In a small meeting room, tucked away from the faux waterfalls of the Paris Regency Hyatt hotel’s immaculate lobby, Warren Smith, a soft-spoken Jamaican economist and the newly re-elected president of the Caribbean Development Bank, explained how it all might work.
“The trick,” Smith said, “is to take a regional approach.”
Electricity in the Caribbean region costs three to four times as much as in the United States. Caribbean island economies are highly vulnerable to the “vagaries of the international petroleum market,” Smith said, and the boom and bust cycles that characterize those markets spell instability and risk for island states hampered by isolation and size constraints.
But the region contains untapped potential. In the eastern Caribbean, volcanic islands contain hidden wells of geothermal heat, which, if tapped and channeled through power plants, could provide the kind of stable base load power that wind and solar energy typically cannot.
Small island developing states often bear the brunt of the adverse impacts of climate change, but they are also finding new ways to protect against disaster and explore renewable energy. St. Vincent and the Grenadines, like many small island developing states, is grappling with these issues, Prime Minister Ralph Gonsalves tells Devex in this video interview.
Early stage geothermal development is a lot like drilling for oil. First you have to drill exploratory wells and hope to find something productive — or lose your investment in the exploration phase. If you do find something, you need to bring steam to the surface, then build a power plant to convert it into electricity. It’s an expensive proposition, and some of the islands that could produce geothermal energy have populations too small to justify the expense.
Smith points to Nevis, a tiny volcanic island in the West Indies.
“If they only invest to produce enough for the 10,000 people [who live on the island], the unit cost of that electricity is going to be pretty high, because they’re not going to get economies of scale,” he said.
The CDB chief wants to help link the development of key regional industries to the development of a regional energy market, using undersea cable to transmit power from islands with geothermal potential to those without it — in effect, eliminating the disadvantages posed by geography and tapping the region’s diverse resources. If the Caribbean finds a way to bring down the cost of energy, Smith said, that could provide the competitive basis for the emergence of new industries, enhancing the resilience of small economies in need of diversification.
“You get stability in pricing, you reduce the importation of foreign oil and gas … and then you can also become an energy exporter. It’s a wonderful solution,” Smith said.
The CDB has partnered with the much larger Inter-American Development Bank, and has begun to raise funds from other donors to move this plan forward. But it only works if a region, which has been relatively loosely integrated so far, can find a way to unite around that kind of cooperative planning and development effort.
The other Paris agreement
While delegates to the United Nations climate change summit sparred over the definition of “shall” versus “should,” Smith and his team seized on the occasion of the Paris talks to advance another mission. At the climate summit, the CDB advocated for an ambitious agreement to limit warming to 1.5 degrees Celsius. But on the sidelines of the negotiations, Smith saw an opportunity to bring an old partner back on board.
France is a big player in the Caribbean, with strong constitutional ties to many islands and trade and development relationships that continue today. And, according to Smith, Caribbean islands that have maintained strong ties to France have tended to be somewhat less engaged with the regional community of Caribbean island states.
Fifteen years ago, the 40-year-old CDB’s quest for greater regional integration took a step backward when France stepped down as a member of the bank. The CDB has continued to contract with French companies when it’s “justified,” Smith said, perhaps assuaging some concerns that the French weren’t seeing enough of a benefit from their membership in the institution.
With discussions underway in Paris about the best way to tackle climate change — an “existential threat” to the Caribbean, Smith pointed out — his team took the opportunity to make its case to the French that they should get back on board.
“[The French] have continued to be very important in the region, and we just think it’s the right thing for them to return … I would just say that we’ve had good meetings here in Paris, and we’re going home feeling quite satisfied with our visit here,” Smith said.
In addition to pulling the region closer together, Smith hopes renewing France’s membership in the CDB would allow the bank to do more in Haiti, a French-speaking nation with a population greater than the combined population of the English-speaking Caribbean countries, and the poorest country in the Western hemisphere.
A climate change opportunity
In climate change, Smith sees more than just an “existential threat.”
The global response to bigger storms, rising seas, acidifying oceans and runaway emissions could offer new opportunities to unite the Caribbean around a regional plan of action — and to attract funding to the cause.
“We’re trying to take advantage of the emergence of climate funding to help us to become … more resilient and also more secure,” Smith said. “Energy security is a big, big objective for us in the whole climate change discussion.”
A variety of funding channels have begun to spring up to finance climate change projects. Some of these, like the Green Climate Fund and the Adaptation Fund, have rigorous, time-consuming accreditation criteria. For many organizations seeking funding for climate-related projects the hurdles can be too costly and burdensome to clear. Even for the CDB, the path to accreditation has been trying, but that barrier to entry could work to the CDB’s advantage.
Smith hopes the CDB will find a role as intermediary between companies and organizations that can build more resilient infrastructure, reduce disaster risks, and prepare for a more turbulent future and the climate funds many have struggled to access on their own.
“Our strategy is that we will get accredited and we will use our balance sheet, the strength of our institution, to intermediate those funds from those institutions to our countries,” he said.
The CDB has pressed countries to build with climate change in mind for a long time, Smith said. Every time a hurricane strikes and infrastructure has to be rebuilt, the CDB reiterates the need for more resilient infrastructure. But that is often easier said than done.
“The challenge has been the cost associated with doing more, and when countries are fiscally strapped there is a reluctance to do that,” Smith added. “The availability of cheap money now induces them to do it.”
The bank has opened a relatively small line of credit — $65 million — with the European Investment Bank to finance climate change projects, but Smith quickly learned that a climate project is not like a run of the mill infrastructure project, he said.
“It requires much more work and justification,” he elaborated. “There is a technical assistance component to this credit line that was very helpful, because we’re able to use that money to hire consultants to work with us specifically on climate change components of these projects.”
The CDB has used the credit line to retrofit a road in Belize, redevelop a water supply in St. Lucia, and finance a solar power plant in Anguilla, among other things; and Smith said the EIB’s vice president of operations indicated in a recent visit to the CDB that once the bank has disbursed a significant portion of its current credit line, a larger fund will likely follow.
“We are not sitting back and waiting,” Smith said. “We have several things in the pipeline.”
Getting more aggressive
China is a Caribbean Development Bank “nonregional member.” For the Chinese, membership in the regional bank offers a foot in the door to the Caribbean’s strategic location between North and South American markets, Smith said.
For the CDB, the relationship could lead to new opportunities to partner with emerging international financial institutions like the so-called BRICS bank convened by emerging economies.
The relationship is more than strategic, Smith pointed out. It’s also historic.
“It might be surprising to you, but several of our countries have substantial Chinese-origin populations.”
Smith’s home country, Jamaica, is home to a large number of Chinese Jamaicans, who played a significant role in the development of reggae music, he added. The CDB, Smith anticipates, will partner with Asia’s emerging development banks and intermediate funds from them to its Caribbean members.
The need for funding is urgent; climate change is not the only problem facing Caribbean islands. Mexico’s success in combating drug cartels has pushed many of them off the mainland and into speedboats that ply the waters of the Caribbean and shuttle drugs from island to island and gang to gang, according to Smith.
The region’s generally poor infrastructure, weak capacity to patrol its territory, and international drug cartels that “are much better resourced than most of our countries” has created a “classic source of transfer,” he said.
This is happening in a region where youth unemployment hovers around 35 percent. The CDB’s member countries pay into a Special Development Fund, which finances projects aimed at the most vulnerable members of society. Unemployed youth is a major focus for the current fund replenishment period.
To tackle those kinds of problems in a meaningful way, the CDB has had to confront the same challenge that faces its member states — the challenge of being relatively small. Among international development banks, the CDB’s roughly $250 million in annual lending is also very small. The World Bank’s International Bank for Reconstruction and Development, by comparison, lends about $15 billion for development projects every year.
While Smith emphasized internal reforms in his first term as president, his second term is about “narrowing the gap” between his institution’s role in regional development plans and that of the global behemoths.
“We want to be way more aggressive in building our pipeline and getting the money out the door.”
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