The Bridgetown Initiator - Ep145: Prof Avinash Persaud

Michael Liebreich  
Hello, I'm Michael Liebreich and this is Cleaning Up. In a few days politicians, negotiators and 10s of 1000s of people working on climate change will descend on Dubai for COP 28, the latest round in nearly 30 years of climate diplomacy. As always, one of the main topics will be how to increase investment in the global south from a few 10s of billions of dollars per year to hundreds of billions, and even the trillions required if we are truly to address climate change and its impacts. One man thinks he has the answers. My guest today is Avinash Persaud, special envoy on climate to Prime Minister Mia Mottley of Barbados, and architect of the Bridgetown Initiative. Please welcome Avinash Persaud to Cleaning Up. 

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Avinash, Avi, welcome to Cleaning Up.

Avinash Persaud  
Thank you.

Michael Liebreich  
Avi, let's start where I always start which is by asking you to describe just what you do in a few words. And we're going to need the short version and then we'll talk about how you got there. But what is it that you do?

Avinash Persaud  
Oh my god, I don't know what I do. I'm trying to build a coalition to get us to change climate finance, so that we can do what we need to do to preserve the planet.

Michael Liebreich  
Okay, that's great. I mean, it's always interesting to ask people in their own words, but you are an academic. Well, you were an academic economist, you were also a financier in a previous life. So tell us a little bit more about what, you know, what is your formal role? And how did you get to be devoted to climate and climate finance and pushing more finance towards climate solutions, particularly in the Global South, which is how I interpret what you do?

Avinash Persaud  
My background is actually as a investment banker, JP Morgan, London. But I was always very excited about policy. I was born in Barbados, a small developing country, and I think when you're born in a small, poor place, you think a lot about how could things be different. So policy was always in my mind. And I got very much involved in international financial policy, banking regulation, and I got described as a policy entrepreneur, Michael, this is something you might find appealing, you're probably a policy entrepreneur yourself. And I remember reading this by an academic writing about what I had done in banking regulation, and thinking policy entrepreneur, that sounds great. I'd love to be that. And so I've sort of redoubled my realisation that's where I- really where I want to do. So a policy entrepreneur is sort of trying to identify what is the problem we need to solve, what is the right solution, and then building the coalition advocating, elevating to get that solution implemented. So, for example, it was ascribed the way I did that with banking, regulation, and Basel III , I'm one of the architects of something called "macroprudential regulation", which is basically saying, "yeah, you can make all the banks individually safe, but that doesn't make the system safe." In fact, all the individual banks trying to be safe, could wreck the system. So there's this notion that you actually have to think- I know, Michael, I know you're into game theory. It's a kind of- the sort of fallacy of composition, that you have to think of the system as well as the individual thing. So-

Michael Liebreich  
Avinash, the last person that I spoke to about macroprudential regulation was Benoir Mandelbrot, you know, the great chaos theorist, because we were talking about how individual agents could not lead to a stable system. 

Avinash Persaud  
Exactly right. So, I got involved in that, found a solution to that or with a group of people, and I enjoyed the mission, the common mission of getting those ideas implemented. And we wrote op-eds, we explained it to a wider audience, and then someone described that as policy entrepreneurship. So I would say that's what I do. And about a few years ago, I thought that climate was a very pressing issue, and that we needed to solve that issue. And I wanted to put my mind towards some policy entrepreneurship, around climate. 

Michael Liebreich  
But by that time you had moved on from being a banker, because I accused you of being an academic economist, which is kind of what I sort of thought that that's what you were doing when you got that- because we're going to talk about this fateful telephone call from- and we also need to introduce Mia Mottley, who is she, why is she such a sort of key figure in all of this? But you had you had left banking and gone into more of a sort of policy and academia-

Avinash Persaud  
Once some, you know, academic had basically defined the future of my life and I realised that that's what I wanted, I then had to leave banking because you can't be involved in developing policy around finance, and also be a financier. I mean you could be but people just assume tonnes of conflicts of interest. Although I think one of the things that I'm quite good at is looking outside of myself. But anyway, so I got involved in policy. And I had met Mia Amor Mottley when we were both 18 years old, at the London School of Economics, I was studying economics. She was studying law. My girlfriend who became my wife was a lawyer, and I was stalking my girlfriend in the law library. Because stalking wasn't illegal back then - this is the 1980s - and so I got to know Mia. And so we've been friends since 18. And I was trying to head home- so when she became PM, and even when she knew she was going to become PM, she brought me into help. I didn't realise it will be so all-encompassing sort of, my entire life will be given over. It's been an exciting ride. But that's the nature of the lady. You can't do Mia in bits.

Michael Liebreich  
Right. I think technically, we should point out that it wasn't really stalking, or at least I hope it wasn't. I hope it was just trying to catch the eye of the woman who became your- I just, I'm just really

Avinash Persaud  
-trying to keep me out of out of jail. Yeah, okay good. Is there any statute of limitations on stalking. I mean, there must be-

Michael Liebreich  
I'll be honest, I don't find it comfortable to to joke about it if I'm honest.

Avinash Persaud  
That's quite right. You're quite right, because it is a serious thing for many people. 

Michael Liebreich  
So now, but Mia's call back to you, you've told this story elsewhere, about there was the storm damage on Dominica.

Avinash Persaud  
It was 2017. It was the Atlantic hurricane season in 2017. One of the worst on record, it had two Category Five hurricanes in the space of within two weeks. Hurricane Irma and Hurriance Maria. Incidentally, female-named hurricanes cause much more damage than male named hurricanes. I'm not quite sure why. Because they're supposed to be random. I think that the men perhaps are complacent about them. So I was in the airport lobby in JFK trying to head home and she called me up and said, 'You need to go to Dominica, they need some support, they've been wiped out by hurricane Maria. And, you know, it's time you stepped up to the plate and did that.' And I wasn't really into climate before then. So 2017 is a key point for me, partly because, you know, Barbados is in the hurricane belt, but is not as- has not suffered from as many hurricanes as some of the neighbouring islands. So I wouldn't have viewed it if Barbados was my entire world as the most pressing problem, the problems of inequality, of housing, of poverty, food security, all these issues. So anyway, I went along to Dominica and I realised that they had lost 226% of their GDP - of the national income - in four hours. That's pretty amazing as an economist to think, "Oh, my god, I can be- you know, there I am trying to get an extra 2% growth, and they can lose 226% in four hours." And so I began thinking about what's the solution to that. You know, then becoming resilient would blow their budget. So they needed help from the development banks. And that would mean unless we solve climate change. So the world needed to do mitigation because Dominica is, you know, we share one climate. So there's nothing Dominica can do to change the likelihood of those storms, the world has to do something.

Michael Liebreich  
It's a very interesting, I mean, you know, I mentioned my meeting with Benoit Mandelbrot, but of course, that sort of thing where you lose 226% of GDP in for hours, doesn't come out of any sorts of- it doesn't work in any of the normal capital asset pricing model, random walk type, you know, normal distributions of outcomes. These are very, very fat-tailed outcomes that you're dealing with. And you've got to protect- and of course-

Avinash Persaud  
that's a great point, Michael, because one of the things that is underlying the Bridgetown Initiative on climate finance - so we don't really talk a lot because it's really quite technical, this bit of the underlying bit - which is that developing countries face these fatter tails than developed countries do, partly because they don't have the safety nets. You know, if things get really rough in America and Europe, they can do quantitative easing, they can print money, they can spend money, people want to own their bonds. In a developing country, that's not the case. In fact, when you're- when an event has happened, the last thing you want to do is own your government bonds. So you're tackling with the money fleeing at the same time as you need it most. And these fat tails are partly why the cost of investing in developing countries - we call it the cost of capital, the amount of money you need to pay the investor for them to come - is so much greater than the actual central risk of things going wrong. Because the investor's worried about these fat tails, these extreme events, this, "I might be there when you've lost 226% of your GDP."

Michael Liebreich  
And so now you've mentioned the Bridgetown Initiative, and that is the- that's the package of ideas that you put together with, with Mia, with the Prime Minister Mottley of Barbados, and are now going to be taking to - or have been syndicating around, I've been involved in a session, but many others as well. And you're now taking them to COP 28, which kicks off in 10 days or so, from filming. By the time this comes out, it'll be probably during COP 28. So let's go forward. So Mia calls you, you go to- you start working on Dominica and the solutions, and then you realise this is part of something much bigger to do with how do you- how do you actually- and so what do you come up with? Is it insurance? Is it- what is it that you come up with that you now call the Bridgetown Principles?

Avinash Persaud  
Yeah, and you know, we had a- we had a big learning experience from that event, and it caused us to do a lot of thinking. It sounds immodest, but you know, the first thing I thought about was that the problem with a disaster like Dominica is Dominica is a small place, 226% of GDP, but 90 lives, 90 lives, each one, critically important. But a train crash in Pakistan might be 250 lives. And I knew very quickly that within a few weeks, the world would have moved on from Dominica. So I was thinking, How do I get the world to remain interested and to be offering us low cost money? And I come up with this idea that Dominica should become the world's first climate-resilient nation. Not an entirely random thought, because it is sufficiently small that it could be the first climate-resilient nation, you could make a small place climate-resilient, you might not do it well, you might not do it efficiently, but you can do it, while America would be, you know, it's just too big a country. So we say this, and as a result, all these people flood in to come and give us advice. And we found that these great institutes around the world, they didn't actually know what to do. They had never experienced someone losing 226% of their GDP. They'd come to us and say, "Oh, you must go solar." And I looked at them and said, "Well, have you seen all the smashed solar panels because we lost all of our roofs?" That renewables does not mean sustainable? It may be sustainable energy, but it's not necessarily sustainable infrastructure. We need to make these renewables sustainable.

Michael Liebreich  
So it may be confusing- maybe confusing adaptation and mitigation, which happens all the time. 

Avinash Persaud  
That's right. So we found that- in fact, we found did they- when I arrived in this world, there was like a word that was "mitigation, adaptation." There was like one word, you know like the way the Germans like to mix all these words together, it's like one word, people were not separating it out. But for us, it mattered hugely, because we couldn't really do mitigation. We didn't have emissions, but we needed adaptation. And yet, the way you fund these things are very different. So- and this is the core of the Bridgetown Initiative. The Bridgetown Initiative basically says, "look, we've got these experts, they've done the work, they've done the math, developing countries need $2.4 trillion a year. Forget about this $100 billion target: $2.4 trillion: mitigation, adaptation, loss-and-damage." So there we are thinking $2.4 trillion. Now, when- you know, when you get over a few 100 million, it's very hard for your listeners to understand- to picture these numbers, right. And so the way I put it is: take all of the aid in the entire world, on everything, all of the development assistance, all of the

Michael Liebreich  
$200 billion?

Avinash Persaud  
$200 billion. So we're talking about something that's 12 times bigger. I mean, they're not even going up by 12%. This is 12 times bigger. Aid isn't going up by 12%, this is 12x bigger. So we were looking at this thinking, "okay, so this is not going to work. How are we going to get 2.4 trillion?" And we thought, "well, we need to break down adaptation, mitigation, and loss and damage, because these are different things." And I had learned a lot from my finance background, that you define things differently if you finance them differently. Because if they're not really fundamentally different, why do you call them different things? But mitigation has revenues attached to it. Solar farms, wind turbines, hydroelectric power, they've got money. Adaptation has much less revenues. They could maybe make you safer, they've got savings, and loss and damage has no revenues and no savings. So we really broke down what we had to do in these buckets and made it financable. And then we said, "look, you know what, if this is gonna work, we need the companies to actually realise that this Bridgetown Initiative is going to be good for them, because we're saying, get the private sector involved in mitigation. Let those companies lobby their governments, because we also need those governments to be lobbying for the other bits, which is more development, financing, more low cost lending, and more grants for loss and damage."

Michael Liebreich  
So let's talk about- because you- so: loss-and-damage, mitigation, adaptation. Let's talk about those in turn, and let's do the easy ones first. I think loss-and-damage, I mean, of course, nothing's easy, right? But loss-and-damage feels like it's about insurance, and we know that there's been progress in the run up to COP 28. It looks like we'll have some kind of arrangement on loss-and-damaage. And so we'll do that one first. Then we'll do resilience because that's largely about the MDBs, the multilateral development banks, and I want to come back to the mitigation because that is the big bucket with the revenues, which goes very deeply into the private capital providers. Okay, so can we start with loss and damage? Where are we?

Michael, can I suggest a different approach?

You are the professor, I'm just, I'm just a talk-show host okay! 

Yeah, well, I mean, hardly, hardly. But $2.4 trillion and the problem is, you got to start with the biggest number.

Okay, so that's the mitigation one, okay we'll start with mitigation. Go for it. 

Avinash Persaud  
Because, you know, if I say to people $2.4 trillion, first- their eyes glaze over, because they think, "well, that's impossible." I say, "no, it's not impossible, because in fact, there's a big chunk of it, over, you know, almost $2 trillion of a 2.4 is attached to a revenue stream." So let's get those revenue streams active. And we have to ask ourselves, and this is where, you know, economics is, is a discipline of thinking, and one of the ways it begins to say, "if it's such a good idea, why is it not happening now?" That's like the first place economists start. So it's the same reason why they leave a five pound note on the floor, because they think if it's such a good idea, it can't be there, someone would have picked it up. So we found that the reason why the private sector wasn't going to developing countries was because of this point we raised earlier, which is this cost of capital, these fat tails, these risks, they were so- so going abroad, you're already risk averse. And then on top of that, you're going to countries that have more volatility, because they don't have the safety nets. They don't have all the different tools that rich countries have. They're not fully insured. They can't print their own money. They don't have government bonds with high ratings, that the international financial system defines which country assets as safe assets. 

Michael Liebreich  
And you also have foreign exchange risk, because you're probably going to be buying your turbines, your solar, your big engineering services in dollars, maybe yuan, but dollars and euros. And then- but the money, the revenue you get, because you said these things have revenue, which is marvellous, but that revenue might be in rand, or it might be in pesos or whatever, correct?

Avinash Persaud  
Exactly right, Michael, exactly right. And indeed, it's not very glamorous, but the biggest risk is the foreign exchange risk. You know, when we speak to people about this, they're much more excited about, "oh, you know, is the risk the company in South Africa? Who's on the company? Whose company is it?" And I say to them, "yeah, you know, that is a risk, and there are standard ways of trying to make sure the company's right, the technology is right, the suppliers are right, the contracts are right. The problem is it's in rand, and you're an investor in dollars and euros and, and the cost of hedging that rand is huge." So a key part of the Bridgetown Initiative is to basically lower the cost of hedging foreign exchange risk by observing that the current marketplace is pricing in the possibility of these fat tails, pricing in the possibility of a huge fall. And as a result, they've got these huge risk premiums, they're overcharging for the risk over the long run. So if we reduce the overcharging, we can lower this cost, and we can unblock the flow of money.

Michael Liebreich  
The risk that- I can't tell you, you probably can guess how many events I've been to how many sessions I've sat through how to get more money flowing into the developing world. I mean, it's in the hundreds. And the risks that people think about, you know, you've talked about the risk of the company, you know, there's things like the solvency of the utility, and there's the sovereign risk, the default risk of the country. To what extent are those captured in the forex? If you can just insure the currency, does that then, you know, does that then deal with all the complicated bits or only some of them? 

Avinash Persaud  
So there are three layers of risk. There is the, if you like, the company risk, there is- which would be you know, have you got the right- is the company solvent, does it have the right contracts for buying and selling what it's doing, and then you've got the sector risk. So it may be that that company's solvent, but the people that they selling to have gone insolvent, the people they are buying from are insolvent, and maybe there's bad policy in that sector, you know, the policy framework is not encouraging.

Michael Liebreich  
Energy policy or-

Avinash Persaud  
Exactly. And then you've got the country, which is the debt, the country's solvency, the foreign exchange. All of the attention is really on the first two. I mean, if you speak to development banks about this problem, they've got hordes of technical analysts which will tell you about the right contract, the right policies, they love that area, and they will come and say, "you need my expertise, and I will solve your problem." And then, you know, making companies and contracts solvent, but the problem is, when you look at the data, you find that the risk for these companies in developing countries is the smallest risk. And it is no higher than the risk for the companies in the rich countries. Now that blows people's minds away, and they don't really understand that because they think operating in South Africa must be difficult, or Brazil or India, but they don't realise what I have to do. And I'm- one of my roles in my little island - so I talked about climate - but when you're in a small state, you end up doing everything right, you are the bottle washer and everything. So one of my roles is to be a sort of Chief Investment Officer. And I negotiate with investors. And when you are a developing country, you offer these investors things they don't get anywhere else and for which people in this space don't understand. We offer the investors and they can take me to court in a foreign jurisdiction. That doesn't happen in Germany or in Britain or in America, that we will guarantee them that whatever happens to our elections for the next election, the election after that election after that, that their policy regime will be the same for them and we will compensate them with cash if anything changes. So in fact, the risk they have in the company, company risk, sector risk is no- is actually in some ways on paper smaller that in rich countries, although there are other things too that will then even out, so the risk is not much different. The problem- the risk that no one's attending to - and this is the point of the Bridgetown Initiative - is the macro risk. Because when you go to these development banks, they're project financiers. They don't think about the macro risk. The World Bank, the- you know, African, Asian, American development banks, they're focused on financing projects, they don't focus on thinking of the country risk.

Just to loop back to where you started, or very early in the conversation, they are essentially not looking at the macro prudential piece, or they know that it exists, but they can't quantify it. And so they're very good at doing all of the micro prudential, the micro risks and pricing those, but then for the macro prudential, I think what you're saying is they just say, "do you know what , we're just going to charge a whacking great cost of capital, because we can't do the sums. Is that fair?

Or they'll say it's someone else's job, it's the IMF job, it's the investors job, it's the country's job, it's not their job. So there's all this apparatus to reduce micro risks and there's no apparatus to reduce macro risk, even though it's the biggest risk. 

Michael Liebreich  
And you're saying that by channelling that into a forex, into a foreign exchange, insurance-type product, or ways of reducing the cost of hedging into that foreign currency, that that captures and insulates the investors from that package of risks. 

Avinash Persaud  
So- and let's use some very simple numerical example. So, the International Energy Association, and IRENA, the renewable energy association, has done this work, which shows that if you're investing in a solar farm, a utility-sized solar farm, in a place like South Africa, we can use South Africa or Brazil, they've got very similar numbers, that you have to pay the investor over 14%, in order to get them into that to invest in that farm. And the equivalent farm-

Michael Liebreich  
Avi sorry to interrupt but my audience may- they're not all very- some of them are project financiers. Some of them are though. That's 14% interest rate on the debt piece per year?

Avinash Persaud  
On the actual- the 

Michael Liebreich  
Or is that the full cost of capital? That's the average cost of capital, equity and debt? Okay. But it's per year, and that's very expensive, right?

It is, yeah. Because- and who's paying that? That's the underlying consumers. So in the countries with the- sort of the poorest consumers, they're having to fund - electricity consumers - they're haviong the fund a 14%, cost of capital. Now, let me just say-

What would the equivalent be in a Germany, US, UK, Denmark, that sort of

Avinash Persaud  
About 4%. So you can imagine that the investors are saying, "well, I'm more likely to make money in a place" - so the equity investors, the people interested in returns, if they look at their- how much they have to spend to get other investors involved, they're more likely to make money in Germany, where the cost of bringing other money is low, than in South Africa, or Brazil, or Indonesia or Mexico. And so that's why 81% of all renewable energies are being financed by the private sector in the rich world, but only 14% in the poor world. And the governments can't make up the difference, they've got no money to make up the difference. So let's use the American example, that you have to spend about 14%, to bring the capital to finance this project in South Africa or Brazil. But the cost of lending to the government, so that's kind of the cost of the risks of currency risk, default risk, and all these macro risks is 12%. So it's telling you the project is only worth 2.

So the project is not the risky bit, the risky bit is the country. 

And yet all of the apparatus is focused on "let's reduce the 2%."

Michael Liebreich  
So I've got bad news for Rachel Kyte, who was one of our very early guests on Cleaning Up, because of course, her entire - when she was at the World Bank was - her brilliant innovation was all of the blended finance and all the approaches, which frankly, to give credit, I think you need to, that's what crushed down that premium to 2%, was because they got very good at managing those risks. But I guess what you're saying-

Avinash Persaud  
Yes and I say to people, it's not that we shouldn't do those things. We're doing them and we could do more. But if I then go off to Germany, I find the project risk there is 2% as well. So I'm saying, "how much lower can we get that 2% down?" I mean, you can be a real optimist, imagine you could halve it, but-

Michael Liebreich  
Okay, so how do you get- t-so you've got- so it's the country risk and that 12%, Bridgetown Initiative, you're gonna get that down to what?

Avinash Persaud  
So let's take South Africa and Brazil. So if you go into financial markets and you hedge your currency risk for lending to the South African government or the Brazilian government, the marketplace is charging you 12%. However, with 30 years of data, you find that the rand only fell by 6% per year. So you're paying 12 for a risk that's 6. That cushion is because of the risk-aversion, the fear of what might happen, the fear of a major problem where you couldn't get out. 6% over- you might call it an overcharging, a 6% excess premium, a 6% uncertainty and risk premium. So we're saying-

Michael Liebreich  
But Avi, doesn't that make lending to, I mean, why don't we just sort of, you know, cut this conversation short now and immediately go and start a lender who would lend not at 12 but at 10, and then we're going to make those 4% super returns, we're gonna undercut everybody else, make 4% extra? What is that- you talked about the five pound note, where the student says, "look, professor of finance, there's five pounds on the floor", and the professor says, "no, there isn't there can't be, it would have been competed away." Why has that 12% not been competed down to 6? How come?

Avinash Persaud  
For three reasons. And I think that I have a perspective on that because I was in the marketplace. And when you're not in the marketplace, you sort of think, "well, if you can make money, why are people not doing it?" But of course, there are many things that make money that people don't do, because they ask themselves, "okay, well, how much capital do I need to put up? How much risk do I get for that dollar return?" And so people make choices . It's not that- and so let me describe the three ways, the three things you're going to have to do to capture that 6%. They're going to have to invest for a very long period of time. The longer the time, the higher the risk, more things can go wrong that you don't know about. Secondly, the biggest return happens when the world's falling apart, when there's stress, when there's risk-aversion, there's great volatility. So yes, if you're happy to lock the money away for 20-odd years, to keep the exposure during the time when the world is going to hell in a handbasket, then you can make 6%. And you know what people say? You know, "I can make 6% a lot safer than that. I can make 6% by being in a developed country, with a jurisdiction I understand, playing the real estate market. I can do that, you know, in a safer environment." So they're not taking that risk, not because it will make money, but because they can make better money somewhere else now. That's fine-

Because the NASDAQ has probably returned 6%. So why not-

The S&P is 7.7% real, right? So why go to- now the problem is, that's fine, as an investor, you and I, that's probably what we should do. We should make our money somewhere where it's safer, where we understand the issue. The problem is there's a huge - what economists call - social externality. People not going to something which actually they're not going to lose money in is causing the world to burn up and drown. So we there's- we need to take that- we need to do something to get the private sector to be making this return. 

Michael Liebreich  
Avi, I'm going to push you to get concrete, because one of the recent episodes that I recorded was with Carine Smith Ihenacho, or Carine Ihenacho Smith, I'm not sure which one, anyway, from- and she's the Head of Governance and Sustainability at Norges Investment Bank. 

Avinash Persaud  
Yes.

Michael Liebreich  
And they manage the oil fund: $1.4 trillion. And she's doing amazing work on climate, you can't criticise what she's doing, except the allocation that's being forced on Norges for that huge vast fund is basically- it excludes the Global South, it excludes any new technologies that aren't already vast public companies effectively will have miniscule allocation, and it almost entirely excludes infrastructure, right. So how does- and you know, you can say, "well, the reason they're putting- they're almost- theyre a near near equity tracking fund, but they're putting- that means that they're putting almost everything into the NASDAQ, the S&P, the DAX, the FTSE, etc. And they're doing that for exactly this reason, that otherwise they would get - at best they could get this 6% you've been talking about, but they can get it much, much, much more safely. So how does what you're going to do with Bridgetown, get Carine's colleagues or at least the Norwegian, frankly, finance minister to say, "Do you know what we're going to? We're going to get- of that $1.5 trillion, the right number is probably, you know, 3 or 4 hundred billion to go into the Global South, new technologies and infrastructure?

Avinash Persaud  
So here's the equation that I'm working with. When an investor in America or Europe, Norway, anywhere, invests in the South African solar farm, and has hedged their macro risk using the currency markets, they're left with this rate of return that's about 3 or 4%. It's a hedged return. 3 or 4% is not really very attractive, you've got so many other things they could do to get more money. But if I eliminate the excess risk premium, they return- their currency hedged return goes from 3 to 9%. That is deep into institutional investor territory. If I gave them a currency-hedged - so no currency risk issue - 9% per year rate of return, they'll do it. That will release trillions of dollars. How do I go from three to six-from three to nine? I've got to I've got to offer them a currency hedge that is the long-term risk-neutral- the long term average cost of insurance with no premiums, and I therefore can't be a private sector person. But the development banks can do that. The development banks can borrow cheaply-

Michael Liebreich  
Right. So that has to be- the only people who can provide a product like that is the- all of our balance sheets, funnelled through the development banks, right. It's-

Avinash Persaud  
The development banks, but because it's not a subsidy - and of course, when we say funnelled through development banks, the  development banks have their money by borrowing in the financial markets, so they're using private sector money, but they're borrowing at a say a triple-A rate to provide that in order to lower that cost. So they can do it cheaper than the governments can. And they can go and offer lower costs of hedging only for green investment projects that will transform the climate and the country. And they're doing it at a commercial- they're doing it not to subsidise it. They're doing it not to lose money.

Michael Liebreich  
So over the long time, as you said over the long term, it shouldn't lose money. But the nature of it, the fat tail that we talked about, is that what it'll do is make money, make money, make money, lose a lot of money, make money, make money, make money, right? And what happens when that really bad thing happens, what happens if that if that occurs, so we're talking about an Asian Financial Crisis, sort of, you know, we've seen this repeatedly, it does happen, real estate crash type stuff, but Asian Financial Crisis is a better analogue. What happens if that occurs in year two of this instrument, and suddenly, you've got these huge numbers of calls on it to provide its hedging. And it's hundreds and hundreds of billions of dollars that has to go out to basically people like the Norwegian Oil Fund, and, you know, Bank of America and Goldman and JP Morgan, and they're all going to be cashing in year two, to the tune of hundreds of billions of dollars. Are you okay with that?

Avinash Persaud  
Because it won't be quite like that. So remember what we're doing - it's a good thought experiment to push through. So I've got my investor, they're investing in a 25-year solar farm. They're infrastructure investors, they know that this investment is not liquid, they're not buying it to sell it today, tomorrow, they're buying it - I mean, they'd like to be able to sell it maybe one day, they don't necessarily need to hold it for 25 years, but they've got some captured money to invest in infrastructure. Currency collapses in year two, in your scenario. What I need to provide them is not the entire balance sheet in year two, at this different exchange rate, it's that year's coupon, it's that year's interest payment. So for- if I've got long-term investors, and I'm going to give them a long-term, risk-neutral exchange rate - I don't need to worry about the exchange rate, they've paid for the hedging, I don't have a lot of risk in one year. So I think that that's why it's possible and it's doable. What we've achieved in Bridgetown this year is we've got people to understand that's the problem we need to solve. That's a problem we're not solving. This is one way of doing it. And the principle I'm trying to cling on to Michael, is try to say, "let's come up with solutions that aren't a subsidy." Because I want the trillion dollars invested in these countries. If you're subsidising it, you won't get a trillion, right.

Michael Liebreich  
And let me just be- let me sum up - I'm being I'm trying to make this as simple, so we've done a deep dive, and now we're kind of coming back up, porpoising back up to the surface, what you're really doing in that situation, in that scenario that I've given you, is you're betting that that currency bounces back. What you're saying is we can just- what we need is a whole bunch of-

Avinash Persaud  
Not completely. I've charged them- I've charged them 6% per year. So if you'd like- so after 10 years, that currency could bounce back to 40- to 60% of where it was, not 100%. And I'm still, I'm still in the money. 

Michael Liebreich  
Okay, but it is a bounce back, it is a bet on a bounce back. I mean, I yes, if you do the maths carefully, then you're saying that that currency is expected to go down 6% a year, not 9 or 10 or 12-

Avinash Persaud  
Some years it'll go up by 5 some years will fall by 20. So I need some patient capital.

Michael Liebreich  
So it goes down 50% in one year, and what you're saying is, "don't worry, it will bounce back to the trend, and therefore we can we can take this risk." Okay. I need to move on, we need to move on. That that I think is, you know, because there's lots of technicalities, around drawing rights, and so on. But I want to talk also about those other two pieces, which was adaptation and loss-and-damage. 

Avinash Persaud  
Yes.

Michael Liebreich  
I'll let you do those in whichever order you want, because you- you chose the order.

Avinash Persaud  
So you know, my big bucket is the private sector, and this doesn't require any money from the government. It requires them to make sure the MDBs have some capital, but they're not gonna be losing any money on an annual basis, right. So I can deal with this big chunk of money. The next bit of money is is resilience. So that means building a sea- a stronger seawall, dealing- creating flood defences, improving drainage systems, blocking saltwater getting into your freshwater supplies, these things save lots of money, but they don't generate a revenue. So I can't get the private sector really to do this, because they want to be able to receive a good revenue. So I could borrow for it. I could borrow for it to become resilient, because I'm gonna get- I could pay it back with the savings from doing it.

Michael Liebreich  
Who is "I" in this situation? It's doing a lot of work there.

Avinash Persaud  
Yes, sorry. A climate-vulnerable country. One of the reasons why the Bridgetown Initiative does very well, has gone far, is because it's actually not about Barbados. We have a credibility that I didn't really imagine, I didn't think through. But most people in the climate space talk about themselves. We're actually talking about other people, other people- how we get other people to profit from mitigation, how we get other people to be more climate-resilient, and how we get loss-and-damage for other people. But we also have rising sea levels. So yeah, if I need a stronger seawall and saltwater protection from my freshwater supply, I need to borrow from the World Bank, Inter-American Development Bank.

Michael Liebreich  
So that- I just wanted to clarify that it is the climate-vulnerable country, not you know, "I" at that point was not an investor, was not a rich country, was not the not the World Bank, it was the country itself, the sovereign, is going to borrow money to invest in resilience, is that correct?

Avinash Persaud  
That's exactly right. And you know, there's a lot of ideology in everything we do, and as a peop- some people who are who believe governments are terrible, and always get things wrong, and the private sector is always right, and there's some people who have the opposite view. Well, the reality is, because we don't have a lot of money in our country, we are always inviting the private sector to consider how they could get involved in resilience-building and adaptation, because they always say, "Oh, we can do that. We could do that." And I have to say, the the idea that we get the private sector to do mitigation, and develop banks to fund adaptation is not based on a theory, it's based on practical experience, that that is the most likely way to get that financed.

Of course, once the government has borrowed the money, they can then pay a private contractor to pour the concrete so it is-

Lots of money, lots of money in the contracts, yes.

Michael Liebreich  
It can be a private- it could be a public-private partnership, it could be paid for success, all sorts, but it is fundamentally the country borrowing money to do this stuff. Now, the reason I wanted to establish that very securely is because these countries are- have maxed out their credit cards, the IMF, you know, doesn't let them borrow more. And now you're turning up and going, "I've got this great idea. These countries should borrow more." And of course, the payments-

Here's how we deal with that-

-you know, the repayment is enabled by the saving: you don't have the flood, the roofs don't all fly off in the next storm, etc. But nevertheless, the IMF is going to say, "Avinash, fantastic idea. Sadly, they've reached their credit card limit." 

Okay, so great point, and it's something we're very conscious of, because when I first came into this space, there were a lot of sort of liberal-minded people in rich countries who were saying, "we should be given low-cost loans for everything." And I'd say to them, "we don't have the space to finance the 2.4 trillion with debt." So what I've done is I've reduced the amount that we have to do by debt, so we're not doing mitigation. Today, developing countries fund mitigation, because the private sector is not doing it because of all the cost-of-capital issues. So we're saying, "move that off my balance sheet, I'm now focused just on adaptation and resilience. "And the IMF says, "teah, you got a lot of debt." So we're asking, part of the Bridgetown Initiatve, for an adjustment to what's called a "debt sustainability analysis", the DSA. Now there are a lot of things in economics and finance where we try to pretend it's extremely sophisticated and complicated. The DSA is one of them. But the DSA is basically the kind of arithmetic we teach nine year olds, it's basically adding up all of your debt and dividing it by the national income. And they say that it needs to be 60%. That is kind of a fairly random number. stems in fact, from Jacques Delors and the Maastricht Treaty, no real found- good underpinning. The right number may not be far from 60 but- and it's probably different for every country. But anyway, the IMF has this framework, 60% you should be at, and if you're not there, you have to have a plan to get there. And so we're saying, "okay, but that doesn't make a lot of sense. That is stopping me investing in something that's going to reduce my debt in the future. Because if I don't have a stronger seawall, and my city is getting flooded every year, and are having to spend money on the cleanup, and all of that, that's gonna be worse-off. It's fiscally imprudent to stop me building a stronger seawall, it's fiscally imprudent." So how do I deal with that? I say to the IMF, "you should count my debt that creates savings - let an independent person assess that this sea wall is going to stop the flooding I previously have, it's therefore going to create the savings, you can quantify the savings, and if the savings are above some threshold, that that debt doesn't count as the same as a debt to fund teacher salaries, consumption, but it is an investment. And maybe you give it a weighting of 3/4, not 1. And that creates this fiscal space, where I can now invest in my seawall, even though I had a high amount of debt.

Okay, now, let me push this, I understand this, what you're saying is, "all debt is not equal, there is prudent debt that reduces risk and therefore ought to be, you know, encouraged is a big word, but it ought to be encouraged." But let me push you on that because I'm not talking about Barbados, this would be not at all an issue in Barbados. But how do you respond to the issue of corruption, which I'm afraid is endemic everywhere that but in some of these countries, you can just look at the transparency, international indices and so on. Because isn't there a huge temptation to say, "well, I'm at my 0.6, but I'd rather like to spend money on, you know, real-estate development, my brother in law, my this, my that, whatever. And I would love it as a state if we were able to go up to 0.8 or 1. And all I need is one consultant to say I mean, you know, god forbid, a consultant might tell you, you know, what you want to hear if you give them a nice, fat contract, and we're just going to slip a whole bunch of stuff through, which has got- oh, we'll call it, I don't know, mangrove restoration, but it's not really, in fact it's a golf course. And how do you- because we never talk in this space, I've almost never heard the word corruption used at any of the hundreds of events that I've been to talking about how to get more money into the developing world, into the Global South. We don't use the word and it's a huge risk. 

Avinash Persaud  
The key will be that I do not determine whether that piece of investment is saving me money. I don't employ the consultant to do it. That if it is the World Bank who's lending me the money, and I want to go to the fund and say, "that debt should be of a lower weighting," the World Bank makes that determination. Now, let me stretch- 

Michael Liebreich  
Avi let me just come in there, sorry, I'm going to come back at you on that. The World Bank is only providing the last tranche of that lending. They're not providing the whole 0.8, 0.9 whatever % times, you know, so they can say, "well, my lending is absolutely fine." But don't you need somebody macroprudential to look at that country and say, "overall, the mix of lending that you've got is either prudent or not prudent?" I mean, isn't it the IMF ultimately-

Avinash Persaud  
Yes, and thatt's what the fund does today. Now, in making that assessment, they're making a huge number of assumptions. So let's- you knowm you talk about corruption but, whether your debt is on target for 60% is extremely sensitive to your assumption of where growth is in 10 years time. We can't even forecast the next 10 months, but we've got a model that says this is where growth will be in year 10, 11, 12. And that's how I either the hit my 60 or not. So there are a lot of assumptions built into this. The key is a conflict of interest, we've got to make sure that there's no conflict of interest, that the person making that assessment is not linked to the person who will benefit from that assessment. And there are a lot of assessments being made all the time which are very critical to all of this lending, and we just need to make sure that assessment is- so all assessments have a degree of subjectivity to it, we find is in a developing country, they tend to be always err on the side of risk-aversion and safety, they're seldom giving us leeway because they believe in all these risks that are out there.

Michael Liebreich  
Because I do- I think it has to be the IMF, by the way, because it's the IMF rule that's going to need to be relaxed. But I think the upskilling required for the IMF to be able to say- you know, to sort the, you know, sort of, what is it, the Harry Potter hat, you know, which lending is okay, reduces risk, and which doesn't, they don't- at the moment have the skills to do that, in my respectful view.

Avinash Persaud  
Well, you know, we work a lot with them both and recently, there's been a very interesting experience with the the Resilience and Sustainability Trust, which is an IMF idea, principally because the World Bank wasn't filling that space under the previous leadership. But there's an IMF idea, which is actually a bit outside the comfort zone of the IMF, its projects to create resilience and sustainability. So what they do is they partner with another development bank, in our case, the World Bank, so the World Bank develops the projects and develops the assessment, and they're working with the IMF on helping to fund it.

Michael Liebreich  
Right, so we're gonna get back - at the end, if we've got time, we'll talk about some of the coalitions that you've got- you're going off to Dubai, wait, because we have- we're running out of time, and we need to talk loss-and-damage the third and final piece-

Avinash Persaud  
That's where I want to go. That's where I want to go. So just to brief recap, ao we're not using taxpayers' money or mitigation, we're getting some mechanism to reduce the risk. We're not using taxpayers' money on a loss-and-damage-  on resilience and adaptation immediately, we're borrowing this money from the development banks and development banks get their money from the markets using their capital. So again, I'm light on taxpayers' money, loss-and-damage, no revenues, no savings. What is loss-and-damage? It's hurricane Maria comes over and wipes out all of your low-income housing. And I've got to rebuild my housing. And yes, I will rebuild it better, but I've got to spend money on rebuilding this house. Now, you've mentioned a couple times insurance. And it's an important point to explain to your listeners, that climate change is an uninsurable event. Insurance is about saying, "well, I don't know when someone's going to crash into me driving my car, but I know that a lot of probabilities will occur once every 10 years or so, and so I can spread out the cost of that by annual premiums to my insurance company.  And the likelihood of someone crashing into me is from independent of me- of the water company failing, right these are these are uncorrelated risks." So insurance companies can come in here, and they can spread these risks across time and across different issues. The problem with climate change is that it is a rising certainty of a rising risk. It's like, the risk I have one crash next year, and the next year it's two crashes, and the year after, three crashes, and four crashes, and I want the insurance company to pay for that? They're gonna say, "well, you got to pay premiums today that are way above next year's crash, of all these future crashes." And so they're just gonna leave the area, either they- either the premiums are going to be too high, or the insurance companies can't insure, and that's what's been happening, they've been vacating from the spaces." So we can't use-  and these risks are now becoming correlated, you know, whether we get saltwater into our freshwater, whether we get Sargassum seaweed on our beaches and our tourism numbers fall, whether we get no agricultural production because of the drought, or the flood, they're all now correlated because of climate change." And so we can't use insurance. We need, we need compen- we need money to deal with the loss, to rebuild the housing, to rehabilitate, we'll build it better and stronger. We've got other money that we borrowed from the World Bank to create this resilience and adaptation, but we need money to deal with the immediate disaster that's happened. And that will have to be taxpayers' money, more grant-based. If we have to borrow money every time we have an incident, we'll be sinking under oceans of debt long before sea levels rise up. Now, where will that money come from? Because remember, we talked about loss-and-damage is probably $100 billion a year, rising to $300 billion, and all of the aid in the world is only 200 billion. So where's that money going to come from? It's not going to come from taxpayers. Some of it needs to, they need to kick off the fund with- to capitalise the fund. But we're going to need new, innovative sources of finance, we're going to need- this methane leakages levy should become global and some of the money going to loss-and-damage. Carbon border adjustment mechanisms, if there's revenues there, part of that should go to loss-and-damage in developing countries. A shipping emissions levy, part of that should go into a loss and damage fund. So that's loss-and-damaged fund.

Michael Liebreich  
So I see the challenge, right. So that you've got this, you know, these catastrophic occurrences. They you know, increasing, and we're becoming increasingly good at allocating them in a sense, to the attribution science of saying, "this was made worse by climate, made more frequent by climate", okay. You were doing fine until you said that you're going to get all this money from shipping this and carbon border adjustments. I have this kind of horrible flashback to 2009 and the Copenhagen COP 15, which was a sort of catastrophic failure, because everybody thought, "oh, we're going to have a Tobin tax on transactions. And we're going to have all sorts things." And of course, every single government said, "in your dreams", and everybody ran away at that point, and it took five years to rebuild back to Paris, because those sorts of hypothecated levies are politically impossible. So I hope you've got a better chart, a better way of putting together the- 

Avinash Persaud  
Yes and exactly.

Michael Liebreich  
Because I like I like things like the two-year debt holiday when a country gets hit by this that they don't have to pay their debt repayments, for you know, for some period.

Avinash Persaud  
No but that's liquidity and Michael, we actually have a solvency problem. So, but let me explain why this is different. So we are very pragmatic and practically minded. 

Not if we're talking about- Avi not if we're talking about a global

Listen to me, Michael, listen to me here. There is already- well, there is an Oil Pollution Compensation Fund already, and so it's about actually extending the Oil Pollution Compensation Fund to include other fossil fuels. A number of countries went to the IMO, on that issue, we have, and we need to better-design that tax. There are aviation- let me finish though Michael, there are aviation taxes already but they need to be extended. The carbon border adjustment mechanism is here, it's not hypothet- it's not theoretical, and there are revenues that will be generated from it. And so we're saying "take those revenues that are being generated from something that's here, I don't need agreement on it. The Europeans have it. The Brits and the Americans and the Japanese are gonna have their own carbon border adjustment mechanisms and America's Inflation Reduction Act, a country that is you know, opposed to international taxation, but they've got a methane leakages levy. And they would like everyone to have a methane leakages levy because they don't like their companies suffering from it and others not. So we can globalise a methane leakages levy, something being discussed at COP, and then take a proportion. The political economy is, you've got to- can't take all the money, you've got to incentivize the governments that they are getting some of this money, perhaps the majority of the money, and some of it's going to a loss-and-damage.

Michael Liebreich  
So the Oil Pollution Fund, I mean, that is very similar by the way to the funds that are created in the nuclear sector to- because any individual catastrophe is so expensive, so it's- but it's an insurance product, it is: pay a small amount, and then, if this thing happens to you, then that fund will come in and-

Avinash Persaud  
Not the Oil Pollution Compensation Fund, to be fair, Michael. That's based on when ther is an oil spillage. 

Michael Liebreich  
Yes, exactly-

Avinash Persaud  
An actual oil spillage.

Michael Liebreich  
Exactly. So that it pays out- everybody pays in, and then it pays out if there's a spillage. The challenge with carbon border adjustment is, you know, well, of course they exist, and they're going to exist, but the chancellor, the treasury of every single country is going to say that's fundamentally our money. All it is is just higher taxes. I mean, I understand the logic of it, I just think it's politically-

Avinash Persaud  
Michale, what is the alternative? What is the alternative, we need to raise $100 billion a year. So what is the alternative?

Michael Liebreich  
I don't necessarily have an alternative, but I do have a thought on the rationale for expecting countries to pay in, which is that this damage is very closely related to cumulative historic emissions. So it's relatively easy to say, "if we need 100 billion a year, then you can divide it, you know, because we know, UK historically, UK, China etc.

Avinash Persaud  
Agreed. Yeah, we've- agreed, we've tried that, they don't like that. America, in particular is very averse to it. So I think the point is, the way to - here's the political economy of getting these revenues. You have to look at something that is possible to be agreed, and when you've got carbon border, and you've got the IRA, that's already there. Secondly, you've got certain revenues that they are not collecting yet. So there's additional revenues, not in their budget. And thirdly, you're saying, "I don't want all of it. I want a part of it." And it is true that that is difficult. But I promise you, it is actually easier than almost anything else. We've come across.

Michael Liebreich  
Avi, the IRA, the Inflation Reduction Act in the US, is a tax break. It's not the government suddenly collecting money, it's the government giving away money.

Avinash Persaud  
No, no, on methane-

Michael Liebreich  
Yeah, but-

Avinash Persaud  
No on methane, it is a levy.

Michael Liebreich  
But the issue is going to be that the government is going to say, "look, we're giving away so much money to all these people trying to do you know, e-methane, we're giving away $70 per million BTU f or a commodity that's only worth 3 it's been so grossly abused-

Avinash Persaud  
You're very wel- you're very welcome to come up with another solution.

Michael Liebreich  
Well, we are going to- we can finish on COP, the reason that we're both going to COP is to have these sorts of conversations and see if we can solve some of these very difficult coalition-building challenges. Correct?

Avinash Persaud  
Exactly. 

Michael Liebreich  
Avi, it's a huge pleasure. Thank you so, so much. I look forward to seeing you out in Dubai. And we will check in from time to time on the Bridgetown Initiative to see how you're progressing with it. I wish you fantastic luck and I'll see you out there.

Avinash Persaud  
My pleasure, Michael, you're doing a terrific job. Keep it up. Thank you.

Michael Liebreich  
So that was Avinash Persaud, Special Envoy on Climate to Prime Minister Mia Mottley of Barbados, and architect of the Bridgetown Initiative. You can find a link in the shownotes to the episode I mentioned during our conversation with Rachel Kyte, former Vice-President and Special Envoy for Climate Change at the World Bank, as well as links to more information on COP 28 and the Bridgetown Initiative. If you've enjoyed today's conversation, please remember to like, share, and subscribe to Cleaning Up, or leave us a review on your chosen podcast platform. And do please, please spread the word on social media or by telling your friends and colleagues. And if you want more from Cleaning Up, sign up for our free newsletter at cleaningup.live, where you'll find our archive of over 160 hours of conversations with extraordinary climate leaders. Cleaning Up is brought to you by our lead supporter, Capricorn Investment Group, the Liebreich Foundation and the Gilardini Foundation.