:: 30 May 2007

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In this issue

• Message from RUPES Project Office
• NWAGES: Welcome Aboard!
• Anticipating the Growing Interest on PES Scheme in Cidanau
• Bringing Conservation Auctions to Indonesia
• Featured Links
• References

Message from RUPES Project Office

In the April edition we presented a story highlighting a decision of the Nepali Ministry of Local Development to replicate the Kulekhani model in all other hydropower districts. This model channels royalties to community development activities. Early this month, from Nepal we received more good news. A national working action group for environmental services known as NWAGES was established. To NWAGES we say "Welcome aboard. We look forward to working together in the future".

In Cidanau watershed - a RUPES learning site in Indonesia - payment for environmental service (ES) has been in place since 2002. Processes are currently underway to establish a more independent institution as the intermediary for providers and buyers in the watershed.

The last article in this edition provides a brief explanation on the use of auction for conservation outcomes. Leimona and Jack conducted a small scale pilot auction at RUPES Sumberjaya site for their PhD research.

Happy reading ... 

Aunul Fauzi
RUPES Communication Specialist

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NWAGES: Welcome Aboard!

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Anticipating the Growing Interest on PES Scheme in Cidanau 

A more integrated approach to watershed conservation began with the establishment of a stakeholder communication forum known as FKDC in 2002. Two years later, FKDC worked with two local NGOs (LP3ES and Rekonvasi Bhumi) to initiate the development of upstream-downstream linkage, using the payment for environmental service (PES) transaction mechanism. This project was supported by the International Institute for Environment and Development (IIED).

Under the facilitation of the project, KTI (Krakatau Tirta Industri) - a state-owned water company supplying water to some 120 large and small companies in the Cilegon industrial area - agreed to sign a contract for 5 years (2004-2009) with farmers in the watershed upland areas. KTI paid USD 17,500 per year during the initial 2 years period and USD 20,000 for the third year. KTI will re-negotiate payment for the last 2 years of the contract.

In return, farmers agreed to maintain no less than 500 timber and fruit trees per hectare within the designated area, to improve their land cover and prevent landslides and erosion. For every 500 trees planted and maintained during the contract, a farmer will receive USD 120 per year. Currently, two farmer groups have signed a contract that covers an area of 25 ha. each. Another two farmer groups will soon enter into a similar agreement. Meanwhile, besides acting as the intermediary, FKDC helped strengthen farmer groups and conducted field monitoring to ensure the farmers are meeting their duties.

In anticipation of the growing interest of more ES providers and buyers, FKDC is currently promoting the establishment of a more professional intermediary body to link ES buyers and sellers in Cidanau watershed. A nearby district government has shown its willingness to pay USD 20,000 allocated from the government budget. Meanwhile, two other private companies have expressed their willingness to pay for the environmental services provided. More farmers' groups have shown a willingness to become part of the PES payment scheme. It is hoped that by the end of 2007, an environmental service management body working under the principles of independence, accountability, transparency and good corporate governance will come into realization. [Aunul Fauzi]

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Bringing Conservation Auctions to Indonesia

Payments for environmental services (PES) change behavior by providing landholders with incentives to restore or maintain environmental service flows. By compensating private landholders for the costs of conservation, payments to private landholders aim to align the private and social benefits associated with conservation. Accurately estimating the private costs of conservation at the individual landholder level determines the appropriate payment amount, which may be adjusted to incorporate other goals, such as poverty alleviation.

However, a classic information asymmetry emerges in this scenario, in which the landholder has private information about the costs of engaging in conservation. Attempts to estimate the correct payment level will be hindered by these asymmetries in most contexts. Auctions present a valuable way of overcoming the information asymmetry by creating a temporary market in which landholders have an incentive to reveal their cost of implementing a conservation contract. Bids can be viewed as a measure of willingness to accept, where a bid higher than the landholder's valuation decreases the probability of winning the contract, and a bid lower than his or her valuation creates a risk of receiving too little compensation for the contract.

Prior to the implementation described here, the use of auctions for conservation outcomes on private land had been limited to developed country contexts. In October of 2006, the RUPES project conducted a small scale pilot auction in Sumberjaya Sub-district on Sumatra. Participants were coffee farmers from two villages in the Way Besai watershed, where erosion from upland coffee farms creates problems for villages and farms downstream. The auction offered a per hectare contract for investment in erosion control techniques, including infiltration pits, ridging and vegetation strips. All the farmers were familiar with the techniques. The RUPES site provided an excellent opportunity to pilot the mechanism in a new context and as a complement to the other project activities in the watershed. The auction was designed to generate information about implementation in this setting and to minimize risk to participants.

Two hypothetical or trial auctions were run prior to the final auction, both to test design elements and to familiarize the enumerators with the approach. The first was conducted with students from the local university and the second was conducted with coffee farmers in a distant part of the Sumberjaya RUPES site. Both trial auctions provided the opportunity to learn which aspects of the mechanism caused confusion. In addition, the both the trial auctions and the final auction were implemented with multiple trial rounds preceding the final allocation round, to allow participants a chance to learn about the mechanism. All contracts were awarded at the same price, to minimize the risk of conflicts among farmers, and to create a more generous buffer between the bids and the payments

Of the 82 participants in the auction, 34 were awarded contracts, and 25 hectares of conservation investment were purchased. Payments are awarded in three installments, with the latter two conditional on performance. The mid-term monitoring will occur in July of this year, at which point, compliance information will be available. In addition, a follow up survey of participants will be conducted to better understand attitudes and responses to the auction. Watch for a more detailed write-up of the auction implementation and analysis of the outcomes soon on the RUPES website

The research was conducted with support from EEPSEA (Environmental Economics Program for Southeast Asia) and IFAD (International Fund for Agriculture and Development). Ms. Beria Leimona led the research with inputs from Ms. Kelsey Jack, who was a research intern at the time. Further analysis of the outcomes will contribute to the doctoral degrees of both researchers, at Wageningen University (Leimona) and Harvard University (Jack). [Kelsey Jack]

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