You can start an organized initiative to finance and implement watershed conservation efforts without a new legal entity in a variety of ways:
- Memorandum of Understanding
- Collaboration and Administration Agreement
- Trust Fund
- Existing National Environment Fund or other government-sponsored entity
Memorandum of Understanding
An MOU is a non-binding cooperative agreement among parties interested in supporting watershed conservation to devote financial or human resources to the effort in a coordinated manner without exchanging or transferring funds. In this case, the “water fund” is completely virtual. One or more persons contribute employee time or money to conservation efforts, agreeing to coordinate their efforts, but each participant manages grants or investments of funds independently. There are no “employees” of the “fund”. The persons conducting the conservation efforts remain employees of their respective organizations or of a third-party implementing organization that receives funds from others [with no further oversight from the financial contributors].
An MOU would typically specify:
- Financial commitments (if any) of each cooperating organization;
- Goals and strategies for the conservation efforts;
- Specific projects to be carried out by participants or third-parties;
- How administrative expenses (if any) will be paid.
This structure works well to get a water fund effort started, but it may be challenging to sustain in the long run, as each source of funding may end up funding and managing grants independently, and receiving entities may have planning challenges if they are receiving funds from multiple donors. It may also be difficult to coordinate efforts towards common strategies and goals unless these matters are carefully and clearly defined in the agreement among the parties. Since the contributors are generally making independent funding decisions about various projects, however, in the worst case, the efforts of various contributors may work at cross-purposes if they are not sufficiently well coordinated.
Collaboration and Administration Agreement
A collaboration and administration agreement can be used to establish a “water fund” in an existing organization, typically a local non-profit organization or a local or national governmental organization, that will receive financial or other resources from the other participants and use its own employees, hire new employees or independent contractors, or contract with one or more third-party organizations to implement the conservation efforts. The “water fund” essentially remains virtual – a construct of the agreement among the parties to the collaborative and administration agreement. The “employees” of the water fund may actually be employees of the “host” entity that is administering the fund itself or with the assistance of a financial institution acting as a trustee for the funds. An expert advisory committee, sometimes including representatives of financial contributors, may advise the host or make initial decisions about which projects will be implemented. Sponsors providing funds will typically insist on having the final word about which projects get funded.
Where the amount of funds to be held and disbursed is large, there are a large number of financial contributors, or the burden of keeping track of incoming and outgoing funds is otherwise administratively complex, it may be desirable to establish a trust to hold the funds to be disbursed by the water fund, with a bank or similar financial institution acting as a trustee to assist with monitoring and reporting on the inflows and outflows of funds and investment of cash in the accounts of the fund. In some cases, particularly where a government organization is involved, the financial contributors to the fund may insist on the establishment of a trust with a professional trustee to administrate the financial aspects of the Water Fund.
What is a Trust Fund?A trust fund is an agreement by which an individual or legal entity (typically called a “constituent” or “trustor”) gives a trust organization one or more specific financial or other assets, whether or not it relinquishes ownership of them, in order to achieve a goal that will benefit the constituent or third parties expressly identified by the constituent. The trust organization has a fiduciary duty to the constituent or such third parties to make its best effort to achieve the goal articulated by the constituent, managing the assets to that end.
What are the benefits of using a trust structure?Use of a trust structure for the custody of a water fund’s financial assets typically builds more trust among fund contributors and the intended beneficiaries of the fund (often, the general public in a particular region), because the trust does not have any relationship with the contributors or other stakeholders and can act as an independent trustee of the financial resources. The trust structure, in which a professional financial institution typically acts as the trustee of the funds, facilitates accurate record-keeping and transparency regarding investment and use of the money contributed to the fund.
Should it be structured as a public or private trust?It will sometimes be necessary to determine whether it is preferable to structure the fund as a public or private trust. A public trust can facilitate the participation and disbursement of financial resources from public sector entities and avoid lengthy biding processes for use of public funds on conservation projects. A private trust can seek competitive bids from private financial institutions for the best combination of high interest fees paid for assets in custody and low administrative fees for administering the funds in the trust.
Existing National Environment Fund or other government-sponsored entity
Often, a subsidiary account for a water fund can be created and separately maintained by an existing national or local government fund dedicated to environmental conservation activities. Such organizations generally have the capacity to manage large budgets contributed by foreign donors. Administrative costs can be reduced by negotiating and agreeing on the administrative commission to be paid and the contribution of hours to be provided by employees of the existing public fund.