This paper is from a session at the Regional Conference on CSRO Accountability & Sustainability -- Critical Lessons from Best Practices, February 18-20, 2002. Text of this paper was prepared by the Philippine Business for Social Progress. Download printable PDF copy (325K) of the entire conference proceedings.
On October 16, 2001, CODE-NGO raised 1.4 billion pesos or $27.46 million to constitute a perpetual trust to fund poverty project. It is the largest endowment for a non-profit in the Philippines and may be in Asia. It was raised from working daily starting February 2000. It was raised not from grants or donations or from philanthropic activities, but from the capital market considered as the bastion of capitalism and profit takers. Boldness, creativity and innovation were the weapons, but later it gave way to titles such as scam artists, thieves and rent-seekers.
It began in October 2000, when some trustees of the Association of Foundations began to work for program to financial small entrepreneurs. The proposal entitled "Hanap Buhay" was prepared. It was aimed to give target beneficiaries opportunity to earn more and get jobs. It captured the excitement and imagination of the Board and Marissa Camacho-Reyes, who had taken on the rotating chair of the President after Dinky Soliman left for government cabinet position.
February 2001, Marissa ran into a friend who's an investment banker, Bob Guevarra. She asked him how do business or private enterprise raise capital. He responded by saying "they go to capital market, where they sell bonds." Marissa asked, "can we do the same?" The response was positive. Then Red Mayo was approached. He asked how much capital is needed. "Can we raise one billion pesos?" was the answer. Red returned and recommended a solution. -- the dream of getting billions could work if the organization could work with government and allow it to buy treasury notes, which will be paid for about 10 years and do not require interest for the period they are loans outstanding. The condition is to resell the bond to secondary market so it could earn probably one billion. Dan Songco presented the idea to the Secretary of Finance, Bert Romulo, and was asked to present it to other sector of government like the Bureau of Treasury and other finance officers. A number of passwords were used to open doors and bring the idea forwarded. The first was the strength of the cause. The fund raising is for the poor, also a priority of the government. Donor funds are dwindling and there is reason to come forward and say, "help." Secondly, CODE-NGO's credibility was used. CODE-NGO is the oldest network with around 2,000 NGO members bounded by a code of conduct. Thirdly, the network boasts of self-regulation. PCNC is operating as an accrediting body in partnership with the Department of Finance, and is working to regulate and bring out the professionalism of NGOs. And lastly, there is a noble idea that makes sense to NGOs and government.
There was assurance that the profit will be used for social development ventures. Since CODE-NGO is not eligible dealer, RCBC was contracted to act as agent to purchase the zero-coupon bond or zeroes. RCBC Capital was also contracted as underwriter. It agreed to purchase from CODE all the zeroes as it could buy from government at pre-agreed price. At the beginning, CODE-NGO negotiated a certain ceiling price if the underwriter succeeds in what needs to be done.
So zeros were obtained on negotiated sale, but the Bureau of Treasury refused to do this. Thus, on October 16, an auction was held. Bid could have been lost, but was won by a fraction. The fury began when Senate started to investigate, the NGO network and groups came out condemning it and media picked up the story.
The Peace Bond controversy has been in the news for quite sometime already. It was in June 2001 that the brother of Marissa was appointed as Secretary of Finance. Because of this Marissa was accused of high-level conflict of interest. The latest from Manila is about 36 people will be filed plunder cases.
Top
In the case of Indonesia, one works effectively with government during crisis. As result of the Asia economic crisis, it created debt and environmental crises, which is unprecedented in scale and nature. CSROs and government were unable to cope with the problems. Indonesia is living in enormous debt -- 138 billion in external debts. 52% of it is private sector debt, while 48% is public sector debts. In 1998, the debt status is equivalent to 68% of GDP and current statistics shows 150% of GDP. The government is put in extremely difficult position with the grave debt problem. About 45% of revenues go to pay for interest and principal. 30% of revenues go to routine expenses. Only 15% goes to development and this has to be divided to all sectors of development e.g. communication, infrastructure, etc. Nothing is allocated for the people or to preserve the natural resources.
More than 50 million people in Indonesia are dependent on forest. The forest is exploited and rapidly degrading because there are no other income sources. People look at natural resources as major source of income. There are only four CSROs in the country working on environment. One is KEHATI. The others are more international such as the WWF, TMC Nature Conservancy and Conservation International. KEHATI took the initiative and tried to introduce the concept of debt-for-nature swap (DNS). 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 conservation of natural resources or the environment. As a financial mechanism, it has enabled the developing countries to reduce external debt while increasing support for conservation both through enhanced protection for biodiversity and through increased funding for conservation activities such as park management, research and assistance to local communities. There are two types of swaps
A creditor government cancels debt for a debtor government setting aside funding for a mutually agreed purpose(s). The amount of local currency generated usually reflects a discount rate relative to the face value of the original debt, which is subject to negotiation between the two countries. In some cases, payment has also been made with no discount.
Several bilateral creditors have debt conversion programs, which provide for the conversion of Official Development Assistance (ODA) debt and sometimes for "buy-backs" have publicly guaranteed export credits or even commercial debts. The negotiation of bilateral debt swaps requires coordinated action among relevant government agencies within the two governments and often involves the participation of conservation organizations and other local NGOs as intermediaries and/or beneficiaries.
most of the debt-for-nature swaps concluded to date have been "three-party swaps" involving external commercial debt owed by sovereign governments (public debt).
The first step in a three-party debt-for-nature swaps is for a "conservation investor" to negotiate for the purchase of public external debt at a discount from face value (with funding raised from donor governments or private donors) or to solicit debt donations from a creditor.
At the same time, the conservation investor negotiates separately with the debtor government for cancellation of the debt in exchange for a commitment to fund a conservation project or to provide enhanced protection for an area with high biodiversity value. In the first step, the conservation investor implements the project with the allocated local currency funding, often in collaboration with local beneficiary organizations which have field experience in project implementation. Normally, the debtor government continues to monitor expenditures related to debt conversion in order to ensure that the debt conversion agreement is respected.
It started with the formation of a steering committee in the group. KEHATI is the Secretariat and focal point committee relation with the government, because it is the only national organization. The hardest part of the process is convincing the government that this program is worth pursuing. Initially, a 3-party swap was planned. Unfortunately because of political and economic reality it was focus on bi-lateral debt swap.
However, there are substantial benefits that can be gained if the government agrees. They are:
KEHATI started working with different agencies in Indonesia and international agencies abroad. But problems arose. One is not all creditor countries are interested. Only Switzerland, Germany, Canada and the USA have facilities that could be used for DNS. Second is there is a need to convince the government and work through its bureaucracies, which proved difficult. In the end, the Ministry of Finance was more decisive and determined among the government ministries. In Indonesia, the Ministry of Finance has Coordinator Officer for Economic Affairs. He has to be convinced first. Convincing took long as the Ministry thinks of billions in debt reduction while DNS only concerns with millions. Indonesia has a huge magnitude of public debts compared to the potentially very small size of DNS. What made the government tick was to talk in budget term.
But even if the CSRO and the Coordinating Minister reached a consensus and agreed, it did not provide guarantee for the debt swap to be implemented. The prevailing political and economic environment in Indonesia became a more determinant factor. During the period of March 1999 to January 2002, when the 4 conservation CSROs pursuing the DNS scheme in Indonesia, there has been changes of 3 Presidents of the Republic of Indonesia and 4 Coordinating Ministers for Economics and Finance. The result is that every time, the process starts all over again -- discussions and consultation introducing the DNS concept and for it to be considered as policy instrument by the new Minister in charge.
The big challenge was which sectoral ministry or government agency should take the initiative and be responsible for the debt swap implementation. Of course this issue is directly related to the question of what the debt swap will be used for. If the debt is to be swapped for natural resource conservation, then the Ministry of Forestry or the Ministry of Sea and Fishery Resources should be in charge. If the debt swap is for mitigating environmental impact of the crisis, it is the responsibility of Ministry for the Environment. However, because the debt swap could also be used for relieving social impact of the economic crisis, the Coordinating Ministry for Social Affairs may also claim it for poverty alleviation program or the Ministry of Health and the Ministry of Education for their health and/or education components of the programs. This bureaucratic rivalries and sectoral budget competition among government agencies have been one of the frustrating aspects in the long and dragging negotiation process, and become major constraints for the delay if not failure in implementing DNS in Indonesia.
In all efforts and throughout the whole process, the CSRO should always be ready to assist and facilitate the government unit and its officials not only with concepts and arguments to be written on government documents, but sometimes with drafting ministerial letters and presentation to various departmental meetings.
The other problem faced is some environmental NGOs in Indonesia are also opposed to the idea of DNS, primarily because of misperception about the concept of DNS itself. The opposing NGOs thought that DNS means exchanging debt with the sovereignty of the land or forest area to foreign owners, which is not the case.
Q. Peace Bond and debt-for-nature swap are innovative mechanisms for raising funds for CSROs. For Peace Bond, the government aren't recognizing that CSROs can play a role in looking at the more innovative and market oriented mechanisms. Do you think it puts a great amount of responsibility on NGOs/CSROs on how they can effectively present themselves or communicate with business?
R. M. Miranda: Yes. In the Philippines, NGOs are recognized and part of the Constitution says partnership with NGOs do take place. What was done with the Peace Bond is that the creators went outside of what is expected of them. The NGO profited. Profit is a bad word for NGOs. As contrast, in the area of micro-finance, the preference is not for NGO to get involved but for NGOs to transform into banks or cooperatives. The feeling is NGOs should stay in catalyzing or advocacy kind of work. As Peggy has mentioned, there are stereotypes that one has to go through.
I. Hadad: For Indonesia, the government is allergic to NGOs. They are considered threat. But government can't look down on NGOs as they have the knowledge, and they work prepared.
Q. With regards to Peace Bond, if it is done all over again, what could be done better or differently to avoid mistakes?
R. M. Miranda: One, there shouldn't be a team of 8 only who know what's going on. Second, make sure that the level of knowledge and understanding would be raised not between team members, but also with government. Third, there is a realization that government viewed NGO as private sector working for public good, in which sense NGO should act cautiously. And lastly, be careful in terms of relationship.
There is a particular nuance in the Philippine case. The politicians involved in the investigation have ax to grind and wish to get back.
One alarming comment about NGO came from a banker. He said: "how vicious could civil society be among themselves." The fact is those NGOs who didn't understand were the first to criticize. So another thing that need to be done is to develop a really good communication plan. As it turned out, the very members cannot extend support because they don't understand what happened. They cannot defend CODE-NGO because they themselves don't understand. That was the bitterest lesson of the Peace Bond.
Q. NOVIB received many emails from NGOs in the Philippines. So we felt it is extremely important to present both sides of the argument. It would be extremely helpful to understand the technicalities as well as the political side. What is turning out is CODE-NGO is participating in indebting the government for a long period of time.
R. M. Miranda: There are 2 things that are circulated in the NGO community regarding creators of the Peace Bond. One, the impermissible rent seeking, which is the use of influence to be able to gain from government or sometimes called "crony deal." Second, the agent hired had an unfair advantage at that the opportunity should have been done on same level playing field.
In terms of the first, creators of the Peace Bond had at one time or another did a lot of rent seeking to get micro-finance on policy agenda or agrarian reform. A lot of time they put up social capital to get their policy agenda on the table. NGOs need to work with government.
On issue of unfair advantage, the question is: did the market know about it? People, networks, the sector knew about it but they didn't take it seriously. In October 1, the Bureau of Treasury tests the auction. It held a mock auction to prepare the market. The secondary reserve notice which was not normally issued was issued a day before. Yes, the creators and the bank knew about it way ahead of anybody. In the first place it was them who conceptualized the idea.
E. Gonzales: For those not familiar with the word, rent seeking is one extreme of lobbying. It is using personal, relational and even blood relation to lobby.
Copyright © 2002-2006 The Synergos Institute
