Fairly efficient or efficiently fair: success factors and constraints of payment and reward schemes for environmental services in Asia

1. Fairly efficient or efficiently fair: success factors and constraints of payment and reward schemes for environmental services in Asia Beria Leimona Co authors: Meine van Noordwijk, Laxman Joshi, Rachman Pasha, Betha Lusiana,, Elok Mulyoutami, Nimatul Khasanah, Andree Ekadinata ICRAF Science Week 12-17 September 2011 Nairobi

2. Thesis committee Thesis supervisor Prof. dr. H.B.J. Leemans Professor of Environmental Systems Analysis Wageningen University Thesis co-supervisor Dr. R.S. de Groot, Associate Professor Environmental Systems Analysis Group Wageningen University Dr. M. van Noordwijk, World Agroforestry Centre Prof. dr. P.J. Ferraro, Georgia State University, US Other members Prof. dr. ir. E. Bulte, Wageningen University Prof. dr. R. Costanza, Portland State University, USA Dr. L.C. Braat, Wageningen University Dr. R. Muradian, Radboud University Nijmegen This research was conducted under the auspices of the Graduate School of Socio-Economic and Natural Sciences of the Environment (SENSE)

3. Rewards for, Use of and Shared Investment in Pro-poor Environmental Services schemes in Asia Phase 1: 2002 – 2007 Phase 2: 2008 – 2012 2001/2002 2011

4. RUPES SITES IN ASIA covering 12 sites in 8 countries Bac Kan

6. Potential organic coffee

7. Environmental Education Centre

8. Agro-ecotourism

9. Integrated Lake Management with Ministry of Environment

12. Improving the quality of smallholder rubber production

13. Supported by Bridgestone

15. Scale up to watershed level for collective financial reward

17. Financial reward for local infrastructure and smallholder business improvement

18. Extension and scaling up at provincial level

20. Supporting a local NGO: KANOPI

22. Gender study on role of women’s knowledge in increasing the sustainable NRM

24. Food security issue on potato farming

27. Collaboration with Mars Symbioscience Indonesia to improve the cocoa agroforestry and promote RES scheme for smallholders. INDONESIA

29. Developing RES scheme for forest ES

32. Supported by Mitsubishi company in developing carbon Project Identification Note

33. Potential bundling ES with watershed and biodiversity conservation

35. A sentinel site for Landcare

36. Supporting policy advocacy of RES , and RES design at district level PHILIPPINES AND VIETNAM

38. Community forestry – on hill slopes, intensive agriculture on the slopes

39. Hydropower station below – reservoir based

40. 17% of hydropower in the country (92 MW)

41. Government royalty collected from Hydropower generation by NEA; 12% channeled back to the district

44. Presence of KeibulLamjao National Park for globally threathened species of Brow Antlered Deer

45. Construction of Ithai barrage of HEP converted a naturally fluctuating lake into a reservoir

49. Environmental economics concepts: internalization of envt. cost, polluters-pay principle and compensation for victims

51. Elements of efficiency and fairness within a reward for environmental service scheme

52. Stages in RES development and its links with efficiency-fairness Effective ES provision Implementation and Monitoring, Reporting & Verifying Implementation & MRV cost Efficiency 1 Commoditized & compensation for ES 6 Livelihood assessment Contract accomplishment Signed contract 5 Reverse auction External investors and regulators Fairness Negotiation 4 Rapid Hydrological Assessment Opportunity cost Scoping and Stakeholder analysis Transaction cost 1 Co-investment for ES Initial interest 2-3 Pro-poor assessment Local stakeholders of land practice and behaviour change Adapted from van Noordwijk et al (2011)

53. 1 Preconditions for application of the PES concept with strict conditionality are not met in many developing countries’ contexts and a wider PES interpretation is needed.

55. A‘PES-like’ term in existence

65. Recurrent monetary payments: supply and demand

66. No explicit poverty target

67. Actual ES delivery & direct marketability:

69. Achievement of a condition of (agro)-ecosystem or effort (or restrictions in input use).

70. Poverty target added with certain conditions

72. Full trust of management plan &local monitoring with high social capital level

73. A flexible contract, broad sanctions and a monitoring requirement

74. Conditionality Level IVProxies, recurrent Plans/ACM, investment 'Real' ES, recurrent Conditionality van Noordwijk and Leimona (2010)

76. Monetary incentives may be counterproductive for public pro-social activities

77. undermine existing norms

78. not sufficient and/or durable enough to offset this loss of intrinsic motivation.

79. PES schemes may need to address a livelihoods approach that considers the five capital types (human, social, physical, financial and natural) in their interactions across scales.

80. Replacing the “payment” concept by “co-investment” language is an effort to appeal to both social and financial concepts. van Noordwijk and Leimona (2010)

82. conducive to the type of respect,

83. mutual accountability and commitment to sustainable development

84. reference to social exchange rather than financial transactions

85. opportunities for phased strategies.

86. An evolutionary process …. After creating a basis of respect and relationships through the paradigm of CIS there may be more spacefor specific follow-upsin the paradigm of CES for actual delivery of ES to meet conservation objectives. van Noordwijk and Leimona (2010)

87. 2 Only under specific circumstances, will cash incentives from PES contribute substantially to increase disposable income and alleviate poverty of ES providers.

88. A model of per capita benefits in terms of a number of dimensionless ratios Population density Income Area Total payment by downstream - TPd = Ad IdРdβd Per-capita benefit received by upstream: RPu = TPd (1 – αu) . (1 – T)AuIuРu-1 1 Willingness to pay Fraction of opportunity cost Fraction of transaction cost

89. A model of per capita benefits in terms of a number of dimensionless ratios RPu = (Ad Au-1) ( Id Iu-1.) (Рd Рu-1) βd (1 – αu) . (1 – T) Population density Area Fraction of transaction cost Income Willingness to pay Fraction of opportunity cost

90. Downstream/upstream ratios of population density and areas covered by agroecosystem combinations found in Indonesia Source: adapted from (Hadi and Noordwijk 2005) Source: adapted from (Hadi and Noordwijk 2005)

91. Ratio of downstream/upstream population density in agro-ecosystem combinations that occur in various areas of Indonesia

92. Multiplying factors for targeting payment of 5 percent of upstream income

93. Outcomes from scenarios on area, population density and welfare

94. Does it increase disposable income by 5%? RES can only have a significant effect on rural income in upstream areas that provide ES if the scheme involves upstream providers who have low population density and /or a small area relative to the beneficiaries and downstream beneficiaries who have relatively higher income than the upstream providers; provides highly critical and non-substitutable environmental services that are substantial and worth paying; is efficient and has low opportunity and transaction costs, but high willingness and ability to pay of downstream beneficiaries.

95. Does it increase disposable income by 5%? Analysis of income and spatial data on agroecosystems in Indonesia indicates that this condition may be difficult to achieve given the population and income structures of downstream and upstream areas in Asia. Although the Asian data shows upstream income levels tend to be lower than those in downstream/urban areas (IFAD 2002), the ratio between urban and rural income is still quite low (less than 2.0).

96. 3 Indirect non-financial benefit at community scale contributes to reducing poverty or a common-goods PES design (Pascual et al. 2010)

97. Local perspectives on factors contributing to poverty (1)

98. Local perspectives on factors contributing to poverty (2)

99. Local perspective of constraints at each RES development stage

100. Expected environmental service rewards by locals (1) 33

101. Expected environmental service rewards by locals (2)

102. Assessment of people’s perspectives on factors contributing to their poverty It portrays social, economic and institutional dimensions Important aspect of pro-poor RES design is to identify rewards that match with people’s needs and expectations Rewards in the forms of human capital, social capital and physical capital (non-financial incentives) – are very often the most preferred and possible types of rewards Higher levels of social cohesion and trust within the community and its external linkages  lower transaction costs. Considering constraints in designing the RES at community level.

103. 4 Reducing discrepancies and improving synergies of ecological knowledge of all actors in PES balance efficiency and fairness of a PES scheme.

104. Feedback loop influencing real drivers of behavioural and land practice changes adapted from Jeanes et al. (2006)

105. Application of multiple knowledge system

106. Application of multiple knowledge system

107. Application of multiple knowledge system

108. Location of RHA sites in Indonesia

110. Forest: 15%

111. Imperata grassland: 17%

112. Issue: water supply for HEPBukittinggi Hydro-Electric Power (HEP) Company Ombilin River Paninggahan Padang City Solok City 17

113. Perceived watershed issues and solution Reforestation of critical land will not be enough to increase water yield & may actually reduce water yield due to increase in evapotranspiration Climatic variation influences the performance of PLTA more than land use change Reduction of water quality will also influence the performance of PLTA (euthrophication) Disappearance of ‘ikan bilih’ due to decreasing water quality and overfishing

117. Constraints in implementation of multiple knowledge Strategic use of information. Intermediary may encountered situation where ‘disclosure ‘ of information is desirable to avoid reduced motivation from buyer. Vested interest of donors and implementing agencies “starting with easy win rather than most urgent issues’ Incompatible scale betwenquanatifiable ES delivery and investement in establishing ES. Integration of perceptions and knowledge of stakeholders allow the development of effective and sustainable RWS scheme by providing information on what ES can be generated and how to achieve it (at various scales).

120. Potential mechanisms for reward transfer in near future

121. 55,000 ha sub-district coinciding with Way Besai upper watershed

122. About 40% protection forest and 10% national park

123. 2003: 82,453 people

124. Density: 150 people/km 2

125. Coffee cultivations: monoculture and multistrata

126. Community as ‘land managers’

128. Conservation Contract

129. Design of Procurement Auction

130. Supply curve resulting from reverse auction Jack, Leimona and Ferraro (2008)

131. Results Total participants from 2 villages: 82 farmers bidding on 70 hectares Participants received contracts for soil conservation: 34 farmers on 25 hectares Average price of contract: USD 171.70 per hectare yearly labor requirements of contract based on wages approximately USD 300 Past investment for soil conservation activities from survey USD 225

132. Final auction outcomes from 2 pilot sites

133. Average village compliance within each site measured during the middle and at the end of the contract term

134. Farmers’ understanding of auction design

135. Farmers’ understanding of auction design

136. Perspective of non-contracted and contracted farmers on social impacts

137. Perspective on environmental impacts from non-contracted and contracted farmers Note: results from 2-sided Fisher’s exact test are in parenthesis. The others are calculated from 1-sided Fisher’s exact test. For the frequency column, proportion is in parenthesis

138. Can it work in a rural context of development countries? The auction for the PES programme in Indonesia was designed using a uniform price rule for fairness reasons. uniform pricing However, uniform pricing is relatively less cost-effective compared to the discriminative price rule. The auction was a multiple round consisting of eight rounds with the last binding round. Farmers learned from the rounds of the auction. However, the announced last round may introduce forms of strategic behaviour. By announcing the last round, the benefits from farmers’ learning on the previous round and the advantages of a one-shot auction for the last round were combined.

139. Discussion What are factors induced a high accomplishment rate? The rate of accomplishment at the final monitoring was moderate. lack of leadership and coordination among farmer group members, difficulty in finding grass seedlings to accomplish the contract, and coincidence with coffee harvesting time. In this specific case, private contract tends to be more successful compared to collective contract when leadership is lacking or “champion” among the community members does not exist. Institutional aspects and contract flexibility might influence the accomplishment of conservation efforts. Analysis showed that there were no significant differences in level of understanding, complexity, and competitiveness and conservation awareness between compliant and non‑compliant farmers.

140. A limitation of this study is that all units of the pilot site were treated as homogeneous, with respect to their contribution to erosion and downstream sedimentation. For a larger scale allocation auction, modifications such as using supply curve information resulting from this procurement auction would be more appropriate. a reasonable platform for designing a scaled up fixed payment scheme, including differential rates and eligibility rules necessary for targeting participants. How to make it work?

142. In this case, the challenge was to design and administer a fair auction for farmers with low formal education, prone to social conflicts, and influenced by power structures within their community. How to make it work?

143. 6 PES schemes give local communities access to various types of capitals

144. The sample of FGD participants

145. The livelihood issues discussed in focus groups

146. The stakeholders involved in the PES scheme

147. The PES scheme relationship and flows of services Legend: FKDC = Forum Komunikasi DAS Cidanau (Communication Forum of Cidanau Watershed); PDAM = state-owned drinking water company; PLN = state-owned electricity company. adapted from Budhi et al. (2008)

148. Actual allocation of revenues by the FKDC in the first four years

149. Household income sources (%)

150. Type of knowledge/ capacity/skills gained by participants and non-participants after the PES implementation

151. Trust among internal and external stakeholders

153. The Cidanau PES scheme has impacted the livelihood of PES participants and non-participants.

154. Benefits were mostly non-financial: expanded social networks with external stakeholders; knowledge and capacity of the community; and small-scale public infrastructure investments.

155. Direct financial benefits were limited

157. Main Findings (2) A competitive market-based procurement auction enhances efficiency of contract allocation but it needs refining for capturing real opportunity costs and co-benefits of participating farmers. A sustainable livelihood framework enables broader analysis of local perspectives by encompassing various types of capitals

158. Hi Lei, I just have time to read your chapters seriously. hehe... I just have a comment on your introduction. It is the first sentence on the second page of your introduction. To the best on my knowledge in economics, we can achieve the efficiency without fairness. Your sentence "efficiency cannot be achieved without fairness and social dimensions of PES firstly" might not be true, at least in my knowledge in Economics :-) but you may mean something I don't know.

159. Truth is the most valuable thing we have. Let us economize it (Mark Twain)

160. Thank You More information about RUPES RUPES Program Beria Leimona (LBeria@cgiar.org) C/o World Agroforestry Centre PO Box 161, Bogor, 16001, INDONESIA Tel: +62 251 8625415 FAX: +62 251 8625416 Email: RUPES@cgiar.org http://www.worldagroforestrycentre.org/sea/Networks/RUPES