Sustainable Financing for Environmental Projects in Africa: Some Ideas for Consideration

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(Main document is UNEP/AMCEN/11/EGM/5)

Sustainable Financing for Environmental Projects in Africa:

Some Ideas for Consideration
Alain Lambert


Prepared for the 11th regular session of the African Ministerial Conference on the Environment

Held in Brazzaville, Congo from 22 – 26 May 2006

Table of Contents
1. Introduction on the Africa conservation finance situation
2. Environmental Funds
3. Payment for Ecosystem Services
4. Debt-for-Nature Swaps
5. Carbon offset projects (CDM)

1. Introduction
In Africa, more than anywhere else on Earth, the well being of people strongly depends on natural resources.
It is therefore essential that natural resources are much better protected and managed. Unfortunately, this is not the case these days and a new approach to nature conservation and the sustainable use of natural resource shall therefore be sought. The traditional “project approach” does not work anymore.
The major reasons for the failure of the old way to do things are threefold:
1) They are based on projects and when the project ends, very often the programme or the activities die with it;

2) They are too dependent on “donor” funding and when the “donor” is not interested anymore, the programme ends, and

3) Environment and development continue to be seen as two different issues.
The situation is worsened by the extremely centralised and bureaucratic way in which bilateral and multilateral development funds are functioning. It can take up to five years of expensive and intensive paperwork to have an EU project or a GEF project approved!
New, locally driven and financed ways of doing things are needed. This paper will review 4 of the most promising conservation finance mechanisms that could be useful to Africa. Some already exist in the region, some not. Of course, all of them shall be adapted to local realities. A very promising South-South cooperation could be established with Latin America (who pioneered most of these mechanisms) as well as Asia.
UNEP has developed a large portfolio of about 20 conservation finance projects all over the world and is actively promoting this South-South collaboration. For example, members of the Latin American Network of Environmental Funds (UNEP/GEF) project will soon be visiting and supporting their colleagues of the Serengeti Trust Fund Project under negotiation (UNEP/GEF).
UNEP/GEF is also promoting exchanges of experiences between colleagues from Uganda, Kenya, Thailand and the Philippines to look at how to best promote biodiversity conservation with social Equity through pro-poor Conservation Financing (another UNEP/GEF project with CARE)
WWF Colleagues from the Danube Delta Payment for Ecosystem Services (UNEP/GEF) project will support their Massai colleagues from the Amboseli forthcoming (UNEP/GEF) payment for ecosystem services project.

2. Environmental Funds

Environmental Funds (EF)1 are not new and the idea dates back to the early 1990s.

It is therefore important to draw lessons from it. Their importance and number have been on the increase ever since but there is still some reluctance on the part of bilateral donor agencies to support the capitalisation of EFs. Today, there are about forty six operating Funds, mostly in Latin America. There are fewer EFs in Africa, Asia and the Commonwealth of Independent States, but their numbers in these regions are also increasing. Globally, about 56 new Funds are either being created or under negotiation.

Since their inception, EFs have attracted considerable expectations and interest from environmentalists. They are seen and often used as much more than mere financial mechanisms. On the financial side, they are promoted as long-term sources of finance for conservation and sustainable development tools. One of the main arguments used is that they are very good instruments to finance protected areas’ recurrent costs. In other words, costs like permanent monitoring, park guards, infrastructure maintenance and any other regular cost that can be planned well ahead could be financed through EFs. At the same time, they are often used to strengthen environmental organisations and promote a participatory approach to environmental management (see below Fund structures). Another argument put forward is that they are a perfect tool to balance the often very limited “financial absorption capacity” in many developing countries.

The GEF is supporting environmental funds for Protected Area systems. Discussions are underway to have the GEF accepting to support Environmental Funds (EFs) outside Protected Areas, in production landscape, for example in connection with payment for ecosystem services projects.
Of course, the counter-argument is that huge amounts of money only render small amounts of cash. Some critics also add to this that EFs require strong institutional capacities and bear a high administrative cost. As we will see below, these arguments are not entirely true and solutions can be found. The fact that the existing global financial mechanisms are administratively cheaper remains to be proved. On the other side, one could bear with a higher administrative cost if it leads to a much more efficient implementation of multilateral environment agreements. Furthermore, capacity building in conservation finance or financial management of conservation assets is an important and often undervalued part of the art of environmental management.
Funds for EFs come from various sources but the most important ones are the Global Environment Facility (GEF), bilateral donor organisations through debt counterpart funds, and development cooperation funds. One also predicts a potential increase in funds from the UNFCCC and its Kyoto Protocol signed in December 1997. The Protocol calls for further exploration of financial mechanisms, including carbon sequestration fees and the Clean Development Mechanism (CDM). This mechanism is still somewhat controversial and particular attention should be paid to make sure the mechanism does not become a loophole for rich carbon emitters through which developed countries could obtain “carbon credits” for their activities in developing countries.
Once they are operational, many Funds manage to raise additional funds from various sources or gain additional capital from good portfolio management. Environmental Funds should not rely solely on Official Development Assistance funding but also, and maybe increasingly, on local funding sources like environmental fees, royalties, and fines, and on any other so-called Market Based Instruments (MBI).

For example, a newly created Fund in Ecuador, with the support of The Nature Conservancy, will be capitalised by fees charged for the use of water in the city of Quito. The Fund, in turn, will provide money needed to protect the forests in the city’s watershed.

What are Trust Funds?

There is no rigid definition for Trust Funds. Their structure, scope of activities and procedures vary according to the purpose for which they were created. Not all Funds are serving environmental goals -- UNICEF has created many Funds for children’s protection. UNESCO has supported Education Funds. Some Funds are specifically designed to support micro-enterprises. But one has to recognise that the majority of the existing Funds are directed at conserving the environment and promote sustainable development. They are generally of three types:

  • National Environment Funds (NEFs) which are often very big and serve a full range of activities. Some of them became real institutions. The Bolivian CONAMA is one of them. The Buthan Trust Fund for Environmental Conservation is another.

  • Some are theme- or site-specific Funds and aim at protecting a specific animal species or a specific ecosystem.

  • Many of them are Funds that make grants to others. The Brazilian Biodiversity Fund (FUNBIO) is one of these, as is the Foundation for the Philippine Environment. These Funds often have a strong civil society institutional strengthening component.

Funds can take at least three fundamentally distinct forms: Cash Fund, Endowment Fund, and Revolving Fund.

Cash Fund or Sinking Fund: This form is the simplest one. The Cash Fund receives money from donors, fines, royalties or any other source, either in one installment or in several tranches, and spends it according to the availability of money and approval of projects. All spending is done on a grant basis. Project monitoring can be carried out by the Fund administration. When Funds are exhausted, either the Fund is replenished or, if it was designed as a Sinking Fund, it ends its operations. This is often the case with debt counterpart Funds.
Endowment Fund: The Endowment Funds invest the Funds received in an interest-bearing form such as bonds, private bank accounts, real estate, etc. and spend only interest earned on those investments. This form trades cash availability, which of course is considerably smaller than in the case of the Cash Fund, against the establishment of a long-term financial investment for environmental conservation.. Moreover, the establishment of administrative bodies is also a more long-term affair. However, this kind of Fund requires a minimal financial critical mass to be worth while. If the capital invested is too small, the interest earned will be insignificant and not worth the trouble.

Revolving Funds: The Revolving Fund disburses the cash in the same way as the Cash Fund but it does so on a loan basis. A long-term financial mechanism is therefore established in the same way as the Endowment Fund. Here again, there is a trade-off, this time between investment security and immediate outreach to target groups. Assuming that loans made in the context of the Fund’s environmental aims are not as secure an investment as government bonds or real estate, the Funds trade greater availability of cash for its projects against a higher degree of insecurity.

What kind of Fund is best?

None of these alternatives is better or superior to the other (Mikitin, 1995). Each one fits a particular situation which should be carefully analysed. Among these deciding factors, one can note the following: the immediate financial absorption capacity of the NGOs, government agencies, and communities; the amount of funds available; the experience NGOs or state agencies have with Revolving Funds; the relationship between the NGO community and the government; the situation of the local financial market, etc.

The Bhutan Trust Fund for Environmental Conservation is the first such Fund established in 1992 as a follow-up to the Rio Conference. It is exemplary in that it is a collaborative venture between the Royal Government of Bhutan, the United Nations Development Programme (UNDP), the World Wildlife Fund (WWF), the Global Environment Facility (GEF) and the cooperation agencies of Denmark, Finland, The Netherlands, Norway and Switzerland.
After a few years of careful financial management, the capital of the Fund rose from an initial US$ 10 million to approximately US$ 28 million today. Administrative costs are approximately 10% of investment revenues. Investment of assets has been contracted out to an overseas private investment manager and net income is more than 8% annually. The success of the Fund capitalisation is due to the strong government commitment to protect Bhutan’s forests and biodiversity.
Grant funding in early years was severely limited by the lack of local capacity in project preparation and implementation. After a few years of concentration on capacity building activities, the Fund has developed grant-making guidelines and procedures and is now supporting a series of projects annually.
The Fund has become a fully independent grant-making organisation financing projects which (1) support conservation initiatives in the entire green sector, including sustainable utilization of genetic and species resources; (2) strengthen integrated conservation and development planning through applied conservation research and monitoring of biodiversity change; (3) promote education and awareness of conservation policies and issues.
The Mgahinga and Bwindi Impenetrable Forest Conservation Trust2 is another very good example of the usefulness of this kind of mechanism, both in terms of participatory and community management of natural resources and of the creative and very positive role the “donor community” can play in fostering this approach.
The Bwindi forest is the most important biodiversity hotspot in Uganda and contains half of the world’s mountain gorilla (Gorilla gorilla beringei). It is surrounded by densely populated agricultural land. Violence is endemic in the area.

Most nearby communal swampland was converted to farmland by few rich farmers, depriving poor people of access to once-communal land used for grazing and collection of natural commodities. Swamp clearance lead to climatic changes.

Logging and hunting in the forest dramatically increased, as did gold mining. In good faith, and so as to avoid further destruction, the Government of Uganda established a national park in 1991. No consultations were held and little attention was paid to local needs. As a result, local resentment rose, forest fires were set and threats made against the gorillas.
Under pressure, local authorities finally agreed to discuss the problem with villagers and communities, supported by the NGO, CARE International. A consultation process started which lead to the creation of a Trust Fund.
The objective of the Fund is to protect prime mountain gorilla habitats by funding park protection, research and community conservation activities in a priority conservation area. The estimated capital needs for an endowment were US$ 10 million. An initial GEF-funded endowment of US$ 4.3 million in 1994 was granted as the basis of the Trust endowment but, because they were sceptical or for reasons of legal restrictions, no donors actually added funds to this endowment.
A USAID 900.000 US$ grant in 1994 and a further DGIS US$ 2.7 million in 1997, given on a sinking fund basis, covered all administrative and project costs for a period of 7 years, allowing the Trust to reinvest 100% of its interest income into the initial endowment. It is estimated that by the end of 2002, the Trust will have amassed an endowment of about US$ 8 million , close to its original target of 10 million.
With these long-term secured resources, the Bwindi Trust Fund created a grant programme with the long-term aim of protecting two national parks: the Bwindi and the Mgahinga. To achieve this goal, the Trust Deed 3establishing the Trust Fund apportioned grant resources according to the following priorities:

  • 20% for research

  • 20% for local park authorities to defray management and recurrent park costs

  • 60% for community projects promoting conservation and sustainable development activities

Not only did the Trust Deed allocate the majority of funds for community development activities, but it also strongly involved the community in its management by establishing community representation within both the governance structure and the organisation’s programme management regime. Three of the nine members of the Board of Directors are community members from the area of operation of the Trust, elected by their peers. They participate in all governance issues related to the management of the Trust.

To further develop the participatory and democratic management of the Fund, a Local Community Steering Committee (LCSC) was established. It comprises villagers, NGO representatives and community conservation officers. Members serve for a two years term. The responsibility of the LCSC is to review and approve all community projects, subject to final technical review and Board approval for projects above US$ 1,000, but more rigorous technical review is required for construction infrastructure projects.
During the first round of projects received by the Trust, more than 90% represented infrastructure projects perceived as essential by local communities, like schools, roads, bridges, clinics. The non-community members of the Board urged the communities to submit projects with a more direct link to resource conservation and economic development! A long, fruitful and democratic discussion took place on the best way to manage the parks and the surrounding area. Finally the Board agreed that the communities’ vision of the long-term management of the parks had to be taken into account and it approved most of the projects. The communities, in turn, confirmed their commitment to sound management of the parks. A strong relationship of trust and confidence was established between the environmental managers and the communities. Recent research reveals growing local support for the Parks and the gorillas.(Hamilton,2000)
The conclusion is that, without anybody noticing it, the Trust Fund helped to implement the Biodiversity Convention, the Ramsar Convention, the Climate Change Convention and maybe several others. It also helped foster democracy and peace in a region characterised by intense conflicts. Finally, it fosters poverty alleviation.
Today, the link between environment and development is recognised and taken into account in the establishment of all new Trust Funds, including in the naming of the Funds. In its June 1998 proposal for a “Haitien Fund for Environment and Development”, the NGO The Nature Conservancy recognises “that while most environmental funds are bio-diversity conservation oriented, the challenge in Haiti is clearly to design a Fund which incorporates a significant component on income generation through sustained use of natural resources”4
Conservation International and WWF-Bioregion Sahul are currently providing technical assistance for the establishment of a “Papua Conservation Fund” in Indonesia. Papua is without doubt another biodiversity hotspot on Earth. But like many others, it is increasingly threatened by continuing large-scale conversion of natural forests, and by disregard for the environmental impacts of logging, mining, oil palm plantations and trans-migrant farming. There is a very urgent need for a better implementation of the CBD, Ramsar Convention, Climate Change Convention etc.
Hopefully, today, the potential for better environmental conservation has improved. With the support of the two above-mentioned NGOs, the Indonesian national and provincial governments and local NGOs are beginning to make real progress towards articulating a sustainable development framework that integrates biological priorities with social and economic imperatives. But, according the findings of several workshops, the main limitation to this progress is the lack of sustainable funding to implement conservation activities.
Because of their knowledge, vision and motivation to conserve biodiversity in Papua, the involvement of local communities and NGOs has been very important. Unfortunately, their capacity and ability to raise financial support cannot yet sustain the implementation of long-term conservation activities.
During a series of workshops involving all national, provincial, local and international stakeholders, the idea of creating a conservation Trust Fund has been adopted. The workshops set the objective of creating a multi-billion rupiah trust fund for the conservation of Papua’s unique biological heritage. The participants were of the opinion that “if this heritage is sustainably managed, it can be a source of economic and spiritual well being for present and future generations “.5

The objective of the proposed Fund is to support community-based organisations, NGOs and research institutions in the following type of activity:

  1. Natural resources and conservation management.

  2. Empowerment of community organisations and strengthening of NGOs.

  3. Scaling-up the quality of conservation activities and the conservation movement in the province, in general.

  4. Empowering local institutions such as traditional and tribal institutions.

  5. Increase conservation awareness among corporations active in the forestry sector.

  6. Strengthening community-based enterprises and economic development consistent with long-term conservation.

In short, implement the CBD, Ramsar Convention, Climate Change Convention, etc…

The governance structure will of course be transparent, democratic and participatory.

The Mexican Nature Conservation Fund (MNCF) is yet another good example. It was created in 1996 and initially capitalised on an endowment basis with a USAID grant of US$ 30 million another US$ 10 million from the Government of Mexico and US$ 16.5 million from the GEF earmarked for use in 10 strategic natural protected areas.
The MNCF main goals are to help conserve ecosystems in biodiversity hotspots; reverse environmental degradation by promoting sustainable productive processes in collaboration with local communities and prepare society in general to protect biodiversity.
Until 1999, the Fund supported 285 projects in the following field:
1. Ecosystem and species conservation 129 projects

2. Sustainable use 31 projects

3. Institutional strengthening 46 projects

4. Identification of conservation needs 12 projects

5. Scholarship 37 projects

6. Various 30 projects

Total 285 projects
In Suriname, 1.6 million hectares of the Central Suriname Nature Reserve is being well managed through an initial endowment of US$ 1 million raised through private funds by Conservation International. This adds to the US$ 15 million of the local Suriname Conservation Trust capitalised through a GEF US$ 9.54 million grant and another US$ 5 million from the UNDP and the United Nations Foundation (UNF). The Fund allows the Foundation to manage protected areas equalling 163.000 square kilometres.

A GEF evaluation of existing Trust Funds
The Global Environmental Facility (GEF) conducted a review of Environmental Funds in 1998 (GEF, 1999a). Some of their findings regarding the performance of EFs are reproduced below:

  • new national parks have been created or existing protected areas expanded or upgraded as a result of EF support

  • EFs have generated substantial financial resources that would not otherwise have been available for nature conservation

  • Environmental Funds have helped devolve responsibility and decision-making about environmental priorities and programmes to the local level.

  • A broad array of stakeholders has often been involved in the creation of Environmental Funds. Increasing participation of civil society in environmental issues.

  • Important scientific work has been carried out through EFs, including inventories, zoning and mapping, that will help measure changes in biodiversity.

  • Some Funds are having an upstream impact on broader environmental policies.

Environmental Funds are more than financial mechanisms
Environmental Funds have proved to be much more than mere financial mechanisms. They are ever more becoming environmental management institutions, some times complex institutions. This is both good and bad. Good because it promotes a greater awareness of the need to effectively conserve nature and promote sustainable development in a participatory way, involving the civil society and public institutions. This is bad because it could also become an obstacle if these institutions become too demanding in terms of administrative and technical capacities and costs. According to the GEF report (GEF, 1999a), the Funds that have done best are those that have done much more than just financial management but also played a role in building institutional capacity and private-public partnership, developing agile and non-bureaucratic management approaches, nurturing community groups becoming involved in environmental management, and contributing to the articulation of environmental priorities and strategies.

This is exactly what Multilateral Environment Agreements should promote!

The GEF report concludes that while EFs have attracted highly qualified board members, directors and other staff, they still require capacity-building assistance to develop fully and meet their potential as institutions. Governing Boards work much better when their members serve in their individual capacities rather than as formal representatives of a constituency or sector.
The GEF (GEF 1999a and 1999b) also identified conditions for the successful establishment and operations of Environmental Funds. The first four conditions in the following list are sine qua non conditions for the success of a Fund.

Important factors for establishing an Environmental Fund

  • The environmental issue to be addressed is significant, and appropriate actions to respond are long term and can be met with the resource flows an EF could produce.

  • There is active and broad-based government support for creating a mixed, public-private sector mechanism that will function beyond direct government control.

  • There is a critical mass of people from diverse sectors – government, NGOs, academic and private sectors, donor agencies – who can work together despite different approaches to nature conservation and sustainable development.

  • There is a basic fabric of legal and financial practices and supporting institutions (including banking, auditing and contracting) in which the majority of people have confidence.

  • There is a legal framework that permits establishing the Fund, and tax laws that allow it to be exempt from taxes.

  • There are mechanisms to involve a broad set of stakeholders in the design process, and willingness by these stakeholders to use them.

  • One or more mentors (e.g., another more experienced fund or an experienced international NGO) are available to provide technical support to the new Fund.

  • There are realistic prospects for attracting a level of capital sufficient for the Fund to support a significant programme while keeping operating costs to a reasonable percentage.

  • There is an effective demand for the fund’s products, i.e. a client community interested in and capable of carrying out environmental activities on the scale envisaged.

If one of the first four conditions is missing, it is suggested to investigate other possible financial mechanisms. Some of the other conditions might not be met but if so, efforts should be made to remedy the situation as soon as possible.

Conditions for an efficient operation of an Environmental Fund

Establishing a Environmental Fund is one thing. Effective operation of this Fund is another thing and, according to the GEF review of existing EFs, requires specific conditions:

  • Clear and measurable goals and objectives, and a results-oriented management culture that learns from experience and is open to changes in approach based on feedback.

  • A governance structure with appropriate checks and balances, conflict of interest provisions, and succession procedures.

  • Members of governing bodies who are prepared to commit their time, engage in Fund policy-making and leadership, and build support with varied constituencies.

  • Linkages between the Fund and any national environmental strategy or action plan.

  • An ability to attract dedicated competent staff, especially a strong executive director. Basic technical and other capabilities that permit the Fund to become a respected and independent actor in the community. Access to and effective use of training, mentoring, and technical assistance resources to build capacity.

  • Harmonious and productive board-staff relationship.

  • Constructive relationship with relevant government agencies, intermediary organisations that provide services to clients, and other organisations in the environment community. The Fund should avoid becoming an executing agency itself.

  • Financial and administrative discipline, combined with programme flexibility and transparency, and procedures that support this and are consistently applied.

  • Mechanisms for continuing to involve a wide range of stakeholders in the Fund’s programmes and direction, tempered with enough strategic direction and leadership to avoid programme fragmentation.

  • Asset management competitively selected, a diversified portfolio of investments, financial expertise to provide regular reporting, and oversight by Fund boards comparing actual performance to benchmarks.

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