programme will provide results-based payments to the States if greenhouse gas

emissions from deforestation in their territories reduce compared to historic levels.

3. Results-based REDD+ partnerships have the potential to strongly incentivise action on the ground,

protect UK funds against non-performance and give host governments scope (within reasonable

limits) to innovate and adapt their programmes to local circumstances. However implementation of

these partnerships has been slower than anticipated when REDD+ was conceived. REM is

different, moving quickly to provide ‘fast-initiation’ support to the governments that have already

started to make significant progress to reduce emissions from deforestation but need funding to go

further.

4. The States, and their delivery partners, will use the money they receive to tackle remaining

deforestation, increase the productivity of forest-friendly industries and improve rural livelihoods in

Acre and Mato Grosso. By accelerating some of the world’s most ambitious programmes to address

deforestation, REM aims to demonstrate rewards and lessons that encourage ambition and better

delivery in less advanced initiatives that follow behind.

Why is UK support required?

The benefits that forests provide

5. From 2010 to 2015, the world’s natural forest area decreased by a net 6.5 million ha per yearviii,

roughly three times the size of Wales. Deforestation accounts for between 6 and 12% of annual

carbon dioxide emissionsix. As forests also have the potential to capture carbon they could play an

even bigger role in climate solutions than this suggests potentially providing one third of mitigation

required by 2030. Without significant action to halt and reverse forest loss the global goals of the

Paris Agreement may be beyond reach.x

6. An estimated 1.2bn of the world’s poorest people depend on forests for subsistence and income.xi

Deforestation undermines these livelihoods, and strikes disproportionately at the most vulnerable,

including indigenous people, the extreme poor and women.xii More than three-quarters of the

world’s accessible fresh water originates from forested catchments.xiii Loss of forests, and the

services they provide, may have contributed to human conflict in countries like Colombia, Liberia

and Myanmar.xiv Reaching the 2030 sustainable development goalsxv will be harder if current rates

of deforestation cannot be slowed.

7. Work in this area closely aligns our climate finance with UK private sector activity by supporting the

implementation of companies’ zero-deforestation supply chain commitments, working alongside

1 These numbers have the potential to change slightly (less than +/- 1%) during contract negotiations with KfW

2 Framework under the UNFCCC to Reduce Emissions from Deforestation and forest Degradation and enhance forest carbon stocks (+)

in developing countries

https://aidstream.org/files/documents/REM-Amazon-Vision-Business-Case-20170308120302.pdf

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businesses like Unilever and M&S, co-chairs of the Consumer Goods Forum sustainability pillar. By

helping to create the enabling environment for forest-friendly production, build a pipeline of

commercially viable investments and unlock private finance flows, we hope to create long-term,

cost-effective sustainable sourcing solutions that ultimately tip markets and create a level playing

field for businesses that source commodities responsibly. It is also an example of Global Britain; the

leading role the UK is playing in programmes to address deforestation is widely recognised.

Figure 1 – benefits of addressing deforestation

Market, governance & information failures drive deforestation

8. Direct causes of deforestation include agriculture (clearing for both crops and livestock), timber

harvesting, extraction for fuelwood or charcoal, mining and road-building.xvi Deforestation reduces

the benefits described above, hitting many of the world’s poorest and most vulnerable people

hardest, without this social cost being reflected in market prices and company balance sheets.

9. In emerging economies market and governance failures typically underpin deforestation. On the

market side this includes the absence of strong demand from carbon markets that value the carbon

benefits provided by forests. Weak technical capacity for improved agriculture and forestry practices

is another common limitation. Markets often lack premiums for sustainably-sourced products.

Environmental taxes that internalise the social costs of deforestation are uncommon. Capital

markets are relatively inaccessible to rural enterprises, which makes it difficult to establish forest-

friendly industries and make them fully competitive.xvii On the governance side combatting forest

loss and fostering markets that reflect benefits of forests is more difficult when bureaucratic

capacity, judicial oversight, market regulation, land use regulation and democratic accountability are

weak.xviii

10. These direct drivers of deforestation, and underlying failures, were covered in detail in the original

Business Case. They apply even in relatively ‘advanced’ programmes like those of Acre and Mato

Grosso. E.g. while national legislation is in place in Brazil to ensure farms cannot legally remove

more than 20% of their forest cover, significantly more progress is needed to register farms,

strengthen the governance capacity of local government agencies and enforce this legislation more


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comprehensively. Market and information failures are also equally relevant in Brazil e.g. lack of

carbon taxes, price premiums for sustainable products and low availability of agricultural credit in

rural regions.

Addressing deforestation

11. In forest-rich regions, compelling business models to improve the livelihoods of local people without

losing more forest do exist. However communities and businesses need help with the significant

upfront investment in technical capacity, infrastructure and market building needed to kick start new

forms of production. They also need stronger governance to level the playing field so that

unsustainable enterprises do not profit at the expense of sustainable ones. This requires the

concerted application of many different interventions, potentially over several decades, as there is

no one single driver or solution.

12. Evidence from programmes that have successfully reduced deforestation in leading countries such

as Costa Rica, Colombia and Brazil demonstrates how effective these kinds of intervention can be

where governments are really committed to taking action.xix The strongest evidence surrounds the

role of governance. BEIS’ stakeholders consistently recommended governance as a critical focal

area for our climate finance for forests. That includes stakeholders from commodity and capital

markets who see it as a way to enable forest-friendly investments to hold their own against less

sustainable investment options.xx Governance also has an important role to play to safeguard

vulnerable indigenous and forest-dependent communities.

13. The governments that BEIS funds with our International Climate Finance (ICF) use the funding they

receive to: (1) strengthen forest governance (policies, laws, institutions and systems that tackle

deforestation); and (2) provide grants and technical assistance to local farmers, businesses and

indigenous communities to help them establish forest-friendly industries. This combination

increases the legal and financial risks for actors who engage in illegal deforestation while

strengthening incentives to invest in more sustainable means of income generation.

Figure 2 – BEIS uses top-down and bottom-up approaches to help reduce deforestation

Recognise and reward leading governments with financial incentives to go further, faster -including results-based REDD+ payments

Strengthen governance capacity in ministries, agencies & delivery partners that monitor and

respond to deforestation

Help to seed, strengthen and scale up forest-friendly businesses, small and large

Support Research, Development & Demonstration of new crops and production

systems

Top-down and bottom-up approaches come together to help halt deforestation in key

partner countries

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BEIS has focussed on “REDD+” finance for forests

14. The UK has focussed a substantial portion of its ICF on halting and reversing deforestation. We are

a recognised leader in this space. In Paris in 2015, Germany, Norway and the UK (the “GNU”) issued

a collective pledge to provide USD $5bn between 2015-2020 if robust programmes to reduce

deforestation were developed by forest nations.3

15. The three Departments that invest the UK’s ICF (BEIS, DFID, and Defra) all have a portion of their

portfolio focussed on this area. As many different interventions are needed, and because we are

still learning about which of these are most effective, the Departments have pursued a ‘portfolio

approach’ that covers several different ways of working.

16. As the lead Department for international climate negotiations, BEIS has focussed on supporting

REDD+: a framework agreed under the UN Framework Convention on Climate Change (UNFCCC)

to reward countries that Reduce Emissions from Deforestation and forest Degradation and enhance

forest stocks (+). The framework builds towards results-based payments, where developing

countries receive finance if they make measurable and verifiable progress to reduce emissions from

deforestation. A key pillar of the UK’s strategic collaboration with Germany and Norway is to

generate proof of concept for REDD+ and, in so doing, increase ambition and implementation of

land sector activities under countries’ Nationally-Determined Contributions.

17. Moving forward we have agreed with Ministers that BEIS’ will:

continue to focus on ambitious, committed REDD+ partnerships with governments that have the

greatest prospects of quick results, to inspire further ambition; and also

increase support for zero-deforestation supply chains, partnering with stakeholders on the

ground, to promote sustainable production and trade of key agricultural commodities and

support companies to overcome barriers to implementing ambitious sustainable sourcing

commitments.

Building on the progress of “REM Colombia”

18. The original Business Case for BEIS investment in REM at the end of 2015, available online here,

described in detail a case for providing REDD+ finance in a different way to enable leading

countries to access funding faster than traditional REDD+ support. By generating tangible results

the initiative aims to inspire and inform those that follow behind. Broadly the status of global REDD+

delivery, and supporting evidence for this assessment, remains largely as it was at that time.

19. The need for, and characteristics of, this ‘fast-initiation’ finance is also summarised in the Appraisal

Case that follows.

20. REM provides results-based payments for verified greenhouse gas emission reductions to the most

committed and ready governments to help them move towards zero deforestation while improving

the livelihoods of people living in forested regions. Making payments based on results strongly

incentivises host governments and protects UK funds in the event that programmes do not perform.

It also allows REM’s agreements to be relatively flexible regarding how host governments achieve

these results, allowing them (within reasonable limits) to pursue approaches that fit their local

circumstances, to innovate and to adapt approaches over time.

21. Implementation of results-based REDD+ finance has been slower than anticipated when it was

conceived. Traditional phased approaches can leave host countries waiting a long time to receive a

3 Developing countries with significant forest resources

http://www.bmub.bund.de/fileadmin/Daten_BMU/Download_PDF/Klimaschutz/joint_statement_redd_cop21_en_bf.pdf


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first payment, which is particularly challenging in the forest and land use sector where government

budgets are often limited and private capital hard to raise (diagram below).

Figure 3 – lengthy timescale to a first results-based payment in some REDD+ programmes

22. REM is different, moving quickly to provide support to the governments that have already started to

make significant progress to reduce emissions from deforestation but need funding to go further. It

reduces administrative burdens by acting as something approaching a ‘one stop shop’ for REDD+

finance, supporting: (i) final steps in readiness and capacity building, (ii) upfront investment needs

and (iii) the establishment of results-based payment systems. It does this by negotiating payment

agreements with host governments at the same time as verifying they have recent emission

reductions that can serve as a basis for a first payment, as well as a robust plan for using these

payments to reduce deforestation further and improve rural livelihoods.

23. REM has exceeded our expectations in Colombia with strong disbursement and fast progress

implementing the initial funded activities. These focussed primarily on establishing implementation

structures and early warning systems to alert authorities when illegal deforestation takes place

(BEIS’ REM Colombia Annual Review is available here). One third of BEIS’ funds have been

disbursed in just over 1.5 years of the five year partnership. The German development bank, KfW,

oversees delivery of the REM programme, and has provided a high quality of programme

assurance with pragmatic controls and solutions.

24. Recent developments in Colombia are challenging. The peace agreements Colombia signed with

the FARC EP4 in 2016 led most paramilitaries that had operated in the region to vacate the Amazon

for demilitarised zones. This has opened up some areas of the Amazon to settlement and increased

deforestation in those areas. - Against these new pressures, with REM’s support, Colombia has

successfully managed to hold emissions from deforestation in the Amazon below the historical

average REM uses as a benchmark for results-based payments. REM’s flexible approach is

enabling a swift response e.g. to front-load support for command-and-control measures to address

illegal deforestation at key hotspots vacated by the FARC.

25. The UK’s partnership with Colombia has a high degree of visibility, particularly surrounding how it is

supporting Colombia’s National Development Plan, Nationally Determined Contribution (NDC) and

peacebuilding efforts. By making quick progress to establish implementation structures and

disburse funding it has increased local ambition. It is often used in international case studies,

4 Revolutionary Armed Forces of Colombia – People’s Army; FARC-EP the initialism in Spanish

Year 2Year 1 Year 4Year 3 Year 5

Development and approval of ‘readiness package’

Development and approval of programme implementation plan

Negotiation of Emission Reduction purchase contract

Larger-scale (supported) implementation…

First emission reduction reporting year

Smaller-scale (own effort) implementation

Independent verification of reductions

Final pre-implementation steps

https://edrms.decc.gsi.gov.uk/ISR/csp/LUCF/inv/Documents1/Folders/Colombia/REM%20Annual%20Review%202016%20-%20With%20KfW%20for%20redactions.docx

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arguably contributed to global confidence in REDD+. Anecdotally it has enhanced overall bilateral

relationship with a key partner in the UNFCCC.

Supporting the Brazilian States of Acre and Mato Grosso

26. BEIS has been working with KfW to expand our support to Brazil. Like the partnership in the

Colombian Amazon, the proposed partnerships in Brazil offer the potential to link the UK with world-

leading efforts to reduce deforestation, strengthen UK soft power and Global Britain impacts,

support the delivery of an important Nationally Determined Contribution and demonstrate rewards

and lessons that could encourage ambition and better delivery of less advanced REDD+ initiatives

that follow behind.

27. The leading recent example of addressing deforestation is Brazil’s. In just seven years, emissions

from tropical deforestation in the Brazilian Amazon declined by 75%, a total of 2.6 billion tonnes of

CO2 (below a 1995-2005 average). Global emissions were 1.6% lower because of Brazil’s

achievement.xxi Brazil still needs to go much further and it has built a strong policy and

implementation environment to do so; ranking a close second to Colombia, among 25 leading

countries, in its readiness for successful REDD+ implementation.xxii Because of the big strides it has

made many other regions with significant deforestation problems are looking to Brazil for inspiration.

28. Brazil’s results were achieved by intensifying and relocating beef and soy production and enforcing

stringent environmental standards for these industries.xxiii Illegal deforestation became riskier with

expansion of protected areas, improved law enforcement, fines and embargos and with market

exclusion through the beef and soy ‘moratoria’. Within Brazil’s federal system, where many relevant

powers are devolved to the State level, some State governments have made particularly strong

contributions. Acre and Mato Grosso are regularly identified as the most committed and ‘ready’ to

go further.xxiv

29. Acre has already received one phase of REM finance. It is potentially the most advanced

jurisdiction in the Amazon basin because of years of investment to engage local indigenous

communities, foresters and farmers in its low-deforestation development model. Decoupling

deforestation from economic development typically takes many years (even decades) of concerted

intervention to build markets and strengthen governance.xxv However Acre made significant

progress in the last decade, reducing deforestation by more than 60% while growing its economy at

more than twice the Brazilian average. We are proposing a second phase of REM support for Acre

because it has reached a point where it has strong potential to demonstrate the rewards and

lessons of achieving ‘zero deforestation’ but with some substantial barriers to overcome to get

there. Particularly to get productive industries (including rubber, other non-timber forest product and

fish farming cooperatives) to the point where they are fully competitive, as well as establish

command-and-control systems against illegal deforestation at a time when the budget of Brazil’s

national government is being cut.

30. We are also proposing that REM should support establishment of a new programme in the State of

Mato Grosso, where substantial progress to reduce deforestation has already been made and

ambitious plans agreed for how the State will go further. Mato Grosso’s ‘readiness’ for support

resembles the starting point for our partnership in the Colombian Amazon, with some important

government and market reforms starting to reduce deforestation but implementation structures on

the ground at an early stage of development. Mato Grosso also faces some different drivers of

deforestation than Acre and Colombia. E.g. the soy industry (dominated by larger private sector

stakeholders) plays a key role. The State’s Government wants to partner with these major

companies as they seek to reduce their impact. This provides the potential to demonstrate new

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ways of working to reduce deforestation. Detailed descriptions of the programmes in Acre and Mato

Grosso are provided in case studies below.

31. The two States share many common features. Both occupy strategically important positions at

Brazil’s deforestation frontier, offering the potential to stabilise it before it encroaches further into the

heart of the Amazon. They are arguably the most committed and ready jurisdictions working to

address deforestation in Brazil, and among the leading group globally.xxvi

32. These States have begun transitions to sustainable land use with relatively little international

support. Though Brazil famously secured a $1bn donor finance agreement with Norway, its share of

international climate finance for forests is small compared to its land mass and deforestation

challenges, averaging just $1.6 donor finance per hectare of forest per year. This is ten times lower

than Mexico; twenty times lower than Indonesia and Ghana.xxvii Brazil has already taken advantage

of the ‘low hanging fruit’ of governance improvement (e.g. legislative programmes and registration

of many farms in Brazil’s Rural Environmental Register). REM’s support is needed to consolidate

progress and tackle more difficult reforms (e.g. to achieve full registration of farms and strongly

enforce legislation) as well as increase the visibility of this leading work to demonstrate the rewards

and lessons of addressing deforestation to less advanced initaitves following behind.

33. REM will support nascent forest-friendly industries that have emerged in these States to scale up,

achieve higher quality and intensity of production and realise better market returns. As with

governance reforms, establishing new industries in the forest and land use sector may take several

years. Many have the potential to transition out of REM support into self-sufficiency during the

funding period while others may require a longer period of support with additional (e.g. donor, host

government or carbon market) finance coming in to help complete the transition.

34. Deforestation in the 2016 (August 2015 to July 2016) performance year was up on the previous

year in both States though a preliminary report from Brazil’s monitoring agency suggests

deforestation was then reduced substantially again in the 2017 performance year. To truly

safeguard their remaining forest the States must go further, to redouble efforts in testing climatic,

economic and political conditions and reach zero net deforestation.

35. In normal years Brazil’s Amazon region is very wet, meaning forest clearing takes significant

expense and manual or mechanical effort. In 2015-16 strong El Niño conditions led to very low

rainfall making it possible to clear forestland with fire. This was exacerbated by far-reaching cuts to

national Government spending, which included reductions for the Environment Ministry and the

enforcement agencies responsible for cracking down on illegal forest clearing. This dynamic is

thought to have been chiefly responsible for the 29% increase in deforestation in the Brazilian

Amazon in 2016 (graph below). Based on preliminary reports from Brazilian monitoring agency

INPE deforestation in the Brazilian Amazon was back down to 6,600km2 in the 2017 performance

year (August 2016 to July 2017), a 19% reduction on the previous year. This included a particularly

strong improvement in Acre State.

Figure 4 – annual deforestation rates in the Brazilian Amazon

14

Source: https://wri.org/blog/2017/07/will-brazil-meet-its-climate-targets

36. Providing financial support at this critical moment would help the States weather the effects of

present restrictions on Federal Government spending and continue to set an example with world-

leading progress to address deforestation and improve rural livelihoods.

37. Our investment in REM would enable Acre and Mato Grosso to:

- increase the capacity of local environmental protection authorities, at a time of fiscal constaint, including to implement new rules that require farmers to restore recently-deforested land;

- build the capacity and track record of new deforestation-friendly industries that require substantial investment to get started but struggle to attract traditional private lending;

- particularly in the case of Acre help these industries reach production volumes and standards that attract market prices and capital investment that allow businesses to become independent of donor support;

- significantly reduce emissions from deforestation, increase the intensity of agricultural and forest-based production to produce more on less land, as well as strengthening the livelihoods and resilience of some of Brazil’s poorest communities; and

- move further, faster, generating valuable lessons that can inform the approaches of those less-advanced or complementary jurisdictional approaches to addressing deforestation.

38. Rural areas of the States where the programme will be working are home to some of Brazil’s

poorest municipalities with Human Development Index scores comparable to the national averages

of the Republic of Congo and Namibia.xxviii The States are arguably the most committed and ready

jurisdictions working to address deforestation in Brazil, and among the leading group globally.xxix

Working at the local level is consistent with the approach of the UK Embassy in Brazil which is

increasingly focussed on reaching the biggest possible audience with action at the State level

across international trade, Newton Fund, Chevening and other initiatives. In Brazil’s federal system

this is the level where a lot critical activity is devolved. The Embassy sees these local efforts as

centrepieces of the UK’s bilateral relationship with Brazil. The Embassy team is keen to work with

BEIS to help deliver the best impact for our investment in Mato Grosso and Acre.

In particular work in Mato Grosso would associate the UK with a major public-private programme to

reduce the deforestation of beef and soy consumption with large companies which is highly visible

within Brazil. Because the programmes in Acre and Mato Grosso are highly advanced and

ambitious by global standards we also expect a global audience for the work, including because

these States are playing a prominent role in the group of 38 Governors that meets regularly under

the Governors’ Climate and Forests task Force.xxx

Acre

https://wri.org/blog/2017/07/will-brazil-meet-its-climate-targets

15

In the far west of Brazil, Acre covers 4% of the Brazilian Amazon and 1.9% of total Brazilian

territory. Its subnational REDD+ programme is arguably the most ambitious and advanced in

the world. Following the efforts of Acre rubber tapper and union leader Chico Mendes to curb

deforestation in the State in the 1980s, and his subsequent murder by cattle ranchers in

1988, the State underwent a significant transformation. A decade after his death the

Workers’ Party that Mendes established took political power and began shifting Acre’s

economy to a sustainable forest-conserving model known as “Florestania”; growing Acre’s

GDP at more than twice the Brazilian average while reducing deforestation significantly.xxxi

Historically deforestation in Acre has been driven by the expansion of agriculture, particularly

cattle ranching. Years of extreme drought (2005, 2010, 2015) increase forest loss by making

it easier to clear land with fire. As is so often the case deforestation has been concentrated

along roads and waterways.

More recently the arrival of migrants from other regions of Brazil have increased pressure in

settlement areas.xxxii Large scale deforestation has largely been addressed by command-

and-control efforts, leaving a more fragmented pattern of remaining deforestation on smaller

farms and forest plots. This calls for a slightly different approach to previous efforts,

particularly focussed on establishing economic alternatives for settlers and farmers on small

and medium-sized farms.

In its first phase of support to Acre (2012-16) REM provided 25m Euros through the State’s

Incentive System for Environmental Services (SISA), funding: territorial governance and

forest-friendly productive systems for Acre’s indigenous communities; creating and building

the capacity of industries that extract products from natural forest (rubber, nuts, fruits etc.);

diversifying and intensifying smallholder agriculture; improving practices and reducing

deforestation on larger cattle farms; and strengthening forest governance including

command-and-control measures focussed on larger instances of deforestation. This

supported livelihood improvement for a larger numbers of beneficiaries than initially

planned5: 3000 smallholder families; 6500 extractivist and rubber tapper families; 5300

indigenous people; and 2000 families on larger cattle farms.

The second phase of REM support to Acre will expand these interventions and extend

incentives to new areas of Acre where deforestation pressure is significant. It will also

introduce support for new forest-friendly industries such as bamboo, wild cocoa and forest

oils. It will help Acre to enforce and support farmers to comply with new elements of Brazil’s

Forest Code including the Environmental Compliance Programme (PRA) which adds, to

previous obligations for farms not to deforest, a requirement for farmers to restore

deforested land. It will also strengthen command-and-control efforts and wider aspects of

forest governance.

Phase 2 support to farmers and extractivists will focus on creating cooperatives around new

processing facilities that help farms achieve a much higher rate of production and quality of

product; which in turn will help them access markets that bring higher financial returns.

Where extractivists are collecting products from the forest there is good evidence that the

forest is more valued by local communities and that they play an effective role in ‘policing’

these areas to prevent deforestation.xxxiii Where farmers can realise higher returns on less

land there is less incentive for them to clear forest land. There are examples from Phase 1

5 The reasons for the higher number of beneficiaries is not yet clear – evaluation report pending

16

where these cooperatives have made a lot of progress e.g. Acre established a competitive

Brazil nut business that has now started to transition off REM support; in these cases Phase

2 will focus on final steps to make the industries ‘bankable’ so that they can sustain

themselves on just private investment.

There are promising new models that Phase 2 will focus support on, including a major new

fish farming cooperative with native fish species that provides farmers with materials, feed,

training, processing and marketing services which early analysis suggests will enable them

to increase financial returns per hectare tenfold.

As in Phase 1 the support indigenous communities, farms and businesses receive will be

conditional on them complying with zero-deforestation requirements and in some cases

implementing restoration requirements under the PRA.

Mato Grosso

In the Centre-West of Brazil, Mato Grosso is one of Brazil’s largest states, with six times

Acre’s land area but a lower proportion forested. The Amazon rainforest covers just over

50% of the State. It has two other important biomes: the tropical savannahs of the Cerrado

(40% of Mato Grosso’s land area); and the wetlands of the Pantanal (6%). The State had

some of Brazil’s highest rates of deforestation from 1995 to 2005 but is also the State that

achieved the largest reductions in deforestation; from 2004 to 2015 reducing deforestation

86% while remaining Brazil’s largest soybean and cattle producer. This happened for a

variety of reasons including the State’s efforts to enforce legal restrictions on forest clearing

on private lands with a Rural Property Environmental Licensing Registry (CAR the initialism

in Portuguese), as well as NGO and legal campaigns that led big companies sourcing from

the region to reject soy and beef linked with deforestation.

In Mato Grosso deforestation in the Cerrado is largely driven by the expansion of cropland

e.g. for soya, including by large businesses working at industrial scale. In its Amazon region

expansion of cattle farming is the primary driver, largely on smaller farms. Like Acre, Mato

Grosso’s deforestation is geographically concentrated. In 2015 72% of deforestation

occurred in 20 municipalities (of more than 100 in total) in the State; 10 of those

Municipalities where responsible for 52% deforestation. Based on 2016 figures 53%

deforestation occurs in private lands, with a high proportion in farms that have not yet

registered in CAR.

Mato Grosso has designed and started to implement an ambitious REDD+ programme

(SiSREDD) and recently launched the “Produce, Conserve and Include” Strategy (PCI),

which sets out targets to:xxxiv

- Reduce forest loss 90% by 2030; and eliminate illegal deforestation by 2020

- Restore degraded pastures and intensify agricultural production (including to increase

cattle production from 50 to 90 kg per hectare per year) to grow the local economy while

taking pressure of forests

- Register 100% of private farms in the Rural Environmental Registry by 2018

- Increase smallholder access to markets from 20% to 70% by 2030 and triple the volume

of credit available to them

Mato Grosso has not received REM support to date and its REDD+ programme is at an

earlier stage of implementation. REM will support the creation of several sub-programmes,

including: establishment and capacity building of forest-friendly farming and forestry

cooperatives; partnerships with larger agribusinesses and industry associations;

17

implementation of land management plans and forest-friendly production systems in

indigenous territories; strengthening Mato Grosso’s deforestation monitoring and control

system, particularly to increase the pace of detection of significant instances of deforestation

to curb illegal activities much faster; and support for the programme’s ‘enabling framework’

including work to enable Mato Grosso to strengthen its participation in the national REDD+

strategy by ensuring a suitable safeguard monitoring system is in place.

Theory of Change

39. The original Business Case provided a Theory of Change for REM’s support in Colombia, with

some details that are very specific to that case. As BEIS is now proposing to increase funding to

enable work in two Brazilian states, and because we may increase funding again in the future as

REM moves to new geographies, we have updated the Theory of Change below to give a better

overview.

Figure 5 – Theory of Change for BEIS’ investment in REM

40. Assumptions that may need to hold for these changes to occur are set out below.

Activities to outputs - REM funds will leverage significant additional public policy and financial contributions

from Acre, Mato Grosso and partners. - REM funds will help overcome initially high start-up costs, increasingly leveraging

additional private investment over time. - Armed conflict, political instability or force majeure will not significantly impede

Impact

Outcome

Output

Activity

Wider influence beyond the ProgrammeE.g. partners go on to successfully secure finance from other initiatives; evidence of other REDD+ initiatives taking account of REM lessons; and increased motivation for REDD+ from politicians, implementers & stakeholders

KPI 15Transformation

Forest cover protected

GHG emissions avoided

Results-based paymentsare made

KPI 6Mitigation

KPI 8Forest hectares

Forest governance is strengthened with policies, laws and enforcement efforts that make deforestation a more risky activity that actors are less likely to pursue

Forest-friendly productive systems are established, consolidated, intensified to produce more on less land, producing higher-quality products, receiving better returns and transitioning towards self-sufficiency

Livelihoods improved E.g. farming families and indigenous communities

KPI 3Livelihoods

Stronger capacity in host government institutions, agencies, delivery partners, civil society and systems (e.g. deforestation monitoring systems)

Funding the creation of implementation units, capacity building for delivery partners and civil society, as well as development of key systems needed for delivery of the Programme

Funding inputs for policy and law-making, improved land-use planning, land titling and registration and capacity building for land and environmental authorities that enforce these rules

Funding and raising private capital for extension services, materials, processing facilities, and market-building for farms, indigenous communities and businesses that comply with zero-deforestation conditions

Programme delivery by host governments, fiduciaries, KfW and delivery partners including:(i) operational and financial planning (ii) monitoring, reporting, evaluation and learning and (iii) delivery of technical assistance, grants and loans to delivery partners, landholders and businesses


18

implementation of the programme. - Elections, machinery of government change and other major organisational changes will

not bring significant periods of time where implementation could not reasonably be expected to be advanced.

- Policies and programmes which could not reasonably be expected to controlled by the organisations leading implementation of the programme, their agencies and delivery partners will not impede implementation.

- Exchange rates do not deviate significantly from starting assumptions. - There are no major changes in local or global market conditions, e.g. for timber and soy,

such that they would significantly impede efforts to reduce deforestation and foster profitable forest-friendly industries.

Outputs to outcomes - Governance (policy and law making, as well as enforcement of these decisions) is strong

enough to prevent rebound effects; so funding productive systems does not lead to more deforestation.

- Deforestation becomes a more risky activity to engage in, legally and financially. - Production becomes more intensive; producing more forest and agricultural products on

less land. - Armed conflict, political instability or force majeure will not significantly impede

implementation of the programme or increase drivers of deforestation. - There are no major changes in local or global market conditions, e.g. for timber and soy,

such that they would significantly impede efforts to reduce deforestation and foster profitable forest-friendly industries.

- Policies and programmes which could not reasonably be expected to controlled by the organisations leading implementation of the programme, their agencies and delivery partners do not impede or reverse the achievement of outcomes e.g. an energy ministry does not introduce measures that incentivise oil extraction in forest land.

Outcomes to impacts - There is continuation or emergence of wider REDD+ initiatives beyond REM. - The host governments that REM partners with remain eligible to apply to these

mechanisms. - New initiatives in REM’s host countries, or elsewhere, seek to learn and apply lessons

from earlier ones.

Risks

41. The political and technical complexity of addressing deforestation means investments in this area

are, by their nature, high-risk. There is a balance to be struck between providing flexible modes of

support and ensuring programmes deliver credible, value-for-money investments. While supporting

progressive front-runner governments is intended to facilitate momentum and cement political

support, the flip-side is that if this support fails to achieve its aims that could have a far reaching

impact. Our assessment is that increasing funding for REM carries high operational risk but also

potential to bring significant rewards. Given the initiative’s potential to produce transformational

impact, we judge this to be within the scope of the risk appetite of BEIS’ ICF.

42. The risks, and the ways these risks will be mitigated, are described in more detail in the

Management Case. The main risks are:

- Change in political and economic conditions in Brazil. Changes in Brazil’s Federal Government

continues and impacts are hard to predict. Brazil’s economy is beginning to emerge from a

severe and protracted recession. We have limited ability to mitigate these risks other than by

continuing to build up our REM portfolio across a diverse range of jurisdictions. Acre and Mato

Grosso have relatively stable political conditions and commitments to preserve environmental

spending despite the Federal Government

19

- ’s austerity drive.

- Drivers for Deforestation in Acre and/or Mato Grosso increase – reducing their eligibility for

payment and negatively impacting the rate or scale of delivery as a consequence. In 2016

deforestation in Brazil was up on previous years, as El-Niño conditions that made it easier to

clear forests using fire and cuts to federal government budgets provided a particular challenge.

There is no certainty that deforestation will reduce in the future. This is still a live issue in 2017

with an increasingly powerful agricultural lobby working to influence the Federal Government. As

well as budget cuts and uncertainty regarding what rainfall the Amazon will see this summer.

The Governments of Acre and Mato Grosso are concerned they will not be able to adapt

budgets and enforcement efforts quickly enough in response to these risks. As a results-based

initiative REM must accept some degree of uncertainty in this area and its chief mitigation is the

incentives it will provide to the States to redouble their efforts to tackle illegal deforestation and

build forest-friendly industries.

- Capacity for BEIS to troubleshoot. REM moves quickly and may uncover implementation issues

with a higher frequency as a result, which are inevitably harder to resolve at a distance and with

language and cultural barriers. We will increase the level of staff time BEIS dedicates to REM.

As part of this we are requesting approval to use ICF programme funds to put in place a

dedicated locally-engaged team member at a UK Embassy office in Brazil to help oversee

delivery and ensure synergies with our other programmes including Partnerships for Forests.

- Management failure. We will mitigate this risk by working with an existing trusted delivery

partner, engaging in critical decisions such as approvals of spending plans and financial reports

and ensuring delivery partners in Brazil receive capacity building to continuously improve their

management practices. Some of REM’s assurance processes for how partners use the results-

based payments they receive are ‘light touch’ compared to traditional upfront funding

programmes. However we believe this flexibility, which empowers partners to optimise and

adapt their approaches, is justified.

- Stakeholder grievances e.g. if an indigenous community challenges the programme on the basis

that its rights have been infringed. REM will require Acre and Mato Grosso to apply careful

processes of stakeholder participation, risk assessment, safeguard systems and grievance and

redress mechanisms. Even so, when dealing with so many stakeholders, including thousands of

indigenous communities spread across vast and remote areas, some objections are expected.

There have been isolated incidents of violent conflict in both States, often as a result of

overlapping land use claims as is common in many tropical rainforest environments.

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Appraisal Case

‘Fast-initiation’ REDD+ finance

43. REDD+, recognised in Article 5 of the Paris Agreement, encourages developed countries to support

developing country efforts to halt and reverse deforestation. It requests support in three notional

phases: (i) grants and technical assistance to build REDD+ plans, organisational capacity and an

enabling framework for implementation of these plans; (ii) upfront funding to help kick-start

implementation; and (iii) results-based payments to reward countries that reduce or reverse

emissions from forest loss.

44. The benefits of moving to results-based REDD+ payments include: they strongly incentivise host

governments to work to achieve emission reductions at a national or subnational scale; donor

money is protected in the event that programmes do not perform; results-based agreements are

less prescriptive, allowing host governments to pursue approaches that fit their local circumstances,

to innovate and adapt; the approach is particularly useful in the forest and land use sector where

many diverse and changeable drivers of land use change need to be addressed – a results-based

agreement accommodates this complexity with less administrative burden; and results-based

REDD+ also builds capability for host countries to participate in global carbon markets, though the

strength of that advantage will depend on how those markets develop.xxxv

45. REDD+ implementation has been slower than originally anticipated when REDD+ was conceived. It

is not a silver bullet but can play a useful role as part of a suite of options to help build the case for

action and support the transition to sustainable land use systems. Results-based finance initiatives

currently in operation today have faced challenges, and provide lessons learned that can inform

future implementation:

- success is highly contingent on how committed a host government is and the capacity and

preparedness of their ministries, agencies and delivery partners;

- substantial, flexible and well-coordinated financial support is needed, particularly to avoid

overburdening host governments with work to secure funding from many different sources;

- traditional approaches to providing results-based finance can leave host countries waiting a long

time to receive a first payment, which is particularly challenging in the forest and land use sector

where government budgets are often limited and private capital hard to raise; and

- motivating host countries is not just about improving financial incentives, many simply see action

in the land sector as ‘too hard’, so more examples of the rewards and lessons of addressing

deforestation while increasing agricultural output are badly needed to convince governments to

pursue this new paradigm.xxxvi

46. In the original Business Case we proposed that a new approach of ‘fast-initiation’ REDD+ finance is

needed to respond to these lessons. This would target the most committed and ready forest nations

or subnational governments where the fastest and most significant outcomes can be achieved with

the lowest risk of negative unintended consequences. It would do so with a streamlined

administrative process that governments and delivery partners can navigate without undue delay. It

would increase the overall delivery capacity of delivery vehicles for REDD+ finance to address or

offset the bottlenecks in the existing management capacity of the major multilateral REDD+ funds.

47. The initiative would aim to raise the ambition of the REDD+ plans of leading jurisdictions and

provide the right kind of support to address the barriers they face and ensure their successful

delivery. This could include addressing their upfront investment needs but also ensuring they build

the systems required to access results-based finance which is likely to form a major component of

future streams of REDD+ finance. A results-based conditionality would ideally be included to

incentivise greater ambition and ‘own contribution’ from the forest nation jurisdiction. To maximise


21

the scale and success of programme delivery the initiative would be designed to leverage both

public and private sector support.

48. The initiative would aim to deliver transformational impact at the global level by demonstrating proof

of concept for REDD+, building the evidence based to inform more successful approaches in a

wider set of REDD+ initiatives that follow behind it, and demonstrating the rewards of REDD+ early,

to improve political will to address global deforestation and (though only playing a small part) agree

ambitious climate agreements. This would be best achieved by consistency with some of the

principles of transformational change of UK International Climate Finance, including testing new and

innovative approaches and ensuring initiatives are locally-owned.

Figure 6 – notional theory of change for a ‘fast-initiation’ REDD+ vehicle; to inform the options appraisal

Options for delivering fast-initiation finance

49. Increasing ‘fast-initiation’ support for REDD+ could be achieved in a number of ways. In the original

Business Case, online here, we generated a large range of options informed by the UK’s

experience and expert analysis from colleagues at the German development agency GIZ. These

were as follows:

Option Assumptions

1. A new UK-funded bilateral initiative (initially led by UK but could grow to be multi-donor or multi-recipient)

On the basis of limited HMG staff availability we assumed that this option would be achieved by appointing a Multilateral Development Bank or similar delivery partner to manage the initiative for DECC (now BEIS).

2. The UN REDD programme We analysed the potential for the fund to deliver the objectives of the Strategic Case in its present form or with modifications that might be feasible to achieve in a relatively short space of time.

3. The Forest Investment Programme (FIP)

As above we considered the fund in its present form or with modifications that could be achieved in near term.

4. The BioCarbon Fund Initiative for Sustainable Forested Landscapes (BioCF)

As above


22

5. The Forest Carbon Partnership Facility (FCPF)

As above

6. The REDD for Early Movers Programme (REM)

As above

7. “Do nothing” – DECC (now BEIS) makes no additional investment beyond BAU

We assumed that DECC (now BEIS) continues with other elements of the investment strategy outlined in the Strategic Case. This option was dismissed before detailed analysis on the basis that it would not be possible to achieve GNU public commitments on increasing REDD+ finance and that a significant opportunity for demonstration of the rewards and lessons of REDD+ would be missed.

50. We noted that the Green Climate Fund, at the time, had potential to support REDD+ but was not yet

set up to do.

51. We have now revisited this analysis from end 2015 to establish if the characteristics of the options,

or their context, have changed significantly such that the assessment in the original Business Case

should be revised. Our conclusion is that the characteristics and circumstances of the seven original

options have not changed sufficiently to affect their scoring, but that the Green Climate Fund has

now progressed to a point where it should be considered in the shortlist as an eighth option.

1. Bilateral. BEIS International Climate Finance team has grown significantly in size, but to meet

the demands of an increasing portfolio of programmes. Primarily because of the technical and

fiduciary expertise required to deliver a REDD+ programme, it is still our assessment that BEIS

would need to appoint a delivery partner, like a Multilateral Development Bank, to assure

delivery on our behalf.

2. UN REDD. This initiative continues to focus on capacity building in the first phase of the REDD+

process. Complicated governance, and the transaction costs associated with that, remain a

limitation.

3. Forest Investment Programme. The performance of this initiative continues to “meet

expectations” with no substantial changes in performance, approach or circumstances since end

2015.xxxvii

4. BioCarbon Fund. The performance of this initiative has increased marginally, “meeting

expectations” in our last Annual Review,xxxviii though with some significant recommendations for

how management can improve. It remains in a relatively early phase of development.

5. Forest Carbon Partnership Facility. This fund has continued to make good progress in line

with our expectations.xxxix The way the initiative works, and the context it is operating in, has not

changed significantly since end 2015.

6. REDD for Early Movers. The Programme has continued to make good progress, “exceeding

expectations” in some areas in our last Annual Review,xl though we do not consider this

significant enough to increase its scores. The way the initiative works, and the context it is

operating in, has not changed significantly since end 2015. Our direct experience of working

with the initiative is greater now, so our assessment has a higher level of confidence.

7. Do nothing. This option was used as the counterfactual in the assessment of other options.

There are no significant changes in the do-nothing scenario.

8. Green Climate Fund. This initiative has developed significantly since end 2015. It is discussing

a potential new REDD+ funding approach. For this reason we have now added it to the options

appraisal, though it is not ready to move at this stage. Its assessment is detailed below.


23

Appraisal criteria

52. The appraisal of investment options will be based on their potential to contribute to the key strategic

objectives identified in the Strategic and Appraisal Cases. As well as and their fit with key

operational factors that will be required to ensure those objectives are delivered successfully. The

Strategic and Appraisal Cases identify these main objectives:

Strategic objectives

Level Objective Includes6

Outcome Ambition and delivery

1. Incentivises and supports

delivery of more ambitious

REDD+ plans

a) Supports upfront investment needs

b) Provides (at least compatible with) a results-based

approach

c) Leverages additional public and private investment

Outcome Acceleration

2. Enables the delivery of

leading REDD+ plans to

progress faster

a) Targets intensive support at the most committed and

ready7

b) Streamlined ‘customer journey’ for forest nations

c) Increases the ‘bandwidth’8 of the global REDD+

architecture

Impact Transformation

3. Early9 demonstration of the

rewards and lessons of

REDD+ at scale, leading to

stronger global REDD+

momentum

a) Locally-owned plans

b) Testing new approaches

c) Compatible with wider and future REDD+ architecture

d) Demonstrates rewards and implementation results10

in

the near term to inform future REDD+ initiatives11

e) Builds goodwill for UNFCCC negotiations

53. The following are the main success factors12 that have a significant role to play in achieving these

strategic objectives.

Success factors

Objective Includes

Management

4. Robust programme and project management

systems, capacity and capability

a) Effective governance

b) Financial management approaches

c) Strategic and performance management approaches

d) Capacity and capability of staff

e) Transparency and accountability

Economy and Efficiency

5. Minimises the costs of achieving the

strategic objectives of the investment

a) Minimises the costs of inputs

b) Maximises the conversion of inputs to outputs

HMG capacity

6. Manageable within the limited staff

resources of DECC(now BEIS)’s International

Climate Finance team

a) Manageable additional FTE requirement for HMG

b) Scalable or replicable

c) Aligned incentives with other stakeholders

54. Each of the six appraisal criteria above was given an equal weighting in the option appraisal

exercise. Each criterion will be scored as follows:

1 2 3 4 5

Very weak Weak Moderate Strong Very strong

6 These subcategories are considered potential indicators of meeting the objective, weighted equally, and not exhaustive

7 REDD+ ‘readiness’ includes getting in place required government capacity, safeguards systems, MRV and a REDD+ plans

8 One measure of this would be the time dedication of programme managers across major REDD+ delivery vehicles increasing

9 N.B. the Theory of Change above puts strong emphasis on ‘speed’, to achieve better local outcomes and to achieve longer-term global

transformational impact by early demonstration that informs what follows – overall appraisal of options strongly weighted for speed 10

Results include flows of funding that demonstrate the rewards of pursuing a REDD+ plan and lessons generated on successful and less-successful implementation approaches 11

E.g. Green Climate Fund support for REDD+, if approved, potential ICAO offsetting mechanism etc. 12

‘Success factors’ are elements of the context or management process of an initiative that lead directly or indirectly to its success. The presence of success factors does not guarantee the success of an initiative, but their absence is likely to contribute to failure to deliver an initiative’s objectives. Ref: Association of Project Managers, Body of Knowledge, Sixth

Edition.

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UK Visibility

55. Since the development of the original Business Case there has been an increase focus on ensuring

ICF investments are ‘visible’, bringing with them recognition of the UK’s role and wider benefits that

come with that e.g. strengthening the overall relationship of the UK and recipient countries. We

have looked at how including this priority as a factor in scoring for the selection of delivery options

affects the the outcome of the options appraisal in the sections that follow.

Assessment of the Green Climate Fund option

56. The assessment set out below draws substantially from the UK’s April 2017 Annual Review of the

Green Climate Fund’s (GCF) progress and BEIS’ direct experience of working with the Fund. For

ease of comparison we have assumed additional money provided to the GCF would be focussed on

REDD+ projects, though in reality the GCF does not earmark contributions in this way. Any

increase in funding for the GCF would support the full range of GCF result areas (energy, transport,

resilience etc.) not just REDD+ ones. It would also be subject to the decision making processes of

the GCF which involves a large number of other Board members. To keep the below assessment

simple we also presupposed the Fund could absorb a significant amount of additional finance for

REDD+, though in practice the initial scale of any GCF REDD+ support may be modest, and

therefore could be drawn from funds already committed.

Option 8 – Green Climate Fund

Ambition and delivery of REDD+ plans

Moderate-Strong (3.5)

The GCF already has mechanisms in place to support host countries’ investment needs. It has the

potential to make both upfront and results-based payments, though it has not supported the latter

to date. The criteria the Fund uses to approve project proposals has a strong focus on efficiency

and effectiveness which will encourage host governments and delivery partners to build in a clear

‘own contribution’ from public spending and demonstrate how they will leverage private finance.

GCF aims to use a full range of terms and instruments (grants, loans, equity, guarantees, results-

based finance etc.) to get the best incentives in place to raise ambition. REDD+ programmes are

complex, with many different technical approaches to results-based payment possible. For that

reason the GCF is currently exploring options for a request for proposals (RfP) for REDD+

programmes, which would give guidance on what kinds of results-based REDD+ proposals the

GCF is likely to approve for funding. That includes e.g. what greenhouse emission baselines would

be acceptable as a benchmark for payments. With discussions around this ongoing it is difficult to

say to what degree the GCF’s potential in this area will translate into higher ambition and more

effective delivery of host country REDD+ plans.

Acceleration

Moderate (3)

As described above the GCF is in the process of exploring a potential RfP for REDD+ programmes,

which could be approved at the earliest at the 18th Board Meeting in September and October 2017.

With this presently uncertain it is unlikely that host countries and delivery partners will be preparing

results-based REDD+ proposals; or if such proposals are under development it is likely that they

would require substantial adjustment to fit the requirements set out in RfP if that is finalised and

approved. Therefore, if the RfP approach is pursued, there is likely to be a period of further

development of proposals before a first proposal is approved by the Board. Thereafter further time

may be needed to sign a funding agreement and make a first payment. This will to some extent

depend on what results periods the GCF is willing to reward and what processes it will put in place

for assessing results, as well as any assessments that may be required for how countries use the

funding they receive. It will also depend to some extent on which countries come forward with

proposals; in some other REDD+ funds it is easier to target the most committed and ready (often


25

Middle Income Countries, many concentrated in Latin America) whereas the GCF is likely to

receive proposals from a wide range of countries (all developing countries – as defined by the

UNFCCC – are eligible to receive GCF financing). The GCF is able to provide support for

programme ‘readiness’ as well as upfront investment and results-based payment; in time the GCF

could act as something approaching a ‘one stop shop’ for REDD+ proposals, cutting down delays

that come with applying to multiple funds. The RfP may encourage proposals to cover off a range

of needs in this way.

Transformation Moderate-

Strong (3.5)

The GCF assures the implementation of its projects in partnership with accredited delivery

partners. There is good scope for local organisations to lead implementation on the ground,

innovate and tailor programmes to their particular circumstances. It has the potential to develop a

unique approach to REDD+ finance and one that is compatible with wider climate finance and ODA

initiatives or carbon markets. The Fund has a wide global reach and high visibility, which coupled

with strong monitoring and evaluation approaches could make the GCF well placed to inform a

wider transformation beyond the GCF’s direct impact on projects. The GCF’s comparative limitation

in this area of scoring are that it is unlikely to be in a position to approve and disburse results-

based REDD+ funding as soon as other funds, nor specifically target the most committed and

ready countries.

Management


As set out in the April 2017 Annual Review the GCF has “met expectations” with recent progress to

grow the Secretariat, increase transparency, implement risk management procedures, accredit

delivery partners, establish a gender policy and action plan as well as approve projects, including a

significant portion that mobilise private finance. There is ongoing work to strengthen the

Secretariat’s capacity, step up collaboration with other international institutions, further intensify

private sector engagement, further increase transparency, continue to drive up project quality and

establish the Fund’s evaluation and learning policies. The initiative has not yet established the

systems required to make results-based payments. Successfully overseeing the selection and

delivery of results-based REDD+ programmes would probably entail the Secretariat taking on

additional experts either as members of the Secretariat itself or as external advisors.

Economy and efficiency


The administrative costs and fees of the GCF are towards the high end, relative to comparable

organisations and funds. Though a large number of proposals have been approved by the fund

relatively few have progressed to disbursement to date, which suggests there may be opportunities

to streamline processes. Economy and efficiency are key criteria in the Fund’s project approvals.

The GCF has a strong framework for financial management during operations including an internal

audit department. Aspects of REDD+ results-based payments that could have a bearing on scoring

in this area, including the rate the GCF could pay per tonne of CO2 equivalent, is uncertain at this

time.

HMG capacity Strong (4)

The UK has had the opportunity to be a full and active participant in the establishment and

management of the Green Climate Fund including through our Board Member. At present we

dedicate c. 3.5 FTE to oversight of the Fund across BEIS and DFID. This would not need to

change significantly with an increase in funding and it is manageable within existing staffing levels.

Total score: 21/30

Assessment of the visibility of the different delivery options

57. Given the increasing focus on ensuring ICF investments are visible, bringing wider benefits e.g.

strengthening the UK’s overall relationship with recipient countries, we have considered whether the

26

selection of REM provides such benefits. We have applied this strategic objective as an additional

appraisal criterion with equal weighting compared to the original six criteria set out above. We have

sought the advice of the UK’s Embassy in Brazil to inform this assessment.

58. The option that would offer the highest level of UK visibility is the ‘bilateral’ option. With no other

donor involved there would be a clear message on how the UK is helping to make a difference.

There would be strong potnential for BEIS to shape the initiative to help strengthen the UK’s overall

relationship with Brazil. The UK would also directly engage with stakeholders in Brazil to ensure the

work has a large audience.

59. However this option has significant limitations, primarily due to the amount of time it would take to

establish an initiative of equal competence, which limits the extent to which a bilateral vehicle would

meet the needs of recipients looking for fast-initiation finance. As set out in detail in the original

Business Case, we have assumed that to deliver the bilateral option BEIS would need to engage an

experienced development bank to create a new initiative with BEIS funds. Because of these

limitations, before introducing an appraisal criterion for visibility, the bilateral option is at a 6 point

deficit compared to the REM option (total socres of 18.5 to 24.5). The bilateral option scores a

maximum 5 for the additional visibility criterion, but even at this level the REM option could not

score lower overall even with a visibility score of 0.

60. Our assessment is that the visibility score for REM is in fact strong (i.e. 4 out of 5) which gives REM

a total score of 28.5 when visibility socring is included. Including the criterion of visibility in the

appraisal of options therefore only serves to confirm REM’s status as the highest scoring option.

The rationale for REM’s score of 4 is set out below.

61. While REM is recognisably led by Germany and KfW, the UK plays an equal role in major decisions

and announcements e.g. we were closely involved in the announcement of the Colombia window

with President Santos at the Paris COP. The programmes in Brazil will be announced on an equal

footing with Brazilian and German counterparts.

62. Associating the UK with REM, a highly competent initiative that is well regarded by its recipients

(among other things because it manages to minimise bureaucracy and initiate payments quickly),

has brought relationship benefits in Colombia and there is the opportunity to replicate this in Brazil.

63. REM’s approach of partnering with State governments is consistent with the approach of the UK

Embassy in Brazil which is increasingly focussed on reaching the biggest possible audience with

action at the State level across international trade, Newton Fund, Chevening and other initiatives. In

Brazil’s federal system this is the level where a lot critical activity is devolved. The Embassy views

these local efforts as the centrepieces of the UK’s bilateral relationship with Brazil. The Embassy

team is keen to work with BEIS to help deliver the best impact for our investment in Mato Grosso

and Acre.

64. In particular work in Mato Grosso will associate the UK with a major public-private programme to

reduce the deforestation of beef and soy consumption with large Brazilian and international

companies. This Produce, Conserve and Include (PCI) initiative is highly visible within Brazil and

increasingly drawing international stakeholder interest.

65. Major companies that are headquartered in the UK, including Marks and Spencer and Unilever

which head the sustainability pillar of the Consumer Goods Forum, are under increasing scrutiny for

– and actively working to try to address – the deforestation risks associated with their use of

agricultural and forestry commodities.xli Recently UK-based companies and civil society have

started to put a lot of emphaisis on soy, a commodity that the UK consumes in large volumes, with

52%13 of soy beans that the UK imports coming from Brazil. Reducing the deforestation risk

13

Which corresponds to 720,000 tonnes per annum; based on unpublished WWF, GCP and RSPB analysis


27

associated with soy supply chains has proved challenging to date and BEIS is considering

coordinating more of our work with companies like this to help overcome some of the barriers to

action. Mato Grosso State, in particular, is a major source of soy for UK companies. REM’s

approach of focussing support on Mato Grosso’s PCI programme, which seeks to achieve zero-

deforestation soy production, is potentially a significant contribution to helping companies like Marks

and Spencer and Unilever achieve their aims.

66. Beyond this, because the programmes in Acre and Mato Grosso are highly advanced and ambitious

by global standards, we also expect a global audience for the work. E.g. both States are playing a

prominent role in the group of 38 Governors that meets regularly under the Governors’ Climate and

Forests task Force.xlii

67. The other five delivery options appraised (UN REDD, FIP, BioCF, FCPF and GCF) are all

multilateral funds with large numbers of donors and recipient countries. We have not set out

detailed visibility scoring for these initaitives here because the more complicated governance of

multilateral initaitives would make it harder to communicate how the UK is making a difference, and

it would be harder to influence these multilateral initiatives to work in ways that strengthen the UK’s

relationships with recipient countries significantly. These options already score significantly lower

than REM based on the original 6 appraisal criteria and the introduction of a further score only

serves to decrease their overall scoring further compared to REM.

Summary of options appraisal results

68. REM remains the best performing option based largely on its closer alignment with each of the

objectives targeted in the Strategic Case. Therefore REM is recommended for investment.

69. Our updated assessment is that REM continues to have the strongest potential to quickly

demonstrate the rewards and lessons of results-based REDD+ support at scale. Since the original

Business Case it has successfully concluded a full programme of disbursement in Acre, Brazil, on

schedule, funded by Germany, supporting the livelihoods of 16,500 farming families and indigenous

communities. REM has exceeded our expectations in Colombia with strong disbursement and fast

progress to establish implementation structures (see BEIS’ Annual Review available here). There is

significant scope for it to shape the approaches of larger and longer-term REDD+ initiatives that

follow behind. For example discussions within the Green Climate Fund, which has the potential

(subject to Board decisions) to provide results-based REDD+ support in the future, have already

incorporated insights from REM. The programme REM has been supporting in Acre, Brazil, is

arguably the most advanced REDD+ initiative in the world and its proponents are now regularly

engaged in sharing lessons with national and local governments around the world e.g. through the

Governors Climate Task Force.

70. The main constraint on the score of the bilateral option is HM Government staff capacity, including a

relative lack of experience of BEIS compared to established REDD+ delivery partners like KfW, and

therefore the time it would take to design and initiate a bilateral initiative of equivalent quality. FIP,

BioCF and particularly the FCPF were viable options overall but scored significantly lower than

REM on strategic fit. UN REDD scores were weaker both for fit with strategic objectives and

success factors. The Green Climate Fund has moderate-to-strong potential but it may take some

time before it is ready to commit and disburse results-based REDD+ support and it is currently

unclear what countries would access this support and on what terms. This uncertainty, and the fact

that the initiative is not ready to move now, is the main limitation on GCF scoring in the scoring

areas: “acceleration”, “transformation” and “ambition and delivery”. The scores for each option are

illustrated in below.


https://aidstream.org/files/documents/REM-COLOMBIA-Annual-Review-2016-20180321010319.pdf

28

Figure 7 – summary of scores of multicriteria analysis

71. The strength of evidence used in the appraisal of each option can be summarised as follows:

Option Operational and

results

available

Independent

review(s) available

UK has significant working

experience of the initiative

Overall

evidence

1. Bilateral No No Yes Low

2. UN REDD Yes Yes No Moderate

3. FIP Yes Yes Yes Strong

4. BioCF Partly No Yes Moderate

5. FCPF Partly Yes Yes Strong

6. REM Partly No Yes Moderate

7. Do nothing N/A N/A N/A N/A

8. GCF Yes No Yes Moderate

How REM payments work

72. REM makes payments to host governments and delivery partners (hereafter “partners”) using a

combination of a results-based cap and an assessment of the recipients’ capacity to effectively

implement the funding received. These are typically made annually, reflecting annual reports of

results and an annual cycle of implementation planning. This is described in detail in the original

Business Case here.

73. The maximum funding that could be made available to partners is based on how much they reduce

greenhouse gas emissions from deforestation rates compared to a recent historical average

(generally based on a recent 10-15 year historical period, in the same way as the other REDD+

funds BEIS supports). Measurement is based on annual reports of satellite and ground-based

monitoring, and these reports must be verified by internationally independent experts to establish

that the reported emission reductions are valid e.g. checking measurement uncertainty and

calculations. Performance is translated into maximum payment potential at a rate of $5 (USD) per


29

tonne of CO2 equivalent reduced, which reflects the rate negotiated in all major jurisdictional-scale

results-based REDD+ partnerships to date. REM requires host governments to ‘retire’ at least one

additional tonne (meaning it cannot be used in the future in carbon markets or to underpin a results-

based payment) for each tonne REM pays against. This is an insurance mechanism against

uncertainty in measurement and calculation as well as the potential for some emission reductions to

be ‘reversed’ in the future; but also a way to ensure host governments make an explicit financial

contribution by forgoing potential payments.

74. Once this maximum is established REM then determines whether the full sum should be paid to

partners, or a lesser sum, based on an assessment of their capacity to implement the funds

effectively. KfW and REM donors are closely involved in the development of partners’

implementation plans both at the outset when the overall plan is being designed and annually as

plans are updated, as well as through appraisal missions and with no-objection powers at key

decision points. The Work Plans agreed between KfW and recipients include the projects that

partners intend to support, their rationale, additionality, delivery mechanism, costs, timetable,

interactions with other sources of funding (including the host government). KfW has a formal no-

objection power for approval of these plans and embeds a team member within the lead

implementing organisation of each partnership to ensure they are robust. This is described in more

detail in the Commercial, Financial and Management Cases. KfW’s assessment of recipients’ Work

Plans, coupled with their assessment of the extent to which partners have effectively utilised

payments already received, determines whether partners receive the maximum or a lesser sum.

BEIS’ scale of funding appraisal

75. We have approached the assessment of how much funding BEIS should contribute to REM

windows in Acre and Mato Grosso in a similar way to the original Business Case for investing in

Colombia. That assessment appears to have been well judged, with c. one third of our funding for

Colombia disbursed in the first 1.5 years of a four to five-year partnership. The assessment

procedure is based on: (i) deforestation rates for 2015/6 and 2016/17 which are already known (ii)

deforestation rate scenarios for future years and (iii) the financial plans of Acre and Mato Grosso

which indicate how much funding they would be able to implement effectively in the timescale that

REM allows.

The scenarios of future deforestation rates that we have used for both Acre and Mato Grosso follow

the same pattern used for Colombia; they are:

a. 2020 target: in this scenario both regions move steadily from their most recent deforestation rate

to their reduction goals in 2020 which are an 80% and 89% reduction of deforestation compared

to levels in their historical reference period as agreed between KFW and local authorities. These

reference periods are 2004-2015 for Acre and 2006-2015 for Mato Grosso

b. Optimistic: assumes a more moderate path, assuming the States move steadily from the most

recent deforestation rate to just 75% of their 2020 reduction goals.

c. Stable: assumes a scenario in which deforestation remains at a stable rate equal to the average

deforestation rate between 2015 and 2016, to serve as a conservative benchmark for limited

change “on the ground”.

d. Pessimistic: assumes a scenario in which net deforestation increases between 2015 and 2020 by

30% compared to the 2015–2016 average14. This scenario presents a scenario where

implementation is derailed by the natural volatility from exogenous factors e.g. rising prices for

agricultural commodities.

14

In the original Business Case for Colombia we used one ‘most recent’ year. However in Brazil there have been large fluctuations in deforestation rates in recent years partly due to El Nino conditions.


30

Figure 8 – forecasted deforestation scenarios (in thousands of hectares)

76. To convert these scenarios of deforestation into the maximum potential eligibility of Acre and Mato

Grosso for REM results-based payments we have used an ‘emission factor’ of 566.4 tCO2e/ha15

which represents the amount of carbon dioxide equivalent thought to be released when the

Brazilian Amazon is deforested. The emission factor used by KfW to value carbon emissions both

for Acre and Mato Grosso is greater than the one used in Colombia (556.1). The number of

emission reductions eligible for REM payment is based on a comparison with a ‘forest reference

emission level’ (FREL); the average historical emissions from deforestation in Acre and Mato

Grosso over the period 2004-2015 for Acre and 2006-2015 for Mato Grosso.

77. REM’s use of a historical average reference emission level from a recent c. 10 year period

corresponds with BEIS policy, used in all our results-based REDD+ partnerhsips to date. We regard

a period of several years of historic data as more representative of ‘business-as-usual’ emissions

compared to a single base year or short period that might not be typical e.g. due to particularly

strong exogenous factors in a given year such as El Niño conditions. We do not accept modelled

projections of future increases or decreases in emissions as reference emission levels because

such models are hard to validate with confidence. This policy helps ensure that the emission

reductions that our partnerships use as a basis for results-based payments are additional to

business-as-usual. It should also be noted that REM requires partners that receive results-based

payments to reinvest all of the funds received in agreed activities to reduce deforestation and

15

As agreed between REM Brazil and KFW.

31

improve rural livelihoods further. These uses of funding are approved by KfW which applies an

additionality test e.g. to ensure that REM funds are not simply displacing existing recipient budgets.

Agreed uses of funding are then reported on and audited to ensure the agreed spending plan is

followed. In this way REM has two significant controls for ensuring additionality.

78. We have incorporated, on top of the above reference levels and emission factors, the ‘matching

mechanism’ that Acre and Mato Grosso have agreed for retiring additional emission reductions from

future use and sale – beyond those paid for by REM – which is designed to mitigate uncertainty and

non-permanence risk and ensure there is an explicit ‘own contribution’ from the partner

governments.

Acre Mato Grosso

Period Matching Period Matching

2014/2015 1 : 1.5 2014/2015 1 : 1

2015/2016 Underperformance 2015/2016 1 : 1

2016/2017 1 : 1.5 2016/2017 1 : 1

2017/2018 1 : 1 2017/2018 1 : 1

2018/2019 1 : 1 2018/2019 1 : 1

79. Once the FREL and matching mechanism are accounted for the emission reductions eligible for

REM payment are monetised using the agreed $5/tonne CO2e rate. Under these assumptions Acre

and Mato Grosso’s eligibility for payments based on deforestation results would be:

Scenario Eligibility Acre (£) Eligibility Mato Grosso (£)

2020 target £38,904,079 £233,141,109

Optimistic £32,956,878 £191,501,755

Stable £8,322,712 £120,616,065

Pessimistic £7,259,829 £68,684,34716

Figure 9 – Eligibility for REM results-based payments

80. REM does not necessarily pay its partners the full sums that their deforestation performance makes

them eligible for. If their work plans or utilisation of previous payments suggests they cannot

effectively implement all of the potential funding in a reasonable timescale, a lesser sum will be

paid. Therefore in order to determine to what extent the above eligibility, based on deforestation

rates, would translate into actual payments we have evaluated the absorptive capacity of the Acre

and Mato Grosso programmes based on the draft work plans that each has prepared. Acre’s work

16

NB under this scenario Mato Grosso’s maximum payment eligibility would fall significantly over time as deforestation rises, and this

would potentially significantly restrict payments compared to Mato Grosso’s budget needs which, as a new programme, are likely to increase significantly over time. Initially Mato Grosso’s eligibility would be high but its capacity to absorb funding low. As REM accounts for budgeted needs and implementation capacity, as well as deforestation results, the outcome would be that REM would pay Mato Grosso significantly less than the £69m maximum eligibility suggests.

32

plan, including administration fees, identifies requirements for REM finance totalling up to £26m;

Mato Grosso’s identifies requirements for up to £43.3m.17

81. We have assumed that capacity to absorb and implement payments effectively will be broadly equal

in all years of the partnership with Acre, because it is already an established REM partner. In Mato

Grosso’s case we have assumed that some time will be needed to reach full capacity for effective

implementation, so we have employed the same (proportionally) increase in capacity over time as

the scenario used in the original Business Case for investing in REM Colombia.

82. Under the optimistic scenario, Acre is limited by the absorptive capacity in 3 out of 4 years. In Mato

Grosso (i) the higher forecasts of emission reductions relative to the results-based payment

performance trigger coupled with (ii) the assumed gradual ramping up capacity to implement the

Work Plan effectively over time, causes our model to predict relatively low initial payment volumes

to Mato Grosso (strongly limited by low initial implementation capacity) rising over time to a point

where deforestation performance becomes limiting rather than implementation capacity. The overall

effect is a recommended investment volume that is substantially below the maximum payments

Mato Grosso could theoretically receive if REM simply paid for all emission reductions generated

without regard to recipients’ implementation capacity.

UK payment forecasts under the optimistic deforestation scenario, accounting for Acre and Mato

Grosso Work Plans and implementation capacity and German finance contributions

Year

payment

made

Performance year of

results Acre

Performance year of

results Mato Grosso

Payment to

Acre

Payment to

Mato Grosso

2017 2014-15 2014-15 £5m £2m

201818 2016-17 2015-1619 £3.3m £7.9m

2019 2017-18 2016-17 £5m £7.6m

2020 2018-19 2017-18 & 2018-19 £5m £7.1m

83. We have created a representative portfolio of investment “pillars” to structure the economic

modelling that follows based on the Work Plans of Acre and Mato Grosso. These are a

simplification of more detailed tables in the Work Plans. These representative portfolios are broken

down below. For the purposes of estimating the benefits of the investment we have modelled under

the assumption that just the direct interventions to improve production of farming and forestry

systems, which are possible to model robustly, generate benefits. These are “agri-environmental”

interventions that establish new productive farming and forestry systems, for which we have

adequate sources of information to enable cost-benefit modelling. Based on the breakdown of

funding in Acre’s more detailed Work Plan we estimate these activities to be 36% of the use of

funding, so we have used that proportion in modelling for both Acre and Mato Grosso.20 The use of

the remaining 64% of funds that would be used for interventions in farms and forests that are less

easy to model, as well as less direct ‘governance’ and enabling framework improvements, is not

modelled and therefore it does not generate modelled benefits.

17

NB these are indications of how much funding the two States propose they could effectively implement in the period to 2022. These are not UK funding contributions, which are recommended below based on: scenarios of deforestation; implementation capacity; and forecasts of German contributions. 18

In the case of Acre this payment may be early in 2019 to allow time for emission reductions to be properly verified 19

In the case of Mato Grosso the first two payments will be based on pre-contract emission reductions, in Acre payments extend and existing REM agreement in place since 2012 20

The Work Plan for Mato Grosso that breaks down uses of funding was not available at the time of modelling but has since been received and this suggests a similar proportion of funding


33

Figure 10 – breakdown of uses of REM funding proposed in Acre & Mato Grosso’s work plans

84. On top of these calculations, based on deforestation rates and implementation capacity, the

optimum level of funding for BEIS to put into these partnerships needs to account for the level of

funding that the other donor (German Development Ministry BMZ) will bring to the table. The initial

contribution from BMZ will be €27m (€10m in Acre and €17m in Mato Grosso), equal to £23.4m in

total at current exchange rates.

85. We have assessed the optimum level of funding for BEIS to provide to REM’s Acre and Mato

Grosso windows to be £18.3m and £24.6m; a total of £42.9m. This is based on need, rather than

aiming to negotiate a 50:50 share with our partners in Germany. The International Climate Fund

does not aim to ‘leverage’ contributions from other donor governments, it focusses on leveraging

recipient country and private sector investment. In this case we have considered potential future

German budgeting decisions just with a view to more accurately judging the financial needs of the

£3.1m, 12%

£5.8m, 22%

9.3m, 36%

£2.7m, 10%

£5.1m, 20%

Breakdown of REM funding in Acre

Pillar 1 - Indigenous Territories

Pillar 2 - Sustainable familiarproduction & Agroenergy

Pillar 3 - Sustainable agri-environmental activities

Pillar 4 - REDD+ Mechanisms

Pillar 5 - Payment Mechanismsimprovement

£5.2m, 12%

£9.7m, 22%

£15.5m, 36%

£4.5m, 10%

£8.5m, 20%

Breakdown of REM funding in Mato Grosso

Pillar 1 - Indigenous Territories

Pillar 2 - Sustainable familiarproduction & Agroenergy

Pillar 3 - Sustainable agri-environmental activities

Pillar 4 - REDD+ Mechanisms

Pillar 5 - Payment Mechanismsimprovement

34

programme and minimising the risk that funds will be over-provided such that not all funding could

be utilised effectively in a reasonable period of time.

86. Our recommendation for the optimum level of funding does not assume Acre and Mato Grosso

reach their 2020 targets for reducing deforestation, but that they move steadily from their most

recent deforestation rate to 75% of these 2020 aims, i.e. the “optimistic” deforestation rate scenario.

We assess this to be the most likely outcome for such committed and ready States, which are at the

forefront of global efforts to address deforestation, but facing the significant challenges that go with

addressing such a complex issue and doing it in uncertain political and economic times. It also

assumes implementation follows Acre and Mato Grosso’s draft work plans. And it assumes BMZ

increases its funding over time to match the UK’s funding in Mato Grosso 1:1. It also assumes the

KfW management fee for oversight of BEIS’ investment is agreed at 2.5%, rather than the 3%

agreed in our Colombia partnership, based on the latest position in contract negotiations with KfW.

It assumes local fiduciary fees are additional costs on top of the budgets for the core pillars of

activity set out in Acre and Mato Grosso’s respective Work Plans. The recommended level of BEIS

funding is based on the first version of these Work Plans, though these will be living documents

which are likely to be revised somewhat each year – typically the scope of work and budgets in

Work Plans for REM-funded programmes are more likely to increase over time than decrease.

87. We assess this to be a reasonably conservative set of assumptions overall, which gives an

adequate marginal incentive for the States to pursue their 2020 targets, particularly when

accounting for the option to mobilise more funding from BEIS or other contributors if efforts are

more successful than we have assumed.

Value for money appraisal

88. A value-for-money assessment was set out in detail in the Original Business Case here and it

remains relevant today. Because REM is making payments that are conditional on results achieved

under the UNFCCC REDD+ framework it attempts to keep controls on how partners use the funding

they receive light touch, to avoid a full ‘double burden’ of administrative procedures that would make

it difficult for the Programme to make progress. This for example includes an acceptance that

partners may not be able to produce evidence that they have optimised their choice of projects and

interventions with quantitative cost-benefit analysis; in which case qualitative assessments and

rationales may be used. These issues and procedures are covered in more detail in the

Commercial, Financial and Management Cases.

89. Nonetheless there are a significant range of features of the REM programme that control costs,

increase efficiencies and ensure effectiveness. To summarise the main features outlined in the

original Business Case these are:

- Economy. REM works at a ‘jurisdictional’ scale covering whole regions or landscapes. This has

the potential to bring economies of scale. Payments to partners are capped at $5 per tonne of

CO2 equivalent which has the potential to incentivise partners to minimise costs. Results-based

payment approaches also allow the recipient more flexibility on how to achieve desired

outcomes which gives more scope to tailor programmes to local circumstances which may give

more scope to reduce costs. KfW assures partners follow strict procedures around competitive

procurement, challenges unreasonable costs and has a no-objection power over major

procurements. KfW assesses recipients’ budget plans and changes to these plans, financial

reports and financial audits. KfW’s own administrative fees (in this case 2.5%) are the lowest

among BEIS’ REDD+ climate finance initiatives e.g. the FCPF Carbon Fund and BioCarbon

Fund charge 8% and 6% respectively, whereas the Forest Investment Programme charges 3%.

However it is difficult to compare fees like this because the scope of activities covered varies

from fund to fund. It is also difficult to predict what downstream administrative fees will be where



35

these initiatives partner with fiduciaries and implementing organisations on the ground e.g. in

REM’s Colombia window KfW pays a fiduciary 5% to oversee Colombia’s procurements,

contracting, financial assurance and reporting whereas for other initiatives such partnerships

have not yet been established and/or assessed. There is a risk, covered in more detail in the

Commercial and Management Cases, that the downstream fiduciary costs in REM’s Acre and

Mato Grosso windows are higher than in Colombia.

- Efficiency. Working with sub-national or national governments has greater potential to

transform rural development models than project-scale approaches e.g. REDD+ programmes

may improve governance, rights and the rule of law in a way that benefits whole populations,

rather than just landholders engaged at the deforestation frontier. Partnerships like these also

offer better integration with host government spending; and can raise additional host

government funds. As well as integration with other climate finance and Official Development

Assistance initiatives. KfW scrutinises the additionality of proposed projects and interventions

before funding partners’ implementation plans. It requires partners to allocate a significant

portion (more than 50%) of funds to direct interventions with landholders and businesses on the

ground rather than just government and agency reforms. It also requires partners to retire

‘matching’ emission reductions for each reduction REM pays against, to hedge against

uncertainty, leakage and non-permanence and ensure an explicit financial ‘own contribution’ is

made by recipient governments. In addition to this we expect some leverage of private finance

from farms and forestry enterprises, as outlined later in the Appraisal Case.

- Effectiveness. By increasingly making payments conditional on results the UNFCCC REDD+

framework intends to provide a strong incentive for host countries to deliver emission reductions.

In addition REM requires partners to reinvest all of the money they receive to reduce

deforestation rates and improve rural livelihoods further. It does not, as standard, require

partners to conduct qualitative cost-benefit-based optimisation of their project and intervention

choices. Instead it requires them to set out a rationale for each choice, and a qualitative

assessment of the likelihood of the proposed investments addressing deforestation drivers and

improving livelihoods based mainly on their theory of change and feasibility for near term

implementation. Few of the tens of individual projects or interventions that a host government

may decide to pursue are required to provide their own detailed results framework; instead they

typically report on one or two key results that feed up into a consolidated logical framework for

the whole REM Programme window. However BEIS is working with KfW and partners on plans

for evaluations that could look into the results of particular interventions in more depth and help

optimise the portfolio of interventions supported over time.

90. In Acre REM has a solid track record, having just completed an initial four-year phase of support.

During this time REM contributed 25m Euros for 5 million tonnes CO2e of verified emission

reductions; supporting livelihood improvement for 3000 smallholder families; 6500 extractivist and

rubber tapper families; 5300 indigenous people; and 2000 families on larger cattle farms. This is

based on KfW’s initial assessments, with a full evaluation currently in progress.

Modelling

91. The appraisal carried out to estimate the expected results of investing funding of up to £18.3m for

KfW’s REM programme in Acre and £24.6m.

92. The modelling only draws on investment components with direct benefits on the ground (i.e.

investments in sustainable agriculture). These investments make up 36% of the results-based

payments available to the two States. As described above, the benefits of the enabling framework,

36

institutional capacity building and TA elements are expected to be indirect, non-linear and diffuse

and therefore remain hard to predict and model.

93. BEIS will not attribute any emission reductions delivered prior to this business case to our REM

funding. This is because pre-business-case effort by Acre and Mato Grosso cannot have been

directly incentivised by BEIS’ financial commitment; notwithstanding the UNFCCC REDD+

framework which invites developing countries to seek results-based payments, which was

formalised in the 2013 Warsaw decisions (Decision 9/CP.19 – Decision 15/CP.19).

Modelled activities

94. The appraisal draws on an illustrative portfolio of the type of Green Financing activities that are

proposed by the Governments of Acre and Mato Grosso whose main beneficiaries are expected to

be small, medium and large producers from the Brazil nut, cattle, exotic fruits, fish and rubber

supply chains both in terms of financial support to establish these systems (approximately 75% of

funds) and technical assistance to help landholders understand how to establish them successfully

(the remaining 25%).

95. The modelling is built on the stylised representation of these financing instruments and includes five

types of agricultural activities:

I) Agroforestry for Brazil nut production

II) Agroforestry for cattle production

III) Agroforestry for exotic fruits production

IV) Agroforestry for fish farming

V) Sustainable agricultural practices for rubber production

96. Agroforestry is an integrated approach that combines more traditional farm activities e.g. cattle

ranching – though often in a more intensive way – with safeguarding existing tree cover and

establishing new tree cover. Producing new products on such farms by introducing Brazil nuts,

exotic fruits, fish farming and rubber trees increases the intensity of production per unit area (e.g.

fish farming in Acre can achieve up to ten times as much financial return per hectare compared to

low-tech cattle ranching approaches). Producing in a more intensive way reduces the need for a

given farm to expand into natural forest area in order to make satisfactory returns.

97. Introducing trees onto farms can improve the productivity of more traditional approaches forms of

production like cattle ranching e.g. in silvopastoral cattle systems (SPS) the trees introduced are

often leguminous, improving the nutrient levels of soils and the nutritional quality of the grasses that

cattle feed upon, or they provide shade that cattle can utilise in periods of high temperatures,

improving milk yields. REM’s support to establish these systems is conditional on farmers not

deforesting remaining fragments of natural forest on their land. Moving forward in Brazil it will also

support requirements for farmers to restore natural forest where it has recently been lost.

98. The following table gives a breakdown of the assumed distribution of funding for the five modelled

activities in Pillar 3.

Percentage of new activities in: Acre (AC) Mato Grosso (MT)

Rubber agroforestry systems 21.6% 21.6%

Nuts agroforestry systems 21.6% 21.6%

Exotic Fruits agroforestry systems 9.9% 9.9%

Fish Farming 27.0% 27.0%

Silvopastoral agroforestry systems 19.8% 19.8%

37

Modelling assumptions

99. UK government contribution. For modelling and assessment purposes it is assumed that, BEIS will

make an International Climate Finance contribution of £18.3m to Acre and £24.6m to Mato Grosso.

It is assumed that the contribution is laid as a promissory note in 2017 and no money is returned to

the UK, as it is assumed that any unspent funds will be reallocated within REM after the 4 year

programme period – though in practice if delivery of the programme goes off course contracts could

allow BEIS to suspend, terminate, withdraw and claw back (where possible) funding sooner.

100. Benefit and cost attribution. Benefits are attributed on the basis of the contribution that the UK

Government commits to the entire REM Brazil window compared to the estimated total donor

funding required. This is 57% based on the assumption of the £75.7m overall funding pot. Private

finance mobilised is attributed to the UK Government on the same basis as the benefits.

101. Timescales. For the cost-benefit analysis it is assumed that benefits accrue over 10 years based on

the average sustainable lifetime of the type of agroforestry and agricultural interventions supported.

This limits the benefits in particular of rubber agroforestry, which do not produce rubber until year 6-

7 and continue producing rubber for the tree’s lifetime of 20-30 years. However, other systems are

more productive within that timeframe. Silvopastoral cattle, Brazil nut, exotic fruit and fish farming

productive systems are assumed to be sustained for 7, 10, 10 and 10 years respectively.

102. Assumptions on leverage and land area of intervention are based on multiple data sources from

Acre and Mato Grosso obtained during the scoping mission to both States (July 2017), online

statistics (mostly from Acre),21 and results of a research done by a well-known local NGO22. In many

cases, when data was not available, BEIS consulted local experts that have been or will be involved

in the implementation of the REM Programme to help identify sensible assumptions.

103. It is assumed that producers supported by the programme will either plant 3 hectares (1/3 of all

producers) or restore 3 hectares of existing systems (2/3 of producers) of their land. This is based

on feedback from the producers, which suggest changing land use on more than 3 hectares at a

time is difficult because production and financial risks increase with the size of land converted and

there is limited amount of labourers available in rural areas. In addition we assumed, as a condition

of accessing REM funding, producers will be required to restore 0.5 hectares of degraded land to

natural systems on their land and maintain the existing natural forest on their land by stopping any

deforestation activities.

104. We have assumed a private finance leverage ratio of 1:1 for modelled activities, based on the

modelling approach in the original business case for REM Colombia. KFW currently expects no

explicit additional public financial contribution from Acre, Mato Grosso or the Federal Government of

Brazil in the contracts it will sign. Therefore we have assumed BEIS investment does not leverage

additional public finance. This may change in due course as the contracts potentially give Brazil’s

public institutions confidence to increase their support.

105. Assumptions related to the investment costs, yields and prices of the different agricultural activities

are taken from multiple data sources from Acre and Mato Grosso obtained during the BEIS and KfW

scoping mission to both States (July 2017), as well as online statistics (in the case of Acre in

particular),23 and results of a research done by a well-known local NGO.24

21

Acre en Numeros (Acre in Numbers) available here 22

Novo Campo Programme, “Promoting sustainable cattle ranching in the Amazon; experiences developing cattle ranching with zero deforestation methods”. 23


Novo Campo Programme, “Promoting sustainable cattle ranching in the Amazon; experiences developing cattle ranching with zero deforestation methods”.


http://www.ac.gov.br/wps/portal/acre/Acre/estado-acre/sobre-o-acre/!ut/p/c5/rVHLcoJAEPwWPwB3VoGF40YQV2VRWeVxsQiJRhBBRQh8faBy1lwyXXPqmuqebhSiDpeoOh2j8pRfojPyUajuJ2uC1wsLA_TLqEMtFZPN0lE7PlD3C1ld7Xpem9sasAneTTlncxiP_rj2kA_y3k2agrVpu0mgbksxGXOD1bYxdYSZjgSU3E4LW6Q5LgWF0qzBbrcN3PVOZm1S5yBNfXPw6wSeDIU_nMxReHrPhnWcDWGoEUXTdawoYwIY6zLyRHz9Nu6sNqhY-5DObmR3qXK3KYLzLn1jJD7WxaHWJtt3KxYPzZni5kEeYL4Zwsos_XYJuZcvwVO3Bud0dVa5dUgCyz3dbNlPlPNH2-xXo_zT1bsM3CAKEibZTvUliQ_9LpXX2UouY4qb26iN7l4rdDonNdYeXYJh_9mzBjbwmu8b6vkXuQUoJE-Tk2Uk_rHD11rqv2rxWZ59oiLbVkulcpkUdaCDH5yj3VU!/dl3/d3/L2dBISEvZ0FBIS9nQSEh/


38

106. Administration and management costs. For the purposes of modelling the expected benefits it is

assumed that both KfW’s administration costs of 2.5% and the Brazilian fiduciaries’ fees (assumed

to be 7.7% and 10.8%25 for Acre and Mato Grosso respectively at the time of modelling) are

charged upon the encashment of the promissory note. Project management costs are assumed to

be 9.45%. An additional 4.66% cost is assumed to be used for monitoring and evaluation at the

project level to verify that the conditions of loans are being met.

107. Carbon Equivalent abated and ecosystem values. The amount of carbon equivalent saved per

hectare by moving from the counterfactual activity to the programme activity is calculated using data

from the academic literature.26 The counterfactual activity is informed by the analysis of the current

land use activities in the two departments, which is overwhelmingly reliant on cattle production (c.

70% and 77% of the current agricultural land for Acre and Mato Grosso respectively). Direct carbon

sequestered from more productive, higher quality grazing land is assumed to be zero. Carbon

emissions avoided by saving forests from being converted to extensive pasture systems forests is

estimated based on the 2012-13 deforestation rate in the two departments which is assumed to be

0.46% based on academic literature. The model disaggregates ecosystem service values

associated with regenerated forests and natural forest values. Due to a lack of reliable data the

valuations are not disaggregated by region. The ecosystem valuation is based on academic

literature and previous business cases, where appropriate experts have inputted knowledge. These

values are applied uniformly to the land area impacted by the project.

108. Carbon valuation and discount rate. The model assesses the social value of carbon using the

BEIS’s international carbon prices series. The main results refer to the use of the central forecasted

values. The future price of carbon is uncertain and therefore sensitivity analysis has been

undertaken testing the NPV with the low and high carbon price scenario (see Annex A). In line with

the appraisal guidelines of BEIS’ ICF a 3.5% discount rate is applied to global public goods; in this

case the carbon benefits accruing from the project. All other costs and benefits are discounted at a

developing country discount rate of 10%, applicable to Brazil.

109. Leakage. A key assumption is the impact of leakage, the amount that the new agricultural activity

displaces the original activity to another area so that the negative impacts are felt there as opposed

to the project area. In this situation there are no net carbon or ecosystem benefits. REM’s overall

jurisdictional approach should minimise local leakage and national leakage, however to be

conservative a 25% leakage factor is applied in the modelling of the central scenario in line with

BEIS’ previous business cases. No further additionality discount is applied to expected results

because KfW assessment will ensure that activities represent an improvement on BAU (see section

on Efficiency above and controls described in the Commercial, Financial and Management Cases).

Modelling evidence assessment

110. Evidence base. As described in the sections above the modelling is based on multiple data sources

from Acre and Mato Grosso obtained during BEIS and KfW’s scoping mission to both States (July

2017), online statistics (particularly in the case of Acre)27, and results of research done by a well-

known local NGO.28 There are however weaknesses within this data, and the strength of the

evidence base will depend on whether investment components are implemented as foreseen. To

allow for the level of uncertainty in the evidence the modelling is deliberately conservative in the

assumptions that are made and also in the counterfactual identified.

25

Subject to ongoing negotiations 26

Amezquita et al., Carbon sequestration in pastures and silvo-pastoral systems under conservation management in four ecosystems of tropical America, 2008; Moreira et al., The potential for rubber plantations for environmental conservation in the Amazon region, 2009 27


Novo Campo Programme, “Promoting sustainable cattle ranching in the Amazon; experiences developing cattle ranching with zero deforestation methods”.


39

111. Comprehensiveness. The quantitative assessment of costs and benefits is only carried out for

components likely to have the most direct benefits on the ground and for which it is possible to

create robust cost-benefit models. This means that in the scenario where all REM results-based

funds are fully disbursed the benefits of only 36% of the REM funding activities for Acre and Mato

Grosso are monetised by the model. Further, there remains a number of non-monetised benefits,

including poverty reduction benefits, learning and network effects, international MRV and carbon

market access, and institutional strengthening and capacity building, that it is not possible to

quantify which are therefore are not included in this analysis.

112. Sensitivities. Expected results are sensitive to donor funding transferred, which are in turn sensitive

to achieved deforestation outcomes, therefore wide ranges of sensitivities are tested around

potential deforestation and funding scenarios at Annex A.

Expected results

Acre

113. REM’s total £26.5m investment returns a partial net present value (NPV) of £125.9m, while the UK-

attributable results show an NPV of £68.1m. This represents a UK attributed benefit-cost ratio of

£4.7:£1. Therefore the REM investment returns a higher private and social value than the initial

donor investment, despite only 36% of the funding activities being monetised. The benefit-cost

ratios of the underlying modelled activities show that positive returns hold from the individual

landholders’ perspective as well, as they range between £3.6:£1 for fish farming to £41.8:£1 for

cattle and are always associated with positive income change. UK-attributable tangible results

include 1.4 million tonnes of CO2 sequestered, abated or avoided at a cost per tonne of £13.4

tCO2e and 900 producers’ livelihoods impacted, in addition to deforestation avoided over a land

area of 2,100 hectares.

Expected results – Mato Grosso

114. REM’s total £49.2m investment returns a partial net present value (NPV) of £377.5.6m, while the

UK-attributable results show an NPV of £192.5m. This represents a UK attributed benefit-cost ratio

of £9.9:£1. Therefore the REM investment returns a higher private and social value than the initial

donor investment, despite only 36% of the funding activities being monetised. The benefit-cost

ratios of the underlying modelled activities show that positive returns hold from the individual

landholders’ perspective as well, as they range between £5.0:£1 for fish farming to £62.3:£1 for

cattle farming, and are always associated with positive income change. UK-attributable tangible

results include 4.3 million tonnes of CO2 sequestered, abated or avoided at a cost per tonne of £5.8

and 1600 producers’ livelihoods impacted, in addition to deforestation avoided over a land area of

9,900 hectares. A table is provided below.

Sensitivity analysis has been carried out for a number of key assumptions in the model. This is set

out at Annex A. This suggests that the investment in REM remains value-for-money even when we

apply a significant range of variations to key parameters.

Cost-Benefit Analysis29

Costs Acre Mato Grosso Total

REM donor costs by region £26.5m £49.2m £75.7m

29

All values in this table have been rounded.

40

UK costs by region £18.3m £24.6m £42.9m

Results-based payments

Results-based payments disbursed £26.5m £49.2m £75.7m

REM RBP funding shortfall (-)/surplus (+)

£0 £0 £0

UK RBP funds unspent £0 £0 £0

% of funding activities monetised 36% 36% 36%

Benefits

Carbon saved (t of CO2e) 2.4m 7.5m 9.9m

Individuals 1600 2900 4500

New area planted with agroforestry or silvopastoral system (ha)

11800 20600 32300

Area improved to more productive, higher quality agroforestry or silvopastoral system (ha)

23900 41700 65700

Area restored to natural system (80% forests) (ha)

6000 10400 16300

Avoided deforestation (ha) 3800 17400 21200

Monetised benefits

Total Ecosystem Value Protected (Discounted)

£1.3m £5.1m £6.4m

Total CO2e Value (Discounted) £120.9m £378.0m £498.9m

Income Change (Discounted) £30.2 £43.5m £73.7m

Total benefits (Discounted) £152.4m £426.7m £579.1m

41

Value for Money indicators

Donor NPV (£) £125.9m £377.5m £503.4m

UK NPV (£) £68.1m £192.5 £260.6m

Donor cost per tonne (£/t) £11.0 £6.5 £7.6

Donor benefit to cost ratio £5.8 £8.7 £7.7

UK cost per tonne (£/t) £13.4 £5.8 £7.6

UK benefit to cost ratio £4.7 £9.8 £7.7

ICF KPIs

UK attributed carbon saved (t of CO2e)

1.4m 4.3m 5.6m

UK attributed livelihoods impacted 900 1600 2500

UK attributed avoided deforestation 2100 9900 12000

UK attributed private finance leveraged

£2.6 £4.5 £7.1

UK attributed public leverage finance leverage

£0 £0 £0

Value for money assessment

115. The cost-benefit analysis presented above is only partial; it does not include a number of co-

benefits or other non-monetisable benefits related to strengthened land-use planning and titling,

increased quality and frequency of monitoring of deforestation activities and enhanced institutional

capacity that REM is likely to bring about by supporting Acre and Mato Grosso’s policies and

forestry governance programmes. Further, the analysis uses an indicative portfolio of interventions

which are realistic but may not reflect the eventual REM funding decisions entirely, which are to an

extent at the ownership of the two State Governments and will evolve and grow over time (though

the approach and any changes are subject to approval by KfW and donors). The analysis however

does provide an indication of the value-for-money of investing in REM’s Acre and Mato Grosso

windows and highlights the importance of making the right decision on the optimal level of funding

provided to minimise underspend risk.

116. REM performs well against key ICF VfM indicators under the optimistic deforestation scenario,

which optimises the donor funds employed with minimised unspent results-based funds. The UK-

attributable results show significant carbon savings (1.4MtCO2e Acre) (4.3MtCO2e Mato Grosso) at

42

a cost per tonne of £13.4/tCO2e for Acre and £5.8/CO2e for Mato Grosso. The cost per tonne for

Acre is towards the lower of the current BEIS ICF forestry portfolio (£5.66-£37.06/tCO2e) however it

is above the spend-weighted average for the forestry portfolio of £8/tCO2e. This is reasonable given

the low proportion of activities quantified. Mato Grosso is both at the lower end of the ICF forestry

portfolio and below the spend-weighted average cost per tonne. Under the less favourable

deforestation scenarios, where a portion of REM results-based modality’s funds remain unspent

under the 4 year programme period, the UK-attributed cost per tonne increases in line with the

opportunity cost of unspent funds. For Acre, with 56.2% of the UK’s results-based payments

unspent in the “stable” scenario, the attributed cost per tonne increases to £33.94/tCO2e, with 60%

unspent under the “pessimistic” scenario the attributed cost per tonne increases to £37.8/tCO2e. As

previously noted, results don’t change for Mato Grosso under the stable scenario but for the

pessimistic scenario where 26.8% of the UK’s results-based payments are unspent, the cost per

tonne increases to £7.1. Underspend risk is a natural element of all results-based payment systems.

117. REM Brazil compares favourably to REM Colombia in terms of value for money. The expected cost

per tonne under the optimistic scenario for Acre and Mato Grosso is well below the expected cost

per tonne for REM Colombia. The business case expected cost per tonne for Colombia under this

scenario was £20.1/tCO2e. This is due to two factors. Firstly, the investments modelled for Acre and

Mato Grosso in Brazil nut and exotic fruits plantations have a higher carbon sequestration rate and

are cheaper to invest in than the investments in cocoa and coffee that were modelled for REM

Colombia. The Carbon sequestration rate for new Brazil nut, and exotic fruit agroforestry systems

are 8.54t/ha/yr and 5.27t/ha/yr with an average investment cost of £2220/ha and £1062/ha per year

respectively. The carbon sequestration rate for both Cocoa and Coffee agroforestry systems in the

Colombian model was 0.25t/ha/yr with an average investment cost of £3271/ha and £4507/ha

respectively. Secondly, the average investment cost for new cattle and rubber systems in Brazil is

cheaper than in the Colombian model. Cattle systems are £1116/ha cheaper in the Brazilian model,

whilst new rubber systems are £580/ha cheaper.

118. The expected attributed cost per tonne of the REM Brazil window is above the cost per tonne of

BEIS ICF’s investments into purely results-based (REDD+ Phase 3) multilateral forestry investment

funds, like FCPF-C which has an expected attributed cost per tonne of £5.66/tonne of CO2e. This

is to be expected as in these funds, according to ICF’s new attribution rule which reflects the

opportunity cost of UK investment, results are attributed based on the UK’s pro-rata share of public

finance at Fund level and not shared with all public finance downstream at the level of project

activities. In our modelling REM’s results-capped but also up-front funding approach, where a higher

share of project costs are borne by REM donors, results in a less cost-effective outcome from a UK

investment perspective as the leverage potential is lower. The public cost per tonne of the FCPF-C

– approximated by project level attribution taking into account all streams of public finance

contributing to the project level activities – at £16.8/tCO2e is more comparable to REM’s value-for-

money indicators. Nonetheless, direct comparability is complicated by the difference in the length of

time benefits that are assumed to be attributable to the UK intervention (limited to 5 years, the

length of results-based payments contracts in FCPF) and the limited comprehensiveness of the

REM modelling.

43

Commercial Case

119. The original Business case for investing in REM Colombia at the end of 2015, online here,

described the selection of the primary delivery partner (German Development Bank KfW) and its

procedures for appointing and managing downstream delivery partners in some detail. Here we

summarise the main points and update on anything that is different in the arraignments for our

increase in funding for Acre and Mato Grosso.

Selection of KfW

120. KfW is a public institution owned by the Federal Republic of Germany and its States. BEIS has

made International Climate Finance contributions to KfW before; including as the delivery vehicle for

the GET FiT programme, the NAMA Facility30 and the REM Programme in Colombia and we have

had a generally positive experience working with these initiatives though we have some

recommendations for optimising management in each case. Other contributors to KfW programmes

include the German Federal Ministry for Economic Cooperation and Development (BMZ) the Nature

Conservancy and the European Commission.

121. BEIS has not run a formal procurement competition for the delivery partner for this investment.

However, as with many ICF investments to date, we have conducted a detailed appraisal of a long

list of eight potential delivery routes. We have ensured that this appraisal is up to date to reflect the

current supplier market and context around extending the BEIS’ REM investment in 2017. We are

satisfied that the grant proposed in this Business Case is allocated, and will be managed, in

accordance with Government Grant Standards.

122. The delivery options are appraised in the original Business Case and that assessment is updated in

this Extension Business Case. The appraisals look at the fit of each option against strategic

requirements identified in the Strategic Case and critical success factors for effective management

of implementation. In these assessments KfW scores significantly higher, scoring 24.5/30 compares

to a next best options at 21.5/30, primarily because of its strategic fit. We have also overlaid onto

this a sense-check against the increasing strategic focus on delivery routes that provide strong UK

‘visibility’ and benefits associated with that e.g. enhancing the overall relationship between the UK

and recipient governments. The REM option continues to be the preferred option with this additional

lens.

123. BEIS (then DECC) engaged Deloittes to undertake a supplier review of KfW which concluded

favourably in 2013.31 The review looked in detail at KfW’s role as delivery partner for three climate

finance initiatives: GET FiT, Indonesia ERI32 and the NAMA Facility. No other review has been

needed or done since then; however KfW has more recently passed the Green Climate Fund’s

(GCF) assessment for selection as an Accredited Entity of the GCF.

124. Based on these assessments we continue to believe direct grants to KfW are an appropriate route

for implementing this investment.

Safeguards and due diligence

125. KfW’s internal policies contain rigorous procedures for checks on money laundering, illegal use,

terrorism finance and “know your client procedures”. It has agreed to adhere to IFC’s standards33 in

relation to Environmental Social and Governance (ESG) reviews. As KfW Development Bank

30 GET FiT is an initiative through which the UK seeks to improve the availability of commercial finance to help decarbonise the Ugandan power sector. The NAMA Facility is a UK and German bilateral programme funding increased quality of developing countries’ climate mitigation plans. 31 Deloitte, Supplier Review of KfW, 2013, prepared in confidence for an internal BEIS audience only 32 Indonesia ERI supports loans to small and medium sized enterprises in Indonesia 33

The IFC’s standards are recognised as the leading developmental standards and are used by CDC and other Development Financial

Institutions



44

programmes are executed locally, grievance and redress mechanisms are operated by recipients.

REM contracts require recipient countries to implement robust systems to record and respond to

complaints from the outset of operations and to strengthen them over time.34 KfW annually presents

results of these mechanisms based on recipients’ annual reports.

126. The REM programme also contracts recipient countries to adhere to Free Prior Informed Consent

(FPIC)35 before significant decision on the use of lands and distribution of funds; as well as

UNFCCC REDD+ social and environmental safeguards.36 In addition to REM support for this work,

the German Government typically makes separate sources of finance and technical assistance. For

example, through the German Development Agency GIZ, Germany is funding programmes in

Colombia and Acre that build capacity in indigenous peoples and work to better integrate them with

REM programmes.

127. On the basis of these procedures and controls, and favourable expert assessments of them, BEIS

has satisfied itself that this investment complies with the Department’s public sector equality duty. In

addition to ‘do no harm’ controls, KfW Development Bank actively fosters gender equality through

all of its projects.

Negotiating a value-for-money contract

128. BEIS will negotiate a new contract with KfW, covering the increase in funding for Acre and Mato

Grosso. This will mostly follow the provisions negotiated for the Colombia window, which in turn

followed aspects of our earlier agreement for KfW to deliver GET FiT. BEIS Legal and Commercial

will be part of the negotiation process, and we will also use the support of external legal counsel

particularly for issues of German Law. Where appropriate our contract with KfW will require

obligations to be passed through to the State Government of Acre or Mato Grosso, the Federal

Government of Brazil and/or its delivery partners.

129. To ensure BEIS’s partnership with REM provides the best value for the Department, we are seeking

to maintain a number of procedures negotiated for our participation in the REM Programme in

Colombia, which are not in KfW ‘standard offer’. These include a confirmed post-implementation

evaluation, additional transparency requirements and provisions for the Department to exit the

agreement if implementation is poor. We will also attempt to negotiate stronger provisions for areas

where we believe management could be optimised, based on our experience of delivery in the

Colombia window, including monitoring and evaluation planning.

Lessons from Colombia partnership Potential remedy in contracts for

REM Acre and REM Mato Grosso

The “indicative” shares of results-based payments, between

the three donors to the Colombia partnership, recorded in our

contract has been quite rigidly applied and has resulted in

faster initial rates of disbursement for Norway and Germany

than would be expected on a pro-rata basis. This is mainly due

to less flexibility regarding in which years German and

Norwegian funds can be utilised. This has the potential to slow

the disbursement of UK funds.

In the contracts for Acre and Mato

Grosso we will work to agree a set

of indicative disbursement

schedules that are closer to a pro-

rata distribution.

The initial drafts of financial reports from the fiduciary in

Colombia were not of the format and quality required, leading

We will seek to ensure KfW’s

contracts with partners in Brazil

34

Based on REM contracts with Colombia 35

FPIC is the principle that a community has the right to give or withhold its consent to proposed projects that may affect the lands they customarily own, occupy or otherwise use. 36

Dec/COP19

45

to redrafting work and delays. set out clear expectations on this.

Monitoring and Evaluation arrangements for the partnership

have been put in place but without a unifying planning

document that records the approach. Some aspects of the

approach also still need to be agreed e.g. expectations for the

form and content of the end-of-programme evaluation.

We will work to ensure the

contracts are clear on what BEIS

requires in terms of the format and

timing of a Monitoring and

Evaluation Plan document.

A small number of key programme documents have been

available to KfW several weeks before KfW passed them on to

BEIS. More time for BEIS to review key documents is always

useful, especially for longer ones such as Annual Reports and

Annual Work Plans.

We will work to agree clearer

provisions that KfW should send

key documents to BEIS without

undue delay.

130. We anticipated that KfW would seek to maintain the 3% administrative fee charged to our existing

REM Programme in Colombia which is towards the lower end of the range of fees we see across

our climate finance initiatives but we have agreed a lower 2.5% fee with KfW in this case, subject to

finalisation of the last details of contracts. We do not anticipate KfW will charge any additional direct

costs, though we may negotiate a contribution to the programmes’ ex-post evaluations, to be

determined during contract negotiations. It is hard to directly compare fees like this. We will be

working to control the administrative costs of downstream delivery partners in Acre and Mato

Grosso especially (described below).

Legal considerations

131. The original Business Case looked at legal considerations in more detail and various legal

considerations are covered throughout this Extension Business Case. As described above KfW is

subject to, and follows, EU procurement rules. KfW’s primary partners are sovereign national or

local governments which are not appointed by competitive procurement. But the goods and services

KfW does procure directly are subject to these EU rules.

132. As REM funding is primarily executed by recipient governments and their delivery partners in

developing countries we assess there to be no risk of distorting EU competition with State Aid.

133. As detailed in the original Business Case we believe the investment is in line with BEIS’ spending

powers and public sector equality duty, as well as the obligations of the International Development

Act 2002. Our contracts will ensure the application of due safeguards and access to information

such as to enable BEIS to meet its obligations under the Freedom of Information Act 2004.

134. Contracts with KfW will be legally binding, in German law (and therefore will require external legal

counsel with this expertise), and based on our existing contract for funding REM’s Colombia

window. Germany are the other donor to the programmes and in practice, while decision making

arrangements are formalised in our contracts, it is likely that any decisions to be taken jointly with

Germany will be arrived at diplomatically rather than by legal means. Failures to deliver the

programme effectively could result in a legal dispute between BEIS and KfW, for which our contract

will make arrangements, but this scenario is highly unlikely as again diplomatic means would be

pursued in the first instance.

135. Drawing lessons from the progress of the REM Colombia programme we will seek to negotiate

some additional wording in contracts for REM Acre and REM Mato Grosso. We intend this to make

clearer by when a monitoring and evaluation plan for each programme will be ready, possibly

agreeing some features of those plans and how long KfW has between receiving progress reports

from recipients and passing them on to BEIS.



46

Competency of the organisation to deliver in-country

136. REM establishes a significant in-country presence to help oversee each of its partnerships. In the

case of Acre and Mato Grosso KfW has a Brazil office that will play a role, and an extensive network

of GIZ staff based in Brazil will also play a big part. These organizations have particularly strong

capacity for forest-sector work in Brazil, due to their longstanding involvement in Brail’s Amazon

Fund and REM’s first phase of support for Acre. As in the Colombia partnership, REM will also fund

a full-time implementation specialist to work to assure delivery in the implementation units of both

Acre and Mato Grosso. BEIS can also count on some support from the UK Embassy in Brazil which

has helped us engage with development of the programmes to date. We are requesting approval to

use BEIS ICF programme funds to put a locally-engaged staff member in the Embassy to help

oversee delivery.

Appointment of subcontractors

137. As described above, as a German public institution, KfW must adhere to procurement rules which

are similar to those governing the UK Government and which derive from EU rules. Where it directly

procures goods and services these standards will be followed, though this will be for a relatively

small number of cases as the majority of funding will be ‘recipient executed’. As REM programmes

are executed by recipient governments, their appointed fiduciaries and delivery partners for the

majority of procurements KfW is not directly in control. It will, however, agree in its contracts with

downstream deliver partners detailed procurement procedures that reflect KfW standards. KfW will

invest significant effort in assuring that these obligations are followed with high quality recipient-

executed delivery processes and KfW retains the right to suspend or terminate support if this is not

the case.

138. As in Colombia, partner governments Acre and Mato Grosso, will appoint a competent local

fiduciary to manage programme finances. These processes are ongoing but some organisations

with the right competencies have been shortlisted for selection and negotiations are underway. The

fee currently proposed for Acre’s fiduciary is 7.7% which is somewhat higher than Colombia (5%)

but reflective of Brazil where such services are generally more costly.37 We had some concerns

about the initial offer on fees from the fiduciary in Mato Grosso, where only one organization

(Funbio) was identified as a suitable provider and it had suggested it would charge at least 14%.

However BEIS and KfW have been successful in negotiating a reduced fee of 11%, subject to

finalisation of the final details of contracts. This remains higher than the direct comparators we have

in other REM partnerships but KfW’s assessment, based on many other partnerships they operate

in Brazil, is that this fee is normal in a Brazilian context. To understand and negotiate the Funbio fee

KfW undertook detailed due diligence on Funbio’s costings for the activites that they will undertake

and assessed these costs to be reasonable and comparable to a range of existing partnerships that

KfW operates in Brazil.

139. In Colombia, KfW’s contracts were with the Government of Colombia’s Ministry of Environment and

Sustainable Development (MADS). In the Acre and Mato Grosso windows the arrangements will be

as follows:

a) Acre’s State Secretariat of Planning (SEPLAN) will be lead implementing partner

b) Acre’s State Secretariat of Finance is likely to be appointed fiduciary

c) In Mato Grosso the State Secretariat of Environment will serve as lead implementing partner

a. In Mato Grosso the selection of a financial mechanism (fiduciary) is still ongoing and we do

not intend to sign any contracts or make payments until this is agreed

37

Based on comparator contracts that KfW have outlined for BEIS

47

140. To ensure ongoing high standards of procurement, KfW’s contracts with the States of Acre and

Mato Grosso will require contracting of local consultancies, goods and services, purchases and

transfers to third parties with REM funds to use open, transparent and good faith38 competition,

enabling the identification of the best offer. Detailed procurement policies are agreed with REM

partners in the form of Operational Manuals and we have the opportunity to comment on these for

the Acre and Mato Grosso partnerships. KfW will assure that delivery follows these agreed

standards through embedding a full-time implementation specialist in recipient programmes, regular

operational and financial reporting from recipients, audits of financial reports and regular monitoring

missions to verify progress on the ground.

141. KfW retains the right to veto any appointments. Appointments without competition are only

permitted where a satisfactory justification is provided that a chosen entity is, according to its role

and function, the only appropriate entity for the defined tasks. While BEIS will not directly engage in

appointment and contract-management for these delivery partners, KfW will continue to consult

BEIS on major decisions and risks identified. BEIS has a direct line of sight to the effectiveness of

procurement approaches and performance of appointed organisations.

38

This term has the legal meaning: openly, honestly, and with consideration for all parties involved

48

Financial Case

142. The Original Business case for investing in REM Colombia at the end of 2015, online here,

described REM’s financial management approaches in some detail. This remains valid and

therefore here we summarise the main points and update on anything that is different in the

arrangements for our increase in funding for Acre and Mato Grosso.

Nature and value of the expected costs

Administrative costs

143. KfW’s administrative cost to assure delivery of the REM Programme in both Acre and Mato Grosso

is 2.5%, which is lower than the rate we agreed for our REM partnership in Colombia (where KfW

charges 3%). That 2.5% fee equates to £1.1m of the UK’s £42.9m contribution. BEIS will be

required to contribute to these costs as a flat 2.5% lump-sum fee as part of each payment made to

KfW.

144. In Acre the State Secretary of Planning will act as fiduciary for the programme of local

implementation. Their admin fee is still under negotiation but is likely to be 7.7%, which represents

£1.37m of the UK’s proposed £18.3m contribution to the State of Acre. In the State of Mato Grosso,

after negotiation, Funbio has indicated it will charge a fee of 11%. This will constitute £2.64m of the

UK’s proposed £24.6m contribution to the State of Mato Grosso. On that basis the total admin fee

for the proposed £42.9m increase of funding to REM is likely to be £4.01m. This is subject to the

finalisation of contract negotations but the process of negotiation is now fairly advanced so we do

not expect major changes..

145. Based on our experience working with the REM Colombia programme we anticipate the following

additional dedication of staff time at BEIS and at the British Embassy in Brasilia will be needed to

manage the increase in funding (note this is all additional to the staff time dedicated to the REM

Colombia window and we have assumed relatively little economy of scale from investing in two

Brazilian programmes as each will have its own set of decisions and processes):

Time dedicated (Full Time Equivalent (FTE))

Staff grade BEIS Embassy

SCS 0.025 0.025

G6 0.05 0.05

G7 0.2 0.1

HEO/SEO 0.6 0.5

Total: 0.875 0.675

146. The UK’s Embassies in Brazil currently dedicate some important resource to the programme and

there should be some scope for this to continue as it enters operation. However it is challenging to

keep Embassy staff engaged, with other demands on their time e.g. trade. To achieve the time

contributions above BEIS would need to fund a post in an Embassy office in Brazil to work full time

on forest and climate initiatives. This individual would be locally-engaged, at FCO grade C4 (HEO

equivalent). We would seek to negotiate with the Embassy that BEIS funds this individual’s wages

and travel costs but the Embassy takes a significant share of oversight of their work including line

management, though with BEIS’ forest team also closely involved and countersigning on key

decisions e.g. end of year performance reviews.


49

147. This staff member would dedicate: 50% of their time to oversight of REM Acre and REM Mato

Grosso; 40% to oversight of other BEIS climate finance programmes in Brazil including potentially

the proposed Partnerships for Forests platform (currently with Minister’s for approval) as well as

development of potential new partnerships; and 10% to embedding our work in the wider activity of

the Embassy and making a corporate contribution. This mirrors the arrangements we are putting in

place in the UK’s Embassy in Bogota for oversight of REM Colombia.

148. We are requesting approval for up to £300,00039 of International Climate Finance programme RDEL

to fund this post from 2018 to 2022 based on estimates of gross salary costs and travel expenses.

Appointment would be on the basis of rolling one-year contracts so BEIS’ initial commitment for

work in 2018 would be £60,000. This £300,000 will be additional to the £42.9m commitment of

finance to REM.

Resource and capital costs

149. REM windows will require a combination of resource (RDEL) and capital (CDEL) funding. For the

UK’s funding of the Climate Investment Funds and Green Climate Fund, DFID and DECC (now

BEIS) agreed with the Office of National Statistics that up to 10% of CDEL funds may be used to

provide grants for administrative costs and expenses of International Climate Finance initiatives.

150. For the increase in funding for REM in this Extension Business Case this up to 10% (£4.29m)

allowance will cover the £1.1m administrative fees of KfW and any additional direct costs to KfW

that may be negotiated in the contract (e.g. a contribution to an ex-post evaluation for each

programme).

151. Based on the Work Plans of the two States BEIS has made an assessment of remaining costs

across the ‘pillars’ of support REM will provide to Acre and Mato Grosso. We assess the “enabling

framework” pillars that strengthen delivery institutions and build essential systems that underpin the

programmes to be more indirect classes of intervention that are not so closely tied to changes in

land use or the creation of capital assets, therefore requiring RDEL funding.

152. We assess the pillars that focus on creating new productive systems on indigenous territories and

farms to be directly tied to changes in land use and the creation of capital assets, therefore requiring

CDEL funding. The main activities of these pillars, and where they relate to the creation of assets,

are described below:

Pillar of activity Main sub-activities CDEL or

RDEL

Indigenous peoples - Grants to help indigenous communities buy materials to establish new production systems e.g. seedlings for fruit crops

- Building these new production system assets, e.g. building fish ponds, including as part of this building process instruction on how to build them, delivered as part of agreements with specific communities that have agreed to build these new production systems

- Implementation of indigenous land management approaches: creating maps and systems of monitoring to prevent outside organisations deforesting indigenous territories

CDEL

39

This is based on posts BEIS is funding in Colombia and Mexico, accounting for circumstances in Brazil where wages and travel costs are approximately 30% higher than Colombia.

50

Forest-friendly

production

- Grants to help purchase materials and establish new production systems: rubber, exotic fruits, honey, bamboo, wild cocoa, forest oils, timber

- Building these new production system assets, e.g. planting new rubber plantations, including as part of this building process instruction on how to build them, delivered as part of agreements with specific farmers that have agreed to build these new production systems

- Grants to help purchase processing equipment for facilities that process, manufacture, package and distribute these products

- Grants to help purchase materials and restore native forests on degraded farmland

CDEL

Diversifying cattle

farms

- Grants to help purchase materials and establish new more intensive farming systems on poor-quality extensive cattle grazing farms e.g. to build cattle sheds and buy feed crop seedlings to replace grassland

- Grants to help purchase materials to establish fish ponds for fish farming in place of poor quality cattle grazing land

- Building these new production system assets, e.g. building fish ponds, including as part of this building process instruction on how to build them, delivered as part of agreements with specific farmers that have agreed to build these new production systems

CDEL

Capacity building,

essential systems &

enabling framework

Grants to help with:

- Creating and operating new Monitoring, Reporting and Verification IT systems

- Institutional capacity building, programme management and administration

- Command-and-control interventions by environmental authorities, to help stop deforestation happening

- Registering lands in a land registry

RDEL

153. Based on the proportion of funding earmarked for each pillar of the Work Plans of Acre and Mato

Grosso, and the assumptions on fees described above, the total CDEL requirement for the

extension of REM funding is £27.9m CDEL and £15m RDEL. Germany do not have restrictions on

capital or resource spend, so they will be in a position to help balance our spending if aspects of the

financial plan change.

REM Acre

% of results-based

payments £ millions REM Mato Grosso

% of results-based

payment £ millions CDEL/RDEL

Indigenous territory 12 2.1 Indigenous territory 13.2 3.2 CDEL

Forest-friendly production 33 5.9 Forest-friendly production 46.8 11.2 CDEL

Diversifyinig cattle farms 25 4.5 CDEL

Systems & enabling framework 30 5.4 Systems & enabling framework 40 9.6 RDEL

KfW fees 0.5 0.6 CDEL

Total Acre contribution (£m) 18.3 Total Mato Grosso contribution (£m) 24.6

Total CDEL (£m)

Total RDEL (£m)

Total all funding (£m)

27.9

14.9

42.9

51

Schedule of funding and payment by promissory note

154. The detailed breakdown of BEIS payments to REM is estimated in the Appraisal Case. As in

Colombia yearly performance-based payments will be determined by:

a) Whether, and to what extent, Acre and Mato Grosso reduce their greenhouse gas emissions

from deforestation

b) The implementation capacity of Acre and Mato Grosso’s programmes to quickly deploy the

funds to address deforestation.

155. BEIS intends to spend the full £42.9m sum in November 2017 by promissory note in pounds

sterling, lodged with the Bank of England. Therefore the spending timetable is as follows.

UK Spend by promissory note (£)

Financial year RDEL CDEL

2017/18 15m 27.9m

156. Results-based payment encashments from BEIS to KfW will be made annually under the

Promissory Note, upon written demand from KfW, based on verified emission reductions, annual

Work Plans from Acre and Mato Grosso and KfW’s assessment of these plans. We will agree

indicative encashment schedules in our contract with KfW. And KfW will then send BEIS demands

for payment, with accompanying evidence, just prior to when they intend to make payments to the

recipient governments (also based on verified emission reductions, as well as implementation

capacity and progress).

157. These encashment schedules are likely to show a more even distribution for Acre where

implementation structures are already in place and funding can flow more rapidly in early years. In

Mato Grosso we expect to see encashment forecasts that increase in amount over time as Mato

Grosso’s programme gets up and running.

Forecast of encashment of BEIS’ promissory note

Year Payment number Acre Mato Grosso

2017 1 £5m £2m

2018 2 £3.3m £7.9m

2019 3 £5m £7.6m

2020 4 £5m40 £7.1m

158. The use of a Promissory Note is consistent with BEIS’s approach to investment in other results-

based multilateral forest funds, the FCPF Carbon Fund and the BioCarbon Fund ISFL. A strong

commitment of funds is particularly useful for results-based payment agreements where recipients

are asked to undertake significant own spending and policy interventions to generate results. BEIS

funds will be co-mingled with at least €27m funds from the German Federal Ministry of Economic

Cooperation and Development (BMZ). While BEIS will seek to negotiate contractual provisions to

withdraw funds from the partnership in some circumstances, these will be closely defined and will be

subject to discussion with KfW rather than a unilateral power for BEIS to withdraw funding.

Contracts will not have a definitive end point at which unused funding must be returned to BEIS, an

40

Acre values do not sum to £18.3m due to rounding

52

indicative timetable will be included in contracts with no firm end point, and all withdrawal of funds

will be subject to discussion with KfW.

Financial accounting considerations for BEIS

159. BEIS does not propose to make a loan, provide returnable capital, establish a company by limited

guarantee or endowment policies. We therefore assess there to be no contingent liabilities from a

spending point of view. However, the potential for return of funds in future financial years is

contingent on the performance of the jurisdictional programmes that are funded. The use of

Promissory Notes means that the amount of notes deposited but not yet encashed will show on

BEIS’s Statement of Financial Position.

Contingent factors

160. There are contingent factors that may influence the cost of the project. As KfW will cap the financial

obligations of donors in the legal agreements it signs with primary delivery partners at a level that

reflects the funding that donors have provided, there is no risk of overcommitting funds if project

costs or performance rise beyond initial expectations.

161. However, if partners underperform, delivering less emission reductions than expected, payments

could be (in more extreme cases of underperformance) capped at a lower level than the available

budget. As a result, the overall cost of the investment could reduce leaving an under-spend.

Mitigations are discussed in the risk management section of the Management Case including the

potential to extend the funding period or work in additional REM countries.

162. KfW will manage liquidity to ensure there are sufficient available funds to meet payment obligations.

Its contracts with Acre and Mato Grosso will specify maximum donor funding in the currencies in

which the donors provide funds (Euros and Sterling for BMZ and BEIS respectively). KfW will

convert all funds to Euros within 4 banking days after receipt. The Euro amount shall be determined

by applying KfW’s rate of exchange on the date of conversion. In-country partners will receive

funding in Euros and convert funds to Brazilian Reales.41 On this basis the donors are protected

from any liability based on changes in exchange rates but Brazilian partners will need to account for

and manage currency exchange risk.

Handling interest accrued

163. The investment will be subject to KfW's rules and procedures pertaining to bank interest or

equivalent benefits. KfW will accrue interest on a quarterly basis on 1 January, 1 April, 1 July and 1

October of every year until the Programme Account is closed. The interest rate to be determined by

KfW depends on its current refinancing conditions, which are calculated on the basis of the

respective money market reference rate prevailing when said interest rate is fixed, and adjusted for

its refinancing. Interest is credited to the Programme Account starting from the receipt of the first

payment. Any interest will be used at the end of the country programme to supplement funds

available to the REM initiative.

Financial planning and forecasting

164. BEIS’s project manager will continue to regularly update forecasts of when the funding will be drawn

down and executed on the ground, as necessary. They will work with the ICF Programme

Management Office and BEIS Finance to ensure any changes in expectations are clear across the

ICF’s financial management system and remain manageable in the context of budgets and

41

Procedure and rate of exchange to be determined

53

competing financial needs. As described in detail in the original Business Case forecasting will be

based on global and annual work plans, progress reports, financial reports and financial audits.

Monitoring, reporting and accounting for expenditure

165. At the highest level, as a public bank, KfW is subject to audits performed by the Federal Court of

Auditors (Bundesrechnungshof). In addition, KfW Development Bank is subject to annual audits

(conducted by PWC) which cover the application of financial and other management guidelines and

procedures.

166. KfW will assure proper financial monitoring, reporting and accounting for the investment. As in

Colombia, for the REM Programme in Acre and Mato Grosso, the recipient government and

appointed fiduciary will be responsible for implementing many aspects of the financial management

system including a financial report (at least once a year) that includes information about

management sub-accounts, transfers made to beneficiaries, the results obtained for the financial

period and the costs related to the administration of REM funds.

167. In addition, each REM country window and its appointed fiduciary, is subject to an annual external

independent financial audit, in accordance with internationally recognised standards for financial

management. The Terms of Reference42 of these financial audits are based on KfW’s standard

procedure as well as the selection of the auditing company which shall be agreed upon between the

partner government and KfW. The costs of the audits are funded by REM. The audit report is

expected to be received during the first semester each year. KfW agrees to provide BEIS’s internal

and external auditors promptly with copies of any relevant documentation and computer records

relating to the programme such as would be required to enable a full financial audit.

Management of assets

168. BEIS’s contributions to REM windows will be in the form of a grant. The Department will not receive

any assets in return. The REM programme makes payments capped according to volumes of

Verified Emission Reductions (VERs) and requires by contract that the partner retires a

corresponding volume of VERs from future sale. However the financing agreement is not a

purchase of VERs, they remain under the legal ownership of the forest nation or other legal owner

until such time as they are retired.

169. REM requires recipient countries to maintain a national REDD+ registry of verified emission

reduction (VER) credits, to avoid double carbon accounting and multiple sales of these assets.

Financial and fraud risk assessment and provisions to withdraw funding

170. Given that REM projects involve the disbursement of subsidies to government and local delivery

partners including fiduciaries, civil society organisations, industry associations and the private

sector, there is a risk of corruption and financial fraud.

171. As part of KfW’s standard financial, delivery capacity and reputational due diligence on the primary

delivery partners (for REM the national or state government and appointed fiduciary), before signing

contracts with these partners, KfW undertakes an assessment of the risk of corruption, financial

fraud and illegal actions. As described below, our contracts with KfW currently include appropriate

provisions for BEIS to suspend, terminate and reclaim funding in the event of such occurrences (set

out below).

42

The starting point for the Terms of Reference for the financial audit is KfW’s standard auditing procedure


54

Scenario Timing and reporting trigger (if relevant)

“Occurrence of any illegal or

corrupt practice…”43

KfW has responsibility to inform BEIS immediately of any

illegal or corrupt practice which it becomes aware of.44

External independent financial audits will look at

performance in this area.

“Extraordinary circumstances that

seriously jeopardise the

implementation, operation or

purpose of the programme…”

This is primarily designed to cover

instances of force majeure. We

assess this may also provide

some cover in extreme cases of

underdelivery.

KfW has responsibility to promptly inform BEIS of any event

it becomes aware of that interferes or threatens to interfere

with the successful implementation of the programme. In

terms of formal reporting, early warnings of significant

delivery issues would most likely surface first in quarterly

progress reports that forest nations and their fiduciaries

prepare or from the direct observation of KfW. Annual

reports (including reporting on the grievance and redress

mechanism), safeguard reports, financial audits and the

mid-term evaluation are all potential triggers.

“If KfW does not fulfill its

commitments according to the

cooperation contract…”

This broad provision applies to requirements of BEIS’s

contract that KfW is directly responsible for delivering. E.g. it

could be triggered by failure to produce an adequate annual

financial statement.

43

From draft BEIS-KfW contract – terms are defined in KfW’s contract with the forest nation 44

Draft BEIS-KfW contract

55

Management Case

172. The original Business case for investing in REM Colombia at the end of 2015, online here,

described REM’s management approaches in some detail. Here we summarise the main points and

update on anything that is different in the arrangements for our increase in funding for Acre and

Mato Grosso.

What are the management arrangements for implementing the intervention?

Global governance of REM

173. REM is a programme commissioned by the German Federal Ministry for Economic Cooperation and

Development (BMZ), with other donors being invited to take part via delegated cooperation. REM

works in a few key geographies with the majority of management at the local-level (through a

‘country window’) rather than at the global level. BMZ is ultimately responsible for approving new

country windows.

174. The global governance structure is illustrated below:

A KfW Executive Board responsible for assuring the work of the KfW Management Unit,

appointing key management staff and agreeing funding levels from BMZ;

The Financial Cooperation Evaluation Unit that assures KfW’s delivery including by coordinating

evaluations of its programmes when these programmes are selected for evaluation;

Donor Committees comprising representatives of each of the contributing donor governments

(at present Germany, Norway, UK) responsible for agreeing key strategic and operational

decisions regarding REM support where relevant to their contributions;

The REM KfW Management Unit responsible for operational delivery of the global REM initiative

including assuring local delivery partners responsible for each country window;

Local delivery partners including the German overseas network (KfW and GIZ offices), the lead

ministry of the recipient country (forest nation) and its appointed fiduciary.

Figure 11 – Global governance of REM

Global

Local

Local governance of Acre and Mato Grosso REM Programmes

175. For each country window, KfW’s contracts with the lead forest nation ministry or local government

organisation require the establishment and maintenance of strong transparent governance systems.

In case of the REM Programme in Acre, the following structures have been agreed:

The programme will work within Acre’s established “State System for incentives for

Environmental Services” (SISA), which brings many organisations together to formally steer and

KfW Executive Board

KfW Management Unit

BMZ Evaluation Unit

Donor Committees:

UK, Germany

GIZ local

office

KfW in-country

office

Implementation

leads: national

or local

government

Fiduciaries


56

take collective decisions on key environmental programmes. This enables effective participation

of indigenous peoples, representatives of different genders and other stakeholder groups.

The organisation leading implementation of interventions agreed under the REM Work Plan will

be the State Government’s Secretariat of Planning (SEPLAN). Within this Secretariat a

Programme Coordination Unit will be established that brings together staff of the number and

competencies required for effective implementation.45

Management of funding received from REM, including procurement processes, financial

accounting, financial reporting and audits will be the responsibility of the State Secretariat of

Finance (SEFAZ).

Other State Government departments and local delivery partners will be responsible for

implementation of the various pillars and projects within the work plan, including: the State

Secretariat of Environment (SEMA), the Climate Change Institute (IMC), Indigenous Peoples

Advisory Panel, State Secretariat of Agro-forestry and Family production (SEAPROF), State

Secretariat of Agriculture (SEAP), State Secretariat of Industry, State Secretariat of Commerce

and Sustainable Services (SEDENS), Acre Technical Foundation (FUNTAC), Land Institute

(ITERACRE), State Secretariat of Tourism (SETUL), Fire Department (CIPA/CBMAC),

Environment Institute (IMAC), Air Operations Coordination Unit (CIOPAER), and General

Attorney’s Office (PGE).

As in Colombia REM will fund an independent programme implementation expert to work closely

with the Programme Coordination Unit to help assure successful delivery, reporting regularly to

KfW.

176. In the case of Mato Grosso, the governance of the partnership is currently being decided and we

are engaging with that as it comes together. KfW is working to agree a structure that closely follows

the pattern that has been working well in REM Colombia and REM Acre, though of course the

organisations involved will be different and there will need to be some tailoring to the particular

circumstances of Mato Grosso.

Donor participation and BEIS’s influence

177. We are content that REM’s governance arrangements provide BEIS with sufficient influence and

control to meet its objectives for the investment. KfW consults the Department on its key ‘no-

objection’ decisions and assurance activities e.g. ahead of approval of partners’ annual Work Plans,

feedback on progress reports, major procurement decisions and disbursements. REM annual donor

meetings for each REM window (Colombia, Acre, Mato Grosso) provide a forum for the donors and

KfW to reach consensus on important decisions and where to focus assurance efforts. BEIS also

participates in KfW’s annual monitoring missions to assess the delivery of each of these windows on

the ground and discuss and agree the way forward on strategic issues with recipient governments

and local partners.

45

This includes: a Finance Manager, Technical Monitoring and Validation Manager, Implementation Specialist, Governance Specialist,

Knowledge Specialist, Pillar Coordinators, Socio-environmental Impact and Safeguards Specialist, Legal Advisors, Procurement Expert,

SISA Manager and an IT and Communications lead. A detailed list of responsibilities for each position is contained in the Operational

Manual of the programme.

57

Figure 12 – illustration of the delivery partners in Colombia, Mato Grosso and Acre partnerships

Brazil

Colombia Acre Mato Grosso

HM Government staffing

178. Staffing is discussed in the appraisal of delivery options in the Appraisal Case, the Financial Case

and the risk analysis sections below. Increasing BEIS’ REM funding will initially require an increase

of BEIS staff time of 0.875 full-time-equivalents (FTE) and 0.675 FTE from the British Embassies in

Brazil. This includes a new dedicated Embassy staff member BEIS intends to finance with ICF

programme funds from 2018 to 2022 to help oversee delivery.

How will progress and results be monitored, measured and evaluated?

179. Detailed arrangements for REM financial planning, reporting and audits are covered in the Financial

Case and covered in the original Business Case, here.

Additional reporting controls

180. KfW’s management system for REM employs the following reporting controls, as agreed in the REM

Programme in Colombia and already in KfW’s draft contract with Acre. Some of these reports will

only be provided in Portuguese as standard so BEIS will need to negotiate in contracts which

should be translated to English:

a) Half-year reports. Brief updates on programme delivery, including: implementation unit capacity,

changes to management structures, expected results including any indications of changes in

deforestation rates or leakage, social and environmental impacts, application of safeguards and

progress against the programme timetable.

b) Annual reports. Detailed updates on the same themes as the half-year reports, including

reporting of results achieved against the agreed programme logframe and updates on wider

context e.g. the national REDD+ process.

c) Emission Reduction (ER) reports. Annual reports that outline the level of greenhouse gas

emissions from deforestation in the target area, compared to the historical Forest Reference

Emission Level.

d) ER verification reports. Independent assessments of the robustness and validity of the ERs

reported in the Emission Reduction reports.

KFW

Ministry of

Environment

(MADS)

Local Fiduciary

(Fondo

Patrimonio

Natural)

Local Fiduciary

(State Secretariat of Finance)

State

Government

(State

Secretariat of

Planning)

Lead partners for executing “pillars” of the work plan: 1. Forest governance 2. Cross-sector working 3. Agri-environmental 4. Indigenous peoples 5. Enabling conditions

Lead partners for executing “pillars” of the work plan: 1. Indigenous territories 2. Forest-friendly production 3. Diversifying cattle farms 4. Forest governance &

enabling conditions

State

Government

(State

Secretariat of

Environment)

Local Fiduciary

(to be confirmed)

Lead partners for executing “pillars” of the work plan: 1. Indigenous communities 2. Forest-friendly production

(Amazon) 3. Forest-friendly production

(Cerrado & Pantanal) 4. Forest governance &

enabling conditions


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e) Safeguards reports. Annual reports on the progress of safeguards development and delivery.

These cover REDD+ safeguards items agreed in relevant UNFCCC decisions and the National

REDD+ Committee of Brazil (CONAREDD+).46

f) External mid-term evaluation. Assessment of costs, social and environmental outcomes and

impacts attributable to the programme in the first half of programme implementation, especially

with reference to the logframe. This will also identify practical lessons learned from early

implementation. Terms of Reference will be agreed by KfW and partner governments in

consultation with the donors. We intend to negotiate stronger contract clauses in this area than

the previous agreement for REM Colombia; clarifying the nature of the evaluations as far as

possible, when deliverables must be finalised by and BEIS’ role in doing so.

g) Final implementation report. The partner government’s report on the delivery of the programme,

including outcomes and impacts reached, especially with reference to the Logframe, covering

the full lifetime of the programme.

h) External end of programme evaluation. An Independent evaluation of the costs, outcomes and

impacts of the initiative as well as implementation lessons. This will be made accessible to a

global audience to inform wider REDD+ initiatives.

Monitoring, evaluation and learning plan

181. ICF initiatives must put in place detailed Monitoring and Evaluation (M&E) and Learning Plans

within six months of funds being committed. BEIS will need to ensure this is prioritised building on

the high-level plan already received. Work is scheduled to finalise it in 2017. For the contract

covering our uplift in funding for Acre and Mato Grosso we intend to seek to negotiate stronger

provisions on this to help ensure the work happens sooner. We have engaged earlier this time to

ensure KfW has a clear understanding of what we would see as a suitable approach to evaluation,

and KfW have already shared our requirements with Acre and Mato Grosso so that they can be

accounted for in the contract negotiations that are ongoing between KfW and the States.

182. In an improvement from the approach in Colombia, REM will fund a knowledge expert to assist with

these processes in Acre (the potential for a similar arrangement in Mato Grosso is to be confirmed,

and something we will push for). Details of the specific role and expertise are described in the

Operational Manual.

183. KfW will agree two logframes, one with Acre and one with Mato Grosso. These results frameworks

will record objectives mainly at the aggregate level (i.e. at the sub-programme or “pillar”) rather than

project level and in some cases for the whole programme. The logframe will, however, break down

key indicators where possible e.g. the outcomes and impacts of more direct interventions can be

estimated, attributed and monitored with greater confidence. The logframes and evaluations will

also attempt to disaggregate results by gender where possible. KfW and the States have agreed to

include or provide information compatible with ICF Key Performance Indicators (KPIs), though final

agreement is yet to be secured in contracts. We will pay particular attention to securing indicators

compatible with the Theory of Change outlined in the Strategic Case.

184. Beyond the logframes the States’ global and annual Work Plans will provide a basis to identify

delivery milestones, including ‘early set up’ milestones, which enable BEIS and evaluators to test if

delivery is on track even in early stages of operations when substantial outcomes or impacts are not

expected. Logframes will be reviewed annually, with any changes clearly highlighted and explained.

KfW reserves the right to object to any modifications of the logframe indicators that the States

propose.

46

REDD+ National Commission.

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185. BEIS reviews the progress of all ICF initiatives annually. All annual reviews are published on the

gov.uk website. KfW has agreed to input into these reviews though BEIS will be responsible for

compiling them and the assessment of performance is ultimately BEIS’ judgment.

186. As detailed above, we anticipate at least two evaluations will be conducted on each REM window

(Acre and Mato Grosso) assessing their costs, efficiency, outcomes and impacts, relevance,

sustainability and lessons learned from implementation. We intend to require evaluations conducted

at mid-term and post implementation. Based on the scale of the project and the research questions,

we estimate these evaluations would be in the midrange of ICF evaluation costs and complexity

(£175k each) but final costs would be dependent on the proposed evaluation design, questions and

methods. The costs of these evaluations will be met by the REM programme and are

accommodated in the breakdown of funding in the Financial Case. KfW and the partner

governments will be responsible for designing, procuring and managing these evaluations; but BEIS

will be consulted and in practice has good scope to influence this because of our comparative

expertise. We are seeking firmer provisions in our contracts to formalise our role.

187. As the REM programme is intended to demonstrate the rewards and lessons of REDD+ to inform

wider REDD+ initiatives, BEIS will work to ensure reviews will be disseminated and accessible to a

wide global audience. KfW’s REM team presents at key events including COPs and meetings of

other funds e.g. Green Climate Fund REDD+ workshops. Acre and Mato Grosso regularly share

lessons with other local governments from around the world, including through the Governors

Climate Task Force. In addition to activities funded by REM, BEIS could consider doing more to

help Acre share their world-leading experiences e.g. by funding a more detailed cost-benefit

analysis of the interventions they have delivered in the first phase of REM implementation. There is

a real paucity of detailed information on the costs, benefits and lessons of addressing deforestation

in the Amazon and public and private initiatives would certainly make use of such information if it

were available and publicised in an accessible format. This would be a bigger exercise than

anything currently envisaged under the REM programme and could be something BEIS looks like in

future Business Case on supporting research needs.

Lessons learned from the Colombia partnership

188. In addition to the lessons set out in the Commercial Case (which relate to contractual provisions on

disbursement rates, reporting and Monitoring and Evaluation and how they can be strengthened for

the partnerships with Acre and Mato Grosso) the following key lessons from the initial phase of

delivery in Colombia will be applied to the initiation and oversight of REM’s Brazil partnerships:

Lesson from Colombia Application to REM Acre and Mato Grosso

Working with one government department as the primary partner for the initiative can pose challenges as addressing deforestation requires the action of several ministries. Placing one in a leading role can marginalise others.

In Brazil REM will work closely with the State Governors who oversee the work of all relevant authorities at the State level. In Acre REM is building on years of successful stakeholder collaboration under the State System for Incentives and Environmental Services led by the State Secretariat of Planning.

Work Plans may need to be adapted opportunistically e.g. to front-load command-and-control efforts when pressure on forests increases. This has emerged as a strong theme in Colombia where conclusion of the peace agreement with the FARC EP has opened up areas of forests previously too dangerous for many potential agents of

This highlights the importance of: frequent planning and review processes; on-the-ground monitoring and decision-making missions; and quick and effective engagement from KfW and donors. BEIS has increased the resources dedicated to oversight of our investment in REM. This Business Case also proposes that from 2018 BEIS should finance a full-time staff member

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deforestation to access. This also presents an opportunity to involve organisations previously occupied by combat to help with environmental programmes.

based in the UK’s Embassies in Brazil, to help oversee delivery.

There has been quick progress to identify concrete projects to finance with stakeholders on the ground in Colombia’s Amazon region, even in areas that were until very recently off limits due to conflict. This is due to the Implementation Unit prioritising recruitment of staff that already have well-established networks and experience in the region.

In both Acre and Mato Grosso the conditions for engaging local stakeholders are arguably better than in Colombia, because REM will be partnering directly with State governments that do all their work in the region, rather than federal-level ministries operating from a capital city. Acre also has the advantage of building on several years of prior delivery of REM-funded work.

What are the risks and how will they be managed?

189. Our assessment is that investing in REM, with a phase one investment in Colombia’s Amazon

Vision programme, carries high operational risk. However, given the initiative’s potential to produce

transformational impact, we judge this level of risk to be within the scope of the ICF’s risk appetite.

190. The original Business Case for BEIS investment in REM at the end of 2015, online here, analysed

risks and mitigations at some length. Below we update on just the main points of the top risks that

Business Case identified, as well as any significant changes. We do so where these existing risks

would also apply to our funding increase for Acre and Mato Grosso. We then go on to provide

analysis of new risks that would come with the funding increase.

Risks in the original Business Case

Risk description Risk Mitigations Residual

risk

Civil war impacts

implementation

Not applicable to the extension to Acre and Mato Grosso

Deforestation rates

increase preventing

results-based payments,

leading to underspend or

delayed spend.

High

- This is part and parcel of the results-

based incentive REM provides.

- Acre and Mato Grosso’s REDD+

programmes are among the most

ambitious and advanced in the world.

- BEIS’ recommended level of funding

pursues a relatively conservative

approach based on models where these

States fall short of their targets.

- Disbursement in Colombia has been

higher than expected; though this offers

limited potential to absorb more funding

should Acre or Mato Grosso prove

unsuccessful.

- However REM may expand to other

countries which offers more potential to

utilise an underspend, should one

materialise.

Medium

Limited numbers of BEIS

and Embassy staff

Medium - BEIS has increased the number of staff

dedicated to managing ICF programmes,

Low-

Medium


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dedicated to overseeing

the investment reduce our

capacity to influence and

respond to issues.

and there is scope to increase further.

- In addition to the existing work our

Embassy dedicates to the programme,

BEIS is seeking approval to fund an

additional full time lead to help oversee

things from Brasilia.

- Overall this reduces the risks substantially

compared to the original REM investment

in 2015.

Focussing on rewarding

greenhouse gas emission

reductions leads to

unintended negative

impacts on biodiversity,

development, gender etc.

Medium-

High

- As in Colombia REM contracts and

assurance activities for Acre and Mato

Grosso will require the implementation of

appropriate safeguard systems.

Medium

Management failure due to

lack of rigour in KfW

processes.

Medium-

High

- KfW has met or exceeded expectations in

BEIS’ due diligence, and our first Annual

Review for the investment in REM.

- As described in the risk analysis in the

original Business Case KfW processes

balance the ‘ex-post’ requirements of a

results-based programme with ‘ex-ante’

checks on how partners use the funding

they receive including agreed work plans,

agreed operating rules for delivery

partners e.g. regarding competitive

procurement, financial reporting and

auditing.

Medium

New risks that apply to the extension of funding for Acre and Mato Grosso

Risk 1 Level before mitigation: high Residual risk: medium-high

Change in political and economic conditions.

Description: There is a big and protracted downturn in Brazil’s economy. This could lead to more

changes at the top of Brazil’s Federal Government and potential impacts of Brazil’s environmental

legislation and programmes.

Assessment: Some of the recent decisions (e.g. to seek to open up areas of protected forest to

mining) will make addressing deforestation more challenging including for the States of Acre and

Mato Grosso. These States may need to increase their own governance efforts. There are

tentative signs Brazil’s economy is beginning to emerge from a severe and protracted recession,

but the recovery could be slow.

Mitigation: We have limited ability to mitigate these risks other than by continuing to build up our

REM portfolio across a diverse range of jurisdictions and ensuring support is available to help

Acre and Mato Grosso as they continue to make progress. The States themselves have relatively

stable political conditions and commitments to address deforestation.





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Conclusion: This risk is medium-high after mitigation but Acre and Mato Grosso have the

ambition and capability to weather these challenges and REM has the potential to act as a source

of continuity in this difficult period.

Risk 2 Level before mitigation: medium-high Residual risk: medium

Drivers for Deforestation in Acre and/or Mato Grosso increase, reducing or slowing REM

payments, impacting delivery of the programme as a result.

Description: Deforestation in Brazil was up on previous years in 2015 when El-Niño conditions

made it easier to clear forests using fire and cuts to Federal government budgets impacted

command-and-control activities. If deforestation increases significantly, the eligibility of Acre

and/or Mato Grosso for REM payments will be reduced, negatively impacting the rate or scale of

delivery as a consequence.

Assessment: There is no certainty that deforestation will reduce in the future. There is the risk

that deforestation rates go up above the baseline used as a benchmark for REM’s results-based

payments. This has already happened in Acre in the 2015/2016 performance year due largely to

the conditions described above. However initial results for the 2016/17 performance year were

published by Brazil’s official monitoring agency in October 2017 and these indicate that

deforestation in the Brazilian Amazon declined again, by 19%, including a significant reduction in

Acre.

Mitigation: This risk is part and parcel of the performance incentive that REM seeks to create

and the chief mitigation is the overall goal of REM itself: to support ambitious partner countries to

make wholesale policy, regulatory and financial changes to address deforestation.

BEIS’s approach to determining the funding level that will be provided balances the incentives

required to drive transformational change at the scale and pace targeted by Brazil with the risk

that Acre and Mato Grosso will not fully achieve its target. BEIS has appropriate controls in draft

contracts to suspend, terminate, withdraw and redirect funding from REM’s Colombia window at

any point if delivery is significantly off course. BEIS could redirect funding to other strongly

performing REM country windows. Alternatively BEIS could withdraw and reallocate funding to

entirely different climate finance initiatives – at the proposed level of funding we believe any

reflows to DECC (now BEIS) would be manageable.

Conclusion: It is impossible to completely mitigate this risk as it is a feature of the results-based

programme design. Acre and Mato Grosso will need to follow through strongly on their ambition to

ensure they can access results-based payments and ensure success on a scale that counteracts

exogenous factors beyond the immediate control of their programmes.

Risk 4 Level before mitigation: medium-high Residual risk: medium

Responding to stakeholder grievances.

Description: stakeholders in Mato Grosso and Acre are not effectively engaged in the

programmes or have grievances because of how the programme impacts the lives of people

living in the regions.

Assessment: REM programmes deals with multiple stakeholders, including hundreds of

indigenous communities spread across vast, remote and inaccessible areas. Objections to the

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plans and interventions of REM programmes are expected. There have been isolated incidents

of violent conflict in both States, often as a result of overlapping land use claims as is common in

many tropical rainforest environments. This has the potential to undermine the credibility of the

programme in Brazil and in the UK.

Mitigation: In order to provide responses to multiple potential requests and claims, the REM

Programme will implement grievance and redress mechanisms at the State level and report on

the operation of that system. KfW will assure that international and national REDD+ standards are

complied with through regular supervision, safeguards reporting requirements, a REM-funded

implementation specialist embedded in the implementation units in Acre and Mato Grosso and

observation of the work of the programmes in-country including during monitoring missions. The

programmes are building on some world-leading local mechanisms for stakeholder participation

including Acre’s SISA platform which engages local civil society and indigenous communities in

decision making.

Conclusion: Overall REM’s requirements are a strong incentive for partner governments to

carefully consider the impacts of programmes on local stakeholders and proactively respond to

grievances. Some grievances are inevitable however and not all will be fully resolvable

i Nepstad et al., More Food, More Forests, Fewer Emissions, Better Livelihoods, 2013 ii Nepstad et al., Slowing Amazon deforestation through public policy and interventions in

beef and soy supply chains, Science, 2014 iii The Global Canopy Programme’s Forest 500 assessment of 10 leading subnational

jurisdictions (did not include Acre) gives Mato Grosso top spot ; Acre is singled out in many

assessments for example Climate Focus’s 2013 report “Acre, Brazil: Subnational Leader in

REDD+” online here iv REDDX Analysis of donor finance for leading forest nations, 2015 v This is based on the Human Development Index scores for Brazilian municipalities compared to national scores vi Global Canopy Programme, Forest 500, 2015 vii See the Governors’ Climate and Forests Task Force website here viii Global Forest Resource Assessment 2015 (FAO) p.3. online here. ix Nature Geoscience x Based on Climate Advisors’ quantification of ambitions set out in the New York Declaration on Forests, as compared to UNEP Gap figures xi FAO (2010). Global Forest Resource Assessment. Online here. xii World Bank (2008). Poverty and Forest Linkages: A Synthesis and Six Case Studies.

World Bank, Washington. Online here. xiii Millennium Ecosystem Assessment (2005). Millennium Ecosystem Assessment, 2005.

Ecosystems and Human Well-being: Biodiversity Synthesis. World Resources Institute,

Washington, DC. xiv REDD+ & post conflict, Forest Trends and Natural Capital Advisors, 2016 vi United Nations (2013). A New Global Partnership: Eradicate Poverty and Transform

Economies Through Sustainable Development: The Report of the High-Level Panel of

http://www.climatefocus.com/sites/default/files/acre_brazil.pdf

http://hdr.undp.org/en/composite/trends

https://gcftf.org/member-states/

http://www.fao.org/3/a-i4793e.pdf

http://www.climateadvisers.com/quantifying-the-benefits-of-the-new-york-declaration-on-forests/

http://www.fao.org/forestry/fra/en

http://www.profor.info/Documents/pdf/livelihoods/PovertyForestsLinkagesCaseStudiesSynthesis.pdf

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Eminent Persons on the Post-2015 Development Agenda. United Nations Publications,

New York, USA. xvi Kissinger et al, Drivers of Deforestation and Forest Degradation, 2012 xvii Ibid. xviii Ibid. xix Union of Concerned Scientists, Deforestation Success Stories, 2014; Nepstad et al.,

Slowing Amazon deforestation through public policy and interventions in beef and soy

supply chains, Science, 2014 xx Based on a BEIS survey of key stakeholders in 2016 xxi Nepstad et al., More Food, More Forests, Fewer Emissions, Better Livelihoods, 2013 xxii Global Canopy Programme, Forest 500, 2015 xxiii Nepstad et al., Slowing Amazon deforestation through public policy and interventions in

beef and soy supply chains, Science, 2014 xxiv The Global Canopy Programme’s Forest 500 assessment of 10 leading subnational

jurisdictions (did not include Acre) gives Mato Grosso top spot ; Acre is singled out in many

assessments for example Climate Focus’s 2013 report “Acre, Brazil: Subnational Leader in

REDD+” online here xxv Nepstad et al., Slowing Amazon deforestation through public policy and interventions in

beef and soy supply chains, Science, 2014 xxvi Global Canopy Programme, Forest 500, 2015 xxvii

REDDX Analysis of donor finance for leading forest nations, 2015 xxviii This is based on the Human Development Index scores for Brazilian municipalities compared to national scores xxix Global Canopy Programme, Forest 500, 2015 xxx See the Governors’ Climate and Forests Task Force website here xxxi Environmental Defense Fund, Ready for REDD: Acre’s State Programs for Sustainable Development and Deforestation Control, online here xxxii REM Template, drafted by SEMA for the 2017 REM scoping mission xxxiii Based on accounts received in BEIS’ scoping mission to Acre, and maps of deforestation in extractives reserves compared to other areas in Acre xxxiv The initialism in Portuguese; see PCI (http://pci.mt.gov.br/) xxxv Lee and Fishbein, Early Lessons from Jurisdictional REDD+, 2015; USAid, REDD+ Supply and Demand 2015-2025, 2015 xxxvi Lee and Fishbein, Early Lessons from Jurisdictional REDD+, 2015; Centre for Global Development, The Indonesia-Norway REDD+ Agreement: A Glass Half Full, 2015; CLUA, The Impacts of International REDD+ Finance, 2015 xxxvii Based on the most recent Annual Review of progress of the Climate Investment Funds and discussions with teams managing the UK’s investment in the FIP xxxviii BEIS’ 2017 Annual Review of progress of our investment in the BioCF xxxix BEIS’ 2017 Annual Review of progress of our investment in the FCPF xl BEIS’ 2017 Annual Review of progress of our investment in the REM Programme here

xli See the Consumer Goods Forum zero deforestation resolution here xlii See the Governors’ Climate and Forests Task Force website here

http://www.climatefocus.com/sites/default/files/acre_brazil.pdf

http://hdr.undp.org/en/composite/trends


https://www.edf.org/sites/default/files/Acre_Ready_for_REDD_EDF.pdf


http://www.theconsumergoodsforum.com/sustainability-strategic-focus/sustainability-resolutions/deforestation-resolution


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