Debt-For-Nature: Past and Future

By Sven Mawson

Introduction:

Our forests are in danger. Actually, more precisely, our forests are being destroyed. Each year another 30 million acres of rainforest are destroyed, an astounding total. Since 1950, we have destroyed half the world's forests. We cannot allow this wanton destruction of our resources to continue, and since the early 1980's people have been looking for a solution, or at least a way to help alleviate the problem. Because of the huge debts that most of the developing countries that contain the largest rainforests have incurred, a way of cutting into that debt in exchange for protection of the rainforests was devised, know as a Debt-for-nature swap. Dr. Thomas Lovejoy originated the idea of the debt-for-nature swaps in 1984. In it's simplest form, a debt-for-nature swap is exactly what it sounds like, a swap of some of the debt that a country owes in exchange for nature, in the form of land. The details of the exchange can vary greatly, but the basic idea is the same throughout all debt-for-nature swaps. In usual circumstances, a small amount of debt, for example $800,000 worth, is exchanged for a natural area to be preserved. The organization who is doing the debt exchange will buy the debt from the country it is owed to, at much less than face value, for example $200,000 to the $800,000 that was actually owed. This debt is then traded with the debtor country in exchange for a fund to protect an area of land, such as a threatened rainforest. This fund is also worth less than the face value of the debt, for example a $400,000 fund will be created in exchange for $800,000 of debt. This may sound like a losing proposition to the country that the debt was owed to, but it in fact is even decent deal for them. Because these exchanges are usually done with poor countries, there is often a very high risk of the debt never actually being paid back; some payback is better than no payback. In addition, because the values involved are so small, they are not that significant, considering the total debt that is usually owed. The organization who does the debt exchange, usually a -non-governmental organization (NGO) dedicated to nature conservation, follows through with one of their main goals, the preservation of forests and lands. The debtor country also has a winning position; part of their debt can be paid off at much less than face value, without any penalties and even with some environmental and economic benefits. The fund that is created can be used for things other than just preservation of a park area, it can be used to develop the area in an environmentally-friendly way, and help to teach their citizens alternative methods of using the land without damaging it. For example, a reserve created in the rainforests of south America can be used to promote tourism, or used for research, or even harvested for its natural products.

Debt-for-nature swaps were initially crated in South America, to preserve some of the waning rain forests in that area, but are currently being extended to many other parts of the world. The United States Government has passed a bill to allow debt-for-nature swaps on monies owed to the US in Africa, Asia, and Southeast Asia. Debt-for-nature swaps have been extended to all parts of the globe, and have even been used domestically, in areas such as the Headwater’s forest of Northern California. These swaps have become very valuable, and while they can’t come close to saving all of the rainforests and important biological regions, they have helped to save some, and hopefully will continue to save more and more.

Past Swaps: South America

The NGO conservation International (CI) did the first debt-for-nature in Bolivia in 1987. This swap was a huge win for CI, as they purchased a face value of $650,000 in Bolivian bank debt for only $100,000. CI then traded that debt to the Bolivian government, in an agreement detailing several steps the Bolivian government should take to protect the rainforests. The government established an endowment fund to pay for the operating costs of managing the reserve that was created; this fund was equal to $250,000. They also raised the legal protection of the reserve that totaled 2.7 million acres.

Other swaps soon followed, such as the swap by the World Wildlife Fund (WWF) in Ecuador, a deal purchasing $9 million in debt for $1 million, saving around 10 million acres. There have been numerous swaps in Costa Rica and Mexico, with the total amount CI spent on swaps being on the order of $6.5 million, purchasing around $16 million in debt. This is actually a very small amount of the debts that the countries owe, while being a small but significant portion of land saved, especially as most of the early targets have had high biological worth, in terms of both research and preservation. A recent focus has been on trying to help save the Amazonian rainforest of Brazil, which is still being destroyed at an alarming rate. The swaps in South America are continuing but we are also starting to focus on other areas of the world, which can also benefit from these types of swaps.

Future Swaps: Africa, Asia, and the Indian Subcontinent

There have already been some swaps in these regions, such as the one done by CI in Madagascar, but no governmental involvement had existed, until now. In late 1998 the Untied States government approved a strongly Bi-Partisan plan to allow the Clinton Administration to enter into debt-for-nature swaps with foreign countries, in an effort to protect the rainforests of these regions. An extension of the 1989 Latin America bill, the plan, AR 2870, allowed for $325 million to be used to buy back debt from countries that currently face crushing debt burdens, some of whom have several of the most important tropical rainforests still standing. This amount pales in comparison to the $15,000 million in debt that ht countries actually face, but nonetheless it can help relieve some of their burden.

The plan allowed for these possible options for the shape of any given swap, the first two to distinguish what kinds of swaps are viable, as the poorer countries don’t have as much to offer in terms of support and funding. There is also an option for third parties to purchase the debt, allowing for NGOs such as CI and WWF to come in and help out. The first option is aimed at countries that are unlikely to ever pay their debt in full. It extends to countries beyond the Western Hemisphere a provision that was enacted during the 13ush administration, called the Enterprise for the Americas Initiative. The country would pay part of the principal of the debt back to the United States, and then use interest payments on the new debt for protecting the rainforests, instead of paying the United States. This would actually have some cost to it for the United States, because congress would have to appropriate funds equal to the subsidy cost.

The second option, for better-off countries, would allow no-cost debt buybacks. Under this option the country would purchase the debt at the full asset value of the loan, and then use an additional 40% of the loan value to create a local fund to protect tropical rainforests. While this sounds like a raw deal for the country, it ends up working out to less than other options, and is a good, easy way to buy back the debt, at very little cost. The third option is for third parties to purchase the debt at full asset value from the US, and then negotiate with the debtor country to create a larger fund for conservation and protection of the rainforests.

There are currently feasibility studies being done in Indonesia, aiming at purchasing some of the debt of the Indonesian government, known as the GOI. The GOI has also shown interest, and so the current stumbling blocks they face are the same ones that all countries face when implementing these types of plans. Their situation can be an example of what steps are necessary to create a successful debt-for-nature swap, and for helping to protect more and more of our forests. The most important aspect of these swaps is information. Everyone involved needs to be informed about how the swaps work, and what they offer, what drawbacks there are, and what problems they may face in creating them. From the debtors, donors, creditors, and conservation community, everyone needs to understand how the mechanism works, and what part they can play in it, to get a coordinated effort. In addition, the needs of the government and people need to be considered, especially the development and conservation needs of the country. Finally, specific terms and conditions for Third Party efforts need to be created, guidelines to how a third party can purchase part of the debt, and what steps need to be taken to get everything going smoothly.

Conclusion:

Debt-for-nature swaps might not be a panacea, and they can only help alleviate some of a nation's debt, and protect some of its rainforests, but they are a huge step in the right direction. One of the few problems they face is that in almost all cases a local fund is set up, in local currency, which can quickly degrade due to inflation, until the huge fund that was 4 times the size of the debt cost is suddenly worth almost nothing. Debt-for-nature swaps are catching on, though, and with strong support from all parts of the US government, they will continue to grow and protect more and more of our forests. In fact, the ideas behind these swaps have even been applied to local concerns, in the Headwaters forest of Northern California. Charles Hurwitz, the owner of Pacific Lumber, owed the US government around $750 million in claims, due to a savings and loan scandal. The headwaters forest, which Pacific Lumber was set to log, was traded in a last minute agreement for part of what he owes, and so a preserve has been created domestically, using the same principals that have been applied so successfully internationally. The principals of debt-trading lend themselves well to this type of deal, where a win-win situation can be created, and a good deal can actually make it through diplomacy. Debt-for-nature swaps are not perfect, but they are at least practical, and if nothing else they provide a small foothold into the billions of acres of rainforest that remain to be saved, or destroyed.