FINANCING BIODIVERSITY CONSERVATION: The Potential of Environmental Funds

FINANCING BIODIVERSITY CONSERVATION:

The Potential of Environmental Funds

by

Ricardo Bayon and Carolyn Deere IUCN-The World Conservation Union US Office

rbayon@iucnus.org

presented at a workshop on

Financial Innovations for Biodiversity Bratislava, Slovakia

1-3 May 1998

Overview

. In the 1990s, Environmental Funds (EFs) have emerged as promising long-term mechanisms for providing financial support to biodiversity conservation and sustainable development activities. Environmental Funds, however, vary widely depending on the source, management and distribution of their funds. This paper responds to frequently asked questions about the operation and performance of Environmental Funds. It provides several case studies to highlight why they are attractive mechanisms for funding biodiversity protection and seeks to draw some of the many lessons that have been learned as Environmental Funds have matured and gained experience at managing assets and grant programs (particularly in Latin America). Finally, the paper offers several recommendations for the Fourth Conference of the Parties to the Biodiversity Convention. In particular, it advises that Environmental Funds are a good way to finance biodiversity conservation and for the Global Environment Facility (GEF)to leverage its funds. It recommends that the GEF be called upon to explore Environmental Funds as preferred financial mechanisms for investment in biodiversity projects.

Environmental Funds vary greatly in terms of their funding, governance, structure, purpose and funding priorities. They operate at the local, national and sometimes, regional level. Yet, there are some common threads, both in terms of lessons learned and features contributing to success. For instance, the most successful funds tend to operate like independent foundations, investing their assets and using the interest to fund programs. They tend to be governed by mixed public-private sector boards, often with NGOs often as "majority stakeholders", helping manage the capital, invest the funds, and determine which projects will receive funding. The key issues to consider in the establishment of any Environmental Fund are:

• The source of funds: To date, major capital funding for Environmental Funds has come from national government payments resulting from debt-for-nature swaps, and from other bilateral or multilateral sources such as the GEF. However, environmental Funds are also increasingly focusing on harnessing in-country resources (such as user fees, taxes and levies, income from privatisation and donations) to ensure financial sustainability in the long-term.

• The Fund's long-term plan: What area/s will the fund focus on? Will it finance National Parks, National Conservation strategies, biodiversity conservation, poverty alleviation, or something else? Funds with clear short, medium, and long-term plans and with specific criteria governing the use of funds tend to be the most successful.

• Fund Governance: The relationship between the board and the secretariat has important impacts on the fund's success. The level of representation and decision-making power of NGOs on the board tends also affects the ultimate success of the fund.

• Asset Management: The long-term viability of the fund is strongly dependent upon the way in which the money is managed, the rate of return on investment, and the use of the fund's capital base.

• Grantmaking Criteria: Both the private and public partners involved in the fund should jointly establish the criteria by which projects will be chosen for funding. Often, this involves building local participation into project preparation and assessment.

• Fund monitoring and evaluation: It is important to monitor and evaluate the impacts and effectiveness of projects funded. This means establishing monitoring and evaluation mechanisms BEFORE the projects are funded.

Clearly environmental funds can provide a useful and sustainable source of funds for biodiversity conservation. But beyond the money, the funds can also help build a culture of philanthropy in the countries concerned and serve as increasingly important actors in national policy arenas.

In this regard IUCN would recommend to the CBD that it:

• Urge developed country parties to help provide funds to EFs that help achieve the goals of the CBD.

• Consider calling on its parties to support a special fund that would assist countries in creating, maintaining, and managing EFs that help finance the implementation of the CBD. This fund could also finance activities designed to help funds exchange experiences amongst themselves and learn from each other.

• Encourage its interim financial mechanism, the GEF, to continue supporting EFs as efficient, effective and innovative means of enabling countries to carry out the activities called for in the CBD.

• Encourage bilateral funding agencies that are not already doing so, to become more involved in the creation and maintenance of EFs for the conservation of biological diversity.

• Encourage multilateral organisations such as the World Bank to help serve as brokers and facilitators of debt swaps designed to capitalise EFs designed to finance activities called for in the CBD. This is extremely important because multilateral organisations have more credibility with, and access to, the government agencies responsible for approving debt swaps in both debtor and creditor countries. Multilaterals should also be encouraged to consider initiatives similar to the Enterprise for the Americas Initiative with debt owed to them by developing countries.

• Establish an inter-sessional working group of the CBD to further investigate the potential of EFs as means for financing the activities called for by the Convention. This group could also monitor the experience of existing funds and look at their contribution to carrying out activities in support of the CBD. This inter-sessional working group would benefit greatly from the knowledge and experience of the IPG, as well as that of other NGOs with experience in EFs.

• Encourage the sharing of lessons learned on EFs, particularly from Latin America, with countries in Asia, Africa, and elsewhere.

1. Introduction

For the last 50 years, a key issue for environmentalists has been the question of how to raise money for their activities. Ever since 1948, when IUCN was created as the first international union of governments and non-governmental organisations concerned with conservation, the world’s environmental movement has consistently advocated the need for more investment in sustainable development and the protection of the environment. In 1972, when the representatives of the world’s governments met for the first UN Conference on the Human Environment in Stockholm, much of the discussion surrounded the issue of financing. 20 years later, in Rio, financing ‘sustainable development’ became one of the most important

bones of contention of the entire conference. On its own, the issue of financial flows almost derailed the entire Earth Summit.

Similar situations have arisen surrounding the negotiations of all the environmental conventions that were signed in Rio, from the Desertification Convention and the Convention on Climate Change, to the Convention on Biological Diversity (CBD). Indeed, many an hour of diplomatic discussions surrounding the CBD has been spent on the convention’s proposed, interim, and overall financial mechanisms. And what has all this talk achieved?

If one goes back to Rio and looks at the price tag for Agenda 21, the non-binding action plan for sustainable development agreed to by almost all of the world’s governments, one comes to the sobering realisation that the problem of inadequate financing for sustainable development is far from over. Agenda 21 estimates that sustainable development will cost the world’s governments a stunning US$ 625 billion dollars to achieve sustainable development. Of that money, US$ 500 billion was to be spent by individual countries on their own environment, and US$125 billion was to be provided by the international community for global environmental problems or issues of common concern. Some even characterise the “Rio bargain” as sustainable development for the world's poor in return for financing from the world's rich.

In reality, the world has come nowhere near meeting the targets (financial and otherwise) of Agenda 21. Those traditionally responsible for carrying out environmental activities, particularly governments, and non-governmental organisations (NGOs), remain financially strapped. In particular, governments in developing countries often lack the resources to fund extensive environmental portfolios. Clearly, not all developing countries are alike. Some are better able to finance sustainable development than are others but, as a general rule, most countries need financial aid if they are to implement some of the activities called for in Agenda 21.

Official Development Assistance (ODA) which has traditionally been a valuable, albeit small, source of environmental funding in many countries has been steadily decreasing over the past decade. From 1992 to 1993, by coincidence the same years of the Earth Summit, aid from OECD countries to the developing world suffered a sharp drop from US$ 61 billion to US$ 56 billion, a 6% fall in real terms. In those same years, and in spite of renewed commitments by donors at the Earth Summit, 14 out of 21 countries actually reduced their aid levels as a percentage of GNP, bringing the average down from 0.33% in 1992 to 0.30% in 1993 - its lowest level since 1973 (0.29%) and far from the UN target of 0.7%!

But other trends are afoot. As the flow of public money begins to ebb, the flow of private capital to developing countries has increased exponentially. According to the World Bank, in the 1990s private investment in and lending to developing countries has gone from US$ 44 billion in 1990 to US$ 244 billion in 1996.1 However, this private capital rarely reaches the poorest of the poor. It tends to flow to countries whose economies are relatively healthy, countries that the World Bank calls ‘middle-income’, "newly industrialised", or ‘emerging’; countries such as

1

French, Hilary, "Assessing Private Capital Flows to Developing Countries" in State of the World 1998, Worldwatch Institute: Washington D.C.

Brazil, Argentina, China, Mexico, the Czech Republic, Hungary, Malaysia, Thailand and Indonesia. The whole continent of Africa, on the other hand, attracts only a fraction of that investment, most of it for oil exploration and extraction.

What is the impact of this money on the environment? How often is it dedicated to environmental purposes? This is a difficult question to answer, but Hilary French of WorldWatch has argued in the 1998 State of the World that one of the most worrisome implications of this trend is that it ‘helps export Western consumerism’. She highlights that this flow of money may place considerable stress on environmental legislation in some countries as the mobile international capital seeks the ‘most hospitable’ home, often in countries with weak or unenforced environmental legislation. However, all is not doom and gloom for, as French herself notes, “on the positive side, investment often brings with it cutting-edge environmental technologies that may help developing countries leapfrog over the dirtiest and most damaging phases of the development path pioneered by the industrial world. Furthermore, private investors as well as national governments and international organisations have begun to devise a growing array of deliberately ‘green’ international investment strategies. These programmes aim to promote the transition to enterprises that nurture rather than decimate the natural world.’ One such mechanism is the Terra Capital Fund that involves financing from the Global Environment Facility (GEF), the International Finance Corporation (IFC) and private investors (Speakers note: and which we will hear more about in this workshop).

Regardless of whether it is private or public, greater investment in the environment is vital. Developing countries need reliable, long-term sources of financing to enable them to develop the internal capacity needed to take responsibility for the environment. Moreover, investment should meet certain basic criteria. It should:

•

Be Sustainable: Wherever possible, investment should be available over the long-term. It should focus on goals rather 10, 15, even 50 years down the line, rather than on short-term gains.

•

Be Locally Driven: Experience has shown that environmental problems are best solved by the people that are closest to the problem, the people most affected by the problem. By the same token, the closer the source of finance is to the activity or project being financed, the more likely it is to reflect the reality on the ground, and be flexible enough to meet changing needs/realities. For this reason, financial mechanisms tend to be most successful when they are locally managed and locally driven.

•

Create local Capacity: The best measure of an investment’s success is whether it builds the capacity of people in the to meet today’s environmental problems as well as future challenges.

•

Leverage other funds: The best investments are those that leverage additional funds to help meet their goals, thus multiplying their impact. One mechanism that, when properly utilised, can meet all of the above criteria is the environmental fund. Variously referred to as ‘Environmental Trust Funds’, ‘Conservation Funds’, ‘National Environmental Funds’, ‘Environmental Trusts’, ‘Conservation Trust Funds’, ‘Environmental Endowments’, or ‘Environmental Foundations’, these funds seek to create the capacity at the local or national level to provide capital for environmental projects. Although every environmental fund is

unique, with its own source of funds, and its own mechanisms for managing and disbursing the funds, they all have certain commonalties. They are all local funds established by or with local people to meet locally defined priorities.

Since Rio, donors have shown considerable interest in environmental funds (EFs). There have been more than 45 such funds established around the world, with many more in the process of being developed. While some have been successful, others have failed and yet they all serve as valuable lessons in how to finance the conservation of biological diversity.

This paper briefly reviews the experience of environmental funds and seeks to answer some of the most ‘Frequently Asked Questions’ about their operation. It does not attempt to be the definitive primer on EFs, but rather to serve as a general introduction for those unfamiliar with these funds. A great deal of more detailed information on environmental funds can be obtained through the Interagency Planning Group on Environmental Funds (IPG) managed out of UNDP. The IPG is a very informal group composed of representatives from multilaterals, bilaterals, foundations and NGOs to serve as: a forum for exchanges of information on EFs; a mechanism for coordination of services and technical assistance to EFs; and an advocate for EFs as an innovative approach to promoting conservation of the environment and sustainable development. [Speaker's note: In addition, there have been numerous workshops held and documents written on the establishment of environmental funds. In fact, some of the people most familiar with specific environmental funds, or with key issues surrounding the establishment of environmental funds, will be speaking later in this workshop].

2. Frequently Asked Questions:

2.1 What is an Environmental Fund?

Environmental funds are regional, national or community-based instruments for financing sustainable development or the conservation of biological diversity. They are instruments for managing money and disbursing it to people or projects that help protect the environment. The best funds help build local capacity for managing financial resources while leveraging existing funds to generate additional financing. A key aspect of environmental funds is that they are locally driven and locally managed. That is, they are financial mechanisms designed to address the priorities of the region, country, province or community in which they are based. The structures of these funds vary. Some are set up to address a specific environmental issue or a specific locale. Others provide finance for a broad range of environmental activities. Still others are set up to address issues of “sustainable development” including poverty-alleviation and the well-being of children.

Some devise their own strategic plans and define the issues for which they will provide money, others finance activities called for by a national or provincial conservation strategy. In short, the funds vary according to the needs, priorities and desires of their creators, but can serve as important vehicles for bringing together representatives of government and civil society, promoting participation by civil society in the formulation of policy, and building national capacity.

2.2 How do they use their money?

One way of distinguishing between funds is by their approach to providing finance for environmental activities:

•

Some funds act as foundations that invest their capital and use the interest on that capital in support of activities consistent with the objectives of the foundation (i.e. grant-making foundations).

•

Funds may also function as banks or micro-credit lending facilities, providing small loans at concessionary rates to individuals or organisations carrying out environmental activities. The interest obtained from these loans is either put back into the fund or used to finance the fund’s management and operation.

•

It is also conceivable that funds could operate as venture capital firms that provide money to permit the creation of businesses that meet certain environmental criteria.

Of these, the first is by far the most common. Although it is possible for funds to provide micro-credit or act as venture capital funds, to date, most EFs have been set up as a mixture of draw-down funds and endowments (see below), investing a portion of the capital and using the return on that investment to support conservation programmes. In this context it is important to note that not all EFs need be endowments. In fact, some of the most successful funds have been draw-down funds with 10-15 year time periods for disbursing their money.

2.3 What Sorts of Activities do Environmental Funds Support?

The scope of environmental funds varies widely. What is most important, is that the particular funding priorities of each is clearly defined. Essentially, there are two kinds of environmental funds:2

•

Single-issue funds: These are funds with very specific missions such as providing funding to cover the long-term costs of operating and maintaining a particular national park or protected area, or for financing the work of a country’s system of national parks. For example, an environmental fund in Uganda finances activities relating to the operation of the Mgahinga National Park and the Bwindi Impenetrable Forest National Parks (see below). Similarly, one of the two funds existing in Jamaica, the Jamaican National Parks Trust, provides money to finance the research and operational costs of Jamaica's newly established National Park system. Single-issue funds have the advantage of a straightforward mission, clear criteria for what projects they do (and do not) finance, and a well-defined constituency.

•

Multi-issue funds: These are funds with broad missions such as "the protection of biological diversity" or the "achievement of sustainable development". One example of a multi-issue fund is the Indonesian Biodiversity Foundation (see Box XXX). Its overarching goal is to preserve biological diversity and support

2 _{The following categories were adapted from “Environmental Funds: The First Five Years”, a report} prepared by the Interagency Planning Group on Environmental Funds, for the OECD/DAC Working Party on Development Assistance and Environment, April 1995

activities such as: Inventories of biological resources; the management of buffer zones outside protected areas; promoting sustainable livelihoods for those who live in or around protected areas (i.e., native tree nursery and reforestation initiatives; soil reclamation programs; sustainable farming practices and products; community-based environmental management education; etc.. Another example of a multi-issue fund is the Fondo Mexicano Para La Conservacion de la Naturaleza (FMCN) is another example of a multi-issue fund. It funds a broad range of environmental activities including the capacity-building of Mexican NGOs.

An important issue when considering the establishment of either a single-issue fund or a issue fund is the development of clear priorities. One problem that multi-issue funds have encountered is that attempting to cover too many areas of activity can dilute their focus and impact. However, when multi-issue funds are closely tied to clearly established and effective mechanisms for setting environmental priorities (i.e. well-developed National Conservation Strategies, National Environmental Action Plans, or a National Biodiversity Strategies), their impact can be considerable.

In any case, the most effective funds tend to be those where all partners are actively involved in managing the EF and establishing the criteria by which projects are chosen for funding. Another important issue is monitoring and evaluation. Effective grant programs are those that select project activities according to a clear strategic plan and identify measurable objectives by which the performance of the grants can be evaluated.

BOX 1: A Single Issue Fund in Jamaica

The Jamaican National Parks Trust Fund (JNPT) is dedicated to the conservation of biological diversity through support of Jamaica’s newly established National Parks System. It was established in 1991 by the Jamaica Conservation and Development Trust (JCDT), a local NGO and was capitalized using the proceeds of Jamaica's first debt-for-nature swap in 1992. The money to purchase the debt was provided by USAID, The Conservation Trust of Puerto Rico, The Smithsonian Institution, Fidelity Investments, and The Nature Conservancy. Technical assistance in debt purchase and conversion was provided by the American Express Bank, the Pan Caribbean Bank and several Jamaican stockbrokers. The fund is managed primarily as an endowment and pays its expenses through investment income; its principal remaining untouched. At the same time, the fund solicits both public and private money as donations to the fund and through it to Jamaica's National Park system. The criteria governing the grants made by the JNPT are clear. Grants will be made in support of operational costs of the National Parks. The implementing agencies are the JCDT and the Montego Bay Marine Park Trust, the only two NGOs in the country who have a government mandate to run National Parks. The Fund, however, has also supported the work of the Conservation Data Centre at the University of the West Indies. Since the Jamaican system of National Parks only contains the two parks managed by these two implementing agencies, problems of prioritization are notof great concern. To date, the fund has made grants totaling US$530,000. However, the fund has had some funding problems due, mainly, to one major donor not paying its pledges to the fund.

Source: UNDP, ‘Strengthening the Capacities of National Environment Funds in Latin America and the Caribbean’, A Report of the Regional Consultation on National Environmental Funds in Latin America and the Caribbean, Merida, Yucatan, Mexico, 1997, p160

Another multi-issue fund is the Trust Fund for Conservation in Guatemala (FCG) which was established in 1991 “to support natural resource conservation, management and use projects and activities employing the sustainable development approach through the raising and stable provision of funds.” The FCG was created by four NGOs: the Interamerican Tropical Research Foundation (FIIT), The Mario Dary Foundation (FUNDARY), the Foundation of Protectors of Nature, and the Worldwide Fund for Nature (WWF). In 1992 they were joined by a fifth group, the Committee to Administer for the Protection of the Environment of Baja Verapaz (FUNDEMABV). In addition to the founding members, two government bodies are standing advisory members: the National Council for Protected Areas (CONAP) and the National Environment Commission (CONAMA), as is one Academic institution, the Center for Conservation Studies of the University of San Carlos (CECON). The FCG is governed by a Board of Governors with five voting members (the four Guatemalan NGOs and WWF). As standing technical advisers, the representatives of the government bodies participate in the evaluation and selection of the projects to be financed, where they have a voice but not to vote. The Board meets twice a year. The FCG was capitalised partly by using contributions from its founders, although the main source of capital were contributions provided by the Whitley Animal Protection Trust, WWF, and a private bank in the US. The Trust Fund initiated it activities with US$ 817,250. Currently it holds some US$ 919,851 in

BOX 2: Multi-issue funds in Bolivia and Guatemala FONAMA in Bolivia (USE OTHER EXAMPLE-Mexico)

The goal of Bolivia’s Fondo Nacional Para El Medio Ambiente (FONAMA) is to "attract, programme, allocate, invest, administer and monitor financial resources for environmental management and sustainable development". It was established by a decree of the Bolivian government and focused, initially, on receiving money from debt-for-nature swaps. Recently, however the fund has received money from various bilateral sources as well as the GEF. As of 1993, FONAMA had received commitments of approximately US$47 million (in the form of actual transfers and legal obligations) with another US$33 million currently under negotiation. FONAMA has set up several sub-accounts which finance various activities such as the operation and management of national parks, the implementation of the National Environmental Action Plan, and the capacity-building of local NGOs. By mid-1993 FONAMA had approved projects for a total amount of US$ 27 million and, by 1997 had disbursed approximately US$ 11 million. Although FONAMA bases its priorities on Bolivia’s National Environmental Action Plan, as well as the results of a prioritization processes carried out by NGOs, it has consistently identified a need to improve its “process of project identification and approval." Clearly, having targeted a wide range of activities, FONAMA has had some difficulty in setting its grant-making priorities. Furthermore, due to its close links to the Bolivian government, FONAMA has had to deal with governmental priorities changing when new governments are elected. In fact, FONAMA has encountered major problems in the last year or two, partly because it has attempted to address too broad a mandate.

Source: UNDP, ‘Strengthening the Capacities of National Environment Funds in Latin America and the Caribbean’, A Report of the Regional Consultation on National Environmental Funds in Latin America and the Caribbean, Merida, Yucatan, Mexico, 1997, pp 75-81.

capital and has made grants of approximately US$ 308,892. The capital was originally invested in three different promissory notes with a six-month term that expired in November of 1997. After that, investment tenders were invited from a broad range of financial institutions. The FCG has defined as its priority areas of activity as those related to: protected areas, sustainable management of natural resources, research, environmental training and education, and institution-building. Source: UNDP, ‘Strengthening the Capacities of National Environment Funds in Latin America and the Caribbean’, A Report of the Regional Consultation on National Environmental Funds in Latin America and the Caribbean’, Merida, Yucatan, Mexico, 1997, pp 142-148

2.4 Where do Environmental Funds Exist and How Many Are

There?

The EF movement has grown rapidly. In 1994, only 21 EFs had been established or were in the process of being created. By the end of 1997, a list compiled by UNDP for the Interagency Planning Group (IPG) on environmental funds, estimated that there are 46 operating EFs in developing countries, 11 EFs in the process of being established and 45 somewhere in the horizon. (See attached map). Of these, most (25) of the existing funds were in Latin America or the Caribbean. However, Asia has recently seen a sharp rise in EFs (there are now six funds in that region), partly as a result of a workshop on EFs conducted there last year. In Europe and the Commonwealth of Independent States there are now nine EFs, while Africa has only six. The three priority areas for the establishment of funds in the upcoming years are Africa, South Asia, and Southeast Asia.

2.5 How are Environmental Funds Structured and Governed?

There are a number of ways to structure the principal governing body of environmental funds. These include:

•

Solely government or Government-majority Funds: These funds are either directly established within the structure of the national government, or else they are created by government, with government representatives making up the majority of the fund's board.

•

NGO-majority Funds: These funds have NGOs as majority stakeholders on their governing bodies. As such, NGOs have a strong impact on decisions regarding the allocations of resources. Government representation is advisory rather than for decision-making.

•

Joint Government-NGO funds: EFs often have a mixed board containing both NGO and government representatives.

A 1995 report entitled Environmental Funds: the First Five Years highlights that there are benefits and costs associated with each of these options. It notes that independence from government may ‘increase donor confidence that money will not be inefficiently used or redirected to other government programs’, or that funding priorities will not shift with changes of government. In fact, some donors may prefer to fund independent organisations such that NGO-run EFs might have a fund raising edge over government-run EFs. The Enterprise for the Americas Initiative, for example, requires that an independent board, with NGO majority, be established to run the EF before it will contribute to its capitalisation. This does not mean that governments can not be represented on the EF's board, but rather that NGOs must be

"majority stake holders". However, the report highlights that independence may also have its drawbacks. For example, an independent fund that is strongly influenced or governed by international NGOs may be perceived as a foreign creation imposed by outsiders. This may, in turn, diminish the sense of national ownership. Likewise, government-run funds may be better able to influence national policies than an NGO-run fund. Finally, some bilateral donors confront fewer policy and procedural obstacles in contributing to a government-run fund than to an NGO-run fund. One key lesson from the Latin American experience with EFs is that the most successful funds tend to be those created in the private domain involving both government and NGOs in a balanced relationship, and where non-government entities are majority stake holders. It seems that when multiple stakeholders help manage the capital, invest the funds, and determine which projects will receive funding, it helps ensure a higher degree of continuity, transparency, and democracy. There have also been cases where funds include representatives of private industry on their Boards. Sometimes this can help raise money, or increase the political influence of the fund. More importantly, it can bring to the fund much needed expertise in asset management.

Getting the balance between private and public sector representation in the management of EFs is extremely important. Barry Spergel of the WWF-US has highlighted some of the key concerns in this regard. They include:

•

Having too strong an identification with government can tempt local officials to see the fund as a branch of the ministry, and they may be unwilling to share power.

•

Having too strong an identification with the NGO community can lead some officials and donors to not take the fund seriously.

•

Having too strong an identification with a single NGO, or type of NGO, can create tensions in the local community and make the fund appear one-sided. Some EFs, notably the Fondo Mexicano, ECOFONDO and Bolivia’s Enterprise for the America’s Account within FONAMA have invested in lengthy nationwide consultative processes to try to avoid such problems.

•

Having too many different representatives represented on the board can lead to

the dilution of the grant-making program. It can also lead to resources being spread too thinly to achieve significant impacts. One other problem with not having a strong mission, is that it may allow board members’ political interests to divert the fund.

•

Having a majority of board members from government is troublesome as this tends to bring with it high turn-over and frequent changes in board membership. This may, in turn, lead to sudden changes in program priorities and/or lead to a lack of continuity in the leadership of the institution.

2.6 What is the Legal Status of Environmental Funds?

3

The legal status of Environmental Funds varies depending, to some extent, on the legal system of the country involved. Environmental Funds: The First Five Years explains that they can take one of several forms:

•

a foundation;

•

a non-profit corporation;

•

a common law trust; or

•

a trust established by act of a national legislature.

Environmental Funds established in countries operating under common law systems (e.g. British Commonwealth Countries) tend to be called Trust Funds. Those established in countries with civil law systems tend be formed as foundations. Many funds have obtained ‘charitable status’ under tax laws to attract contributions from individual or private foundations.

2.7 Where do Environmental Funds get their Money?

Environmental Funds receive financing from different sources including:

3 _Ibid

BOX 3 An EF with an NGO Majority

The Foundation for the Philippine Environment

The Foundation for the Philippine Environment (FPE) is an example of a fund with mixed public and private sector governance. The 11 members on the Board of Trustees come from various Philippine organizations representing different interests, but all serve in their personal capacities. The board includes one seat for government (Department of Finance), one seat for an international NGO (in 1997 it was World Resources Institute), two seats for each of the three Philippine regions where the fund makes grants, and three seats at-large. At present, two of the latter seats are occupied by the private sector (two foundations of business conglomerates). The nomination process for the seats incorporates a system of checks and balances where an individual can only be elected by the present trustees from a list of nominees made by the Regional Advisory Committees (RACS) in consultative assemblies. The three RACs – one in each of the three major regions of the country – are composed of NGOs and private organizations from those regions. This process builds the ‘street credibility’ of representatives of the Board in the regions, while at the same time avoiding the politicization of the Board, which could occur if the members were elected directly by the RACs.

Source: Foundation for Philippine Environment, The Nature Conservancy and UNDP, Report on the First Asia-Pacific Forum on Environmental Funds, A Regional Consultation on National Environmental Funds in Asia and the Pacific, Cebu, Philippines 16-21 February, 1997, p. 113-120

Debt-for-Nature Swaps

Many of the existing EFs have been capitalised through debt-for-nature swaps. There are numerous sources that explain in detail the functioning of debt swaps. However, depending on a country’s debt situation, there are essentially two kinds of debt swaps possible:

•

Debt buy-backs: In a debt buy-back, an NGO or another suitable organisation acts as an intermediary between the debtor country and its creditors. Often, creditors have partially or wholly "written-off" bad debts such that they can be "bought" on the market at a fraction of their face value. When this is the case, the intermediary organisation can "buy-back" that debt at the reduced price (say 30 cents on the dollar) and "sell" it back to the debtor government for more than it paid for the debt, but less than the face value (say, 50 cents on the dollar), usually in local currency. In this way, the debtor government pays for its debt in local currency and at a fraction of the real cost, while the intermediary organisation leverages its money for local conservation projects. Increasingly, EFs are being used to disburse the local currency derived from debt buy-backs.

•

Debt forgiveness: A debt forgiveness involves the creditor essentially agreeing to "forgive" a country's debt in return for conservation actions, or an agreement to invest, in local currency, a fraction of the debt's value in conservation projects. This has fast become the most common kind of debt swap, simply because it can often involve much larger sums of money than are possible through debt buy-backs. Since debt forgiveness can often involve tens of millions of dollars, the debtors and the creditors have preferred to use EFs as a mechanism to disburse the funds because they allow for the money to be spent slowly and in small increments, rather than overwhelming a country's capacity to cope with the donation.

From 1987 to 1994, it has been estimated that US$177.5 million in debt has been eliminated through swaps which provided funds for nature conservation projects. 4 One key issue related to debt swaps is whether or not they can be used for multilateral debts. Up until recently, all debt swaps have involved bilateral or commercial debts, never debts held by multilaterals. For various reasons, including concerns about credit ratings, etc., multilateral creditors have in the past been opposed to forgiving or "selling" their debts at a discount. However, this is changing with the multi-donor supported Highly Indebted Poor Country’s Initiative (HIPC) on debt. The only question remaining is how will this initiative impact on the environment. The outcome of these discussions will be of great interest to most developing countries since multilateral creditors hold the lion's share of outstanding debts in many developing countries.

Regardless of whether or not multilateral creditors ultimately agree to allow the debts they hold to be converted, they can often play a major role in convincing commercial or bilateral creditors to convert their debts in return for conservation action. If and when multilaterals agree to serve as "mediators" and "brokers", it will open up a tremendous amount of opportunities for countries and existing EFs to negotiate debt swaps.

4

Kaiser, J. and Lambert, A. (1996) “Debt Swaps for Sustainable Development: A practical Guide for NGOs” IUCN/SCDO/EURODAD, IUCN Gland, Switzerland and Cambridge, UK; 1996

Direct Bilateral Grants

Canada, Germany, Switzerland, the Netherlands, and Finland have been active supporters of EFs, typically, but not always, through direct grants. In the case of the United States, which has contributed around US$ 100 million over the last six years to EFs, this money has come both in the form of direct grants (approximately 20% of the total) and debt reductions (approximately 80%). However, some bilaterals are legally proscribed from capitalising endowments, although they may be able to provide additional funds to existing endowments.

One major concern of bilateral donors has been the potential loss of control over the funding priorities of EFs after they have contributed resources. To counter this problem, some bilateral donors have set up "funding windows" within existing EFs where they are guaranteed a seat on the board and a say in how their money is spent. However, many bilateral donors continue to see EFs as a good way to spend their aid dollars. USAID, for example, through the Enterprise for the Americas, has been particularly instrumental in setting up funds in Latin America and the Caribbean. One interesting approach is that presently being negotiated by a particular European bilateral aid agency which, rather than creating an office and staff capacity in a country to which it would like to provide aid, is investigating the possibility of using its money to capitalise an environmental fund. By so doing, it will not only help finance projects in the country, but also help create the capacities necessary for development. In short, the agency believes it will get more environmental impact per dollar spent in the country concerned by NOT establishing a staff capacity there.

Multilateral Assistance

Among the multilateral organisations, the Global Environment Facility (GEF) is one of main sources of financing for EFs. The GEF has even gone as far as to provide all of the capital to endow certain EFs. One estimate is that by January 1998 it had donated approximately US$ 51 million to seven EFs, making it one of the single, most important sources of funds for EFs after debt swaps. For the GEF, EFs provide an effective way to channel large grants that might otherwise overwhelm the receiving country’s capacity to implement activities. By establishing a fund, the GEF not only creates local capacity to carry out conservation action and manage money, it also ensures that the financing is sustainable and that it reaches recipients in manageable amounts. Moreover, disbursing GEF money through national, regional, or local funds is important because it means that the priorities and activities are determined at the appropriate national, regional, or local level. At present, the GEF Council has commissioned a review of EFs to be carried out over the next couple of months.

Although the World Bank as such has not been involved with the capitalisation of many trust funds (mostly because the bank operates in loans, not grants), it has provided considerable staff time and expertise to the establishment of several EFs. Besides, the World Bank is an implementing agency of the GEF (as are UNEP and UNDP), and therefore much of the money provided to EFs by the GEF has come through the Bank.

Unfortunately, the regional development banks (with the sole exception of the Inter-American Development Bank (IDB)) have not played major roles in the establishment of environmental funds. The IDB, however, did help establish Brazil's National Environmental Fund (FNMA), by providing a four-year loan of US $22

million to help capitalise it. Currently, the FNMA is negotiating with the IDB a new loan agreement amounting to some US$ 50 million. There are of course re-payment issues and other questions surrounding the use of loans to establish EFs. But the further involvement of regional development banks, including the World Bank, in the establishment of EFs could bring added benefits and should be explored. Likewise, the role of the European Commission in the capitalisation of EFs has yet to be determined.

Foundations and other Private Sources

Another source of funds for some EFs have been private, philanthropic foundations, international NGOs and some corporations. For instance, there are two environment/sustainable development funds for the Carpathian region in Eastern Europe: a more strictly environmental fund financed by the MacArthur Foundation, and one more geared towards capacity building of NGOs financed by the C.S. Mott Foundation. The Ford Foundation and other US foundations have also played important roles in the establishment of several environmental funds. Also, C.S. Mott, MacArthur and other US foundations have provided money to the Interagency Planning Group (IPG) on Environmental Funds and to the preparation of meetings on EFs in Latin America, the Caribbean and Asia. Likewise, international NGOs have played important roles in the establishment of various EFs by donating money, serving as intermediaries and brokers, or by providing technical assistance. Private corporations, on the other hand, have historically only provided minor funds to a few funds in Latin America and the Caribbean. However, as many corporations in developing countries begin to establish their own philanthropies, their contribution to EFs could dramatically increase.

User Fees

User fees and direct contributions from tax revenues are other sources of funds for EFs that could well grow in the future. Some EFs have successfully negotiated that a portion of fees for visits to national parks and reserves, or a portion of revenues raised by special taxes (such as Costa Rica’s tax on leaded gasoline, as well as hotel taxes), and levies for natural resource use should be dedicated to EFs. In Belize, for example, the Protected Areas Conservation Trust (PACT), a local EF, gets all its money from a “conservation tax” levied on tourists together with a portion of the country’s tourism revenues (see case study below). In a similar way, a new environmental fund in Ecuador is slated to receive the money collected as the result of fees on water usage in parts of the country. This money, in turn, would be used to finance the conservation of forests, watersheds and river basins that contribute to the maintenance of the local water cycle. One of the most innovative proposals for the capitalisation of an EF also came from Ecuador, where the government was at one time considering using the money raised by the privatisation of state-owned companies to finance an environmental fund. User fees and other such mechanisms for raising local financing are the most logical, and perhaps even the most sustainable, sources of funds for environmental funds worldwide.

The National Government

Most local governments tend to contribute in some way to the establishment of EFs in their country. In Mexico, for instance, the government has made a one-time donation of US$10 million to the Mexican Nature Conservation Fund. This has, in turn, been used to leverage US$ 20 million from USAID and US$ 16.5 million from the GEF (in the latter case, for the management of 10 pilot protected areas). Finally,

some funds have also received in-country bequests or grants from individuals or corporations.

2.8 Case Studies in Capitalisation

Innovative Domestic Funding: PACT and User Fees

One example of a trust fund financed entirely from domestic sources is the Protected Areas Conservation Trust (PACT) of Belize. Officially, 36% of Belize is under some form of protected area status, including Forest Preserves, Marine and Nature Reserves and Wildlife Sanctuaries. But all of the protected areas in Belize are under-resourced in terms of finance, equipment, infrastructure and qualified staff. PACT was created in 1996, to provide a sustainable source of funds for the conservation and management of the country's protected areas. It is funded entirely from a conservation fee of $3.75 charged to foreign tourists as they leave the country, together with 20% of the revenues collected through park entry fees, concession fees, permit and license fees, and cruise ship passenger fees. This is expected to raise around US$ 750,000 annually. The funds of the trust will be invested in risk-free instruments such as Certificates of Deposit in local banks that provide a good rate of return. By law, 5 percent of the revenues collected each year by PACT will be managed as a permanent endowment fund. PACT is managed by a nine member board composed of three NGO representatives, three government representatives, one representative from the private sector (usually tourism) and two non-voting members of the PACT Secretariat (the Executive Director and the Financial Secretary). There will also be a three-member Honorary Board and an 11-member Advisory Council that will include representatives from the Ministry of Economic Development, the Ministry of Social Services, local governments, and NGOs. All decisions will be made by majority vote. According to the managers of PACT, one of the noteworthy aspects of this fund is that "its funds will be allocated by Belizeans, independent of the conditionalities often imposed by outside donors." Source: UNDP, ‘Strengthening the Capacities of National Environment Funds in Latin America and the Caribbean’, A Report of the Regional Consultation on National Environmental Funds in Latin America and the Caribbean’, Merida, Yucatan, Mexico, 1997, pp 72-74

Multiple sources, including a debt swap:

The National Fund for Protected Areas of the State (PROFONANPE) in Peru was established in December of 1992 to “provide sustainable, long-term financing for Peru's protected areas”. It began operations in August of 1993 but did not receive the majority of its financing until 1995. Its main sources of funding were:

•

The Canadian International Development Agency (CIDA) and the German Technical Cooperation Agency (GTZ) which provided start-up funds between 1993-1995. At the same time, GTZ provided US$ 380,600 for the execution of three pilot projects.

•

In 1995 the Global Environment Facility (GEF) and the World Bank provided about US$ 5.2 million to establish a trust fund, the capital of which may not be touched. The interest on this capital, which is invested through a local investment company, is used to finance projects in various protected areas and to finance the core costs of PROFONANPE.

•

In addition, through an agreement with the Government of Canada, the fund received US$ 354,919 in bilateral debt forgiveness.

•

An agreement signed with the Ministry of the Economy and Finance of Germany has made it possible to convert a portion of the country's bilateral debt with that country into a grant of approximately US$ 6 million. This is to be used to finance the recurring costs of nine protected areas in Peru.

•

Another bilateral debt swap with the government of Finland has produced a grant of almost US$ 3.7 million. This money is to be used essentially to help manage the Machu Picchu Historic Sanctuary over a three-year period. Part of the interest earned on this money is being converted into another trust fund which, after the project is finished, will hold around US$ 1.5 to 2 million.

•

For 1998, the fund received a grant of US$ 6.5 million from the German

Financial Cooperation Agency (KfW) for the management of six new protected areas.

•

Finally, smaller grants have been received from the MacArthur Foundation and the government of the Netherlands.

Over all, the resources already raised, including the interest they have earned, will amount to approximately US$ 27 million. This money is invested through the national banking system through various calls to tender. The investment structure is highly diversified and includes various financial instruments such as fixed income and common stock securities as well as national and external securities (e.g. corporate bonds, shares and stocks). Overall, projected yields range from 10% to 15% annually.

Source: UNDP, ‘Strengthening the Capacities of National Environment Funds in Latin America and the Caribbean’, A Report of the Regional Consultation on National Environmental Funds in Latin America and the Caribbean’, Merida, Yucatan, Mexico, 1997, pp 191-198

Bilateral Aid Money

(See KEHATI-Indonesia example below) The Global Environment Facility

The GEF has supported national or regional funds on biodiversity conservation in Bhutan, Brazil, Mexico, the Carpathians, Peru, Uganda, and South Africa among others. The GEF grants have focused on covering the long-term, recurrent costs of protected areas or providing alternative livelihoods for communities putting pressure on such areas. The Bhutan Trust Fund for the Environment (BTF) is one EF that has relied heavily on GEF funds to get started. The GEF has contributed US$10 million, with contributions also coming from WWF-US (US$1 million), the government of the Netherlands (US$2.492 million); Switzerland (US$ 2.59 million); the government of Norway (US$2.9 million); the government of Denmark (US$2.4 million); and the government of Finland (US$0.029 million). The total BTF endowment to date amounts to US$24 million. In short, the GEF has leveraged its funds by MORE THAN 100%. The BTF has a Management Board composed of seven members: five from the Royal Government of Bhutan representing the Ministry of Planning, the National Environmental Commission, the Ministry of Agriculture, the ministry of Finance and the Civil Service Commission; one member from WWF/US, and one from UNDP. The goal of BTF is raise an additional US$ 20 million from bilateral and multilateral sources in order to generate at least US$ 1 million per year. A portion of this income will be re-invested to adjust for inflation, and the principal will be maintained at a minimum of US$ 8.5 million according to the investment policy of the fund. The priorities, goals and objectives of the fund are

guided by the Government of Bhutan’s National Environmental Strategy, Biodiversity Action Plan, and the Five-year Environment plans. The BTF provides grants to NGOs, government agencies and local communities in the following areas: training in ecology and natural resource management; assessment of biological resources; management plans for protected areas; enhancement of public awareness and environmental education in schools; institutional and logistic support to organisations engaged in environmental conservation; and projects integrating conservation and development.

Source: Fund for the Philippine Environment, The Nature Conservancy and UNDP, ‘Profile of the NEF’s Bhutan’, Report on the First Asia-Pacific Forum on Environmental Funds, A Regional Consultation on National Environmental Funds in Asia and the Pacific, P. 67-69

2.9 How do Environmental Funds Use the Money they raise?

How are they Structured Financially?

Decisions regarding the financial structure and the management of assets are extremely important for environmental funds. Regardless of whether the legal mechanism being used is a trust fund, a foundation or some other option, a choice has to be made about whether to set up an endowment, a revolving fund, or a sinking fund.

•

An endowment maintains all of the money originally raised as capital. This money is then invested, and the interest, or return on that investment, is used to finance environmental activities. Most existing funds maintain a portion of their capital as endowments.

•

A revolving fund has new revenues added periodically (each year, for example), usually through fees, levies, or special taxes collected by the government; it can disburse the money collected and can also set aside a certain percentage to create an endowment that can be drawn on in case of need.

•

A sinking fund is designed to disburse its entire principal plus any income earned over a designated period of time. With sinking funds, the principal is generally drawn down over a longer-term horizon (10-15 years). Sinking funds are a good option when there are prospects of developing an alternative and dependable revenue source over the long-term.

In fact, most funds in existence today employ a mix of these three financial structures, for instance through the establishment of separate sub-accounts.

PRONATURA: A Sinking Fund

PRONATURA (The Integrated Fund for Nature), was established in the Dominican Republic in 1990. It is made up of a coalition of non-governmental and governmental organisations devoted to the conservation of biodiversity, natural resource management, conservation of natural as well as historical heritage, and the protection of the environment. PRONATURA has obtained funds through a debt swap, from the GEF (small grants programme administered by UNDP), the Ford Foundation, USAID, The Nature Conservancy and the MacArthur Foundation among others. Total assets to date amount to US$ 490,782. PRONATURA receives funds from the donors, converts them into local currency at the official rate, and immediately deposits them in sub-accounts for each project. While disbursements are being made, these resources, or a part of them, may be deposited for a fixed term earning interest, which is used to cover operating expenditures. Currently, PRONATURA is thus operating as a sinking fund, but in the future, as more money comes in, it may consider establishing an endowment or revolving fund.

Source: UNDP, ‘Strengthening the Capacities of National Environment Funds in Latin America and the Caribbean’, A Report of the Regional Consultation on National Environmental Funds in Latin America and the Caribbean, Merida, Yucatan, Mexico, 1997, pp 116-121

For an example of a Revolving Fund see the case study on PACT above

2.10 How are Assets Managed?

Developing an asset management strategy for any aspiring environmental fund and engaging an effective assets manager is perhaps one of the most essential parts of

BOX 4 The Indonesian Biodiversity Foundation (Yayasan KEHATI): An Endowment

KEHATI was established in 1994 as a national foundation legally registered as an independent, non-profit, self-sustaining, institution dedicated to funding biodiversity conservation activities through small grants to priority projects carried out by Indonesian NGOs, local communities, scientific researchers, and others. In April 1995, the US Agency for International Development, through the Biodiversity Support Program (BSP) and the Natural Resource Management Project, provided KEHATI with a ten-year grant of US$16.5 million to establish a permanent core endowment fund (Yayasan KEHATI). Through a subsequent grant, USAID agreed to provide US$2.5 million over a period of five years for start up activities and institution building. KEHATI has also received funds from UNEP and the Government of Indonesia amongst others. Interest earned from the investment of the endowment is used to provide grants. The endowment assets are managed to maintain a par with inflation while simultaneously distributing 5% percent of the assets annually. However, during the first few years of operation, when interest earned was not large, KEHATI was able to increase its grantmaking capability through a grant from the MacArthur Foundation.

Source: Fund for the Philippine Environment, The Nature Conservancy and UNDP, ‘Profile of the NEF’s Indonesia’, Report on the First Asia-Pacific Forum on Environmental Funds, A Regional Consultation on National Environmental Funds in Asia and the Pacific, P. 89-96

establishing a successful and sustainable fund. The long-term viability of the fund, as well as its effectiveness, is strongly dependent on the quality of the strategy for preserving its capital and generating adequate, spendable income. However, many funds have suffered from not establishing their asset-management strategies early on and thereby missing opportunities to obtain adequate returns on their investments. The asset management strategy of different funds varies. Some invest all of their money in low-risk, fixed-income government bonds. Others invest in stocks, bonds, real estate, etc. Still others have highly diversified portfolios that include a mixture of investments. Some EFs stipulate that the money can not be invested in companies or activities that violate the fund's goals, whereas other EFs do not apply social or environmental screens to their investments. Some funds obtain the services of local stockbrokers or money managers, others put out the funds for tenders from local banks, and other have funds managed by companies in the United States or elsewhere. The choice depends on the fund's investment goals, the local economic situation, and the fund's overall money-management strategy.

Box 5 Examples of Asset Management

Jamaican National Parks Trust Fund established a successful investment

committee composed of members from the private financial sector, the chairperson of the Jamaica Conservation and Development Trust and the Government of Jamaica. The fund’s assets are managed in distinct blocks of $125,00 (US dollar value, but the majority of the funds are in Jamaican currency). Investments are not screened according to environmental or social criteria. The majority of the fund’s assets are in fixed-term investments and short term bonds. The fund can put up to 15% of its assets into stocks or real estate but has not done so because of lower yields and higher risk and because bonds pay a higher return in Jamaica.

The Indonesian Biodiversity Foundation (Yayasan KEHATI): KEHATI’s assets

are allocated in a globally diversified portfolio of equities and fixed-income securities traded on public capital markets. The foundation employs investment managers that offer high quality, broadly diversified services to institutional investors. Currently, the portfolio is invested through commingled funds offered by The Investment Fund for Foundations (TIFF), an investment cooperative of public and private foundations), Hotchkis and Wiley, and the Vanguard Group. Shares in Indonesian Securities are held through these funds. These investment management firms are registered with the US Securities and Exchange Commission (SEC) as required by the fund's major donor, USAID. Chemical Bank in New York serves as master custodian for the portfolio. An Investment Committee is responsible for monitoring the portfolio's performance and reporting is conducted monthly, quarterly, and annually with the portfolio's success measured against appropriate benchmarks in each asset category.

Source: Fund for the Philippine Environment, The Nature Conservancy and UNDP, ‘Profile of the NEF’s: Indonesia’, Report on the First Asia-Pacific Forum on Environmental Funds, A Regional Consultation on National Environmental Funds in Asia and the Pacific, P. 89-96

2.11 What are some key issues for EFs?

Sustainable and Diverse sources of finance

While some Environmental Funds have a reliable, single funding source, many others have found reliance on single donors to be a significant constraint on their options. They are hostages to delays, fluctuations in donor support, as well as donor funding priorities. The success of many EFs derives from the efforts to diversify their funding base and focus on sustainability.

In many instances, sustainability will require a stronger focus on harnessing in-country resources (such as user-fees, taxes and levies, and other in-in-country donations). Possibilities include pollution fines; higher entry fees for environment dependent recreational activities; and environmental fees on mining, petroleum, hydroelectric power (proposed in Laos), shipping, fishing, forestry (charging timber companies a percentage of their revenues to pay for the conservation of natural forests) or tourism. Domestic fundraising often requires making the appropriate contacts with the private sector in the countries and/or creating partnerships with government agencies such as the Ministries of Finance.

User fees can serve as useful model because they have proven successful in generating revenue even at a time of severe budgetary constraints and declining international aid. Since tourism is now the world’s largest industry, charging tourists even a moderate conservation fee has the potential to generate large sums for the management of protected areas. However, some governments may be concerned about the implications of using the proceeds of a tax (the conservation fee) to finance an off-budget fund not under their direct control. Again, this requires sensitive negotiations with the relevant government officials.

Future Funding Innovations

Other possibilities for the capitalisation of EFs include carbon-offset funds and other mechanisms such as the so-called joint implementation (JI) of the Climate Change Convention. Indeed, one such fund is in the process of being created in Bolivia with the help of The Nature Conservancy. Still another possibility for EFs is that they may become the seeds of Green Venture Capital funds investing in local businesses that help achieve conservation.

Local Philanthropy

As the economies of many countries begin to develop, wealthy individuals and profitable companies may soon turn to private philanthropy. While EFs should be careful to avoid competition with their beneficiaries, in-country sources of funds will probably become increasingly important in places such as Brazil, Argentina, Mexico and some Asian countries. One additional benefit of EFs in this regard is that they can serve as a means of building the capacities of a "cadre of money-managers and grant-makers" that will become increasingly useful as wealthy individuals in the countries begin to establish their own philanthropic foundations. The Importance of Priority Setting

Many EFs have faltered because of the lack of a clear strategic plan with identifiable priorities. This not only affects the money-management strategy, but also the way grants are disbursed, and proposals are analysed. Indeed, they affect every aspect of

the fund's operation. For 'single-issue' funds, the problem of priority-setting may be less acute than it is for funds that attempt to address a wide range of issues, but it is nonetheless important.

For funds with large memberships and governing structures that include the participation of dozens, if not hundreds, of NGOs, the priority-setting process can be extremely complicated. Nevertheless, if a participatory and democratic process is skilfully carried out, the priorities established for these funds will tend to be more widely accepted and carried out. Some people have advocated that EFs should not attempt to set their own priorities, but rather that they should be seen as financing mechanisms for priorities established in some other, parallel participatory process. This has been the case of funds that were set out to finance National Conservation Strategies or National Environmental Action Plans in some countries. As might be expected, the success of these funds depends to a large extent on how good these plans are, and whether they were developed following a participatory process. In this regard, some have advocated the use of EFs as a way of financing the activities called for in National Biodiversity Strategies (see box below).

Experience is showing that without clear missions, the focus of EFs waivers depending on available financial resources, or the whims of their major donors. As a generalisation, it may be fair to say that funds with clear short, medium and long-term plans and with specific criteria governing the use and allocation of funds tend to be the most successful. At the same time, it is important that priorities be established through a participatory process that involves all major stakeholders, including the donors, if the fund is to be sustainable.

Another problem faced by funds that do not establish clear priorities is that they are often overwhelmed by the amount of grant-seeking proposals they receive. This not only makes their work more complicated, it can sometimes prevent the fund from making any grants whatsoever. For this reason it is important that EFs establish the criteria and methodology by which they will assess project proposals.

Whatever the approach, it is important for EFs to be clear about what they expect from grant-seekers. Their grant-making guidelines need to solicit the necessary information about the proposed activity – including provisions for its monitoring and evaluation – while at the same time not discouraging smaller, and less experienced organisations from applying. EFs must decide how groups not involved in the management of the fund will know about the fund and whether or not they will accept unsolicited proposals; require a full project proposal up front; or just ask for a 2-3 page "letter of inquiry" before deciding which proposals to entertain. The best EFs build the capacity of grant-seekers to implement and monitor projects, whether or not those projects are ultimately financed. (See Chile case study below). The Importance of Monitoring and Evaluation

The best funds devote considerable attention to ensuring that projects have adequate monitoring and evaluation components. This means establishing monitoring and evaluation mechanisms up front and ensuring that project implementers are an integral part of any monitoring and evaluation process. One fund has even begun to incorporate a "monitoring and evaluation" budget-line in all the projects they fund. This money is not given directly to the project implementers, but is held back until the fund is satisfied that the results of the project are adequately captured, assessed and understood.

The Importance of Building Capacity to Manage Money

Some EFs have made unfortunate mistakes regarding fund management. Others are receiving disappointing or below-market returns. Often the problem is one of diversification, with funds needing to change their investment strategies, diversify the currencies in which their investments are made, or find more competent asset managers. Some funds have found they get better results if they have more than one fund manager. It is important that EFs have written investment policies and obtain maximum performance from asset managers.

A regional workshop on strengthening the capacities of EFs in Latin America and the Caribbean, organised by the IPG in Mexico, noted that, in terms of asset management, "many [EF] boards have a good understanding of investments and yields, but a less than adequate understanding of risk and how to manage it. The biggest problem of [EFs] with regard to risk is lack of a written investment policy. Basically, there are four ways to manage risk: eliminate it; mitigate it; tolerate it; accumulate it… It is the responsibility of the board of directors to establish the [EF's] policy on risk; i.e., how much risk the fund is willing to tolerate in its investment portfolio. This responsibility includes establishment of a risk profile for the investment management firm and making decisions on asset allocation, i.e., what percentage of the assets should be invested in particular markets and in stocks, bonds, or other instruments. Likewise, many funds have become accustomed to high returns in recent years, but these cannot be reasonably expected to continue over the long term."5

While most EFs are interested in investing locally and responsibly, they lack the expertise to minimise risk and maximise return. Key priorities include: (1) development of written investment policies, (2) processes for selecting, supervising and evaluating an asset manager, (3), developing environmental and social criteria or screens for investment, (4) improving performance while minimising risk, and (5) consideration of local, as opposed to offshore, investment.6

The importance of learning to Work with and Serve on Boards

The level of representation and decision-making power of NGOs on the board has proven particularly important. However, this often means that the board members have little or no experience serving on a board, while the fund secretariat has little or no experience in working with a board.

The aforementioned meeting on EFs in Mexico identified the need to improve the functioning of boards in terms of continuity, participation, and adherence to the mission. It noted that the most common problems related to boards tend to be:

•

The difficulty inherent in reaching consensus on the governance of funds with large and heterogeneous boards

5

UNDP, “Strengthening the Capacities of National Environment Funds in Latin America and the Caribbean”, A Report of the Regional Consultation on National Environmental Funds in Latin America and the Caribbean”, Merida, Yucatan, Mexico, 1997 pp. 35-36

6 _{UNDP, “Strengthening the Capacities of National Environment Funds in Latin America and the} Caribbean”, A Report of the Regional Consultation on National Environmental Funds in Latin America and the Caribbean”, Merida, Yucatan, Mexico, 1997