Implementing the debt-for-nature swaps for marine protected areas: case studies from Seychelles and Belize … – Nature.com

As the DFNS is proposed and implemented against the background of debt crisis and environmental challenge, it, in nature, has dual mandates to address financial problems and protect the environment. First and foremost, the DFNS is designed to provide sustainable and continuous financial support for environmental protection, thus causing environmental impacts. Moreover, as an additional measure to alleviate the unsustainable debt of the debtor country, the DFNS are expected to realize debt reduction, which has multiple impacts on the economy. Besides, the implementation of DFNS is based on debt swap agreements among the debtor countries, creditor countries, and NGOs. In this sense, various legal issues surrounding DFNS influence its performance. Accordingly, the overall evaluation of the performance of DFNS for MPAs is carried out from the perspectives of economic, legal, and environmental impacts.

As the last link of the entire DFNS mechanism chain, the establishment of MPAs also determines the performance of DFNS to some extent. Whether the MPAs are well developed to a certain degree can be assessed from data such as how many MPAs have been built and how many square kilometers the current MPAs have increased. According to the GoS, by March 2020, 13 MPAs had been legally designated, totaling more than 410,000 sq. km (SMSP, 2022). The protected areas are split into two zones. High Biodiversity Protection Areas (Zone 1) allow almost no extractive human activities (SMSP, 2022). Zone 1 areas include one of the worlds most ecologically important habitats, the waters around the Aldabra Group (SMSP, 2022). Medium Biodiversity Protection and Sustainable Use Areas (Zone 2) are also designed to conserve natural ecosystems while allowing some economic activities. Thereinto, there are five Zone 1 areas designated as Marine National Parks totaling 203,071 sq. km and eight Zone 1 areas, totaling 238,442 sq. km, two of which are expanded and redesigned (SMSP, 2022). In addition, the DFNS has provided some funds to support the implementation of the marine spatial plan (MSP), which is a comprehensive, public, and participatory process to plan for sustainable development and integrate large-scale marine conservation in the context of a changing climate that is also likely to ensure ecological protection for years to come, including expanding, designing and redesigning the MPAs (SMSP, 2022).

Like the practice in Seychelles, the progress of Belizes new MPA construction plan under the DFNS is open to the public. The MSP of Belize was launched in 2022, which continues to complement the Belize Blue Economy Development Policy and Strategy (2022-2027) and Maritime Economy Plan and advance other MSP approaches currently used in Belize, such as MPAs (GoB, 2022). According to the situation that the GoB initiated the MSP on time, one year after signing the Conservation Funding Agreement, up to 20.53% of the ocean of Belize has already been designated in Biodiversity Protection as promised (House of Representatives and Senate of Belize, 2021).

As a way to fund marine conservation, DFNS need to be localized in debtor countries. The debtor country tends to coordinate the DFNS with its overall environmental protection strategy to realize the conservation objectives. For example, the GoS first had expansion objectives on MPAs, the MSP, etc., and then sought to use the DFNS to obtain financing through debt conversion (GoS, 2015). In the Belize practice in 2021, the government simultaneously considered protected area planning and debt sustainability. Through the combined use of the DFNS and sovereign blue bond/loan, not only can a considerable amount of financing be obtained, but also the overall environmental protection strategy of the country can be effectively implemented.

The way to provide funding for marine conservation through the DFNS has two steps: the first step is for the debtor country to make marine conservation commitments under the DFNS agreement; the second step is to manage the DFNS transactions through trust funds established under the national laws, which generates incomes to invest in marine conservation. The marine conservation commitments made by the debtor countrys government are reflected in the content of the debtor countrys environmental protection strategy.

Specifically, the debtor country has enacted legislation for issues such as DFNS transactions, fund establishment, and conservation commitments and described in detail the implementation measures of the DFNS at the economic, legal, and policy levels. For instance, the Conservation and Climate Adaption Trust of Seychelles Act 2015 (see National Assembly of Seychelles, 2015) provides that the annual budget of the SeyCCAT sets forth the costs of monitoring and evaluating the Seychelles system of protected areas and that the object of the SeyCCAT shall be to administer the assets of the Trust, intended to provide a sustainable flow of fundsto support the long-term management and expansion of the Seychelles system of protected areas and other activitiesthrough consultations with stakeholders. The Blue Bonds Loan Act 2021 (see House of Representatives and Senate of Belize, 2021) stipulates that the Conservation Fund shall be an entity devoted to support conservation activities in Belize focused on marine and marine-related activities and that the obligations of GoB include to use any grant it may receive from the Conservation Fund to supplement funds allocated by Belize in its budget or otherwise for conservation activities and to complete a legally enforceable MSP and designate up to 30% of its Ocean in Biodiversity Protection Zones. These acts legislated the DFNS transactions into the debtor countrys environmental protection strategy, effectively solving the localization of the DFNS to better promote the environmental protection in debtor countries.

Although its implications for addressing the debt crisis vary according to different conditions, the DFNS plays a decisive role in achieving direct debt relief for debtor countries. Moreover, the DFNS does not change the debt sustainability of debtor countries. As for debt relief, the success of the DFNSs debt relief directly depends on the discount rate of its sovereign debt on the secondary market. The theory of realizing debt reduction of the DFNS is based on the comparatively high discount rate of its sovereign debt in the secondary market. The amount of the reduction increases as the discount rate increases; inversely, the amount decreases as the discount rate falls. In practice, Seychelles debt was discounted at 93.5 cents per dollar in 2015, making the reduction small. Belizes debt was discounted at 55 cents per dollar in 2021, and the overall amount is enormous, making the reduction quite large.

In addition, the DFNS may favorably impact the debt sustainability of debtor countries. A debt is sustainable if it satisfies the present value budget constraint without a major correction in the balance of income and expenditure given the costs of financing it faces in the market (IMF, 2002). Seychelless debt sustainability is unchanged following the implementation of DFNS. While the total external debt has decreased, the overall debt amount has not fundamentally decreased due to the need to pay back the promissory note to SeyCCAT in local currency (IMF, 2015). Belizes practice in 2021 is different. The DFNS is considered one of the two key reasons Belize made significant progress towards restoring debt sustainability in 2021, the debt conversion reduced the public debt by 12% of GDP (IMF, 2022). The debt swap also would reduce Belizes debt service payments to a small extent during Fiscal Year 2022-34 (IMF, 2022). However, according to follow-up data, Belizes debt has become sustainable (IMF, 2023). That should be the favorable impact of the DFNS. So, given the practices of Seychelles and Belize, debt sustainability improves when implementing the DFNS, which may be considered a satisfactory debt instrument for changing the countrys debt sustainability.

The debt buyback between debtor countries and creditor countries generally generates income from DFNS. This income is often used for investment in conservation. From the existing practices and rationale of funding MPAs, DFNS can provide a long-term and stable conservation funding source. Often, debtor countries willing to use DFNS need long-term and stable funding for conservation plans because a comparatively low discount rate indicates that a debtor countrys debt repayment ability is not optimistic, reflecting the economy of the debtor country less stable. Generally, a permanent trust fund is built into the DFNS legal structure to manage the funding. And, in the practices of Seychelles and Belize, whether holding long-term promissory notes or regularly acquiring income under the agreement, the period for which the trust fund gets income is very long. That makes the income long-term available. Moreover, the stability of the income from DFNS often relies on trust funds, mainstream currency bonds with stable yields, and local currency payments. Also, the stability of funds of the DFNS in Belize in 2021 is stronger due to political risk insurance and commercial sovereign debt catastrophe insurance for covering the Blue Loan, so repayment expectations are unaffected even though the country is more vulnerable to natural factors like climate change affecting its economic activities.

Reaching a DFNS agreement tends to encounter challenges in both form and substance. Formally, the DFNS agreement must be agreed upon by all creditors and debtor countries through long-term negotiation, which is time-consuming before the final formation of the DFNS agreement. In essence, the DFNS agreement must be conditioned on the terms of a preexisting loan or bond agreement. This process requires a constant balancing of the interests of various stakeholders.

In the practice of Seychelles, the debts available for transformation are debts that have been restructured under the umbrella of the Paris Club in 2009. The debt swap provision (Paris Club, 2015) of the Paris Club has been included in the debt restructuring agreement since 2015, providing an opportunity to sign the DFNS agreement in Seychelles. The Paris Club has six principles to underlie their work, among which the principles of solidarity and consensus make all members need to act as a group in their dealings with a given debtor country. Because all of Seychelles Paris Club creditors agreed with the debt swap provision, which is stated in the previous debt restructuring agreement, the new debt swap agreement to convert some or all of the debts can be made among all or some of Seychelles creditors. It also means that the debt swap transaction can proceed even if only part of the creditor countries agree to implement the DFNS. Moreover, Seychelles DFNS plan took more than five years from the beginning of the negotiation to its completion (Convergence, 2017).

The 2021 Belize practice differs from Seychelles in that the Belize sovereign bond, or Super Bond, is subject to debt conversion because of the CACs in the prior bond. It requires that the implementation of the sovereign debt restructuring program only needs to be approved by a certain majority of creditors to bind all creditors. All debts were finally restructured after more than 85% of the bondholders agreed to execute debt swap agreements (Chamon et al. 2022). In conclusion, for the DFNS agreement to be signed, it must be done to uphold the conditions of the prior agreement, and a successful consensus between the debtor country and the creditors must be established. Moreover, debt conversion negotiations in Belize took longer than those in Seychelles, and there was a pause around late 2020 (TNC, 2022). To conclude, the DFNS deal does have some challenges. But as far as the practices of Seychelles and Belize are concerned, it only needs the ambition of protection actions and the time cost of negotiations.

A binding force is a force that can bind the agreement to be obeyed or carried out. The DFNS agreement is complex, and its nature is different from a general treaty. In traditional international law governed by the Vienna Convention on the Law of Treaties (VCLT), the DFNS agreement is not a treaty because it involves more than just creditor countries or debtor countries. However, the VCLT governs the content between creditor countries and debtor countries. Nevertheless, it does not mean that the DFNS agreement is not legally binding.

By the nature of the DFNS agreement, it can be considered a contractual approach to sovereign debt restructuring, and its legally binding force may show the same relative weakness as its superordinate concept. The reason is that sovereign states are still effectively free to default if they no longer obtain financing from international capital markets. Moreover, the lessons of the sovereign default cases of Argentina and Greece showed that the possibility of sovereign debt default still exists, and debtor countries can even choose to default on their own. It also showed that the agreement with default clauses is not binding enough in essence. But in the end, debtor countries often choose to get back on track, reach debt restructuring agreements with creditors, and repay the debts. That demonstrates that the legally binding force of the sovereign debt restructuring agreement is relatively weak.

The legally binding force of the DFNS agreement is divided into two levels to discuss: the international level and the domestic level. Internationally, as a kind of credit agreement, the DFNS agreement affects the certainty and predictability of the implementation. Such binding force also has implications for the behaviors of debtor countries and creditors. From the civil law perspective, an agreements binding force requires moral restraints or other forces to guarantee. Nevertheless, for agreements made by countries, the situation is slightly different. The fundamental cause is the absence of a supranational organization to guarantee the agreements execution. Nonetheless, debt agreements are often fulfilled in a timely way when the debtor country can fulfill its obligations or when it has the capability to do so, as there would be a significant cost if the debtor country decided to default.

Although the legally binding force is weak, in practice, such weak force has no impact on its practical execution. In fact, according to the long-term observation of international credit, it can be found that debtor countries rarely defaulted on their own initiative, and they often had the willingness to perform when they were able to perform. Similarly, creditors tended not to break their loans and continued to provide loans to debtor countries for a long time. The deeper reason may require other disciplines theories to answer. From the perspective of the International Political Economy, the structural power (see Strange, 1992; Brown, 1999; Roos, 2019) of finance makes it difficult for both parties to cut off debt repayment or loans easily (Strange, 1992). Other critics also used the repeated prisoners dilemma of Game Theory to explore the reasons for the long-term existence of credit, showing that to international lending, where legal enforcement of loan contracts is impossible, so that implicit-contract enforcement becomes essential, and a party who violates an internal implicit contract typically loses the opportunity to cooperate with its current partner; a party who violates an external implicit contract loses the opportunity to cooperate with some or all potential partners as well (Crawford, 1987). In this way, the loss of current and potential cooperation opportunities makes it lose the opportunity to obtain funds again in the international credit market, creating a quasi-binding force. In fact, this seems as concessions offered by countries that lack access to financing. But now, based on environmental goals, implementing DFNS for MPAs may bring a win-win situation for debtor countries and creditors. To a certain degree, the implementation of DFNS in Seychelles and Belize was initiated by their national governments, which shows a positive attitude of debtor countries towards DFNS.

Moreover, default clauses and the waiver of sovereign immunity clause in Belizes Blue Loan Agreement enhance such binding force. In this way, if the GoB defaults, it can be arbitrated in New York, New York, USA, in accordance with the Rules of Arbitration of the International Chamber of Commerce entered into force on January 1, 2021. The GoB hereby unconditionally and irrevocably waives and agrees not to assertany such immunity from jurisdiction, from suit or arbitration (House of Representatives & Senate of Belize, 2021).

In addition, at the domestic level, surrounding issues of the DFNS agreement, the laws and regulations of the debtor countries also enhance such binding force of the DFNS agreement. At least, in the debtor country, the act can guarantee the fulfillment of the debtor countrys commitments. Both Seychelles and Belize have enacted acts on the DFNS to ensure that the DFNS mechanism can be effectively implemented, which demonstrates the confidence of the two countries in the execution of the DFNS agreement and their ambition to achieve environmental protection goals.

There are many potential barriers to implementing the DFNS agreement because the DFNS agreement has the connotation of imposing responsibilities on other parties. Although the parties of the agreement do not include domestic residents, marine conservation commitments and changes in the countrys external debt are likely to affect domestic residents. Moreover, the rationale basis of the agreement itself may be based on subsidy or aid. Given this, it appears that the DFNS agreement has three problems, including the lack of transparency in the pre-signing consultation procedure, the absence of explicit prior consent from the residents whom the protected areas would impact, and the conformity of the DFNS to the Polluter Pays Principle (PPP).

The first barrier is mainly reflected in the lack of transparency in the negotiations between the debtor and creditor countries. The public is unable to grasp what has been accomplished in these deals and how much money firms are receiving due to this lack of transparency. Some argued it is against the Voluntary Guidelines for Debt Transparency agreed by the Institute for International Finance (IIF) and the OECDs Debt Transparency Initiative (CADTM, 2022). However, this phenomenon was greatly improved in Belizes practice in 2021 because the GoB made all DFNS agreements open to the public in the form of legislation. In this way, although the negotiation stage is not transparent enough, at least the people can know what effect the DFNS transaction can produce.

The second one primarily has a possible negative effect on those whose primary means of life are related to the environment, such as local fishermen. Some critics are concerned that the DFNS may affect the residents and thus believe that the prior consent of the affected residents should be obtained before signing such a debt swap agreement (CADTM, 2022). The reason for thinking this way may be that an agreement that imposes obligations on a third party requires the third partys consent. However, the international agreement signed by states may be another logic; even if it is based on the doctrine of privity of contract, the agreement is established and takes effect. Although the debtor countries commitments were stated in the DFNS agreement, the establishment of MPAs that the debtor country promised to complete is its internal affairs. According to the doctrine of privity of contract, inter-state agreements can be established and take effect without the prior and informed consent of the affected residents. Suppose the government of the debtor country has caused a loss of rights and interests to the residents that may be affected during administration. In that case, the compensation should be made in accordance with its domestic laws.

The last one is about the relationship between the PPP and the DFNS. The establishment of DFNS is based on certain legal and economic relationships. The relationship between its financial support for environmental protection in debtor countries and the connotation of the PPP can lead to the DFNS lack of legally binding force. The reason is that the DFNS is a counterexample of the PPP. Some concluded that DFNS made creditors relieve the debt in exchange for the debtor country agreeing not to engage in environmentally destructive practices (Knicley, 2012). The DFNS is, in fact, a kind of subsidy or international aid for developing countries, thus making creditor countries not responsible for relieving the debt. That also shows, in fact, that the creditors are in the dominant position in the DFNS negotiations.

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Implementing the debt-for-nature swaps for marine protected areas: case studies from Seychelles and Belize ... - Nature.com