Innovative economic and financial instruments

It is important that as well as demonstrating the costs and benefits associated with watershed investment, land and resource use decisions, the resulting information is used to identify practical measures to create more enabling conditions for integrated watershed and river basin man-agement. Innovative economic and financial instruments need to be developed and used to provide incentives and funding for more sustainable, equitable and efficient management and in support of the functional

govern-ance and institutional frameworks that are used to imple-ment them.

Various forms of payments for watershed services (PWS) schemes are emerging as key tools in the Mekong Basin and beyond for providing financial and economic incen-tives for integrated watershed management. China has seen a particularly rapid growth in the development of PWS over the past decade (Figures 7 and 8), including

0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

BILLION $

1999 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Note: This excludes16 provincial-level forestry programs, for which no data on starting year is available, but which began sometime since 2001.

New PWS Schemes in China per Year, 1999-2008 Figure 7.

Annual PWS transactions China

Figure 8.

New PWS schemes in China

Source: Stanton et al. 2010 various forms of water use rights trading schemes and

watershed ‘eco-compensation’ schemes. Such schemes involve agreements by downstream water users (such as municipalities, irrigation schemes or hydropower facilities) to reward or compensate upstream land and resource managers (such as farmers, forest users or gov-ernment environmental agencies) for the economically valuable water supply and water quality benefits they provide.

The aim is to ensure sufficient economic incentives and funding for sustainable upper watershed management.

For example, in order to protect the Miyun Reservoir (Bei-jing’s main water supply), Beijing Municipality has been providing PWS to upstream Hebei Province (where per capita incomes are only half that of Beijing residents).

Almost US$60 million is transferred each year to fund land conversion from irrigated rice fields to rain-fed farming, water pollution control, water resource protection, affor-estation and forest management. Of this amount, 60% is distributed to forest owners as a basic payment, and 40%

channelled as incentive payments for forest management and landscape restoration.

Payments for watershed services have also been emerg-ing in other Mekong Basin countries over the last few years. In Cambodia, for example, the term ‘payments for ecosystem services’ is widely used in public planning and in operational projects for ecosystem conservation (Chervier et al. 2010). Various forms of PWS are being scoped out in Lao PDR, e.g in Houay Xon watershed, de-tailed work has identified a clear willingness to pay by downstream beneficiaries, which would, in principle, be sufficient to compensate upland farmers for implementing new land management practices to abate some of the negative impacts of soil erosion on water quality (George et al 2009; Mousquès et al 2008). A recent UNDP-spon-sored workshop has identified great potential to apply PWS in Thailand (UNDP 2009). A case study on Viet Nam’s progress in developing a legal, policy and implementation framework for payments for forest ecosystem services is described in Box 12.

These schemes are driven by a sound economic rationale:

that such mechanisms are often a far cheaper and more cost-effective way of maintaining important water serv-ices than bearing the costs and losses that arise once they are lost, or investing in the measures that are required to mitigate or remediate the effects of their degradation.

For example, recent studies have found that the Da Nhim Hydropower Station in southern Viet Nam would incur additional operating and plant costs of US$3.75 million a year if the 45,000 hectares of forest in its upper water-shed were converted to agriculture.

In Lao PDR, private-sector hydropower developers have been particularly active in funding watershed manage-ment and watershed managers in recognition of the

eco-Source: Stanton et al. 2010

nomically valuable services they provide for downstream electricity generation. Experiences with the benefit-sharing mechanisms operating under the Nam Theun 2 Hydropower Project and the Theun-Hinboun Expansion Project suggest that by investing US$1 million per year in the Nakai-Nam Theun Protected Area (in the case of Nam Theun 2) and US$2.3 million in a Catchment Pro-tection Plan (in the case of the Theun-Hinboun Expan-sion Project), hydropower developers hope to achieve

‘win-win’ solutions in terms of reduced costs/improved efficiency in power generation, and income/funding for upstream land and resource managers.

Box 12. Payments for forest environmental services

Lam Dong and Son La Provinces, Viet Nam The idea of payments for environmental services began to take hold in Viet Nam in 2005. In 2008, the govern-ment issued Decision No 380/QD-TTg on piloting Payments for Forest Environmental Services in Lam Dong and Son La Provinces. These two schemes have been developed collaboratively between the Minis-try of Agriculture and Rural Development and ex-ternal donors: USAID/Winrock International in Lam Dong, and GIZ in Son La. Similar systems operate in both provinces.

Cash payments are received from key water users (hydropower, water bottling companies and other urban and industrial consumers). The revenues col-lected are retained in separate bank accounts as part of Provincial Forest Protection and Development Funds. Between 10–20% is retained by government, and the remainder paid out to upstream forest own-ers – the environmental service providown-ers. Local households in watershed areas are eligible to receive payments, calculated on a per hectare basis. In Lam Dong Province, almost 10,000 households (or 40,000 beneficiaries) are receiving between US$540 to US$610 per year, funded by hydropower plants, wa-ter supply companies and tourist companies. It has been documented that, as a result, illegal logging has been reduced by a half. At the same time, the pay-ments made represent an average 400% increase in household income for forest owners. In September 2010, Decree No 99/ND-CP was passed; this scaled payments for forest environmental services up to the national level, and provides the opportunity for such incentive systems to be extended to other parts of Viet Nam.

4.4 Funding watershed