Feasibility Assessment Report for Financing the Heart of Borneo Landscape

Transcription

1 Feasibility Assessment Report for Financing the Heart of Borneo Landscape Brunei Darussalam April 2010 Page 1

2 Feasibility Assessment for Financing the Heart of Borneo Landscape Brunei April 2010 Completed under the direction of WWF and Starling Resources for MIPR and Brunei HoB Council Cover Photos: WWF Page 2

3 Table of Contents Executive Summary Introduction The Heart of Borneo Initiative Sustainable Finance Approach Outline of Financial Feasibility Assessment Report Landscape Management Land Use Categories Brunei Indonesia Malaysia Landscape Financing Sources and Mechanisms Introduction Flow of Funds and Direct Allocations Government Sources of Finance Licensing & Royalty Fees Special Funds Direct & Indirect Subsidies Debt-for-Nature Swaps Market Sources of Finance Watershed Service Payments REDD Tourism Payments, Fees &Taxes Mitigation Banking & Biodiversity Offset Payments Bioprospecting In-situ Ex-situ Conservation Partnerships Sustainable Capital Donors Multi-lateral and Bi-lateral Agencies Corporate Donors and Corporate Social Responsibility (CSR) Page 3

4 Philanthropic Foundations and NGOs Individuals Conservation Trust Funds HoB Specific Trust Fund Considerations and Examples Financial Feasibility Report: Brunei Brunei Overview Heart of Borneo and Land Use Categories Enabling Conditions of Sustainable Finance Institutional Framework Policy Framework Assessment of Landscape Finance Flow of Funds and Government Direct Allocations The Brunei Consolidated Fund National Development Plans and Fund Suspense Account Funds Public-Private Partnership Government Sources of Finance - Current Taxes Royalties Other Fees Forestry Department Specific Revenues Saw Mill Revenue Subsidies, Tax Incentives, and Government Investment Schemes Brunei Industrial Development Authority Brunei Economic Development Board (BEDB) Government Sources of Finance Potential and Recommendations Market-Driven Sources of Finance - Current Tourism Bioprospecting Sustainable Capital Market-Driven Sources of Finance Potential and Recommendations Donor-Driven Sources of Finance - Current Donor Sources of Finance Potential Conclusions Page 4

5 7. Conclusion and Recommendations Main Recommendations Tri-national Recommendations Conclusion Appendices Appendix 1: Acronyms Appendix 2: Country Policy Frameworks Appendix 3: HOB Programs, Objectives and Actions Appendix 4: References Page 5

6 EXECUTIVE SUMMARY This executive summary is the summary of the Brunei Assessment only. The Brunei Assessment discusses in detail the current situation in the Brunei part of the HoB and a focused assessment of constraints and opportunities that exist when it comes to developing successful financing strategies. A summary discussion is provided below, including recommendations to the National Council for ensuring future management and financing strategies and actions to deliver on the country specific programs and plans of action, and the three country declaration of Three countries, One Conservation Vision. The full report represents the initial scoping, or assessment, of land uses, management, financing policies, enabling conditions, and HoB strategies in the three HoB countries. The sustainable finance approach presents four phases (Figure 1), the first of which (the Scoping Phase) has been completed. The Analysis Phase, upcoming, aims to integrate the value of forests, biodiversity and carbon emission reduction into current development plans. This requires modeling economic scenarios, based on ecosystem services values, their benefit distribution as well as climate change impacts. The cost associated with sustainable landscape management, the sources of finance and the mechanisms to allow for efficient and equitable flow of finance needs to be assessed. The establishment of trust funds for example provides governments with an efficient and effective means of ensuring money is transported to the HoB. This can be done through government channels or stand-alone mechanisms like conservation trust funds. Figure 1. Sustainable Financing approach for the Heart of Borneo Initiative The Project Implementation Frameworks/Strategic Plans of Actions of each country and findings from the analysis phase will build the foundations of Heart of Borneo operational plans with quantifiable conservation and sustainable development targets leading to an economic growth which incentivizes responsible investments, charges for resource use and pays for services. Page 6

7 Implementing HoB strategic plans and programs - and sustainable landscape management in general requires close collaboration between the three HoB countries as well as partnerships between, and interactions among, the various entities within the HoB landscape: companies, communities, civil societies and governments. The relevant programs and management efforts are dictated by the land use categories, and associated policies and enabling conditions. The National Council can take the leadership to develop and optimize feasible and meaningful sustainable financing strategies for ensuring implementation of effective and sustainable landscape management. HoB Brunei - Landscape Management Brunei Darussalam has formed a National Council on the HoB, chaired by the Ministry of Industry and Primary Resources. With a total land area of 5,765 km2, Brunei Darussalam is the smallest country involved in the HoB Initiative. However, Brunei s forest cover contributes significantly to the island s biological richness, estimated at about 80% of the country s total land area. The land of Brunei Darussalam is allocated to the following fundamental uses, in accordance with the national master plan. Table 1. Land Uses in Brunei Darussalam Uses Hectares % Agricultural 13, % Gravel & White Sand Deposits 3, % Proposed Forest Reserves 86, % Gazetted Forest Reserves 235, % Other Conservation Areas 8, % Urban & Residential 12, % Resettlement Areas 2, % Uncommitted State Land 213, % Total 576, % Much of the designated land use is for purposes of Forest Reserve (including all relevant uses therein. See discussion below for further details), as noted in the table below. Table 2. Forest Reserve Categories and Uses in Brunei Darussalam Gazetted Total Proposed % of Forest Category Area Area Area (Ha) Forest (Ha) (Ha) %Total Land Area Production Forest 18, , Conservation Forest 28,562 3,173 31, National Park 46,210 2,644 48, Protection Forest 138,026 80, , Recreation Forest 4, , TOTAL 235,520 86, , Page 7

8 The current Brunei Master Development Plan ( ) as presented by Town and Country Planning department in recent forums indicate that the amount of protected forest may be reduced in favor of increasing production forest uses. This points to a need to integrate more closely the objectives and ambitions of the HoB initiative as well as other National Forestry and other strategies with regards to maintaining 58% or greater of Brunei s forest estate sand Forest Reserves. Specific policies, laws and regulations determine the feasibility of potential financing sources and mechanisms and allowed management approaches in the Brunei section of the HoB. The land use categories of the forest areas in question also determine the feasibility of the sources, mechanisms and management approaches. The report studies two main categories of what are deemed enabling conditions : an institutional framework of the relevant actors dealing with land use and conservation issues at all levels; and a policy framework of legislation and regulations that enable or constrain landscape financing in Brunei. Generally speaking, forests and forest management (including much of the lands included in the Brunei designated HoB areas) are under the responsibility of the Ministry of Industry and Primary Resources (MIPR), Brunei Forestry Department, as enshrined in the Brunei Darussalam Forest Policy. Formed in 1989, the Ministry of Industry and Primary Resources (MIPR), has the responsibility for promoting and facilitating industrial development in Brunei Darussalam by offering investors an environment that is conducive for investment in terms of security, stability, continuity, confidence and competitiveness. The MIPR maintains responsibility for the following Departments: Forestry, Agriculture, Fisheries, the Brunei Industrial Development Authority (BINA), and the Brunei Tourism Board. The MIPR reports directly to the Prime Minister s Office in Brunei. Other Ministries and Departments within the Brunei Government are also directly relevant to achieving the objectives of the HoB initiative, including the Ministry of Finance, the Department of Economic Planning and Development, and Town and Country Planning. Assessment of Finance Sources Sustainable financing is defined as the ability to secure adequate financing to cover the true costs of managing the landscape with respect to agreed-upon objectives regarding biodiversity, habitat conservation, as well as the equitable, efficient and sustainable use of natural resources. As a result of the predominance of oil export income, Brunei s relatively low population, and the priority the government places on conservation, Brunei has been able to avoid the development pressures from timber extraction, agricultural expansion and human settlement expansion as faced in other parts of Borneo. As a result Brunei also has not had to look too far for additional revenue sources. Nonetheless, Brunei has a fairly wide range of financing for the sustainable management of the HoB landscape. The report analyzes three sources of finance which are/can be used for financing the HoB landscape: Government, Market and Donor. Each is summarized here. A full diagram of the current and potential sources is highlighted in Figure 2. Page 8

9 Figure 2. Current and Potential Sources of Finance (Brunei HoB) Government Sources of Finance In Brunei, the government raises tax and non-tax sources revenues which are administered by the Ministry of Finance and allocated for approved government expenditures through one of three budget mechanisms to cover the expenses of the Government of Brunei: The Brunei Consolidated Fund The National Development Fund Suspense Account Funds The Brunei Consolidated Fund is approved and allocated annually under the auspices of the Supply Act; usually covering salaries, maintenance of facilities, general issues related to operational cost of departments. A proposed Consolidated Fund Budget from each of the Ministries is received by Ministry of Finance in September or October of the year preceding the budget allocations. These requests are prioritized and basic allocations are allocated annually to different ministries in March of the following year to cover expenditures during the fiscal year (April March). The Forestry Department indicates that its budgets for each of the previous 2 fiscal years (2008/2009 and 2009/2010) totaled approximately B$8.2 million (or less than.2 percent of the total Consolidated Fund budget for the year). While government revenues are going up slightly the MIPR does not see a marked change in the latest round of budgets. Generally, allocations are based on historic norms with no real changes. National Development Plans (RKN) in Brunei are established for 5 year periods, and are currently guided by the Wawasan Brunei 2035, the long-term development plan vision endorsed by His Majesty. The current 9th National Development Plan (RKN9, ) received a total of B$9.5 billion to finance the implementation of 826 projects. The RKN9 has allocated B$283 million for Page 9

10 industrial and primary resources sectors to finance the implementation of 77 projects. Of this, a total of B$71 million (or less than 0.75 per cent of the total National Development Budget allocation) has been allocated for the forestry sector to implement priority projects. In addition to its Consolidated Fund and its National Development Fund budgets, the Ministry of Finance can agree to set-up a Suspense Account Funds which are essentially a pre-commitment earmark to budget for a very specific purpose from general Treasury funds, or for separate funding sources. Suspense Accounts offer an opportunity to earmark revenues for specific purposes. The HoB Council currently has a Suspense Account held by the Forestry Ministry which acts as the holding account for initial monies raised on behalf of the HoB. It does not, however, appear that there is any commitment from the government of Brunei to divert any revenues or government budgets into this account. Additional sources of Government financing includes: Taxes, Royalties, and Other Fees Forestry Department Specific Revenues Various Government tax incentives and assistance mechanisms (EFS, MFS, BEDB, BINA) While forest cover in Brunei is indeed extensive, the actual area of Brunei is quite small, limiting the economic potential of the timber resources industries. In 2007, according to IMF analyses, total GDP in Brunei was B$18.5 billion, while the oil and gas sector accounted for approximately B$12.32 billion of that (or 66.5% of national GDP). In 2007, according to the same analyses, the forestry sector contributed B$4.9 million (and averaging B$5.02million per year from ). The corporate tax base in Brunei was this year lowered to 22%, from 25.5% in 2009 and 27.5% in While the analysis which produced this report did not assess the total amount of taxes from all forestry activities, tax revenue of B$1 million is estimated based on the 20% corporate tax rate and the estimated, combined B$5 million size of the forestry sector in Brunei. Overall, it is important to take note of the fact that the Forestry Department receives approximately B$8.2 million per year from the National Consolidated fund, and an estimate B$14.2 million per year from the National Development Budget. Along with this it earns an additional B$1.3 million in other revenues each year (including B$300,000 from special assessment on sawmillers which is channeled through a special suspense account). Market Sources of Finance The Brunei section of the Heart of Borneo is a valuable asset economically and ecologically. Many goods and services are produced across the landscape. These include raw materials and other environmental services (e.g., watershed protection, carbon sequestration, bioprospecting potential) and tourism opportunities, in addition to those of the traditional natural resource extraction industries. There are currently relatively few market-driven sources of finance in place within Brunei HoB. Tourism fees and payments are in place, yet secure relatively small amounts of revenue (entrance fees and related fees). Direct biodiversity offset payments from large corporations, particularly in the oil and gas sector, are not required, although these companies do make an effort to understand their impacts and self assess through corporate social responsibility payments, etc. (See Donor-Driven Sources of Finance section). Bioprospecting is an opportunity being explored through an agreement Page 10

11 with a Japanese institutional partner, yet this is not contributing direct revenues to the HoB initiative yet. Banks in Brunei are a source of some project financing for development across Brunei and within the HoB landscape, but account for a very small percentage of the actual financing made available (most comes through government investment accounts and schemes or offshore banks), and so the scale of sustainable capital flowing into the Brunei HoB is of little significance. Donor Sources of Finance The current donor sources relevant to sustainable financing in the HoB include corporate (primarily from the oil and gas, and the banking sectors), NGOs (mainly WWF), and other donor support. Private sector donations from CSR programs and other commitments are small, yet remain an important source of financing for HoB specific initiatives and can be leveraged further to supplement government and market sources of finance for Brunei landscape management going forward. Of particular note are the following donor contributions: Standard Chartered Bank (through WWF-UK) provided US$500,000 to the Brunei HoB Council as the winning prize from the Greatest Race for The Living Planet. These funds are held and managed by WWF. Allocations are assigned by agreement between SCB, WWF and the Brunei HoB Council. HSBS and Shell International (through BSP) each pledged to finance 25% (to a maximum B$500,000) of the cost of running the Heart of Borneo Centre for two years providing that the government will sponsor the remaining 50 per cent. Brunei Shell Petroleum Sdn Bhd provided B$225,000 and technical expertise toward the preparation of the Brunei HoB 'Project Implementation Framework' (PIF). The International School of Brunei (ISB) has sponsored the "Million Trees Project" coordinating the planting of 50,000 trees in the HoB landscape of Brunei. It will be important to encourage donors to support the HoB Iniatitive in a coordinated/ partnership approach and ensure that the funding is channeling to the most urgent, relevant, and necessary areas and projects and that donor supported efforts compliment rather than duplicate government or marketdriven sources of financing. Recommendations Moving forward the following is recommended for Brunei Darussalam: It will be important to prioritize and pursue, and collectively focus on the following recommendation applicable to each and the larger cross-cutting issues related to financing sources and enabling conditions. These include: Align the HoB Strategies with national development plans and strategies. Focus on integrating the objectives and priorities of the HoB initiative into the Brunei National Development Plans (5 year plans) is a critical priority to ensure cohesion between conservation and sustainable development efforts. Objectives of the HoB need to be fully integrated within the next Brunei National Development Plan (RKN10) The development towards a sustainable economic model which reflects the true values of forests and ecosystems would provide the basis for this integration. Page 11

12 Set up small team to explore and develop government sources of finance.recommendations on increasing and improving government sources of finance include: Consider ways to divert increasing amounts of the royalty fee revenues collected by the Government of Brunei from companies operating in the Forestry Sector to sustainable HoB landscape management activities and costs. Consider ways to assess offset fees to the companies responsible for forest and peat fires in Brunei based on the damage done to the environment (making fees on par with the royalties and fees paid by logging companies for removing forests). Such fees should also be considered as offsets for any commercial development actions which cause forest loss. Set up small team to explore and develop market sources of finance. Recommendations on increasing and improving government sources of finance include: Consider a willingness to pay survey for entrance fees to the National Park reflect tourist willingness to pay and costs needed to maintain the park. Also, consider expanding application of an entrance fee payment for access to other important Forest Reserves of note. Consider assessing a departure tax on all visitors departing from Brunei airports or ports to be collected and deposited into a HoB specific suspense account to be administered through Forestry Department on behalf of the HoB National Council for ongoing implementation of the HoB strategy. Conduct a cost/benefit assessment on the value of watershed services, especially for determining value of these services for industrial users (e.g. LNG) and to guide future payment mechanisms. Invest in a national bioprospecting business plan and the development of the specialized expertise and national human resource capacity necessary to operate a bioprospecting center in Brunei. Formally evaluate the concept of establishing biodiversity offset requirements and explore the use of such offset payments from industrial operators in Brunei. Explore the potential for REDD carbon financing, and setting up a National System to manage REDD financial flows. The MIPR and the BEDB are both preparing to explore the potential for REDD+ and are keen to explore these issues further in coming months. A new Climate Chance Council has also been established. Develop ways to focus these parallel efforts and mandates. Profile upcoming REDD+ plans at international events/forums will help engage investors into the HoB. Consider effective screens and principals on future project and development financing in HoB or which would affect the health of the HoB landscape. To the extent possible finance should be made available to green ventures, such as small and medium-sized micro-hydroelectric, bio-fuels, waste to energy, and organic farming ventures, to name a few. Engage donors in a coordinated manner (e.g. series of HoB Partners roundtables). It will be important to encourage donors to support the HoB Initiative in a coordinated/ partnership approach Page 12

13 and ensure that the funding is channeling to the most urgent, relevant, and necessary areas and projects. Understand financial requirements and implications of the HoB Initiative. Conduct a detailed cost analysis to determine the short and long-term implications of implementing HoB Operational Plans (to include implementing the already budgeted PIF, as well as a broader range of HoB initiatives and efforts.) Conduct a full assessment of, and define, government activities and requirements as they related to the HoB Strengthen Enabling Conditions. Assess and strengthen its set of enabling conditions (policies and institutions) necessary to effectively manage the HoB landscape as well as to collect, manage, and disburse financing to HoB efforts. Traditional subsidy and incentive instruments do not encourage conservation and sustainability and give little considerations to sustainability criteria when making decisions concerning forested areas. Such enabling conditions result in lack of competitiveness and high oportunity costs. A framework for responsible investment and payment for services needs to be in place which is fully supportive of the HoB Initiative and which will increase competitiveness and lower opportunity costs. Develop HoB Operational Plan. Complete coherent and comprehensive HoB Operational Plan which become part of the national development plans. These operational plans should outline a clear set of objectives and activities, which departments should be involved, and what incentives need to be in place and what capacity needs are required. Tri-national Recommendations Partnership Approach: The HoB Governments are encouraged to explore opportunities with donors in a coordinated approach. Such joint facilitation of donor-aid and finance for tri-national and country specific HoB efforts as well as transboundary activities should help secure appropriate long term commitments. Leverage Regional Political Forums: The efforts of Brunei, Indonesia and Malaysia to develop the HoB has been commended within regional political forums (BIMP-EAGA and ASEAN), but there is a real benefit to be gained through formally aligning trade and investment priorities, as well as general trans-boundary cooperation against the priorities of the HoB plans. Jointly Pursue Responsible Tourism: One of the key programs as identified in the Heart of Borneo Strategic Plan of Action is ecotourism development, more specifically to identify, develop and promote trans-border ecotourism programs. This will also contribute to the sustainable financing of the Initiative. Coordinate Knowledge Exchanges: Each country could develop strategies and initiatives in line with their specific needs and opportunities. This includes developing improved enabling conditions (policies and standards), financing mechanisms (biodiversity offsets, bioprospecting, watershed services, etc.) and communication efforts around globally important issues such as carbon and watershed management. Tri-national HoB meetings will continue to provide opportunities for such sharing, however new modes of knowledge exchange could also be developed and implemented. Page 13

14 Conclusion The Heart of Borneo Initiative (HoB) represents a critically important international effort to ensure an ecologically and economically balanced mix of protected areas, sustainably-managed forests and green economic development. Brunei s commitment to the HoB Initiative is clear. The Brunei government, with His Majesty s support, committed 58% of Brunei s total land area to be protected and sustainably managed within a delineated HoB landscape. To develop its commitments and actions on the HoB, Brunei pursued the development of a Project Implementation Framework (PIF). However, implementation of the PIF - and a broader HOB initiative integrated into the Brunei National Development planning process will require additional focus and efforts on the part of all stakeholders, but especially the Brunei HoB National Council. Moving forward, the focus needs to be on formally integrating the objectives and intentions of their HoB strategy into the next Brunei National Development Plan (RKN10) and further exploring and optimizing potential government and market-driven sources of finance. It is also important to develop a Brunei specific Heart of Borneo Operational Plan, defining actual costs, resource and capacity requirements, and policy conditions necessary to achieve the objectives and intentions of HoB strategies. Understanding the economic value of specific ecosystem services (watershed, carbon sinks, etc) will become important as Brunei assesses appropriate trade-offs between conservation and economic development, and works to optimize for these. Together with the Project Implementation Frameworks/ Strategic Action Plans, the HoB Operational Plan will become important tools for communicating the HoB vision across government departments and agencies, with private and community stakeholders, and to trans-boundary and international partners and investors. These Operational Plans will require necessary financing and investments, and institutional and human resource capacity inputs. As such, the HoB National Council is advised to consider designing and securing financing from various sources, including government, market and donor sources. The recommendations in this report offer guidance for doing so and if pursued will place the HoB countries on sound footing as we strive to achieve a shared HoB Vision. Page 14

15 1. INTRODUCTION Sections Heart of Borneo Initiative Sustainable Finance for the Heart of Borneo Summary The Heart of Borneo (HoB) Initiative is an international effort built around trans-boundary cooperation to enable collaborative and lasting conservation and sustainable development. The HoB Initiative intends to find an ecologically and economically balanced mix of protected areas, sustainablymanaged forests and green economic development. Commitments of the three HoB governments to pursue this objective are laid out in the Heart of Borneo Declaration, signed in February 2007, and in the Heart of Borneo Strategic Plan of Action as well as and each country s Project Implementation Framework and/or Strategic Plan of Action. Implementing these requires developing feasible and meaningful sustainable financing strategies for ensuring implementation of effective and sustainable landscape management. Sustainable financing or long-term financial sustainability in this report refers to securing adequate financing to cover the true costs of managing an economically and ecologically viable landscape with respect to agreed objectives regarding biodiversity and habitat conservation, as well as sustainable use of natural resources. This financial feasibility assessment an initial scoping for a larger analysis and design effort for sustainable financing of the HoB should be viewed as the first step in the larger process of establishing clear and compelling Operational plan(s) for sustainable management and conservation of the Heart of Borneo. The Heart of Borneo Initiative The Heart of Borneo (HoB) Initiative is an international cooperative effort to facilitate equitable and sustainable development that improves welfare and save forests of Borneo from destruction and deforestation. Representing approximately 30% of the island of Borneo s land area, the Heart of Borneo covers more than 22 million hectares of equatorial rainforests across three countries: Brunei Darussalam, Indonesia (Kalimantan) and Malaysia (Sabah, Sarawak). The Heart of Borneo represents many important values which must be conserved and maintained to enable delivery of a green economy, strengthen socio-economic values, and enhance environmental goods and services at the regional, national and sub-national levels. As one of Page 15

16 the largest contiguous tropical forest remaining in Southeast Asia, it is home to an astounding 6% of the world s total biodiversity, a high number of endemic small mammals, birdspecies and wild orchids and several endangered species, including the orangutan, pygmy elephant, clouded leopards and sun bears. There are over 10,000 plant species in the region; between 1995 and 2010, 500 new species were documented within the area; the region contains the headwaters of 14 of Borneo s 20 major rivers. It is an economically, culturally and ecologically-connected and important landscape. Commitments of the three HoB governments (Brunei Darussalam, Indonesia and Malaysia) to pursue this objective are enshrined in the Heart of Borneo Declaration, the tri-national Heart of Borneo Strategic Plan of Action, and each country s Project Implementation Framework and/or Strategic Plan of Action. The following governance structures have been established to develop and guide the conservation and sustainable management of committed forestland: Brunei s Heart of Borneo National Council, Indonesia s Heart of Borneo Working Groups at national, provincial and local levels, and Malaysia s National Expert Group and state level Steering Comittees. Sustainable Finance Approach The three Bornean governments have recently completed a financial feasibility assessment. The purpose of the study is to outline important necessary steps to finance a sustainable landscape as well as identifying sustainable and long-term sources of funding. It takes a particularly close look at current and potential sources of financing from government, market and donor sources and provides recommendations as to how these can be explored further. Sustainable financing or long-term financial sustainability in this report refers to securing adequate financing to cover the true costs of managing an economically and ecologically viable landscape with respect to agreed objectives regarding biodiversity and habitat conservation, as well as sustainable use of natural resources. The three governments and their partners will need to optimize a portfolio of sources, including a combination of government, market and donor sources at the national, provincial and district levels. Sufficient enabling conditions, such as policies and institutions, will also be required to ensure financing is effectively and efficiently delivered. In order to initiate the process of designing the appropriate sustainable financing architecture across the Heart of Borneo, a phased approach is outlined below and in Figure 1.1. I. Scoping The initial financial feasibility assessment provides an understanding of the enabling conditions, current land use and landscape management, and current and potential financial flows from government, market and donor sources. This provides a preliminary view as to what long term financing opportunities for the Heart of Borneo landscape are feasible to explore in further detail. (This report is the output of this first phase). II. Analysis Building on the findings from the scoping exercise, detailed assessments are needed to clearly understand the short and long-term implications of developing a sound enabling environment, approach to landscape management, and portfolio of financing sources. This will further lead to Page 16

17 designing the most feasible financing architecture for the Heart of Borneo within each country and at tri-national level. Objectives in this phase include: Objective 1: Strengthen Enabling Conditions for financing a sustainable landscape One crucial step to undertake includes improving the current economic models to include the value of environmental services, guides sustainable resource use and assess appropriate trade-offs between conservation and economic development. Each country has its own framework of institutions, laws and regulations. An enabling environment with strong institutions, governance and environmental laws which enables responsible investments and adequate payments is necessary. This would require support in the shape of political will to direct investments in legislation, policies and (fiscal) incentives which promote conservation and best practices. Establishing transparent and effective institutional framework to manage and disburse funds is a fundemental pre-requisite to any sustainable financing architecture. Objective 2. Assess Full Cost of Sustainable Landscape Management Long-term financial sustainability means securing adequate financing to cover the true costs of managing the HoB landscape. This requires looking at short and long term costs of landscape management. The HoB Trilateral Strategic Plan lays out the objectives and the proposed actions for 5 programs of the Initiative. Each country has further published or drafted their own Strategic Plans of Action or Project Implementation Framework. Within the defined programs in each country, sustainable landscape uses need to be established and managed by both public and private sectors, according to legal mandates, regulations, best practice methods. A fundamental requirement of the Heart of Borneo Initiative is therefore to assess what actions and requirements are necessary to reach sustainability for the entire HoB landscape within each country. Objective 3: Assess Feasible Sources of Finance While this report may present an array of options, it is important to prioritize those most feasible and suitable within each country s enabling conditions. Financing efforts must flow from a portfolio of government, market and donor sources. This requires a combination of national, provincial and district level public investments, market mechanisms such as ecosystem service payments, and donor support. Further assessment and pilots of specific financing schemes will be necessary to define associated policies and to operationalise relevant financing options. Associated with this same objective is the need to more fully understand the value of ecosystem goods and services within the HoB. In order to make the case for the need to protect and sustainably manage the HoB landscape, it is important to understand the value that healthy ecosystems provide to the subnational, national and international communities through watershed services, carbon sequestration, and more. Understanding the economic value of specific ecosystem services (watershed, carbon sinks, etc) will also become important as each country assesses appropriate trade-offs between conservation and economic development, and works to optimize for these. As well as further analyzing ways to improve existing sources and implement additional schemes it will be necessary to review the flow of funds. Specifically, it will be important to review the potential for national, sub-national or tri-national trust fund mechanisms to help facilitate the capture of government, market and donor sources as well as the allocation of these sources to most effectively achieve the HoB objectives. Page 17

18 III. Design Clear and compelling operational plans are necessary to guide the management of an economically viable and sustainable HoB landscape. Throughout the past phases, relevant information will become available to assist in the creation of comprehensive country, or state, as in the case of Malaysia, operational plans. These operational plans will include the objectives and value proposition, as well as details behind the programs and activities, short and long-term financial and resource requirements, and financing sources and strategies. IV. Implementation The Operational plans (Brunei, Indonesia, Sabah and Sarawak) will guide the long-term implementation of the country and tri-national level efforts. Drafting the Operational plan(s) early on and working on this as a living document will help direct efforts, bring relevant necessary information together from the Scoping and Analysis and Design phases. The aim of developing and implementing the Operational plans is to secure adequate financing to cover the true cost of managing the HoB landscape, with roles and responsiblities assigned to appropriate stakeholders and with respect to agreed to objectives. A broad, comprehensive and coordinated approach by Heart of Borneo Partners interested in supporting this Initiative and financing the development of this sustainability framework is vital to the success of this Initiative. A Heart of Borneo landscape jointly managed by three governments, the private sector, communities and civil society as an economically viable and sustainable landscape will lead to the delivery of the three country declaration of Three countries, One Conservation Vision. Page 18

19 Figure 1.1 Proposed Sustainable Financing approach for the Heart of Borneo Initiative Page 19

20 Outline of Financial Feasibility Assessment Report This report is the output of the first step in this process Scoping. For each country an initial assessment of policies and enabling conditions, current land uses, and financial flows was conducted. Government budget allocations and financial flows, as well as other government, market and donor sources of finance were explored. The report presents the following two Chapters to provide an understanding on HoB landuse catogeries across the three countries and an overview of primary sources and mechanisms of financing. Following that, an initial feasibility assessment for Brunei is presented and organised as follows: 1. Country Overview 2. HoB/Land Use Categories 3. Enabling Conditions of Sustainable Finance 4. Assessment of Landscape Finance 5. Conclusion. Chapter 7 ends the report with overall Recommendations and Conclusions. This Tri-National financial feasibility assessment should be viewed as the first step in the longer process of establishing a substantial Heart of Borneo Operational Plan(s). The recommendations and next steps presented in this report are only of value if they indeed help decision-makers in making the necessary and important decisions to pursue a sustainable financing architecture reflecting the integral value of Heart of Borneo. Page 20

21 2. LANDSCAPE MANAGEMENT Sections Landscape Management Land Use Categories Summary Landscape management is a process for managing the dynamic and complex interactions between people, natural resources, and land uses so as to deliver more equitable and sustainable benefits to stakeholders. The relevant programs and management efforts are dictated by the land use categories, and associated policies and enabling conditions, across the three countries. The Brunei government, with His Majesty s support, committed 576,422 ha, or 58% of Brunei s total land area, to be protected and sustainably managed within the delineated HoB landscape. Indonesia has committed a proposed HoB boundary of 16,794,184 ha (approximately 33.7% of the land area of East, Central and West Kalimantan). Nearly 50% of the total area will be designated as production forests. The Sabah HoB area contains 18 districts and 4,000,673 ha (approximately 54% of the total land area). In Sarawak, the HoB area encompasses 6 divisions and 2,030,200 ha (approximately 16.4% of Sarawak s land area). The Heart of Borneo Initiative is an international effort built around transboundary cooperation to enable collaborative and lasting conservation and sustainable development. The HoB Initiative intends to guide the design of a network of protected areas, sustainably-managed forests and green economic development. Effective, economically-viable and sustainable landscape (land use) management is at the core of this Initiative. Landscape management develops and implements strategies to address both the threats to the landscape, such as forest fires and illegal logging, as well as the underlying causes of these threats, such as poor governance and perverse subsidies. This approach is driven by scientific evidence which shows that forest preservation for biodiversity and economic purposes needs large scale, contiguous forest landscapes. Without it, there will be side effects on climate, hydrology, species extinction, and other negative impacts; conservation and sustainable economic activity cannot be maintained in the HoB under a patchwork of protected areas and partially managed landscapes. Landscape management integrates conservation practices with appropriate forms and approaches for economic activities, such as sustainable forestry and agriculture or generating revenue through various payments schemes based on the value of the HoB landscape. It is a process for managing the dynamic and complex interactions between people, natural resources, and land uses so as to deliver more equitable and sustainable benefits to stakeholders. This approach accepts that there has to be a compromise between conservation and development while at the same time acknowledges that issues such as watershed protection and biodiversity conservation need coordinated action at a larger scale to be effective. It aims for a balanced mixture of protection, management, and restoration to provide biodiversity, ecological, economic and social benefits. The management techniques and strategic interventions range from site-based actions to those at national and landscape levels. Some of these approaches can overlap at the site-level or larger, building into a complex mosaic of different potential and applicable interventions across various sectors. At the Tri- National level, the primary programs identified to allow for benefit maximization and realization of the HoB objectives include: Page 21

22 1. Trans-boundary management, 2. Protected areas management, 3. Sustainable natural resource management, 4. Ecotourism development, and 5. Capacity building. Implementing these programs - and landscape management in general - requires close collaboration between the three HoB countries as well as partnerships between and interactions among the various entities within the landscape: companies, communities, civil societies and governments. The details underlying the Heart of Borneo Strategic Plan of Action can be found in Appendix 3, followed by brief overviews of each country s individual Strategic Plans of Action or Project Implementation Frameworks. Land Use Categories The relevant programs and management efforts are dictated by the land use categories, and associated policies and enabling conditions, across the three HoB countries. Table 2.1 HoB Land Use Overview Country Size (ha) % (Total HoB size) Land Use Types Brunei 576, % Agricultural Gravel & White Sand Deposits Proposed Forest Reserves Gazetted Forest Reserves Other Conservation Areas Urban & Residential Resettlement Areas Uncommitted State Land Indonesia 16,794, % Conservation Forest Production Forest Protection Forest Other Land Uses Malaysia Sabah 4,000, % Forest Reserves Conservation Areas State Land Sarawak 2,030, % Totally Protected Areas Permanent Forest Estates State Land TOTAL 23,401, % The specific breakdown of land use categories by country are provided below. Brunei 1 This is the proposed boundary. The current boundary is 12,624,380 ha. Page 22

23 The Brunei government, with His Majesty s support, committed 576,422 ha, or 58% of Brunei s total land area, to be protected and sustainably managed within the delineated HoB landscape. Table 2.2 Land Uses in Brunei Darussalam Uses Total Size (Ha) Total Size (%) Agricultural 13, % Gravel & White Sand Deposits 3, % Proposed Forest Reserves 86, % Gazetted Forest Reserves 235, % Other Conservation Areas 8, % Urban & Residential 12, % Resettlement Areas 2, % Uncommitted State Land 213, % Total 576, % Indonesia Indonesia has committed a proposed HoB boundary of 16,794,184 ha (approximately 33.7% of the land area of East, Central and West Kalimantan). Nearly 50% of the total size will be designated as production forests, and almost 30% of the total Indonesia HoB will be managed by concession holders. Table 2.3 Land Use Categories Proposed Indonesia HoB Land Use Total Size (Ha) Total Size (%) Concessions (Ha) Concessions (% of total) Conservation Forest 2,661, , Protection Forest 4,253, , Production Forest 8,300, ,337, Other Land Use 1,579, , Total 16,794, ,579, Malaysia Both Sabah and Sarawak have committed significant amounts of land to the HoB Initiative. The Sabah HoB area contains 18 districts and 4,000,673 ha (approximately 54% of the total land area). In Sarawak, the HoB area encompasses 6 divisions and 2,030,200 ha (approximately 16.4% of Sarawak s land area). The specific land use categories included within the Malaysia HoB vary slightly between Sabah and Sarawak. Details can be found below. Table 2.4 Land Use Categories Malaysia HoB (Sabah) Land Use Approximate Size (ha) 2 Forest Reserve Class I Protection Forest Reserve 342,848 Forest Reserve Class II Commercial Forest Reserve 2,638,480 Forest Reserve Class III Domestic Forest Reserve 7,355 Forest Reserve Class IV Amenity Forest Reserve 21,092 Forest Reserve Class V Mangrove Forest Reserve 315,874 Forest Reserve Class VI Virgin Jungle Reserve 91,914 2 Sabah Strategic Plan of Action. Page 23

24 Forest Reserve Class VII Wildlife Reserve 132,653 Conservation Areas Sabah Parks 245,172 Conservation Areas Wildlife Sanctuaries 30,708 (proposed) State Land NA Table 2.5 Land Use Categories Malaysia HoB (Sarawak) Land Use Approximate Size (ha) 3 Totally Protected Areas 526,652 Permanent Forest Estates 1,608,555 State Land / State Forest Land 100,000 A map of the entire HoB, including vegetation, is included in Figure 2.1 below. 3 Sarawak Project Implementation Framework. Page 24

25 Figure 2.1 Borneo Forest Classification Map Page 25

26 3. LANDSCAPE FINANCING SOURCES AND MECHANISMS Sections Introduction Government Sources of Finance Market Sources of Finance Donor Sources of Finance Conservation Trust Funds Summary There are three main types of sources: Government, Market and Donor, each including a variety of sub-sources. Government sources include: licensing and royalty fees, special funds, subsidies and incentives, and debt-for-nature swaps (under agreement with international governments). Market sources include: watershed service payments, tourism payments, REDD+, mitigation banking & biodiversity offsets, bioprospecting, in-situ exsitu partnerships and sustainable capital. Donor sources include: multilateral and bilateral agencies, corporate donors (including corporate social responsibility), philanthropic foundations and NGOs and individuals. A Conservation Trust Fund (CTF) is a stand-alone mechanism that can be effective at channelling funds from the above sources if properly designed and managed. Introduction Sustainable financing or long-term financial sustainability in this report refers to securing adequate financing to cover the true costs of managing an economically and ecologically viable landscape with respect to agreed objectives regarding biodiversity and habitat conservation, as well as sustainable use of natural resources. It requires a combination government and other sources, including the coordination of donor grants and cooperation, as well as the enabling conditions which allow the financing to be effectively and efficiently delivered. The aspects, impacts, and needs of landscape uses, sustainable management and conservation demand that this not be a narrow mandate of one Ministry, sector of industry, or donor. Financing requires that the governments and their partners optimize a portfolio of funding sources and mechanisms from a variety of sources. Figure 3.1 illustrates a typology of primary financing sources and mechanisms, centered on: government, markets, and donors. Each of the specific financing mechanisms available under each of the primary sources will be explored in more detail in general terms before going into the discussion of the current and potential mechanisms across the three HoB countries. Case studies are highlighted in several instances to provide specific examples of certain mechanisms, particularly those which show strong promise within the HoB. Page 26

27 Figure 3.1 Typology of Financing Sources and Mechanisms Landscape financial sustainability refers to securing adequate financing to cover the true costs of managing a defined landscape with respect to agreed-to objectives regarding biodiversity and habitat conservation, as well as the equitable, efficient and sustainable use of natural resources. Itrequires a combination of national public investments, payment mechanisms for goods and services, and the coordination of donor grants and cooperation, as well as the enabling conditions which allow the financing to be effectively and efficiently delivered. Government Licensing & Royalty Fees Special Funds Subsidies & Incentives Mitigation Banking & Biodiversity Offsets Bioprospecting In-Situ Ex-Situ Partnerships Donor Market Watershed Service Payments REDD+ Tourism Payments Sustainable Capital Debt-for-Nature Swaps Multilateral and Bilateral Agencies Philanthropic Foundations and NGOS Corporate Donors / Corporate Social Responsibility Individuals An enabling environmentfor successfully financing a landscape is formed by the combination of factors or conditions that promote or influence the functioning, effectiveness, equity and impact of the financing; together with the attractiveness of practicing sustainable management of the landscape, investing in it or paying for it. These factors mainly concern legal, political and institutional frameworks. Before reviewing the current and potential sources of finance it is first important to understand the general flow of funds and allocation process. In other words, to understand how revenue is collected and then allocated. Flow of Funds and Direct Allocations Government (domestic) budgets can be made to represent a significant amount of financial support for all aspects of landscape management, including direct budget allocations for conservation forests and protected areas, tax earmarks and fee revenues to manage production forests and other industries. This money is channeled from the state budgets, generated by taxes or other non-tax revenue, to the national or local government. Specifically, government administered fiscal instruments include taxes and subsidies on natural resource extraction, removal of environmentally damaging product subsidies, introduction of new product taxes and user charges, and modifications of other taxes and charges. Properly designed, these create economic incentives for more efficient resource use and pollution abatement, by driving up the cost of environmentally harmful activities or increasing the returns to sustainable approaches (e.g. environmental taxes and charges); mobilize funds for environmental protection and natural resource management (e.g. via environmental charges and fiscal transfers); and ensure a more equitable distribution of benefits and Page 27

28 costs from the management of environmental resources (e.g. improved access to environmental public goods via public investments and pricing reforms). 4 Unfortunately, fluctuations in international markets, poor economic conditions, and other factors can cause government revenues and budget allocations to vary year by year, resulting in insufficient and uncertain funding for conservation and sustainable development. Earmarking revenues collected through various fiscal instruments specifically for defined and justifiable sustainable landscape management needs can allow governments to stabilize and even increase their allocations. Earmarked revenues can include government taxes on tourism and on commodities such as gasoline, structured debt relief earmarked to conservation, and government bonds. Government Sources of Finance The following Government financing mechanisms offer potential financing for sustainable landscape management: Licensing & Royalty Fees (non-tax government revenue), Special Funds, Subsidies & Incentives, and Debt-for-Nature Swaps. Licensing & Royalty Fees Licensing and royalty fees are typically classified as government non-tax revenue. Collected from resource extractive companies, licensing and royalty fees are collected on a one-time or yearly basis. The magnitude of the fees are dependent on government policy but are usually attached to a quantifiable number (e.g., amount of natural resources extracted). Concessions are contractual agreements, usually extended over long periods of time, between a government and a non-governmental party. The concession allows the non-governmental party to engage in an activity within the area of question, such as: logging, mining, and biodiversity conservation and generates revenue to the government in the form of a concession payment(s). Special Funds Special funds are government initiatives that specify the collection and use of certain fees from resource extractive companies. Direct & Indirect Subsidies In addition to capturing potentially significant revenues for conservation and sustainable forest management, fiscal instruments can also be used to encourage producers to adopt biodiversity-friendly and sustainable practices by providing direct or indirect subsidies. These financial incentives provide companies with financial motivation to engage, or disengage, in certain practices. 4 Emerton, L., et al Page 28

29 Debt-for-Nature Swaps Debt-for-nature swaps are a mechanism by which public debt is purchased at a discount by an outside agency or organization and retired in exchange for government commitments to fund conservation activities, often through the establishment of a trust fund. Since the first swap was executed in Bolivia in 1987, such programs have contributed more than $1 billion to conservation around the world. That said, debt-for-nature swaps do carry some risk. Local currency devaluation and inflation can reduce or even eliminate the cash value of the conservation commitment in a trust fund or similar vehicle. Furthermore, the revenue from debt relief arrangements may not actually be put toward its originally intended use. To mitigate these risks, agreements should be designed to minimize market vulnerability and provide for contingency action in the event such a situation arises. Also, agreements should be structured to promote the intended outcomes. Indonesia Debt-for-Nature Swap under the U.S. Tropical Forest Conservation Act (2009) The United States will forgive nearly $30 million in debt owed by Indonesia in exchange for increased protection of endangered rainforests on the island of Sumatra, reports the Wall Street Journal. The deal is the largest debt-for-nature swap under the U.S. Tropical Forest Conservation Act unanimously reauthorized this May by the Senate Foreign Relations Committee last week and its first such agreement with Indonesia, which has the second highest annual loss of forest cover after Brazil. Under the terms of the pact the government of Indonesia will put $30 million into a trust over the next eight years. The trust will issue annual grants for forest conservation and restoration work in Sumatra, an island that lost nearly half of its forest cover between 1985 and 2007 as a result of logging, conversion for plantations, and forest fires. Specifically, 13 protected areas are set to benefit from the debt-for-nature. (Source: Mongabay. Market Sources of Finance The Heart of Borneo is a valuable economic and ecological asset. Many goods and services are produced across the HoB landscape. These include raw materials, environmental services (e.g., watershed protection and carbon sequestration) and tourism opportunities, in addition to those of the traditional natural resource extraction industries. Charging for these services allows for multiple benefits: it acknowledges the value that ecosystems provide and it raises new funds for the landscape. The following sub-categories will be further defined: Watershed Service Payments, REDD+, Tourism Payments, Fees & Taxes, Mitigation Banking & Biodiversity Offsets, Bioprospecting, In-Situ Ex-Situ Partnerships, Sustainable Capital. Page 29

30 Watershed Service Payments Payments for watershed services are now being used worldwide and this form of finance is emerging more and more in developing countries. The general structure is that payment agreements are set up between government agencies and private water users or private landowners. The approach considers the impacts of industry operations and other activities on a watershed. Payments for water use generally come from four major sources hydroelectric power suppliers, large industrial users, municipal water suppliers, and irrigation water users and are applied toward achieving improved water quality and habitat restoration in the watershed. 5 Payments for Watershed Services, Lombok, Indonesia In 2004 a payment for environmental services (water) scheme was initiated in Rinjani Protected Area, Lombok, Indonesia. In July 2007, the PES scheme was adopted as part of the local government s policy, and is effective for Lombok island. The initiative involves the Municipality of Mataram the Water Utility Company and individual water consumers in Mataram as the buyer of water system services from communities up stream who maintain the water supply and forest. Through the local regulations (Perda No. 4/2007), 75% of the cost paid by the people who use the water services from PDAM Lombok, are allocated to the people in the hills of Mount Rinjani as a payback mechanism to help look after the forest that sustains the living systems of this small island. The scheme is expected to be fully implemented by 2010 upon the issuance of a District Regulation regarding Environmental Services. (Source: WWF Indonesia. REDD+ REDD+ is a financing mechanism that directly links financial incentives for conservation with carbon stored in forests. REDD+ was introduced in the Bali Roadmap in 2007 and then was recently accepted by the UNFCCC participating states at the recent Copenhagen Summit. The scheme was an acknowledged success of Copenhagen, and the non-binding Accord recognized that REDD+ can play a potentially critical role in global climate change mitigation through its incentive-based market approach. The general principle of REDD+ is that developing countries can receive credits for decreasing emissions by preventing forest degradation and loss. In other words, states are preventing forest carbon emissions by agreeing to not carry out logging and agriculture activities on forest lands. These emissions reductions can be translated into Verified Emissions Reduction (VER) credits and then sold to parties in domestic or overseas markets. The profits from these sales can then be channeled back into conservation and protection efforts or to benefit the communities living on the areas in question. Generally speaking, production forests and protection forests are viable sites for REDD+ projects. That being said, conservation forests could have a role to play in REDD+ by reducing national-scale deforestation through strengthening protection within existing protected areas and/or declaring new forest areas. 6 As a heavily forested area, the HoB will stand to benefit from further engagement with REDD+ in a number of ways. First the potential reductions of carbon emission within from the HoB could play significant parts of the national emissions reductions pledges of Brunei, Malaysia and Indonesia. Second, REDD+ has the potential to generate significant future income for involved stakeholders. Private sector actors have recognized the potential future income prospects of selling credits on the open market. Third, communities can benefit from increased REDD+ projects because it represents direct to cash NGOs and other development organizations also are interested in potential finance generation for community 5 WWF Guide to Conservation Finance Coad, et al Page 30

31 development and empowerment. Regulations governing REDD+ are underdeveloped in Brunei and Malaysia, but Indonesia currently requires that project developers divide any REDD+ income with the state and local communities. There remain some concerns from project stakeholders over REDD+ in the HoB. First are the institutional capacities and existing policies of the central and local governments involved. There may be insufficient capacities of central and local governments to efficiently track, monitor and verify carbon stock assessments and then regulate the eventual sale of carbon credits. Some of the existing policies in Brunei, Indonesia, and Malaysia are vague or do not exist, making it difficult for developers to secure the necessary licenses and then implement projects. At the global level, markets for carbon emissions credits are still immature. The inability of the participating states in Copenhagen to agree on a binding agreement means that REDD+ credits as part of those negotiations are not yet eligible for sale. One possibility is that HoB states may bypass the UN-led process and instead agree on bilateral arrangements with developed states directly sell carbon credits to international companies. Even in this case there is considerable work to be done, including but not limited to verifying assessments of carbon stocks in REDD+ project areas, addressing stakeholders concerns on unclear policies and regulations, ensuring the transparency of financial flows and issuing of permits by the authorities, and clarifying regulations on revenue distribution requirements between the project developers, the state and local communities. Tourism Payments, Fees &Taxes There is often a precedent and legal framework that makes tourism entrance fees a viable financing mechanism to establish and collect funds. The tourism industry, and associated revenues, is dependent upon a number of factors, primarily: the ease of accessing the destination in question and visitor willingness to pay. The various types of payments, fees, and taxes can include: Protected area entrance fees, Recreation license fees and special access payments, and Transportation and hotel taxes. Protected area entrance fees Protected area entrance fees provide a mechanism for raising tourism-based conservation revenue because fees are generally collected at certain protected area entry points. Raja Ampat Tourism Fee Mechanism, Papua, Indonesia The Raja Ampat district government introduced a tourism fee system to help support conservation and community projects within Raja Ampat. The entrance fee is Rp500,000 (approximately US$55) for foreign visitors and Rp250,000 (approximately $28). Looking more closely at the foreign visitor fee, Rp150,000 represents the tourism management fee and enters the coffers of the Raja Ampat tourism department and is targeted at improving tourism management in Raja Ampat. The remaining Rp350,000 goes towards conservation and community development: 40% for community development fund for activities within the 92 villages/sub-villages in Raja Ampat, 40% for the conservation and enforcement fund, and 20% for management of the fee system. The priority activities under the conservation and community development fund are determined on an annual basis by the entrance fee management team. (Source: Dive Raja Ampat. Recreation license fees and special access payments Many protected areas charge additional fees for park-related activities: daily use fees; vehicle, boat, and plane fees; camping fees; and special service fees. Income from such sources can supplement basic park Page 31

32 entry revenue and help cover the true costs of supporting park visitors. This income capitalizes on highly attractive features (scenery, charismatic species) and in some cases produces enough revenue to benefit other protected areas or conservation practices in the region. 7 Transportation and hotel taxes Most countries have established systems of hotel and airport passenger taxes but the vast majority of this revenue goes into general government coffers. Some governments have implemented additional airport passenger and hotel taxes specifically to raise revenue for conservation; they include Costa Rica, Nepal, Galápagos, Belize, and the Turks and Caicos. Mitigation Banking & Biodiversity Offset Payments An increasing number of natural resource extraction companies are voluntarily addressing the environmental impact of their activities and enhancing their contribution to biodiversity conservation and sustainable development by establishing direct payments to offset these impacts. Many of these efforts are driven by CSR programs. Payments can vary widely in amount and may be voluntary or required by law. Mitigation banking is rapidly emerging in the global conservation arena as a way to address the impacts of consumption and development. In environmental contexts, mitigation generally refers to efforts to reduce or offset the negative environmental consequences of activities that are permitted despite their negative impact. Biodiversity offsets are measurable conservation outcomes resulting from actions designed to compensate for significant residual adverse biodiversity impacts arising from project development and persisting after appropriate prevention and mitigation measures have been implemented. The goal of biodiversity offsets is to achieve no net loss, or preferably a net gain, of biodiversity on the ground with respect to species composition, habitat structure and ecosystem services, including livelihood aspects. 8 These compensation payments vary widely in amount and may be voluntary or required by law. Biodiversity Offsets in Rio Tinto, Madagascar In early 2009 in Madagascar, the Rio Tinto mining subsidiary QIT Madagascar Minerals S.A. (QMM) began building infrastructure for planned mining operations that will remove significant portions of coastal forest. This ecosystem is recognized as both biologically unique and extremely limited. The mining project will encompass about 1,000 hectares (2,471 acres), some of which are already deforested. Costs are estimated at $850 million. The operations will initially mine approximately 750,000 tons of ilmenite per year, which will be processed at Rio Tinto s facilities in Quebec, Canada. As part of the project, QMM is helping to finance a 620-hectare (1,532 acres) conservation zone that has been excluded from the mining area to protect surviving coastal forest and management of 31,275 hectares (77,280 acres). To determine the parameters of the conservation initiative, Rio Tinto has worked with key international NGOs and the Malagasy government. The aim is to achieve a net positive impact on biodiversity and to rehabilitate and restore the land and ecosystems affected by the mining project and related development. It is also important to note that this project has been controversial, with opposition from local communities and international NGOs. (Source: WWF Guide to Conservation Finance. 2009) Bioprospecting Bioprospecting is the systematic search for new sources of chemical compounds, genes, proteins, microorganisms, and other products with potential economic value. Pharmaceutical companies enter 7 WWF Guide to Conservation Finance Business and Biodiversity Offsets Programme (BBOP) Page 32

33 bioprospecting agreements with developing countries in order to engage in these pursuits. In return, the companies get exclusive rights to screen the biodiversity for pharmaceutical compounds. In the event that the search leads to the development of a major drug, the agreements stipulates the benefit sharing (e.g., profits) to the host country. The host country, at its discretion, can utilize the money for biodiversity conservation or other activities. Bioprospecting (INBio), Costa Rica The National Biodiversity Institute (INBio) was created in 1989 as an NGO for private founding members. INBio s mission is to promote a new awareness of the value of biodiversity and conservation. INBio s formal agreement with the Costa Rican Ministry of the Environment and Energy allows it to do biodiversity prospecting in government protected areas in collaboration with research centers, universities, and private companies. The agreements require that 10 percent of the research budgets and 50 percent of future royalties be donated to the ministry to be reinvested in conservation. INBio s annual operating budget is about $6 million. Seventy percent of that comes from grants and contracts with research institutions and companies (Nature, 2006). In 2006, INBio entered into an agreement with the San Diego-based biotech company, Diversa (later acquired by Verenuium), in which Diversa was paying $6,000 per year for two products developed and derived from natural resources in Costa Rica. These products were DiscoveryPoint, a fluorescent protein that comes from a marine organism in the Caribbean Sea, and Cottonase, an enzyme for processing raw textile material (and a substitute for harsh chemicals). INBio has further formed research collaborations with Novartis, University of Michigan, Harvard University, and the Massachusetts Institute of Technology. (Source: WWF Guide to Conservation Finance. 2009) In-situ Ex-situ Conservation Partnerships In-situ ex-situ conservation partnerships, typically between governments and zoos (e.g., China lending pandas to U.S. zoos, Denver Zoological Society supporting Orangutan conservation in Borneo), can support biodiversity conservation activities while providing benefits to both sides. The in-situ institution (usually a government wildlife agency) can earn steady revenue during the term of the partnership and use it to help fund local conservation activities associated with the designated species. In exchange, the exsitu organization gains access to a rare species that can be integrated into scientific research and highlighted in educational exhibits. Further, zoos and zoological societies, and botanical gardens are extending their reach into field-based conservation efforts, investing in field research, training and direct conservation, in many cases directly funding government partner s costs on the ground. Sustainable Capital Sustainable capital is an area of public and private finance that utilizes access to favorable equity, credit, and microfinance as incentive to promote environmental sustainability and responsible business practice. This category of funds that encourage conservation and sustainable forest management include: Favorable Credit Tied to Sustainable Practice Standards, and Microfinance for Sustainable and Community-based Conservation. Favorable Credit There are a number of institutions which provide favorable interest rates attached to sustainable businesses. Across the world, a number of networks are emerging with the intention to connect environmentally responsible businesses to both public and private sector lenders. For example, the Page 33

34 Finance Alliance for Sustainable Trade (FAST) is a global, nonprofit association that represents lenders and producers dedicated to bringing sustainable products to market. Microfinance Over the past few decades available credit from microfinance operations have grown and have proven to be successful in terms of both risk management and profitability (BlueOrchard, 2009). Microentrepreneurs who borrow at market rates have shown a repayment track record that beats that of most commercial banks (97% on average) (Grameen Foundation, 2009). Importantly, the lessons learned from early microfinance programs like Grameen are now being adopted by mainstream financial institutions that recognize business opportunities in this market. 9 Microfinance cannot only be applied to boost local businesses and entrepreneurship, but can also be a powerful development tool, generating job creation and better living standards. If designed properly, microfinance lending practices can acknowledge and guide a triple bottom-line approach (people, planet, profit) and can have positive impacts on biodiversity conservation. Microfinance and Sustainability, Tanzania and Kenya Since 1999 a number of projects in Tanzania and Kenya have used microfinance to promote sustainable development and conservation in communities surrounding important protected areas. A microfinance model that has shown success in generating local income while encouraging natural resource protection is the Village Saving and Loan Associations (VSLA) model. VSLA is a network of informal voluntary groups of individuals, established for the purpose of mobilizing savings for lending back to the group members. The model has been applied as an entry point for health, education, and environmental projects in Tanzania, Kenya, and Zanzibar. The VSLA, among other things, provides a number of opportunities to improve environmental sustainability of individual community-based businesses that are members in the network. The main mechanism includes setting prohibitions against unsustainable business activities and encouraging alternative income generating activities that generate fewer environmental impacts. The VSLA model has shown good performance in comparison to other community-based microfinance models and is well suited to enhance financial, social, and environmental sustainability in many rural and conservation situations (Source: Wild et al., 2008). Donors A range of mechanisms exist through which voluntary donations are channeled to landscape management efforts. These include: 1. Multilateral and Bilateral Agencies, 2. Corporate Donors and Corporate Social Responsibility, 3. Philanthropic Foundations and NGOs, and 4. Individuals. Multi-lateral and Bi-lateral Agencies Multi-lateral Agencies, which often combine contributions from various sources, have over the last decade come to the forefront of international efforts to finance conservation and sustainable development. 9 WWF Guide to Conservation Finance Page 34

35 These agencies include the Global Environment Facility (GEF), the Asian Development Bank and the World Bank, among others. Bi-lateral aid is a voluntary transfer of resources from one country to another. Corporate Donors and Corporate Social Responsibility (CSR) Multinational/Corporate funding in this case refers to money from international and national sources. This money originates from special funds or programs, often tied to a company s Corporate Social Responsibility (CSR) efforts. The term CSR is interpreted in a number of ways and there are many PT Sumalindo Lestari Jaya Tbk, Indonesia Sumalindo is a forestry company operating within the Indonesian section of the HoB. Since its founding in 1980, the company and its subsidiaries have implemented various community development, social and educational activities, be it at the company s outskirt forestry operation and sites or at the factory s more urban location. At the moment, the company is expanding the Participatory Conservation Planning (PCP), i.e. a community development program that is being implemented by the logging division. In this program, the company and the communities commit toward working together for common benefits, among others the sustainable management of the forestry resources and the prevention of illegal logging. (Source: PT Sumalindo Lestari Jaya Corporate Website. different names for the same or similar concepts, such as: Corporate Citizenship, Business Sustainability, and Corporate Responsibility. At the core, however, all of these terms and concepts point to the same fundamental principle: that a company is responsible for providing more benefits than just profit for shareholders. Specifically, a company has a role to play in treating its employees well, preserving the environment, developing sound corporate governance, supporting philanthropy, fostering human rights, respecting cultural differences and helping to promote fair trade, among others. 10 The World Business Council for Sustainable Development (WBCSD) in its publication "Making Good Business Sense" by Lord Holme and Richard Watts says that Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large. In addition to these interpretations of CSR, countries, including Indonesia, have started developing specific regulations around CSR and its requirements. Philanthropic Foundations and NGOs This category includes international and national philanthropic foundations and NGOs. Foundations have long been a mechanism for funding conservation and sustainable development efforts globally. Other NGOs, such as the World Wildlife Fund (WWF), Conservation International (CI), and The Nature Conservancy (TNC), have also long supported conservation efforts around the world. Individuals This can include individuals of any type, but general focus on tourists and tourism operators and high net worth individuals. Through voluntary contributions, tourists (and tourism operators) can support directly Parks or other areas they wish to see sustainably managed. Mechanisms such as voluntary surcharges, supplementary donations on retail or resort bills, and even charitable research assistance can establish a direct financial 10 Juno Consulting Page 35

36 link between a tourist s natural experience and the conservation of the place. Tourists are more likely to contribute if they can be assured that the funds collected will be disbursed transparently and allocated to the conservation of the species or places they have viewed. Tourism operators generally contribute to conservation when it directly benefits business operations. High net worth individuals that view conservation and sustainable forest management favorably may give large donations to NGOs that focus on these areas. Conservation Trust Funds A Conservation Trust Fund (CTF) is a stand-alone mechanism that channels and disburses funds originating from various sources of finance described above. The fund typically consists of money or other assets that are legally restricted to a specified purpose and must be kept separate from other sources of money (such as a government agency s regular budget). Depending on the country s legal system, trust funds can be established as foundations, nonprofit corporations, or common-law trusts. A CTF can be incorporated in the country of intended beneficiaries, or it can be incorporated as an offshore fund in a country with more favorable legal regulations and support. Conservation trust funds may be managed as one of three different types of funds: an endowment fund, where the investment income but not the capital is spent; a sinking fund, where the income and part of the capital is spent every year, eventually sinking the fund to zero within a predetermined time frame; or a revolving fund, which continually receives and spends new revenues from earmarked taxes or fees. 11 Such trust funds (environmental, conservation, and other similar types) have been established in more than 50 countries around the world to provide long-term sustainable financing targeting specific environmental or conservation needs, including: protected areas, species conservation, programmatic grant funding, community sustainability program and others. CTFs, if well-funded and well-managed, not only help to receive and provide a stable source of funding for conservation, but they can also often benefit the conservation community by promoting coordination among various stakeholders such as NGOs, government agencies, community groups, and the private sector; by offering technical assistance in the design and implementation of conservation strategies; and by building local capacity for biodiversity conservation and sustainable resource management. Conservation trust funds are just one of the tools for financing biodiversity conservation and are not necessarily appropriate or feasible for all countries and all situations. According to the GEF, the following conditions are essential for establishing CTFs: 1. the issue or program to be funded needs a commitment of at least 10 to 15 years, 2. the government actively supports establishing a public-private sector mechanism outside direct government control, 3. a critical mass of people from diverse sectors of society have agreed to work together to achieve biodiversity conservation and sustainable development, and 4. a basic fabric of legal and financial practices and supporting institutions (including banking, auditing and contracting) exists in which people have confidence. 11 WWF Guide to Conservation Finance Page 36

37 The GEF Evaluation in 1999 also identified the following CTF advantages and disadvantages. Table 3.2 Advantages and Disadvantages of CTFs (GEF Evaluation, 1999) Advantages Disadvantages Can finance recurrent costs Can facilitate long-term planning Broad stakeholder participation leads to transparent decision-making and strengthens civil society Can react flexibly to new challenges Can plan for the long-term because independent of changes in government and shift in political priorities More capable than donor organizations of working flexibly and with attention to small-scale details Create better coordination between donors, government and civil society Allow donors to comply with international recommendations for aid effectiveness A vehicle to collect and secure greater private contributions for biodiversity conservation Can tie up large amounts of capital Modest income High administrative costs Exposed to market volatility and possible loss of capital Can create pressure to spend too much on grants instead of building up capital Secure financing can breed complacency if there are no performance incentives Making grants reflects a project-based approach, and risks neglecting legal and economic framework Donor agencies are not able to follow up on such long-term investments and ensure accountability for the use of public funds. In addition to the essential conditions and advantages and disadvantages identified by GEF, the following factors must be taken into account when considering the setup of a CTF: Objectives: It is crucial that specific, measurable, realistic and time specific objectives for the CTF be set and monitored regularly. This will allow for proper management and allocation of funds. Funding: It is generally quite time consuming and difficult to capitalize funds. It is crucial to understand, at the beginning, the feasibility of securing various types of funding. The sources of funding would ideally include a diversified group of entities such as government, private sector and civil society as well as market-based mechanisms such as PES. The following section briefly explores some HoB specific information and examples related to CTFs. HoB Specific Trust Fund Considerations and Examples There are currently no HoB-specific trust funds in place. That being said, both Indonesia and Malaysia have funds that are or resemble CTFs and which could be referenced in setting up a CTF for the HoB. It is currently possible, given existing legislation, to setup a CTF in each of the three HoB countries. Country Review and Examples Brunei Brunei does not currently have any CTFs in place. That being said, it does have the required enabling conditions to allow for the creation of one; Brunei has specific legislation on both charitable and noncharitable purpose trusts. The International Trust Order (ITO) contains a specific provision that trusts for purposes, whether charitable or non-charitable, would be valid if the purpose is reasonable and practical, not immoral or contrary to public policy. The trust income would be tax exempt in Brunei. Page 37

38 Indonesia There are no formal trust laws in Indonesia. That being said, there are several CTFs currently setup either directly through the government or through NGOs. Two primary examples are Yayasan Keanekaragaman Hayati Indonesia (KEHATI) and the recently established Indonesia Climate Change Trust Fund (ICCTF). KEHATI KEHATI, the Indonesian Biodiversity Foundation, was established in 1995 with assistance from the US Agency for International Development (USAID). The mission of KEHATI is to achieve biodiversity conservation by mobilizing resources for community empowerment, public policy advocacy, shared learning, and enhancement of stakeholders and participants. The KEHATI Endowment was established with an initial $16.5 million from USAID through a ten year Cooperative Agreement between the two organizations 1995 to 2005). In addition to the $16.5 million contribution to the endowment, USAID gave $2.5 million to KEHATI to cover its operating costs for the first five years of the Cooperative Agreement. KEHATI, to fulfill the Cooperative Agreement, secured $6.5 million, of which $4.7 million went to the endowment and $1.8 million went to the operational and program expenses. 12 During this process KEHATI secured a letter from the Ministry of Finance allowing them to classify their endowment revenue as charitable giving, thereby avoiding an Indonesian tax liability on endowment revenue. ICCTF The GOI has established the ICCTF to address the emerging and immediate needs of their upcoming Climate Change Sectoral Roadmap (20-CCSR) and plans to prioritize climate change issues in the next National Medium-term Development Plan for The ICCTF is designed to finance several priority areas, both in the mitigation and adaptation sectors. There are two funding mechanisms under the ICCTF, the Innovation Fund and the Transformation Fund. The Innovation Fund will be capitalized from grant funding from development partners and other contributors and will be used for grant-based activities that provide indirect economic and social benefits but not a financial return. At a later stage, the Transformation Fund will be capitalized from domestic funds, loans, international funds under the UNFCC, and the world capital market and which would generate direct financial returns while at the same time providing support to stakeholders including both the government and private sector. Malaysia In Malaysia, there are a number of government established and directed Trust Accounts or Corporate Funds that, while structured slightly differently than traditional CTFs in that they are more similar to revolving funds than endowments, have similar goals and purposes to CTFs. A few examples of these include: Penang Botanical Garden Trust Account and the Sabah Parks Fund. In addition, Malaysia has laws such as in Labuan (jurisdiction in Sarawak) that facilitate the creation of CTFs. According to the Labuan Offshore Trust Act 1990 (LOTA), purpose trusts must be for a charitable purpose. Charitable purposes include: the relief or eradication of poverty, the advancement of education, the promotion of art, science and religion, the protection of the environment, the advancement of human rights and fundamental freedom, or any other purpose which is beneficial to the community. Penang Botanical Garden Trust Account Created in 1995, the Penang Botanical Trust Account was legislated according to the Financial Procedures Act 1957, Subsection 9(1) and 9(3) for the purpose of receiving contributions to be used for financing expenditures related to the administration, operation and implementation of activities. It is 12 This $6.5 million was secured primarily from International sources (98%), followed by the Indonesian private sector (2%). The government did not commit any money to the CTF fund. Page 38

39 managed by the state government of Penang. Sources of money include: companies, organizations and individuals, as well as receipts from activities that are not directly finance using State allocation and receipt from the sale of goods which are purchased or made using the resources of the account. The uses of money include payments to cover allowance, honorarium, and other staff payments, expenses related to promotions, programs or projects, and refurbishment of existing attractions, and other approved expenditures. Sabah Parks Fund The Sabah Parks Fund was enacted in 1984 to allow PA revenues to be earmarked for specific purposes rather than channel to the State Consolidated Fund. This Fund receives contributions or gifts or bequests of money, as well as entrance fees and other moneys paid for offenses or fees. This money is then used for the development and operational expenses of the Sabah Parks. Page 39

40 4. FINANCIAL FEASIBILITY REPORT: BRUNEI Sections Brunei Overview Heart of Borneo and Land Use Categories Enabling Conditions of Sustainable Finance Assessment of Landscape Finance Conclusions With a total land area of 5,765 km2, Brunei Darussalam is the smallest country involved in the HoB Initiative. The Government of Brunei, with His Majesty s support, committed 58% of Brunei s total land area to be protected and sustainably managed within a delineated HoB landscape. A Brunei Heart of Borneo National Council has been established to develop and guide the implementation of a Project Implementation Framework (PIF) and also an integrated and internalized HoB vision. The land use categories within the Brunei HoB include Forest Reserves, which are broken down into the following designations: Production Forest, Conservation Forest, National Park, Protection Forest, and Recreation Forest. Forests and forest management (including much of the lands included in the Brunei designated HoB areas) are under the responsibility of the Ministry of Industry and Primary Resources (MIPR), Brunei Forestry Department, as enshrined in the Brunei Darussalam Forest Policy. Current sources of financing include: o Government: Taxes, royalties, and other fees and revenues mainly channeled through the National Consolidation Fund, Development Fund and Suspense Accounts. o Market: Tourism fees, nascent bioprospecting assistance under MoU, and some sustainable capital. o Donor: Funding from corporate sponsors and NGOs. Potential sources and recommendations: o Government: Consider ways to divert increasing amounts of the royalty revenues collected to HoB management, and consider ways to assess offset fees to the companies responsible for forest and peat fires in Brunei based on the damage done to the environment. o Market: Optimize tourism fee revenues and also consider a departure tax on all visitors departing from Brunei airports or ports. Brunei should conduct a cost/benefit assessment on the value of watershed services, and work on plans to invest in a national bioprospecting operational plan. Brunei should also formally evaluate the concept of establishing biodiversity offset requirements and explore the potential for REDD carbon financing further. Finally, Brunei should consider development and application of effective screens and principals on future project and development financing in HoB. Donor: Coordinate international efforts and funding across HoB in greater Borneo, including from the BIMP-EAGA, ASEAN and others Generally, Brunei needs to focus on integrating the objectives and priorities of the HoB initiative into the Brunei National Development Plans, conduct a detailed cost analysis to determine the short and long-term implications of implementing a comprehensive HoB Operational plan in Brunei, and complete a coherent and comprehensive Brunei HoB Operational plan which outlines a clear set of objectives and activities. Page 40

41 Brunei Overview With a total land area of 5,765 km2, Brunei Darussalam is the smallest country involved in the HoB Initiative. However, Brunei s forest cover contributes significantly to the island s biological richness, estimated at about 80% of the country s total land area 13. The terrain of Brunei Darussalam is characterized by vast flood plains and lowlying valleys that extend deep into the interior. The western part of the country is hilly lowland which rises in the hinterland to about 400 meters. To the east, in the Temburong Province, the wide coastal plain reaches up to more mountainous regions. Brunei includes six major forest types: mangrove, peat swamp, freshwater swamp, Kerangas (tropical heath), mixed dipterocarp, and montane. Wetland forests cover approximately 20% of Brunei s land area. The fauna and flora of Brunei is broadly similar to that of Borneo as a whole. Source: New World Encyclopedia With a population of approximately 400,000, and a GDP (current prices) in 2008 at approximately B$20.4 billion (US$ 14.6 billion) 14, Brunei is financially secure. Brunei's resource-rich oil & natural gas economy affords its population high living standards - the government provides for all medical services and subsidizes education, rice, and housing. Government, construction, services, retail and some light manufacturing are the other major sectors in Brunei's economy. While making efforts to sustain and strengthen the oil and gas industry, Brunei is also pushing hard for economic diversification, a move that could ensure a more sustainable economy driven by technology, knowledge-based, and capital-intensive industries. Eco-tourism, bioprospecting and halal brand foods have identified as economic development priorities. As a result of the predominance of oil export income, Brunei s relatively low population, and the priority the government places on conservation, Brunei has been able to avoid the development pressures from timber extraction, agricultural expansion and human settlement expansion as faced in other parts of Borneo 15. There is an opportunity to achieve national land use management and HoB objectives in Brunei in line with both environmental and economic policies and actions. In order to develop both sustainable economic and conservation outcomes over the long term it will be important to: fully assess the existing specific and priority activities of relevant agencies and departments in Brunei; identify additional efforts required to ensure HoB objectives can be met and to integrate these into national level planning mechanisms; and develop clear and feasible plans for adjusting government budget allocations to meet these need and to developing new sources of financing from the private sector and donor communities. 13 According to the last comprehensive forest census (Anderson & Marsden, 1984). Latest data by Forestry Department shows that number has dropped to close to 76 per cent of Brunei's land area. 14 Oxford Business Group Report, Brunei Darussalam, CIA World Factbook Brunei Economic Development Board website, and ERE Consulting documents, April Page 41