The seven steps to understanding the debt-for-nature in Galapagos.
The Galapagos Marine Reserve (RMG) has 40 nautical miles and according to Bucaram et al (2018) plays an important role in the repopulation of commercial fishing species such as tuna. However, new technologies in the fishing industry such as the use of geographic positioning systems to locate shoals could lessen its positive impact. In this context, the expansion of the marine reserve or the creation of a new larger area is debated. Part of the industrial fishing sector and several artisanal fishermen are against this expansion, presuming that fishing yields will drop. Meanwhile, the scientific community and environmental organizations, led by the actor Leonardo Dicaprio, highlight the urgency of increasing the conservation area.
Pescadores artesanales en Puerto Ayora en la temporada de langostas
Lobster season in Puerto Ayora
This dilemma between fishing more or fishing less is what is known in economics as Hardin's "tragedy of the commons"; according to this economist, human nature is relentless when it comes to using every fish nonmatter the consequences. The Nobel Prize winner Elinor Ostrom also described how the collective use of natural resources -such as the case of fishing in Galapagos- tends to overexploitation and in the long term in the destruction of the whole ecosystems without anyone else being able to enjoy these "empty-handed”. However, Ostrom also worked to show that the solution to this tragedy can be solved with clear rules and transparent trust agreements between the parties. Despite not having a compromise like Ostrom suggest, the expansion of the reserve is on the agenda of the Ministry of the Environment and Water (MAAE by its acronym in Spanish) and the Council of the Special Regime of the Galapagos (CGREG by its acronym in Spanish).
In an interview with Bitacora, Minister of Environment Marcelo Mata announced that expansion of the reserve is a fact. In the case of the CGREG, the document “Plan Galapagos 2030” indicates that the overexploitation of migratory marine species is a concern in the local planning of the islands; therefore, a project to support the expansion of the reserve with a sustainable fishing zone is part of CGREG´s strategic and political objectives. However, this document also recognizes that efforts made in favour of nature should include fishing families as part of the marine conservation ecosystem. These families need mechanisms so that their livelihoods also benefit from conservation.
In this panorama that will expand the marine conservation space in Galapagos, concerns arise about the budgetary capacities that the Galapagos National Park must have to face a larger marine protected area. Public funds on the horizon are unlikely due to the economic situation of the country and the MAAE itself suffered an unprecedented cut in personnel in September 2020. For this reason, several organizations such as the Mas Galapagos collective propose the creation of a Sustainable Fund for Galapagos (SFG), which would be nurtured by a private trust consolidated through a debt swap. The fund mechanism was proposed to President Lenin Moreno by Maximiliano Bello from Mission Blue.
Since the debt for nature proposal, various opinions for and against pass through the media, without clarity. This journal obtained a technical interview with Robert Weary, negotiator of this initiative. Weary is known in the world of green financing for having carried out 11 other similar transactions throughout twenty-one years of work. For an hour Weary unravelled the nature of the agreement and how it would work in favour of financing the management of the new reserve.
Fuente: Captura de pantalla reunión con Robert Weary vía Zoom
Source: Screenshot of the meeting with Robert Weary via Zoom
First, it is important to emphasize that debt-for-conservation swaps are not new for Ecuador. For example, in the past, the extinct NGO Fundación Natura, where the former mayor of Quito Roque Sevilla - current owner of the Hotel Finch Bay Galapagos - worked, participated in these financial models, known as the "Sevilla Initiative". The exchange that is being proposed for Galapagos consists of a financial transaction or “swap” as it is known in English for 1000 million “2030 and 2045 bonds” of sovereign debt issued by Ecuador that would be transformed into “blue bonds” through a debt restructuring.
This process is detailed in seven steps below:
Step 1: This mechanism works when there is a devaluation of the debt bonds of a country such as Ecuador. Due to this loss in value, it is likely that the holders of these bonds will want to sell them to recover at least part of their investment. Taking advantage of this drop, the exchange mechanism for Galapagos proposes that a third party - the same country cannot buy its own debt bonds - acquires 1 billion bonds for the current market value, which is around 0.6 USD for each bond.
Step 2: An intermediary entity, in this case, the Oceans Finance Company (OFC) presents investment banks with the opportunity to buy 1000 million bonds at a lower price. These bonds initially sold for one dollar, currently cost 60 cents. In global numbers instead of paying 1 billion, they would pay 600 million dollars. According to the Mas Galapagos collective, the OFC has the interest of at least three investment banks to finance the 600 million necessaries for the purchase.
Step 3: In addition, to avoid the risk that these bonds continue to lose value, OFC offers to pay political risk insurance to the US International Development Finance Corporation, a US government entity; with the objective that these 1 billion bonds are backed against any stock market crash and are attractive in the market for investment banks and, once, to potential repurchasers.
Step 4: On the other hand, the OFC proposes to restructure Ecuador's debt, if the advantages of this exchange are used for the conservation of the New Galapagos Marine Reserve. From the outset, this agreement has a discount rate of 12%, that is, 120 million dollars. Thus, we subtract 1 billion minus 120 million, which puts the debt at 880 million.
Step 5: These 880 million debts must be placed in two notes. The first is a “conservation note” for 280 million that will be settled over 20 years at an annual interest of 4%, on this note to be paid, the OFC will provide the liquidity for the creation of the trust. The second will be an “impact note” for the remaining 600 million amortizable in 11 years with an interest of 5% per year. The first 5 years will pay only interest and the following 6 years capital and interest on the remaining capital. If the restructuring is carried out, the so-called "Blue Bonds" are generated.
Step 6: With the restructured debt, the OFC will place the 280 million dollars in a trust that is expected to generate an annual return of 20.6 million (7%) that will be the money available for the conservation of the New Marine Reserve. Of these 13.2 million would be directed to pay for the conservation activities of the Galapagos National Park and projects for fishing families. The remaining 7.4 million would be used to capitalize the fund.
Source: Robert Weary
Step 7: The Sustainable Fund for Galapagos (FSG) will be constituted as a non-profit organization in the United States with local offices in Ecuador. This NGO will follow the scheme of many other environmental organizations that work in Ecuador. This fund will be governed by a Board of Directors with the presence of the Ministry of the Environment and Water, the Ministry of Defense, the Chancellery, the CGREG and from the private sector, local NGOs, representatives of the tourism sector, as well as the artisanal fishing sector. It is important to take note that one member of this board must be a representative of the OFC.
Under this seven-step scheme; by year 20, Ecuador will have amortized its initial debt of 880 million and the New Galapagos Marine Reserve would have a total fund of 316 million, which would allow maintaining the cash flow needed for its management. If the calculations are stable, the swap proposal at the end of this time will have saved Ecuador a total of 222 million, plus the conservation benefits.
All of this sounds too good to be true, but according to Weary, eleven other similar cases of debt swaps for marine conservation are ongoing in other coastal countries. Perhaps the best known is Seychelles due to the participation of Leonardo Dicaprio's foundation. This actor -who was recently in the Galapagos with President Lenin Moreno- recently retweeted one of the studies of Nature magazine that assures the urgency to protect at least 30% of the world's ocean if we want to have healthy populations for fishing.
Source: screenshot from Dicaprio's website
Several detractors of the expansion of the marine reserve, such as Mr Bruno Leone, point out that accessing this debt swap would mean losing sovereignty due to the consolidation of the fund in the United States. The minister, Marcelo Mata, described this debt swap mechanism as "an idea", although he is aware that public funds are scarce.
The creation of the New Marine Reserve should be celebrated by all stakeholders. The fact is clear: without this protected area, fishing will be "easier", but it will be less over time. However, it is important to recognize that whatever the means of financing the new reserve, the State, through the Ministry of Finance, has a task to fulfil to certify this type of exchange and the participating institutions. Just as it does with other cooperation agreements that happen in Ecuador daily. These financing mechanisms may be appropriate depending on the conditions and the negotiation that the country maintains.
Blue Booby in Isabela