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On 26 and 27 November Eurodad, Latindadd and Afrodad were invited to participate in the first meeting of an international working group established by UNESCO to explore how to promote the far greater use of debt swaps and best practices in these operations. The first meeting brought together a range of government officials from creditor and debtor nations, education experts, representatives of multilateral development banks and civil society experts.

Debt swaps (or conversions) are when a creditor and debtor government come to arrangement to cancel a portion, or all, of a debt in exchange for investments in a mutually agreed sector and/or project(s). The initiative had the support of and was attended by the Argentine Minister for Education and the Spanish Government. How debt conversion operations could support Education for All objectives was a particular focus of the event. The first meeting brought together a range of government officials from creditor and debtor nations, education experts, representatives of multilateral development banks and civil society experts.

It was generally agreed that debt swaps are "coming back into fashion" with both creditor and debtor governments increasingly speaking-out in favour of such operations, in particular for countries so far excluded from international debt relief initiatives. Recently, Spain had concluded a number of "swap" arrangements with Ecuador (US$50mn), Nicaragua (US$38.9mn) and El Salvador (US$10mn) among others. Germany and Indonesia had also reached an agreement to swap US$25.6mn for social sector investments, half of which went towards the education sector. The basic premise of the whole event was that it was both necessary to invest in education in developing countries as well as reduce debt. How therefore could use of this instrument be deepened in order to further these objectives?

There were a number of concerns raised however in relation to such conversion operations. These can be grouped under a number of broad headings:

Sustainability: a number of participants expressed concern over the sustainability of debt conversions in the longer-term. For example a country could become dependent on the funds freed-up via such arrangements for investments in a particular sector. This is potentially harmful because conversions are by nature short-term injections of extra funds. Care must therefore be taken to ensure that debt swaps complement national plans for the development of long-term sustainable education systems (see below).

Coherence: debt swaps must be entirely consistent with national development plans. The Argentine Minister for Education revealed that there have been examples in the past of debt swaps for education which have not involved the Ministry of Education in the debtor country. The representative of El Salvador spoke highly of their swap operation with Spain stressing that the deal was entirely consistent with the country's 2021 education plan. He suggested that a debtor country must have a long-term sectoral strategy in place as a necessary precondition if these kinds of conversions are to be effective.

Transparency: under "standard" debt swap arrangements, funds are transferred into a special account (the counterpart fund). Many participants highlighted the importance of transparency and accountability in the management of the counterpart fund and of clear channels for civil society participation to ensure funds are well used. Good models for the management of counterpart funds include the setting-up of tripartite committees with representatives of debtor and creditor government and local civil society groups.

Administrative burden and donor coordination: given the relatively small amounts of money treated, debt swaps represent a heavy administrative burden on often already overstretched debtor country governments. A whole series of political negotiations and agreements must first be reached at high level before the technical and operational level details can be worked out at lower levels. Eurodad suggested that donors could assist in this process by "clubbing together" to simultaneously agree on debt swaps for a particular country (or countries). Funds from several donors could be all be transferred into a single counterpart fund for mutually agreed expenditures. This would have the distinct advantage of freeing-up greater volumes of finance and one management and reporting system. If the political will exists, this can be done, argued Eurodad. In 1992, Poland benefited from the largest counterpart fund in the history of debt for development swaps. Five creditors simultaneously supported a swap for the country (France, Italy, Sweden, Switzerland and the United States) in the framework of a Paris Club deal. A total of US$545 million will be invested in environmental projects via the "EcoFund" swap until 2010.

Additionality: positively, representatives of creditor and debtor nations and civil society all raised concerns around the issue of additionality. Concern was expressed that debt conversions may substitute for increased donor ODA (which in effect would mean that other poor countries pay for these debt swaps). At the same time, debtor governments could use the funds freed-up via these arrangements to substitute for investments they would have otherwise had to make with their own funds. It would therefore not translate into extra investment the education sector. Although there are methodological difficulties in assessing the additionality of any debt cancellation operation, it was agreed that there should be certain guidelines or benchmarks in place to assess the additionality of debt conversions and ensure they are complementary and effective as they can be.

Conditionality: it was highlighted that there had been cases in the past when debt conversions had been used to impose policy conditionalities on beneficiary countries such as privatisation of key sectors or industries, or had been tied to the purchase of goods and services in the creditor nation. These were explicitly rejected by the overwhelming majority of participants. It was noted that Spain had recently shifted its policy on this issue. Spain would no longer tie swaps and bind debtor nations to the purchase of goods from Spanish companies.

Illegitimacy: Eurodad and Latindadd raised the issue of the legitimacy of credits "swapped". In many cases, the loans being treated may be odious or illegitimate in origin. The concern is that donors will continue to portray swaps as an act of good will when in some cases loans had been extended to undemocratic governments for political purposes and had served no useful developmental purpose. These debts clearly need to be cancelled but creditors must explicitly recognise shared responsibility in such instances.

Selectivity: the representative of the Philippines stressed the concern that Japan holds 70% of the country's ODA portfolio and Japan has traditionally preferred to provide fresh finance rather than engage in lengthy and technical debt swap arrangements. Given theses considerations, one could also see why some debtors might also prefer this route. But this raises a very important issue. Who decides which country or countries are "eligible" for debt swaps and how much debt should be treated under the arrangement? Are there clear international guidelines on this? Eurodad was concerned that the absence of clear criteria in this regard opens the door to politically motivated decisions: some countries are strategically more important and may therefore be able to benefit from such measures while others are left out. This highlights the need for clear criteria and guidelines to be established on the critical "who decides" question.
At the event, debt swaps were portrayed as a good alternative to the HIPC Initiative and MDRI frameworks because they offer the potential for substantial debt write-downs to a much longer list of lower and middle income countries ineligible for HIPC and MDRI debt relief. But how far do debt swaps really represent the "alternative solution"? This is doubtful. According to a new Latindadd study of 40 debt conversion operations around the globe, the total volume of debt treated amounts to just US$5bn. Globally developing country debt stands at over US$2.6trillion.
In addition, debt swaps have been overwhelmingly applied to bilateral debt. Bilateral debt accounts for only 18% of developing country debt with the rest composed of multilateral (17%) and private commercial debt (65%). In percentage terms, the relatively lower sums involved mean that conversions should in no way be seen as the magic bullet or alternative solution to the debt crisis. Eurodad pressed the Inter-American and African Development Banks on their future involvement in these kinds of operations. Several other participants agreed that this was a good idea but no firm response was received.

So what now? Given the high profile status of the group headed by Argentina's Minister for Education, it is hoped that this group could act as an important lever to push political engagement and increased political commitment on the issue of debt swaps, in particular in support of Education for All objectives. In addition, Spain suggested that they also wanted to be at the forefront of international efforts to promote deeper use of the instrument. A new law on external debt in Spain provides for debt swaps of up to US$1.2bn, said the Spanish representative. Finally a need was expressed for a central point to collate more case studies which should serve as a useful basis for evaluation, the dissemination of best practices and the elaboration of key principles. It is expected that a website will be developed over the next six months to collate and disseminate this kind of information.

This article was first published by Eurodad in Debt-Watch listserv.

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