Opes Oceani releases Seychelles’ blue finance analysis

Just a few years ago, blue bonds were being acclaimed as a new and innovative marine environmental financing solution that brings the rigor of capital markets to ecological challenges. But the Seychelles blue finance transactions remain an outlier, with very few other blue bonds issued, even at a time when “impact” and “ethical” investing maintain their cachet within the financial sector.

So what can coastal nations learn from the experience of the Seychelles’ so-called ‘Debt for Nature’ swap? Do blue bonds represent an attractive means for advancing global environmental visions? Will the World Bank’s project to manage fisheries and generate growth in the Seychelles (known as ‘SWIOFish3’) deliver on its intended marine benefits and economic rates of return? Are non-Governmental Organizations (NGOs) and philanthropic bodies essential to blue finance? Are there other viable and tested marine management options to consider?

As the concept of blue finance receives continued worldwide interest, a new report, produced for Opes Oceani by Finology financial economist Dr. Alister Hunt, examines whether blue bonds offer an attractive option to Small Island Developing States (SIDS). ‘Seychelles Blue Finance: A Blueprint for Similar Countries?’ catalogues for the first time how the Seychelles blue finance developed and untangles the transactions and ocean commitments that were undertaken to realize the SWIOFish3 vision.

Seychelles Blue Finance Instruments

In 2016, the Seychelles purchased $21.6m of its debt from the Paris Club, a loose network of creditor countries, at a discount of 93.5c on the dollar. The Nature Conservancy (TNC), an American NGO, provided a $15.2m loan through its NatureVest fund, repayable over ten years, with the interest rate set at 3 percent, to pay off creditors. To cover the rest of the debt purchase, grants worth a total of $5m were provided by philanthropic bodies, including the Leonardo DiCaprio Foundation, the Waitt Foundation, China Global Conservation Fund and Oak Foundation. The TNC loan and the grants from philanthropic bodies are now administered by the Seychelles Conservation and Climate Adaption Trust (SeyCCAT), which was formed specifically to manage this project.

A few years later, the World Bank issued a $15m Seychelles Blue Bond (SBB). To entice “impact investors”, financial risks were largely offset by a $5m guarantee from the International Bank for Reconstruction and Development (IBRD) and a $5m concessional loan from the Global Environment Facility (GEF), which covered the bond’s interest payments. SeyCATT became the organizational vehicle through which the Seychelles implemented its activities under the World Bank’s SWIOFish3 project.

As part of the arrangement, $3m was channeled from the Seychelles Blue Bond into SeyCCAT’s Blue Grants Fund, which finances ecologically attractive welfare-orientated projects. So far, this fund has paid for the spatial planning activity and other projects such as producing a Citizens’ Guide to Climate Change and a roadmap for Blue Carbon opportunities in the Seychelles. The remaining $12m is managed by the Development Bank of Seychelles in its Blue Investment Fund. Ultimately, the aim is to endow $6-7m to provide loans that can fund ongoing blue projects from 2036 onwards.

In return for a low-interest rate loan, the Seychelles Government gave TNC an equal stake in the governance and management of SeyCCAT. In that role, the NGO oversees the Seychelles’ marine spatial planning (MSP) process that has now assessed, mapped and zoned an ocean area larger than Germany.

Financial Benefits

The Seychelles transactions are unique, especially from a corporate finance perspective. Although these two transactions use the “bond” framework of corporate finance, they provide no hard governance benefits and their associated ocean commitments are not eliminated by repayment.

The report states: “A particularly desirable attribute of debt structures like bonds is that they place considerable discipline on the borrower to ensure that the expected benefits derived from debt funding actually become a reality. If those benefits do not materialize, the borrower is likely to forfeit the underlying asset or business to the lender.”

The transactions also do not ensure good environmental outcomes because the borrower does not forfeit assets and it does not have to repay the grants if the covenants are broken. Generating environmental benefits is not the same as making a financial investment.

The report states that: “[I]nvestors are not connected with, or exposed to, the underlying oceanic activities. The structure is such that their stream of debt servicing payments is unaffected by whether or not the debt proceeds generate sufficient benefits to meet debt payment obligations… [W]e are unaware of debt covenants in either transaction that provide strong accountability for whether MSP and the resulting MPAs result in desirable marine management outcomes.”

Global corporate finance discipline typically identifies potentially value-creating projects before seeking finance to turn them into reality. But the two blue financing instruments reversed this order, securing finance first and then inviting applicants to pitch projects that will receive grants and loans.

All of this will make it difficult to assess the success of the blue transactions. The claimed base investment rate of return of the blue bond is 16 percent after six years. However, this is accounted for by intangible non-monetary, unmeasurable benefits, such as the value of climate change resilience.

The World Bank appears to have adopted an idiosyncratic set of performance metrics for its SWIOFish3 project that depart from well-accepted metrics of oceanic health and effective marine management.

Fisheries Management

The Seychelles had already intended to turn 30 percent of its EEZ into an MPA long before the blue finance transactions were signed. The large MPA, therefore, was not the product of a marine spatial planning process involving a technical assessment of what needs to be protected, along with measurable outcomes. It was already decided.

TNC stipulates that to be eligible for its Debt for Nature scheme in the future, a country must commit itself to turning 30 percent of its Economic Exclusion Zone (EEZ) into an MPA – before instituting marine spatial planning.

It is not established that MSP – a concept that essentially derives from land-based resource management disciplines – is an effective way to manage fisheries. Managing marine environments involves more ecologically dynamic and transboundary pressures. Fish and biomass do not respect zones and few marine organisms whatsoever obey demarcation lines. Instead, prohibitions or limits on tuna fishing in the Seychelles EEZ will reduce license, landing and processing revenues while doing nothing to reduce the overall catch or to conserve the species.

Citing a real-world example of actual success, the report compared the Seychelles’ approach to that of Western and Central Pacific Ocean nations managing tuna stocks. There, the Vessel Day Scheme (VDS) – which stipulates strong property rights – provides around $400m in revenue per year to a number of small Pacific island nation states, with combined EEZs amounting to 13 million km². In the Pacific, this shared resource management approach has ensured that the tuna stock is among the healthiest in the world – not least because the prosperity of the VDS stakeholders depends on the sustainability of the scheme.

Importantly, fisheries provides SIDS with food security as well as economic resilience. Property rights are a proven means to manage fisheries productively and sustainably. In contrast to centralized planning, defining clear property rights incentivizes strong management, ownership responsibility and economic returns, resulting in coastal nations maximizing revenue while ensuring that fish stocks thrive ecologically.

Innovative or Complicated?

In the near future, it is almost certain that a number of SIDS will find themselves considering the benefits of blue bonds as they weigh differing options to service sovereign debt. TNC believes that blue finance transactions offer a way forward and calculates that its NatureVest fund could generate up to $1.6b for “Debt for Nature” deals.

Nevertheless, the report states that: “The magnitude of multilateral and NGO grants is significantly below the value that a nation with a large exclusive economic zone can derive from a well-structured, well-managed marine management regime that defines defensible, transferable property rights … economically and environmentally important regional cooperation among sovereign nations is thwarted by outsourcing sovereign marine governance and by establishing large MPAs.”

The analysis suggests that nations should be cautious about promises made under the label of ‘blue bonds’. Traditional financial investment tools still offer the greatest discipline and accountability as well as the most public transparency and assurance. And other proven methods exist for managing ocean resources beyond those adopted by the Seychelles under this blue financing arrangement.

Gavin Carter of Opes Oceani said: “This ground-breaking report reveals that marine spatial planning and large no-take Marine Protected Areas do not have to be inextricably tied together through blue bonds, philanthropy and shared governance. Capture fisheries do not have to become ‘captured fisheries’.”

Download “Seychelles Blue Finance: A Blueprint for Similar Countries?”.