Tropical Forest Conservation Act (TFCA) Debt Treatment Options
Under the TFCA, eligible countries may consider three debt treatment options: (1) Debt reduction/loan restructuring, (2) debt-for-nature swap and (3) debt buy-back.
(i) Debt reduction/loan restructuring
Under this option, interest and/or principal payments on treated debt are made in local currency into a new local tropical forest fund.
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Forests benefit from the Philippines’ involvement
in the U.S. Government’s debt reduction/loan
restructuring program. |
These payments stay in country rather than being paid to the United States.
A local board is established to administer the fund and award small grants to eligible recipients, primarily local non-governmental organizations, such as environmental, forestry, indigenous or community groups. In exceptional circumstance, government entities may also be eligible to receive grants.
The board includes representatives from the U.S. Government and the host country, as well as representatives from non-governmental organizations (NGOs), which are approved by the governments. Under the TFCA, the NGOs must constitute a majority of board members.
The debt reduction/loan structuring option is executed through two legal agreements negotiated between the U.S. Government and the host country: (1) a Debt Reduction Agreement and (2) a Tropical Forest Agreement to establish the tropical forest fund and board.
As of November 2006, five countries have entered into such agreements with the United States: Bangladesh (2000), El Salvador (2001), the Philippines (2002), Paraguay (2006) and Botswana (2006).
(ii) Subsidized debt-for-nature swap
Under this option, both the U.S. Government and non-government organizations contribute monies to reduce or cancel a portion of eligible host country debt. Typically, the funds contributed by NGOs are equal to about 20% of those contributed by the U.S. Government.
Payments on treated debt are made in local currency for conservation activities as agreed by the host country, U.S. Government and contributing NGOs. Such activities may include a grants program (as in the debt reduction and buy back options). They also may include specific conservation activities, such as creating or managing a specific protected area, developing training programs, and creating permanent endowments for park management over time.
A local oversight committee is established to administer the program. Governments and NGO donors sit on the committee. Local NGOs approved by the governments and donors may also sit on the committee. NGOs constitute a majority of the oversight committee in all existing debt-swap agreements.
The subsidized debt-for-nature swap option is executed through three legal agreements: (1) a debt reduction agreement between the USG and host country, (2) a swap fee agreement between the USG and donor NGOs transferring the private funds to the USG, and (3) a forest conservation agreement between the host country and donor NGOs outlining how the funds will be used and establishing the oversight committee and its operating modalities.
As of November 2006, six countries have entered into such agreements with the United States: Belize (2001), Peru (2002), Panama (2003 and 2004), Colombia (2004), Jamaica (2004) and Guatemala (2006)
(iii) Debt buy-back
Under this option, a country may purchase, in U.S. dollars and at a discount, one or more eligible loans in exchange for a commitment to endow a Tropical Forest Fund with local currency. The amount of local currency paid up-front, must equal the lesser of 40% of the purchase price or the difference between the purchase price and the face value of the original loan.
As in the debt reduction/loan restructuring option, a local board is established to administer funds and award grants to local non-governmental organizations and in exceptional circumstance, government entities. Again, the board includes representatives from the U.S. Government and host country, as well as from NGOs approved by the governments, with the NGOs constituting a majority.
To date, the debt buy-back option has not been used under TFCA because current debt discounts are not attractive to eligible countries.
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