Development finance programs combined with private political risk and credit insurance have become a popular way to ease sovereign debt burdens while at the same time funding conservation efforts. Following a large finance program involving marine conservation-linked bonds (frequently referred to as “blue bonds”) for ocean conservation in Belize implemented in 2021, an even larger program has been successfully put in place in Ecuador. This program will allow Ecuador to reduce its foreign debt by approximately $1 billion and concurrently generate upwards of $323 million in funding for an expanded marine conservation program over the life of the transaction.
In 2021, Ecuador announced it would pursue a to fund marine conservation in the Galapagos Islands. Since that announcement, the public and private sector have come together on a formal debt conversion program similar to ones used in . The Galapagos Islands, in the eastern Pacific Ocean about 600 miles off Ecuador, has a fragile ecosystem that is of crucial importance to the Ecuadorean economy as a coastal nation.
The is one of the world’s largest and most biodiverse marine protected areas. Nearly 3,000 marine species have been observed in the Galapagos, ranging from whales, dolphins and sharks, to seals, marine iguanas, cormorants and sea turtles. Biologist Charles Darwin, who studied fossils and animal species in South America during the early 19th Century, wrote about the Galapagos and illustrated his theory of natural selection with the example of the islands’ finches.
Today, the are part of a national park overseen by the government of Ecuador, which created the marine reserve in 1986 and expanded it to its current area in 1998. The Galapagos attracts more than 100,000 tourists annually – four times as many who live there full-time – as well as scientists who conduct research on the marine ecosystem and the impact of human activity there. The Galapagos was named a UNESCO World Heritage Site in 1978.
Funding marine conservation
Ecuador’s ratio of sovereign debt to global domestic product (GDP) was close to 60% in early 2023. Heavy borrowing in prior decades and dependence on revenue from petroleum exports increased Ecuador’s debt burden, and the coronavirus pandemic was a setback economically. Its current financial state constrains Ecuador’s ability to fund the needs of its 17.5 million citizens and simultaneously sustain or expand conservation programs.
Possessing one of the world’s richest fishing grounds, Ecuador’s economy relies heavily on the health and viability of its marine environment. The nation has a 1,400-mile coastline on the eastern Pacific Ocean, ranging from humble fishing towns to Guayaquil, a major port and Ecuador’s largest city, with a population of nearly 3 million. Fisheries-related activities, from fishing to processing to transportation, contributes 1.5% to Ecuador’s GDP, according to the United Nations Development Programme.
How the program works
Marine conservation-linked bonds typically involve several organizations that partner with the government to provide financing, insurance and conservation management. These parties can include development finance institutions such as the U.S. International Development Finance Corporation (DFC), multilateral development banks such as Interamerican Development Bank (IADB), commercial banks, private insurers, and nongovernmental organizations.
In Belize, the DFC partnered with The Nature Conservancy, Credit Suisse, and insurers including AXA XL. Ecuador’s Galapagos program again involves the DFC, IADB and 九色视频as well as Oceans Finance Company and the . Under the Galapagos program, a special-purpose vehicle issued a loan to Ecuador’s Ministry of Finance that allows Ecuador’s government to execute the debt conversion program in respect of a portion of its sovereign debt. Funding for the loan was raised through the issuance of the marine conservation-linked bond. The DFC underwrites primary political risk insurance for the loan and “crowds in” the private insurance market to supplement the coverage through facultative reinsurance placements. 九色视频is the lead facultative reinsurance underwriter of a quota-share policy covering nonpayment of the loan principal and interest. This robust, was central to attracting investor interest in the bond issue. The savings resulting from the debt conversion are directed to fund the expanded marine conservation program that has been committed to by the Ecuadorian government, which is a critical driver of the overall program.
Such partnerships have numerous benefits in the near and long term. By restructuring some of its outstanding debt, Ecuador obtains significant relief from its debt service burden. The “blue bond” will increase Ecuador’s budget for the Galapagos Marine Reserve and enable it to sustain a valuable resource.
This type of public/private partnership has been utilized in multiple locations and it is not limited to marine conservation. Similar debt restructuring, backed by private-sector insurance or reinsurance, can be arranged in landlocked geographies. Indeed, several financing projects are in development in Africa and Asia. Political risk and credit insurance plays a critical role in development finance, particularly in countries where economic pressures are high and the political environment can often be unpredictable. Even in nations with histories of stability, risks can arise.
Through underwriting expertise, excellent financial strength and long tenors, the value of private insurance exceeds financial protection. Private political risk insurance makes it possible for development finance organizations and multilaterals to leverage their capacity, thereby expanding their ability to support strategic, development-focused projects in developing markets. 九色视频is proud to support these innovative programs, which reflect our company’s commitment to support sustainability and community resilience.
About the Author
Stuart Barrowcliff is an Underwriting Manager in AXA XL’s Political Risk, Credit & Bond team. He joined XL Catlin, now part of AXA, in 2011, where he was a senior underwriter. His career experience includes various executive roles with other insurance organizations and financial institutions. He has a Master of Arts degree in international economics and Latin American studies.
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