Debt-for-nature swaps
By Kathryn S. Fuller
No one wins when mounting debt in the developing world leads to environmental degradation. Debt-for-nature swaps, an innovative financial mechanism aimed at leveraging conservation dollars, may be the only international financial transaction in which there are no losers and few risks. These swaps involve the acquisition of debt by conservation organizationsat 14H
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a discount, its redemption in local currency, and its use for conservation purposes. Such swaps can increase the impact of conservation dollars dramatidy. In Ecuador’s most recent swap, for example, one dollar of acquired debt yielded over eight dollars’ worth of local currency for conservation. It is little wonder that conservationists regard this as a unique opportunity not only to protect biological diversity throughout the tropics, but to
foster sustainabledevelopment as well. The idea of using the debt-equity model to support conservation efforts in developing countries was first proposed in 1984 by Thomas E. Lovejoy, then vice-president of the World Wildlife Fund. International conservation organizations, including WWF, The Nature Conservancy, and Conservation International, as well as local conservation organizations such as Fundacih Natura and Fundaci6n Neotropica pur-
0013-936)(18910923-1450$01.5010 a 1989 American Chemical Society
sued the idea vigorously with the financial community. By the end of 1987, swaps had been carried out or were in progress in Bolivia, Costa Rica, Ecuador, and the Philippines. Bolivia’s swap, carried out in July 1987 through Conservation International, involved an agreement by the Bolivian government to set aside 3.7 million acres of tropical forest around the existing Beni Biosphere reserve as a protected area and to establish a $250,000 fund in local currency to manage the reserve. In Costa Rica, a total of $70 million-5% of the country’s external debt-has been exchanged since 1987 through donation from private groups such as WWF, Conservation International, and The Nature Conservancy, with the bulk of the funds coming from two European governments. The funds have helped expand Costa Rica’s park system, create bu&er zones around the parks, and establish a major reforestation program. In the Philippines, a $2 million debt swap funded through WWF in collaboration with the Haribon Foundation, a prominent nongovernmental organization based in Manila, has improved management of the national parks and has helped build the infrastructure of the park system. The Ecuador example highlights some of the key features of successful debt-forsonsenration swaps. The concept underlying the Ecuador program originated with R q u e Sevilla, then president of Fundacih Natura, Ecnador’s leading private conservationorganization and one of the most dynamic nongovernmental conmation organizations in Latin America. As a result of Fundacih Natura’s efforts, the Ecuadorean government agreed to exchange up to $10 million of the country’s external debt for local currency bonds to be held by Natura. The interest on the bonds-31 96 in the first year-linances a variety of conservation projects, including management of existing and new national parks, training for park personnel, and environmental education. At maturation, in nine years, the principal from the bonds wiU become an endowment for Fundacih Natura. In December 1987, WWF used approximately $355,000 to buy $1 million of Ecuador’s outstanding commercial debt. Early in 1989, WWF and The Nature Conservancy completed the $10 million program by purchasing $5.4 million and $3.6 million of debt, respectively. By issuing nine-year bonds rather than cash, Ecuador addressed one drawback to swaps: their potential inflationary effecton the debtor country’s economy. In addition, the use of bonds provides a dependablelong-term means
iservaiion rounaaric OOO members, the Wo ‘und (WWF) is the largc onservatlon group wo ldwide to prot tndangered spec I t ~ i t a t sWWF’s . top aving tropical forests erica. Asia and Africa
totaling $2.3 million was also recently completed. It is similar in structure to Madagascar’s swap. In both cases, proceeds from the swap are in cash and will be disbursed over three to four years to mitigate iationary effects. With the implementation of six private debt swaps to date, worldwide acceptance for these deals has grown and there are now even more opportunities. With the recent endorsement of debtfor-nature agreements at the Paris Emnomic Summit, governments are now exploring ways in which they can incorporate this mechanism into their foreign assistance program. The debt-fornature concept is ripe for expansion in light of the continuing debt crisis and increasing concern over the state of the global environment. The conservation community has broken new ground in the use of debtfor-nature swaps. Most crucial to their success, however, is the involvementof local nongovernment and governmental organizations from the early stages of the deal. Debt swaps have little chance of succeeding without a solid relationship between the government and the private agencies in developing countries that are responsible for implementing conservation programs over the long term. Debt-for-name swaps offer g l i mers of optimism in the struggle to strengthen local conservation programs in developing countries. The mechanism has helped focus public attention in these countries on environmental problems and has led to increased coop eration between the public and private
wctors. of support for local wnservation. The assured annual revenue from the bonds over the next nine years will allow Fundacih Natura to plan and implement long-range programs without the fear of funding shortfalls. Moreover, creating a permanent endowment from the matured bonds for Fundacih Natura provides a stable financial base for future conservation efforts. Such stability is critical in developing countries, where the growth of effective private conservation organizations is more recent than in the United States and Europe. WWF’s recent debt-for-nature swap in Madagascar is yet another success story. Last July, WWF negotiated a three-year, $3 million swap program with Central Bank officials. WWF immediately acquired $2.1 million of the eligible debt, which was converted into local currency. The proceeds will be used in part to train,equip, and support 4M)park rangers for Madagascar’s priority protected areas. A debt-for-nature swap for Zambia
Through their involvement with debt-for-nature swaps, conservationists have developed unprecedented relations with the international financial community. Perhaps other novel ways of funding needed conservation efforts will develop. In the meantime, debtfor-nature swaps represent the best way to stretch the buying power of all those involved in promoting the sustainable U s e Of M h d reSOUrCeS. Ecuador’S M o r to the United States, H.E. Mario Ribadeneira, summed it up best when he said of his nation’s first debtfor-name swap, “It is one of those rare c~ses where everybody wins.”
Kathryn S. Fuller is president of the Wrld Wikflye Fund (U.S.) and Ihe Consendon Foundation. She has a B.A. in English and Ameriazn Literature fmm Brown Universiry: a J.D. fmm the University of Texas School of Law: and has pursued graduate studies in m a r i n eeshmine, , and environmental snrdies at the University of Mary-
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