step 6.3 create comprehensive list of potential finance solutions - Biofin

Step 6.3: Create comprehensive list of potential finance solutions

Step 6.3 is to transform the list of 100-200 existing instruments and potential finance solutions into a clearly defined list that can be effectively used for prioritization (Step 6.4). Three critical elements are involved in the formulation of finance solutions.

First, each solution must have a clear objective through which it seeks to change a situation from a present state to a new desired state.

Second, each solution must be described in sufficient detail.

Third, each solution should lead to an estimate of a financial impact along the four results described in Chapter 1. If this is not possible, then it is not a finance solution.

These three critical aspects can be supported by the identification of a clear name and definition for each finance solution. If these are too vague, different interpretations and assumptions could produce wildly varying scores in the prioritization. By defining solutions clearly, it is possible to generate consistent assessments.

The prioritization process requires each finance solution to be properly formulated and described by referring to the core components listed in Box 6.4. The solution name should be descriptive enough to differentiate it from other solutions. For example, if the finance solution is a payment for ecosystem services (PES), the name should include the fact that it is PES, the relevant ecosystem service, and potentially a location. For example, “Establish a new PES for water services in the Magdalena River watershed in Mexico City”. Communication products at a later stage might require shortened names and more appealing messages (e.g. PES 2.0), but this is not required for the prioritization of finance solutions at this stage.

The description should ultimately allow an expert to score each finance solution with a reasonable degree of accuracy. It is ideally a short and concise paragraph of three-four sentences. The description should ideally contain the following elements:

Justification for the solution
Opportunity – why is this needed now?
Tentative impact formulation

Box 6.4: The Definition of a Finance Solution

An action-driven term – “solution” – characterized and described by:

The sources of finance the solution relies upon.
The lead agent or intermediaries tasked to manage the operationalization of the solution: a government entity proposing a tax reform or the bank establishing a trust fund or issuing a bond to deliver conservation finance.
Beneficiaries or principal stakeholders that either receive the financing or are the targets of the instrument.
The instruments used to mobilize, collect, manage and disburse the funding. They can be strictly financial instruments like bonds or equities, or fiscal and regulatory reforms.
The desired finance results the solution aims to achieve.

South Africa Giraphes at Safana, By Biofin UNDP

An example from South Africa’s BFP

Name : Water tariff funding for ecological infrastructure

Description : Investing in ecological infrastructure as part of catchment management offers significant water regulation and supply benefits along with co-benefits for biodiversity, livelihoods and disaster risk reduction, among others. This finance solution aims to improve existing means, and establish new viable mechanisms, to capture and distribute an adequate portion of water tariffs for investment in ecological infrastructure in catchments. This would be in keeping with the user-pays principle and is achievable by operationalizing elements of the revised Draft Water Pricing Strategy.

Note that the three-sentence description above includes the instruments (“water tariffs”, distribution of tariffs), expected results (“water regulation and supply benefits”), and the strategy (“operationalizing” the Draft Water Pricing Strategy) all framed under investment in ecological infrastructure.

Step 6.3 often requires several weeks of team efforts in collaboration with national experts in tax law, protected areas management, budgeting, natural resource economics, etc. To transform the list of existing instruments and potential finance solutions into the above, we suggest the following strategies:

Reforming or combining existing finance instruments.The team should review existing instruments and think of solution formulation by asking a series of questions, e.g. Is the instrument functioning optimally? If not, why? What would be the most impactful change? Can the instrument be scaled or replicated to achieve greater impact? If the instrument is well-designed but not functioning, what supporting actions can be taken? The change is the finance solution to be included in the BFP. For example, the proliferation of small and independent trust funds might suggest opportunities for a rationalization and mergers among those institutions.

Refining policy and regulatory opportunities.Issues with policy, regulations, legal aspects, enforcement and other related areas were identified during the BIOFIN process. Biodiversity finance solutions can be designed to address these challenges. To frame reforms in finance solutions, questions like these can be asked for each driver: Are existing policies, regulations and laws effectively implemented? If not, how can small improvements create powerful economic or financial incentives? For example, the prevalence of harmful subsidies in the forestry sector may suggest a greening subsidy agenda.

Expanding and/or earmarking existing revenues.Biodiversity-related revenues are often collected from accessing or exploiting a natural resource or from a polluter responsible for the degrading of an ecosystem. Options will typically include: 1) increasing the revenue; 2) earmarking revenues for conservation; and 3) measuring the impact of change in behaviours by technical reforms. The latter (#3) may include a new fee design to better reduce consumption patterns, e.g. addressing the largest consumers.

Exploiting planning and budgeting opportunities.Public budgets remain the primary source for biodiversity in most countries. Finance solutions address possibilities for additional or more effective allocations. This may require working with multiple ministries (agriculture, mining, etc.) to mainstream biodiversity into their budgets, lobbying for greater budget allocation, etc. In the Philippines the engagement with Parliament resulted in the approval of a legislation to allow several protected areas to access earmarked funding. In Peru, biodiversity-related investment was added as an eligible category in the public rolling investment plan.

Achieving cost-efficiency.Opportunities to deliver better on each dollar invested in biodiversity are often overlooked. Proposals to achieve efficiency and effectiveness can be derived from the PIR, the BER and the FNA. In addition to identifying organizational cost-efficiency gains, there could be opportunities to inform future spending practices. For example, reforestation projects could switch to plant only native trees. Subsidies for fishing and agriculture that can be used for sustainable products could be simplified.

Introducing innovative strategies and approaches.While innovative approaches and strategies may require more time and in certain cases higher sunk costs, existing instruments have been largely failing to provide adequate financing for biodiversity. Technology-driven solutions such as crowdfunding or blockchain can be explored through innovative partnerships with the private sector.

Table Of Contents