Cláudio Puty (Federal University of Pará)
The Hourglass of Time
The European Union’s Copernicus laboratory has just announced that 2024 was the hottest year in human history, reaching 1.62°C above the average temperature in the period that the UN calls pre-industrial (1850-1900). It is important to remember that the reference ceiling in the 2015 Paris Agreements is 1.5°C, a limit to avoid, for example, the collapse of tropical coral reefs, the thawing of boreal permafrost and the significant alteration of ocean circulation systems, with serious consequences for life on Earth, particularly for the most vulnerable populations.
This is a state of emergency and requires the ability to imagine solutions with the boldness that the moment requires.
One of the dimensions of the problem refers to the ways in which countries in the Global South absorb the resources arising from the global effort for climate transition.
There is a legitimate and important focus in the negotiations on the supply of these resources, the value of which is far below what is necessary to cover the mitigation and adaptation needs of countries that are victims of a process originating in the Global North. Both the successive calls for reform of the multilateral development bank system (in the context of the annual meetings of the IMF/World Bank) and the Conferences of the Parties (in this case, COP16 on biodiversity and COP29 on climate) have ended in frustrating results in terms of the willingness of developed countries not only to comply with financial contributions in line with the Paris goals, but also to promote a reform of the so-called global financial architecture in order to mobilize many more resources to face the climate tragedy.
However, there is a dimension that should not be overlooked and that is on the other side of the counter: what are the financial and institutional conditions for countries in the Global South (including states, municipalities, provinces and city halls) to access the resources necessary to adapt to and mitigate the effects of ongoing climate change?
The Relevance of Subnationals
When we deal with large-scale phenomena, such as climate transition problems, the temptation is to think at a certain level of abstraction and on a compatible scale: in large biomes, regions and countries. This is understandable, given the systemic connectivity of the problem, the political mobilization required to solve it, as well as the complexity of the networks of agents involved.
However, ignoring the factory floor, particularly the relevance of subnational entities and their key role in absorbing the resources offered, turns the debate on the amount of resources available into an inconclusive battle to a certain extent. The vast majority of those affected by the environmental catastrophe may never have access to the resources because the state network with greater capillarity and transformative potential simply will not see the color of the money.
The reasons are varied and involve the “poor quality” (the quotation marks contain a certain irony) of the projects presented by the municipalities, the lack of fiscal conditions to apply for a loan or even the lack of staff to minimally manage the accountability of a donation (or all the alternatives mentioned).
In the Brazilian case, despite being a federation, the design of subnational financing is strongly centralized in the Union, reflecting the historical circumstances of the reforms arising from the state debt crisis in the 1990s. The Support Program for the Restructuring and Fiscal Adjustment of States (PAF) (Law No. 9,496/97), the State Privatization Program (PED), and the Incentive Program for the Reduction of the Presence of the State Public Sector in Banking Financial Activities (Proes) originated from those years. Mechanisms for controlling subnational debt were created there, culminating in the Fiscal Responsibility Law of 2000.
Despite undeniable advances in debt control mechanisms, the reforms of the 1990s, whose central purpose was macroeconomic stability, provoked a crisis in fiscal federalism. The most visible aspect of this change was the centralization of taxes in relation to what was established in the 1988 Constitution, repeating a pattern observed in the Vargas New State and the post-1964 dictatorship.
The reform of the fiscal framework at the end of the 20th century combined, in practice, strict debt controls by the Union with restrictions on autonomous financing mechanisms for subnational entities, including the end of instruments that could potentially mobilize resources, such as state banks.
The legacy of the reforms of the 1990s persists to this day, and, despite having been occasionally improved, it remains basically the same.
There are alternatives
The National Front of Mayors and many municipalists have been discussing for some time a reform of the federal guarantee system, which would make it less time-consuming, less bureaucratic and even more respectful of legitimately elected municipal leaders. Brasília is a via crucis for the few mayors who risk a trip to the technocratic world of the Planning and Finance Ministries.
Another concern of the Front is to financially include thousands of municipalities that would not currently be eligible to obtain resources for the climate transition. Replicating the good experience of the remaining state and regional banks could be a good alternative to be explored. Institutions such as the Development Bank of Minas Gerais (BDMG) and the Regional Development Bank of the Extreme South (BRDE) have created financing instruments for municipalities that cannot access loans with sovereign guarantees because they do not meet the requirements of the National Treasury Secretariat (STN). The regional banks have created mechanisms for transferring international loans guaranteed by the Municipal Participation Fund (FPM), without sovereign guarantees. Wouldn’t it be better to create financial institutions dedicated to mobilizing resources for the specific realities of mesoregions through consortiums between municipalities or other institutional arrangements?
And finally, we still have the famous and controversial issue of the quality of projects, which are normally ineligible for financing from multilateral organizations. This aspect has always seemed to me to be the equivalent of blaming the victim for the problem – a convenient excuse to leave everything as it is. Development banks, which are cooperatives between countries that signed their founding charter, have become so autonomous that they dedicate much less time and resources than necessary to training teams and developing projects that fill this important gap.
When it comes to climate finance, the problems described above become even more complex, as Nature-Based Solutions add aspects of technological innovation, which, if not addressed, become additional costs for credit providers, who will pass them on to borrowers, in this case, those affected by the climate crisis.
While nothing is done, of the 5,569 Brazilian municipalities, only a little over 200 have had access to any financing throughout their history, even with interest charged by public banks that can now reach almost 20% per year, even with a guarantee from the Union or the FPM.
Some international experiences seem quite relevant to me and can be useful for us to think outside the iron box of dominant thinking. In China, around 75% of the resources for urban infrastructure are executed by municipalities and, particularly, through agencies similar to Special Purpose Entities, which use a combination of accounting instruments (off balance sheets) to mobilize resources, often with guarantees offered by land assets.
In the US, municipal bonds are traditionally a way of leveraging resources for urban infrastructure based on various receivables (lighting fees, sewage fees, etc.). The list of experiences different from ours is long and needs to be known so that we can know which more efficient alternatives for mobilizing and internalizing existing resources are viable in our country.
There are solutions. All we need is a sense of urgency and political determination to change our institutional framework and create a federalism that is more friendly to investment in infrastructure.
