Conservation Finance

Capitalizing the “Missing Middle”

Marine iguanas. Photo by Rogerio Assis.

In early 2003, tourism in the Galápagos Islands was booming, one of the few bright spots in Ecuador’s sputtering economy. Yet small tour boat operators like Rocio Martínez de Malo and Rolf Wittmer were struggling to compete against larger and better capitalized companies with direct links to customers in North America and Europe. The dramatic growth in visitors and an influx of residents from the mainland were also straining the islands’ star attraction: their extraordinarily rich but highly sensitive biodiversity.

Considered the birthplace of Charles Darwin’s theory of evolution, the islands were declared a national park in 1959 and a United Nations Education, Scientific and Cultural Organization (UNESCO) World Heritage Site in 1978. The Galápagos National Park Service (GNPS) manages the islands using a combination of regulations and market-oriented approaches. The islands’ inhabitants live in designated areas on three percent of the Galápagos’ landmass, with the remaining 97 percent protected from development. GNPS awards “bed permits” to a fixed number of licensed boat operators to regulate tourism activity and tightly manages resource use by residents.

What was once a pilgrimage destination for scientific researchers and Darwin enthusiasts developed over the last quarter of the 20th century into a popular vacation spot for North American and European travelers. The islands’ popularity translated into higher occupancy rates for existing bed permits and an overall growth in visitors from 12,000 in 1974 to 25,000 in 1981 to 46,000 in 1994. As occupancy rates reached capacity in the early 1990s, GNPS responded to pressure from tour operators and increased the number of bed permits from 800 to 1,400 beds per day. These changes favored larger boat operators as smaller operators had already maximized bed capacity on their boars, but larger, better-capitalized operators were able to add more beds or replace medium-sized boats with larger ones.

Facing stiff competition in the market and mounting environmental pressure, small-boat operators Martínez de Malo and Wittmer worried about the future of the businesses they had toiled for years to build and the islands they called home. One of only a few female boat owners in the Galápagos and the daughter of a fisherman, Martínez de Malo was the owner of Daphne Cruises and a prominent leader in the local community. Wittmer, the son of the islands’ earliest settlers, had pioneered tourism on the islands as far back as the 1960s and later founded Rolf Wittmer Turismo Galápagos (Wittmer Turismo) with his three sons. For years, Martínez de Malo and Wittmer had run their businesses as an extension of their personal values and deep roots in the Galápagos community, hiring local residents as crew members and working to minimize their environmental impact.

In 2000, a new certification known as Smart Voyager was designed for tour boat operators in the Galápagos by the international nongovernmental organization (NGO) Rainforest Alliance and the Ecuadoran NGO Conservación y Desarrollo. Obtaining this certification would enable boat operators like Martínez de Malo and Wittmer to communicate their businesses’ social and environmental commitments to consumers and differentiate them from their uncertified competitors.

To qualify for Smart Voyager, however, Daphne and Wittmer Turismo would first need to acquire new equipment to reduce energy use and pollution. Unable to finance these investments from their businesses’ cash flows or to access credit from Ecuadorian banks, Martínez de Malo and Wittmer feared they would be excluded from Smart Voyager and the opportunities it might create. Too large for microfinance institutions but considered too small and too risky by commercial banks, businesses like Daphne Cruises and Wittmer Turismo find themselves trapped in the “missing middle” without access to capital that could yield cost savings, make them more competitive in the market, and generate critical social and environmental dividends.

Daphne Cruises and Rolf Wittmer finally obtained certification after accessing credit from Root Capital, a nonprofit social investment fund that lends to unbanked businesses in the missing middle.

Nature-related tourism in the Galápagos Islands offers a microcosm into the opportunities and challenges for leveraging market forces to conserve biodiversity and improve livelihoods throughout the Americas.

The David Rockefeller Center for Latin American Studies at Harvard, in conjunction with the Lincoln Institute of Land Policy and the Universidad Austral de Chile (UACh), hosted a hemispheric meeting on conservation finance in January 2009 in Valdivia, Chile. The meeting was co-organized by Levitt and Antonio Lara, Dean of the UACh Faculty of Forest Science.