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

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.