Debt-for-Nature Initiatives and the Tropical Forest Conservation Act: Status and Implementation

Debt-for-Nature Initiatives and the
Tropical Forest Conservation Act:
Status and Implementation
Updated March 20, 2008
Pervaze A. Sheikh
Analyst in Natural Resources Policy
Resources, Science, and Industry Division

Debt-for-Nature Initiatives and the Tropical Forest
Conservation Act: Status and Implementation
In the late 1980s, extensive foreign debt and degraded natural resources in
developing nations led to the creation of debt-for-nature initiatives that reduced debt
obligations, allowed for debt repayments in local currency as opposed to hard
currency, and generated funds for the environment. These initiatives, called debt-for-
nature swaps, typically involved restructuring, reducing, or buying a portion of a
developing country’s outstanding debt, with a percentage of proceeds (in local
currency) being used to support conservation programs within the debtor country.
Most early transactions involved debt owed to commercial banks and were
administered by non-governmental conservation organizations and referred to as
three-party swaps. Since 1987, three-party transactions have generated more than an
estimated $117 million in local currency for conservation projects, as a result of the
purchase of approximately $168 million in debt (face value) for $49 million. Other
debt-for-nature initiatives involved official (public) debt and were administered by
creditor governments directly with debtor governments (termed bilateral swaps).
In the early 1990s, the United States restructured, and in one case sold, debt
equivalent to a face value of nearly $1 billion owed by Latin American countries;
these transactions were authorized by Congress as part of the Enterprise for the
Americas Initiative (EAI), which broadened the scope of debt swaps to include a
number of social goals. Nearly $178 million in local currency for environmental,
natural resource, health protection, and child development projects within debtor
countries was generated from these swaps. The model for debt-for-nature initiatives,
outlined in the EAI, was expanded in the Tropical Forest Conservation Act (TFCA)
to include countries around the world with tropical forests. Under this program, debt
can be restructured in eligible countries, and funds generated from the transactions
are used to support programs to conserve tropical forests within the debtor country.
Since 1998, $95.2 million has been used under the TFCA to restructure loan
agreements in 12 countries, and nearly $162.5 million in local currency will be
generated in the next 12-26 years for tropical forest conservation projects. The
TFCA was authorized for appropriations under P.L. 108-323 until FY2007. The
TFCA is being considered for reauthorization under H.R. 2185 and S. 2020 in the

110th Congress.

Debt-for-nature transactions are generally viewed as a success by conservation
organizations and debtor governments because of the funds generated for
conservation efforts. The appeal of debt-for-nature transactions has been tempered
in recent years, however, by higher debt prices on secondary markets and lower
appropriations. As a result, fewer transactions have taken place. This report
provides a description of debt-for-nature transactions and a summary of the Tropical
Forest Conservation Act.

Background Information............................................1
Debt-for-Nature Initiatives and Their Mechanisms........................1
Three-Party Swaps.............................................1
Bilateral and Multilateral Debt-for-Nature Initiatives..................5
U.S. Bilateral Debt-for-Nature Initiatives.......................6
Tropical Forest Conservation Act.............................8
Congressional Role in Debt-for-Nature Initiatives.......................11
Authority for Debt-for-Nature Initiatives...........................11
Rationale for and Criticism of Debt-for-Nature Initiatives.............11
Decline of Debt-for-Nature Transactions...........................13
Emergence of Subsidized Debt-for-Nature Transactions..............14
Appropriations .............................................15
Future Directions.................................................16
Appendix: List of Related Laws and Appropriations That Support
Debt-for-Nature Initiatives......................................17
List of Tables
Table 1. Countries Participating in Three-Party Debt-for-Nature Swaps,
1987-Present (excluding TFCA transactions)........................3
Table 2. Countries Other than the U.S. Participating in Bilateral and
Multilateral Debt-for-Nature Initiatives.............................5
Table 3. U.S. Bilateral Debt-for-Nature Transactions Under EAI............8
Table 4. U.S. Bilateral Debt-for-Nature Transactions Under TFCA..........9
Table 5. Appropriations Provided Under the Tropical Forest Conservation Act
of 1998.....................................................15
List of Figures
Figure 1. An Illustrative Example of a Three-Party Debt-for-Nature
Swap Agreement..............................................2
Figure 2. An Example of a Bilateral Debt-for-Nature Transaction
Modeled After the TFCA........................................6
Figure 3. Three Party and Bilateral U.S. Debt-for-Nature Transactions

1987-2007 ..................................................14

Debt-for-Nature Initiatives and the
Tropical Forest Conservation Act:
Status and Implementation
Background Information
Debt-for-nature initiatives were conceived to address the rapid loss of resources
and biodiversity in developing countries that were heavily indebted to foreign
creditors. Conservationists had noted that the pressure to pay off foreign debts in
hard currency was leading to increased levels of natural resource exports (i.e., timber,
cattle, minerals, and agricultural products) at the expense of the environment. In
many cases, indebted developing countries had difficulty meeting their hard currency
debt obligations and defaulted. Reducing foreign debt and allowing for portions of
it to be paid with local currency while increasing funds for the environment was
thought to improve environmental conditions in developing countries and had the
advantage of relieving the debtor country’s difficulties in procuring sufficient hard
currency to pay off its debts.1 Money generated from debt-for-nature transactions has
been used to fund a variety of projects, ranging from national park protection in
Costa Rica to supporting ecotourism in Ghana and conserving tropical forests in
Since 1993, there has been a declining trend in the number of debt-for-nature
transactions involving official (public) and private funds. Accounting changes
requiring new appropriations to support official (public) debt transactions in creditor
countries such as the United States, and a higher price of commercial debt on
secondary markets, are two reasons suggested for the decline of debt-for-nature
transactions. While Congress has periodically authorized U.S. participation in three-
party debt-for-nature swaps and has supported two bilateral debt-for-nature
initiatives, appropriations to support these types of efforts have generally diminished
over the years.
Debt-for-Nature Initiatives and Their Mechanisms
Three-Party Swaps
Three-party debt-for-nature swaps, involving nongovernmental organizations
such as The Nature Conservancy and Conservation International, were the first debt-
for-nature agreements to be formed. In a three-party swap, a conservation group
purchases a hard currency debt owed to commercial banks on the secondary market

1 Thomas E. Lovejoy III, “Aid Debtor Nations’ Ecology,” New York Times, Oct. 4, 1984,
sec. A, p. 31.

or in some cases a public (official) debt owed to a creditor government at a
discounted rate compared to the face value of the debt, and then renegotiates the debt
obligation with the debtor country.2 The debt is generally sold back to the debtor
country for more than it was purchased for by the NGO, yet less than what it was on
the secondary market. The proceeds generated from the renegotiated debt, to be
repaid in local currency, are typically put into a fund that often allocates grants to
local environmental organizations for conservation projects (see Figure 1). In these
cases, the fund is administered by the conservation organization, representatives from
local environmental groups, and the debtor government. Money to buy the debt
initially may come from the nongovernmental organization, governments, banks, or
other private organizations.
Figure 1. An Illustrative Example of a Three-Party
Debt-for-Nature Swap Agreement
Step 1
$200,000 to purchase debt
Bank or Creditor GovernmentNon-governmental Organization
$1 million of debtStep 2
$1 million of debt is restructured
Debtor GovernmentLocal Conservation Groups
$300,000 in local currency
Step 3
!Step 1 = An outstanding debt is sold to a NGO at a
discounted rate (e.g., 20% of a face value of $1 million,
which is $200,000).
!Step 2 = The debt is cancelled by the NGO as part of an
agreement that requires the debtor country to provide funds
in local currency equivalents for local conservation groups
(e.g., 30% of the original face value, which is $300,000).
!Step 3 = The debtor country provides the agreed to funds to
local conservation groups.
In 1989, Congress authorized the United States Agency for International
Development (USAID) to provide assistance to nongovernmental organizations to
purchase the commercial debt of foreign countries as part of a debt-for-nature
agreement (P.L. 101-240; 22 U.S.C. 2282-2286). Several nongovernmental
organizations participated in debt-for-nature swaps with financial assistance from

2 Sometimes debt is donated to the NGO in the three-party swap.

USAID; however, specific information on funds given by USAID to support three-
party debt-for-nature swaps is not available.
While debt initiatives conducted with three-party swaps are numerous, they have
resulted in less reduction in total debt than the debts swapped under bilateral
agreements (government-to-government), and slightly less in conservation funds
generated. In total, $168 million in debt (face value) has been reduced, restructured,
or swapped using this mechanism, generating approximately $117 million in local
currency for conservation purposes (see Table 1).
Table 1. Countries Participating in Three-Party
Debt-for-Nature Swaps, 1987-Present
(excluding TFCA transactions)3
(U.S.$, in thousands)
CountryYear PurchaserCostFace Value ofConservation
DebtFunds Generated
BOLIVIA 1993 T NC/WWF $0 $11,500 $2,860
1987 CI 100 650 250
Total Bolivia10012,1503,110
BRAZIL1992TNC 7482,2002,200
COSTA RICA1991RA/MCL/360600540
1990 SW/WWF/ 1,953 10,574 9,603
1989 TNC 784 5,600 1,680
1989 Sweden 3,500 24,500 17,100
1988 Ho lland 5,000 33,000 9,900
1988 NP F 918 5,400 4,050
Total Costa Rica12,51579,67442,873
DO M I NI CAN 1990 PRCT /T NC 116 582 582
ECUADO R 1992 Japan NA NA 1,000
1989 WWF/FN 640 5,400 5,400
1987 WWF 354 1,000 1,000
Total Ecuador9946,4007,400
GH ANA 2000 CI 80 100 90
1991 CI /SI 250 1,000 1,000
Total Ghana3301,1001,090
GUATEM ALA 1992 CI /U SAI D 1,200 1,334 1,334
1991 TNC 75 100 90
Total Guatemala1,2751,4341,424
JAMAICA 1991 T N C/USAI D/ 300 437 437
M ADAGASCAR 1994 WWF/JPM 0 1,341 1,072
1994 CI 50 200 160
1993 WWF 909 1,868 1,868
1993 CI 1,500 3,200 3,200
1991 CI /UNDP 59 118 119

1990 WWF 446 919 919

3 A cost of $0 indicates that funds were written off by the bank to restructure the debt.

CountryYear PurchaserCostFace Value ofConservation
DebtFunds Generated
1989 WWF/ 950 2,111 2,111
Total Madagascar3,9149,7589,449
M E XI CO 1998 CI 256 550 318
1996 CI 192 391 254
1996 CI 327 496 443
1996 CI 440 671 561
1995CI/USAID 246488337
1994 CI 399 480 480
1994 CI 236 280 280
1994 CI 248 290 290
1993 CI 208 252 252
1992CI/USAID 355441441
1991 CI 0 250 250
1991 CI 183 250 250
Total Mexico3,0924,8384,155
NI GERI A 1991 NCF 65 150 93
PERU 1993 WWF NA 2,860 1,573
2002WWF, CI,5,50014,00010,600
Total Peru5,50016,86012,173
PHILIPPINES 1993 WWF 13,000 19,000 17,100
1992 WWF/USAID 5,000 10,000 9,000
1990 WWF/USAID 439 900 900
1989 WWF 200 390 390
Total Philippines18,63930,29029,090
P O LAND 1990 WWF 11 50 50
ZA M B I A 1989 WWF 454 2,270 2,500
Grand Total49,001168,193117,627
M. Moye, Commercial Debt-for-Nature Swaps: Summary Table (Washington, DC: World Wildlife
Fund, 2003).
M. Guerin-McManaus, Ten Years of Debt for Nature Swaps 1987-1997 (Washington, DC:
Conservation International, 2000).
The World Bank, World Debt Tables, 1996 (Washington, DC: The World Bank, 1996).
Notes: Funds generated may be cash or bonds. Figures given do not include interest earned over the
life of the bonds. Full titles of abbreviations are given below. Grand total given is an estimate since
some figures were not available.
USAID = Agency for International DevelopmentNPF = National Parks Fdn. of Costa Rica
CABEI = Central American Bank for EconomicPRCT = Puerto Rican Conservation Trust
IntegrationRA = Rainforest Alliance
CI = Conservation InternationalSI = Smithsonian Institution
FN = Fundacion NaturaTNC = The Nature Conservancy
JPM = J. P. Morgan Chase and Co.UNDP = United Nations Development Prog.
MBG = Missouri Botanical Garden U.S. = U.S. federal government
MCL = Monteverde Conservation LeagueWWF = World Wildlife Fund

NCF = Nigerian Conservation Foundation

Bilateral and Multilateral Debt-for-Nature Initiatives
Bilateral debt transactions are conducted with official (public) funds directly
between the creditor and debtor governments. The creditor government determines
the criteria for eligibility, which usually involve the existence of certain financial and
political conditions in the debtor country. Debt agreements are usually cancelled and
then restructured to extend payback periods, or in some cases, debt is bought back
by the debtor country for a discounted price. Money for the environment can be
generated through interest payments from the debtor country if the debt is
restructured, or from a percentage of the buyback price (see Figure 2). Multilateral
debt-for-nature agreements have also been conducted between more than one creditor
country and a debtor country (see Table 2). Poland, for example, benefitted from a
multilateral debt-for-nature agreement from 1991 to 1997. During this time, five
countries restructured debt obligations with Poland, generating over $473 million in
local currency for environmental projects. The United States was the primary
participant in this deal, swapping 10% of Poland’s debt to generate $367 million for
environmental programs.4
Table 2. Countries Other than the U.S. Participating in
Bilateral and Multilateral Debt-for-Nature Initiatives
(U.S.$, in thousands)
CreditorDebtorYear Face ValueFace Value ofConservation
CountryReductionDebtFunds Generated
CanadaColumbia199367% reduction18,00012,000
El Salvador1993100% forgiven7,5006,000
Honduras 1993 n/a 22,000 15,000
Nicaragua 1993 n/a 12,000 9,000
Peru199475% reduction15,0003,800
Belgium Bolivia 1992 n/a 13,000 n/a
Finland Poland 1990 n/a n/a 14,000
Peru199570% reduction27,0008,100
France Egypt 1992 n/a n/a 11,600
Philippines 1992 n/a n/a 4,000
Poland199310% reduction520,00052,000
Came roon 2006 n/a n/a 25,000
GermanyPeru199470% reduction22,9706,100
Indonesia 2003 15,000,000 n/a n/a
Holland Peru 1996 n/a n/a n/a
Costa Rica1996100% reduction17,00017,000
Costa Rica19885,000,00033,0009,900
Norway Egypt 1993 n/a 17,300 n/a
Egypt 1993 n/a 6,200 n/a
Nige ria 1993 n/a 10,200 n/a
SwedenCosta Rica19893,500,00024,50017,100
Tunisia1992100% reduction1,1001,100
Tunisia1993100% reduction520520

4 Organization for Economic Cooperation and Development, “Swapping debt for the
environment: The Polish EcoFund,” Paris: EU Phare program (1996).

CreditorDebtorYear Face ValueFace Value ofConservation
CountryReductionDebtFunds Generated
Bolivia 1993 n/a 35,400 3,900
Switzerland Peru 1992 n/a 130,800 32,600
T a nzania 1993 n/a 22,200 3,300
Poland199310% reduction480,00048,000
Bulgaria199520% reduction83,50016,700
Egypt199520% reduction115,00069,000
Guinea Bissau1995100%8,400400
Philippines199550% reduction32,30016,100
U.K.Nigeria19937,300,000 7,300n/a
T a nzania 1993 n/a 15,400 15,400
Source: Various sources and R. Curtis. Bilateral Debt Conversions for the Environment, Peru: An
Evolving Case Study,” IUCN World Conservation Congress, Montreal (1996). n/a = information not
U.S. Bilateral Debt-for-Nature Initiatives. The model for bilateral debt-
for-nature agreements conducted by the United States was first defined in 1990 by
the Enterprise for the Americas Initiative (Title 15, Section 1512 of the Food,
Agriculture Conservation and Trade Act of 1990, “1990 Farm Bill,” P.L. 101-624;
7 U.S.C. 1738) and has since been expanded numerous times (see Appendix). It was
last amended by the Tropical Forest Conservation Act (TFCA) in 1998 (P.L. 105-

214; 22 U.S.C. 2431).

Figure 2. An Example of a Bilateral Debt-for-Nature Transaction
Modeled After the TFCA
Step 1
New debt agreement is created
United StatesDebtor Government
Principal payments to the United StatesStep 2
Interest from the principal of the loan
Tropical Forest FundLocal Conservation Groups
Interest earned from the Tropical Forest Fund
Step 3
!Step 1 = The current debt agreement is cancelled and a
new one is created.
!Step 2 = A Tropical Forest Agreement is created and
interest payments for the principal of the loan are deposited
in local currency equivalents into a Tropical Forest Fund.
!Step 3 = Interest earned and the principal of the Tropical
Forest Fund is generally given in the form of local currency
as grants to local conservation groups.

The Enterprise for the Americas Initiative legislation authorizes the sale,
reduction, cancellation and country buyback of eligible P.L. 4805 (P.L. 101-624; 7
U.S.C. 1738m, p-r, etc.), AID6 (P.L. 102-549; 22 U.S.C. 2430 and 2421), CCC7 (P.L.

102-549; 22 U.S.C. 2430 and 2421), and Exim8 (P.L. 102-429; 12 U.S.C. 635i-6)

debt of eligible Latin American and Caribbean countries.9 Debtor countries must
meet certain political and macroeconomic criteria in order to be eligible. Eligible
countries are required to (1) have a democratically elected government, (2) not
support terrorism, (3) not fail to cooperate with the United States on drug control, and
(4) not engage in gross violations of human rights. From an economic perspective,
eligible countries are required to have (1) an IBRD (International Bank for
Reconstruction and Development) or IDA (International Development Association)
structural or sectoral adjustment loan or its equivalent, (2) a macroeconomic
agreement with the International Monetary Fund or equivalent, and (3) instituted
investment reforms, as evidenced by a bilateral investment treaty with the United
States, an investment sector loan, or progress towards implementing an open
investment regime. Each country that participates in the EAI must enter into an
America’s Framework Agreement with the United States to establish an America’s
Trust Fund and create enforcement mechanisms to insure payments into the fund and
prompt disbursements out of the fund.10 Funds can be used to support environmental,
natural resource, health protection, and child development programs within the
debtor country.
Debt swaps, buybacks, and restructuring are three mechanisms used to conduct
debt-for-nature transactions under the EAI. Seven of the eight countries that have
participated in debt-for-nature transactions under the EAI used the debt-restructuring
mechanism to generate environmental funds (see Table 3); only Peru took advantage
of the debt buyback option. In a debt-restructuring agreement, the original debt
agreement is cancelled (i.e., a percentage of the face value of the debt is reduced) and
a new agreement is created with a provision for an annual amount of money (in local

5 P.L. 480 “Food for Peace” loans were low-interest loans given to developing countries to
purchase U.S. agricultural products. For more information, see CRS Report RS20520,
Foreign Food Aid Programs: Background and Selected Issues, by Geoffrey S. Becker and
Charles E. Hanrahan.
6 USAID Foreign assistance loans.
7 Commodity Credit Corporation loans are given to developing countries to enable them to
import U.S. agricultural products.
8 Export-Import Bank loans are made to foreign importers of U.S. goods and services.
9 Although debt under the P.L. 480 program was the first to be authorized for debt-for-nature
transactions, authorization quickly followed for reduction of debt owed to the United States
under three other programs: (1) Commodity Credit Corporation programs, (2) Export-Import
Bank loans, and (3) foreign aid loans administered by USAID.
10 The America’s Trust Fund can be either an endowed fund or a sinking fund depending on
the agreement reached by the United States and the debtor country. Interest payments made
by debtor countries on their new restructured loans are deposited into the fund. These
payments form the principal of the fund, and interest earned on this principal and the
principal itself can be used to fund environmental, community development, and child
survival and development programs.

currency) to be deposited into an environmental fund. In 1992, for example, the
United States reduced 10% of a $310 million (face value) debt owed by Colombia
in return for the deposit of $41.6 million in local currency into an environmental fund
by the Colombian government over 10 years.11 In a debt buyback, the debtor country
purchases its debt at a reduced price. The lesser of either 40% of the repurchase price
or the difference between the face value of the debt and the repurchase price is
deposited in local currency into an environmental trust to support environmental and
child support programs in the debtor country (P.L. 104-107, Title V, Sec. 574). For
example, in 1998 Peru took advantage of this program and bought back $177 million
in debt for $57 million, generating nearly $23 million (40% of the repurchase price)
in local currency funds for conservation and child development programs. For all
eight debtor countries, nearly $1 billion (face value) of debt was reduced from a total
debt of $1.8 billion, and almost $180 million of conservation funds were generated
under the guidelines of the EAI (see Table 3).
Six transactions under the EAI continued to operate in 2007 (Chile and Uruguay
have been concluded). These programs support small projects with grants and
monitor existing projects that have been funded. Some examples of projects include
coastal zone marine management and hurricane relief projects in Jamaica,
environmentally based development projects in the Peruvian Andes, and community12
production grants in Bolivia.
Table 3. U.S. Bilateral Debt-for-Nature Transactions Under EAI
(U.S.$, in thousands)
CountryYear Face ValueFace Value ofConservationDuration
ReductionDebtFunds Generated(years)
Bolivia 1991 30,700 38,400 21,800 15
El Salvador1992463,300613,00041,20020
Uruguay 1992 3,700 34,400 7,030 12
Columbia 1992 31,000 310,000 41,600 10
Chile1991 & 199231,000186,00018,70010
Jamaica1991 & 1993311,000406,00021,50019
Arge ntina 1993 3,800 38,100 3,100 14
Peru 1998 120,000 177,000 22,840 n/a
T OT AL 993,998 1,803,300 177,770
Source: The United States Department of Treasury.The Operation of the Enterprise for the
Americas Facility and the Tropical Forest Conservation Act, Report to Congress,” March, 2001.
Tropical Forest Conservation Act. Acknowledging that tropical
rainforests were valuable for preserving biodiversity, reducing atmospheric carbon

11 R. Curtis, “Bilateral Debt Conversions for the Environment, Peru: An Evolving Case
Study,” IUCN World Conservation Congress, Montreal (1996).
12 Tropical Forest Conservation Act Secretariat, Operation of the Enterprise for the
Americas Initiative and the Tropical Forest Conservation Act, 2006 Annual Report to
Congress (Washington, DC: Mar. 2007).

dioxide, and regulating hydrological cycles, Congress sought to expand the EAI
authorization to countries throughout the world with tropical forests. The result was
the 1998 Tropical Forest Conservation Act (TFCA), which was established to
generate funds to conserve tropical forests by reducing external debt in countries with
such forests. TFCA is an extension of the Enterprise for the Americas Act, in that
it allows debt swaps, debt restructuring and debt buybacks to generate conservation
funds. These funds, however, are specifically designated for the conservation of
tropical forests and are not confined to Latin America. To date, 12 countries have
participated in this program, establishing 13 agreements (Panama has two
agreements) that will reduce a total of at least $20.0 million from the face value of
their debts to the United States and generate $162.5 million in local currency in the
next 12-26 years for tropical forest conservation projects (see Table 4). For 2007,
Costa Rica completed a debt-for-nature transaction, and the Republic of Indonesia
is presently negotiating for a debt-for-nature swap under the TFCA. For the Republic
of Indonesia, the swap is reported to entail $19.6 million from the United States,
potentially making it the largest transaction to date.
Table 4. U.S. Bilateral Debt-for-Nature
Transactions Under TFCA13
(U.S.$, in thousands)a
Country YearBudgetPrivateFace ValueConservationDuration
CostFundsbReduction ofFunds Generated(years)
Leveraged Debt
B angl adesh 2000 $6,000 $0.0 $600 $8,500 18
Belize 2001 5,500 1,300 1,400 9,000 26
El Salvador20017,7000.03,00014,000 26
P eru 2002 5,500 1,100 3,700 10,600 12
P hi l i ppi nes 2002 5,500 0.0 100 8,300 14
Panama I20035,6001,20010,00010,00014
Columbia 2004 7,000 1,400 n/a 10,000 12
Panama II20046,5001,300n/a10,90012
Jamaica 2004 6,500 1,300 n/a 16,000 20
P araguay 2006 4,800 0.0 n/a 7,400 12
Guatemala 2006 15,000 2,000 n/a 24,400 15
Botsw ana 2006 7,000 0.0 n/a 8,300 n/a
Costa Rica200712,6002,500n/a26,00016
TOTAL $95,200 $12,100 n/a $162,500 n/a
Source: Email communications with Scott Lampman, 2004-2006, and U.S. Agency for International
Development, Operation of the Enterprise of the Americas Facility and Tropical Forest Conservation
Act, Report to Congress (Washington, DC, March 2004, 2005, and 2006).

13 In the transaction with Peru in 2002, $1.1 million was given by The Nature Conservancy,
World Wildlife Fund, and Conservation International, and $5.5 million was given by the
U.S. government.

a The Republic of Thailand signed a debt reduction agreement in September 2001. The signing of the
second required agreement, the Tropical Forest Agreement (TFA), never took place. The government
annulled the agreement on January 30, 2003, amidst false media reports that warned that the U.S.
government would retain control over forests involved in the agreement.
In some debt-for-nature transactions, a third party is involved (generally a non-governmental
organization or NGO) in the process and subsidizes a portion of the debt-reduction done by the United
States. Non-governmental organizations such as the World Wildlife Fund, The Nature Conservancy,
and Conservation International have subsidized these transactions.
To be eligible for this program, a developing country must contain at least one
tropical forest with unique biodiversity, or a tropical forest tract that is representative
of a larger tropical forest on a global, continental or regional scale.14 Political and
macroeconomic criteria for eligibility are almost identical to those used for
participation under the EAI.15 Conservation funds (in local currency) from these
transactions are deposited in a tropical forest fund for each country. The fund is
overseen by an administrating body composed of one or more appointees chosen by
the U.S. government and the government of the beneficiary country, and individuals
who represent a broad range of environmental, academic, and scientific organizations
in the beneficiary country (the majority of the board is represented by these
individuals). This fund operates in the same manner as the America’s Fund: Local
currency payments of interest accrued on restructured loans are deposited into a
tropical forest fund and serve as the principal. Interest earned from this principal
balance and the principal itself is usually given in the form of grants to fund tropical
forest conservation projects. Eligible conservation projects include (1) the
establishment, maintenance, and restoration of parks, protected reserves, and natural
areas, and the plant and animal life within them; (2) training programs to increase the
capacity of personnel to manage parks; (3) development and support for communities
residing near or within tropical forests; (4) development of sustainable ecosystem and
land management systems; and (5) research to identify the medicinal uses of tropical
forest plants and their products.
The TFCA was reauthorized for appropriations in 2004, including $20 million
for FY2005, $25 million for FY2006, and $30 million for FY2007. This law also
authorizes funds to conduct audits and evaluations of debt-for-nature programs. A
“TFCA Evaluation Sheet” has been created to evaluate the performance of TFCA
country programs. The Evaluation Sheet establishes criteria for TFCA program
categories and functions and will be completed each year by the U.S. government
representative on the local TFCA board or oversight committee. Many of the
programs under the TFCA are in beginning stages and have not disbursed grants to
local non-government organizations. However, in Peru, El Salvador, and Belize,

14 Developing country is defined as a “low” or “middle” income country as determined by
the International Bank for Reconstruction and Development in its World Development
Report. In 2001, the cutoff for low-income countries was a per capita annual income of $745
or less. For middle-income countries, the range is $746-$9,205, and the cutoff is $9,205.
15 Instead of having in place major investment reforms in conjunction with an IADB loan
or making progress toward implementing an open investment regime, the country must have
in place a bilateral investment treaty with the United States, investment sector loans with
the IADB, World Bank supported reforms, or other measures as appropriate (22 U.S.C.


some grants have been disbursed for projects and project monitoring has begun. This
law would also allow the principal of restructured loans to be used in debt-for-nature
transactions. Currently, interest accrued on restructured loans are deposited into a
tropical forest fund for disbursement.
Congressional Role in
Debt-for-Nature Initiatives
Authority for Debt-for-Nature Initiatives
Early debt-for-nature legislation concentrated on understanding and promoting
third-party debt-for-nature swaps (see Appendix for legislation summaries and
United States Code citations). Congress in 1989 directed the Secretary of the
Treasury to ask the U.S. Executive Director of the World Bank to develop a pilot
debt-for-nature program and other ways of reducing debt owed by foreign countries
while generating funds for the environment. A subsequent law, the International
Development and Finance Act of 1989, authorizes USAID to make grants to
nongovernmental organizations (NGOs) to purchase debt in three-party swaps.
Official (public) P.L. 480 debt owed to the United States by eligible Latin American
countries was authorized to be reduced by the 1990 farm bill (P.L. 101-624; 7 U.S.C.nd
1738b). The 102 Congress authorized debt reduction for foreign assistance loans
made by USAID (P.L. 102-549; 22 U.S.C. 2430 and 2421), the Export-Import Bank
(P.L. 102-429; 12 U.S.C. 635i-6), and the Commodity Credit Corporation (P.L. 102-
549; 22 U.S.C. 2430 and 2421). Together, the P.L. 480, USAID, CCC, and Ex-Im
debt reduction authorizations were undertaken as part of President George H. W.
Bush’s Enterprise for the Americas Initiative. In 1996, USAID was further authorized
by Congress to conduct swaps, buybacks, and cancellations of debt owed to the
United States by eligible Latin American and Caribbean countries (P.L.104-107). In
1998, the Tropical Forest Conservation Act (TFCA) was passed, allowing debt
swaps, buybacks, and restructuring to generate funds for tropical forest conservation
worldwide. Funding for the TFCA was reauthorized by Congress in 2004 (P.L. 108-
223) and is currently being considered for authorization in the 110th Congress in the
House (H.R. 2185) and Senate (S. 2020). The reauthorization bills being considered
would both expand the TFCA to include coral reefs. H.R. 2185 further expands the
TFCA by including all forest types as eligible for conservation activities. (S. 2020
would maintain activities only to tropical forests.) H.R. 2185 would authorize $30
million annually in appropriations for the TFCA from FY2007 through FY2010. S.
2020 would reportedly authorize $20 million in FY2008, $25 million in FY2009, and
$30 million in FY2010.
Rationale for and Criticism of Debt-for-Nature Initiatives
Advocates of debt-for-nature initiatives argue that reducing debt in developing
countries will help create free-market systems (as part of the reforms required for
eligibility), stimulate economic growth and trade liberalization, provide incentives
for foreign investment, and help protect the environment. Converting hard currency
debts to local currency debts, advocates argue, will lower debt burdens on developing
countries and in the long run may reduce resource extraction at the expense of the

environment. Critics of debt-for-nature initiatives argue that only a small percentage
of debt is reduced, thereby minimizing the positive benefits of debt reduction in
developing countries. For example, in some transactions under the TFCA, the
interest paid for the debt is used for conservation projects, while the principle of the
debt remains. Supporters point out that while the percentage of debt reduced by debt-
for-nature transactions is small, conservation funds generated for debtor countries are
generally significant relative to what the country would have originally spent on
conservation.16 The relationship between debt reduction and lower resource
extraction rates is controversial. Some analysts suggest that debt reduction has no
direct relationship to lower extraction rates of minerals or timber in developing
countries with foreign debt.17
Advocates of debt-for-nature initiatives note that the United States has a history
of supporting debt reduction initiatives in developing countries and appropriating
funds for environmental causes. Recent appropriations by the United States to
support the Heavily Indebted Poor Countries (HIPC) initiative (22 U.S.C. 262p-6)
support the claim for reducing debt in developing countries.18 HIPC was created by
international creditors, the World Bank, and IMF to reduce debt of poor countries
that have demonstrated social and economic policy reforms that enable fluid export
revenues and capital inflows.19 Funds generated for the environment in developing
countries are argued to improve local environmental conditions, promote sustainable
resource use, and help to preserve global biodiversity and ecosystem services.
Advocates also suggest that debt-for-nature transactions that generate funds to
support tropical forest conservation are especially appropriate. Most tropical
countries with high levels of total debt owed to the United States also have some of
the largest areas of tropical forest cover. For example, Brazil and Peru have debts to
the United States totaling over $1 billion each, and have two of the largest areas of
tropical forest cover in the world.20 Other countries, such as the Democratic Republic

16 For example, Ecuador reduced its external debt of $8.3 billion by only $1 million from a
debt-for-nature swap, yet doubled its budget for parks and reserves with money received
from the resulting conservation fund.
17 Dal Didia, “Debt-for-Nature Swaps, Market Imperfections, and Policy Failures as
Determinants of Sustainable Development and Environmental Quality,” Journal of
Economic Issues (2001), pp. 477-486; and Esben Brandi-Hanson and Kaspar Svarrer, “Debt-
for-Nature Swaps: One or the Other, or Both?” Royal Veterinarian and Agricultural
University of Denmark, Department of Economics, 1998, 17 pp.
18 Eligibility requirements for participating in the HIPC program include that a country must
receive only concessional financing from the World Bank and IMF (i.e., borrowing only
from the World Bank’s International Development Association (IDA) and from the IMF’s
Enhanced Structural Adjustment Facility (ESAF)), establish a track record of economic
reforms under IMF and World Bank-sponsored programs, and hold a debt burden that is
unsustainable under existing (Naples terms) relief arrangements.
19 See CRS Report RL30214, Debt Reduction: Initiatives for the Most Heavily Indebted
Poor Countries, by Larry Nowels.
20 U.S. Department of Treasury and Office of Management and Budget, “United States
Government Foreign Credit Exposure As of December 31st 1999” (2001). Food and
Agriculture Organization of the United Nations, “State of the World’s Forests 2001,” Rome

of Congo and Sudan, also fit this pattern; however, these countries may be ineligible
for debt-for-nature transactions under the TFCA due to political and economic
eligibility requirements.21
Those who oppose debt-for-nature transactions often argue that they are not
adequately enforced by debtor countries, generate insufficient funds to improve
environmental problems, and may infringe on national sovereignty.22 Three-party
debt swaps have historically had weak enforcement mechanisms; however, bilateral
debt swaps such as those conducted under the EAI generally include safeguards and
default provisions to protect the U.S. government from losing funds. National
sovereignty became an issue in Bolivia when a conservation organization was
reported to have obtained title to forested lands. There was a public outcry and
ensuing political crisis when the Bolivian people thought a large part of their country
had been given to a foreign organization. Consequently, conservation organizations
involved in recent three-party swaps have generally refrained from directly buying
land in debtor countries with conservation funds earned from swaps.
Decline of Debt-for-Nature Transactions
The number of debt-for-nature transactions has declined in recent years, perhaps
due to accounting changes that require greater appropriations to fund debt-for-nature
transactions with official (public) debt, and a higher price of commercial debt on the
secondary market (see Figure 3). Before 1991, no appropriations were required for
debt cancellations, and the United States cancelled between $11 and $12 billion in
debt between 1988 and 1991. This changed with the Federal Credit Reform Act of
1990 (2 U.S.C. 661a et seq.). This law requires that the net present value (NPV) to
the United States of debts of foreign countries be used to report the cost of debt
restructuring, buybacks, swaps, and cancellations to the U.S. government. The NPV
of the cash flow of the loan is calculated often giving consideration to projected
default losses, fees, and interest subsidies. Therefore, appropriated funds for these
programs must be used to cover the interest fee no longer coming to the United States
(in the case of funds set up under EAI and TFCA) and the difference in the NPV of
the loan that may result from restructuring.23
A decline in three-party commercial debt-for-nature swaps may also be due to
the conclusion of Brady Plan operations by Latin American countries. The Brady

20 (...continued)
21 Participation in three-party debt-for-nature swaps through USAID is not subject to the
same economic and political criteria required for participation in TFCA and EAI debt-for-
nature transactions. An eligible country must be committed to, plan for, and have a
government or local nongovernmental organization responsible for the long-term viability
of the programs under the swap agreement.
22 R. T. Deacon and P. Murphy, “The Structure of an Environmental Transaction: The Debt-
for-Nature Swap,” Land Economics (1997), pp. 1-24.
23 Stacy Warden, “The Tropical Forest Conservation Act,” PowerPoint presentation, U.S.
Department of Treasury, Washington, D.C., 2001.

Plan allowed for partial debt forgiveness with a restructuring of the remaining debt
into bonds that could be traded on the securities markets. When this program was
concluded, the price of debt on the secondary market increased and financing
leverage decreased, making it difficult and less attractive for environmental
organizations to acquire debt for resale.24 Further, debt relief for developing
countries is available through other programs that allow for relatively greater
amounts of debt to be cancelled (e.g., HIPC). These programs may be more desirable
to developing countries with debt than debt-for-nature initiatives under the EAI or
TFCA. Under the TFCA, there was an 18-month period from 2004 to 2006 when no
transactions were made. Lastly, the political and economic requirements needed to
be eligible for debt-for-nature transactions make it difficult for several countries to
participate in EAI or TFCA programs.
Figure 3. Three Party and Bilateral U.S. Debt-for-Nature
Transactions 1987-2007

8f sw
6er o
7 98 8 98 9 99 0 99 1 99 2 99 3 99 4 99 5 99 6 99 7 99 8 99 9 00 0 00 1 00 2 00 3 00 4 00 5 00 6 00 7
1 98 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2
Ye a r
Three-party SwapsEAI/TFCA Transactions
Source: Created by CRS.
Emergence of Subsidized Debt-for-Nature Transactions
In 2001, a different form of a debt-for-nature transaction emerged under the
TFCA. The Nature Conservancy and the United States joined to buy down a portion
of debt that Belize owed to the United States. This partnership in debt-for-nature
transactions is referred to as a subsidized debt swap. In a subsidized debt swap, an
NGO generally matches 20% of the U.S. government contribution toward a debt-for-
nature transaction. For example, in a recent transaction with Panama in 2003, the
24 The World Bank, “World Debt Tables, 1996,” Washington, D.C., 1996.

U.S. government provided $5.6 million and the The Nature Conservancy provided
$1.2 million to reduce Panama’s debt by $10 million and generate $10 million in
conservation funds. The transaction is completed when three agreements are signed:
(1) the U.S. government and the beneficiary country sign a debt restructuring
agreement; (2) the U.S. government and the NGO sign an agreement to transfer NGO
funds; and (3) the NGO and the beneficiary country sign a Forest Conservation
Agreement.25 In a subsidized swap, the U.S. government is not a signatory to the
Forest Conservation Agreement, yet generally has representatives on the oversight
committee.26 Subsidized swaps have been implemented in the last three out of four
transactions under the TFCA (see Table 4).27
Appropriations for debt reduction activities authorized by the EAI have totaled
$90 million. Forty million dollars was appropriated for P.L. 480 debt reduction for
FY1993 (P.L. 102-341) and $50 million for other debt restructuring under EAI in
FY1993 (P.L. 102-391). For debt reduction activities under TFCA, appropriations
have totaled up to $117 million from FY2000 to FY2006 (see Table 5).
Appropriations are not authorized for FY2008 and beyond under TFCA.
Table 5. Appropriations Provided Under the
Tropical Forest Conservation Act of 1998
FiscalRequested AmountAppropriated AmountActual Amount Useda
Year($ in millions)($ in millions)($ in millions)
2000 $50.0 $13.0 $6.0
2001 $37.0 $13.0 $14.4
2002$13.0Up to $25.0 ($11.0 wasb$11.0
given for the TFCA)
2003Up to $40.0Up to $40.0 ($20.0 was$6.0
given for the TFCA)
2004 $20.0 $19.8 $20.0

2005 $20.0 $20.0 $0.0c

2006 $20.0 $20.0 $26.0
2007 $8.0 $20.0 $12.6
2008 $20.0 $50.0 n/a
a Cells with n/a indicate that funds have not yet been determined.
b This figure consists of $5 million in direct funds and $6 million in funds transferred from unobligated
balances. c
No transactions under the TFCA were conducted in 2005.

25 The U.S. government is a signatory on a Tropical Forest Agreement, which is used with
debt-for-nature transactions that are not subsidized.
26 This agreement generally addresses the structure of the conservation fund, its
administrative council, and the use of monies from the fund, among other things.
27 Scott Lampman, “Debt Swaps Create New Conservation Opportunities,”Biodiversity 13
(2003), pp. 1-3.

Future Directions
Bilateral debt-for-nature initiatives implemented by the U.S. government have
been supported with appropriations (e.g., under the EAI and now the TFCA
authorization) for 7 of the last 10 years. Debt-for-nature transactions administered
by the United States have focused on transactions under the TFCA. Since most of
the transactions are relatively new, there have been no comprehensive analyses of
their effectiveness in preventing the destruction of tropical forests. Some contend
that a fair analysis might not be possible until 10 years after the implementation of
a transaction. Nevertheless, many conservation organizations support the framework
of the TFCA and suggest that it should serve as a model for conserving other
ecosystems such as coral reefs and grasslands.
Transactions under the TFCA are expected to continue since it is included in the
Administration’s strategy to address global climate change.28 Tropical forests make
up the largest proportion of carbon stored in terrestrial land masses and are thought
to be a carbon sink. Despite uncertainties on the part of some, it is generally thought
that maintaining existing tropical forests will store carbon, and that preventing
deforestation will reduce the entry of carbon into the atmosphere.29 Indeed, a pending
debt-for-nature swap with Indonesia under the TFCA has been billed as a cooperative
effort to deal with climate change by the Indonesian President.30

28 See [], last updated
February 2002, and last accessed Oct. 11, 2006. (Hereafter referred to as Climate Change
29 T. K. Rudel, Sequestering Carbon in Tropical Forests: Experiments, Policy Implications,
and Climate Change, Society and Natural Resources, vol. 14 (2001), pp. 525-531.
30 President of the Republic of Indonesia to Seek Debt-for-Nature Swaps to Deal with
Climate Change, Antara (Sept. 10, 2007)

Appendix: List of Related Laws and Appropriations
That Support Debt-for-Nature Initiatives
!Continuing Appropriations Act for 1988 (P.L. 100-202; Section
537(C)(1-3)). Directs Secretary of the Treasury to analyze initiatives
that would enable developing countries to repay portions of their
debt obligations through investments in conservation activities.
!International Development and Finance Act of 1989 (P.L. 101-

240; Title VII, Part A, Section 711) (22 U.S.C. 2282 -2286).

Authorizes USAID to provide assistance to nongovernmental
organizations to purchase debt of foreign countries as part of a debt-
for-nature agreement (i.e., three-party swap). Authorizes USAID to
conduct a pilot program for debt-for-nature swaps with eligible sub-
Saharan African countries.
!Support for East European Democracy (SEED) Act of 1989
(P.L. 101-179; Title I, Section 104) (22 U.S.C. 5414). Authorizes
the President to undertake the discounted sale, to private purchasers,
of U.S. government debt obligations from eligible Eastern European
!FY1990 Foreign Operations Appropriations Act (P.L. 101-167;
Title V, Section 533(e)) (22 U.S.C. 262p-4i- 262p-4j). Directs the
Secretary of the Treasury to (1) support sustainable development and
conservation projects when negotiating reduction of commercial
debt and assisting with reduction of official (public) debt
obligations, (2) encourage the World Bank to assist countries in
reducing or restructuring private debt through environmental project
and policy-based loans, and (3) encourage multilateral development
banks to support lending portfolios that will allow debtor countries
to restructure debt that may offer financial resources for
!Enterprise for the Americas Initiative (Title XV, Section 1512 of
the Food, Agriculture Conservation and Trade Act of 1990 (P.L.
101-624; 104 Stat. 3658) (7 U.S.C. 1738b). Amends the Agriculture
Development and Trade Act of 1954 to allow the President to reduce
the amount of P.L. 480 sales credit debt owed to the United States
by Latin American and Caribbean countries.
!Export Enhancement Act of 1992 (P.L. 102-429; Title I, Section

108) (12 U.S.C. 635i-6). Authorizes the sale, reduction, cancellation,

and buyback of outstanding Export-Import Bank (Exim) loans for
EAI purposes.

!Jobs Through Exports Act of 1992 (debt forgiveness authority
under EAI) (P.L. 102-549; Title VI, Section 704) (22 U.S.C.

2430) and (22 U.S.C. 2421). Authorizes the sale, reduction,

cancellation, and country buyback (through right of first refusal) of
eligible Commodity Credit Corporation (CCC) debt. Also authorizes
the reduction of foreign assistance (USAID) debt.
!Enterprise for the Americas Initiative Act of 1992 (P.L. 102-

532)(7 U.S.C. 1738m, p-r, etc.). Establishes guidelines for debt-

for-nature swaps for Latin American and Caribbean countries.
!Agriculture Appropriations for FY1993 (P.L. 102-341). Provided
$40 million for P.L. 480 debt reduction under EAI.
!Foreign Operations Appropriations for FY1993 (P.L. 102-391).
Provided $50 million for debt restructuring under EAI.
!Foreign Operations Appropriations for FY1995 (P.L. 103-306;
Title II, Section 534). Authorizes nongovernmental organizations
associated with the Agency for International Development to place
funds from economic assistance provided by USAID in interest-
bearing accounts. Earned interest may be used for the purpose of the
grants given.
!Foreign Operations Appropriations for FY1996 (P.L. 104-107;
Title V, Section 571). Provides authority to perform debt
buybacks/swaps with eligible loans made before January 1, 1995.
For buybacks, the lesser of either 40% of the price paid or the
difference between price paid and face value must be used to support
conservation, child development and survival, or community
development programs (Title V, Section 574).
!Tropical Forest Conservation Act of 1998 (P.L. 105-214) (22
U.S.C. 2431). Amends the Foreign Assistance Act of 1961 to
facilitate the protection of tropical forests through debt restructuring,
buybacks, and swaps in eligible developing countries with tropical
!Reauthorization of the Tropical Forest Conservation Act (P.L.

107-26). Authorizes the appropriation of $50 million, $75 million,

and $100 million for FY2002, FY2003, and FY2004. Reduces the
magnitude of investment reforms that must be in place for eligible
!Reauthorization of Appropriations under the Tropical Forest
Conservation Act (P.L. 108-323). Authorizes the appropriation of
$20 million, $25 million, and $30 million for FY2005, FY2006, and
FY2007, respectively. Includes authorization for evaluating
programs and allows for the principal on debt agreements to be
treated by the debt-for-nature transaction.