Financing Action on Adaptation in Small Island Developing States (SIDS) via Debt-for-Climate Swaps, a Global Approach

Robert WearySr. Conservation Finance & Policy AdvisorCaribbean, 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

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 6.3% 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:

– 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 SwapFace Value of Gov’t Debt: $30M Discount Value of Gov’t Debt: $20 M

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

33% discount33%

discount or “haircut”

Payable to local CTF

Potential Activities funded by a Climate Adaptation Debt Swap

1. Expand and secure marine protected areas and replenishment

no-take zones

2. Improve marine policy and regulatory protection regime

3. Coral and mangrove restoration projects

4. Provide alternative livelihoods for affected users

5. Reduce impacts from residential and tourism activity in the

marine area

6. 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