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Debt-for-nature swaps: an overviewBrijesh Thapa aa Pennsylvania State University, University Park , PA, 16802, USAPublished online: 02 Jun 2009.

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Int.J Sustain. Dev. World Ecol. 5 (1 998) 249-262

Debt-for-nature swaps: . an overview

BTjesh Thapa

Pennsylvania State University, University Park, PA 16802, USA

Key words: debt and environmental crisis, debt-for-nature swaps, environmental protection

SUMMARY The debt crisis of developing countries in the early 1980s has been linked with environmental degradation. In order to combat the debt and environmental crisis, debt- for-nature swap transactions were proposed by Lovejoy in 1984. They involve a mechanism of exchange in which a certain amount of the debtor’s foreign debt is cancelled or forgiven, in return for local currency from the debtor government to be invested in a domestic environmental protection project. The swaps may involve two governments, and in most cases, are aided by an International Non-Governmental Organization (INGO), who must have a local contact with a domestic NGO. The first swap (1987), between Bolivia and Conservation International (US-INGO) involved cancellation of $650 000 Bolivian foreign debt for exchange of $100 000 worth of local currency to be used towards the Beni Biosphere Reserve. Since 1987, swaps have resulted in an excess of US$1.5 billion in transactions. Debt-for-nature swaps may not provide debt relief of significant magnitude nor solve the world’s environmental or conservation problems, they have enabled provision of additional funding to ailing environmental organizations (more than $100 million), raised a sense of awareness about environmental protection, and some environments especially in Costa Rica are benefiting from the process.

INTRODUCTION The global deterioration of the environment can be attributed at least in part to developed countries and their monetary lending agencies, that have created an invincible cyclical pattern of debt accumulation among developing countries. The developing countries are in a predicament over the environment as global inequalities and social structural arrangements have been detrimental to the culmination of environmental persecution. The basic causal factor is the ‘debt bomb’ as indicated by Falvey (1990), which is interrelated with environmental degradation, and is responsible for the sustained consumptive dependency on the environment and its natural resources. T h e perpetual progressional motion of debt accumulation has been further exacerbated by the lack of debtor

countries ability to pay their interests on the principal borrowed. The link between debt accumulation and environmental degradation should be of great concern to citizens of both developed and developing countries as the environment sustains all life existence. However, in an attempt to reduce the debt burden, developing countries are resorting to innovative approaches, such as debt swaps, to combat the mounting debt crisis.

Debt-for-Nature Swaps, a creative concept conceived by Dr Thomas E. Lovejoy in 1984 (then with the World-Wide Fund for Nature and sewing as the Vice President for Science) suggested that debtor nations who are willing to safeguard the natural resources within their boundaries, should be able to qualify for debt reductions through the

Correspondence: Brijesh Thapa, Box 10809, Calder Square, State College, PA 16805, USA. e-mail:bxtl18@psu.edu

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process of debt discounts and credits (Lovejoy, 1994). This concept remained dormant in the mid-l980s, but implementation of this seed concept gained momentum in the late 1980s. The first debt-for-nature swap was officially arranged in 1987 between Conservation International, a US based non-governmental organization and the government of Bolivia. The swap involved cancellation of a $650 000 foreign debt in exchange for $100000 worth of local currency to be used towards the Beni Biosphere Reserve within the Amazon Basin. Also, additional areas surrounding the Biosphere Reserve were to be given protected status (Conservation International, 1989). However, it should be noted that debt-for-nature swaps were derived from debt- forequity exchanges which involve trading a developing country's debt between corporations and commercial banks for local currency of the debtor country, which in turn is used as equity investments in the firms of the debtor countries (Conservation International, 1989; Wagner, 1990).

Debt-for-nature swaps have received mixed reviews, and are subsequently being implemented in various developing countries. An important component of every swap should result in a reduction of a country's debt as well as a renewed commitment to provide increased resources for conservation purposes (Conservation International, 1989; Hrynik, 1990; Page, 1990). Since their introduction, debt-for-nature swaps have resulted in transactions involving 19 debtor countries ranging from Costa Rica, the Philippines, Nigeria, and Poland (Deacon and Murphy, 1997). However, findings indicate that tropical countries that have a diverse array of endangered species are prone to enter such a process. Also, those countries with high debt burden are more likely than countries with low burden to enter the debt-for-nature swap process. Finally, debt-for-nature transactions are more likely to be a common practice in democratic institutions (Deacon and Murphy, 1997).

Debt swaps have also been associated with various fields and are better known as debt-for- health swaps, debt-forcharity swaps, debt-forchild development, debt-fordevelopment, debt-for-aid swaps, and debt-for-sustainable development swaps. However, in this paper, an overview of debt-for-nature swaps will be explored, aided by

analysis of the associated costs and benefits attached to such a process. Also, pertinent incidents (debt crisis, environmental crisis. . .) leading to such swap practices will be outlined.

THE DEBT CRISIS The 1970s were predicted to be the days of great economic growth for many developing countries, especially Latin American countries. Coincidentally, the 1970s also witnessed an era of monopolistic OPEC (Organization of Petroleum Exporting Countries) oil prices, in which prices escalated in successive progression, resulting in huge surplus revenues for OPEC nations. The surplus revenues were channelled to commercial banks of the Western world which experienced an increase in deposits between 1973 and 1979. Overridden by OPEC monies, these commercial banks sought high interest rates and diverted their attention towards developing countries to make loans. It has been noted that loans allocated to developing countries rose from US$22 billion in 1978 to US$35 billion in 1979, and further escalated to US$40 billion in 1981 (Theophile, 1994). The total accumulated debt in 1982 was US$850 billion (Vaggi ,1993). These loans were primarily used by developing countries for development purposes such as investment in new industries, upgrading old plant, improvements in the agricultural sector (production), building infrastructure, etc. However, the boom of the developing countries economies reached a bust phase in the early 1980s, as inflation rates increased in the developed countries, thus causing interest rates to skyrocket. Hence, the economies of the developed countries slumped into a recession phase which drastically reduced the demands for goods from developing countries. Consequently, oil prices also decreased, which further exacerbated the flow of revenues to western banks. Collectively, these incidents caused foreign exchange earnings to plummet, and consequently developing countries lacked the resources to pay for imports as well as inability to service their debts (Theophile, 1984; Wagner, 1990). The global recession largely contributed to the demise of economic growth, and attributed to economic stagnation or rather economic deterioration in developing countries. The

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growing pains of the recession era of the early 1980s, which contributed to the international debt dilemma came to a head when Mexico was unable to service its $80 billion foreign debt in 1982. Analysts officially labelled this stage as the ‘debt crisis’. Brazil, Argentina and others followed suit, shortly thereafter (Theophile, 1984; Vaggi, 1993). In 1983, there were 43 different debtor countries who had similar problems of servicing their debts (Moran, 1992).

According to Vaggi (1993) , the time factor was one of the most important causes for the occurrence of the crisis. He indicates that debts began to accumulate within a span of a couple of years between the late 1970s and early 1980s. Also, most of these loans were short-term loans, and commercial banks lacked the foresight of a potential economic catastrophe, as debts were accumulating rapidly. Furthermore, in order to avoid a potential economic systems’ collapse, mutual agreements between creditors and debtors were reached to convert the short-term loans to long-term commitments. Therefore, it was evident that a debt crisis was escalating for years and it became an official ‘crisis’ in August 1982. Hence, despite various measures that were adopted, it was apparent that collection of debts was not a reality (Greener, 1991; Vaggi, 1993; Wagner, 1990).

SOLUTIONS IMPLEMENTED FOR THE DEBT CRISIS Upon analysis of such a crisis, international monetary institutions, creditor banks, and various Western governments opted to cooperate with the developing countries, in order to escape a global economic financial catastrophe. The principal players, the International Monetary Fund (IMF) and the World Bank, the largest creditors, imposed fiscal austerity and export programmes in an attempt to transform the economies of the developing nations. Austerity measures included cutting government spending and imports, increasing exports, elimination of subsidies on basic necessities, foreign trade liberalization, money wage freezes, devaluation of local currency and reduction in the real value of wages. However, austerity programmes made import products more expensive due to the

devaluation of the currencies. Also, the elimination of subsidies resulted in basic goods becoming more expensive. This was the single most significant factor as the whole population was affected (George, 1992; Greener, 1991; Moran, 1992; Vaggi, 1993). For example, as a result of three devaluations in the local currency during a 13-month period in the Philippines, families had to pay almost 80% more in 1984 than in 1983 for the same basket of groceries (Moran, 1992). This factor was also held responsible for revolts in Yugoslavia, Venezuela and Algeria (Vaggi, 1993).

The 1980s also witnessed a sharp decline in imports in developing countries as numbers recorded by the World Bank indicate an average of -6.9% between 1980-1986. For example, Nigeria registered a significant decrease among developing countries, registering an average annual growth rate of imports as -14% during 1980-1987. It should also be noted that revenue transfer from debtor to creditor countries before 1982 equalled 2%, but this trend since 1983 has reversed and 3% of debtor’s GNP is transferred annually to the creditors (Vaggi, 1993). In 1988, the negative transfer of capital (from debtor to creditor) resulted in US $50 billion deficit (Dogse and von Droste, 1990). The 1990 data for developing countries external debt was US$1.5 trillion, doubling the 1980s total of US9615.7 billion. Preliminary figures for 1996 was US$2.18 trillion, a steady increase from 1995 which accounted for US$2.06 trillion (World Bank, 1997). As a result, the decline in imports in developing countries affects the economies of developed countries in various sectors, such as, trade, industry, banking and farming. In terms of the US, trading with developing countries represents one-third of total US trade. The IMF restrictions on imports has had a significant affect in the US economy as in June 1985, within a one year period, 800 000 jobs were lost due to the Latin America’s debt crisis (Moran, 1992).

Another factor was increase in exports which were achieved by monoculture of crops for world markets. Subsistence agriculture was replaced by growing non-traditional export crops, and staple foods were rare in the local market. With developing countries growing export crops, the world market was flooded with commodities such as coffee, cocoa, clothing, coconuts and copper.

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Hence, prices decreased for such commodities (Moran, 1992). Another example illustrated by Moran (1992) reflecting this issue was that production costs of sugar in the Philippines in early 1985 was 12-14 cents a pound, but the world market for sugar ranged between 5-6 cents a pound. These strategies caused living conditions to decline drastically, while simultaneously increasing the cases of malnutrition due to the lack of available stable diets (Moran, 1992; Vaggi, 1993). Moreover, these measures which were supposed to facilitate the economy of developed countries only made it worse.

On an informal approach, commercial banks, especially in the US, suspended financing to developing countries who they perceived as high risk ($850 billion accumulated debt). As a result, a dramatic reduction of credit has been in place since 1982 towards developing countries (Vaggi, 1993). According to Vaggi (1993:88), ‘developing countries have had to rely solely on official assistance, which has been barely sufficient to pay interest to private creditors’.

Because of the insurmountable debt burden of developing countries, and the remote likelihood of repayment, lending agencies sought other avenues to salvage or minimize their losses. Hence, a secondary market for such bad debt was born in 1982, in which a mechanism of trading debt at a substantial discount was at play. According to Mahony (1992:99), ‘discount was calculated by a country’s ability to repay in the future, considering aspects such as a country’s foreign exchange resources and its expected net income from foreign trade’. For example, a $20 million debt could be bought for $10 million at a discount rate of 50%. However, discount rates were up to 70- 80% of the original sum. There were over $20 billion worth of debt traded in the secondary market by 1989, and the discount rate for each country varied according to the method of discount calculation (Mahony, 1992). This was a useful tool as banks were able to recover a small sum as well as readjust or retire their debts.

Another tool used for debt reduction was debt- forequity swaps. This concept involves trading foreign debt for local currency of the debtor country, which in turn is used as equity investments in the firms of the debtor countries (Wagner, 1990). This process usually involves two steps, in which the debt is converted into local currency at

the debtor’s central bank. Then, with approval of the government of the debtor’s country, the money would be invested (buy shares) in that country’s firms. This process involves no foreign exchange; the foreign creditor has a stake in a domestic firm and, finally, the debtor nation has reduced its foreign debt into domestic debt (Genberg, 1992).

The US government has also largely played a role in methods to combat the debt crisis, especially in Latin American countries. Upon realization of the longevity of the financial crisis, the then US Treasury Secretary, James Baker, in October 1985 called for a plan (The Baker Plan) to allocate $20 billion in new loans from various banks to fifteen developing countries. The plan was an attempt to restore the lending process towards developing countries via commercial banks. However, the Baker Plan lacked success due to the negative flow of resources ($43 billion in two years) from these fifteen debtor countries to the creditors (Greener, 1991; Vaggi, 1993; Wagner, 1990).

After the Baker Plan, the Brady Plan was proposed by then US Treasury Secretary, Nicholas Brady, in 1989. The plan’s strategy was to negotiate some form of debt relief so that economic progress could be rejuvenated. However, this plan supported the Baker Plan’s initiative of encouragement of new lending practices, pending structural changes and austerity measures as outlined by the IMF and the World Bank. Also, the recipients were required to make interest payments on the principal borrowed (Greener, 1991; Vaggi, 1993; World Bank, 1997). The fundamental difference between the two plans was that the Brady Plan acknowledged that a mechanism of refinancing would not solve the issue, but some sort of debt write off was needed (Vaggi, 1993).

Another US initiative in combating the debt crisis in developing countries is the Enterprise for the American Initiative, proposed by President Bush’s administration in 1990. The strategy is to ease developing country’s (Latin American countries, in particular) debt, although certain criteria must be met in order to qualify. A fundamental criterion states that nations must not be in arrears to the creditors (major ones), and must be accommodating to foreign investors. Also, environmental policies were mandated

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within the Initiative. In fact, $1.7 billion were allocated for debt-for-nature swaps in which countries ‘need to qualify’, pending passage of various criteria (Greener, 1991; Moran, 1992).

ENVIRONMENTAL CRISIS As indicated by Theophile (1994), ‘once indebted, poor countries are then forced to exploit their natural resources to service their debt’. There is a positive correlation between the debt crisis and environmental degradation (Greener, 1991). Largely, the causal factor is due to the austerity programmes mandated by the IMF and the World Bank. The external debt of developing countries and the additional austerity programmes, which affect economic policies of developing countries largely promote the idea of increasing revenues to service the debt. In order to generate hard foreign currency, export cash crops were abundantly cultivated, promoting ecologically unstable monocrops. More importantly, tropical forests were severely affected as wood was exported to generate revenue and the lands were used to cultivate cash crops. Also, the poorest people who depended upon the forests for their livelihood were affected severely (George, 1992; Moran, 1992).

Deforestation of tropical forests is still an occurring phenomenon. Brazil has been guilty of subsidizing the expansion of forest lands for cultivation of export cash crops (Theophile, 1994), which has in turn created road projects, and with roads other effects can be expected (Greener, 1991). It has been estimated that half of the world’s rain forest has disappeared since 1950, and the other half is projected to disappear within one generation (Falvey, 1990). The potential consequences of deforestation has many irreversible effects. Some of the areas of concern are global warming, dramatic changes in local climate, rise in temperature, decrease in rainfall precipitation. Also, deforestation threatens genetic diversity, and these forests are home to 50% of all plant and animal species living on earth (Hamlin, 1989). Besides logging, mining and expanded cattle production were part of the national and international policies to generate hard currency (George, 1992). These, as we know, are major contributors of environmental degradation.

It should be noted that the debt was primarily borrowed by developing countries for development projects such as, building infrastructure, dams and roads which are accountable for major environmental destruction, as multilateral development bank projects are notoriously known for lack of environmental consciousness (Greener, 1991). This is justifiable as the World Bank, under pressure from environmental groups have recently created an Environment Division within their Organizational structure. Furthermore, most analysts believe that large sums of money was used for ‘ill-advised and unproductive development projects’ (Greener, 1991:140).

The austerity programmes created a socioeconomic impact upon the growing poor in developed nations, as monocropping decreased the availability of staple foods, and basic goods were more expensive. Also, increased population growth, inequitable land distribution, poor land use and land tenure policy, and inappropriate development policies led to the perpetuation of poverty, which increased additional pressure on natural resources (Moran, 1992). In Latin America, Wagner (1990:162) reports that ‘a substantial amount of environmental destruction is the result of measures to meet the most basic human needs for shelter, food, and a rudimentary livelihood’. Therefore, the environmental crisis, fuelled by the debt crisis, will continue in developing countries until ‘realistic resource management strategy’ with a ‘sustainable economic base’ is implemented in developing countries (Greener, 1991).

Furthermore, Greener (1991) indicates that developing countries will not be able to develop economically via sustainable economic development principles if natural resources are stripped. Also, stripping leads to depletion of the natural resource base that developing countries depend upon, thus, they will have no alternatives left and consequently, loans will be defaulted (Greener, 1991; Moran, 1992). Hence, creating another global economic crisis and perpetuating more poverty. Finally, the economic, social and aesthetic benefits of the tropical forests are too immense to waste for short-term gains, as the world benefits from the maintenance of natural areas comprising a diverse range of plants and animals (George, 1992; Greener, 1991).

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The huge debt burden which is intertwined with environmental degradation, and the lack of capital for investment in developing countries poses a major obstacle for sustainable development efforts (Dogse and von Droste, 1990). Due to the interlocking world systems (globalization in economy and environment), the environmental issues are of a global concern. However, it should be understood that elimination of the debt, and investment capital does not guarantee environmental emancipation (Dogse and von Droste, 1990; Hrynik, 1990). A concept such as debt-for-nature swap will not, and is not expected to, have any major impact on debt reduction as the debt figures are astronomical ($2 trillion, estimated), but it does meet various objectives that will be discussed. The following sections will provide an overview of the concept of debt-for-nature swaps, the working procedures, as well as insights about the advantages and disadvantages of conducting such a process.

THE DEBT-FOR-NATURE SWAPS: AN OVERVIEW Debt-for-Nature Swaps involve a mechanism of exchange in which a certain amount of the debtor’s foreign debt is cancelled or forgiven, in return for local currency from the debtor government to invest in a domestic environmental protection project. For example, projects may include conservation, natural resource management, designation and management of protected areas, increase in funds for National Parks, park personnel training, and environmental education programmes and activities. (Dogse and von Droste, 1990; Genberg, 1992; Occhiolini, 1990; Page, 1990). Usually a debt-for-nature swap mechanism is composed of two types (Environment Bulletin, 1996). They are :

Bilateral: This form involves the debtor and creditor countries, and is principally employed for official debt purposes. In such a swap, the creditor country forgives a certain amount of the foreign debt owed, while the debtor country allocates resources in local currency for an environmental protection project. Usually, the money is held by a special fund which is administered by a mutually agreed committee.

Trilateral: This form is employed for both official and private debt. The parties usually involved are the debtor and the creditor countries, and at least one additional party, which in most cases are an International Non- Governmental Organization (INGO). The INGO usually has a particular interest in environmental protection, regionally or globally.

Although the debt-forequity swap established the mechanism for debt swaps, debt-for-nature swap and debt-forequity swap are not synonymous. There are certain degrees of similarities and differences between the two concepts. The similarities indicate that no foreign exchange is involved, and the foreign debt has been exchanged for domestic debt by the debtor government. The principal difference is that when a debt-for-nature swap is conducted, the foreign counterpart receives nothing in exchange, as the resources that are involved in the exchange remain in the debtor government’s hands. However, a word from the debtor government that the environmental protection project will be undertaken and financed is assured to the creditor. Also, the fundamental goal of such a swap is not motivated by profit but more importantly, utilized to increase funds for local conservation efforts. Hence, technically speaking, a donation to the debtor nation has been made by the foreign counterpart. On the other hand, as mentioned before, debt-forequity swap involves a foreign creditor having a stake in a domestic company through the purchase of shares. However, some debtors attribute foreign imperialism to this process. Therefore, debt-for- equity swaps are more likely to be adopted by commercial bank creditors, while the debt-for- nature swaps are usually undertaken by parties who have an interest in environmental protection or a particular potential project. Also, it is these parties that usually secure the commercial debt in the secondary market, and are also responsible for the facilitation of the process (Genberg, 1992; Page, 1990; Reilly, 1990).

The functioning mechanism of debt-for-nature swaps entails a progressional stepwise process and may involve bilateral or trilateral parties. In most cases, swaps involve an international conservation organization, and these organizations have been typically based in the United States, although

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some are European. The principal players of the Big Ten environmental movement organizations in the US who are involved in debt-for-nature swap process are: 1) Conservation International; 2) The World-Wide Fund for Nature and Conservation; and 3) The Nature Conservancy (Deacon and Murphy, 1997). In a trilateral swap process where an INGO is involved, there are three principal actors, the debtor country, the central bank of the debtor country, and most importantly, the INGO who usually buys the debt in the secondary market, and consequently sponsors the swap process. However, the international INGO needs to have a local contact with a private domestic NGO in the debtor country, who is responsible for the administration, operation and smooth facilitation of the undertaken project.

There are certain procedures or steps to be followed during a debt-for-nature swap process. The initial step is for the sponsoring INGO to establish a dialogue with the debtor country, and eventually gain approval from the principal players of the debtor country (government, central bank and a domestic NGO). Once approval is met, negotiations occur and eventually mutual agreements are reached in terms of funding potential projects and the mechanism of funding. In such situations, the debtor country usually indicates what areas for swap intentions should be considered, and can also regulate the amount of the swap investments. The sponsor searches for a potential donor, which may include governments, banks, organizations, private foundations, etc. Also, International Secondary Debt Markets for second-hand debts are investigated for prices and discount levels. When a match is met, the sponsor will buy the debtor’s debt or receive a donation in exchange for investment of local currency, used towards environmental protection projects in the debtor’s country. The coordination and facilitation of the project will be undertaken by a domestic NGO and/or institutions mutually agreed by both parties (Figure 1; Dogse and von Droste, 1990; Greener, 1991; Sadler, 1990).

In the stage of the process where debt is channelled to become a domestic debt, it should be noted that the debt is either bought at a discounted rate from the secondary market, or it is received as donations from creditor banks

Do no rs: banks,

governments, organizations

Purchase of a debt at market discount by a

professional debt trader

Private bank Debt exchange investor in

secondary consultation with the debtoi

market Debt government note

Local NGOs andlor institutions in the debtor country in bank co-o perarn with 1, B”o:d @ co;;tv I the conservation indebted investor and local

banks cash

revenues

including management of national parks and biosphere reserves

Figure 1 A simplified hypothetical debt-for-nature operation. (Source: Dogse and von Droste (1990))

(Dogse and von Droste, 1990; Sadler, 1990). Creditor banks make these debts as donations as they know the debt will be impossible to collect, as a goodwill gesture; and importantly, the US tax laws (Internal Revenue Service Revenue Ruling 87-124) permits donor banks to make charitable deductions. Also, the ruling states that only donations made to registered non-profit organizations (WWF, CI, TNC, etc.) are accounted for, and direct donations to the debtor country are not classified as charitable donations. Furthermore, the ruling has a stipulation that these donated funds are specifically to be used for ‘nonprofit’ goals by the receiving non-profit

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organization (Hamlin, 1989). The debt which is bought by the sponsoring agency is transferred to the Central Bank of the debtor country which is exchanged for cash in local currency or for bonds (varying interest rates and maturity dates) issued by the debtor government (Dogse and von Droste, 1990). The interest from the bonds are used by the coordinating, respective domestic NGO or institution. The maturity of the bonds vary in years, however, the bond issuing system may pose a threat to inflation due to the increased supply of money (Wagner, 1990).

Upon receiving funding through direct cash or through interest from bonds issued by the host country, the final stage encompasses monitoring and enforcing of the objectives of the swap by the domestic NGO a n d / o r host institutions. Throughout the process, the sponsoring INGO has the highest stakes involved as it ‘not only relinquishes effective controls of the funds’, which puts them at risk, but also needs to bestow assurance to donors and respective tax officials that the funds were used appropriately in concert with the negotiated swap agreements (Sadler, 1990: 323). So, the question of monitoring and enforcement coordinated by the local NGO is critical, as a strong mutual agreement and trust should exist between the NGOs, which is key to effective and efficient functioning of the project (Greener, 1991; Sadler, 1990).

DEBT-FOR-NATURE TRANSACTIONS In figures reported as of mid-1989, a face value of US$79 million was retired, with Costa Rica being a principal player (Occhiolini, 1990). However, as of the early 199Os, 15 swap programmes were reported, in which the environmental organizations in developing countries were the recipient of more than US$lOO million in funds, including bonds (von Moltke, 1991). As of 1992 data, debt-for-nature swaps resulted in a total of US $1.46 billion in transactions among 19 debtor countries including Costa Rica, the Philippines, Nigeria, and Poland (Deacon and Murphy, 1997). Since there are a number of swaps that have originated, only pertinent details of some swaps will be explored, including the historic landmark swap in Bolivia. However, based on various reports and existing data, Table 1 has

been formulated to provide a synopsis of swaps that existed up to 1996.

The first swap was facilitated by Conservation International, a US based NGO, and the government of Bolivia. The agreement measured between the two parties included cancellation of a small portion ($650 000) of Bolivia’s foreign debt, in exchange for protected status of 3.7 million acres in three conservation areas surrounding the Beni Biosphere Reserve within the Amazon Basin. The Biosphere Reserve is a forested land-mass with grasslands, and home to 13 endangered plant and animal species, 500 species of birds, as well as the nomadic Chimane Indians. The Bolivian debt was purchased at an amazing discount of 85% for $100 000, through a grant provided by the Frank Weeden Foundation. In addition to the designation of protected areas, the Bolivian government contributed 100 000 pesos. Also, the US Agency for International Development (US AID) contributed 150 000 pesos, which collectively was equivalent to the invested $100 000, to an operating fund to manage the Biosphere Reserve and the protected areas. The fund was administered by a local environmental group, facilitated by the Ministry of Agriculture (Occhiolini, 1990; Sadler, 1990). This swap was historic as it was the only swap that mandated land to be set aside and development activities to be restricted. It was a challenge for the environmental community as the deal was stalled due to mounting patriotism advocated by a few, who thought of the swap as relinquishing sovereignty. However, the actual monetary sum was paid only after 21 months by the Bolivian government due to lack of attention, and also its scarce resources (Occhiolini, 1990; Page, 1990).

Following in Bolivia’s footsteps, Costa Rica attempted to capitalize on the new trend. Costa Rica has a deep sense of conservation, which is reflected by 12% of its total land mass designated for national parks or protected biological reserves. In order to facilitate a swap movement, the Central Bank in 1987 established a programme to convert $5.4 million at 75% of its face value, offering $4.05 million in monetary bonds in local currency, with a maturity level of 5 years and an average interest rate of 25%. The proceeds of the bonds were to be employed towards the Costa Rican Park system (Occhiolini, 1990; Page, 1990). The second wave approved by the Central Bank for

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Table 1 Development Finance (1997); World Debt Tables (1996)

Year Countv Purchaser Face value cost Funds

Debt-for-nature swap transactions (1987-1996) in US$ millions. (Source: Deacon and Murphy (1997); Global

1996 1995 1994 1994 1994 1994 1993 1993 1993 1992 1992 1992 1992 1992 1992 1992 1992 1992 1992 1991 1991 1991 1991 1991 1991 1991 1991 1991 1991 1991 1990 1990 1990 1990 1990 1990 1989 1989 1989 1989 1989 1989 1988 1988 1987 1987

Mexico Mexico Mexico Mexico Mexico Madagascar" Madagascar Philippines Mexico Ecuador Brazil Chile Bolivia' Guatemala Panama Ecuador Philippinesb Mexico Poland Ghana' Jamaica Guatemalad Mexico' Nigeria Philippines Mexicocs Costa Ricad" Madagascar" Bolivia Jamaica Madagascar Philippines Madagascar Costa Rica Dominican Rep. Poland Zambia Madagascar Ecuador CostaRica CostaRica Philippines' Costa Ricd Costa Rica Ecuador Bolivia

CI CI CI CI CI CI/WWF CI/WWF WWF CI Japan TNC EAI TNC/WWF CI'USAID TNC WWF WWF CI/USAID Paris Club DDCICI/SI TNC/USAID TNC CI NCF USAID/WWF CI Rainforest Alliance CI/UNDP EAI EAI WWF WWF CI WWF/TNC/Sweden TNC/PRCT WWF WWF WWF WWF/TNC/MBG Sweden TNC WWF Holland NPF WWF CI

0.39 0.49 0.29 0.48 0.28 2.00 5.00

19.00 0.25 n.a. 2.20

15.90 11.50 1.30

30.00 1 .oo 9.90 0.44

3000.0 1.00 0.44 0.10 0.25 0.15 n.a

0.25 0.60 0.12

38.40 271.0 0.92 0.90 5.00

10.80 0.58 0.05 2.30 2.10 9.00

24.50 5.60 0.39

33.00 5.40 1 .oo 0.65

0.19 0.25 0.25 0.40 0.24 0.05 3.20

13.00 0.28 n.a. 0.75 n.a

0.00 1.20 7.50 n.a

5.00 0.36 n.a

0.25 0.30 0.08 0.00 0.07 n.a

0.18 0.36 0.06 n.a n.a

0.45 0.44 n.a. 1.90 0.12 0.10 0.45 0.95 1.10 3.50 0.78 0.20 5.00 0.92 0.35 0.10

0.25 0.34 0.29 0.48 0.28 2.00 5.00

17.70 0.25 1 .oo 2.20 1.40 2.80 1.30

30.00 n.a

8.80 0.44 n.a

1.00 0.44 0.09 0.25 0.09 8.00 0.25 0.54 0.12 1.80 9.20 0.92 0.90 5.00 9.60 0.58 0.05 2.30 2.10 9.00

17.10 1.70 0.39 9.90 5.40 1 .oo 0.25

n.a. = Not applicable; CI = Conservation International; DDC = Debt for Development coalition; EAI = Enterprise for the American Initiative; MGB = Missouri Botanical Gardens; NPF = National Park Foundation of Costa Rica; PRCT = Conservation Trust of Puerto Rico; SI = Smithsonian Institute; TNC = The Nature Conservancy; UNDP = United Nations Development Programme; USAID = US Agency for International Aid Development; WWF = World-Wide Fund for Nature a. Debt donated by JP Morgan; b. Face Value of debt includes $200 000 debt donation by Bank of Tokyo; c. Involves buying blocked local currency funds from multinational organizations; includes Midwest universities, Consortium for International Activities, and US Committee of the International Council on Monuments and Sites; d. Purchase of Central American Bank for Economic Integration debt; e. Total amount of programme is $4 million; f. Debt donated by Bank ofAmerica; g. WWF contributed $1.5 million on top of the swap; h. Total amount of programme is $5 million; i. Total amount of agreement is $3 million; j. Includes $250 000 donated by Fleet National Bank of Rhode Island

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debt-for-nature swap purposes amounted to $5.6 million. Funding was met with the help of The Nature Conservancy who purchased the entire debt at a discount rate of 83.5% (14 cents per dollar). The total amount laid out by the Nature Conservancy was equivalent to $784 000, of which $254000 was given to TNC by Fleet National Bank of Rhode Island (earmarked for Brauho Camllo National Park), and cancelled the Costa Rican debt. Costa Rica, in return, invested $1.7 million in monetary bonds in local currency, with a maturity level of 5 years and an average interest rate of 25% (Page, 1990). Similarly, more projects materialized as donations poured in from Holland and Sweden, and in most cases, donations had funds earmarked for certain projects such as reforestation or a park project. However, within 1988-1990, with the support of donations of an amount equalled to $10 million, Costa Rica managed to retire the face value of $69 million of its foreign debt. Also, this has enabled them to raise $33 million in local currency bonds, that support parks and protected areas, reforestation projects, etc. Although, in comparison to the big picture, that amount only represents a dent of 5% in the $1.6 billion foreign debt (1990), this was still an improvement, and the positive tangibles and intangibles to the environmental protection movement were enormous (Page, 1990).

Debt-for-nature swaps usually involve public and private transactions. Private transactions are a trilateral process, in which the mechanism of funds raised and negotiated are conducted by International NGOs. On the other hand, public transactions are bilateral agreements between two governments. Of the total swaps reported at the end of 1992, 23 swaps were private, and were undertaken in 14 countries, while some were still in the progress. The estimated face value of the swaps entailed $95.1 million, bought at a discounted cost of $24.6 million, with an average face value discount of 26%. Of the $95.1 million, it was estimated that $78.7 million was allocated towards conservation trusts, in which the domestic environmentalists were responsible for the implementation of the swap agreements in their respective countries (Deacon and Murphy, 1997).

Similarly, the public sector numbers are equally impressive. Of the total 11 public swaps conducted, the face value of the retired debt amounted to

$904.5 million, generating conservation funds of $181 million. However, a historical event occurred in 1992 when the Government of Poland and the Paris Club, comprising 17 wealthy creditor nations, decided on an agreement to swap debt for environmental concessions at amounts estimated up to almost $3 billion. Since deduction from the estimated $3 billion is accounted for only in terms of environmental work accomplished, the currently available data (1992) accounts for $460 million, but that figure is expected to rise as work progresses. Anyway, this represents the single largest debt swap to have occurred in the short history of debt swaps for the environment (Deacon and Murphy, 1997; Environment Bulletin, 1996).

However, there are only certain countries that are heavily involved in such a process. Currently, Costa Rica, Ecuador, the Philippines and Madagascar are the primary actors (Deacon and Murphy, 1997). There has been more progress in such swap practices in Europe. A more recent example was found in Switzerland who will forgive SF20 million for exchange of the equivalent local currency to be spent on environmental protection and clean-up in Bulgaria. The SF20 million represents 20% of the total official Bulgarian debt to Switzerland. Hence, Bulgaria becomes the second country, after Poland, in Central and Eastern Europe to sign a debt swap agreement, committed for environmental purposes (Environment Bulletin, 1996).

ANALYSIS OF THE ARGUMENTS The potential benefits and disadvantages of debt- for-nature swaps for the principal three players, the debtor country, the creditor bank, and the conservation sponsor, is illustrated in Table 2, which was derived from Dogse and von Droste (1990). However, some of the essential arguments that have surfaced with regards to this process are discussed below in this section.

Jaeger (1990:167) notes that ‘linking debt and conservation issues could be a sensible move to overcome the stalemate of the debt crisis’. He also indicated that debt relief could help the conservation cause, and that debt-for-nature should be encompassed towards debt-for- sustainable development. He viewed this process as a beneficial tool for the conservation of natural

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Table 2 Potential benefits and disadvantages from debt-for-nature exchanges for the debtor country, the conservationinvestor and the creditor band. (Source: Dogse and von Droste (1990))

Potential benefits Potential disadvantages

Debtor counQ Debt reduction (at discount) Reactive (additional) domestic and foreign investments Improved credit worthiness Environmental benefits International goodwill Increased environmental awareness among politicians and bankers

High inflation rate Crowding out of domestic expenditure ‘Overpayment’ in redeeming the debt Public reaction against any sort of debt negotiations Public misrepresentation of sovereignty issues Locking up natural resources for conservation Small swaps may be inadequate in changing underlying causes of resource misuse

Consmation investor Reduced investment cost (discount on foreign exchange) International goodwill and publicity Inflation Strengthened links to banks and financial institutions Financial know-how

Restrictions in investment opportunities

Currency exchange risks High transaction costs (time consuming negotiations Risk that governments do not honour their commitments Small swaps may be inadequate in changing underlying causes of resource misuse

Creditor bank Clearing books of problematic (non-performing) debts Improved business relations with debtor country Goodwill (if debts are donated) Banks that can combine finance and environmental issues will be better prepared to take advantage of the expected future increase in environmental related investments

Loss on balance sheets Moral hazard (reduced debt sexvicing discipline Produce benefits to ‘free-riding’ competitors

resources as well as for the debtor countly in terms of debt reduction, and hopefully, its’ citizens, via sustainable development practices. Just like Jaeger (1990), a win-for-all scenario has been portrayed by many practitioners and researchers. However, Occhiolini (1990) raised a flag of caution, and indicated that such is not necessarily the case. Mahony (1992), a critic of the debt-for-nature swap movement, mentions that the whole movement was ‘flawed’ from the beginning, and misguided by the environmentalists. Her thesis is that the concept of reducing the debt through such swaps, and by drawing paper parks is not a solution to reducing the debt burden and to provide protection for fragile ecosystems in developing countries. She supports her arguments by noting that the parks that were created as a result of swaps are not ‘protected’, as they are ‘invaded by loggers, miners or the landless’ (p. 97). Her results emphasized that enforcement is key, and developing countries lack efficiency in daily operations. And, with added

problems such as corruption, the results are usually uncooperative chaotic si tua ti ons . Furthermore, Mahony (1992) claimed that revenue flow from North-South is nonexistent, and that money swaps are between commercial banks in developed countries, while it is the developing countries that support the environmental groups through the process of money allocation. Finally, she concluded that the Northern banks are really the main beneficiaries of this process.

Those who support debt-for-nature swaps agree with the notion that this process will not alleviate the debt burden as numbers are indicative of this, however, it is a small solution to a big problem that aims at the debt dilemma, and does offer some positive approaches towards environmental protection. Wagner (1990) points out that debt- for-nature swaps, if popularized, could possibly reduce the overall debt burden by $200 million per year, which is still a small amount when the overall debt ($2 trillion, current estimate) is

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concerned. Also, in terms of environment and conservation efforts, this amount can play a large role, as debt-for-nature swaps help to increase funds for environmental organizations. For example, WWF’s swap with Ecuador represents a dent of $1 million in the pool of $8.3 billion in Ecuador’s foreign debt, however, the swap established a fund yield that is twice the size of the current parks and reserves budget. Also, it has been learned that there is still a good potential for increased future funding (Deacon and Murphy, 1997; Patterson, 1990). Fuller (1989:1050) further indicates that in Ecuador, ‘one dollar of acquired debt yielded over eight dollars-worth of local currency for conservation’. Similarly, Costa Rica’s Minister of Natural Resources, Energy and Mines indicated that ‘debt- for-nature swaps . . . even though they affect less than 1% of the total debt. The interest alone from Costa Rican debt-for-nature swaps is several times more than the annual budget of our national park service’ (Reilly, 1990:136).

Another important issue is the sovereignty issue, which was encountered in the first swap in Bolivia, and that resulted in a 21-month delay in the implementation phase of the process. Many groups, domestic as well as international, oppose this swap issue as they feel it is morally wrong to exploit the weaknesses of the developing countries. ‘Eco-imperialism’ has been uttered by a few as they feel it is the second coming of the North raiding the South’s resources, again (Greener, 1991). Some suggest that since the debt crisis was attributed to the developed world and caused socioeconomic and environmental disruptions, developing countries should not pay up (Hamlin, 1989). However, Hamlin (1989) also suggests that the players in the debt-for-nature swap, especially the sponsors, accommodate the sovereignty concerns by permitting the debtor government to play larger roles in administrating the process mandated in the agreements. Also, the lack of enforcement of the agreements gives the debtor country the upper hand. The sovereignty issue is also addressed by Reilly (1990), who stated that ownership of land does not exchange hands, and it is up to the discretion of the debtor country whether they want to get involved in the transaction.

In spite of some criticism, Moran (1992) indicated that debt-for-nature swaps help to secure

our natural environment for the present as well as future generations, in other words provides an outlet for - sustainability! Also, promotion of sustainable use of natural resources is encouraged, which is an essential component for economic development. Wagner (1990) concurs with Moran (1992:165) and believes that debt-for-nature swaps have the ‘potential to create jobs and get economies moving, often in remote regions that are difficult to reach with more traditional investment. It can mean, in some cases, the development of sources of foreign exchange in agriculture or tourism’.

CONCLUSIONS Realistically, the debt burden will never decrease through this process, as we have seen from the numbers, in which, Costa Rica, the largest player’s minute dent (5%) to its overall foreign debt budget. It was never meant to provide debt relief of significant magnitude nor was it meant to solve the world’s environmental or conservation problems. Even though debt-for-nature swaps may not provide a major impact on the debt burden or the environment of developing countries, it has provided additional funding to ailing environmental organizations in developing countries, raised a sense of awareness about environmental protection, and some environments, like Costa Rica, are benefitting from such a process. Therefore, is success limited or subject to certain areas? Is such a simple and rudimentay concept with a complex process unattainable?

There is a general belief that there is a link between the debt crisis and environmental degradation. However, solving the debt crisis will not solve the environmental crisis, as there is no way deforestation can be totally curtailed. Development is inevitable in developing countries. As Reilly (1990:138) said, ‘debt-for- nature agreements are part of a new wave of thinking about the links between development and the environment and debt’. However, how can we interconnect the loop between development, environment and debt? Is it an oxymoron?

A positive vibe for the environmental community is that governments are getting

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involved, and have extended support for the efforts of debt-for-nature swaps. In the US, the International Development and Finance Act and Foreign Assistance Act (Fact) of 1989 to ‘actively promote, coordinate and facilitate debt-for-nature exchanges’ was passed (Falvey, 1990). The US government has used US AID as a vehicle to facilitate such processes, and estimates that almost $16 million in grants have been offered to NGOs who have coordinated 17 swaps. The result retired an external debt face value of about $100 million (Theophile, 1994). Similarly, the EAI has set aside $1.7 billion, exclusively for debt-for-nature swap ventures. The European community have also been active on this issue, which is largely reflected by the pledge of up to $3 billion for Poland’s environmental objectives. Therefore, there is a global effort, which is also supported by the diverse range of countries that have been involved in this process.

In spite of a certain degree of skepticism, debt- for-nature swaps have been able to retire a face value external debt of over $1 billion in more than 15 developing countries. This trend seems to be regaining momentum, as indicated by governmental support. However, it can be argued that this concept reached its apex in the late 1980s- early 199Os, which is evident by the number of transactions. Also, the increased frequency of such swaps during that era can be largely attributed to the attention that was given by researchers, practitioners and the INGOs. Therefore, why has such an innovative concept

lost its limelight in academic and popular media, as well as in participation? A possible explanation could be that such swaps are generally participated in by Latin American countries (71%), and the Brady Initiative has largely decreased the appeal of buying debt in the secondary markets, due to lack of deep discounts and high prices (World Bank, 1995). Therefore, why are more non-Latin American countries not solicited by INGOs? There is immense potential for swap practices, especially in Asia. Currently, only the Philippines has been a participant, and surely there are more countries, especially smaller ones with lower debt burdens, that would delve into the possibilities of debt swaps.

Debt-for-nature swaps are a potential plausible strategy for developing countries who are proactive in environmental issues, and can achieve some degree of success, like Costa Rica’s tourism earnings from National Parks and Reserves. However, each debt-for-nature swap should have agreements that are site-specific, and should offer alternatives to locals living within o r a round the vicinity, as local commitments and trust is mandatory to ensure a positive degree of success. Also, creation of local jobs should be a major component, as protected area tourism is likely to grow with the increase in debt-for-nature swaps in developing countries. Most importantly, there must be site-specific standard monitoring and enforcement programmes, as the objectives of the swaps are highly dependent on these.

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