Financing Action on Adaptation in Small Island Developing States (SIDS) via Debt-for-Climate Swaps, a Global Approach Robert Weary Sr. Conservation Finance & Policy Advisor Caribbean, The Nature Conservancy

Alternate Title How to turn $500 million into: $250+ million in debt relief $650 million for climate adaptation work (over 20 years), and capitalize $650 million in climate adaptation endowments to continue to fund climate adaptation work into perpetuity

Presentation Overview Caribbean Challenge What is a Debt for Nature Swap? European Climate Change Fast Track Funds UNDP SIDS Debt Sustainability Report (2010) Climate Adaptation Debt for Nature Swap Model Conclusions

Caribbean Challenge Launched during the CBD COP7 in Bonn, Germany in May 2008 by gov’ts of Bahamas, DR, Jamaica, Grenada & SVG Commitment to: Protect 20% of near-shore marine area by 2020 Develop conservation finance mechanisms to support national PA systems Develop/implement ecosystem based adaptation to climate change projects Implemented as 4 GEF projects (JA, BA, DR & E. Caribbean) totaling over $50 million

What is a debt for nature swap? Emerged during Latin American debt crisis of the 1980s US cancelled $875 million of debt to 7 LA countries Two types: Commercial or Private: involving debt owed to banks Bi-lateral: involving debt owed to governments

Commercial Debt for Nature Swap Willingness of commercial banks to sell developing country debt at discount to third party Ability of third party to raise funds from donors to buy discounted debt Agreement by developing country to create new note – often payable in local currency – managed by local conservation trust fund to support local conservation efforts in return for the third party canceling original debt

Bi-lateral Debt for Nature Swap Cancellation of “sovereign” debt owed by one government to another Creditor government agrees to cancel (“forgive”) debt, in exchange for the debtor government’s agreement to spend an amount of local currency on conservation activities that is equivalent to a fraction of the face value of the debt

Advantages of Debt for Nature Swaps Donors can leverage their funds to fund more conservation activities then giving direct grant For developing countries, mechanism for them to reduce foreign currency debt and replace with local currency debt to fund worthy projects in the country

Disadvantages of Debt for Nature Swaps Complex, require technical experts from many government agencies Financial leverage achieved by donors may be eroded by currency devaluation or inflation, although this is mitigated these days by linking local currency debt payments to USD (or other external currency)

TNC’s Experience From 1988 to 1992 participated in commercial debt for nature swaps totaling $50M in face value which generated $30M in funds for conservation. Since 2001, participated in 10 of 16 TFCA deals, including Belize, Jamaica, Costa Rica, and Guatemala Invested $12.1 million to purchase $173.6 million (face value) of debt Other investors: NGOs: $6M; USG: $103.8M Resulting in approx. $225 million (P+I) in new funding for forest conservation Leverage of over 18:1 on TNC’s investment

Copenhagen Fast Start Funding European commitment €2.4 billion (US$3.4 billion) annually (2010-2012) 37% for adaptation (remaining for mitigation) 61% through bi-lateral channels (remaining through multi-laterals), w/ 63% for Africa 73% via grants, remainder through soft loans (France) Germany, UK, France approx. €400 million/yr (US$560 million/yr) each Comparisons: approx. US$2 billion/yr globally in ODA for biodiversity GEF5 replenishment of US$4.3 billion over 4 years

In 2010, 8 Caribbean SIDS w/ debt ratio in excess of 100%

SIDS avg. debt grew 9% between 2007-10

- SIDS GDP growth est. at 1. 7% for 2010, compared to 6 - SIDS GDP growth est. at 1.7% for 2010, compared to 6.3% for developing countries -SIDS will have a hard time “growing out” of debt

Large Portion of Caribbean Public Debt is Privately Held

Report Findings & Conclusions Official ODA to SIDS has declined over the last decade from 3.7% to 2.8% (as % of budget) Forcing gov’ts to borrow more to meet shortfalls In 2010, 4 SIDS restructured debt, including Antigua & Barbuda and Jamaica Report calls for: Debt conversions for climate change adaptation: such innovative financing mechanisms could support the neediest countries to generate additional resources for climate change adaptation

Debt Swap Comparisons Stakeholders: Similarities to TFCA Debt Swap: Donors (Bi, Multi-lateral, Private) National Government (Ministry of Finance especially) Debt holder (e.g. bank or other commercial entity, bi-lateral entity) Local Conservation Trust Fund (recipient of funding flows) Similarities to TFCA Debt Swap: Debt purchased at a discount Repayment could be in local currency Government agrees to redirect new loan payment to support conservation activities in country Potential subsidy from bi-lateral donor(s) to fund swap Differences from TFCA Debt Swap: No “guarantee” of repayment (by USG) – risk issue needs to be addressed Non-formal mechanism, addressed country by country and donor by donor

Sample Debt Swap Face Value of Gov’t Debt: $30M Discount Value of Gov’t Debt: $20 M 33% discount Payable to local CTF 33% discount or “haircut” Donor Input or Swap: $20M New Face Value of Gov’t Debt: $20M $1.3M/yr for Climate Adaptation Work New Note: 20 yrs @ 7% - $1.9M/yr $0.6M/yr for Climate Adaption Endowment $1.9M/yr Total Outcomes (immediate and project life): Reduces Gov’t Debt by $10M $26M over 20 yrs for Climate Adaptation Funding Capitalization of Climate Adaptation Endowment w/ approx. value of $26M by 2030 Will provide $1.3M/yr for Climate Adaptation work starting in 2031

Potential Activities funded by a Climate Adaptation Debt Swap Expand and secure marine protected areas and replenishment no-take zones Improve marine policy and regulatory protection regime Coral and mangrove restoration projects Provide alternative livelihoods for affected users Reduce impacts from residential and tourism activity in the marine area Raise awareness and disseminate information

Process Identify/speak with countries willing to participate in climate change debt for nature swap, including identification of CTF to manage proceeds of swap Identify/speak with donors w/ climate adaptation funding and/or bi-lateral debt willing to fund swap with said country Negotiate legal agreements between parties, including amount of debt purchased, debt reduction, payment currency, interest rate on new note, activities to be funded, CTF to manage funds, etc. Purchase of debt and/or cancellation of debt by third party (CTF) or bi-lateral entity Country creates new debt note payable to CTF per terms of agreement

Scaling Up the Concept Global commitment to reduce SIDS debts by $750 million to $1 billion via swaps SIDS write new notes for $500 million (33% - 50% discount) to support climate adaptation of marine ecosystems (and commit to place at least 20% of marine area under protection by 2020) Results: $250-$500 million of immediate debt relief $650 million to fund climate adaptation of marine ecosystems (over 20 years) $650 million endowments w/in local CTF capitalized to fund climate adaptation of marine ecosystems work into perpetuity

Conclusions Opportunity to merge MDG, biodiversity, and climate goals in one project – the so called “Holy Grail” Opportunity to create large, sustainable funding streams for local conservation, combined w/ real debt reduction Complex, time consuming mechanism, requiring multiple willing actors to negotiate and agree on terms