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Debt-for-nature swaps: a decade of experience and new directions for the future

J.P. Resor

James P. Resor is Director, Conservation Enterprises, World Wildlife Fund-United States.

This article discusses the experience of debt-for-nature swaps, their achievements, some current limitations and how they have led to other creative conservation financing strategies such as conservation trust funds.

A view of the El Nido Marine Sanctuary, established as part of a debt-for-nature swap on Palawan Island in the Philippines

In 1984, World Wildlife Fund [now the World Wide Fund for Nature] (WWF) initiated the debt-for-nature swap as a mechanism for enhancing conservation efforts in developing countries. The idea arose from the observation that much of the world's biological diversity is harboured in the same countries that face the greatest financial strain from foreign debt burdens. Debt-for-nature swaps leverage funds for use in local conservation efforts, based on the model of debt-equity swaps - in which private sector interests buy discounted debt and exchange it for local currency investments in the indebted country. While debt-for-equity swaps did provide the initial outline for the financial mechanism, debt-for-nature swaps have a very different purpose. A debt-for-equity swap is used to generate profits for the investor. A debt-for-nature swap does not seek profit, but rather to provide additional funds for conservation activities within a country. The debt-for-nature swap differs in that there is no transfer of ownership or repatriation of capital to a foreign investor.

In 1987, the Government of Bolivia and Conservation International (CI) signed the first debt-for-nature swap agreement. Under that agreement, CI was able to acquire US$ 650000 of Bolivian external debt at a discounted price of $100000. In return, the Government of Bolivia undertook to provide the Beni Biosphere Reserve with maximum legal protection and to create three adjacent protected areas. It also agreed to provide $250000 in local currency for management activities in the Beni Reserve. However, the swap raised a lot of controversy and encountered delays before implementation owing to a combination of factors: a lack of open participation by 1 organizations in Bolivia; some misperceptions of the swap agreement, fuelled by misleading press reports; and the newness of the debt-for-nature swap concept (FAO, 1993; Conservation International, 1989). In the long teen, however, the controversy of the Bolivian swap had the beneficial- results of attracting much needed attention to conservation challenges and helping debt-for-nature swaps take root as a creative tool for financing conservation.

The debt swap mechanism came to be viewed as a clever way to multiply contributions to conservation in developing countries. Donors conservation organizations liked it, since they saw a way to increase funding for badly needed conservation efforts in these countries. Many developing country governments embraced it as a tool to help manage their foreign debt situation as well as promoting selected conservation and development programmers in their countries. And, from a publicity standpoint, the idea of swapping debt for nature sold well.

Debt-for-nature swaps in the Philippines

In 1988, WWF purchased an initial $390000 of Philippine debt at a discounted cost of $200000 (51 percent of face value). This debt was then redeemed by the Central Bank of the Philippines for the equivalent of the full face value of $390000 in Philippine pesos over a two-year period, In other words, the Central Bank no longer owed $390000 in dollars to the commercial banks, but instead it agreed to pay the peso equivalent to support designated conservation projects. This arrangement enabled the Central Bank to keep money in the country to help stimulate investment, rather than send it out as debt repayment. This reduced pressure on the Bank's scarce stock of hard currency. The advantages of the swap from a conservation perspective are also clear. Haribon Foundation, an environmental organization in the Philippines, used the funds from the debt swap for a variety of conservation actions, ranging from enhanced management support for national parks to training programmes for national conservation professionals.

Debt-for-nature swaps - how they work

A debt-for-nature swap involves purchasing foreign debt, converting that debt into local currency and using the proceeds to fund conservation activities. The key to the transaction lies in the willingness of commercial banks (or governments) to sell debt at less than the full value of the original loan. This seems counterintuitive: why would any lending institution holding a promissory note for US$ 1 million, for instance, be willing to part with it for just half that amount? The answer lies in the hard economic fact that many developing countries have not been able to repay their debts in full, and may never be able to do so. As a result, commercial banks may prefer to sell debts at a discount rather than wait for an uncertain repayment in the future.

While no two debt-for-nature swaps are the same, they usually include the following steps:

1. An indebted country establishes general guidelines for a debt-for-nature programme and invites participation from conservation organizations.

2. An international conservation organization and local private and public organizations reach agreement on a conservation programme.

3. The participating conservation organizations verify that sufficient funding will exist for the debt purchase or that debt donations or partial forgiveness may be possible.

4. The partners request government approval for the swap, usually from the central bank and the Ministry of Finance, and often from the government ministry that has jurisdiction over the relevant sector where the proceeds will be used.

5. Specific terms of the swap are negotiated, including the exchange rate from foreign currency to local currency, the redemption rate and the local investment instrument. The purchase price depends on the secondary market price of the debt, which is determined by the market's view of the credit history and repayment expectations for the particular country. The amount of conservation funds generated depends on the redemption rate, which is the percentage of the face value debt that is redeemed in local currency. The redemption rate is sometimes 100 percent of the face value debt, but it is often less depending on negotiations among the parties involved. The redemption rate must exceed the purchase price of the debt by a large enough margin to make the transaction worth while.

6. The debt is acquired and is presented to the central bank of the indebted country which cancels the debt and provides funds in local currency, either in the form of cash or bonds.

7. The conservation projects are implemented over the life of the agreed programme.

The Cuyabeno Ecological Reserve In Ecuador

Debt for development

To date, a total of approximately $180 million in foreign commercial debt has been acquired at a total cost of $47 million (i.e. 26 percent of face value), generating more than the equivalent of $ 130 million in funds for conservation. If one includes swaps in other social sectors (e.g. health, education), more than $500 million of debt-for-development swaps had been executed by 1995. In fact, between 1989 and 1995, the United Nations Children's Fund (UNICEF) alone acquired $ 189 million of debt at an average purchase price of 12 percent and generated $44 million (average redemption of 23.3 percent) of funding for child development programmes in eight countries. The acquisition cost of the debt was very low on average, since $127 million of the debt were for swaps in the Sudan and Zambia, where debt prices were very low - about 2 and 11 percent, respectively.

In addition, swaps involving commercial debt spearheaded by NGOs have led to a second generation of debt swaps where government-to-government debts have been restructured to reduce financial transfers out of developing countries and provide funding for conservation and other social sectors. For example, the Enterprise for the Americas Initiative (EAI), which involved the partial forgiveness of debts owed by Latin American governments to the United States Government, forgave 53.8 percent of the original $ 1626.3 million for seven Latin American countries during the 1991-1993 period. As a result, approximately $ 154 million in funding will be generated for conservation and child survival programmes over the next ten years.

These amounts represent only a small portion of outstanding developing country debt, which exceeds $1 trillion, but significant gains in conservation and other social programmes have resulted. Debt-for-nature swaps have also influenced the way that conservation organizations, donors and governments in developed and developing countries approach the topic of financing conservation.

While considerable attention initially focused on the unusual nature of the swap process, it is only a means rather than an end in itself. The ultimate success of debt-for-nature swaps depends on the viability of the programmes financed, and on the strength of the organizations and communities implementing the programmes and managing the swap proceeds.

A mountain gorrilla In Uganda's Bwindi Impenetrable Forest National Park

One of the most important successes of debt-for-nature swaps has been their ability to influence conservation over the long term. Swaps provide a long-term source of funding which facilitates the implementation of conservation programmes with long time horizons.

For example, two separate swaps, carried out in Ecuador by Fundación Natura (an Ecuadorian NGO), WWF and The Nature Conservancy (a United States-based environmental organization), in 1987 and 1989 funded a $10 million programme. The Central Bank of Ecuador is paying out swap proceeds to Fundación Natura over nine years with a percentage each year being placed into an endowment fund which will exist in perpetuity (Gibson and Curtis, 1990). In turn, Fundación Natura is working with the Ministry of Agriculture and Livestock (responsible for National Parks) and numerous NGOs in Ecuador to carry out a variety of conservation programmes. Thus, the $10 million debt swap programme has already generated more than $10 million in local currency for conservation in Ecuador and will continue to generate funding for years to come.

However, challenges and limitations remain: organizational capacity and strategic planning on the part of conservation organizations were initially inadequate and have proved difficult to institutionalize, despite the advantages of having long-term funding in place. These challenges are further complicated when political and economic landscapes are unsteady to the point where swaps, which have substantial transaction costs and long-term payouts, are not justified. This partially explains why many countries, despite having very highly discounted debt, have not had correspondingly robust debt swap programmes.

The case of Zambia illustrates some of these issues, but it also demonstrates how they can be satisfactorily addressed. In 1989, WWF executed a $2.2 million swap in Zambia. On the surface, this swap appeared very successful since the debt was purchased at a cost of only 20 percent. However, owing to poor planning and the rapid devaluation of the Zambian kwacha, WWF was forced to spend the local currency proceeds of the swap in less than one year. This greatly undermined the intended conservation impact of the swap.

By contrast, after lengthy negotiations, in 1993 the Government of Zambia established a debt conversion programme which permitted an orderly conversion of external debt by many NGOs. In this programme, funded by a World Bank IDA debt buyback and facilitated by the Debt-for-Development Coalition (a non-profit institution that executed debt-for-nature swaps on behalf of single NGOs), NGOs purchased Zambian debt at 11 percent and received a dollar-denominated note worth 16.5 percent.

While the multiplier was only 1.5 (16.5/11.0), the programme was well-structured to permit NGOs to finance development activities in Zambia with a high degree of certainty and reliability, which significantly improved the development impact of the swaps.

Strengthening the capacity of the local conservation organizations to plan and manage funds effectively is as essential to the success of the conservation initiative as the funds are. In the early swaps, WWF and other organizations did not include sufficient investment and technical assistance to meet these organizational challenges in the original design and budgeting of the programme.

Beyond debt-fop-nature swaps

Encouraged by the success of the 1988 debt-for-nature agreement in the Philippines and the projects financed under it, beginning in 1990 leaders of the Philippine NGO community, the Philippine Government, WWF and the United States Agency for International Development (USAID) began planning for a much larger swap to capitalize a major new institution, the Foundation for the Philippine Environment (FPE). The strategy was to capitalize FPE with an endowment fund and thus permit FPE to set its own direction and finance conservation efforts for decades to come. As a result of two large swaps - $9.8 million in 1992 and $19 million in 1993 FPE has an endowment of 640 million pesos (about US$ 26 million), making it the largest capitalized environmental NGO in the developing world. FPE has a Board of Trustees comprising representatives of Philippine development and conservation organizations, government representatives, the business community, academia and one international NGO (initially WWF and now the World Resources Institute). FPE is currently financing a wide variety of conservation and development projects throughout the Philippines.

As the experience in the Philippines suggests, debt swaps have been the starting point for the development of a number of new approaches for long-term financing of conservation and have also benefited other social sectors.

Conservation trust funds

In March 1991, WWF, the Royal Government of Bhutan and the United Nations Development Programme (UNDP) established the first hard currency trust fund for conservation. Currently, the Bhutan trust fund has a $20 million endowment with contributions from the Global Environment Facility (GEF), WWF and the Governments of the Netherlands, Norway and Switzerland. While Bhutan did not have a foreign debt problem (and thus a debt swap was not possible), the impetus for the trust fund still came from WWF's past experiences with debt swaps, since the Bhutanese were very interested in establishing long-term capacity for conservation that was not possible under conventional short-term arrangements.

The Bhutan trust fund has been the precursor for trust funds in many other countries, with varied institutional arrangements reflecting the uniqueness of each country, the sources of funding and the respective conservation objectives. For example, ECOFONDO a conservation trust fund in Colombia was largely capitalized through government-to-government debt swaps between Colombia and the United States and also swaps between Colombia and Canada. ECOFONDO has a national agenda and has formed 12 regional committees to handle the different needs and priorities throughout the country (Gibson and Schrenk, 1992; WWF, 1996)

The Mgahinga-Bwindi Impenetrable Conservation Trust in Uganda received a $4.4 million capital infusion from the GEF. Its conservation objectives are targeted specifically to village-level conservation and development activities in and around Mgahinga and Bwindi National Parks, which harbour remarkable biological diversity including a majority of the world's remaining mountain gorillas (World Bank, 1995b).

The Belize Protected Areas Conservation Trust (PACT) offers an important difference from debt swaps and trust funds preceding it in that PACT is to be funded largely by domestically generated funds rather than by external donations. PACT, established in June 1996, raises revenues on an ongoing basis from "conservation fees" and earmarked taxes collected from tourists and other natural resource "users" (Spergel, 1996). Table 2 summarizes the salient features of these three trusts in order to illustrate the range of issues that have been considered in their respective formations.

TABLE 1. Profiles of five debt-for-nature swaps



Cost (US$)

Face value of debt (US$)

Conservation funds generated (US$)

Payout in years








Fundación Natura







Fundación Natura







Haribon Foundation







Foundation for the Philippine Environment







Foundation for the Philippine Environment

1 Endowment means that debt swap proceeds are continually reinvested so that the principal is not used and only annual investment income is used for conservation projects.

Where do we go from here?

Debt-for-nature swaps have made important contributions to conservation. They have done this directly, for example in the Philippines and Ecuador where they have generated substantial funding for conservation and helped catalyse new institutions, and indirectly by providing lessons for conservation bust funds and other institutional reforms that can foster participation from diverse sets of stakeholders ranging from national monetary officials to grassroots community organizations.

However, debt swaps and conservation trusts funds have limitations, as they are largely dependent on donor grants. In the case of debt swaps, the financial multiplier enhanced donor interest in debt swaps, but several factors have eroded the potential for such multipliers and generally have decreased opportunities for debt swaps in the late 1990s and beyond. Some countries, for example the Philippines and Mexico, have undergone structural adjustment, including restructuring of their external debt, and thus the premium associated with debt conversions has decreased substantially as their own debt situation has improved. This is particularly true in the Philippines, where not only did debt prices increase (from mid-40s in 1988 to the high 60s in 1993) but the redemption price offered by the government decreased sharply from 100 percent to about 10 percent above the debt price, as determined by a competitive auction. For other countries, even when debt prices remain very low, the lack of local private conservation and development organizations will remain a limiting factor.

TABLE 2. Profiles of three conservation trust funds


Protected Areas Conservation Trust

Mgahinga-Bwindi impenetrable Forest Conservation Trust

Value of the fund

US$ 18000000

US$ 500000 per year estimated

US$ 4400000

Principal sources of funding

Debt swaps by USAID and the Canadian International Development Agency. Grants from local and international NGOs and Colombian Government for establishment

US$ 3.75 tee per foreign tourist, other 'user" fees

Fund capitalized by GEF grant. Administrative costs for first two years funded by USAID

Principal sources of technical assistance in designing the fund

Colombian Government, local NGOs, TNC, WWF

WWF. USAID, Colorado State University

World Bank/GEF, Ugandan Government, Makerere University, WWF

Representatives on the fund's board of directors

7 voting members:
- 5 from Colombian NGOs
- 2 from Colombian Government
USAID and CIDA have separate accounts over which they retain some authority

7 voting members:
- 3 from Belizean Government
- 3 from NGOs, tourism industry and village councils
- 1 at large 2 non-voting members

9 voting members:
- 2 from Ugandan Government
- 1 Ugandan conservation NGO
- 3 from local communities
- 1 research institution
- 1 from tourism industry 1 international NGO

Institutional mechanisms to increase grassroots participation in fund governance

General Assembly composed of 297 NGOs and 27 governmental organizations, meets once a year to approve the annual budget and set broad policies; there are also 12 regional councils

NGO and Village Council representation

Local Community Steering Committee and county organization screen community project proposals and make small grants

Legal structure

Private non-profit corporation established under Colombian law

Trust established by act of parliament

Private trust established under Ugandan law

Investment policy

Fund's capital is invested locally by private Colombian investment firms

Fund's capital will be invested in local currency bank deposits and any foreign currency can be invested internationally

Fund's capital is invested internationally by a United Kingdom investment firm

Principal grant beneficiaries

Environmental and development NGOs

Conservation and development organizations, local community groups

Local communities (60%) research (20%) national parks (20%)

Sources: ECOFONDO 1995 Annual Report: Spergel (1996).

While there was a surge of government-to-government debt swaps in the early 1990s often with local proceeds being at least partially managed by local NGOs - these kinds of swaps also face constraints since they ultimately rely on foreign assistance budget allocations from developed countries at a time when foreign assistance and national budgets are contracting.

Given the success of debt swaps involving commercial debt and government-to-government debt, there has been much debate over the potential of conversions involving multilateral development bank (MDB) debt. This is particularly relevant for most of the highly indebted countries for whom MDB debt stock and servicing flows represent a major portion of their foreign debt. Despite a 1995 World Bank working paper arguing that MDB debt should be restructured along the lines that commercial debt and bilateral debt have been restructured, this portion of the debt pie has remained off limits (World Bank, 1995a). However, this offers the most significant opportunity for the next generation of debt conversions.

With debt swaps, the international community has successfully modified the debt-for-nature concept from its inception in 1984 through the mid- 1990s to keep it fresh and innovative and thus an effective means for financing conservation. While debt swaps will continue to offer good opportunities on a case-by-case basis, we have reached a point of diminishing potential except perhaps until there is a major breakthrough on MDB debt. The pace and amount of debt swaps will decrease. Thus, it is necessary to look for new ways to generate more sustained funding for conservation.

The Belize PACT, which derives its funding from a $3.75 "conservation fee" paid by each of the estimated 140000 tourists visiting Belize annually, is a step in this direction. Other possibilities for generating conservation funding from natural resource "user fees" include charging fees for timber extraction and fishing as a logical extension of the Belize PACT model, although it is to be expected that industry participants may resist initially. Several organizations, including WWF, are already pursuing this avenue to generate more funding for conservation as well as encouraging more environmentally sustainable patterns of resource use altogether.

The next challenge is to mobilize long-term financing for conservation on a commercial basis, i.e. where investors can realize an economic return and still promote conservation. This could accelerate the adoption of environmentally sustainable development to replace resource liquidation practices that are common (and often preferred by financial markets) in many places. Conservationists need to engage the private sector on terms favourable for the environment - along the same lines as those followed by debt swaps over the past ten years to encourage investments that are good for conservation and the people who depend on those natural resources.

Community-based timber processing in the Kikori River Basin, Papua New Guinea

In the Kikori River Basin of Papua New Guinea, WWF is facilitating an ambitious partnership among local landowners, private investors and a timber company which specializes in environmentally certified timber. The goal is to establish an environmentally sustainable and economically viable forestry operation. It is anticipated that this joint venture, which will adhere to independent environmental certification, can demonstrate the mutual economic benefits to be derived from collaboration and simultaneously secure conservation objectives for future generations (Henry and Price, 1996).


Debt-for-nature swaps have ushered in a new way of thinking about conservation and also initiated opportunities to involve institutions not previously engaged in conservation efforts. Proponents have successfully found new opportunities and tailored the mechanism to the particular national circumstances. Now there are emerging examples of harnessing similar creativity and strategic partnerships in order to tackle the greater challenge of attracting more private investment on terms that balance economic returns with conservation objectives over the long term.


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