Bilateral Debt-for-Nature Swaps: The PROFONANPE Experience Peru

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1 V th World Parks Congress: Sustainable Finance Stream September 2003 Durban, South Africa Applications Session Learning from concrete successes of sustainably financing protected areas Workshop 11 Debt Relief and Conservation Finance Bilateral Debt-for-Nature Swaps: The PROFONANPE Experience Peru Alberto Paniagua V. Executive Director Peruvian Trust Fund for National Parks and Protected Areas PROFONANPE Peru This paper summarizes the experience of the Peruvian Trust Fund for National Parks and Protected Areas (PROFONANPE) in the management of financial resources originating in debt for nature swaps. 1. The bilateral debt swap mechanism Conversion of concessional and non-concessional bilateral debt first appeared in Latin America in the 1990s, mainly as a consequence of the Club of Paris decision to clear the way for bilateral debt negotiations. This institution opened a range of new options by including clauses that allowed debtor countries to reduce the whole of their eligible concessional debt (contracted before January 1, 1983) and up to 10% of their non-concessional debt. Each stage of the process defined special conditions named after the cities where they were identified, including the Terms of Venice and Toronto, the Expanded Toronto Terms and, finally in 1990, the Houston Terms. The Houston Terms which most regional countries adopted for their negotiations in the 1990s, opened access to countries with per capita incomes between US$600 and US$2400. Since 1991, various debtor countries around the region chose to adopt these options, including Argentina, Brazil, Costa Rica, V th World Parks Congress: Sustainable Finance Stream 1

2 Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Panama, Peru, the Dominican Republic, and Trinidad & Tobago 1. If we take 1996 as our base year, the face value of Latin American debt negotiated as debt swaps reached about US$7,6 billion with swaps worth US$873 million 2. The main creditor countries included in these transactions were Germany, Belgium, Canada, the U.S., Finland, France, Holland, Norway, the United Kingdom, Sweden and Switzerland. 2. Debt swaps in Peru Against the background of continuous negotiations since 1991 with the Club of Paris, Peru negotiated and consolidated the whole of its debt in July 1996 which at that time amounted to US$9 436 million of which 80% were pre-cut off debts that had been agreed to before January 1, 1983, that is the eligible category for debt conversion and swaps. As a consequence of these arrangements with the Club of Paris, to date Peru has reduced about 70% of its debt with Germany, Canada, the U.S., Finland, Holland and Switzerland. With the corresponding swaps, it has created local funds for environmental programs worth US$57 million with Profonanpe s active involvement in these transactions. Balance of Peru s swap transactions (To December 2002) Amount US$ million Percent Negotiable debt ,0 % Canceled debt 645 6,8 % Total countervalue 272 2,9 % For nature 50 0,5 % As some countries like Peru near the end of their foreign debt rescheduling processes, the chance of entering new swap options will become more restricted. Nevertheless, this stage will leave as an undeniable legacy a new breed of institutions, like Profonanpe, that building on other and new financing schemes will continue contributing to the country s sustainable development. 1 At the same time and before ( ) Bolivia, Guyana, Honduras and Nicaragua sign agreements in the frame of the Expanded Toronto Terms. 2 Cfr.: Curtis, R.: Bilateral Debt Conversion for the Environment - Peru Envolving Case Study. Montreal, V th World Parks Congress: Sustainable Finance Stream 2

3 3. PROFONANPE s experience in debt-for-nature swaps 3.1 Institutional summary Profonanpe, the Peruvian Trust Fund for National Parks and Protected Areas, is Peru s first private environmental fund and the only fund to focus on conserving biodiversity in protected areas. It has been designed so that it can capture, manage and channel local and international funds. Its main initiatives are aimed at managing and negotiating financial resources, portfolio management (principally trust funds) in local banks, and financing government and private programs and projects. The fund was born as a result of negotiations by the Government of Peru, a team of local NGOs devoted to environmental conservation and the Global Environmental Facility (GEF) of the World Bank. GEF gave Profonanpe a seed contribution of US$5,2 million to create an endowment fund, the interest from which would be used to pay the organization s basic operating expenses. Thanks to this arrangement, in eight years Profonanpe has grown its seed capital about 15 fold to create an overall fund worth US$83,8 million in Operational background of Peru s debt swaps Agreements with each individual creditor country are set forth in a Framework Agreement that lays down the will of the parties to undertake debt swap negotiations. Based on this initial arrangement a conversion program is set in motion that incorporates the debt tranches subject to review and negotiation. As a function of the conversion program agreed with each creditor, every fiscal year the Ministry of Economy and Finance includes in the national budget the resource allocation for debt conversion transactions. In coordination with government agencies from different sectors, the Ministry then provides the specific guiding priorities to prepare the projects eligible for financing. Finally, during negotiations between governments for each debt tranche the candidate project(s) are reviewed followed by a Debt Swap Protocol detailing the agreements and the conditions for the Protocol to come into force and leading to the debt tranche s formal write off. Among the main conditions are: i) the signing of a Project Implementation Agreement by MEF, the donor country and the fund manager (Profonanpe); ii) the signing of a funds Transfer Agreement between MEF and Profonanpe; and iii) a bank deposit for the negotiated countervalue funds. Thereafter, both the national government and the creditor country will oversee the proper use of the resources through the regulations and mechanisms set forth in the Implementation and Transfer Agreements. 3.3 Profonanpe transactions Since its inception, Profonanpe has negotiated several debt swap transactions with Germany, Canada, Finland and the United States. Both for the amount of resources involved (US$34,6 million) and the number of operations (eight are underway), this scheme has provided Profonanpe with the largest portion of its financial portfolio s resources (41,3%). Six of the debt swaps are sinking funds and another two are endowments. In addition, Profonanpe successfully proposed a mixed scheme for the use of countervalue monies. In this arrangement for sinking funds, the whole of the principal is disbursed during the project s execution stage to finance conservation activities while the annual accrued interest goes to a separate account that will create an endowment fund once the project comes to an end. V th World Parks Congress: Sustainable Finance Stream 3

4 Each fund constitutes in turn an investment portfolio managed by Peruvian private financial organizations. The portfolios are put together following investment guidelines set down with the donors. In individual cases, these portfolios may include several risk levels, from structures only comprising fixed income revenue instruments to others with a maximum one-fourth equity Activities funded through swaps At present debt swap arrangements allow Profonanpe to fund biodiversity conservation and sustainable development programs in 18 protected areas with about 11.8 million hectares, or approximately 72 % of the area surface under the National Protected Areas System. Programs and projects underway in these areas are carried out by government and private organizations through agreements signed with Profonanpe. A summary of each swap operation and the activities of the involved projects appear in the annex. ***** V th World Parks Congress: Sustainable Finance Stream 4

5 Annex Profonanpe s debt-for-nature swap operations Debt swap Year Cancel Countervalue Project Description debt Currency Amount Curency Amount Amount in US$ % Canada 1995 CAN CAN ,1 Canada endowment fund An endowment fund set up in 1996 to fund activities in protected areas conservation, rational use of natural resources by surrounding indigenous communities and training and education for the National Protected Areas System (Sinanpe) and local populations. Germany 1996 DMK DMK ,3 Financing of recurrent costs Finland 1996 FIM FIM ,0 Integrated management of the Machu Picchu Historical Sanctuary Since 1996 this project has provided 10-year financing for hiring over 100 professional field experts, purchasing natural resource monitoring equipment, resource research and diagnosis, preparing dissemination and training materials, and other operating expenses. Since its inception in 1997, this program has tried to conserve and protect the sanctuary s natural heritage through its 5 components: sanctuary management skill-building, funding for research on the santuary natural history, consolidation of the present Inca Trail and conditioning of alternative paths to reduce pressure on the main trail, collaboration with peasant farmers on the sanctuary to prevent negative environmental impacts, and initiatives in the nearby town of Aguas Calientes to reduce impacts from city sprawl. An additional US$100,00 has been set up as an endowment fund with interest accruing from the first account. The fund now totals US$2.4 million. Germany 1999 DMK DMK ,0 Plan of environmental action for the Alto Mayo buffer zones. The project started in 2001 to create a control and management system with participation of indigenous communities, colonists and local governments, preparing ground studies for planning in the conservation of ecosystems and natural resources, creating a forum to disseminate natural resource conservation and management strategies, identifying alternative sources of cash incomes through the rational use of resources in the protected areas, and preparing and setting in motion management plan s for the region s protected areas and indigenous communities. Germany 1999 DMK DMK ,0 Development of Sinanpe's institutional capacity in management, administration and sustainable use of biodiversity and natural ressources in protected areas. This project was inaugurated in Over its 10-year life it will aim at building Sinanpe's skills through a management system and toolkit, and providing training to an expert team. Together, they will create an appropriate foundation for further cooperation with Germany in developing Sinanpe. United States 2002 US$ US$ ,5 Tropical forest conservation agreement. Since 2002 this project facilitates conservation, protection, restoration, sustainable use and management of Peru s tropical rain forest for the benefit of mankind. Germany 2003 EUR EUR ,0 Territorial management and sustainable use of A project started in 2003 to conserve biodiversity and preserve essential natural ressources in the basins of Morona and Pastaza rivers. biological processes (biodiversity), developing and diversifying the productive base on the principle of comprehensive management, and raise well-being and build self-management skills principally among indigenous communities. Total in US$ V th World Parks Congress: Sustainable Finance Stream 5