Water funds: an “ideal” PES project – or better?

As payments for ecosystem services (PES) gain momentum, rules of “best practice” are also emerging. But how do these “ideals” for PES projects work on the ground, and what happens if you don’t follow them exactly? Rebecca Goldman-Benner and her colleagues at The Nature Conservancy ask precisely such questions in their 2012 Oryx paper,”Water funds and payments for ecosystem services: practice learns from theory and theory can learn from practice.” The group looks at South American water funds as examples to measure a theoretical PES project against the reality, and find that a little flexibility may not be a bad thing.

García Moreno street in the historic centre of Quito, Ecuador. The Andean city initiated South America’s first major water fund in 2000. Its Fondo para la Protección del Agua (FONAG) has become a model for the entire region. Source: Wikimedia Commons, Author: Cayambe.

The Latin American Water Funds Partnership, set up by The Nature Conservancy in partnership with FEMSA Foundation, the Inter-American Development Bank (IDB) and the Global Environment Facility (GEF), is launching 45 funds in various stages of development across the Caribbean and Latin America. The oldest, Quito’s Fondo para la Protección del Agua (FONAG), dates back to 2000. Although the structure has started to vary as the programs expand, the original projects in Ecuador and Colombia typically rely on an independently-governed trust fund. Downstream water users such as cities, utilities, and industries pay into the fund, which then pays upstream landowners to use their land in a more eco-friendly way. Investments focus on maintaining a clean, reliable supply of water throughout the year, as well as protecting ecosystems around the watershed and securing alternative livelihoods for upstream residents. A trust fund structure has been suggested for other kinds of PES projects too – for example, as a model for the wildlife media (for more information, see the previous BioFresh post discussing the current Oryx forum on PES and the wildlife media).

The Artisana reserve is part of the watershed for Quito. Source: Wikimedia Commons, Author: Author: Stefan Weigel.

Broadly speaking, this falls under the spirit of payments for ecosystem services. PES are supposed to convince landowners to manage their land in a way that promotes conservation and benefits others – for example, reducing fertilizer use in a sensitive watershed protects an ecosystem service (clean water supply) for everyone who uses that water. But this relies on two rules. First, the payments have to make the difference – they have to convince land managers to act in way that they wouldn’t otherwise. This is known as additionality. Secondly, the payments can only continue if the landowners in question provide the ecosystem service and then continue to protect it. This is called conditionality; in effect, making sure service “buyers” aren’t paying something for nothing.

Aerial view of the River Pirai in Bolivia, with Santa Cruz in the background. The Fundación Natura Bolivia has collaborated with departmental and municipal government to establish the water fund FONACRUZ. Source: Wikimedia Commons, Author: Sam Beebe.

In practice, water funds deviate somewhat from both of those rules. Additionality is very difficult to measure exactly, since it involves both putting a fixed price on a piece of land’s watershed value and figuring out what would have happened in a pretend future where the landowners weren’t paid to conserve. Also, a trust fund model means payments are usually made from the accumulated interest – this violates the conditionality rule, since you can’t just withdraw your money from the fund if you think the payments aren’t getting upstream landowners to conserve the watershed.

But Goldman-Benner and her colleagues claim that these departures from the strict PES definition may allow water funds to work better in the long term. Violating conditionality by using the interest from a trust fund rather than direct contributions keeps a sustainable source of financing for the project and protects the fund from political instability. It also gives the service users a reason to stay involved long-term. And targeting people who are more likely to conserve their land anyway (against the idea of additionality) may take advantage of “social diffusion” – the idea that if a small set of a population (sometimes as little as 15%) take up an initiative, then it may act to influence everyone else to do the same.

As more and more institutions move forward with payments for ecosystem services, from the World Bank to the UK government to NGOs like WWF, the tendency may be for an ever-more-standardized definition of PES. Goldman-Benner and her colleagues say that staying flexible about what constitutes a PES project allows for creative approaches that fit local realities, not just international ideals. However, Goldman-Benner argues that it is also critical to measure true return on investment from the water funds. “We need to not just show we are paying for keeping cows out of waterways, but that by doing so we are providing water with less sediment at a scale that matters,” she says.

Read other articles in our Special Feature on Freshwater Biodiversity and Ecosystem Services

Goldman-Benner, R.L. et al., 2012. Water funds and payments for ecosystem services: practice learns from theory and theory can learn from practice. Oryx, 46(01), pp.55–63. Available at: http://www.journals.cambridge.org/abstract_S0030605311001050.