In search of win-win solutions to RI's woes

By Jim Plouffe

JAKARTA (JP): As economists and statesmen discuss win-win solutions to Indonesia's economic crisis, they tend to ignore an economic sector that invariably loses during times of economic slowdown: a nation's natural resources. In tough times, nature is the first to suffer as companies and governments extract more and more natural resources to earn quick cash to cover short-term obligations.

During a recent fact-finding visit to Indonesia, Marianne Guerin-McManus, the conservation finance director for Conservation International, introduced a scheme that would not only reduce Indonesia's debt burden but also greatly enhance the nation's natural resources conservation. The solution, said McManus, is a "debt-for-nature exchange" in which a portion of Indonesia's debt is swapped for a commitment to bolster conservation. It is a win-win-win solution.

"Some debt relief is going to have to come through," said McManus. "There has to be some debt forgiveness and we would like to see the opportunity for some to be delivered in rupiah to conservation."

In a debt-for-nature exchange, explained McManus, a conservation organization acquires the commercial bank debt of a developing country by either purchasing it at a substantial discount from the debt's face value or receiving it as a donation. The organization then agrees to cancel the debt in return for the borrower country's commitment to fund local conservation efforts.

In Indonesia's case, since it has not yet defaulted on its debt so there is little commercial debt on the secondary market, a bilateral or multilateral swap is most likely. McManus said the most appropriate partners would be either the United States or Japan, two huge donor countries with environmental programs in Indonesia. Whoever the partner, explained McManus, the result is still the same.

"The debt-for-nature exchange reduces the foreign debt burden, increases funds for conservation and reduces pressure on natural resources," said McManus, pointing out the true win-win-win situation.

Debt-for-nature exchanges are not a new idea. Since Conservation International brokered its first swap in Bolivia in 1987, more than US$ 1 billion in environmental funds have been generated through debt-for-nature swaps in over 17 countries (see chart). Every international conservation organization, from the Nature Conservancy to WWF, has embraced swaps as a viable way of maintaining environmental programs within developing countries. Conservation International's latest swaps involved buying $3.5 million of Mexico's debt over a period of years for $2.5 million. Conservation International then canceled the debt in exchange for the Mexican government's commitment of $3.2 million in conservation funds. The conservation funds are paid in the country's currency to local NGOs or programs working in natural resources management.

Because the conservation funds are converted into the local currency and usually dispersed through trusts over a long period of time, explained McManus, there is little chance the usually small swaps will increase inflation within a nation. According to an environmental brief by UNESCO, which also supports the scheme, the most important incentive for the debtor nation "is that in an exchange the government usually redeems its debts at less than face value. The benefit is then enhanced by the fact that the expenditure is invested within its borders, rather than abroad." The brief added that "the goodwill value of exchanges should not be underestimated."

McManus said that peoples' first reaction to the scheme is "Oh my God, its high finance!" and then switch off. She said this quickly changes as they realize that a debt-for-nature exchange is, in principle, as simple as trading in a car.

The simplicity of the swaps also means they are totally flexible. Deals can be set to the greatest benefit of all parties, especially the debtor country and its conservation programs, and can involve anything from outright money swaps to the establishment of nature reserves. In the first swap with Bolivia, McManus explained, Conservation International purchased $650,000 in debt for $100,000 and swapped it for an endowment fund of $250,000 in local currency to pay for the operating costs of a nature reserve. Subsequent swaps in the Philippines, Ecuador, Costa Rica and Madagascar have involved setting up trust funds or foundations to finance local conservation groups.

A growing trend, said McManus, is the move away from corporate debt swaps toward bilateral and multilateral exchanges. She said a multilateral or bilateral swap would be the most logical for Indonesia given the country's recent accumulation of debt burden to individual countries and institutions. A benefit of bilateral swaps is that the debtor country does not have to have had defaulted on its loans before funds become available. An exchange between countries can be a straightforward agreement to bolster environmental spending and aid programs.

The United States, explained McManus, is open to exchanges. Since 1991, the U.S. has converted $875 million in face value debt into the equivalent of $154 million in local funds to support environmental and child survival programs around the world. McManus added that Conservation International is lobbying for the "Tropical Rainforest Conservation Act" now before the American Congress. The Act would offer debt relief to tropical debtor countries in exchange for project funding for rainforest conservation.

Debt-for-nature exchanges are not without their detractors, however. Emil Salim, a former environmental minister and director of environmental NGO Kehati, said that although a good idea, he does not understand exactly what nature could be swapped for debt in Indonesia. Emil and other environmental law experts argue that because Article 33 of the Constitution states that all "land and water and natural riches contained therein shall be controlled by the state and shall be made use of for the people," the government is powerless to swap nature for debt.

Reed Merrill, the Protected Areas Management Adviser for a USAID funded natural resources management program in Indonesia, refuted this argument. He said that because the terms and conditions of a swap are negotiable, and are directed toward setting aside certain marine or terrestrial areas for conservation, a debt-for-nature exchange does not result in swapping debt for full ownership of nature. The swap can result in a management agreement where the government assigns conservation management responsibility of an area for a specific period.

"This is similar to granting a timber concession, though the management objective would change from production to conservation. In either case, Indonesia retains sovereignty over its natural resources," said Merrill. McManus added that swaps are more about program funding than debt funding. The swapped debt goes toward helping NGOs and communities conserve the environment within a country, which in turn fosters biodiversity and directly benefits a country through increased tourism and a better international image.

"Debt conversion converts an external obligation into a local, socially desirable productive investment," concluded McManus. "Simply put, it turns liabilities into assets."

The bottom line is that, with relatively little expenditure, the Indonesian government can help itself conserve its own natural resources while generating international goodwill and creditworthiness. A truly win-win solution to today's problems.