Overview of Debt for Nature Swaps and Description of the Structure of
Debt for Nature Swaps Executed Pursuant to the US Tropical Forest
Conservation Act
Romas Garbaliauskas (Conservation International)

DAY2
Session 2

Overview of Debt for Nature Swaps and Description of the Structure of Debt for Nature Swaps
Executed Pursuant to the US Tropical Forest Conservation Act
Romas Garbaliauskas (Conservation International)
Overview
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Photo
Photo11
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10.31”
Position
Position
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8.74”,y:y:.18”.18”

Presented
Presentedby:
by:
Romas
RomasGarbaliauskas
Garbaliauskas
SeniorSeniorLegal
LegalAdvisor
AdvisorConservation
ConservationInternational
International

Photo credit: © CI/Haroldo Castro
Photo credit: © CI/Haroldo Castro

I think the one disadvantage of speaking last in the session is that I expect that I will probably get all
the hard questions, but please ask many hard questions.

I am ready.

Why am I speaking about debt for nature swaps? Debt for nature swaps are a tool to provide
financing for nature conservation including REDD+ activities.

This session will have two parts.

a general overview of debt for nature swaps just to explain what they are.

One is justMany people in the audience

probably already have a pretty good understanding but it should be helpful to generally to give a quick overview
of what they are and then to speak about debt for nature swaps done under the US Tropical Forest
Conservation Act which, I believe, has been the largest bilateral debt for nature swap program.

I will also

speak about three debts for nature swaps that have benefited Indonesia.

1. Debt for Nature Swap (DNS) Overview
Part 1- Debt for Nature Swap (DNS) Overview
DNS Definition:•A financial transaction in which debt owed by a debtor(most often a developing country government) is forgiven
by a creditor in exchange for local investments inenvironmental conservation measures being financed by
the debtor
Two types of DNS:•Commercial•BilateralPart one is just the overview of the debt for nature swap.

A debt for nature swap is a financialtransaction in which debt owed by a debtor (most often a developing country) is forgiven by a creditor.
exchange local investments in environmental conservation measures are financed by the debtor.

In

There aretwo types of debt for nature swaps. The earlier ones were commercial debt for nature swaps. Subsequently,
in the last 15 years or so there have been a lot of bilateral debt for nature swaps.

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Description of Commercial DNS• NGO purchases discounted sovereign debt
from commercial banks on the secondary
market• NGO then cancels the debt and in exchange
the debtor country invests a percentage of theface value, normally converted to local
currency, into domestic conservation programs

In a commercial debt for nature swap, an NGO purchases discounted sovereign debt fromcommercial banks on the secondary market. The NGO then cancels the debt in exchange for the debtor
country investing a percentage of the face value, normally converted to local currency into domestic
conservation programs.

Bolivia: The First-Ever Commercial DNS Swap
• Conservation International (CI) acquired Bolivian
debt with a face value of US$650,000• CI paid US$100,000 for this debt on the secondary
market• In return for CI cancelling the debt, the Governmentof Bolivia undertook to provide the Beni Biosphere
Reserve with maximum legal protection and tocreate three adjacent protected areas• The Government of Bolivia also agreed to invest
US$250,000 in local currency for management
activities in the Beni Biosphere Reserve

It is good to illustrate this by way of examples.

I have the honor of working for the organizationthat actually initiated and did the first ever commercial debt for nature swap well before I joined theorganization.

It was a very exciting moment for CI early in its history. This happened back in the 1980s.

Conservation International acquired Bolivian debt with a face value of $650,000.
American debt crisis.

This was during the Latin

A lot of the Latin American debt was being sold at discount because it was in default at

the time.
CI was able to purchase $650,000 face value debt for $100,000 because the secondary market was
only valuing that $650,000 debt as being $100,000 because of the inability to seek repayment of the face
amount.

CI then canceled the debt, and in exchange, the Government of Bolivia did two things.

It

undertook to provide the Beni Biosphere Reserve with maximum legal protection and create three adjacentprotected areas.

The Government also agreed to invest $250,000 US in local currency for management

activities.
The government basically was able to get rid of $650,000 face value debt off their books in exchange
for only a $250,000 investment, an investment, in their own conservation priorities.

CI as a conservation

Overview of Debt for Nature Swaps and Description of the Structure of
Debt for Nature Swaps Executed Pursuant to the US Tropical Forest
Conservation Act
Romas Garbaliauskas (Conservation International)

DAY2
Session 2

organization was able to leverage $100,000 to $250,000 to be used in a country where it was already very
interested in doing conservation work.

Description of Bilateral DNS• Creditor government cancels the bilateral debt
owed by debtor country• In exchange the debtor country invests all or apercentage of the face value, normallyconverted to local currency, into domestic
conservation programs• Several creditor countries have engaged inbilateral DNS, including the US through the US
Tropical Forest Conservation Act (TFCA)

Bilateral debt for nature swaps: these are country to country debt for nature swaps.

A creditor

government cancels a bilateral debt owed by a debtor country.

In exchange, a debtor country invests all or apercentage of the face value.

There could be a cancellation of $20 million,

Sometimes, it has a haircut.

but only a requirement to invest $15 million.
domestic conservation programs.

Normally, it is converted into local currency and it is invested in

Several creditor countries have engaged in bilateral debt for nature swaps,

including the US through the US Tropical Forest Conservation Act.

2. Description of the Structure of DNS Executed Pursuant to the TFCAPart 2 - Description of the Structure of DNS
Executed Pursuant to the TFCA
TFCA Overview:•Enacted in July 1998
•Offers developing countries options for United States
Government (USG) debt relief in exchange for financing of
tropical forest conservation activities•Transacted as either a “bilateral” swap or a “subsidized”
swap, which includes NGO participation•20 TFCA agreements have been signed with 14 countries todate and are projected to generate more than US$340 million

Part two of this presentation is to describe the structure of a debt for nature swap pursuant to the
US Tropical Forest Conservation Act. That is really the area that I am most familiar with.

I have worked onfour debt for nature swaps under the US Tropical Forest Conservation Act. My organization CI has been
involved in, I believe, five or six to date. I believe, as I said, that it is the largest bilateral program.
TFCA1 overview: it was enacted in 1998. It offers countries options for the US debt relief in
exchange for financing of tropical forest conservation activities.

The deals are transacted either as a bilateralswap or a subsidized swap. The difference is, in a bilateral swap, the only financial contributor to the swap is1

Tropical Forest Conservation Act: http://www.usaid.gov/biodiversity/TFCA

DAY2
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the US government.
reduction.

In a subsidized swap, NGOs also contribute some of the money towards the debt

Also, in a bilateral swap, the negotiation is purely between the two governments.

swap, the NGOs also get to participate in the negotiations of the transaction.

In a subsidized

To date, there have been 20

TFCA agreements with 14 countries, and they are projected to generate more than $340 million.
them have been subsidized debt swaps.

Most ofI believe only five or six have been truly bilateral debt swaps.

TFCA Process• Interested debtor country submits letter of interest/request to
USG• USG determines eligibility based on the debtor country having
tropical forests, having eligible debt and satisfying certain
political and economic criteria• Structure and legal agreements negotiated among parties(including with participating NGOs in a subsidized swap)• At closing, eligible country debt is cancelled and new obligations
to make payments into a conservation fund become effective• Program for use of fund amounts is implemented by an oversightcommittee consisting of representatives of USG, debtor country ,participating NGOs and other local NGOs

The TFCA process: an interested debtor country submits a letter of interest/request to the US
government.

The US government then determines eligibility based on the debtor country having tropicalforests, having eligible debt, and satisfying certain political and economic criteria.

Even if there is an interestand the country satisfies the various criteria, not every interest will be accommodated. There is only a limited
amount of money appropriated by US Congress to this program.
program.

The treasury department administers the

In certain years, they may only have a certain amount of funds available for the program and many

countries are asking for a debt swap.

The US government does have to go through a process of deciding

which interest to accommodate.
Once the US Government and the country actually agree to enter into a debt for nature swap, thenthe participants (and the participants in a subsidized debt for nature swap include NGOs) work to structure thelegal agreements.

They negotiate how the whole program will work.

is really on how the money is going to be spent.

Most of the emphasis of negotiations

There are also a lot of technical details; how the swap isgoing to be governed; how it is going to be administered. That is all very important, but really where mostnegotiations happen is which geographies will the money be invested in and for what priorities?
At closing, the eligible country debt is cancelled and new obligations to make payments into
conservation fund become effective. When the eligible country debt is canceled, the debtor government thenhas an obligation to pay an equivalent amount or a discounted amount somewhere. It does not stay with thegovernment.

It gets paid into a third party fund.

It actually goes into a non-governmental fund. Then the

program for the use of funds is implemented by an oversight committee. The agreements may actuallyspecify geography. They may specify a priority.

There will be an example in this presentation of a debt for

nature swap done a few years ago which had a REDD+ focus in Kalimantan.
process.

Nonetheless, it is a dynamic

You cannot just decide upfront exactly where every dollar will be spent.

governed and administered over time.

It still needs to be

It is a very interesting governance arrangement where you have thisOverview of Debt for Nature Swaps and Description of the Structure of
Debt for Nature Swaps Executed Pursuant to the US Tropical Forest
Conservation Act
Romas Garbaliauskas (Conservation International)

DAY2
Session 2

oversight committee which has members appointed by each of the governments.
In the Indonesian example, there is a member of the oversight committees appointed by theGovernment of Indonesia, one appointed by the government of the United States and then the othermembers are appointed by NGOs.

I think that one of the strengths that has evolved out of the US debt for

nature swap program, is these governance arrangements where there is a real collaborative effort among
different governments and NGOs which really brings together very different perspectives and very different
expertise to provide some very robust and well thought out governance for how the money is spent.

3. Overview of Indonesia TFCA DNS Transactions
Overview of Indonesia TFCA DNS Transactions• Negotiated among USG, the Government of Indonesia(“GOI”) and participating NGOs
• 3 transactions cancelling more than $56 million of GOI
debt to USG at closing• Equivalent amount (+ interest) to be paid by GOI into afund over multiple years• Fund amounts to support conservation activities in
Sumatra and Kalimantan•Kalimantan activities are focused on 3 existing REDD+
initiatives

I am going to do a quick overview of the Indonesia debt for nature swap transactions.

These

transactions, were subsidized debt for nature swap transactions, so they included the US government, theGovernment of Indonesia, and participating NGOs.
There have been three of them.

In two of them, the participating NGOs were Conservation

International and an Indonesian NGO by the name of KEHATI2.
Nature Conservancy3 and WWF.

In the other, the two NGOs were The

These three transactions in total canceled more than $56 million ofGovernment of Indonesia debt to the US at closing with an equivalent amount committed for conservation.
There was no reduction of the amount of the Government of Indonesia’s financial commitment.

The

Government of Indonesia was assessed to have sufficient foreign currency reserves, have sufficient ability to
repay the original debt and so on, so it was negotiated that there was not going to be a haircut to what wascanceled. An equivalent amount was going to be obligated by the Government of Indonesia to finance theprogram.
years.

This equivalent amount was to be paid by the Government of Indonesia into a fund over multiple

For various reasons, the fund was structured offshore.

It was set up as a trust in Singapore where thecapital of the fund is held and annually money from the fund gets transferred and disbursed into Indonesia foruse for the program.
The fund amounts are used to support conservation activities in Sumatra for two of the debt swaps
and in Kalimantan for the other.

The Kalimantan activities are focused on two existing REDD+ initiatives,

but there are three different geographies: the Barao project and the heart of Borneo.
2
3

Indonesian Biodiversity Foundation: http://www.kehati.or.id/
http://www.nature.org/

The REDD+ project isDAY2
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the one with the Nature Conservancy and WWF as the NGO participants.
not the deepest knowledge of that particular project.

I have some knowledge of it but

The ones that I was involved in are those that aresupporting Sumatra.
In a lot of the US debt for nature swap transactions, the way that the money is spent is through an
open grants program.

There are eligible geographies and priorities for the use of funds, but funds are

disbursed based on an open grants program which will involves an annual request for proposals to local NGOs.
Local NGOs submit proposals for grants in accordance with the program priorities, geographies and a strategicplan.
Just another thing to point out: the NGOs that participate in negotiating these debts for natureswaps are not eligible to actually receive funds. There is a real division between their participation and thengos receiving grants.

They participate by negotiating the deals and helping create the vision for the debt for

nature swap, but they themselves are not eligible to receive money for their own conservation activities incountry.

4. Payment Flows

Payment Flows at Closing
USG
Treasury

USAIDbilateral debt equal
to USG/NGO
contributions iscancelled at closing

GOI

Participating
NGOs

These are two schematics as to how it works.

This first schematic basically shows what happens at

closing and explains how the various payment mechanics work.
all of the participants.

Right before a deal closes, what you have are

You have the Government of Indonesia, two parts of the US government, the US

treasury and USAID, and the participating NGOs.
Before closing, all you really have is bilateral debt. Most of this debt is either old USAID4 debt or
old US Department of Agriculture debt. The Government of Indonesia owes several million dollars to
USAID. At closing, the US treasury, which has a certain amount of money sitting in its accounts from acongressional appropriation, makes a payment to USAID and so do the participating NGOs.

Normally, if theoutstanding face value of the debt (for example in the first Indonesia debt swap) was $22 million, the US
Treasury would pay 80% of that $22 million to USAID and the participating NGOs would pay 20%.
Collectively, the US Treasury and participating NGOs pay the equivalent of what is the principal
outstanding amount at the time of closing. They basically prepay the debt on behalf of the Government of

4

United States Agency for International Development: http://www.usaid.gov/

Overview of Debt for Nature Swaps and Description of the Structure of
Debt for Nature Swaps Executed Pursuant to the US Tropical Forest
Conservation Act
Romas Garbaliauskas (Conservation International)
Indonesia.

DAY2
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At that point, the bilateral debt is canceled. In exchange for that the Government of Indonesia

agrees to make the exact same amount of payments with the exact same payment dates into a fund for the
program.

Payment Flows
Post-Closing

GOI$ payments (= tocancelled debt
+interest) paid
periodically over
# of years

Conservation
funds held in
trust by HSBC,
as Trustee

Periodictransfers toadministrator,
as needed formaking grants

Local administrator

Instructs

Grant recipients(local NGOs)
implement
conservation
projects

ProvidesGrantsInstructs

Oversight
Committee(representatives ofswap parties and 3other ngos)

This is how it works after the deal is closed. The government of Indonesia now has an obligation
to make $22 million in principle payments plus interest over a number of years.
payments?

Every deal is structured differently.

held in trust in Singapore.

Where are they making theseIn this one, it was the parties agreed that the fund would be

A Singapore trustee was identified and HSBC5 acted as a trustee. Over thecourse of eight or nine years after the transaction closed, the Government of Indonesia had the obligation to
make periodic payments to the trustee, which will equal with $22 million in principal plus interest.
The money gets paid over eight or nine years.

It starts getting built up with the trustee. Then,

shortly after the transaction closes, the oversight committee and, very importantly, also a local administrator
start managing the debt swap funds.

The oversight committee is really a committee of a number ofindividuals who are appointed by the governments and the NGOs. This is like a voluntary board position.
They meet periodically every few months.
strategic focus for the program.

They make the big decisions; how to spend the money and set the

However, they are not the ones who are actually interacting with the grantees,

so they need somebody to do that from a day to day perspective.

Therefore, there is always a local

administrator that is hired. In this situation, it was the same organization, the same NGO that participated asa debt swap participant, KEHATI. KEHATI is the leading Indonesian organization when it comes toconservation finance.

They have a lot of experience in managing money for conservation.

KEHATI was

hired on a contract to basically provide administrative services for the program.
What happens is that, after closing, the oversight committee gets to work with the administrator.
They develop a strategic plan.

They develop a whole grant making procedure. They go out and they dotheir first request for grant proposals and so on. That may not happen for a year or so until they havedeveloped what they believe is a robust program.
Very often, the very first grant cycle will be a learning experience.

They will get to know who the

grantees are and there is sometimes a need for capacity building and so on.

After a year or so, they are ready5

Hongkong and Shanghai Banking Corporation: http://www.hsbc.com/

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to start distributing their first grants.

What happens is that the oversight committee makes the final decision

regarding what grants are going to be given for that year’s allocation of grants.

The oversight committee

instructs the trustee. For example, the oversight committee may have approved in that particular year $2
million worth of grants to local NGOs.

They instruct HSBC to wire $2 million to KEHATI.

KEHATI does the day to day administration.

Then

They receive that $2 million and then they grant that money tothe local NGOs pursuant to grant agreements.

5. Benefits to Participating NGOs
Benefits to Participating
NGOs• NGOs help establish conservation investment priorities• NGO monetary contribution leveraged• New financing sustains past NGO conservation
investments• Strengthens NGO relationship with local government• Strengthens local NGO partners• High communications value

Why do NGOs like Conservation International, the Nature Conservancy, KEHATI, and WWF
participate? There is a cost here.

We pay 20% of the debt forgiveness.

One is that, invariably, we always

work in the countries where we participate in these debts for nature swaps.

I believe that has always been thecase.

It would be hard to understand why an NGO would participate in a debt swap for a country where they

are not working.

We get to basically help establish conservation priorities.

amount of respect to the host countries’ conservation priorities.

Nowadays, there is an incredible

However, I think it is helpful for the NGOs

and the US government to also share their perspectives on what the priorities should be.
NGO contribution is leveraged. We only contribute 20%, so our contribution is highly leveragedby the US contributions.

The new financing sustains past NGO conservation investments.

We have a fundat Conservation International called the Critical Ecosystem Partners Fund6, which had already invested heavily
in three areas in Sumatra.

The debt swap really helped consolidate our previous investments.

Our

investments were basically in local conservation organizations to help build their capacity of conservation.
It helps further strengthen NGO relationships with local governments.
NGO partners and it is good messaging for us.
fair amount of attention.

6

http://www.cepf.net/Pages/default.aspx

It strengthens our local

It has a high communications value. These deals do attract a