Actors across a watershed often have very different needs, with upstream landowners trying to exploit natural resources, such as forests and grasslands, without necessarily taking into account how their actions might impact downstream water users.
Incentive-based conservation mechanisms, such as Reciprocal Watershed Agreements (RWAs) or Payment for Environmental Services (PES), attempt to align incentives across the watershed by having downstream users compensate upstream landowners for undertaking practices that improve the quality and reliability of the water supply. These include, for example, minimizing cattle grazing or limiting deforestation to certain areas, in order to avoid soil erosion and to contain the negative impacts on aquifer recharge.
Our organization, the Multilateral Investment Fund (MIF), a member of the Inter-American Development Bank Group, currently supports several watershed management initiatives across Latin America and the Caribbean. These include RWAs, which in Bolivia have been branded as “Watershared” agreements by MIF implementing partner Fundación Natura Bolivia (Natura), as well as both public and private PES agreements (in Panama and Guatemala). The aim of such pilot activities is to better understand how and when each type of agreement can be successful in increasing long-term efficiency in the use of watershed resources.
While they share the same objective, Watershared and PES models differ considerably in many ways, for example:
- Government-led PES agreements, such as the Mexican National Program for Hydrological Environmental Services, operate under the assumption that natural ecosystems provide benefits to all members of society, and therefore schemes to conserve them should be paid through general tax revenue. Private PES agreements focus on quantifying the externalities associated with resource use and conservation, in order to devise compensation schemes to align the economic incentives of local actors. In contrast, the reciprocity-based Watershared model assumes that environmental resources are only conserved if the appropriate institutions are in place, and therefore focuses on creating and/or developing those institutions at the local level.
- In government-led PES programs, payment levels are often defined nationally and standardized across geographies with citizens paying through general taxes. In private PES agreements, payment levels are calculated by balancing the opportunity cost of service provision with the value of the service provided. In contrast, Watershared compensation packages are discussed and negotiated by local stakeholders, who decide themselves what is the appropriate level of downstream support for upstream “water producers.”
- Government and private PES agreements tend to require the justification of expenditures and/or the estimation of a series of economic variables, and are generally data-intensive in their implementation. Watershared agreements, on the other hand, are based on the precautionary principle, so that they can generally be implemented based on community perceptions, without the need for extensive data collection.
- Government-led PES programs can benefit from economies of scale, but their administrative structures may also increase their cost. Additionally, centrally managed PES schemes, like other command-and-control tools, pose other problems for regulators, such as determining the right level for up-front payments, which can be challenging if there is no negotiation involved. Private PES may be difficult to implement if prices are set solely based on the opportunity cost of the land, as vulnerable or lower-income downstream water users may not be in a position to afford such payments. Watershared agreements usually require donor funds in their early stages, which can be lengthy as stakeholders need to be persuaded to buy in to the model. However, implementation of Watershared agreements is generally very cheap, because they build on local institutions and take advantage of existing community norms such as reciprocity and trust.
- PES usually contemplate cash compensation to align incentives across upstream producers and downstream users of water. In contrast, Watershared generally do not involve cash payments, and instead provide for the use of non-financial incentives and in-kind payments, such as materials for better land management and inputs for alternative income-generating activities.
In Bolivia, Natura has successfully implemented a series of Watershared initiatives in the Valles Cruceños region since the early 2000s. Under these agreements, referred to in the local context as “Agreements with Mother Earth” (Acuerdos de Complementariedad con la Madre Tierra, or “ACMTs”), downstream water users provide upstream producers with productive materials, such as seedlings, beehives, barbed wire, or drip irrigation systems, combined with training services.
The implementation of this watershed management scheme was accompanied by a rigorous analytical exercise to assess its effectiveness, carried out with the support of researchers from the Jameel Poverty Action Lab (J-PAL). According to Natura’s director of strategy and policy Nigel Asquith, the study’s preliminary results suggest that the Watershared agreement has been successful in promoting a more efficient management of environmental resources, and in particular, that:
- Incentive-based conservation schemes can work: conserving land through Watershared agreements led to a positive impact on water quality within 24 months, and after five years fecal coliform loads were significantly lower in intervention communities than in control communities.
- Watershared schemes can have very high uptake rates (up to 70% of eligible landowners), but this takes time: the key ingredient to get stakeholder buy-in is trust.
- The Watershared model is remarkably cost effective and cheap: local service users contributed almost 80% of the total cost of less than $10 per hectare and year.
- Behavioral economics and institutional theory are as useful as neoclassical economics in project and program design: stakeholder buy-in can be both rapid and long lasting.
- With proper functioning institutions in place, local stakeholders easily accept the need to contribute to protecting ecosystem services.
In view of all the above, the MIF and Natura have partnered to implement an integrated model for watershed conservation in the Gran Chaco region of Bolivia, which encompasses swamps, salt flats, scrublands, and the largest virgin dry forest on earth. The highland forests are key in the hydrological cycle, as they store and channel the modest rainfall that the region receives. However, the vast majority of the original lowland Chaco forests have been cleared over the last three decades to make space for large-scale agriculture, and the spread of low-productivity cropland and cattle grazing has reduced water quality and quantity, increasing public health risks in the form of water-borne diseases. Moreover, climate change and the increased variability of rainfall patterns is further exacerbating water scarcity issues in the Gran Chaco region, reinforcing the urgency of implementing effective watershed management solutions.
The Gran Chaco RWA will be rolled out in upstream areas that contain the remaining forestland in the region, and will build up on and complement Natura’s experience in Valles Cruceños. In particular, the project will test the ACMT model in predominantly indigenous (Guaraní) territories in Gran Chaco, across the departments of Santa Cruz, Chuquisaca and Tarija. These are generally governed by communal land governance systems, as opposed to the mainly private, non-indigenous ownership of small-holdings in Valles Cruceños. Also, the Gran Chaco region is one of the hottest and driest parts of the country, while the Valles Cruceños region has a relative abundance of water resources. Therefore, it is expected that the intervention in the Gran Chaco region will help to address questions of external validity. Moreover, the project will also attempt to assess whether take-up and compliance with watershed agreements differ according to community values, land-tenure arrangements, and incentive and supervision mechanisms. Finally, it expected that multiple treatment arms will allow for the testing different incentive schemes, such as payments to individuals versus payment to communities.
As in the case of Valles Cruceños, the Gran Chaco project has been designed as a randomized control trial (RCT), with the goal of testing the effectiveness of the model in the most rigorous way possible, so that robust evidence to inform public policy discussions can be generated. Out of 230 eligible communities, 100 will be randomly selected through a public lottery to be offered the RWA model. After four years, these communities will be compared with the 130 who did not participated in the project, which will be also subsequently offered the RWA model. Water quality data collected by Natura technicians in the field will be complemented with satellite imagery and scientific surveys to assess land use and landscape-level habitat status, and the socioeconomic impacts of the project will be assessed with household surveys.
We expect that the collaboration by Natura and the MIF in the Gran Chaco region will help the Bolivian government to further refine the ACMT model, and that it will contribute to the refinement and adoption of watershed management systems across Latin America and the rest of the world.
Nigel Asquith, director of strategy and policy at Natura, contributed to this blog post. For further information, see his Harvard Review of Latin America articles: “Investing in Latin America’s Water Factories: Incentives and Institutions for Climate Compatible Development” and “Reciprocal Agreements for Water: An Environmental Management Revolution in the Santa Cruz Valleys.”
Also, for further reference, please see Will McFarland and Ilmi Granoff´s Review of Literature on Financial Instruments and Policy Interventions that Support the Environmental Dimension of Sustainable Development.
From the Multilateral Investment Fund Trends blog