| European
Tropical Forest Research Network |
This section of the newsletter is dedicated to financing initiatives at the international level. Two examples of the role played by international financial institutions are provided. Gunars Platais presents the experiences of the World Bank in promoting the payment for environmental services in Latin America, by supporting the design and implementation of related projects. Kari Keipi of the Inter-American Development Bank describes the mechanisms of debt-for-nature swaps involving international environmental NGOs and national governments, and green venture capital funds. Other examples of financing mechanisms, in which international nature conservation organisations are involved, are given in Section V (Financing biodiversity conservation). Adrian Whiteman presents the findings of an FAO project aimed at collecting and exchanging experiences from different countries of the African continent. Maharaj Muthoo proposes the set-up of a new international fund, the Global Forest Fund. Finally, Barin Ganguli advocates the approach of consortium financing as a co-operative effort of international funding institutions aimed at sustainable forest management.
By Gunars Platais
Environmental services originate in natural assets (soil, water, plants, other living organisms and the atmosphere) providing mankind with economic, financial, ecological and cultural benefits. More often than not these benefits are taken for granted. The hydrological services provided by forests, such as clean and regulated water flow, and reduced sedimentation, for example, are only noted when natural disasters, flooding, siltation of reservoirs and scarcity of water occur as a result of the removal of forest cover.
That such services should be lost despite their value is easy to understand: land users typically receive no compensation for the services their land generates for others, and consequently do not take them into account in making land-use decisions. Recognition of this problem has led to efforts to develop systems in which land users are compensated for the environmental services they generate (Pagiola, 2000). This typically would create additional income streams for land users who are often poor and would make benefits of environmental and natural resources explicit. The World Bank is assisting various countries in this endeavor. Thus far this work is mostly focused on Latin America although initiatives in other regions are currently being explored.
Costa Rica has the most advanced system of payments for environmental services. Land users who protect natural forest or reforest their land receive payments of about US$ 50 per hectare per year. These payments are financed from energy taxes, the sale of carbon offsets, and the international donations for biodiversity conservation.
In Ecuador, municipal authorities in Quito, Cuenca and Pimampiro, recognizing the environmental services provided by surrounding ecosystems are allocating part of their revenues to financing protection activities in the watersheds from which they receive drinking water (see Hofstede and Albán in this issue). The World Bank is assisting the government in the preparation of a project on payments for environmental services from private lands. The project is designed to work on different ecosystems and is expected to provide input to the further development of other such initiatives in the region.
El Salvador, which recently experienced the disastrous effects of Hurricane Mitch and several earthquakes demonstrated the importance of integrating natural resources management into the decision making process. The World Bank is assisting the country in the design of a project whose objectives are to enhance and protect the environmental services generated by El Salvador's natural ecosystems and conserve the globally significant biodiversity they contain, through the development of a system of payments for environmental services and the consolidation, expansion, and restoration of natural protected areas.
In Brazil, the Prototype Carbon Fund is supporting an innovative mechanism through which biodiversity conservation benefits are expected. The Plantar greenhouse gas emission reduction project is expected to enhance biodiversity conservation in inexpensive, quantifiable ways, providing an additional benefit to project investors. The Plantar properties that will produce charcoal for pig iron smelting with new plantations of high-productivity, clonal Eucalyptus stands, also support cerrado savannas in various stages of recovery. The global importance of cerrado ecosystems is high. Plantar's most important contribution to biodiversity conservation is its existing system of fire surveillance and control, which is allowing cerrado remnants on its properties—and perhaps on neighboring properties—to partially recover their original plant and animal composition (Nepstad 2001).
Gunars Platais
PhD
Sr. Environmental Economist
Environment Department, World Bank
1818 H Street, NW. Washington D.C. 20433 USA
Tel.: +202-473-2627, Fax: +202-522-1142
E-mail: gplatais@worldbank.org
http://worldbank.org/biodiversity
References:
Hofstede, R. & M. Albán.Drinking water companies, municipal level, Equador
2002. ETFRN News 35
Nepstad, D., 2001. Biodiversity benefits of the Plantar Fuel Substitution Project. Prototype Carbon Fund internal mission report. Washington D.C.
Pagiola, S., 2000. Environment Matters. World Bank. Washington D.C. http://www-esd.worldbank.org/envmat/
By Kari Keipi
Forestry can be a profitable business in Latin America. This is evident in the increasing flows of international investments in the forestry sector of the region. In looking at the profit issue, the question of time horizon is of utmost importance. The time frames for sustainable forest practices are often longer than for other types of investments, and affect their relative profitability compared with other land uses. Yet the returns on this type of investment accrue much more broadly than solely to the private investor's pocket book. The returns also accumulate in the form of ecological and environmental benefits to local, regional and global societies.
Many types of investment strategies involve the public sector, the international community and various public/private partnerships. This article focuses on two mechanisms: debt swaps used mostly at national level and private sector investment via venture capital funds for individual companies.
Debt related
mechanisms
In certain cases, a debt situation can be used by a nation to leverage financial
resources for conservation investments. For instance, the debt can be bought
at a discount on secondary markets by a third party (usually an environmental
NGO) and be swapped with the debtor government for conservation activities.
It is also possible for the creditor government to agree to forgive or exchange
the debt (at a discount) in return for local currency to be used in conservation.
This is known as a "debt buy back" or "debt forgiveness". Since the first debt
for nature swap in 1987, some US$1 billion has been leveraged at global level
for conservation. Bayon et al. (2000) list 26 debt swap operations with an average
face value of US$ 4.3 million in eight countries of Latin America and the Caribbean
(1987-1996). The purchasers were international nature conservation organisations
or governments such as Japan, The Netherlands, Sweden, The United States, and
Finland.
The IDB has participated in one debt-related issue, to finance the Ecological Conservation Program of Mexico City in 1992. The Government of Mexico used a US$100 million loan to extinguish an outstanding foreign debt by redeeming its long-term bonds in the secondary market. These bonds were sold at a discount, which in this case is 82.5% of face value. Hence, for the amount loaned by the Bank, the borrower could retire US$ 121 million of outstanding long-term foreign debt. All proceeds of the transaction and an additional US$100 million of local counterpart financing were used for the funding of the Mexico City Ecological Conservation Program. The key activities were investment in urban trees and park management in order to reduce the negative environmental impacts of urban sprawl and air pollution.
Green businesses
and certification
The past ten years have seen the creation of companies with missions favouring
both business and the environment. An increasing number of business leaders
now agree that the environment (and its problems) can be looked upon as one
of the most important commercial opportunities of the coming decades. In order
to support the development of green businesses, appropriate regulatory frameworks
should be in place and new financial instruments are to be developed. This will
be especially important when it relates to innovative small and medium-sized
biodiversity-based enterprises operating in developing countries, because the
collective impact of these enterprises on the economy - and on the global environment
- is expected to be huge.
In this context, certification systems such as those for timber and organic products are crucial. Certification often allows environmentally friendly products to be sold at a premium. The so-called "green trade" that certification promotes helps pay for the added cost of sustainable production methods and improves potential investor returns. Increasing demand for these products has helped establish venture capital financing for the firms involved in their production and trade.
Venture
capital funds
A way of addressing the special needs of green businesses is through equity
or quasi-equity investments via venture capital funds or sector investment funds.
Like traditional venture capital funds, these tools are designed to provide
capital in return for equity or quasi-equity positions in promising nature-based
businesses. While green venture capital funds can be high-risk/high-return operations,
they can also serve to provide much needed capital and business expertise to
small conservation based enterprises. Two recent examples of venture capital
funds promoting conservation and the sustainable use of biodiversity are the
regional Latin American Terra Capital Fund and the Central American EcoEnterprises
Fund. Both are partially financed by the Multilateral Investment Fund (MIF)
of the Inter-American Development Bank.
These funds are pioneering initiatives designed to experiment with the role that venture capital can play in supporting biodiversity conservation. Depending on their success and profitability, they may help stimulate similar undertakings in the region. The two initiatives are also mutually supporting. Whereas the EcoEnterprises Fund will focus on start-up ventures, which tend to be smaller, riskier and more difficult transactions, Terra Capital Fund will probably end up working with larger projects. This means that projects started by EcoEnterprises may eventually "graduate" into support from Terra Capital Fund.
Elements
to increase forest financing
The demand for financing largely depends on expected profitability. Consequently,
it should be clearly shown how forestry sector operations could be made profitable
and competitive with other sectors. The purpose is not to create new direct
subsidies through lower interest rates and other softer financing terms. Neither
is the goal to establish expectations of lower profitability requirements for
these investments but to direct the financing to areas with high levels of private
and socio-economic profitability. Because of the strong role of positive externalities,
which are present in many forest investments, there is a need to broaden the
view of profitability assessments beyond the traditional timber management investments.
Other key measures to induce private sector investments in forestry are related to reducing barriers to sustainable forestry due to inadequate policy frameworks. National policies and legislation need to provide an internationally competitive and conducive business environment. Secure land tenure is fundamental but tax reforms and reducing unnecessary regulations and bureaucracy are also important issues in many countries of the region. However, a conducive business environment does not mean laissez-faire. Adequate forest management standards need to be in place and enforced to ensure sustainability.
The forest sector's capability for self-financing is significant, but the potential is far from being reached due to the undervaluation of forest resources. Private sector operations can range from timber production to non-timber forest products, ecotourism, and producing various services (such as watershed protection and prevention of natural disasters). Emerging new financing instruments in support of the trade of benefits from forest environmental services have unexplored potential. The funding role of businesses in the private sector should be enhanced through innovative financing instruments, two of which have been presented in this article. New private sources and mechanisms are needed as public sector funding is falling short of the financing demands for SFM and conservation.
Bayon, R., S. Lovink & W. Veening, 2000. Financing biodiversity conservation. Sustainable Development Department, ENV-134. IDB, Washington, D.C.
A full reference
list can be obtained from the author:
Kari Keipi Ph.D.
Senior Natural Resource Specialist
Environment Division, The Inter-American Development Bank (IDB)
1300 New York Avenue, NW, Washington, DC 20577, USA
Tel.: +202-623-1939, Fax: +202-623-1786
E-mail: karik@iadb.org
By Adrian Whiteman
As part of an EC-FAO Project on sustainable forest management in Africa, FAO is working with African countries to examine the effect of fiscal policies on the implementation of sustainable forest management. Twenty-eight countries have participated in this project so far and produced reports on their forest revenue systems and government expenditure in the forestry sector. In total, these reports cover most of the African countries with significant forest resources. As part of their reports, authors were asked to examine issues such as: the effects of their forest revenue systems on sustainable forest management; the effects on forestry of fiscal policies in other sectors; and innovative sources of finance for sustainable forest management.
Current
status of innovative financing
The country reports produced for the project revealed that innovative or new
sources of finance to support investment in the forestry sector are currently
not very well developed in Africa. However, a few countries did report some
innovative mechanisms that they have been exploring. In Africa, the main sources
of finance for forestry administrations can be categorized as: charges levied
on the major forest products and services; the state budget allocation to the
forestry administration; and donor grants and loans for forestry projects. There
is no precise definition of innovative financing, but this can be broadly described
as any mechanism by which the forestry administration attracts new sources of
investment in forest management outside of these traditional channels. Three
main sources of innovative financing for forestry administrations were identified:
revenues from new types of forest products and services; charges collected from
other sectors; and new sources of public and private investment.
New types
of forest products and services
It is generally accepted that forests produce a wide range of goods and services,
but that markets do not exist for many of these outputs. Attempts have been
made in a number of countries to try to develop markets for some of these outputs,
but progress in Africa has been limited to date. This approach tends to work
best where the consumers of these products or services can be clearly identified
and an agreed value or price for the output can be established.
In terms of revenues from new types of products and services, the forestry administration in Malawi has started to rent unused forest workers houses to forest visitors. In Tanzania, forest land can be leased for a wide range of commercial activities (such as telecommunication facilities, mineral water extraction facilities, hydropower and large-scale irrigation facilities). Nearly all other African countries only collect forest revenue from traditional wood and non-wood forest products and services. The collection of charges from ecotourism activities is quite common in a number of countries (for example in Ethiopia, Burundi and Niger), but the revenue from these activities is mostly very small and it is questionable whether this can be considered as an "innovative" source of finance.
Charges
collected from other sectors
Some of the non-market outputs from forests are more general and it is not possible
to identify precisely who benefits from these outputs or to establish markets
for them. An alternative to trying to charge for these outputs individually
is to collect charges in the sector that benefits from the forestry sector and
to transfer this revenue to the forestry administration.
An example of this is provided by Burkina Faso, where there is a regulation that states that 3% of the revenue collected from taxes on tobacco, matches, petrol and oil should be put into the Forestry Equipment Fund. However, the report from Burkina Faso notes that this regulation has not been implemented. There is also a proposal in The Seychelles that tourists would have to buy a "Gold Card" for US$ 100 when they enter the country. The card would be valid for life and would allow them to enter recreation sites (including forests) for free. The revenue such generated would be used to support management activities at these sites. Other than these two examples, all of the other countries only seem to collect revenue from the forestry sector.
New public
and private sources of investment
The two examples above have described new types of revenue. Another form of
innovative financing is to encourage new types of investors into the forestry
sector. For example, partnerships can be developed between the state and the
private-sector or non-governmental organisations (NGOs) to invest in forests
for benefits other than commercial timber production (e.g. conservation, recreation
or water catchment protection). In the commercial sector, there are new types
of investors who are looking for opportunities to invest in environmentally
friendly wood production. In addition, the priorities of donors are changing
gradually over time. Funding for traditional forestry projects is declining
as donors focus their attention on broader environmental concerns and poverty
reduction. The forestry sector can contribute to these programmes, but foresters
must develop new and innovative types of projects that will attract such funds.
The country reports do not mention any mechanisms to attract new types of private investment in forestry. However, there are some examples of new types of funding partnerships in countries, such as forest parks that are managed with the support of international NGOs (e.g. Conservation International's work with local counterparts in Kakum National Park in Ghana). If broader revenue-sharing and joint forest management with local communities is considered as an innovative source of finance, several African countries have either already implemented such schemes (Niger for example) or are planning to do so (Zambia) and many of the country reports described such schemes. A few countries have obtained funding from major international environmental funds, such as the Global Environmental Facility (GEF), but most foreign assistance to the forestry sector still comes in the form of loans and grants for traditional forestry projects.
Regional
workshop in Abuja, Nigeria
In November 2001, countries discussed how they could improve the financing of
sustainable forest management at a technical workshop on fiscal policies and
the forestry sector in Abuja, Nigeria. Amongst other topics, the potential for
innovative financing mechanisms in the forestry sector in the region was examined
and countries produced some ideas about how this might be developed further.
Countries discussed the potential to develop new sources of finance, the constraints
that they might face and the sorts of technical assistance that might be helpful.
Countries suggested that the following new sources of finance might have the most potential: charges on non-wood forest products (e.g. bee-keeping, fruit, traditional products), charges on non-forest uses of forest land (livestock grazing, ecotourism and general tourism development), bioprospecting, carbon sequestration, watershed protection, and debt-for-nature swaps. Another interesting suggestion was that taxes might be levied from consumers of forest products rather than producers. Countries noted that most of the barriers to such developments were likely to be political or institutional (e.g. conflicts of interest, uncertainty over land tenure, lack of political support) rather than technical. In terms of support, countries felt that assistance to overcome some of these problems would be most useful in the form of training and local and international networking to share experiences and learn from each other. These recommendations will be followed-up by FAO in selected countries in the current year.
Further information can be found under "Planning and Statistics" at: http://www.fao.org/forestry/fo/subjects/subj-e.stm, or can be obtained from:
Adrian Whiteman
FAO, Room D423
Via Terme di Caracalla, 00100 Roma, Italy
Tel: +39-06-570-55055, Fax: +39-06-570-55137
E-mail: adrian.whiteman@fao.org
By Maharaj Muthoo
The Millennium Summit has resolved "to intensify our collective efforts for the management, conservation and sustainable development of all types of forests". Of all the forests that continue to be lost irrevocably are those in the tropics -at the rate of over ten million hectares annually, i.e. an area slightly larger than the size of Portugal.
One of the challenges facing the world community thus is to combat tropical deforestation and the concomitant loss of the earth's richest biodiversity resource, and to create mechanisms for the sustainable management and conservation of the remaining forests in the tropical countries. Most of these countries are however beleaguered by poverty, disparities and debt. For example, 27 countries that between them account for 97 percent of the remaining tropical forests owe some US$ 670,000 million. The burden of debt servicing and repayments not only pre-empts any opportunity for investment in forest conservation, but the forest is seen as a source of green gold to deal with today's pressing plight. Not only do we need a global forest funding mechanism to embody debt-for-nature swaps, but also to adopt sector-wide approaches (SWAps) for harmonisation and donor co-operation vis-ŕ-vis the priority requirements of the needy developing countries.
Needs
of forest dependent people
In forest dependent communities in the South, there are about 500 million poorest-of-the
poor with an income of less than a dollar a day. The people living in and around
the forests include nomads, tribal people, indigenous groups, small entrepreneurs,
shifting cultivators, pastoralists, and jobless and landless rural people. They
are among the most powerless and disenfranchised, and often witnessing unsustainable
logging with almost no stake in the forest sustaining their lives. They use
four fifths of wood harvested for fuelwood, without having access to other sources
of energy. Forest dependent communities are vulnerable to violence, disease,
hunger and ignorance, and comprise a large number of ecological and economic
refugees.
Sustainable
livelihoods
Resources are lacking in the tropical developing countries to promote sustainable
livelihoods for the landless and jobless millions eking out their existence
from the overexploitation of non-timber forest products, overgrazing and shifting
cultivation in forest clearings. Concerted international assistance is warranted
for the measures that they must install to aid and empower local communities
and to break the vicious circle of deforestation and destitution. This is also
needed to create conditions which motivate and compensate developing countries
for the protection of high conservation value forests, and for managing tree
cover to promote carbon sequestration and mitigate climate change.
It must be recognised that poverty eradication, good governance and sustainable forest management are mutually dependent and reinforcing. This gives clues to innovative financing mechanisms, which need not be restricted to forestry issues per se. With a holistic approach to environmental, social and economic dimensions of sustainable forest management, financing for tropical forest conservation and development should become available from the increasingly important poverty alleviation and sustainable human development programmes. In support of this, capacity should be created for those concerned with forests and forestry in order to present their proposals in a cross-sectoral context, both to international donors and to the national authorities.
Global
Forest Fund
This calls for a global vision with local action in a multidisciplinary manner,
with synergies among institutions and stakeholders concerned about the security
of the planet. A Global Forest Fund (GFF) is proposed to combat tropical deforestation
and to create an enabling environment for the conservation and management of
the remaining tropical forests by simultaneously reducing poverty and vulnerability
of the poor forest dependent communities. Resources for the project portfolio
to be financed through GFF can be drawn not only from the environment, poverty
reduction and rural development programmes of multilateral and bilateral donors
and International Financial Institutions (IFIs), but also from enlightened foundations,
NGOs and other civil society stakeholders. Collaborative partnerships and alliances
will be established with them and other players interested in the issues of
GFF or complementary with its goals and objectives. Examples are GEF, UNFF,
UNCCD, UNDP, UNEP and FAO, or Tropenbos, CIFOR, ITTO and ICRAF, or WWF, IUCN,
FOE, Greenpeace, Sierra Club, Conservation International, ODI, OXFAM, Actionaid,
or Novartis, Ford and Rockefeller Foundations, or academic institutions and
centres of excellence in pertinent subject matters, including WRI and WBCSD.
Aid and
trade benefits
With heightened awareness among consumers -which the GFF should aim to promote,
among other things- about the prevailing unethical trade in tropical forest
products, about the impact of unscrupulous logging, mining and oil exploration,
and inappropriate infrastructure projects in fragile tropical forests, GFF should
be attractive to the private sector in view of the emerging ethos of corporate
social responsibility. This may be linked to certification as a market tool
for sound forest management, importantly noting that foreign direct investment
in developing countries and emerging economies is more than ten times that of
the ODA, which has been hovering at around US$55 billion. In view of the recent
resolve of the international coalition, it is hoped nevertheless that the donor
fatigue of the nineties may soon be replaced by a reinvigorated flow of aid
and trade for benefiting the poor in order to stem disparities, to build an
overarching solidarity and to safeguard the society.
It is proposed to launch the Fund at the Johannesburg World Summit for Sustainable Development with some commitments already obtained for a revolving fund of US$ one billion.
Dr. Maharaj
Muthoo
(Former Executive Director FSC)
Via Teosebio 44, Casalpalocco, 00124 Rome, Italy
Tel.: + 39-335-634 5919
E-mail: mmuthoo@hotmail.com
By Barin
N. Ganguli
(Former Senior Forestry Specialist, Asian Development Bank,
Manila)
Relative to Overseas Development Assistance (ODA) as it is currently delivered, achievement of "new and additional financial resources" for forestry in general and sustainable forest management (SFM) in particular will have to come from the private sector. A consortium approach, involving co-operation in funding SFM among public bilateral and multilateral institutions and the private sector (profit and non-profit) is being proposed as a potential mechanism that may deserve systematic effort. This concept was discussed in the Expert Meeting on Financing SFM in Oslo in January 2001, organised by the United Nations Forum on Forestry (UNFF). The present article describes the consortium approach as a way to more effectively mobilise international funds for SFM. Some examples of successful consortium arrangements in SFM with particular reference to tropical forest and natural resources are given. Its advantages and disadvantages in comparison to single donor funding are evaluated, and some issues to enable further debate on the subject are listed.
The consortium
approach
A consortium in the context of financing SFM can be defined as a broadly inclusive
co-operative effort, among all relevant funding institutions, aimed at assisting
countries (notably developing countries and countries with economies in transition)
to achieve SFM by leveraging new, additional and stable funding to enable investment
in activities that hitherto could not be addressed by (groups of) funding bodies.
Consortium as a concept for funding investment is not new. Successful consortia have been formed by multilateral development banks, bilateral donor agencies and governments for bridging the financing gap of irrigation projects, natural resources development projects and also in feasibility studies of investment projects, in principle with a commitment to finance the ensuing investment projects. However, these consortia are normally formed ex-post after the projects have been formulated. Currently, successful consortia are being formed to combine resources of the governments, development banks, commercial banks and private investment funds to finance projects on infrastructure, energy and industries. In several countries of the world, the private sector has also formed successful consortium partnerships for financing oil and gas pipelines.
Examples
of consortium funding
Three illustrative examples of successful consortium funding of natural resources
projects in tropical countries are provided to validate the argument:
Pros and
cons
Several advantages of consortium funding can be mentioned. If well implemented,
the consortium approach could contribute both to mobilisation of new and additional
financial resources. The magnitude of the challenge to achieve SFM is overwhelming
for any one donor. Furthermore, it could raise the effectiveness of existing
mechanisms: the approach is considered a potentially superior alternative in
effectiveness to donors operating "all by themselves" in development co-operation.
Funding agencies, including the private sector tend to lean towards a limited
number of aspects of SFM, however SFM requires a range of skills and capacities
that few, if any, development agencies can singly deploy with any confidence.
Finally, donors working separately, each with different calendars and reporting
needs, procedural requirements and shifting priorities tend to create insupportable
burdens upon the beneficiaries.
The disadvantages of this approach arise when partners are individually insistent on each retaining their prevailing modus operandi. This makes it difficult to be responsive in a unified manner. Another disadvantage is that large development projects often pay inadequate attention to environmental sustainability and social aspects. This argument was used by environmental organisations in Indonesia to criticise the Integrated Pulp Mill Project. Thus, a consortium approach does not necessarily avoid or reduce negative environmental and social impacts of large projects.
Issues
for further deliberation
In order to explore the idea further, the following are considered issues for
further deliberation:
Contact details:
Barin N. Ganguli
I-1783 Chittranjan Park, New Delhi-110019, India
Tel.: +91-11-648-9775 /91-11-641-2947
E-mail: barin@mail2.bol.net.in