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Chapter I. Table of Contents and Front Pieces

Chapter II. What is an Environmental Fund, and When is it the Right Tool for Conservation? -- Scott E. Smith, Monitoring and Evaluation Officer, Global Environment Facility

Chapter V. Governance of Environmental Funds -- Bruce Moffat, The Nature Conservancy

Chapter VI. Operational Issues

Chapter VII. Raising Capital

Chapter VIII. Asset Management -- Mary McClellan, The Nature Conservancy

Annexes

 
Contributors to the Handbook

The Inter-Agency Planning Group on Environmental Funds (IPG) gratefully to acknowledges the excellent work of Ruth Norris in editing this handbook. She has worked tirelessly to obtain and guide contributions to the handbook. Even more important, she has brought to this task a unique and highly valued knowledge of virtually all issues relating to the establishment and operation of environmental funds.

The IPG is also deeply grateful to PACT for publication and distribution of the handbook, and to The Nature Conservancy's America Verde publications unit for copy editing and indexing, as well as to the individual experts who made time in their busy lives to prepare chapters of the handbook. Their names and organizational affiliations are given in the Table of Contents.

The web version of this handbook was developed by John Shores, who continues to maintain the site on a voluntary basis.

IPG members who have contributed by participating in one or more meetings of the handbook editorial review committee include:

• EFs are appropriate when the issues being addressed are long-term and require a sustained response over a number of years.

• EFs can be structured as endowments, sinking funds, revolving funds, or a combination of these.

• EFs are appropriate when existing agencies cannot effectively manage the amount of funds and type of activities needed to address the problem - when there is a need for new procedures or a new kind of institution, accountable to and counting on the participation of its stakeholders.

• There should be a community of organizations able to implement the range of activities needed to achieve the objective.

• EFs cannot succeed without active government support and broad-based participation from a community of agencies and organizations who can work together despite their differences.

• EFs can only operate in an environment of rigorous record keeping, transparency, and reliable systems of contracts, banking, and auditing.

Terms

Environmental Funds (EFs) have been set up in many countries during the past decade as a way to provide long-term financing for biodiversity conservation and other environmental activities. They are typically created in and managed by private organizations, and are capitalized by grants from governments and donor agencies, the proceeds of debt-for-nature swaps, and from taxes and fees specifically designated for conservation. They seek to provide more stable financing for national parks and other protected areas, or grants to private organizations and community groups for projects to expand understanding of conservation and to conserve biodiversity by using resources more sustainably.

A recent evaluation conducted by the Global Environment Facility, Experience with Conservation Trust Funds, found that the most successful EFs were more than just financial mechanisms. They were able to act as independent organizations to influence their environment to build effective, responsive, and focused programs. They were the product of broad consultative processes. They had governance structures that involved people from different sectors, credible and transparent operational procedures, and sound financial management practices. The creation of such a trust fund requires a substantial investment of time and resources, and long-term commitment to building a new institution.

One of the questions often asked about Environmental Funds is whether the advantages of creating a fund outweigh the costs of tying up capital to generate relatively modest amounts of income over a long period of time. However, the choice of approaches depends on what a program is trying to accomplish; it cannot be answered on purely financial grounds.

• What is the nature of the environmental threat to be addressed?
• What are the type and time horizon of conservation activities that are needed to address this threat? Are they conducive to the type of programs that EFs can support?
• What other organizations are presently addressing these threats? What are their strengths and weaknesses?
• Is there a need for-and what value would be provided by-creating a new mechanism for governmental and non-governmental organizations to work together to address conservation issues?
• How committed are government and other key players to support an EF and participate in its work?
• Are the country's legal and financial practices and supporting institutions reliable, and do they inspire confidence domestically and abroad?

Environmental Funds are appropriate when the threats to the environment that are being addressed are long-term and require a sustained response over a number of years. EFs are not the solution when the environmental issue in question faces major, urgent threats requiring mobilization of significant amounts of funding in a short time.

Financially, EFs can be structured in three ways. Creating an endowment allows capital to be invested. Only income from those investments is used to finance a fund's activities. Sinking funds disburse their entire principal and investment income over a fixed period of time, usually a relatively long period, e.g., 10 years. Revolving funds provide for the receipt of new resources on a regular basis-such as proceeds of special taxes designated to pay for conservation programs-which can replenish or augment the original capital of the fund and provide a continuing source of money for specific activities. Any particular fund can combine these features as part of its mix of resources. Endowed Environmental Funds can be appropriate for ongoing activities such as basic protected area management costs. Shorter term projects may be better for immediate needs such as infrastructure development. Between these two extremes, sinking funds can provide predictable but medium-term support for activities that eventually conclude, are handed over to organizations whose capacities have increased, or develop other sources of recurrent funding.

An important question to ask when considering the creation of an EF is whether an existing agency can effectively manage the amount of funds and type of activities needed to address the problem. Environmental challenges often require new institutions to provide long- term financial stewardship and to pioneer participative, inclusive approaches to defining priorities and evaluating project proposals. In these cases, the public-private structures typically adopted by EFs can provide advantages, including the ability to time disbursements for effective use.

Another factor to take into account is whether there is a community of organizations able to implement the range of activities needed to achieve the environmental objective being sought. This includes not only organizations to conduct field-level activities, but also supporting institutions to carry out monitoring and data collection, raise awareness and provide environmental education, and offer management training to support local groups. EFs have shown an ability to work flexibly to build capacity in partner organizations. For example, some funds help potential recipient organizations plan their activities better and strengthen internal management skills. They also collaborate with others to improve understanding of threats to the environment, and expand environmental education efforts.

It is also important to ask whether existing operational procedures are appropriate for the kinds of conservation activities needed. Some EFs have been able to break administrative bottlenecks and develop alternatives to bureaucratic procedures that kept money from reaching the field in a timely manner. In several cases, government procurement and accounting systems are not appropriate for managing the types of disbursements typical in remote protected areas-many small expenses for which formal receipts are not available. EFs that function as private institutions offer an opportunity to bring to bear a more businesslike system of financial management and controls, while maintaining transparency and accountability to contributors and other stakeholders.

Where existing agencies already operate in participative and transparent ways, there may not be a need to create a new institution. However, when there is a need for a new kind of institution that will be accountable to its stakeholders and will bring in leaders from various sectors to create open and inclusive mechanisms, an EF can be an effective approach.

The GEF evaluation concluded that two conditions are essential for the success of an Environmental Fund. First, there must be active government support -- not just acquiescence or agreement -- for a mixed, public-private sector mechanism in which the government actively participates but that operates beyond its direct control. The most effective funds enjoy broad- based government support at all levels -- from senior political leaders to regional and local bodies, extending beyond environmental departments to include ministries of finance and planning. Second, there must be a critical mass of people from diverse sectors of society -- NGOs, government, the academic and private sectors, and donor agencies -- who can work together despite what may be different approaches to conservation and sustainable development. A common vision is needed for an EF to realize its many potential advantages. Developing this support and vision may require substantial encouragement through broad consultations and advocacy, often over long periods. When prospects for meeting these two conditions are bleak, an EF is not likely to be a viable approach.

Environmental Funds can provide a steady stream of resources only if their capital is invested prudently and managed well. Accountability to contributors and the public requires rigorous record keeping and regular, independent audits. Optimum performance depends on the fund's ability to have faith in and enforce contracts with project implementers, technical assistance providers, and others. Thus, a successful EF must be set in an environment with well established systems of banking, auditing, and contracting, including appropriate legislation and oversight. When these systems are absent or cannot be depended on, a project approach that includes other kinds of conditions and safeguards would usually be preferable.

Global Environment Facility (1999a), Experience with Conservation Trust Funds. The report of the GEF evaluation, available in English and Spanish. Also available from the GEF Web site, http://www.gefweb.org and choose the [Results and Impacts] link.

Global Environment Facility (1999b), "When is Conservation Best Served by a Trust Fund?", GEF Lessons Notes No. 5, January 1999. Available in English, Spanish and French. Also available from the GEF Web site, http://www.gefweb.org and choose the [Results and Impacts] link. Based on the GEF evaluation, this short (6 pp) article summarizes the main questions to examine when considering creating an Environmental Fund. Contains two checklists: factors important for establishing a trust fund, and factors important for successful trust fund operations.

Mikitin, Kathleen (1995), Issues and Options in the Design of GEF Supported Trust Funds for Biodiversity Conservation. Washington, DC: The World Bank, Environment Department Papers, Biodiversity Series.

• EFs play a key role in the definition and implementation of national planning processes, including management of protected areas, sustainable-use practices for conservation of natural resources, economic valuation of natural resources, and monitoring their status.
• EFs' important attributes include program continuity, agility, collaboration between the public and private sectors, and ability to strategically direct and leverage financial resources.
• EFs can be particularly important for NGOs and community groups that otherwise might not have a dependable source of funding for their projects. Given the mission-driven nature of these groups, their involvement lends significant value in conservation programs.
• EFs are often an important source of capacity building, networking, and information exchange.
• EFs can be limited by the absorptive capacity of their clients and may need to develop programs to address this challenge.

Lorenzo Rosenzweig, Executive Director, Mexican Nature Conservation Fund

Countries that have embraced the 1992 Convention on Biological Diversity (CBD) as the principal international organizing framework with respect to biodiversity conservation and sustainable use have committed themselves automatically to the design and implementation of country level conservation strategies. Environmental Funds (EFs) play a key role in the definition and execution of these national planning processes. Among other things, those processes address such key issues as:

• Effective management of natural protected areas
• Sustainable practices for the conservation of natural resources
• Valuation of biodiversity and the environmental services and functions of the ecosystems
• Establishment of baseline information and performance as well as impact conservation indicators at a country level
• Diversification of primary sector activities that as such have a direct impact in the ecosystems

Biodiversity, culture, society, and government blend together in a mosaic of interactions that does not favor a stereotyped approach to streamline the working relation between Environmental Funds and government agencies. However, at least seven key elements, relevant in this context, can be identified that position EFs as strategic players that:

• Give continuity to national conservation policy and national conservation programs across the inevitable changes brought by new government administrations.
• Field test strategic programs such as natural protected areas financial self-sufficiency, wildfire prevention, impacted areas restoration and environmental education. In this respect EFs can be seen as the research and development arm of potentially successful conservation strategies.
• Serve as an interface between the NGO community and government, fostering the creation of learning networks and communities that link the otherwise diffuse efforts of individual organizations.
• Participate in the design and execution of national environmental policy and strategies.
• Support cooperation between countries in transboundary conservation initiatives.
• Manage and direct economic resources to key market instruments to mitigate climate change, preserve ecosystem services, and in general, conserve biodiversity.
• Magnify conservation initiatives by mainstreaming the biodiversity conservation agenda in large scale government programs.

Several EFs have been successful as strategic stakeholders that cooperate with national governments that have adopted a policy of conservation and sustainable use of biodiversity.

The Mexican Nature Conservation Fund (FMCN) is a good example of a private institution promoting the continuity of the official conservation agenda during the transition of six-year government periods, or "sexenios" as they are known in Mexico. FMCN was incorporated in 1994 after an extensive and participatory consultation process with the support of all sectors of society. This strong consensus on design and operation issues, together with the strong support of a government convinced that the conservation of natural capital is key to the long-term economic viability of a country, was fundamental to carry on the initiative from President Carlos Salinas to President Ernesto Zedillo´s administration. Early involvement of top-level government personnel during the design process allowed the steering committee to address key issues that secured the political will and later proved fundamental in the capitalization process of the Fund.

After almost five years of operation, FMCN has also proved very useful in field testing conservation initiatives like the protected areas program (FANP) and the recently created Wildfire Prevention and Restoration Program (PPRIF).

For the protected areas program, FMCN has helped to leverage funding from different sources, strengthening the financial self-sufficiency of protected areas. The program's most relevant achievements to date are:

• Timely disbursement of basic conservation and operation resources to ten key protected areas.
• Close involvement with all sectors of Mexican society through central and regional governance structures of the program.
• Increased credibility with national and international donors through the adherence to administrative procedures that are operational and transparent.

Another good example of field testing a strategic conservation program in coordination with government is the PPRIF, funded by a $5.75 million grant from USAID to be operated as a sinking fund over a five- year period. This program is part of the National Wildfire Prevention Strategy, funded largely by government. It originated in the devastating 1998 wildfire season that was particularly intense in México. The FMCN, through the PPRIF, plays a key role in supporting this initiative and incorporates the local NGO community in a targeted effort of wildfire prevention and burnt areas restoration in nine key protected areas and three strategic sites throughout the country.

EFs' strategic role as linking agents between NGO community capacity and government priorities can be best appreciated through the experience of the Mexican Conservation Directory and the Protected Areas Program. In both cases the FMCN has promoted the creation of learning communities and has streamlined otherwise disperse efforts of individual organizations.

With regard to the design and implementation of a national environmental strategy, EFs can and should play an active role supporting national governments under the principles of the Convention on Biological Diversity. Good examples of this joint effort can be seen in Mexico and Costa Rica.

In Mexico, the National Commission for Biodiversity (CONABIO) was assigned to the task of developing a biodiversity country diagnosis (Estudio de Pais) and a national strategy for the conservation of biodiversity. This government effort, carried on through a participatory process cutting across all sectors of society involved, streamlines the following ruling principles:

• Biodiversity in Mexico has strategic economic, cultural, social and aesthetic values.
• Decisions relative to the economic and social development of the country must take into account the conservation and equitable share of natural resources.
• A substantial wealth of knowledge on how to conserve our ecosystems is in the hands of indigenous groups throughout the country.
• Conservation of biodiversity is a common responsibility of all sectors of society.
• Biodiversity loss and ecosystem degradation should be dealt with at its origins and causes.
• The protected areas system must be representative at a national and regional scale and at the same time must be, socially, economically and biologically functional.
• Economic models must take into account environmental costs and the value of ecosystem services.
• The capacity of all groups, public and private, involved with the use, study, regulation, enforcement and conservation of biodiversity should be permanently strengthened and promoted.
• Public awareness and environmental education should be promoted at all levels and sectors of society.

In relation to cooperation efforts between countries in transboundary conservation initiatives, as one of the key national planning processes where EFs have an important role linking neighboring governments, environmental networks play a strategic role. The Latin America and Caribbean Environmental Funds Network (REDLAC), under design since 1997 and established in 1999, addresses these cooperation efforts as one of its most relevant goals. REDLAC itself will not execute transboundary conservation projects but will work on creating favorable conditions, through the EFs as members, to promote international cooperation on conservation programs that must address migratory species or transboundary ecosystems.

Finally, the Costa Rican experience through FONAFIFO, on the role of EFs as management tools that help national governments direct economic resources to key market instruments such as joint implementation or environmental services compensation should be reviewed as a valuable experience.

This initiative takes a proposition from theory to practice on the basis that forests and ecosystems in general would be better maintained if land owners were directly compensated for all the environmental services they provide to the rest of the population.

FONAFIFO, responsible also for the administration of the national forestry incentives, manages and executes payments to land owners that take part in this environmental initiative giving priority to those that hold a green seal designation issued by an international certification agency in compliance with the sustainable forest management criteria established and approved by the Costa Rican Ministry of Environment. FONAFIFO is thus a good example of an EF acting as a transparent and expedient mechanism that links national conservation strategy in Costa Rica to individual land holders committed to conservation.

Please see the Bibliography for general references on EFs with relevance to this topic.

FMCN's Web site: www.fmcn.org

Chomitz, Kenneth et al. (1998). Financing Environmental Services: The Costa Rican Experience and its Implications.

Global Environment Facility(1999). GEF Lessons Notes Nº 7, "The Mexican Nature Conservation Fund." Available from the GEF Web site www.gefweb.org (monitoring and evaluation page), or by sending an e-mail to geflessons@gefweb.org.

Key Points

The legal structure of an EF depends to a great extent on the way that the legal system of the country in question deals with the concept of a trust fund.

In countries whose legal systems are based on the English common law, the trust - either a perpetual endowment or a sinking fund - is established by a deed of trust or charter. The trustees who have authority over the use of a trust may be an individual, group of individuals, a company set up for that purpose, or another designated organization, such as an NGO.

In civil law countries there is generally no legal foundation to establish a trust fund per se, but foundations or associations can manage EFs, and trusts can be set up by government decree.

The chapter gives examples of EFs set up under the different regimes and guidelines for developing legal documents.

In general, there are two major systems of law that exist in some form or another in most countries today. Common law systems are found in most English-speaking countries, and are derived from the English common law tradition of creating and modifying law in the courts, relying on the precedent established by judicial rulings. Civil law systems rely primarily on legislation - that is, codification of law through statutes called civil codes, and do not recognize the concept of judge-made law. In common las systems, the "law of trusts" was created through centuries of judicial decisions. Civil law systems generally use the statutory concept of a "foundation," "association," or "fideicomiso" (in Spanish-speaking countries) to achieve similar results.

Barry Spergel, WWF-US

Trust fund. (also referred to as a "trust") A legal structure by which money or other property is held, invested, and spent by a board of trustees or board of directors exclusively for a specific charitable purpose, as defined in a charter or deed of trust. Note: In common law countries, trust funds can also be established for specific individual beneficiaries, and be administered by an individual trustee, rather than by a board of trustees. A trust fund in this general sense can take one of several different legal forms, depending on the legal system of the country involved.

Trust funds (also called "trusts") have a long history in the English common law, and in those countries whose legal systems are based on English law, including the United States, Canada, Australia, New Zealand, India, and almost all of the English-speaking countries in Africa, the Caribbean and the South Pacific. Trusts can be defined as a legal arrangement in which one person (or a group of people) -- called the trustee(s) -- legally own(s) and manage(s) money or other property that has been donated (i.e. "entrusted") to them exclusively for the benefit of designated other persons - the beneficiaries -- or for a specifically designated charitable purpose, such as promoting education, the arts, health, or nature conservation.

The common law imposes a fiduciary responsibility on trustees for prudently managing the money that they hold in trust, and for ensuring that the money is only used for the designated beneficiaries or purpose(s) of the trust. The beneficiaries can sue the trustees in court for failure to invest the trust's assets prudently, or for using any assets for putposes other than those specified in the original legal document that established the trust.

In the common law, a trust can either be perpetual -- in which case only the annual interest or income from investing the principle (i.e. capital) of the trust is spent, but none of the principal is ever spent -- or alternatively, a trust can be set up to last for only a fixed period of years. At the end of this period, the assets of the trust will either be transferred to the designated beneficiary's full ownership and control, or else will have been completely spent for the purpose(s) designated by the donor.

Common law rules and doctrines relating to trusts are based on hundreds of years of decisions by judges in specific cases. These decisions collectively serve as the "common law of trusts". This "case-law" may differ slightly from one common-law jurisdiction to another. Many common law countries have also enacted statutory laws relating to trusts, which codify or replace the common law of trusts.

In particular, many common law countries (including the UK, the US, Canada, Australia, etc.) have enacted statutory laws granting tax exemptions for charitable trusts. If a trust meets specified, then it will be exempt from having to pay taxes on the income that it earns from investing the money that has been donated to it, and individuals who contribute to the trust may also receive some form of tax benefit. Since the legal requirements for obtaining tax-exempt status are often quite complicated, the founders of a charitable trust should obtain the advice of a lawyer or tax specialist before incorporating the trust fund.

Trusts in common law countries can be legally established by registering the trust's basic legal document (which may be called a Deed of Trust, Charter, or Articles of Incorporation) in the appropriate government office. Sometimes an accompanying set of more detailed statutes or by-laws may also need to be registered. Payment of a one-time registration fee or an annual registration fee, is also commonly required. The statutory laws regarding trusts that have been enacted in particular common law countries specify exactly how and where to register the trust. For example, in the case of Uganda's Mgahinga-Bwindi Impenetrable Forest Conservation Trust (MBIFCT), it was first necessary to apply for registration as a trust with the section of the Ministry of the Interior that deals with non-governmental organizations; and then to register as a not-for-profit corporation with the Secretary of Corporations at the Ministry of Justice. A trust may also need to obtain additional government approvals, such as the approval of the Ministry of Finance for the trust to receive and hold foreign currency and invest it overseas.

Environmental Funds have been established in the legal form of a Trust Fund in the following common law countries: South Africa (the Table Mountain Trust Fund), Uganda (MBIFCT), Belize (the Protected Area Conservation Trust, established by an Act of Belize's Parliament), the Sri Lanka Wildlife Trust, the Bhutan Trust Fund for Environmental Conservation, the Jamaica National Parks Trust, and the Papua New Guinea Conservation Trust Fund.

In the case of trusts that are set up for a specified charitable purpose (as opposed to trusts that are set up for the benefit of named individuals), the Deed of Trust or Charter needs to state the following:

1. The purposes for which the trust is established, the duration of the trust (usually "in perpetuity" or "until dissolved by an act of law or a vote of its Trustees"), and the location of the trust fund's main offices.
2. The composition of the Board of Trustees (which can also be called the Board of Directors) of the fund; its powers; the procedures for appointing and replacing Board members; their responsibilities, their term of office; and their remuneration (if any); the required frequency of Board meetings; the number of Board members whose presence is required in order to constitute a quorum; and the number of Board members whose vote is required in order to approve of any proposed action.
3. The mode of appointment and responsibilities of the executive director and other staff of the trust fund.
4. The mode of establishment and functions of any non-voting advisory committees or councils.
5. The potential sources of revenue for the trust fund (by general category).
6. Rules on how trust fund monies can be invested, and how they can be expended.
7. Accounting procedures, and provision for outside auditors.
8. The categories of activities that can (and cannot) be funded by the trust.
9. Rules requiring Board members and staff to disclose any potential conflicts of interest.
10. Conditions and procedures for dissolution of the trust, if that should ever be necessary.

These ten issues are very similar to those that are typically addressed in the "Articles of Incorporation" of an environmental fund in a civil law country. The main difference is that judges and other government officials in common law countries are likely to be familiar with many different kinds of trust funds, and therefore be more flexible in allowing different charitable purposes and governance structures. On the other hand, civil law countries tend to impose more specific requirements on how a fund must be structured, and may limit the purposes for which it can be established.

Contact trust funds mentioned in this chapter (see Annex D: List of Environmental Funds for contact information) to request copies of by-laws and articles of incorporation.

• A focused program is crucial to achieving impact as well as operating efficiency.
• The basic vision of the fund and its strategic focus should be in place before making decisions on design issues.
• A focus that is too broad can leave the EF swamped with many more proposals than it has time to consider or resources to fund. When the great majority of applicants are rejected, the EF can experience conflict with its beneficiary community.
• Clear criteria for project selection help to avoid this type of conflict and make selection processes transparent and fair.
• Most funds are managed by an executive unit headed by an Executive Director and responsible to the Board. This chapter discusses structure and responsibilities.
• It is important to distinguish among program support costs, institution building costs, and operating costs, and to keep operating costs low in relation to program support.
• Technical advisory committees are a useful mechanism to add expertise to a lean staff.
• Successful EFs have forged strong partnerships with complementary local and international organizations, including community foundations and the GEF Small Grants Program.
• Capacity building is an important function of EFs and involves capacity assessment during the selection process, development of a strategy (several approaches are discussed in this chapter), and providing services to grantees.
• Monitoring and evaluation is important at both the program and project levels. EFs that have been most effective have defined a clear role for themselves and established measurable indicators for the achievement of identified impacts.

The amount of money that environmental funds can disburse to support conservation projects is small in relation to the scope of the needs. Funds that lack a focused strategy run the risk of spreading their resources too thinly, financing many discrete efforts but cumulatively failing to achieve any significant impact. Funds that have developed a focused strategy, and targeted their grant programs to have an identified impact, have been successful at reducing the number of funding proposals that have to be turned down. They have also been better able to identify partners to help strengthen the kinds of organizations and prepare the kinds of projects they seek to support.

• Does the fund have broad national purposes or exist to support a selected portfolio of strategically selected activities?
• What is its strategic focus? Thematically? Regionally?
• Will the fund be driven by national planning processes; have its own priority setting process, or link the two to make decisions relative to mission, purposes, and activities to be funded?

One of the key lessons learned from existing EFs is that it is critical to have the basic vision of the fund in place before making decisions on design issues. In deciding on the scope of the fund, it is necessary to define the environmental problems to be addressed and then identify what kind of activities could be funded to respond to these problems. There are many advantages to exploring the scope (goals and objectives) through a participatory process involving government, donors, NGOs, community groups, beneficiaries, and other stakeholders. These include building awareness of the fund and support for its role, as well as learning from the experience already available among potential grantees and others.

Generally funds that focus their goals and objectives on activities selected for strategic impact, feasibility, and ability to be carried out quickly to build a track record, do better than those that start out with an "open door" policy based on reacting to whatever is proposed. The scope can be broadened later if appropriate. Alternatively, if a fund starts out with a fairly broad mission and purpose, it can declare a "pilot phase" in which it concentrates on a focused area before beginning to accept proposals from other areas. There are several reasons for this:

Most funds' objectives are compatible with national policies, such as a national environmental strategy or action plan, and some are formally linked. Even if linked to a national plan, an EF needs flexibility to focus on selected sub-areas within that overall framework, and to set its own priorities. There have been cases of a fund's work being severely affected when a national plan was overturned or rewritten.

It is more congenial and less controversial to have a vigorous discussion of potential scope and the implications of these issues during the design process, rather than later, when there is already a sum of money over which various constituencies are already competing. Investing time and effort at the design stage can help to reach a consensus that will "hold" for several years. Involving donors in the discussion allows fund designers to be aware of their interests in financing specifically targeted types of activities.

• What organizations, agencies, and individuals will the fund support?
• What types of activities will be eligible for funding?
• Should the fund seek to give small grants to many organizations, or concentrate its resources in larger grants that would be given to a few organizations (who might then give sub-grants to smaller local organizations)?
• What will the proposing organizations be expected to "bring to the table" e.g. counterpart funding?

It is important to distinguish between paying recurrent costs (eg., ongoing management costs of protected areas) and supporting projects (activities that have a specified funding period and then are expected to become self-sustaining, or to terminate). Some EFs have made long-term commitments to recurrent costs such as salaries of protected area personnel, but usually they attach conditions (such as the government's maintaining or increasing its own annual support of basic protection activities). It is more common for EFs to support "additional" or "incremental" costs such as special equipment, training, one-time expenses such as an initial planning process or boundary demarcation.

Most EFs support projects proposed by NGOs and community-based organizations; a few also allow individuals and even private businesses to apply, under certain conditions. Projects with a development or income-generating potential can be expected to become self-sufficient after an initial seed money or startup phase. Projects of education, capacity building, etc. may require longer periods of support, or may have to be designed for a fixed period after which they terminate. EFs are often under pressure to demonstrate results and success quite quickly. One way to address this is to seek out currently successful or promising projects, organizations, and innovations, and attempt to extend or build on them, as opposed to venturing immediately into unknown territory.

Very few EFs are able to operate simply as a financial mechanism. Unless the country has a robust NGO community with access to training and capacity-building support from sources external to the EF, the fund usually has to engage in significant capacity-building of implementing organizations. Some do this directly (ie., their own staff deliver training and technical assistance) and others indirectly (by giving grants to intermediary organizations that provide training and technical assistance to ultimate implementers/beneficiaries).

In general, the success rate of projects is better when there is a requirement for counterpart contributions, which may be in-kind. Even the poorest communities are usually able to contribute labor, for example, if materials are paid for.

Many EFs are interested in developing revolving credit schemes, particularly when they are supporting development of alternative livelihood activities that should be able to repay initial funding. However, none has yet successfully implemented such a program. This appears to be because the "worlds" of grant-making and micro-credit are quite different, and EFs to this point lack the expertise to be effective providers of credit. Partnerships with commercial lending institutions or micro-credit NGOs appear to be a better route.

Support of, and linkages to, national or regional priority-setting. The Mexican Nature Conservation Fund (FMCN) provided financial support to and participated in a national planning and priority-setting processes that played an important role in establishing criteria for its selection of grants.

Use of community or technical advisory committees to identify priorities in particular geographic or thematic areas. Uganda's Mgahinga-Bwindi Impenetrable Forest Conservation Trust (MBIFCT) initially received almost 100 times more proposals for small grants than it had planned to finance, but relied on its Local Community Steering Committee to respond to the deluge by first setting clearer priorities and then screening the proposals according to those criteria.

Use of a logical framework methodology to identify planned impacts and measures to be used to evaluate progress toward achievement of those impacts. Several funds require the individual projects they finance to prepare logical frameworks. FMCN also uses a logical framework at the overall program level to identify impacts and indicators for its grant portfolio as a whole and its protected areas program.

Identification of specific types of innovations or catalytic actions that the fund wishes to promote. The Brazilian Biodiversity Fund (FUNBIO) set as its priority projects that significantly involve the private sector (businesses or private foundations) in conservation activities. This was seen as a key way to attract private contributions to long-term biodiversity conservation and sustainable use.

This chapter draws significantly on GEF Lessons Notes No. 6, Creating Program Focus in a Conservation Trust Fund. This publication is available at the GEF Web site www.gefweb.org (select the [Results and Impacts] link). The publication is available in English, French, and Spanish, and can also be requested by sending an email to geflessons@gefweb.org.

The Council on Foundations has many publications for grantmaking organizations. Some foundations in developing countries have found them useful, while others find that their US focus limits their relevance overseas. One publication relevant to this topic, "Principles and Practices for Effective Grantmaking," is available free. To order, or view a catalogue and descriptions of publications, visit the COF online at www.cof.org.

Contacting EFs mentioned in this chapter:

SarahTimpson, Global Manager, GEF Small Grants Programme

A growing number of Environmental Funds are developing in-country partnerships with relevant small grant programs. The Global Environment Facility Small Grants Programme (GEF/SGP) is a good example. The GEF/SGP was launched in 1992 by the United Nations Development Programme (UNDP). It provides grants of up to $50,000, mainly for community-based activities by NGOs and community-based organizations (CBOs) which help to conserve the global environment by linking concern for the environment to sustainable livelihood concerns. More than 1,200 projects have been funded by the SGP in 46 countries, including many countries with Environmental Funds.

Collaboration between environmental funds and SGP national programs has involved co-financing projects, sharing information and experience, cooperation in program implementation, institutional linkages, and policy dialogue. Some examples of these partnerships include:

• In Belize, cooperation between the Protected Areas Conservation Trust (PACT) and the SGP has involved:
• Representation by the PACT executive director on the SGP National Steering Committee.
• Adoption by PACT of SGP formats for proposing projects, screening grant applications, and monitoring projects through field visits.
• Exchanges of information on grant applications to avoid duplication and promote synergy.
• Joint field visits to projects of mutual interest.
• Complementary grants to NGOs; exploration of project co-financing.
• Implementation by PACT of a GEF Medium-sized Project to develop a community co-management park system for Belize; this provides an opportunity to mainstream GEF/SGP by cooperating with PACT on a larger-scale project involving communities around four protected areas.

• In the Dominican Republic, the SGP is housed at the EF, PRONATURA. This has resulted in:
• Benefits to the SGP, including a strong institutional base, government and NGO support, outreach to communities, and dissemination of the SGP experience.
• Benefits to PRONATURA, including a wider geographic and substantive scope of action, strengthened technical staff, and increased resources for projects to be carried out by SGP.

• The possibility of housing the Small Grants Programme in Peru at an environmental fund, PROFONANPE, the Fund for Areas Protected by the State is being explored. The relationship is mutually beneficial in part because:
• Both PROFONANPE and the SGP are committed to conserving biodiversity.
• PROFONANPE works exclusively within protected areas but the SGP can support projects in buffer zones surrounding protected areas.
• Co-financing activities allow PROFONANPE to cover the livelihood components of activities that seek to conserve global biodiversity with funding from the SGP.
• It enables both PROFONANPE and SGP to develop a wide range for other partnerships and to mobilize increased funding from in-country resources, contributing to increased program and project sustainability.

• Collaboration in the Philippines between the Foundation for the Philippine Environment (FPE) and the Small Grants Programme has involved:
• Co-financing by FPE of SGP-assisted projects.
• Joint sponsorship and implementation of capacity-building activities for community-based grantees.
• Complementary approaches to project monitoring and evaluation (M&E).
• Creation of the Communities for Global Environment Foundation, Inc. (CGEF), a foundation to promote biodiversity conservation and sustainable development in the Philippines.
• Establishment of a formal partnership between FPE and SGP to support community-based activities in six regions of the Philippines.

The GEF/SGP operates in 12 Latin American and Caribbean countries, of which 10 have one or more environmental funds. In-country collaboration along the lines outlined above has been promoted by UNDP in all countries with both mechanisms.

Even closer collaboration between environmental funds and the GEF/SGP can be expected in this region inasmuch as the SGP has recently become a founding member of REDLAC, the new regional network of environmental funds for communication and capacity strengthening. Like other members, the SGP will participate fully in initiatives to share information and experience in grant-making activities at the community level.

Steps to promote increased cooperation among environmental funds, the SGP and the GEF Mesoamerican Biological Corridor (MBC) project were planned at a meeting in Antigua, Guatemala, in October 1999 involving the SGP and MBC national coordinators from Belize, Costa Rica, Guatemala and Mexico and several members of the REDLAC Executive Committee. Participants agreed that the MBC provides a useful planning framework for on-the-ground activities by environmental funds and the SGP.

The Small Grants Programme is also launching a new project, the SGP Community Management of Protected Areas Conservation (COMPACT) project, at six to eight World Natural Heritage Sites and globally significant coral reefs. Under this three-year initiative, the SGP will provide grants of up to $50,000 for sustainable livelihood activities that reduce threats to the protected area. Sites selected to date include:

• Belize Barrier Reef Reserve System and World Heritage Site, Belize.
• Morne Trois Pitons National Park and World Heritage Site, Dominica.
• Sian Ka'an Biosphere Reserve and World Heritage Site, Mexico.
• St. Pauls' Subterranean River National Park, Palawan, Philippines.

An additional two to four sites located in Africa south of the Sahara, North Africa and Asia are in the process of selection. The COMPACT project is being funded by a grant to UNDP from the United Nations Foundation (UNF).

Information on the GEF Small Grants Programme and projects supported by SGP can be obtained by:

• Contacting the UNDP Country Office in each of the 46 countries offering the SGP.
• Visiting the UNDP/GEF Web site: go to www.undp.org/gef and click on "Small Grants Programme."
• Sending an email to marie.khan.kakou@undp.org.

More information on foundations can be found at the Council on Foundations web site www.cof.org and The Synergos Institute's Web site www.synergos.org

Also see: The Synergos Institute: Case Study Series on Foundation Building, Series on Collaboration and Partnership Building

A detailed listing of publications available in these two series can be found in the Bibliography.

General information about philanthropy, volunteerism and the nonprofit sector can be found at:

• International Center for Not-for-Profit Law (www.icnl.org)

• International Meeting of Associations Serving Grantmakers (www.imag.org)

• CIVICUS (www.civicus.org)

• The Foundation Center (www.fdncenter.org)

• Independent Sector (www.indepsec.org)

• National Committee for Responsive Philanthropy (www.ncrp.org)

Contact information for the foundations mentioned in this chapter:

George Scharffenberger, PACT

EFs and other grantmaking, foundations strive to achieve ambitious social and economic objectives through the activities that they fund. Their success is therefore directly related to the success of the organizations, agencies and individuals funded. The selection of the organizations and individuals to fund is as important (and some would argue even more important) as selecting the activities to support. In selecting organizations to fund, an objective assessment of capacity is fundamental.

Capacity is a broad concept that boils down to the ability of an organization or individual to do what it is they propose to do. It includes both quantitative and qualitative elements. Does an organization have enough people, infrastructure, tools and financial resources to get the job done? Are they the "right" people, infrastructure, and tools? Are financial resources used optimally? Does the organization (or the individual) have the necessary knowledge, skills, relationships, management systems, and sustainability strategies? And even if the answer to all of the above is "yes," does the organization have the ability to bring all those pieces together in an effective, efficient and transparent manner?

Given the broad definition of capacity, there are likely to be few circumstances in which good project ideas coincide with absolute capacity to carry them out. If they did coincide, there would be little need for support from an Environmental Fund! EFs identify and address capacity gaps of their grantees. Historically EFs have focused primarily on the financial, infrastructure, and equipment sides of grantee capacity rather than the less tangible aspects. At best EFs have concerned themselves with the specific technical skills and experience to get the job done. Environmental Funds have come to learn what other funding and support organizations have learned -- that a more holistic approach to capacity, and especially the inclusion of management and sustainability issues, can increase the likelihood of success for grant-funded activities as well as the long term, sustainable impact of their overall grant program.

Addressing capacity issues involves both pre- and post-funding strategies. Prior to funding, holistic capacity assessment increases success rates by providing a realistic basis for assessment of the relative level of risk of various project proposals. In addition to helping in project selection, such an assessment can also serve as the basis for post-funding risk-management strategies and for the development of an array of approaches and strategies to support capacity development among grantees. Particularly where grants are being made to community based organizations or local NGOs the assessment will often identify areas that could be strengthened in order to increase organizational efficiency and effectiveness in reaching objectives. These include areas of internal management such as accounting and report writing skills as well as skills to build links with other sectors and to develop sustainable sources of financing. The environmental fund can take a direct role in capacity building or it can be more distant. In either case it can itself provide specific capacity-building services or it can provide, allow or encourage the recipient to use other available resources.

• How can more holistic notions of capacity be built into the application and selection process?
• Which areas of capacity are most critical indicators of likely success? How can they be measured in the most accurate yet cost-effective manner?
• How should the examination of past performance be used as an objective basis for assessing capacity and predicting future success?
• If openness and trust between the environmental fund and the organizations and individuals it supports are seen as essential elements of success following funding (see below), how can the initial assessment of capacity (which is often perceived of as being intrusive) be turned into an opportunity to begin building a trusting partnership?
• What level of risk is the environmental fund willing to take with organizations that have good ideas and high potential for impact but relatively lower levels of current capacity?

To date, the practices that EFs have used for assessing capacities of potential grantees have included the following:

• "Absorptive capacity" studies, usually carried out by external consultants, often with direct funding from the EF's donors, during the design process.
• Linkages with NGO networks that work with their members to identify organizational strengths and weaknesses and capacity-building needs.
• Policies of encouraging partnerships between potential grantees and third party organizations (such as international NGOs) that provide assistance in capacity assessment and organizational strengthening strategies.
• Maintaining registries or databases of national NGOs and other potential implementers, including data on organizational capacities.
• Including capacity assessment as part of the selection process. Elements have included use of capacity indicators as part of the peer review process, applicant self-assessment, and reviews by external consultants.
• Funding preparation phases that include assessments of capacities and organizational strengthening plans if needed.

None of these practices in and of itself has proven sufficient to guarantee that grants will always be made to the best possible organizations, or to avoid the pitfalls encountered by grantees who get in over their heads. In many countries - particularly in areas where civil society organizations are just beginning to develop - the EF necessarily makes riskier investments in start-up organizations, or sees its role as strengthening organizations and preparing them to achieve conservation impacts in a second or third generation of funding. However, EFs and other organizations that fund new, emerging, or small community-based organizations have generally found it worthwhile to enter into these funding relationships in phases, assuring successful completion of planning, feasibility analysis, and capacity-strengthening components before making commitments to major ongoing support.

• What approach should the fund take toward capacity-building vis-à-vis its recipients?

• What role should the fund play in providing actual capacity-building services?

Most of the lessons learned about grantee capacity-building are quite neatly summarized in the lists of "Advantages" and "Disadvantages" of the various approaches and methods discussed above. Environmental funds can also learn from the experiences of other funds which in many cases have been addressing capacity building issues for the past decade.

The Abrinq Foundation for Children's Rights was created in 1990 to make children and youth a priority, and to promote and disseminate successful experiences, policies and actions that can be multiplied. In the course of evaluating its efforts, the Foundation realized that its "Our Children Program," a grantmaking program providing support to child care organizations in the state of São Paulo, was not having the envisioned level of impact. Abrinq decided to complement its grants with capacity building to assist grantees to improve the quality of programs. It created a new program called the Technical Management Capacity-Building Program aimed at raising the quality of care provided by 43 of its grantees.

During the first year, Abrinq focused on increasing the awareness of its grantees about the need to improve the quality of the care they were providing. The "quality approach" focused on areas such as strategic planning, management, communications, marketing and fundraising. The second year focused on improving the management skills of staff and providing the staff of day-care centers, shelters and youth centers with access to technical and pedagogical resources. Abrinq sponsored seminars, meetings of educators, in-service workshops, and courses, related to the care of 10-to-18-year-olds and management skills for child-care organizations. Abrinq hired consultants to organize the events (seminars, courses, workshops, etc.). The topics were chosen jointly by the technical team of Abrinq's "Our Children Program" staff and the consultants. Responding to the needs identified in the first year of the program, working groups of practitioners from grantee organizations were formed around four broad themes:

• Work and education of children and adolescents;
• The social responsibility of service organizations for the child and the adolescent: a technical-legal approach;
• The organization as a social business: the challenge of nonprofit organizations; and
• The children's shelter as special protection: its relations with the community and the legal system.

Abrinq hired a consultant to evaluate the impact of the capacity building program. The consultant gathered data about the organizations before and after participating in the program. First the consultant evaluated each organization, relying on Abrinq staff reports, before the start of the program. In a second phase, the consultant participated in program events. In the third stage, after the completion of the program, the consultant visited organizations in the field to evaluate the change in organizational capacity. The final result was an individual report on each organization and a final follow-up report of the Technical and Management Capacity Building Program.

Four aspects of organizational development were chosen as evaluation indicators:

• Management;
• Physical installations;
• Human Resources; and
• Services.

Abrinq monitored the progress of the participating organizations with regard to these aspects to determine the effects of the program. The evaluation concluded that:

In general, participants made important progress. They were exposed to many topics to which they had not given much thought until then. They were eager to implement the new concepts they had learned, applying concrete measures to improve their services or working towards those goals. The whole process of capacity building and its results transformed the relationship of association with Abrinq to one of greater financial independence and allowed Abrinq to free up resources for new affiliations.

The Abrinq Foundation for Children's Rights intends to publish workbooks that pull together the findings of each of the working groups. They believe this material will contribute to their efforts, within the framework of the "Our Children Project" to build a movement for the improvement of services to children and adolescents.

Scott E. Smith, Monitoring and Evaluation Officer, Global Environment Facility, and Renée Gonzalez, Director, Protected Areas Program, Mexican Nature Conservation Fund

Environmental Funds (EFs) are increasingly being asked by their boards of directors and principal contributors to report on their performance and results, not just on the number of projects they support or the amount of money they have spent. EFs that know what their programs are accomplishing - and understand what is working, what is not, and why - are likely to be more successful in raising funds and achieving their environmental objectives.

Monitoring and evaluation (M&E) are two distinct, but closely related, management tools that allow EFs to measure the performance and assess the impact of their activities. They also provide a structure for EFs and their partners to learn from experience, so this knowledge can be used to improve the projects and programs they support.

Because different people often use the same words to mean different things, it is useful to include at the beginning of this chapter definitions of key terms that will be used in this handbook when discussing monitoring and evaluation.

(a) Monitoring is a continuous process of collecting and analyzing information to measure the progress of a project or program toward expected results. Monitoring provides managers and participants with regular feedback that can help determine whether a project or program is progressing as planned. Effective monitoring requires a clear statement of objectives, performance and impact indicators, sources of information on these measures (including baseline data), regular reporting, and a feedback mechanism for using monitoring information for decision making.

(b) Evaluations are periodic assessments that answer questions about why results are or are not being achieved, what unintended consequences of a project there may be, and what lessons are being learned from experience. Evaluations can also examine whether assumptions continue to be valid or whether causal linkages are proving to be correct.

(c) A strategic plan sets out an EF's organizational purpose, its long-term (usually 5-8 years) objectives, and the means for accomplishing them. Ideally, strategic plans are the result of a process of wide consultation with interested stakeholders. The objectives identified in a strategic plan provide the basis for program-level monitoring and evaluation.

(d) The logical framework is a tool used by many EFs and other development organizations to guide the design, monitoring and evaluation of projects and programs. Typically, a logical framework will identify the broad goal toward which a project or program contributes, the specific objective that the project or program seeks to achieve, the outputs that are needed to achieve this purpose, and the inputs that the project or program provides to produce these outputs. For each level, the logical framework identifies indicators, the sources of information and the way that these indicators will be measured, and the assumptions that are made to link one level of the framework to the next. The logical framework is usually presented in a matrix form. Ideally, it is the product of a participative process of problem analysis and discussion of alternative ways to achieve desired objectives. A participative approach ensures that strategies identified to achieve goals are realistic.

(e) A goal is a statement of a broad, long-term change to which a project or program (together with other activities) contributes. It is the reason why a project or program exists, and it reflects the ideal state in response to a problem.

(f) The objective is the specific result that a project or program seeks to achieve. It defines the strategy to achieve the goal. (This level of the logical framework hierarchy is sometimes referred to as "purpose".)

(g) Outputs are the products (e.g., trained people, protected area management plans, policy changes) that are needed to bring about the objective. (This level of the logical framework hierarchy is sometimes referred to as "results".)

(h) Inputs are the resources or activities (e.g., training courses, funding for policy studies, credit funds for alternative income sources, technical assistance, computers and vehicles) provided by the project or program that are needed to produce the outputs. (This level of the logical framework hierarchy is sometimes referred to as "activities".)

(i) Indicators are measures of the achievement of the various levels of a logical framework. Indicators are observable phenomena that should be "objectively verifiable," i.e., different people looking at the same information would reach the same conclusion. Performance indicators measure the implementation of activities. Impact indicators measure the changes, status, or trends that projects or programs seek to affect, e.g., habitat fragmentation, population living near protected areas, financial sustainability of an organization. Ideally, advances on performance indicators should lead to advances in impact indicators under identified assumptions. To the extent possible, indicators should be precise, direct measures of the intended result and should be practical (i.e., data are available or can be generated when needed at reasonable cost). They should show quantity, refer to quality, and correspond to a clear time frame.

(j) Assumptions are the actions or events beyond a project's or program's influence that need to occur in order for inputs to produce outputs, outputs to lead to achievement of objectives, and for the objective to contribute to the goal. They are also important conditions or risks which may endanger a project's or program's success.

EFs have found it important to monitor and evaluate their activities at both the program level and the project level. Program level M&E allows EFs to understand their overall performance and results as institutions. Some EFs also carry out groups of similar activities designed to achieve a broader impact. For example, FMCN in Mexico and PROFONANPE in Peru seek to bring about changes in the protected areas systems in their countries by supporting individual protected areas; FUNBIO in Brazil seeks to develop partnerships with the private sector by the way it carries out some of its activities. In these cases, managers and participants use program level M&E to measure the broader results sought from the sum of individual activities. Project level M&E allows EFs and the recipients of their support to measure the performance and impact of each individual project or activity.

• What are the EF's long term organizational objectives? Are they clearly articulated and measurable?

• Does the Fund's strategic plan identify performance and impact indicators that can be used to measure progress toward its organizational objectives? What sources of information are available for these indicators? Is there a reliable baseline against which to measure progress?

• Does the EF have one or more programs (i.e., groups of individual activities) aimed at achieving a common, broader objective? Do these programs have clearly articulated objectives, outputs, indicators and assumptions? Are these programs well integrated into the vision of the whole organization?

• Are there clear linkages between the projects and other activities that the EF supports and the Fund's broader organizational or program objectives? Are there clear linkages between programs within the EF?

• Is there a monitoring plan in place for program level objectives? Does it identify sources of information; methods, roles, and responsibilities for data collection and analysis; resources available for these activities; reporting procedures; and the ways that monitoring information will be used in decision making? What procedures are there for reviewing monitoring information with key stakeholders?

• Is the timing of program evaluations related to key decision points? Is there flexibility, and adequate resources, to carry out evaluations when needed to understand more fully the reasons behind trends indicated by monitoring information?

• What are the expectations of key stakeholders (including donors) regarding the Fund's ability to report on its performance and results?

EFs that have been most effective have defined a clear role for themselves within the countries in which they operate. This role is linked to national environmental or biodiversity strategies or action plans. It is also based on a good understanding of the Fund's comparative advantage vis-à-vis other organizations working in the same area, and the development of collaborative linkages with them.

Successful EFs have used a participatory strategic planning process to define a clear mission for themselves and reflect this mission in long term (usually 5-8 years or longer) organizational objectives. A realistic assessment of the role the Fund can play within its national context and the nature of its relationships to government, private businesses, research institutions, other non-governmental organizations, and social sectors of the country are important to reflect in its mission statement and strategic plan. For example, FMCN in Mexico was designed based on an extensive consultation process that involved over 400 people representing all sectors of society. Since its creation, FMCN's mission, objectives and indicators have been periodically reviewed to respond to the growth of the organization and to changes in the conservation setting in Mexico. The goal of the institution is "to conserve the biodiversity of Mexico and to insure the sustainable use of its natural resources through strategic actions and medium- to long-term financial support".

Performance and impact indicators based on the EF's long-term organizational objectives provide the basis for monitoring whether these objectives are being achieved as planned, and whether the activities supported by the Fund are leading to the accomplishment of its organizational objectives. Revisiting their strategic objectives periodically allows EF's to take into account changes in the overall environment within which they operate and experience using performance and impact indicators.

Workshops that bring together people from different sectors in conservation and experts in planning are good means of generating ideas on possible program indicators. These meetings should not be overly structured, but allow a free exchange of ideas. For example, FMCN's strategic plan in Mexico is periodically reviewed and incorporates performance indicators. The last revision was based on the input that resulted from a workshop, where representatives of all sectors of Mexican society participated. Based on from this latest strategic plan, impact indicators are being identified through an ad hoc committee of experts from all sectors in conservation. This committee faces the challenge of defining indicators that measure the impact of a universe of 260 projects in the program. In parallel, the program on natural protected areas at the FMCN defined the planning methodology, its goal, objectives and indicators through an initial workshop that gathered stakeholders, academics (both in the social and natural sciences), and experts in planning. The directors of the natural protected areas and their staff further reviewed these initial ideas, and provided most of the baseline data.

Experience has shown that it is best to limit the number of performance and impact indicators to the smallest number possible to measure the progress of activities and/or results sought. Indicators should be ones for which reliable information is available on a regular basis and at as low a cost as possible. This means using data routinely collected by others whenever possible rather than an EF carrying out its own data collection efforts, especially in the case of impact indicators.

Because of the nature of the results sought or availability of data, it will most likely not be possible to collect information on all program level indicators annually. However, it is useful for the EF to monitor progress toward its objectives every year using at least some of the indicators chosen. Reviewing monitoring data with all relevant stakeholders is a good way to further understanding of what is occurring, build commitment to the achievement of organizational objectives, and confirm whether key assumptions remain valid.

There are differences in program level M&E between small grants programs funded by EFs and programs to support protected areas. Because of the relative homogeneity and, typically, the small number of protected areas supported by an EF, it is likely to be easier to use common indicators and to link project level indicators to program indicators in protected areas programs than in grants programs.

Monitoring is a continuous process that should be a routine part of management. Evaluations, on the other hand, are done at specific times. These can be planned in advance - such as a mid-term or final project evaluation - or only when the need arises. For example, information from monitoring might raise issues (e.g., progress toward an objective is significantly slower or more rapid than expected) or there might be major changes in the environment within which a project operates. An evaluation would be useful to help understand better why this is happening and the impact on project or program activities.

• Do all projects or other activities supported by the EF have clear and measurable objectives, outputs, and performance indicators? Are the key assumptions linking inputs to outputs, and outputs to objectives clearly identified? To what extent are these the results of a genuinely participative process involving all key stakeholders? Do projects use the logical framework approach as a basis for design, monitoring and evaluation?

• Does each project have a monitoring and evaluation plan? Does it identify sources of information, and methods, roles, and responsibilities for data collection and analysis? Are adequate resources available for these activities? Are they in proper proportion to the size and/or innovation of the project? What procedures are there for involving key stakeholders in the collection and/or review of monitoring information? How is information from monitoring reported to those responsible for managing the project, other stakeholders, and to the EF? How will monitoring information be used in decision making?

• Is the timing of project evaluations related to key decision points? Are all planned evaluations necessary? Is there flexibility, and adequate resources, to carry out evaluations when needed to understand more fully the reasons behind trends indicated by monitoring information?

• Who is responsible for managing and using information from monitoring and evaluation of projects in the EF itself? Do they have sufficient time and resources to carry out these responsibilities, including to make field visits to independently verify monitoring and evaluation data?

• How is information from project level M&E used by the EF? What systems are in place to permit the EF and its partners to adapt to and learn from experience?

• What are the expectations of key stakeholders (including donors) regarding the EF´s ability to report on the performance and results of the projects and other activities it supports?

Protected areas programs have had success focusing on strategic planning at the level of individual parks as a basis for defining objectives and indicators. Small grants, however, are more likely to be focused on the project activity that the EF is supporting. The logical framework methodology has proven to be useful for both processes.

Clear project objectives, outputs, assumptions and indicators are essential to determine the performance and impact of projects, both individually and in comparison to others. The logical framework has proven to be a valuable tool for doing this. However, like any tool, it can sometimes be more costly to insist on adhering rigidly to the full logical framework process for some projects. Full adherence may also require a level of capacity that many prospective grantees do not have. Therefore, it is more important to emphasize that project proposals have clear objectives and indicators, and use them as a basis for their M&E plans, than to insist that grantees follow rigidly the logical framework process or any other particular method.

Many EFs have found it necessary to develop ways to assist prospective grantees design projects and related M&E plans. They have had greater success working in partnership with and supporting other organizations to do this as much as possible, rather than building up their own staff to do it. For example, organizations that submitted proposals to FMCN's grants program in Mexico that did not meet its evaluation committee's standards for project design were invited to participate in a workshop on strategic planning, the project cycle and the logical framework. The response has been very positive and a gradual improvement in the preparation of proposals is being observed. In other cases, FMCN's evaluation committee has approved projects with a recommendation that support be provided to strengthen the planning or administrative capacity of the grantee. FMCN has set aside a portion of its grant funds to cover the costs of training for them through Mexican organizations that specialize in this field.

For protected areas, it is important to support strategic planning at individual protected areas and at the system level as the basis for identifying project objectives, outputs and indicators. EFs have found it valuable to work closely with protected area managers to build their capacity to define their own strategic plans and the way that the resources provided by the EF factor into and relate to their overall objectives and activities. For example, the definition of the goal, objectives and indicators for the program on natural protected areas at the FMCN in Mexico followed three steps. The first was a workshop with stakeholders, experts in planning, and academics to define the overall program logical framework, the planning methodology and the program impact indicators. Next, directors from the protected areas participated at a workshop where they became familiar with the planning methodology. Third, regional workshops gathered the technical core teams for each protected area to define the specific logical frameworks for each reserve, including impact and performance indicators. The frameworks for each individual reserve provide the basis for the overall strategic plan of the program. Both reports and operating plans, including their financial and technical aspects, are based on these frameworks. It has required more than a year to have a polished system both for the program and for each natural protected area, as well as the respective baseline data. The challenge ahead consists of standardizing the methods to collect and analyze data in the program, involving all stakeholders.

It is important to involve all stakeholders in the project planning process, including defining objectives and indicators, and in collecting data on indicators. Once staff in the field and at EF offices understand the need and use of a M&E system, collecting, analyzing and considering results for decision making can more easily become part of the management of an EF.

Aaker, Jerry and Shumaker, Jennifer (1994). Looking Back and Looking Forward: A Participatory Approach to Evaluation. Little Rock, AR: Heifer Project International.

Gosling, L. (1995). Toolkits: A Practical Guide to Assessment, Monitoring and Evaluation. London: Save the Children (UK).

Hitz-Sánchez, Alex, Paquita Bath, Richard Devine, Patricia León, Bruce Moffat, and Monique A. Zegarra (1997). Rumbo al Éxito: una guía para juntas directivas de organizaciones sin fines de lucro. América Verde Publications. Arlington, Virginia: The Nature Conservancy. Distributed by Island Press. ISBN 1-886765-07-3.

Kremen, C., Merenlender, A., and Murphy, D. D. (1994). Ecological Monitoring: a Vital Need for Integrated Conservation and Development Programs in the Tropics. Conservation Biology 8 (2): 388-397.

Margoluis, Richard and Salafsky, Nick (1999). Measures of Success: Designing, Managing, and Monitoring Conservation and Development Projects. Washington DC: Island Press.

Mexican Nature Conservation Fund (1999). Monitoreo y Seguimiento del Fondo para Áreas Naturales Protegidas (in draft).

The Nature Conservancy (1999). Planificación para la Conservación de Sitios: un Proceso para la Conservación de Sitios Prioritarios (in draft).

UNESCO (1996). Reservas de Biosfera: La Estrategia de Sevilla y el Marco Estatutario de la Red Mundial. UNESCO, Paris.

United Nations (1996). Indicators of Sustainable Development: Framework and Methodologies. New York. ISBN 92-1-104470-7.

United Nations Development Programme (1997). Who are the Questionmakers? A Participatory Evaluation Handbook. New York: UNDP.

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http://www.interaction.org/evaluation/tips.html

http://www.unep-wcmc.org/

Key Points

• Successful fundraising generally requires a well-thought-out strategy involving program planning and financial needs assessment as well as research of the various potential sources to determine which may actually be available to any given fund.
• In general, multilateral bank funding is available only to governments or to private-sector projects expressly approved by governments. Therefore, close collaboration with government is a prerequisite for eligibility to major sources such as the GEF.
• Bilateral donor support to an EF, whether hard or local currency, can be directed to the capitalization of the endowment itself, technical assistance, or parallel funding of programs selected by the EF. This type of funding is also typically negotiated government-to-government and usually requires active government support.
• Debt-for-nature swaps or conversions may generate endowment capital or recurrent flows of local currency to support EF projects. The key elements include existing national debt meeting certain conditions, a creditor willing to cancel the debt in exchange for a negotiated (reduced) payment and/or specified commitments to conservation, and a national government willing to authorize and abide by the agreement.
• International foundations have not been a major source of capital to EFs but have provided important collaboration and co-financing for EF projects.

• EFs have successfully used special taxes and fees as well as other national sources to generate both recurrent and endowment income.
• Every EF confronts the question of how and where to raise resources from the beginning of its design. Even well into its operational phase, an EF continuously has needs to raise additional resources to meet co-financing targets set by the original donors, and to build enough capital to carry out its programs and operations over the long term. This chapter addresses each of the key questions with a separate analysis of best practices and lessons learned, contributed by EF managers, donor representatives, and experts in the relevant fields.

• What are the elements of a good resource mobilization strategy?
• What multilateral institutions support EFs?
• What are the potential bilateral sources?
• How can an EF benefit from debt-for-nature swaps?
• Are international foundations a potential source of resources?
• What strategies are most successful for raising funds locally?

Each of the sections of this chapter discusses best practices and lessons learned relevant to one or more of these questions.

Lorenzo Rosenzweig, Executive Director, Mexican Nature Conservation Fund

Environmental Funds (EFs) are permanent financing mechanisms that have a long time horizon and provide grants and technical assistance to community based groups, indigenous people's organizations, NGOs and in certain cases (especially protected areas funds), to government agencies. Typically, EFs secure funds from international and in country sources and then disburse them through open or focused conservation and sustainable use programs that answer to thematic and geographic national and in some cases regional priorities.

When designing a resource mobilization strategy, one of the first questions to be asked relates to the nature of funds raised. In very broad terms, the possibilities include earmarked or sinking funds, and capital or endowment funds (See Chapter II, "What is an Environmental Fund, and when is it the right tool for conservation?"). Most EFs combine both types. As a general rule, sinking or project earmarked funds are much easier to obtain and have a greater short term impact. On the other hand, endowment funds are more difficult to raise and fit into long term conservation strategies that, if combined with adequate sinking fund disbursements in the early phases of the programs, secure the permanence of the conservation efforts.

The Mexican Nature Conservation Fund (FMCN) is a good example of an evolving EF that started as a permanent endowment fund supported by USAID and the Mexican Government, contributing on a 2:1 ratio to support grants to organizations of the civil society. Later a protected area fund was added with a capital contribution from GEF. FMCN's $10 million annual budget is obtained from a combination of contributed sinking funds and revenue from investment of its $46 million endowment.

The development of a fundraising strategy, and actually raising sinking and/or endowment funds, has been always a top priority for all EFs. A questionnaire answered by more than 20 EFs in preparation to the IPG's Merida, Yucatán workshop in December 1997 placed this subject as the most important and pressing capacity-building need. Resource mobilization campaigns have been always part of the development programs of conservation NGOs and EFs. Increased competition for philanthropic contributions, ever-growing organizational needs and the gradual reduction of international aid programs are forcing most EFs to implement more organized and intensive fundraising efforts.

The exact nature and design of these efforts, like the nature of EFs themselves, is specific to each institution. Many of the international donors have particular preferences, and national governments show different degrees of commitment towards conservation of the natural resources. However, the following key components apply in most cases and should be taken into consideration. Any successful resource mobilization strategy must have:

• Support and time commitments from all key groups involved such as the board of directors, the president of the board, the national government through the corresponding ministries, and the grantee or beneficiary community.
• A clear vision and a sound strategic plan for growth and improvement of the grantmaking program.
• Objectives based on clear priorities and accurate plans, budgets and needs.
• A compelling and authentic case for support (case statement) properly documented and supported.
• A market survey of potential national or international donors whose giving priorities are in line with the EF's profile.

The following summary outlines key steps essential for laying the foundation for a successful resource mobilization strategy.

1. Examine case as per the mission statement of the EF
1. Why does the institution exist?
2. How does the EF address the country's most pressing needs in relation to biodiversity conservation?
3. How does the EF strategy fit within the national strategy?
2. Define objectives
1. Mission and goals translated in specific and measurable terms or programs. How does the EF provide solutions to the problems and needs?
3. Prepare estimated needs statement
1. Program plans projected for at least 5 years
2. In depth financial planning accompanying program planning
3. Estimate resources required for programs
4. Identify endowment and sinking fund needs over a 5-year horizon.
4. Identify potential funding sources
1. Bilateral sources - direct grant contributions
2. Bilateral sources - debt conversion
3. Multilateral sources
4. Private foundations
5. Private corporations and individuals
6. Other sources such as national governments operating potential financing mechanisms like privatization fees, conservation easements and carbon sequestration.
5. Based on the potential sources, define a fund raising strategy
1. Select fund raising vehicles suited to the potential sources. Determine cost-benefit ratios and testing techniques
2. Establish management scheme for analysis, planning, implement resource mobilization strategy and adjust in response to day to day experience and results.

Implementing a fund raising campaign, be it for securing sinking funds or for obtaining a capital endowment, is an expensive time consuming initiative. EFs should tackle it as the first priority and fund it correspondingly.

A profile of the financial structure of most EFs of the Latin America and Caribbean Region can be obtained through REDLAC.

BIONET (1999). Innovative Financing and the GEF: Directions for a New Millennium.

Dove, Kent. (1990). Conducting a Successful Capital Campaign. Jossey-Bass Publishers, San Francisco.

The term "multilateral donors" refers to the banks (World Bank, International Finance Corporation, Africa Development Bank, Asia Development Bank, Inter-American Development Bank, etc.) and international agencies (for example, of the United Nations Development Program, European Community, etc.) that support economic development by channeling resources from the developed world. These resources come in the form of loans to central governments, special projects, grants, and sometimes support for private-sector activities.

In recent years, support for conservation programs in general and EFs in particular from the multilateral development banks has increased significantly. The major new thrust is the Global Environment Facility. However, additional forms of conservation finance are being developed by regional development banks such as the Inter-American Development Bank.

In general, multilateral bank funding is available only to governments or to private-sector projects expressly approved by governments. Sometimes conservation funding might also be attached to an infrastructure development project -- for example, as mitigation to the environmental effects of developing roads, railways, dams, etc. Projects submitted to development agencies, especially multilateral banks, usually must have the backing of the appropriate government agencies, and generally be submitted by or with those agencies. There are exceptions, as in the case of the Inter-American Development Bank's small projects that finance NGOs directly or the funding through its private sector windows to environmental enterprise funds.

The major multilateral funding source for EFs is the Global Environment Facility (GEF). As of December 1999, the GEF has supported about 15 currently operating funds and about that many more in the preparation phase. To meet GEF eligibility criteria, an EF seeking a grant from this source must be located in a country that has signed the Convention on Biological Diversity and have the active support of the national government, which will have to sign off on the application. It must be able to demonstrate that the conservation activities are consistent with GEF operational programs and strategies and will protect globally significant biodiversity resources, and that there will be substantial local contributions (i.e., that only incremental costs are to be supported by the GEF).

In addition to providing endowment capital, the GEF has a "window" for medium-size projects (up to US $1 million) that can support technical or preparatory assistance as well as direct conservation activities. See the section on "resources" below for obtaining information about this program. These proposals can be submitted to UNEP (for research activities), UNDP (technical assistance and capacity building activities), or the World Bank (investments).

The Inter-American Development Bank (IADB) has used a loan mechanism to finance three national public environmental fund operations: two in Brazil and one in Colombia, with a total financing of US$71 million. It is currently studying the application of that mechanism in other countries (Argentina and Paraguay are example of this). The Brazilian National Environment Fund (FNMA), that has been subject to IADB loans in two phases, has financed so far over 530 projects, totaling over US$30 million, mostly through local NGOs and community groups. The projects financed through grants are for sustainable natural resource management and conservation, environmental management, conservation units, and applied technology development in natural resources and environment. Experience has shown that that relying solely on the demand-driven approach may not guarantee adequate coverage of problems that may be of national priority. Priority areas are established by the Deliberative Committee of the Fund, whose representation includes state-level and academic interests, in addition to the five representatives of the NGOs throughout the country.

In addition, the IADB has financed five environmental enterprise funds through its private-sector windows in order to make use of the opportunities of direct private-sector propensity to invest in sustainable management and utilization of natural resources. As examples of financing approved for Central America, two operations of the IADB's Multilateral Investment Fund (MIF) should be mentioned. One of them is the capitalization and technical cooperation of "Empresas Ambientales de Centro America" fund, providing resources for small companies in energy efficiency, water treatment, pollution abatement, and ecotourism. The second operation is a provision of a $5 million grant to transform environmental NGO income-generating activities in agriculture, agroforestry, aquaculture, ecotourism, biogenetic prospecting, and environmental education into commercially viable small enterprises. This Eco Enterprise Fund is managed by The Nature Conservancy, which is matching the IADB-MIF $5 million grant with an additional $5 million. An estimated 20 to 30 ventures will be established during the seven-year period of the project.

Another example of an environmental enterprise fund with multiple sources of financing is the regional Terra Capital Fund based in Brazil. It is promoting biodiversity-related business ventures. The funding comes from MIF, IFC, the Swiss Government, and private investors. GEF is providing grant resources to meet the Fund's biodiversity technical needs.

A greater effort is being made by the World Bank and UNDP to help developing countries better plan their development strategies and use the financial resources provided by multilaterals. Civil society organizations are strongly encouraged to become involved in multilateral-sponsored priority-setting exercises such as the World Bank's recent Comprehensive Development Framework. To the extent that Environmental Funds can influence the multilateral resource- allocation process by participating in these country strategies, they may stand to benefit as legitimate vehicles for implementing part of the environmental component.

The European Commission's Budget Line B7 6200 ("Environment in Developing Countries") was created in 1982 by the European Parliament to fund pilot actions and strategic studies with the broad aim of contributing to sustainable development. The purpose of the Budget Line is to provide financial assistance for and technical expertise on activities conducted in developing countries that enable people in these countries to integrate environmental protection and sustainable development concepts into their daily lives.

Budget Line B7 6201 ("Tropical Forests") was crfearted in 1991 at the initiative of the European Parliament in response to the Rio de Janeiro "Earth Summit" process. This budget line supports conservation and sustainable management of tropical forests and their associated biological diversity in developing countries.

Eligible recipients and partners are governments and regions, decentralized departments, regional bodies, public agencies, traditional and local communities, private operators and industries, cooperatives, NGO's, and associations representing local people. For NGO's, the majority of the organization's human and financial resources should originate within the Eurpoean Community or developing countries.

Every GEF-eligible country nominates focal points who are key national contacts for coordination of GEF programs. Typically there is an operational focal point (often in the ministry or department of environment), a political focal point (finance/planning ministry) and sometimes an NGO focal point. In-country offices of GEF Implementing Agencies (UNDP, World Bank) can usually provide contact information for these people.

Visit the GEF web site at www.gefweb.org

An information packet on medium-sized projects, including an introductory brochure, answers to frequently asked questions, sample project briefs and concept papers, and application forms for project development funding, is available from the

or on the GEF's web site. This packet is generally available at in-country UNDP and World Bank offices as well.

An EF can subscribe to a newsletter, "GEF Lessons Notes," disseminating findings from monitoring and evaluation of GEF projects, by visiting the monitoring and evaluation page of the GEF Web site, sending an e-mail to geflessons@gefweb.org, or writing the GEF Secretariat's Monitoring and Evaluation Unit at the address above.

IUCN - The World Conservation Union has published several very useful guides to the GEF aimed at NGOs. The Global Environment Facility from Rio to New Delhi: A Guide for NGOs is a 64-page booklet with a good orientation to the GEF, explanation of the processes by which funding is allocated, discussion of each of the four focal areas (biodiversity, international waters, climate change, and ozone depletion), options for NGO involvement, and a directory of contacts. Biodiversity, International Waters, and the GEF: An IUCN Guide to Developing Project Proposals for the GEF is a step-by-step guide that clearly explains criteria and procedures and includes samples of the "products" - project brief, concept paper, annexes, etc. - that need to be submitted at each stage of the process. For copies, contact

FAX (44) 1223-277175 and email iucn-psu@wcmc.org.uk

Recently the IADB made improvements to its Web page to make information about publications, upcoming events, and programs of interest more accessible. The web page is divided into sections: Integrated Water Resources Management, Urban Environment and Pollution Control, Forestry and Biodiversity Conservation and Management, Coastal and Marine Resources Management, Sustainable Agriculture and Rural Development, Energy Conservation and Alternative Sources of Energy, and Environmental Management, Law and Economics. You can visit the IADB webpage at www.iadb.org/sds/index.html

Contact information for the European Commission:

Most Environmental Funds agree that it is very important to diversify funding sources and avoid dependence on a single or a few sources. However, most developing country EFs have one major source that is the backbone of the fund. That source is typically from outside the country, frequently a donor government or a multilateral organization (particularly the Global Environmental Facility, see the multilateral sources section). Bilateral donors (one government giving to another) typically contribute to an EF through a direct hard currency donation or through a local currency donation as part of an official debt (government to government debt) conversion. (See Chapter VII. D, "Debt-for-nature swaps.") Bilateral donor support to an EF, whether hard or local currency, can be directed to the capitalization of the endowment itself, technical assistance, or parallel funding of programs selected by the EF.

Bilateral donors collectively contribute about $50 billion per year to developing nations' sustainable development programs, according to the Organization of Economic Cooperation and Development-Development Assistance Committee (OECD-DAC). Though this amount has been gradually decreasing in recent years (the 1997 figure was $48.3 billion), it is still a significant source of direct funding for environmental programs in developing countries. In 1996, the 21 or so DAC members (i.e., bilateral donors) budgeted about $1.2 billion in environmental protection out of a total $55.4 billion for all developing country programs. This environmental protection figure is considered to be an underestimate, as it does not capture environmental programming in other sectors.

Bilateral debt can be a considerable portion of external debt in a country. For example, in 1998 Paraguay's debt to DAC creditors (official bilateral loans from DAC members) was $0.4 billion out of $2.2 billion of the country's total external debt. In another example, in 1998 Brazil owed its DAC creditors $7.7 billion out of its total $192.8 billion in external debt. This bilateral debt can be a significant source of local currency for EFs from debt conversions, such as debt buy-backs (where countries buy back their own official debt at a discounted rate, through investing in local currency programs).

The US Government has supported the creation of at least 18 EFs, particularly through the US Agency for International Development (USAID) and the Enterprise for the Americas Initiative (EAI), an official debt conversion program. USAID has considerable experience in establishing endowments and is at the forefront of donor involvement in this area. USAID has supported the creation of about 35 endowments in all sectors; about 10 of these are in the environment. USAID has made about $100 million available to environmental endowments and another $20 million in technical assistance or program funding. Other bilateral donors to EFs include Canada, Denmark, Germany, Switzerland, the Netherlands, and Finland. Most of these bilateral donors have supported local currency programs. Whether the USG or another bilateral donor is involved, the donor is almost always involved from the inception of the EF. Early contact with the bilateral donor is essential.

The EAI program, launched in 1990, has converted about $900 million in official USG debt to create over $175 million in eight local currency funds. EAI was designed to reduce the debt burden in LAC nations while promoting mainly environmental protection, and to a lesser extent child survival and development. To participate, a country must have USAID and/or "PL-480" (also known as "Food for Peace") debt, must meet the political criteria (democracy, drugs, terrorism, and human rights), and meet economic reform criteria (open investment regime, IPR, structural adjustment, and satisfying commercial debt). Nations that qualified for EAI had their official USAID and/or PL-480 debt reduced (by as much as 50%) with the additional benefit of paying the interest on the remaining debt (in local currency) into a locally managed trust fund. The program works through a bilateral agreement between the USG and beneficiary country called the Americas Framework Agreement. Between 1991 and 1993 agreements were signed with the following countries: Argentina, Bolivia, Chile, Colombia, El Salvador, Jamaica and Uruguay. In 1998 another was signed with Peru.

Under the bilateral agreement, the debtor nation sets up a locally managed board to determine which environmental issues to address and which projects to fund through a grants program. The board includes a majority of representatives from the private sector (i.e., NGOs, community groups, and universities), nominated by the government in broad consultation with the public. In some cases, existing agencies or NGOs serve as secretariats for the board -- with mixed results. In most others, a new foundation has been created to administer the grants.

In July 1998, the USG expanded the EAI program by passing the Tropical Forest Conservation Act. TFCA enables the US Government to favorably treat approximately $13 billion of outstanding USAID and PL-480 debts in countries with tropical forests. The level of treatment will depend on a calculation of the net present value to the USG budget of their debts. To participate, a country must have USAID and/or PL-480 debt, must have tropical forests, must meet the usual political criteria, and meet the usual economic reform criteria. TFCA (and EAI) are run by a 15-member interagency public/private Board, appointed by the President. This Board is currently chaired by the Department of Treasury and vice-chaired by State, and includes USAID, Agriculture, Interior, EPA and other federal agencies, plus 7 private members.

TFCA has three mechanisms for treating debt:

• Buy Back
• Third Party Swap
• Reduction

Debt buy backs and swaps do not require any appropriations from the US Congress and can be used at any time. Debt reductions require an appropriation to pay certain costs, but less than one-for-one of the amount of debt reduction. All of the mechanisms include the creation of local currency funds for conserving tropical forests according to the EAI model described above. The President signed the Executive Order to implement TFCA in July 1999, and so it is now fully operational. The trigger mechanism to begin the interagency process to determine the eligibility and treatment value of outstanding debt stocks is a letter sent from the Minister of Finance to Treasury Under Secretary Geithner. As of December 1999, no TFCA boards have been set up in the 44 eligible countries, but the President's board has received official inquiries from at least 6 countries.

The next step for these countries and any others that submit letters will be for Treasury, State, USAID and other federal agencies to make formal determinations on eligibility and net present values on outstanding debt stocks. The debt reduction mechanism requires a special appropriation from Congress. The Administration requested $50 million in the USG FY 2000 budget, however, it appears that only $13 million was appropriated for this purpose - $12 million for debt reduction and $1 million for operation expenses. Reduction, of course, is the most attractive and generous treatment and so demand will likely far exceed supply.

Most bilateral donors are decentralized, so any conversations with them regarding EF support should start with their office in the country in question. If direct endowment support is not possible, be sure to discuss the possibility of support for start up costs, technical assistance, and parallel funding of projects. Both the positive and negative aspects of bilateral support of a EF should be considered and discussed with donors up front:

Advantages:

• An EF is flexible; can be set up to maintain the principal, to draw down on the principal for a specific time period, ultimately depleting it; or to draw down on the principal only for a specified period, after which the balance would be preserved and only the interest would be available.
• Can be structured to leverage resources; opens up possibilities for financing from other donors, from host government, etc.
• Aids in the development of self-reliant, effective, and sustainable local organizations.
• Investment in an EF may be a good "exit strategy" for a bilateral donor if it plans to scale down its program or leave a country. The EF can continue supporting a former bilateral strategy.

Limitations:

• Bilateral donor usually has to amass a sizeable amount of funds, whether in hard or local currency, although not all in one year.
• EFs require an intensive time commitment to set up the endowment structure and the investment plan; donor should plan on one to two years of set-up time .
• Bilateral donor usually has no direct monitoring over grants once the fund is established (though the donor may require representation and voting power on the board); all conditions have to be established up front.
• Five to ten years of oversight or technical assistance may be required before the fund can fully operate independently.

Details on bilateral donor programs can be researched at OECD's Web site, http://www.oecd.org/dac/htm/online.htm#dac/o).

See the Joint BIS-IMF-OECD-World Bank web site for statistics on external debt. The address is http://www.oecd.org/dac/Debt/htm/debto.htm

USAID working paper #221, "Endowments as a Tool for Sustainable Development," is available on USAID's website http://www.dec.org/usaid_eval/#010

The complete text of the Tropical Forest Conservation Act can be found by searching the 105th Congress database for "H.R.2870.ENR" at the US Library of Congress website http://thomas.loc.gov

The text of the executive order establishing the Enterprise for the Americas Initiative is on the web at http://www.fedworld.gov/pub/w-house/0728-3.txt.

A debt-for-nature swap (or conversion) is defined as the cancellation of debt in exchange for a commitment to mobilize domestic resources for the environment.

The debt crisis in Latin America in the 1980s led to the introduction of the debt-for-nature swap, a financial mechanism which has enabled developing countries to reduce external debt while increasing support for conservation. Since the first debt-for-nature swap in Bolivia in 1987, it is estimated that over 30 countries have benefited from debt-for-nature swaps which have generated over $1 billion for the environment.

The economic rationale for swaps is based on the willingness of a creditor to accept less than face value for debt that is not likely to be repaid at full face value and of the debtor to make payment at a higher value, but usually at less than 100%. Much of the additional funding generated through three-party debt-for-nature swaps has been channeled through EFs. The following steps are necessary to implement a three-party debt-for-nature swap:

1. A "conservation investor" purchases public external debt at a discount from face value or solicits debt donations from a creditor.
2. At the same time, the conservation investor negotiates separately with the debtor government for cancellation of the debt in exchange for a commitment to provide funding or protection for conservation.
3. The conservation investor then implements the project with the allocated local currency funding. EFs have often been the beneficiary of debt-for-nature swaps negotiated by international conservation NGOs that have raised funding from bilateral and private donors.

With the introduction of the Paris Club swap clause in debt rescheduling agreements in the 1990s, bilateral creditors established debt reduction programs to convert Official Development Assistance (ODA) debt owed by developing countries. In a bilateral swap, a creditor government cancels debt owed by a debtor government in exchange for the debtor setting aside an agreed amount of counterpart funds. Many of Latin America's EFs were first capitalized through bilateral swap programs.

In 1998, the U.S. Congress passed the Tropical Forest Conservation Act which will allow for debt reduction in support of conservation in countries with globally significant tropical forests. (See Chapter VII. C, Bilateral Sources.) The TFCA is modeled after the Enterprise for the Americas (EAI) which generated $154 million in local currency funds for environmental protection and child survival in seven Latin American countries.

Feasibility Research: Because of the complexity of implementing debt-for-nature swaps, it is important to evaluate the feasibility of debt-for-nature swaps prior to developing a debt swap proposal. Typically, the following questions will need to be addressed:

• Is debt available for swaps?

• bilateral or commercial debt
• owed to a creditor that is willing to sell or donate the debt

• Is the debtor government interested in and able to implement swaps?

• experience with swaps and legal framework (e.g., debt swap program)
• fiscal resources available

• What are the potential financial terms for swaps?

• discount rate
• exchange rate
• schedule for payment

Preparing a Debt Swap Proposal: In a three-party debt-for-nature swap, a debt swap proposal to the debtor government will typically include the financial terms proposed for the swap along with a description of the EF that provides information about the EF's legal status and objectives, the rationale for supporting a swap benefiting the EF and the proposed use of the debt conversion proceeds generated by the swap (e.g., creation of a local currency fund to support a grants program).

• Importance of advocating for swaps: As EFs in Mexico and Peru have shown, EFs can play an important role in advocating for swaps both with creditor and debtor governments. Advocacy can take the form of advice on the technical aspects of swaps as well the development information regarding the use of funding generated through swaps.

• Need for financial/legal assistance: it is often necessary to call on specialized financial and legal advisors in order to implement swaps. For example, a lawyer specialized in swaps will be needed to draft a debt purchase agreement and debt swap agreement. A financial intermediary may be necessary to identify debt for purchase.

• Partnership with international NGOs: International conservation NGOs can often provide technical expertise in negotiating swaps and access to hard currency funding that may be necessary in order to purchase debt.

• Sinking Funds: Because debt swaps generate local currency, they have been a good funding source for sinking funds, but not for endowment capital. Experience has shown that is important to consider ways to counter the risk of loss of value due to inflation or currency depreciation.

In 1993, with US$13 million in funding provided by USAID, the World Wildlife Fund was able to purchase US$19 million in commercial debt owed by the Government of the Philippines, which represented a purchase price of 68% of face value. In exchange for cancellation of the debt, the Government of the Philippines agreed to pay Philippine pesos and peso notes valued at the equivalent of US$17 million (or a redemption price of 90% of face value). The conservation funds generated were used to assure long-term funding for the environment through the creation of an endowment for the Foundation for the Philippine Environment.

Peru was able to negotiate bilateral debt swaps with six of its bilateral creditors (Canada, Germany, Finland, the Netherlands, Switzerland and the USA). The discount rate applied to the face value of debt for these conversions was close to 75% (which is equivalent to paying 25% of the original face value of the debt). Much of the funding has been channeled through Peru's National Trust Fund for Protected Natural Areas (FONANPE).

Resources for more information

This chapter draws significantly on "Debt-for-Environment Swaps for National Desertification Funds," an introductory guide which can be requested from the UNDP Office to Combat Desertificatification and Drought (UNSO) by calling (212) 906-6497 or by e-mail at unso@undp.org.

Another useful guide "Debt Swaps for Sustainable Development: A Practical Guide for NGOs" can be ordered from IUCN Communications and Corporate Relations Division, Rue Mauverney 28, CH-1196 Gland, Switzerland.

NGOs such as Conservation International, IUCN-the World Conservation Union, the Nature Conservancy, the Swiss Coalition of Development Organizations and WWF can also provide information about their experience with debt-for-nature swaps.

Creditor governments, such as Belgium, the United States and the United Kingdom can also provide information about their debt swap programs.

VII. E. International Foundations

Of the EFs with which the IPG maintains contact, only one has received endowment capital from an international foundation: the Foundation for Eastern Carpathian Biodiversity, which received $300,000 from the John D. and Catherine T. MacArthur Foundation. However, there have been several examples of EFs receiving foundation funding to support specific parts of their grant portfolio (for example, KEHATI in Indonesia and the Foundation for the Philippine Environment received foundation grants for project disbursements during the first year of operations, before their endowment capital had generated income). Foundations may also be a potential source of funding for programs of capacity-building among grantees, policy initiatives by the EF and/or its grantees, or specific kinds of project activities.

There are a few basic points to be understood about foundation donors at the outset:

• A partnership with a conservation organization in the country where the prospective foundation donor is located can be a very useful point of entrée.
• The activities that a foundation can support must meet the definition of charitable purposes in the country where the foundation is located.
• Foundations have missions, goals, and objectives. Your project will have a much greater chance of success if it is presented in terms of meeting those aims. (Information about specific foundations' aims can be researched through directories, libraries, or copies of their annual reports.)
• Foundations are publicly regulated in the countries where they are registered. Their missions, officers and directors, and grant-making data are generally a matter of public record, and most will respond to requests for information. Many foundations issue guidelines for prospective grantees, and it is wise to consult these before making an approach.

VII. F. In-Country Resource Mobilization

In addition to relying on grants from international donors, environmental funds are often able to tap a variety of potential in-country sources of financing.

The first place to look for in-country sources of revenue for an environmental fund, is a country's national or provincial governments. There are basically two options: a one-time government grant to endow the fund, or a government commitment to make annual budget allocations to support the fund. In some cases, the government of a developing country may actually be required by an international donor to make some kind of matching contribution to an environmental fund (usually, on a less than one-to-one basis), as a condition for obtaining the international donor's contribution. For example, the Mexican Nature Conservation Fund was established by a $20 million contribution from the US government, which was conditioned upon the Mexican Government's agreeing to make a matching contribution equal to half of that amount, i.e. $10 million. By contrast, the Government of Bhutan was not required by donors to the Bhutan Conservation Trust Fund make any matching cash contribution to the endowment capital of the trust fund, but was, however, required to make a matching contribution each year (by providing labor and office space) equivalent in value to 10% of the trust fund's annual budget. In Ecuador, the government recently contributed the sum of $1 million to establish a new national environmental fund, by using money which came from privatizing certain state-owned enterprises. The Ecuadorian government did this in order to impress potential international donors with the depth of its commitment to the new environmental fund, and thereby set an example for international donors to follow.

Other potential in-country revenue sources for an environmental fund include:

• donations from individuals in the country.
• donations from local or international corporations operating in the country.
• donations from already established local philanthropic foundations.
• money from pollution fines. For example, many "brown" environmental funds in Eastern Europe are financed in this way, and some of these funds allocate a fixed percent of their budget for "green" nature conservation and protected areas.
• money paid as part of judicially approved out-of-court settlements in pollution cases. For example, in many cases in the US, courts have ordered industrial polluters to contribute money to trust funds for long-term conservation of the particular rivers or ecosystems damaged, rather than paying fines tot he government.
• charging a nature conservation fee in addition to an existing airport departure tax, and channeling the extra revenue into an Environmental Fund (this is how the Belize Protected Areas Conservation Trust is largely financed).
• Imposing a tax on airline tickets that is earmarked for a national environmental fund (as is currently done in Egypt and Algeria).
• Adding a surcharge on gasoline taxes, and earmarking the resulting revenue for an environmental fund (this is how Namibia hopes to finance a proposed new "Environmental Investment Fund")
• Imposing excise taxes on sales of hunting and fishing equipment (which is how several hundred million dollars are raised annually for the U.S. Wildlife Restoration Fund and the U.S. Aquatic Resources Trust).
• Earmarking the revenues that are collected by government as payments for off-shore oil drilling leases, to go into an environmental fund (which is how the $1 billion U.S. Land and Water Conservation Fund is financed).
• Adding an environmental surcharge to consumers' monthly water bills (which is how watershed forest conservation funds are financed in Bogota, Colombia and Quito, Ecuador).
• Imposing a surcharge on local property taxes, that is earmarked for the acquisition of undeveloped private land in order to create or expand parks and other protected areas (which is done more than 40 states in the U.S., and is also done by local governments in France in specially designated "scenic areas")
• Lottery revenues (which is how the US state of Colorado finances its $60 million per year Great Outdoors Colorado Fund, which buys up privately owned 'wildlands' to protect them for future development).
• Adding a 1% or 2% surcharge to the price of tourists' hotel rooms (which is how the newly established Turks and Caicos Islands Conservation Fund is financed).
• Earmarking part of the money that is collected by the government as timber royalties (which is how the Sabah Parks Foundation is funded in Malaysia).

In most countries, an act of Congress or Parliament is required in order to impose any kind of new taxes or mandatory fees. It may take several years and considerable effort, for such legislation to be passed. On the other hand, it may take a similar amount of time and effort to secure large grants from international donor agencies with which to endow an environmental fund.

If governmentally imposed fees and taxes are the sole source of financing for an environmental fund, the fund may readily come to be "controlled" by the government. If, however, the environmental fund also receives substantial contributions from international donor agencies and foundations, or from individual and corporate contributions, then the government's role in managing the fund will usually be balanced by the roles taken by these other donors to the fund, who will want to have a voice in how the fund's money is spent. The most successful environmental funds are those that rely on a variety of different funding sources, including international donors, and in-country sources, both public and private.