Discussion: Some Insights for Designing PES

Evidence from the case studies reviewed here suggests a number of factors that have implications for the adoption of PES, and the impact this may have on livelihoods, as well as the ultimate effectiveness of the mechanism in protecting ecosystem services. The findings of this review could be organized into four broad categories: property rights and tenure security, community characteristics and the role of collective action, transaction costs, and the role that information and communication in PES schemes play in the likelihood of them being adopted by local landowners. In the following section we will elaborate these findings under these four headings. Although it is still too early to fully evaluate these PES schemes as they are at an early stage of implementation and lessons are still more suggestive than conclusive, we hope lessons from this review will offer some fundamentals for the next generation of PES schemes to becoming a success.

3.1 Institutional Arrangements

Secure property rights arrangements have been considered prerequisite in the PES literature (Grieg-Grann and Bann 2003). Most ecosystem services are public goods because of the difficulty of excluding anyone from enjoying these services and also the inability of management institutions to limit the benefits to only those who bear the cost of maintaining these services. This non-excludability and non-rivalry in consumption means there can be failure in the markets and free riding. As PES schemes usually require a significant upfront investment for land-use modifications or improvements, insecure land tenure could discourage farmers from making long-term investment decisions. This is particularly true for poor squatter communities in rural areas where usufruct rights held by the communities are vulnerable to development interventions. Past experience shows that countries that manage to clarify and strengthen land tenure are most likely to succeed in implementing PES schemes (Leimona and Lee 2008). The case studies support these prepositions and suggest that launching large-scale PES schemes cannot be sustainable without addressing land tenure issues, an urgent necessity for generalizing conservation contracts (Karsenty 2008).

Importance of tenure security, from identifying service suppliers to determining beneficiaries and encouraging farmers to invest in land conservation decisions, strongly emerged as a stimulus for the environmental service markets. For instance, even with the temporary written rules (a sense of tenure security), communities in the Sumber Jaya province of Indonesia were willing to maintain watershed service provisions for downstream users. Further, the recognition of informal institutions such as rights of a local community to declare the village land where agricultural activities have been absent for more than ten years as common property facilitates the adoption of the PES scheme. Bungo's case shows congruence between locally crafted rules and the state's rules, an important factor that helps promote institutional efficacy with regard to forest conservation. A number of locally practiced land-use norms such as tanah batin (lands assigned for upland paddies where a number of ritual activities could be performed) and nagari (a complex social system governing land use) were instrumental in Singkarak for executing a carbon sequestration project. The notion of common property approaches to land is widely held in West Sumatra which governs land use, fishing, and forests uses. These traditional institutions acknowledge self-ownership of land by both the state and societal rules which, to some extent, facilitate the PES scheme in the area. The importance of tenure security also came up strongly in the case study of the Kulekhani watershed in Nepal. It demonstrates that the implementation of the PES scheme was possible due to the policy of community-based forestry adopted by the government through the enactment of the Forest Act in 1993. In contrast, the lack of private ownership of land was identified as a factor responsible for the relatively lesser degree of success in adopting a PES scheme in Viet Nam.

A large body of literature recognizes informal institutions as a key determinant in understanding rural development outcomes (Scoones 1998; Mehta et al. 1999). This notion appears to be consistent with the outcomes of PES schemes in Indonesia. For example, in Sumber Jaya, two informal institutions, gotong-royong (labor sharing on common property) and arisan (capital sharing among community members), were instrumental in facilitating the adoption of local PES schemes. This was also the case in Bungo where pelerin (labor sharing for private land) and berselang (labor sharing for paddy planting and harvesting) systems were instrumental in uniting local communities for the carbon sequestration project. These informal institutions help increase local participation and adoption of conservation measures as well as reduce the costs of transactions. This review of the case studies confirms that social relationships and networks are critical to uniting communities, and that these institutions promote cooperation, share resources and risks, and facilitate the adoption of PES schemes.

In some cases, PES schemes help strengthen land rights (e.g., temporary rights established through frontier activities) where tenure security is very informal. For example, in the Bungo watershed in Indonesia, institutions supporting biodiversity services were achieved through acquiring land-use rights by forest frontier activities. This includes the planting of cash crops such as rubber, cinnamon, and other tree crops. Plantation of these cash crops facilitates the adoption of PES schemes, which in turn, provide a sufficient basis for farmers to claim permanent land rights in areas where PES schemes are functional.

Enabling policy environment appeared to be crucial for both tenure security and mobilizing resources for PES schemes. The case studies show that major support for PES usually come from dynamic and innovative leaders at both local and national levels who can act as champions for innovative approaches. For example, political willingness and support from the local government was a success factor in the Maasin watershed in the Philippines where the provincial governor and municipal mayor were champions of PES, motivating local stakeholders and mobilizing finance for conservation efforts. Further, in the NSMNP watershed in the Philippines local government contributed to the PES scheme directly. This support was not only crucial to consolidate local efforts towards PES, but also instrumental in designing acceptable watershed protection fees to be paid by watershed service beneficiaries in the area. Even though government entities would not assume the role of suppliers and buyers of all environmental services, participation in PES could be enhanced through enabling policy support, and financial and technical assistance. The role of national governments will be more relevant when it comes to creating the necessary legal framework for PES schemes, and if sufficient governmental institutions are present, property rights can be clearly assigned and enforced (Huberman and Leippraud 2006). Equally important is cooperation between other relevant institutions towards the shared objectives of enhancing environmental service markets and conservation. Since partnerships between private and civil society institutions are relatively uncommon (Agrawal 2008), a more coordinated and integrated approach helps efforts toward addressing poverty-related environmental degradation and comprehensive natural resource management.

Equity has to be addressed especially in the adoption of a proactive approach in areas such as distribution of entitlements, designing payment schemes, and crafting institutions for resource use by reflecting the welfare of those directly affected by the scheme. The Viet Nam case study accentuates the importance of transparency and equity in benefit sharing. The case study of the Nha Trang Bay marine protected area unequivocally pointed out the importance of clear mechanisms for allocating funds to legitimate stakeholders. Researchers have emphasized the importance of accurate information, fair institutional mechanisms, and appropriate incentives for watershed service markets (Asquith, Vargas, and Wunder 2008).

The success of the PES scheme also depends on how property rights are assigned. The issue of property rights could be determinant in ensuring equitable participation, potentially excluding landowners who do not hold proper land titles (Huberman and Leippraud 2006). For instance, implementation of PES schemes could alter the existing system of resource use as enjoyed by poorer households under the informal and customary institutional arrangements. Any alteration of resource use due to the definition or redefinition of existing property rights could have negative consequences on local livelihoods. For example, an alteration could cause concern to the landless, who do not have formal rights to land despite their cultural and spiritual dependency on ecological services. In such a situation, resistance to PES could emerge if these informal rights are not considered. Evaluating the social impacts of PES schemes is thus important for understanding the possible social consequences of PES schemes on different stakeholders or policy changes with regard to resource management. India's experience shows that formalization of property rights through a market-based mechanism for watershed services may hurt the poor where rights to ground water are ill-defined (Kerr 2002).

3.2 Transaction Costs

Consistent with theory, this review posits that high transaction costs could be a barrier for participation because they create disincentives for market exchange. Transaction costs in PES schemes refer to those costs associated with negotiation and enforcement of the scheme. Negotiation costs include time and effort in organizing buyers and sellers, assessment of current land uses and land-use practices, establishing and designing contracts, and preparing documentations as well as the costs of making implementation decisions. The transaction costs of monitoring include costs of certification, monitoring of contractual obligations of buyers and sellers, and among groups of buyers and sellers (Swallow, Meinzen-Dick, and van Noordwijk 2005; Adhikari and Lovett 2006). Higher transaction costs involved in PES schemes have implications on cost-efficiency, effectiveness, and equity involved in developing PES schemes as well as sustainability in the long run (Mayrand and Paquin 2004). Findings from this study confirmed the earlier arguments that high transaction costs (e.g., of information, of defining property rights, and of drawing up legal contracts) could create barriers for small holder's participation in environmental service markets (Asia-Pacific Forestry Commission 2006).

The role of intermediary organizations appeared to be vital to link service producers and buyers as well as reducing the costs of transaction. Past evidence shows that awareness of environmental services and even willingness to pay for environmental services rose through the concerted efforts of environmental NGOs (Leimona and Lee 2008). These organizations can mobilize and assist communities in crafting rules and regulations at the local level. The role of NGOs was apparent in many cases, especially in raising awareness among stakeholders. In the Maasin watershed in the Philippines, NGOs helped in community mobilization, organization build up, data collection, conflict resolution, and execution of environmental activities compatible with the PES scheme in the watershed. In the Kulekhani watershed in Nepal, the presence of credible civil society organizations, such as community forestry user groups, boosted the adoption of PES schemes through community mobilization, advocacy, and raising awareness. Institutional access was relatively easy in this area because of the presence of mature community-based organizations. Local intermediary organizations could facilitate negotiation and coordinate activities to help reduce the costs of negotiation, monitoring, and implementation.

3.3 Household Characteristics and the Role of Collective Action

The case studies highlighted a number of socio-economic factors that have important policy implications for the adoption of PES schemes. Household characteristics such as education, income, labor, skills, and technical capacity are central to implementing PES schemes, as demonstrated in the Viet Nam study. Technical capacity of individual farmers was shown to be crucial, as households with minimum levels of education were experiencing difficulty adapting to a new land-use system. These findings are similar to those of previous studies which found family labor availability to be a key factor in the participation of households in land-use modification and technology adoption decisions (Thatcher, Lee, and Schelhas 1997). While the availability of family labor was positively associated with the adoption of PES schemes, education of the household head significantly influenced the decision to participate. The larger the land holding was, the greater the chance of its members participating in PES schemes. This was due to the fact that small landholders might not be able to allocate land for PES schemes without jeopardizing their food security.

Another finding of this review was that PES schemes can be viable where participants are socio-economically better off and landholders are well structured. This is consistent with previous arguments that PES schemes are likely to be more functional where land users are well organized (Mayrand and Paquin 2004). This is due to the fact that the decision-making procedure becomes more complicated and costly with increasing group size since the required time and effort appear to be rapidly increasing functions of the size of the group.

Profitability of adoption or modification of existing land uses emerged as an important concern for the poor and smallholders. Acceptability of PES schemes could be low if payments were not sufficient to meet costs associated with socially and environmentally acceptable land-use practices (Pagiola 2002). This could happen as a result of a mismatch between the net value of the current payment and net costs for adopting the new technology (e.g., land-use practices) and forgone income from existing land uses. PES schemes must be able to meet the opportunity costs of land if sustainability conditions are to be satisfied. Adequate socio-economic incentives for local people help shift farmers' behavior towards more environmentally friendly activities, even though this sort of land use provides little benefit in the short run. The PRC case study emphasized the role of off-farm activities in diverting people from traditional agricultural practices, but that alone might not bring the desired outcome unless it is supported by capacity-building measures (e.g., education and skills) for participating households.

The India case study showed the importance of participation of broader sections of society, especially the gender dimension, for adopting market-based approaches to watershed services. Recognition of the success of women-headed households in implementing watershed conservation programs prompted intense consultations with women in Kuhan, leading to a timely and much-needed agreement. This was not the case in Suan, where the objective of shifting grazing pressure from the catchment resulted in failure due to the inability of the management institution to consider needs of stakeholders (e.g., the Bhodi micro-catchment). Another imperative was maintaining transparency in the decision-making process for the voluntary market for watershed services. Once again, democratically elected local leaders were successful in securing confidence among users in Kuhan.

Scholars have pointed out the significant association between social capital and both transaction costs and organizational outcomes (Fussell et al. 2006). Social capital also helps overcome factors such as group heterogeneity and controls deviant behaviors. The lack of effort towards building institutions at the community level appears to be critical to the success of SLCP in the PRC. Compared to other parts of the country, building strong farmers' organizations was considered a luxury in the Ningxia province. The absence of a strong community-based organization resulted in weak social networks and lack of community capacity to spread risks by pooling community resources in times of natural disaster and economic hardship. The Ningxia case study strongly considered social capital to be an important ingredient for PES schemes and for making the conservation program sustainable. This case highlighted that mobilizing collective community strength, enhancing institutional access to information and credit, and addressing inefficiencies of government institutions were crucial if a strong case was to be made for farmer adoption of the program. Building local institutional capacity for implementing program activities, enhancing their competence to influence decision-making policy, and rationalizing local tenure systems were central to inducing a change in conservation practices aimed at improving the quality of environmental services.

Technology adoption may be hindered when returns are risky and insurance or other financial markets are imperfect (Giné and Yang in press). Scholars have highlighted income and debt as factors influencing household decisions related to adoption of or participation in PES schemes (Sureshwaran, Londhe, and Frazier 1996). Because access to credit is very limited in the rural areas of developing countries, micro-credit programs could facilitate poorer household participation in PES schemes. Support for PES should therefore include credit service and technical advice for enhancing efforts for the provisioning of environmental services. The Viet Nam case study illustrates a strong correlation between household debt and adoption of PES as the probability of adoption was negatively correlated with the amount of outstanding household loans. Most land-use modifications in PES require upfront investments which could be a barrier for participation. Moreover, it became clear that debt burden may force households to harvest plantation forests and this could undermine the optimal level of watershed services. Micro-credit facilitates for potential farmers may encourage the adoption of PES in such situations. The Australia case also addressed the issue of upfront investments for farmer decisions towards land-use modification.

Collective action towards PES is envisaged as an efficient solution for the provisioning of environmental services such as biodiversity conservation and watershed protection. Swallow, Meinzen-Dick, and van Noordwijk (2005) supported this proposition because community-based approaches help to minimize the costs of transaction. Community-based approaches help reduce the costs of transactions, particularly those related to the monitoring and certification of PES schemes. This is because of the community's built-in incentive and idiosyncratic knowledge that can be used to make resource-specific decisions. The cases from Indonesia, the Philippines, and the PRC reinforce the notion that collective action towards PES is central to reducing the costs of transaction. It helps farmers to coordinate spatial coverage of PES schemes with larger geographical scope such as biodiversity conservation and watershed protection. Collective choice rules crafted by local communities retain the potential of reducing the costs of monitoring and certification as these institutions amplify individual's compliance towards management decisions.

Few local contextual factors appear to be relevant for the uptake, adoption, and operation of PES and also their outcomes. In the Maasin watershed, the proximity of the watershed to beneficiaries was a real stimulator for the market for watershed services. The watershed is very close to the urban area so any changes in the quality of watershed services could be immediately realized by the nearby population, particularly quality and quantity of drinking water supply. Another contextual factor was the level of community preparedness for implementing market mechanisms to environmental services. For example, communities that already have good social infrastructure in place (e.g., mature community organizations) seemed to be more efficient in implementing PES schemes than communities without them.

3.4 Information and Communications

There is significant consensus in the case studies that participation in environmental service markets can be realized and enhanced through maximum dissemination of information. Through various dialog and consultative processes, households and communities could be motivated to participate. The key purpose for consultation with strategic stakeholders would be raising awareness on PES as well as facilitating stakeholders' buy-in to the importance of the PES concept. Advocacy, through media mobilization, could also facilitate the awarenessraising process and highlight the demand for increased information on the subject. It is therefore important to galvanize proposed PES schemes with awareness-raising efforts that illustrate how PES options contribute to mobilizing local resources, poverty reduction, and environmental improvement. In the Maasin watershed, approximately 70 information centers provided information on watershed management and also supported environmental movements. In the Kanlaon area, efforts directed towards educating people, exchange of information, and better communication were crucial for the project. The watershed management council of MKNP was a strong player which facilitated the adoption of a watershed management strategy with a strong component of conservation education. In Australia, landowners were not aware of the implications of different land management practices in reducing recharge to saline aquifers. Although scientific uncertainties associated with ground water dynamics, salt sources, and concentrations were overriding concerns, even general knowledge about ecosystem services production processes such as changes in vegetation cover and salinity outcomes could address impediments to creating marketbased instruments for ecosystem services.

This review finds that PES design should be influenced by well-informed technical studies. Quite often, there is a great degree of uncertainty, as well as a disconnect between conservation activities undertaken, and associated ecological outcomes. Willingness to pay for environmental services often increases if there is an established link between the upstream land-use practices and their corresponding effects on downstream environmental outcomes. The Nepal case study shows the importance of a good technical study in order to make the downstream beneficiaries confident about the relationship between increased conservation activities in the upper watershed and enhanced supply of downstream environmental services (i.e., water quality and quantity). The Viet Nam case study also put emphasis on carefully designed cost-benefit analysis of watershed degradation to pursue both buyers and sellers. The Australia case study further stressed an established link between land management practices in upper watersheds and downstream environmental outcomes. The India case study underscores the importance of credible scientific information to assess problems, find areas of intervention, and build consensus among stakeholders to modify land-use changes and design the payment system.

Well-informed hydrological and economic valuation studies are instrumental for PES schemes. An effort to put monetary value on environmental services is not straightforward because of the difficulty of measuring public goods and assigning a proper value to them (e.g., value of wetlands such as flood control and pollution reduction), but careful choice of valuation methods with insights from local use of resources could help design of viable markets for environmental services.

This review suggests a need to engage and build support and partnerships at different levels for enabling legal and environmental policy. This is essential to help build constituency for a broad-based acceptance and interest in PES, gain legitimacy from both buyers and sellers, and support for developing social infrastructures.

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