How to scale up Australia’s investment in Pacific climate adaptation

Pacific Island countries are among the most climate vulnerable in the world and face huge unmet adaptation financing needs, especially for investment in physical infrastructure. Australia has recently made progress in scaling up its investment, but its main mechanisms for doing so — the Australian Infrastructure Financing Facility for the Pacific (AIFFP) and its dedicated climate window — have almost run out of concessional financing firepower. Australian investment is still modest relative to the Pacific’s financing needs, but an increase will require difficult trade-offs given the limited scope to lift the overall Australian aid budget.

The Pacific’s extreme climate vulnerability means investing more in climate adaptation is good for the region’s development. It is also smart diplomacy, providing highly visible and tangible evidence of Australian support on the Pacific’s most pressing concern. Australia should direct more of its aid resources to the AIFFP for adaptation purposes. To pay for it, Australia should modestly reduce its heavy use of technical assistance (mostly international consultants), which currently absorbs a large share of all Australian aid to the Pacific. This could allow total Australian adaptation infrastructure investment to reach almost half a billion dollars a year. Increased investment should be linked to partner country governance to improve its targeting and incentivise complementary country reforms. A review of the AIFFP should also be conducted to ensure that it has the right institutional capacity to deliver on this agenda.

The Pacific is home to some of the world’s most climate vulnerable countries. The region also faces a huge financing shortfall, especially for infrastructure investments needed to improve the resilience of Pacific communities and economies to climate change threats. Australia has a strong interest in helping meet this requirement, lest future climate shocks undermine or destabilise a region vital to its own security.

The creation in 2019 of the Australian Infrastructure Financing Facility for the Pacific (AIFFP) and its dedicated climate window — the Pacific Climate Infrastructure Financing Partnership (PCIFP) in 2022 — have been game changers in helping to scale up Australia’s investment in “hard” adaptation projects. However, these mechanisms are quickly running out of concessional financing firepower. Yet there remains a substantial need for Australia to lift its investment further, with large benefits from undertaking upfront investments in adaptation to reduce the future costs of ongoing climate change.

There is no shortage of useful potential investments. Additional Australian financing could be used, for instance, to expand coastal protection in atoll islands, reduce flood risks in exposed areas, improve clean water supply in vulnerable locations, build climate-resilient transport networks, meet higher infrastructure maintenance needs due to rising climate impacts, and retrofit existing infrastructure for better climate resilience.

This Policy Brief sets out the case for Australia investing far more in Pacific climate adaptation and how this can be done most effectively via the AIFFP within the confines of a limited Australian aid budget. Channelling more Australian funding to international organisations such as the multilateral development banks is also an option. However, in this brief we focus on the case for investing more of Australia’s aid through the AIFFP as a bilateral mechanism offering unique strategic and diplomatic advantages to Australia.

Pacific countries are among the most exposed to the impacts of climate change (Figure 1). The most pressing threats include rising sea levels and intensifying extreme weather events, including tropical cyclones, floods, and droughts. Some Pacific communities sit only one to two metres above sea level, leaving people and infrastructure vulnerable. [1] Climate impacts are destroying infrastructure, increasing the spread of disease, damaging freshwater systems and subsistence crops through saltwater intrusion, shrinking habitable land, devastating fish stocks, and destroying vital ecosystems. The result is disrupted essential services, damaged livelihoods, weakened state finances, slower economic growth, and greater poverty. [2]

Vanuatu offers one of the most acute case studies. The country has experienced three major tropical cyclone disasters over the past decade, each causing damages exceeding 40% of GDP. [3] The most recent twin-cyclone event in 2023 impacted more than 80% of the population and destroyed over 90% of crops in the worst-affected provinces. [4]

Climate impacts are already being felt in the region and will only rise further. [5] Scaled up and sustained investment to protect communities and infrastructure is thus increasingly critical. Urgently needed “hard” adaptation investments include both adaptation specific assets such as coastal protection as well as enhancing the climate resilience of standard infrastructure investments such as ports, roads, energy systems, and public buildings. [6] For example, Australia has contributed $38 million to the Tuvalu Coastal Adaptation Project, [7] for land reclamation and coastal protection measures like sea walls and revetments to shield houses, hospitals, and schools from coastal inundation and wave action.

“Soft” adaptation — such as through improved planning, climate-resilient building codes, and strengthening land-use regulations — is also essential. However, progress here depends less on the availability of financing and more on policy actions by Pacific governments (we return to this issue later). The bulk of the financing challenge relates to infrastructure.

The International Monetary Fund (IMF) estimates that the Pacific needs around $2.3 billion a year in hard adaptation investment. [8] Notably, this refers only to the marginal cost of retrofitting existing assets, upgrading new ones, and for coastal protection. It does not include standard infrastructure costs not specifically for the purposes of climate change adaptation — for example the cost of building a new port versus the marginal cost of ensuring it is climate resilient. Hence, the Pacific’s total hard investment needs are much larger than even these already high IMF estimates suggest. The Pacific Islands, including Papua New Guinea, report having collectively received just $340 million annually in recent years in total climate finance for both adaptation and mitigation purposes, leaving a huge shortfall. [9]

Donors will inevitably need to provide the lion’s share of this funding. The sheer scale of the adaptation investment gap combined with other needs is prohibitive. For small Pacific Island economies, the IMF estimates adaptation investment needs equal to 9% of GDP. For Papua New Guinea, the costs are still substantial at 2% of GDP. The Pacific also requires an estimated 3% of GDP for other core development objectives such as in health and education. [10] Lifting tax and other domestic revenues is crucial but will not alone close these financing gaps. The financial returns for private investors are also too low, and the risks too high, for private investment to play a substantial role in meeting the Pacific’s adaptation needs.

The Australian government’s International Development Policy, launched in 2023, prioritises helping Pacific Island countries improve their climate resilience. [11] Bilaterally, Australia invests in Pacific climate adaptation broadly through two channels — its regular aid program and the AIFFP. [12]

Australia’s regular aid program essentially consists of grants and is mostly allocated to individual countries through the government’s annual budgeting process. The AIFFP is set up differently, with $4 billion in total financing capacity consisting of $1 billion in grants and $3 billion in non-concessional (market rate) loans allocated on a project-by-project basis. AIFFP grants and loans can be combined to create concessional (below market rate) project financing, which is essential given the IMF assesses most Pacific countries as facing elevated debt risks. Out of the AIFFP’s $4 billion in total financing capacity, $350 million is for PCIFP, its climate finance window. However, most AIFFP projects involve a climate adaptation component (i.e. additional elements to improve climate resilience).

In recent years, Australia has provided around $115 million annually, largely through its regular aid program, for infrastructure projects that at minimum include an adaptation component. This includes funding for both capital works and infrastructure-related technical assistance – such as for project preparation or improved infrastructure planning – which should broadly be seen as part of the cost of making effective infrastructure investments. However, as this includes funding for the overall infrastructure costs beyond that related solely to adaptation, this overstates the amount of pure adaptation investment, which we estimate to be $35 million a year. [13]

The AIFFP is changing this picture. It has thus far signed around $2 billion in projects. [14] The largest project to date for $620 million is financing the upgrade of seaports in Papua New Guinea, including for enhanced climate resilience to meet a design life of 50 years in the face of rising sea levels and storm events. [15] Another example is a $72 million project to upgrade roads and bridges in Fiji, with the latter targeting a 100 year design life and the ability to withstand a once-in-a-century storm. The AIFFP has also initiated solar power projects across the region to enhance energy access and security as well as several undersea internet cable projects. The main adaptation-specific AIFFP investment to date is the Tuvalu Coastal Protection Project.

As AIFFP projects are implemented, we estimate this will result in about $160 million in additional infrastructure investment annually, with almost $50 million of this in terms of the pure adaptation component. [16] If current amounts under Australia’s regular aid program continue, total Australian adaptation investment will have more than doubled to about $80 million a year due to the AIFFP (Figure 2), inclusive of both capital works and infrastructure-related technical assistance. .

The success of Australia’s recent adaptation investment efforts in the Pacific will ultimately depend on implementation and how well these assets are subsequently managed by the Pacific. Still, in terms of financing, the AIFFP has made a huge difference thanks to its infrastructure focus and lending capability. Indeed, it is notable how little of Australia’s climate finance has otherwise gone into adaptation-related infrastructure through the regular aid program. The AIFFP is playing a vital role in changing this — in part because of its ability to lend and thus achieve greater scale, but also simply as a dedicated Australian instrument for making hard investments in Pacific infrastructure.

There are, however, important caveats to this progress. First, the Pacific’s unmet adaptation investment needs remain huge. Second, while the AIFFP still has about $2 billion in lending capacity, it has now exhausted most of its grant funding. Currently, there is no indication as to whether the government intends to provide additional grants to the facility nor when this might occur if so. Additional grants will be needed for continued grant financed AIFFP projects, the demand for which remains high. An infusion of additional grants is also needed to enable continued lending, since AIFFP loans are based on market interest rates and must therefore be combined with grants to provide the concessional project financing that the Pacific requires. Without this, the AIFFP’s remaining lending capacity will likely be left effectively idle.

The most straightforward way to lift grant funding to the AIFFP is to increase the size of the total Australian aid budget. [17] However, the political scope for more aid spending is limited. Currently, the Australian government is planning for a slight reduction in the aid budget in inflation-adjusted terms from about $5 billion at present to $4.8 billion by the end of this decade and holding steady thereafter. [18]

An alternative path is to increase the share of the aid budget going to the Pacific. However, the Pacific is already substantially prioritised over other regions and objectives, accounting for almost 40% of Australia’s total aid budget, its highest level since the late 1980s.

That leaves reprioritising within Australia’s existing aid to the Pacific as the main option. In general, prioritising adaptation investment is very likely good development policy given funding for this remains so low and the estimated needs so high. [19]

The Pacific’s extreme climate vulnerability means adaptation and development must go together. Development projects — such as building roads, schools, and hospitals or promoting private sector growth — risk being ineffective without adequate complementary investments in adaptation. Businesses cannot operate, children cannot get to schools, families cannot access health services, and food and energy supplies cannot reach where they are needed if critical infrastructure (e.g. roads) and public buildings (e.g. schools and health clinics) are repeatedly destroyed or rendered unusable by extreme weather events or rising sea levels. Tourists will not come — and local businesses will not invest — if natural attractions are damaged, reliable infrastructure is not in place, or quality hotels, restaurants, and other services are not sufficiently available. Nor can governments finance enough spending on infrastructure and public services if their fiscal health is persistently weakened by climate-driven shocks that slow development progress, undermine state capacity, and create a further source of economic uncertainty that deters private investment.

Pacific leaders themselves have unequivocally identified climate change as the paramount development and security challenge. This is reflected in foundational documents such as the Framework for Resilient Development in the Pacific, [20] the 2018 Boe Declaration on Regional Security, [21] and The 2050 Strategy. [22]

The evidence also suggests prevention is better than cure. At the global level, climate-resilient infrastructure is estimated to generate almost $5 in benefits for every dollar invested. [23] The returns are large enough and the benefits immediate enough — e.g. by lessening damage from disasters — to make many investments worthwhile even with uncertainty over future climate impacts. [24] In the Pacific, IMF modelling indicates significant benefits from upfront investment in climate-resilient infrastructure because it will help reduce the cost of disasters and other climate impacts, facilitate faster economic recovery, lower debt risks, and allow countries to sustain faster rates of economic growth by lessening repeated setbacks. [25] The benefits hold even amid weak public investment management in some Pacific countries, though the benefits are much greater with stronger institutions.

Importantly, although the Pacific faces elevated debt risks, there is also a need to avoid a false dichotomy between debt sustainability and adaptation. [26] Broader circumstances matter but, other things equal, effective investment in adaptation lowers debt risks. [27] The ability of adaptation investment to enhance economic resilience implies AIFFP lending for adaptation, if combined with sufficient grants, remains a potentially sustainable proposition for some Pacific countries, notably Papua New Guinea and Fiji.

Scaling up investment in Pacific climate adaptation is also in Australia’s national interest. Climate-related shocks hit the least-prepared states the hardest, amplifying existing economic and state fragilities, and in turn heightening the risk of social unrest and political instability in Australia’s region. [28] Communities are already being displaced, triggering land disputes and conflicts. [29] As territorial loss accelerates, the consequences will drive increased migration pressures and the need for peacekeeping and humanitarian assistance. [30] In low-lying countries such as Tuvalu and Kiribati — where most land sits just two metres above sea level and entire islands are expected to disappear in the coming decades — more than 70% of people surveyed would consider migrating if climate impacts worsen. [31] Partly as a result, in 2023, Australia introduced the Falepili Union climate mobility pact with Tuvalu. [32]

Investing more in Pacific adaptation is also good foreign policy in a narrower diplomatic sense. Amid rising geostrategic competition with China, visible and tangible investments in Pacific climate adaptation are central to Australia’s bid to remain the Pacific’s “partner of choice”. [33] Yet, as mentioned, only a small amount of Australia’s aid is in the form of hard adaptation investment in infrastructure. Conversely, around half of Australia’s aid takes the form of technical assistance (see next section) — a relatively intangible and invisible form of aid poorly suited to soft power competition with the highly visible and politically attuned projects frequently provided by China. [34]

Australia can look to free up funding for greater hard adaptation investment by reducing its heavy use of technical assistance across its Pacific aid efforts, a longstanding concern about the effectiveness of Australia’s aid program. [35]

Technical assistance refers to the use of advisers (mostly consultants but also donor government staff) to provide various services as a form of aid. It is often used for capacity building (e.g. training), capacity substitution (e.g. using advisers to directly perform government functions), and technical work (e.g. undertaking studies or supporting project implementation). Technical assistance is often criticised for its use of expensive international consultants as well as the dominant role played by Australian managing contractor firms, resulting in accusations of “boomerang aid” that primarily benefits Australia rather than recipient countries. [36]

A more generous interpretation recognises that limited institutional and human capacity in the Pacific makes technical assistance an important form of aid, especially in enabling project delivery and supporting better public sector governance. The Australian government’s International Development Policy prioritises supporting “effective and accountable states” — giving technical assistance a key role. [37] Linked to the new policy, Australia is also in the midst of an ongoing effort to increase local participation in its aid projects, which should reduce the role of international consultants in Australia’s technical assistance. [38] Finally, it is important to recognise that the quality of policies and institutions is crucial to the effectiveness of other aid projects, including investments in adaptation. [39]

Yet it must also be recognised that technical assistance, and aid more generally, have at most a limited ability to improve governance in partner countries, which is instead overwhelmingly determined by domestic political dynamics. [40] Moreover, success in supporting governance is usually driven not by the quantity of technical advice provided but by the ability of outside support to work in politically attuned ways in close concert with local reform actors. [41] In the Pacific, despite decades of aid directed to this purpose, and some important successes, the overall quality of governance has improved slowly at best. [42]

How much technical assistance does Australia currently provide? The last official number from 2008 states that about half of Australia’s aid appeared to be in the form of technical assistance — twice the average among Organisation for Economic Co-operation and Development (OECD) donors. [43] To understand how this has evolved since, we built a proxy measure based on projects across all aid sectors reported as supporting “policy and administration” or otherwise explicitly classified as technical assistance (Figure 3). [44]

According to our measure, Australia has historically relied especially heavily on technical assistance in the Pacific. In 2010, this was about 60% of Australia’s aid to the Pacific. By 2019, just before the Covid-19 pandemic, this had fallen but was still about 50%. The picture since then is affected by Australia’s response to the Covid-19 crisis and the aftermath, which has seen a jump in aid in the form of budget support to Pacific governments. Technical assistance has consequently fallen to 40% of Australia’s aid to the Pacific – a lower but still substantial share. Excluding the crisis-driven increase in budget support, the share of technical assistance in the rest of Australia’s aid remains about half.

Overall, it is a question of balance. At present, Australia remains an outlier internationally. It is spending almost $700 million a year of its aid on technical assistance, compared to just $35 million at present for hard adaptation investment, or $80 million when including the AIFFP.

Australia should pivot from technical assistance to greater hard investment. However, it remains important that the latter be closely linked to governance. This is because it is widely accepted that allocating aid based on the quality of partner country policies and institutions helps to improve aid effectiveness, primarily by directing support to where it will be used most effectively and therefore have the greatest impact. [45]

Directing more of Australia’s adaptation investment to countries with better public investment management will, for example, help to ensure the right projects are selected, and that the partner government can and will operate, manage, and maintain these assets effectively. It also increases the likelihood that complementary infrastructure (e.g. connecting roads) is in place to make the most of Australia’s investments. This will increase the economic and social return on these investments and their effectiveness in promoting climate resilience.

A secondary benefit is to help incentivise reform. For instance, the promise of substantial funding from the US Millennium Challenge Corporation saw many countries undertake difficult anti-corruption reforms during the early 2000s in order to qualify. [46] While one must remain realistic about the ability of aid to incentivise governance improvements, the potential to unlock increased hard investment in adaptation infrastructure (a top priority of Pacific governments) could be an effective incentive. Especially if the required reforms are also narrowly targeted to enabling better climate adaptation and investment.

Conversely, the evidence shows aid is less effective when it is given for geopolitical motives, as donors become less likely to prioritise the best quality projects and less able to push for partner reform and performance. [47] This does not rule out a useful alignment between geopolitics and development, such as by increasing Australia’s incentive to provide more responsive and tangible aid support, as we have argued above. Nonetheless, excessive “securitisation” is a major risk for Australian aid in an era when it is competing intensely with China for influence in the Pacific. [48] Formally linking some of Australia’s aid to governance can help mitigate this risk.

How could this be operationalised? It could be done by creating a special funding window, with allocations to individual countries based on a limited set of criteria, with countries that score higher being eligible for greater funding (subject to the approval of individual projects). Flexibility around funding allocations and a narrow set of criteria would be important to allowing the AIFFP to continue to operate responsively and avoid complicating its ability to find suitable projects. Targeted policy criteria will also avoid excessive conditionality that could undermine partner country ownership of the reform process or create unrealistic reform demands out of scale with the size of incentive offered by potential increases in investment. The framework must also balance prioritising countries with better policy performance and countries with higher adaptation needs, since some higher need countries have weaker governance. A base allocation for each country tied to a measure of their climate adaptation needs can be part of the solution. Finally, a technocratic approach and long-term commitment are critical to ensure effective targeting of Australian investments and so policymakers in partner countries can be confident that difficult reforms will be rewarded with a sustained increase in funding. [49] Figure 4 sketches out a potential policy framework.

Under our proposed framework, funding could be tied to performance across three pillars. First, quantitative indicators capturing country adaptation needs and policy performance would provide a strong technocratic anchor. This could draw upon similar approaches to those of several multilateral organisations, including the World Bank. [50] A second pillar would be based on the systematic assessment of key enabling policies and institutions related to the quality of public investment management including core adaptation-specific aspects such as an up-to-date National Adaptation Plan and the integration of climate vulnerability assessments into infrastructure investment planning. This could draw upon expert assessment reports and frameworks already widely used in the Pacific. [51] The final pillar would capture progress on country-specific reform requirements including improvements in public investment management, reforms directly related to adaptation projects, and other “soft” adaptation measures. This would introduce greater country specificity and reward countries for incremental progress. It would also create a strengthened mechanism for policy dialogue between Australia and Pacific governments on key adaptation-related reforms.

There is a compelling case for dramatically scaling up Australian investment in Pacific “hard” climate adaptation. This can be done by reducing some of Australia’s heavy reliance on technical assistance to finance a new infusion of adaptation grants for the AIFFP and linking this to partner country governance to enhance its effectiveness and support incentives for reform. These recommendations can be taken up by the Australian government partially (e.g. by simply increasing grant funding to the AIFFP) or as a full package, which would be the most effective strategy.

Australia should take a medium-term approach. For the full package of recommendations, this would involve gradually scaling up its adaptation investment while simultaneously undertaking a centrally directed review process to cut the least promising technical assistance activities. We suggest targeting a 15% reduction in technical assistance. This is large enough to free up a sizeable $100 million in grants that can be channelled to the AIFFP, but small enough to limit the risk of unduly reducing worthwhile technical assistance activities (which would still account for about 40% of Australia’s aid to the Pacific excluding budget support). It should be recognised that technical assistance will still be needed as a complement to our proposed increase in Australian hard adaptation investment (e.g. for project preparation or to support related reforms). There should however be plenty of scope to meet this within the substantial amount of remaining technical assistance spending that would continue to occur as well as through the additional grant funding directed to the AIFFP where this is needed to directly support its projects.

Although we suggest taking a medium-term approach, a decision needs to be made soon to allow time to develop new projects that can begin implementation over the next few years. This would avoid creating a gap in the AIFFP’s project pipeline that would delay urgent adaptation investment and lower the facility’s credibility in the region. Attention will also need to go towards ensuring the AIFFP has sufficient operational capacity to design and implement an increasingly large volume of projects. The government should conduct a review of the AIFFP’s performance to date and the adequacy of its current institutional setup. A review conducted in 2022, for instance, concluded that the facility was performing well but also raised important institutional questions around adequate staffing given its substantial work program and the relevance of considering alternative operating models. [52]

In taking this proposal forward, the Australian government could announce an infusion of grants into the AIFFP as a new Pacific adaptation initiative worth perhaps $1 billion over the long term — based on an expected average $100 million a year over ten years in grant funding reallocated within the existing aid budget. Given the experience with AIFFP thus far, this could be expected to unlock an additional $100 million a year in AIFFP’s remaining lending capacity, resulting in an additional $200 million in total annual investment compared to what could currently be expected. [53] Adaptation-specific costs tend to average around 30% of total project costs, so about $60 million of the additional grants would be for pure adaptation purposes. The rest would cover other associated infrastructure project costs beyond those for adaptation specifically. [54] With this, Australia’s current annual adaptation investment in the Pacific would rise by 75%, from about $80 million to $140 million. Combined with the AIFFP’s lending capacity, this could potentially take Australia’s total adaptation-related infrastructure investment in the Pacific to close to half a billion dollars annually (Figure 5).

The total amount of investment unlocked by this proposal will ultimately depend on the specific projects undertaken as well as the outcomes of performance-based country funding allocations given the differing capacity of countries to take on additional debt. Fully grant-financed projects will be needed in the Pacific’s smaller and more vulnerable island economies as well as for smaller-scale and community-level projects across the region and pure adaptation investments such as retrofitting assets to be more climate resilient. Where the AIFFP does lend, notably to Papua New Guinea and Fiji, this should also arguably be blended with greater grant funding to limit the reliance on loans. [55] While there is a need to avoid a false dichotomy between debt sustainability and adaptation, large uncertainties warrant extra measures to minimise the chance of inadvertently creating debt problems in the region. [56] Providing more concessional financing could lower the potential scale of additional Australian investment but would allow for erring towards safer and more impactful financing. Ultimately, the real value of the AIFFP is less as a lending facility and more as an Australian commitment to making hard investments in the Pacific where they are needed most and can have the greatest impact.

Note: All currency is quoted in Australian dollars.

The authors would like to thank Robert Jauncey, Meg Keen, Cameron Hill, Terence Wood, Alyssa Leng, Lorena Estigarribia, Alexandre Dayant, and Melanie Pill for their comments on earlier drafts as well as Clare Caldwell, Sam Roggeveen, Ian Bruce, and Hervé Lemahieu for their editorial and publishing assistance.