1

Payment for Ecosystem Services in Nepal Prospect, Practice and Process

Supported by:

2

Technical Advisor Team of IUCN Nepal:Rajendra Khanal Sony BaralAnu AdhikariYam Bahadur Malla

Consultant:Bijendra Basnyat

The designation of geographical entities in this book, and the presentation of the material, do not imply the expression of any opinion whatsoever on the part of IUCN concerning the legal status of any country, territory, or area, or of its or concerning the delimitation of its frontiers or boundaries.

The views expressed in this publication do not necessarily reflect those of IUCN.

Published by: IUCN Nepal, Kupondole, Lalitpur, Nepal

Language editing: Hermes Huang and Amit Poudyal

Copyright: © December, 2013 International Union for Conservation of Nature and Natural Resources

Reproduction of this publication for educational or other non-commercial purposes is authorized without prior written permission from the copyright holder provided the source is fully acknowledged.

Reproduction of this publication for resale or other commercial purposes is prohibited without prior written permission of the copyright holder.

Layout by: Sunil Khadgi

Available from:IUCN NepalKupondole, LalitpurP.O. Box 3923, Kathmandu, NepalTel: (977-1) 5528781Fax: (977-1) 5536786E-mail: info-np@iucn.orgWebsite: www.iucn.org/nepal

This Report has been published under ‘Ecosystem-based Adaptation in Mountain Ecosyestem’ Project, jointly implemented by International Union for Conservation of Nature (IUCN), United Nations Development Programme (UNDP) and United Nations Environment Programme (UNEP) with financial support from Germany’s Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU).

3

TABLE OF CONTENT

1. UNDERSTANDING PAYMENT FOR ECOSYSTEM SERVICES 1

Genesis 1

Definition 2

Key Elements 2

Ecosystem Services and Payment 3

2. PAYMENT FOR ECOSYSTEM SERVICES IN NEPAL 5

Policy, Legislative and Institutional Arrangements 5

PES Mechanism, Practices and Lessons 6

Opportunities and Challenges 9

3. OPERATIONALIZING PAYMENT FOR ECOYSTEM SERVICES 11

Overview 11

Guiding Principles 11

Operational Framework 12

Sequential Steps 13

4. WAY FORWARD 15

5. REFERENCES 16

4

ACRONYMS & ABBREVIATIONSICIMOD : International Centre for Integrated Mountain DevelopmentIUCN : International Union for Conservation of NatureMEA : Millennium Ecosystem Assessment MFSC : Ministry of Forest and Soil ConservationMSFP : Multi-Stakeholder Forestry ProgrammeNARMA : NARMA Consultancy Pvt. Ltd.PES : Payment for Ecosystem ServicesREDD : Reducing Emissions from Deforestation and Forest DegradationUNDP : United Nations Development ProgrammeUNEP : United Nations Environment ProgrammeWTLCP : Western Terai Landscape Complex Project

5

OVERVIEW

Payment for ecosystem services (PES) has received global attention to provide incentives for local actors for sustained supply

of ecosystem services and adoption of sustainable management practices. It is also seen as an instrument for promoting conservation and addressing rural poverty. Different localized PES schemes are already being practiced in Nepal and are mostly focused on use regulations but these schemes grossly ignore the key elements of PES. There are always debates and dilemmas among policy makers, planners and implementers regarding whether a practice is PES or PES like; compensation or payment of services; bundle of services or single service; maintenance or additionality of services, payment based on economic/use value or willingness to pay or accept etc. Recognizing this, this report intends to develop a clear conceptual understanding of PES based on review analysis of PES practices, which have been adopted in Nepal and elsewhere.

The main purpose of this report is to explore existing practices and prospects of PES in Nepal and develop sequential steps for implementing PES at the local level. This mechanism is more applicable for implementing localized PES where both demand and supply of services exists locally.

The report argues that localized PES should be promoted focusing on bundle of services for changing behaviours of stakeholders (both the buyers and sellers) rather than generating money. Likewise, emphasis should also be given on maintenance and enhancement of services. Policy and institutional mechanism should be developed based on lessons of PES pilots which are being conducted by different conservation partners and programmes/projects.

The report is targeted at conservation and development decision-makers, planners and managers who are working towards institutionalizing PES in Nepal.

Explore existing practice and prospects of PES in Nepal and develop sequential process for implementing PES at the local level.

Localized PES should be promoted focusing on bundle of services for changing behaviors of stakeholders

6

1

Genesis: Ecosystems provide a wide range of direct and indirect services to society. The Millennium Ecosystem Assessment

(MEA), 2005 has identified 24 broad categories of ecosystem services such as food, fibers, climate regulation, tourism, soil conservation, landscape conservation and beauty etc. Economic and market-based instruments such as taxes, subsidies, use fees, penalties and fines etc were institutionalized several decades ago for ecosystem conservation based on the Polluter-Pays Principle. Most of these try to prevent negative ecosystem externalities (for example, pollution or habitat destruction) but were less effective regarding sustained supply of ecosystem services and growing awareness among resource managers. More than 60 to 70 percent of the world’s ecosystem services are deteriorating, which are mostly affecting people dependent on these services (MEA, 2005). Unsustainable management and degradation of ecosystem services can be attributed to demographic, economic and climate change impacts in conjuction with inadequate investment into the conservation of these services.

Growing scarcity of ecosystem services and less interest in conservation led to a flurry of conservation innovations over the past decade in the form of payment schemes (Wunder, 2007). Instruments of this kind have been linked explicitly to the provision of specific ecosystem services through the concept of Payments for Ecosystem Services (PES) (Ferraro and Kiss, 2002; Wunder, 2007). Over the last decade, PES became very valuable transfer mechanisms to internalize positive environmental externalities, and generate revenues for sustainable development. PES have gained momentum over the last few decades, mainly because of:

• growing realization regarding the need for ecosystem conservation, including wise use of resources;

PES became very valuable transfer mechanisms to internalize positive environmental externalities and generate revenues for sustainable development

1 UNDERSTANDING PAYMENT FOR ECOSYSTEM SERVICES

2

• high economic demand for ecosystem service and provision of services at lower cost;

• generating sustainable and new sources of conservation finance;• increasing interest of corporate or private sector actors in ecosystem

investment, including avoiding lost of outputs and reduction of repair and maintenance cost; and

• changes in resource governance practices and tenure arrangements.

Definition: PES is a method of internalizing the positive externalities associated with a given ecosystem. PES operates according to the

logic of the ‘free market,’ which says that if ecosystem services are given economic values and assigned property rights, the rational behavior of buyers and sellers in the market environment will produce efficient ecosystem outcomes (Engel et al. 2008, Wunder 2005). The provider, often a resource manager, of a service is paid to maintain or enhance that service.

PES involves transfer of financial resources from beneficiaries of certain environmental services to those who provide these services or are fiduciaries of environmental resources (Mayrand and Paquin, 2004). The concept revolves around financial support schemes that aim to conserve ecosystem services, by providing an economic incentive to those who contribute to conservation of specific resources, which is done mainly by managing ecosystem services to adopt land use practices and by encouraging the protection and conservation of ecosystems (Khanal and Poudel, 2012).

Guided by a different definition, the study defines PES in context of Nepal as "a mechanism of providing an economic incentive from benefit recipents

to those who provide services to ensure sustained supply of services".

Key elements: PES is an innovative market-based

mechanism, which stands on twin principles: those who benefit from environmental services should pay to those who provide environmental services (World Bank, 2007).

PES is a mechanism of providing

an economic incentive from

benefit recipents to those who

provide services for sustained

supply of service

3

According to Wunder (2005), PES scheme should have at-least five following basic components or elements, which includes: • a voluntary transaction;• a well defined ecosystem service or land use option likely to secure

that service;• at least one buyer of services;• at least one provider or seller of services; and• if and only if, the service provider secures service provision as a

conditionality.

PES schemes are either area-based or product-based. Area-based schemes provide payments contingent upon adoption and maintenance of a particular type of land use whereas in the product-base schemes consumers pay a ‘green premium,’ in addition to the market price of a product or service in order to ensure an environmentally friendly production process.

Ecosystem Services and Payment: Over the last decade, use of PES schemes has gained popularity with focus on watersheds,

biodiversity, carbon sequestration and aesthetic and landscape beauty. There are more than 300 programmes worldwide with the broad estimated global value of USD 8.2 billion (Blackman and Woodward, 2010). PES are estimated to channel over USD 6.53 billion annually by national programmes in China, Costa Rica, Mexico, the United Kingdom and the United States alone (OECD, 2010). The payment schemes are increasing at 10-20% per year (Karousakis, 2010).

Table 1 below highlights ecosystem services and payment mechanisms which are being practiced internationally. In all of the schemes, the rationale is to provide incentives and benefits to people to utilize ecosystem services for the benefit of the wider population (Karky and Joshi, 2009). Hence, those who provide ecosystem services should be directly compensated by those who receive the services.

A PES scheme should have • a buyer• a seller• well defined

service• contractual

obligation

4

Major ecosystem services

Scheme type Focus Market Payment

mechanism

Watershed protection (Irrigation, drinking water, hydropower,

flood and sedimentation control)

Area based, water-shed

level

Financing land use that generates watershed services

Mostly local Cooperative relationship between sellers

and buyers

Use feeAdditional charge

Carbon sequestration Area based, forests

Financing based on carbon credits,

sequestration, Reductions and carbon off-sets

Mostly global market, & International buyers Highly competitive and developed

International market price

Biodiversity Conservation

Area based, Product based

Land uses that protect species, ecosystems or genetic diversity

Local, national and international scale

Pharmaceutical companies, conservation agencies

Markets are nascent and experimental

Conservation grants & concessionsConservation

finance Incentives Premium pricing

License fee

Recreational use and contribution to scenic

beauty

Area based, Product based

Promoting tourism on protected areas or natural or cultural

heritage

Local, national and international scale Immature

& less willingness to pay

Use feeEntrance feeService taxes

Source: Modified from Mayrand and Paquin, 2004

Table 1: Ecosystem services and payment mechanism

5

Policy, Legislative and Institutional Arrangements: Laws and policies are important drivers influencing the success of PES

schemes. There is no specific policy or legislation in Nepal, which support or facilitate the institutionalization of PES. Nevertheless, recent policy reforms specifically national development periodic plan identified PES as one of the potential market based instruments for generating conservation finance. The Three Year Plan (2010/11-2012/13) and the Thirteenth Plan Approach Paper (2012/13-2013/14) have accorded high priority for generating sustainable conservation finance through the selling of ecosystem services such as tourism, carbon and water resources. Apart from this, Ministry of Forests and Soil Conservation (MFSC) formulated the guidelines to compel hydro-power companies operating inside protected areas to deposit 10 percent of their royalty fees towards environment conservation and community development. Likewise, MFSC also established a Forest Sector Development Fund from the commercial sale of forest products from national and private forests. Regardless of the debate on whether these mechanisms can truly be considered PES or not, most of these mechanisms were not fully operational. Contradictions and confusions with the existing legislation and less interest from the government on timely amendment or formulation of new policies are main reasons for the poor implementation of these innovative financing practices.

There are few environmental related legislation such as the Forest Act (1993), Water Resources Act (1992), National Parks and Wildlife Conservation Act (1973), Environment Protection Act (1996) and, Soil and Watershed Conservation Act (1982). All these acts are regulatory instruments directing the implementation of specific activities and delegate power to stop activities that have adverse effects on the environment. These acts follow the polluter pays principle rather than PES approach.

Government had accorded high priority for generating sustainable conservation finance through selling of ecosystem services

2 PAYMENT FOR ECOSYSTEM SERVICES IN NEPAL

6

Despite this, the Forest Act and the National Park and Wildlife Conservation Act provide ample opportunities for the institutionalization of PES. The Forest Act recognized Forest Users Group as autonomous institutions and delegated management responsibility including sustainable use. Likewise, tourism entry fees, hunting/gaming license fee are being charged from National Parks and Wildlife Conservation Act. These act support for institutionalizing PES in Nepal, and specific laws may not be needed until and unless the communities have use rights. This has been quite evident from local level piloting in Nepal as well such as Kulekhani hydropower. However, institutional mechanism are yet to be developed and established. Establishment of REDD cell within the MFSC can be seen as one step ahead. Supportive policy and institutional environment is crucial for the success PES. Hence, PES policy and operational guideline with appropriate institutional mechanism should be developed and strengthened.

PES mechanism, practices and lessons: Some form of payment mechanism for use of ecosystem services, specially on drinking water,

irrigation and tourism already exists in Nepal. Local communities are making payments in the form of cash or kind for the salaries of watchers/operators, repair and maintenances. However, it lacks the key elements of PES, especially in case of service providers not receiving payment for management of services. Most of the payments are made because of mandatory requirements, but not for sustained supply of services. Hence, PES differs from community based conservation approaches in three respects: their focus on ecosystem services (the benefits provided by

ecosystems), their use of positive financial incentives to achieve the production of additional services, and the conditionality of those incentives on some measure of performance (Arriagada and Perrings, 2009). Sharing of protected area income between park owner and local communities is one of the examples of PES like mechanism. Income received from protected area in terms of entry free and its utilization for conservation and management of protected area or hunting and

PES policy, operational

guideline along with

appropriate institutional mechanism

should be developed and

strengthened

7

license fee obtained from game hunting are some form of PES practices, which are operational in protected area of Nepal. However, it again does not comply with the fundamental principles of PES.

Nepal has a very recent history of PES implementation. PES piloting first started nearly a decade ago (2006) by International Union for Conservation of Nature (IUCN) Nepal at Shivapuri National Park focusing on investigating delivery of ecosystem economic benefits for upland livelihoods and downstream water resources. Afterwards, it started gaining momentum in Nepal as a efforts of conservation partners and international agencies. Most popular PES scheme is at Kulekhani watershed area, which focused on promoting sustainable natural resource management and alleviating poverty among poor upland communities through transfer payment on use of environment services. Nearly a dozen of PES schemes are being piloted or implemented in Nepal, focusing on watershed services, especially on drinking water.

Apart from above, a few schemes are at preparatory stage or in process of implementation, focusing on watershed services at Shivapuri National Park and Sardu watershed with support from International Center for Integrated Mountain Development (ICIMOD). World Wildlife Fund (WWF) is working in Phewa watershed for establishing PES mechanism. Likewise, Multi-Stakeholder Forestry Programme (MSFP) of government intends bring management of 100% of community managed forests, 50% of government managed forests and 50% of private managed forests under the PES mechanism (MSFP, 2011). MSFP is also supportingfor implementing PES at the local level. This shows high growth prospects of PES in Nepal.

PES has been able to create conservation awareness, change behaviour at local level but not been able to generate adequate conservation finance.

Most of PES schemes implemented in Nepal are localized, faciliated by intermediatory organizations, but do not comply with fundamental principle of PES.

8

Tabl

e 2:

PE

S s

chem

es im

plem

ente

d in

Nep

alEc

osys

tem

ser

vice

sYe

arLe

vel

Purp

ose

Selle

rsBu

yers

Paym

ent s

yste

mPa

ymen

t con

ditio

ns

Recr

eatio

nal

serv

ices

/ eco

-to

uris

m

1970

s on

war

ds

Prot

ecte

d ar

ea, h

erita

ge

site

sGe

nera

te re

venu

eGo

vern

men

t, co

mm

unity

Dom

estic

and

fo

reig

n to

uris

ts

Entra

nce

fee,

le

ase

fee,

lice

nse

fee

Use,

no

cont

ract

ual

oblig

atio

ns

Wat

er (S

hiva

puri

Natio

nal P

ark)

2006

Wat

ersh

edEc

onom

ic b

enefi

ts

Com

mun

ityDo

wn-

stre

am

user

s No

t defi

ned

-

Hydr

o-po

wer

(K

hule

khan

i w

ater

shed

) 20

06W

ater

shed

Im

prov

e la

nd u

se

prac

tice

Com

mun

ity

fore

st u

ser

grou

ps

Dist

rict

Deve

lopm

ent

Com

mitt

ee

Roya

lty s

harin

g

(10%

)

Not c

lear

ly

spec

ified

, no

cont

ract

ual

oblig

atio

ns

Wat

er q

ualit

y (R

upa

lake

, Kas

ki)

2006

Wat

ersh

edRe

duce

eu

troph

icat

ions

an

d se

dim

enta

tion

Upst

ream

co

mm

unity

Coop

erat

ive

Profi

t sha

ring

(10%

of a

mou

nt)

Not c

lear

ly

spec

ified

, no

cont

ract

ual

oblig

atio

ns

Carb

on fi

nanc

e (D

olak

ha &

Kav

re)

2009

Wat

ersh

edCa

rbon

sto

ck

impr

ovem

ent

Com

mun

ity

fore

st u

ser

grou

ps

Inte

rmed

iary

or

gani

zatio

n

(Pro

ject

) Ca

sh ,

gran

tsCa

rbon

sto

ck

impr

ovem

ent,

perfo

rman

ce b

ased

Drin

king

wat

er

(Sha

rdu

wat

ersh

ed,

Dhar

an)

2009

Wat

ersh

edSu

stai

n su

pply

of

serv

ice

Com

mun

ityLo

cal

gove

rnm

ent/

Mun

icip

laity

Trus

t fun

d es

tabl

ishe

d

Not c

lear

ly

spec

ified

, no

cont

ract

ual

oblig

atio

ns

Drin

king

wat

er

(Dhu

likhe

l)20

10W

ater

shed

Sust

ain

supp

ly o

f se

rvic

e

Loca

l go

vern

men

t/ co

mm

unity

Loca

l gov

ernm

ent

, uni

vers

ityCa

sh, fi

xed

amou

nt p

er y

ear

Cont

ract

ual

oblig

atio

ns &

cl

early

de

fined

Biod

iver

sity

Co

nser

vatio

n (K

aila

li &

Bar

dia)

2011

Land

scap

e Pa

ymen

t bas

ed

on c

onse

rvat

ion

outc

omes

Com

mun

ity

fore

st u

ser

grou

ps

Inte

rmed

iary

or

gani

zatio

n (P

roje

ct)

Cash

, gra

nts

Perfo

rman

ce b

ased

, no

con

tract

ual

oblig

atio

ns

Irrig

atio

n (K

anch

anpu

r)20

11Su

b-w

ater

shed

Volu

me

of w

ater

us

e

Com

mun

ity

fore

st u

ser

grou

ps

Irrig

atio

n us

er

grou

pCa

sh, R

s 50

per

ho

ur o

f wat

er u

seUs

e, c

ontra

ctua

l ob

ligat

ions

Land

slid

e co

ntro

l (K

aila

li)20

11Fo

rest

sRe

duce

ero

sion

an

d riv

er b

ank

cutti

ng

Com

mun

ity

fore

st u

ser

grou

psLo

cal g

over

nmen

t Ca

sh, R

s 10

000

for l

ands

lide

cont

rol

Prot

ectio

n,

cont

ract

ual

oblig

atio

ns

Sou

rce:

Mod

ified

from

WTL

CP

,201

2

9

Most of the above PES schemes are area based localized in scale focusing on watershed services such as drinking water, irrigation and landslide control. These schemes are promoted as self- organized private deals focusing on the relationship between buyers and sellers. In a few schemes, payments were made by intermediary organizations (carbon and conservation services), hence sustainability remains in questions. Payment schemes are at pilot scale, with limited geographical coverage and less involvement of government stakeholders. These schemes have been able to generate conservation awareness at the local level and generating part of some conservation finance. However, they have neither been able to generate adequate conservation finances to sustain services nor been able to influence on policy processes. Sustainability of payment including compliance of contractual obligations is very poor. The Government should play supportive roles in organizing private deals among the buyers and sellers by developing appropriate policy and procedures for ensuring sustainability of these initiatives.

Opportunities and challenges: Table 3 below presents opportunities and challenges for institutionalizing PES based on lessons learned

from several PES schemes which are being implemented in Nepal. PES is at an evolutionary stage in Nepal. The efforts have been largely confined on piloting and development of appropriate policy tools. Many of these schemes often lack key elements of the PES. Nevertheless, growing environmental awareness and high economic use value of ecosystem services provide opportunity for institutionalization. However, poor compliance of contractual obligations, limited number of buyers of services and less willingness to pay, free availability of services, poor conservation awareness, poor economic conditions of buyers and sellers are the main challenges.

The fund concept has been widely used, however, limited funds have been generated. Most have been utilized for the management or regulation of services. Absence of true economic valuation and poor cost and benefit analysis on designing and implementing schemes often possess challenge for making investments on conservation.

Growing environmental awareness and high economic use value of ecosystem services provides opportunity for implementing PES

10

Table 3: Opportunities and challengesOpportunities Challenges

• Growing environmental awareness among private sectors and civil society

• Management responsibility delegated to community institutions,

• Favorable policy environment, recent policies have prioritized securing sustainable conservation finance through market based instruments such as PES

• Piloting already started on localized scale, Knowledge and lessons learnt from existing practices & knowledge

• High economic use value of ecosystem services such as water and carbon

• Fund concept had already been institionalized at local level, hence provide institutional framework

• Increasingly used as a tool to promote the twin goals of conservation and development

• Payment based on Increment or additionality of services or sustained supply

• Poor compliance of contractual obligations • Limited number buyers of services • Less willingness to pay and fund even not

adequate for maintenance or management of services

• Minimizing or avoiding leakages within and nearby area

• Payment based on true economic value of services or willingness to pay

• High dependency on ecosystem services, especially on forest products

• Equitable sharing of conservation benefits among different community institutions

• Sustainability of schemes, including establishment of appropriate institutional structure

Payment for watershed services such as drinking water, irrigation and hydropower should be institutionalized at the local level even within the existing policy and legislative framework. However, the government should promote localized PES schemes by creating a conducive environment. Appropriate policy and operational guidelines should be developed.

A one size fits all approach does not work well when there are different ecosystem services. A bundle approach should be promoted instead of single ecosystem services to avoid perverse incentives. Hence, flexibility

in processes should be ensured based on local conditions and situations. The focus should be on both maintenance and enhancement of services while minimizing leakages. Performance based mechanisms should be institutionalized for ensuring equitable sharing of conservation benefits.

Government should promote

localized PES by creating conducive

policy environment

Sustainability of PES schemes

remain in questions

11

Overview: PES intends to achieve twin objective of sustainable economic growth and ecological restoration. However, major threats

related to its effectiveness include: • non-compliance with contractual conditions; • poor administrative selection (i.e., contracts are offered to areas or

individuals who are not in the best position to supply ecosystem services cost-effectively);

• spatial demand spill overs (general equilibrium effects, or “leakage”) whereby protecting a resource in one location pushes pressure onto resources elsewhere; and

• adverse self-selection, where people would have supplied the contracted PES service or activity even in the absence of a payment (STAP, 2010).

Taking this into account, PES process and mechanisms have been developed based on lessons of PES pilot in Nepal with emerging opportunities and challenges while complying fundamental principle of PES.

Guiding Principles: Guiding principle is to ensure efficiency, effectiveness, equity and sustainability of PES following consultative

processes. However, a one size fits all approach will not work and flexible approaches should be followed considering local situations, service conditions and interests of stakeholders.

• Changingbehavior: It should be designed in such a way that it not only generate money but also change behaviors on wise use to ensure sustain supply of ecosystem services.

• Bundle of services: Focus on bundle of services such as biodiversity conservation, tourism, water use regulation and carbon finance within the specified geographical area instead single services such that perverse incentives could be reduced.

3

Achieve twin objective of sustainable economic growth and ecological restoration

OPERATIONALIZING PAYMENT FOR ECOSYSTEM SERVICES

12

• Paymentforbothmaintenanceandenhancementofservices:Payment should be done not only for increments of services but also for maintenance of services depending on type and extent of use of ecosystem services.

• Selforganizedprivatedealswithsupportiverolefromgovernment:Government should facilitate private deals with buyers, especially with hydropower developers, irrigation users, travels agencies and trekking organizations and other international community's by developing appropriate policy and institutional mechanism.

• Informeddecisionsandconsultativeprocesses: Payment should be determined on the basis of willingness to pay and willingness to accept best on negotiations between buyers and sellers guided by cost benefit of investment decisions.

• Equitable sharing of conservation benefits: It should be done by avoiding leakages and institutionalization of performance based measures.

• Ensuring sustainability: It should be eunsured through development of appropriate institutional structures including fund establishment, improving resource governance, capacity building of stakeholders, contractual compliance monitoring, less involvement of intermediary organizations and managing conflicts and grievance.

Operational Framework: Review of legislation reveals that specific laws may not be required for institutionalizing PES. It is possible to

implement PES mechanism over common property resources as long as communities have management rights over such resources. Taking this into account, figure 1 presents the operational framework for PES. The framework emphasized for developing a mechanism to provide financial incentives to maintain and enhance ecosystem services while establishing appropriate institutional framework, strengthening capacity and improving governances. PES should be implemented on at least at landscape or watershed level focusing on bundle of services and fund concept should be introduced which could be utilized for managing transaction cost, resource conservation and enhancement of services.

PES should be implemented to

provide financial incentives at landscape or

watershed level focusing

on bundle of services for

maintainence and

enhancement ecosystem

services

13

Sequential Steps: Table 4 below presents sequential steps and processes which should be followed for institutionalizing PES. The sequential steps have been

defined on moderate details since the slight variations may occur depending on the type of services and geographical coverage.

Figure 1: Operational framework of PES

Negotiation

Ecosystem services(Recreation, biodiversity, carbon sequestration, water)

Institutional framework

Agreement

Intermediaries (If needed)(DDC, DFO, Central government)

Intermendiaries(If needed) (DFO, NGOs)

Sellers(CFUGs, CFUGs Network)

Fund from sale of services (PES)

Equitable sharing of beneits

Fund allocation

Fund utilization

Trasactioncost

Forest resourcesconservation

Serviceenhancement

Buyers(Local, regional, national

and global community etc)

Payment (Cash or kind)

Capacity building

Performance based fund

disbursement

Strengthening financial

management

Monitoring

Verification & monitoring

Sensitization

Sustain supply of ecosystem services

Source: Modified from NARMA, 2009 & WTLCP, 2012

14

Source: Modified from NARMA 2009 & WTLCP 2012

Flexible approaches

should be followed

considering local situations,

service conditions

and interest of stakeholders.

Steps ProcessesStep I:

Prioritization of services and

locations

• Identify geographical area either at watershed or landscape level • Clearly demarcate boundary of area in GIS domain • List and prioritize ecosystem services having trade potential

Step II:Identification of buy-ers and generating

demand

• Identify potential sellers and buyers of ecosystem services • Identify service providers or intermediaries if required • Interact with buyers, sellers and intermediaries about the problems of

ecosystem services including potential benefits from restoration • Preliminary agreement between buyers, sellers and intermediaries on

their rights, roles and responsibilities for further processes

Step III:Valuing of

ecosystem services

• Quantify value of prioritized ecosystem services following appropriate valuation techniques

• Conduct negotiation between buyers and sellers on payment value/price of ecosystem services

• Fixed the price of service based on willingness to pay & accept

Step IV:Establishing institu-

tional structure

• Establish appropriate institutional mechanism for implementing PES • Finalize implementation mechanism including fund establishment and

payment processes • Sign contract agreement between buyers and suppliers including

clearly definition of roles, rights and responsibilities of each actors • Identify the stakeholders/actors for verification including verification

processesStep V:

Generating fund for sellers

• Establish baseline value for performance monitoring including code of conduct of both buyers and sellers for receiving the payment

• Establish fund including payment processes

Step VI:Mobilizing funds

• Develop performance based mechanism for sharing of funds among different community institutions (sellers)

• Develop fund mobilization guidelines focusing on conservation, • Design detailed annual programme for utilization PES funds

Step VII:Monitoring,

Evaluation and Public hearing

• Establish multi-stakeholder platform representing buyers, sellers and service providers for effective monitoring

• Conduct monitoring based on baseline value including use of services • Organize public hearing to ensure transparency • Develop action plan for improving performances including managing

conflicts and grievances.

Table 4: Sequential steps

15

Policyinfluence: PES have been widely acknowledged in recent policy documents; however there is lack of specific PES policy

and operating guidelines. Likewise, different agencies are promoting different approaches and mechanism based on localized situation. Each modality has its own strength and weakness. Knowledge sharing among stakeholders should be organized for developing shared visions. Government should take a lead role on developing policy through the consultative processes with different stakeholders based on learning of several piloting initiatives.

Institutional development and capacity building: PES is being implemented as self organized private deals. There are no designated

organizations or institutions responsible for promoting or monitoring PES in Nepal. Policy advocacy and lobbying should be carried out for the establishment of designated organizations. Likewise, capacity of the stakeholders should be strengthen on effective implementation of PES, including monitoring.

Transparent, participatory and result based monitoring: There have been several pilots on the PES conducted in Nepal. However,

sustainability is very poor. Many of these schemes might have already collapsed either because of poor mentoring support or termination of project. Likewise, contract provisions are poorly followed by either contracting parties. Hence, there is a need for establishment of transparent and participatory processes for monitoring of PES schemes such that accountability could be developed. A mult-stakeholder committe should be formed and mobilized for facilitating PES implementation and monitoring by involving all the parties, such as government, buyers and sellers.

Equiatablesharingofconservationbenefits: It is more likely that different institutions may operate within the same geographical area

with vary degree of contribution towards conservation and sustained supply of ecosystem services. Performance measure index should be developed and payment amount should be shared based on their contribution. This will not only help to ensure common code of conduct or management at landscape level but also control free riding problem. This will help to ensure equitable sharing of conservation benefits.

4

A road ahead • Piloting &

knowledge sharing

• Policy influence• Instutitional &

capacity building• Result based

monitoring

WAY FORWARD

16

• Arriagada, R & Perrings C. (2009). Making Payments for Ecosystem Services Work. United Nations Environment Programme, Nairobi, Kenya.

• Blackman, A & Woodward, R.T. (2010). User Financing in a National Payments for Environmental Services Program: Costa Rican Hydropower. Resources for the Future, Washington, DC 20036, United States of America.

• Engel, S., S. Pagiola and S. Wunder. (2008). 'Designing Payments for Environmental Services in Theory and Practice: An Overview of the Issues', Ecological Economics 65(4): 663-674.

• Ferraro, P. & A. Kiss. (2002). Direct payments to conserve biodiversity. Science 298:1718-1719. • Karky B.S. and Joshi, L. (2009). Payment for Environmental services-an approach to enhancing

water storage capacity, pp.31-33. ICIMOD, Sustainable Mountain Development Kathmandu, Nepal.• Khanal, R & Poudel, P. (2012). Payment for Ecosystem Services (PES) Schemes for Conserving

Sardu Watershed Nepal: Existing Practices and Future Prospects. International Union for Conservation of Nature, Kathmandu, Nepal.

• Mayrand, K & Paquin, M. (2004). Payments for Environmental Services: A Survey and Assessment of Current Schemes for the Commission for Environmental Cooperation of North America. Unisféra International Centre.

• MEA. (2005). Ecosystems and human well-being: current state and trends: findings of the condition and trends working group. Millennium Ecosystem Assessment, Washington, DC 20036, United States of America.

• NARMA. (2009). Payment for Environmental Services in Nepal. NARMA Consultancy Private Limited.

• OECD. (2010). Paying for Biodiversity Enhancing the cost-effectiveness of payments for ecosystem services (Executive summary).Organization of Economic Development and Cooperation.

• STAP. (2010): Scientific and Technical Advisory Panel (STAP), Payments for Environmental Services and the Global Environment Facility, “A STAP advisory document” http://stapgef.unep.org/

• World Bank. (2007): Guidelines for “Pro-Poor” Payments for Environmental Services, World Bank, Environment Department.

• WTLCP. (2012). Knowledge Documentation Payment for Environmental Services Piloting in the Western Terai Landscape Complex Project (WTLCP). Western Terai Landscape Complex Project, Babarmahal, Kathmandu, Nepal.

• Wunder, S. (2005), “Payments for environmental services: Some nuts and bolts”, CIFOR Occasional Paper No. 42, Center for International Forestry Research, Bogor, Indonesia.

• Wunder, S. (2007). The efficiency of payments for environmental services in tropical conservation. Conservation Biology 21(1): 48-58.

• MFSP. (2011). Multi-Stakeholder Forestry Programme: Common Programme Document:. Multi-stakeholder Forestry Programme, Kathmandu, Nepal.

• ICIMOD. (2012). Protected Areas and Payment for Ecosystem Services A feasibility study in Shivapuri-Nagarjun National Park, Nepal, Internation Center for Integrated Mounted Development (ICIMOD), Nepal.

5 REFERENCES

17

18

INTERNATIONAL UNIONFOR CONSERVATION OF NATURENepalCountryOfficeKupondole, LalitpurP.O.Box 3923, Kathmandu, NepalTel: +977 1 5528781Fax: +977 1 5536786Email: info-np@iucn.orgwww.iucn.org/nepal