Important Background to PES

The ongoing and efficient balance of natural ecosystems is essential to the health of the planet and all who live on it. “Nature” provides us with essential services which support, provide, regulate and culturally maintain our way of life. Researchers are evidencing daily that ecosystems globally are under increasing pressure. Irreversible damage is being caused to these essential systems. The IPCC (2007) predicts impacts from climate change will see global average temperatures rise, patterns of rainfall change, extreme weather events become more frequent and severe, sea levels rise and other environmental changes occur. Biodiversity will be adversely affected.

Figure 1: PES unlocks the value in ecosystem services

Payment for Ecosystem Services (PES) schemes

PES schemes are one of a portfolio of policy options which are aimed at managing this risk. PES schemes do this by contractually linking an ecosystem service provider/seller with an ecosystem service user/ buyer. The financial payment from buyer to seller is conditional on the ongoing supply of the ecosystem service.

In financially incentivizing environmental protection, PES schemes also have significant potential to be an effective lever to lift local communities out of poverty. PES schemes

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UNIVERSITY OF BIRMINGHAMIDD Student Policy Brief April 2016

Note: this is an assessed student assignment and not an official UoB publication

Making PES schemes work in developing countries: A Crucial role for IntermediariesStephen M Baines

Key Messages

1. Despite some localised successes, widespread evidence suggests that existing mechanisms for global environmental protection are not gaining sufficient traction and that the battle to avoid irreversible damage to essential ecosystems is progressively being lost.

2. PES (and PES style schemes) have enormous potential to be a fresh mechanism for preventing irreversible damage through crystalizing the value of the ecosystem services nature provides and at the same time providing sustainable livelihoods for local people.

3. Widespread adoption of PES schemes “on the ground” requires a number of thorny challenges to be overcome.

4. The use of trusted and authoritative PES Intermediaries can provide the essential link in navigating these challenges and facilitating a much broader take-up of PES schemes globally.

5. Community, INGO and Faith Based Organisations (FBOs) are exceptionally well-placed to perform this Intermediary role within local contexts. In order to perform this function, stakeholders can build on experience gained by both Civil Society Organisations (CSOs) and Community Based Natural Resource Management (CBNRM) organisations.

are proving effective in the areas of: Carbon sequestration, Biodiversity protection, Watershed protection and Landscape beauty.

Figure 2: The Scope of Ecosystem Services

Uneven PES take-up

The take-up of PES programmes has however been patchy. Cash-based schemes have worked well in Latin America where local and national Governments have encouraged small-holder and community participation. However, despite isolated successes, such conditional payments have yet to develop a critical mass in the African context (Porras & Nhantumbo 2015). This Briefing examines the practical barriers to PES implementation and recommends actions for enabling large-scale PES roll-out across developing countries.

“Arguably PES is the most promising innovation in conservation since Rio 1992”

(Source: Wunder 2005 page 3)

PES – a central place within a portfolio of ecological interventions

Of course, PES is not the only policy option for decision makers attempting to preserve vital ecosystem services. It fits within a portfolio of other interventions. These include:

Government environmental regulation (incl. creation of protected zones/areas set aside for conservation)

Promotion of Sustainable Agriculture/Forest management practices

Environmentally motivated taxes/subsidies Integrated Conservation & Development Projects

(ICDPs)

Product certification leading to ecological price premiums

Land Acquisitions for conservation

Research suggests that PES works best in scenarios where a limited financial incentive will have a decisive effect on a landowners’ land-use decision (i.e. where land-use economic viability options are finely balanced).

Case Study: Equitable Payments for Watershed Services programme (EPWS), Tanzania

The Ruvu river network originating in the Uluguru mountains is the major source of fresh water for the 4 million residents of Dar es Salaam. The local Water Supply and Sewerage Corporation (DAWASCO) spent US $2 million annually in water treatment costs due to increased sediment in the river system. The EPWS programme now ensures the quality and flow of water for downstream users by compensating upstream farmer to engage in land use practices which contribute to water flow and purity.

(Source: http://www.watershedmarkets.org/casestudies)

Obstacles to Wider PES Adoption

Despite the potential, there are several significant practical obstacles to PES adoption and the delivery of sustainable PES Management Plans. These can be categorized into 5 key areas:

Biophysical Obstacles - These are predominantly linked to location and the type of land use activities required by the buyers. Are smallholders located in the right areas and can they deliver the services required?

Legal Obstacles - Landowners often have only informal or unclear land rights. Multiple smallholders may not have the capacity to negotiate, implement or enforce collective contracts with service buyers. Knowledge of the dynamics of the ecosystem services supplied and the institutional preconditions/frameworks governing the “market” mean that local communities are often cut off from this opportunity.

Economic Obstacles - PES schemes often involve high up-front transaction costs (most pressing where numerous smaller landholders each have high, fixed legal set up costs). PES may involve up-front capital expenditure for landowners (i.e. fencing off land) at a point when returns from the scheme may still be hypothetical/unclear. Buyers and sellers may be risk averse with concern centring over capacity of buyers to guarantee funding into the long term.

Technical Obstacles - PES schemes require stakeholders to be able to access new skills sets. These include agency/introduction services, brokerage of contracts, financial intermediation, assessment of optimum PES price, data collection & evaluation, monitoring of outputs achieved

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against counterfactual projected baselines and enforcement & compliance. These are technical functions requiring specialist expertise.

Information/Education Obstacles - Understanding and confidence in the working of PES can present a communication barrier for both policy-makers and potential stakeholders. Links between the land use and the provision of the ecosystem service needs to be sufficiently understood for the model to be appreciated.

Many of the above obstacles distil down to issues of understanding and crucially trust between parties. To enable a much wider take-up of PES there is a clear and urgent role for an “honest broker” to employ their reserves of “social capital” to facilitate schemes which have the potential to be beneficial both for the environment and for local livelihoods

PES Example: REDD+ (Reducing emissions from deforestation and forest degradation) is perhaps the highest profile PES scheme in the international context.

Figure 3: REDD+ logo

The Crucial Role of the PES Intermediary

PES Intermediaries are actors who play a vital connecting role between users (buyers) and providers (sellers).Their role ranges from traditional agency roles to additional technical services where Intermediaries have remained an integral part of project implementation and delivery. In current carbon marketplaces there are over 200 bodies acting as brokers, wholesalers, retailers or developers of carbon credits (Peters-Stanley et al 2011).

Intermediaries have traditionally been from the following sectors: Government agencies (national/local), Local community groups, NGOs/INGOs and Private Sector.

However they are best defined by the roles they perform rather than by their organisational characteristics (Moss et al 2009). Intermediaries enable win-win scenarios by:

Matching Sellers with Buyers. Crucially this normally involves coordinating umbrella arrangements linking many small landholders into a coherent contractual entity with legal rights.

Building on existing reputation, skillsets and community trust to establish a legitimacy and credibility for the project. This may involve the Intermediary performing roles as certifier, legal arbiter in contract negotiations, provider of insurance and robust risk management and key link with donors, agencies and Government.

Helping small-scale producers adapt to required changes to land use. This may involve facilitating external loan/grant support to cover set up costs.

Informing programme design through developing a knowledge of market actors, processes and values. This may involve establishing methods for payment and distribution, review processes and quality accreditation.

Bulking ecosystem services/credits (such as biodiversity and emissions reduction) to obtain the optimum premiums for the services provided. On occasion this involves the Intermediary taking on financial risk and purchasing credits in advance of selling on. Obtaining the best price frequently involves Intermediaries in marketing to prospective buyers – setting out the extra benefits (co-benefits) of supporting the ecosystem in question. This requires an intermediary to be able to “package and sell a good story” (Porras & Nhantumbo 2015)

Ongoing & Authoritative Monitoring/Verification of management systems and outputs to retain confidence of buyers.

Networking, representation & mediation to promote access to the market for buyers and sellers.

Administration & Project Coordination. This involves project administration, managing contracts and administering programme funds

A hub for Information Exchange. Intermediaries often hold important information on legislation, best practice, up to date technologies and markets as well as potential sources of financing. This is particularly important where issues of applicant eligibility and a project’s ecological requirements/standards may be frequently subject to regulatory change

Selection of Intermediary

Recent research demonstrates (Costa Rica; Bosselmann & Lund 2013) that the identity of the Intermediary affects the shape and potential for success of the PES project. The choice of intermediary matters to issues of inclusiveness, efficiency and the targeting of project benefits. Different Intermediaries bring different networks of local contacts and have different value systems. The role performed by an Intermediary may be heavily influenced by Government or buyer requirements. In the comparative study above an NGO, a Producer Cooperative and a County Agricultural centre each performed their Intermediary roles in contrasting ways.

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Case Study: PES in Costa Rica

In Costa Rica in 2009 there were 18 intermediaries administering PES schemes. More than 50% of all PES contracts signed 2005-2009 were facilitated by an intermediary. Key roles provided by intermediaries included sorting legal documents & land titles, navigating application processes (enabling wider participation), conducting field studies and monitoring contract compliance.

(Source: Bosselmann & Lund page 53)

In the longer term Private sector intermediaries are seen as being likely to play a key role in this market. Private sector actors may be content to manage a higher risk profile, have a strong knowledge of the financing landscape and have a good network of potential buyers. However, concerns have been raised about the primacy of shareholder/owner returns over environmental benefits, the degree to which they may respond to market volatility and the potential for unethical behaviour.

PES in Vietnam:

“Intermediaries acted as bridge-builders, mediators, arbitrators, equalizers, developers of standards, representatives and watchdogs”

(Source: Pham et al 2010 page 26)

Practical Best Practice Innovations in community intermediation

Keeping Transaction costs low – through use of group contracts, collective action and group enforcement.

Keeping Transaction Costs low along the value chain – through simple and effective monitoring, not expensive accreditation.

Attracting Price Premiums - through clearly linking produce to sustainable agricultural practices.

Sharing Risk – through upfront sales of credits, sharing costs of input requirements, soft loans and co-finance mechanisms.

Adding Value for Communities – through establishing formal tenure rights, community capacity building and transparent and equitable intra-community distribution of PES revenues.

Reducing the impact of transaction costs – through negotiating standard legal template documents and clear rules of engagement.

Levering Sustainable long term PES funding – through establishing long term partnering relationships with buyers of ecosystem services.

Tackling risk aversion – through developing simple and well explained models of PES interaction and actively publicising successful schemes in policy, business and community circles.

Conclusion & Policy Recommendations

This Briefing recommends that:

1. The indispensable role of PES Intermediaries in enabling PES implementation and effective ongoing PES management is widely understood as an essential element of PES design.

2. PES Intermediary “Best Practice” is widely disseminated to add extra value to existing and proposed PES schemes.

3. Community-based organizations and FBOs are encouraged to acknowledge the significant potential environmental and social benefits of PES schemes. They are further encouraged to recognise their unique position to utilize “social capital” locally to act as a trusted and authoritative “honest broker” to facilitate PES take-up and effective ongoing management.

4. Caution is exercised in engaging with private sector PES Intermediaries.

Further Study

Bosselmann A S & Lund J F (2013) Do intermediary institutions promote inclusiveness in PES programs? The case of Costa Rica Geoforum, 2013, Vol.49, pp.50-60

Ferraro P & Simpson R (2002) The cost effectiveness of conservation payments Land Economics78 (3) 339-353

Pham T et al (2013) Approaches to benefit sharing: A preliminary comparative analysis of 13 REDD+ countries CIFOR

Porras I & Nhantumbo I (2015) Linking smallholders to PES/REDD+ IIED Issue Paper, London

Wunder, S (2005) Payments for environmental services: Some nuts and bolts CIFOR Occasional Paper no.42

Contact us: Stephen Baines c/o International Development Department University of Birmingham Edgbaston Birmingham B15 2TT United Kingdom idd@bham.ac.uk. About IDD: The University of Birmingham’s multi-disciplinary International Development Department (IDD) has been providing knowledge and consultancy services to the international development sector since 1964.

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