Kenya

Investment in concrete structures to secure public water supply, such as this spillway in Sasumua (Kenya), still often lacks the counterpart investment in social and natural capital to provide the essential ecosystem services Photo by World Agroforestry Centre/Mwangi and Gathenya (2008). Suggested Citation: Namirembe S, Bernard F, Neves B. 2017. Sustainable financing and support mechanisms for Payments for Ecosystem Services in low income countries. In: Namirembe S, Leimona B, van Noordwijk M, Minang P, eds. Co-investment in ecosystem services: global lessons from payment and incentive schemes. Nairobi: World Agroforestry Centre (ICRAF).

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CHAPTER 16

Sustainable financing and support mechanisms for Payments for Ecosystem Services in low income countries Sara Namirembe, Florence Bernard and Bernadette Neves

Highlights •

• • •

Financing for Payments for Watershed Services so far mostly came from public sources, especially in Asia where policies allowed ecosystem service providers to be paid with revenue from water abstraction fees Direct financing of PES by beneficiaries was possible in only a few schemes and was in the form of short-term commitments for corporate social responsibility Beneficiaries were willing to co-invest in watershed ecosystem services with public and other stakeholders Local financing sources need to be supplemented with additional funding from donor sources if payments for watershed services are to be applied at large scale and over a long time

16.1 Introduction Payments for ecosystem services (PES) aim to generate additional financing for natural resource management from non-government sources 1 as well as boost or redirect preexisting government funds more efficiently towards stakeholders and locations where land use improvements are desired. The success of PES depends on how well the schemes motivate these financing sources. PES are long term, requiring financing to cover costs related to project negotiation, feasibility studies, project development, capacity building, monitoring, as well as payments to those supplying the ecosystem services (ES) 2. When PES schemes seek additional values such as pro-poor focus, poverty alleviation and equitable representation, they tend to cost even more 3,4. In the developing world, PES schemes were piloted using mostly donor financing through nongovernmental organisations (NGOs), which worked directly with potential ES suppliers while seeking buy-in from would-be ES buyers (the ‘demand’ side). Post-pilot financing was needed not only to motivate continued participation in the PES scheme, but also to recruit more farmers to cover the area needed to create impact. However, this financing took on different forms and in some instances stalled, resulting in failure. In this chapter, we seek to understand potential financing pathways for PES in low-income countries by examining watershed PES schemes that were piloted by the World Agroforestry Centre (ICRAF) in Africa and southeast Asia. The aim is to understand what conditions enable PES financing in these low-income regions. Chapter 16

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The demand side of PES is described using different terms in literature, such as buyers, users, beneficiaries, investors and payers, which do not necessarily mean the same thing and may imply different financing arrangements. We distinguish between these terms in Table 16.1 in the context of watershed ecosystem services and show how their financing drives PES (Figure 16.1). Interests of PES financers include perceived present or future need for ES as well as non-ES interests, for example, a good image with consumers or a need to comply with policy regulation 5. Table 16.1 Roles of different actors on the demand sides of payments for watershed ES ES Actor

Role

Examples

Beneficiary

Directly gains or saves costs from ES provision

Water or energy utility, bottling company

User

Consumes ES

Domestic and industrial water users paying raised tariffs

Buyer

Purchases ES or ES credit for utilitarian or policy compliance purposes

ES Beneficiary, ES user or ES broker

Investor

Devotes resources to ensure future ES production and safeguard against threat; Purchases ES credits for future value

Institutions interested in conservation, NGOs, funds, private speculators of future policy demands

Payer

Pays for improved land use/conservation without necessarily obtaining direct benefits from ES supply

Third-party donors, government, well-wishers, intermediary organisations, buyers of another ES that is delivered by the same landuse action

Figure 16.1 Flow of PES financing from actors on the PES demand side to ES providers or sellers

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Sustainable financing and support mechanisms for Payments for Ecosystem Services in low income countries

Water inlet for the Singkarak hydropower scheme in West Sumatra (Indonesia); funding for PES is based on fees that the company pays to the province, and that are, in part, reinvested in the catchment through local government. Photo: World Agroforestry Centre/Meine van Noordwijk

16.2 Methodology We reviewed fourteen payment for watershed ecosystem services (PWS) schemes piloted by ICRAF under its two projects: Rewarding the Upland Poor for Ecosystem Services (RUPES), which ran for 12 years and nurtured 8 PWS schemes in southeast Asia, and the Pro-poor Rewards for Ecosystem Services in Africa (PRESA), which ran for 4 years and nurtured 6 PWS schemes. We provide a brief background on each case showing financing arrangements that developed under different contexts to determine what generalizable conditions are necessary to enable financing for PWS in low-income countries.

16.3 Overview of PWS schemes piloted by ICRAF Schemes for PWS were established in watersheds where unsustainable agricultural practices by smallholder farmers in the uplands were causing soil erosion, affecting the quality of water that flowed into water bodies and reservoirs. The schemes sought to promote Sustainable Land Management Practices (SLMPs) that minimize soil erosion in uplands in order to deliver cleaner water resulting in reduced water purification and dam desilting costs. The expectation was that companies managing these reservoirs would buy this reduction in sediment inflow. The schemes negotiated for PWS agreements between upland communities and reservoir managers, generated data to support decision-making of stakeholders, developed low-cost tools for monitoring hydrological ES and trained communities and partners (e.g. public institutions, universities and NGOs) to use them and to monitor changes in ES. The schemes fell into four major financing arrangements as presented in Table 16.2. We provide details about each scheme and summarize financing sources in Table 16.3.

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Table 16.2 PWS schemes according to financing categories PWS scheme

Financing source

Sumberjaya, Indonesia Cidanau, Indonesia

Beneficiary

Singkarak, Indonesia Kapuas Hulu, Indonesia Bakun, Philippines Nyando-Yala, Kenya

Public funds

Kulekhani, Nepal Manupali, Philippines Sasumua, Kenya Rushebeya Kanyabaha, Uganda

Co-investment

Kapingazi, Kenya Coyah, Guinea Ulugurus, Tanzania Kalahan, Philippines

None

16.4 Beneficiary-financed PWS schemes Sumberjaya, West Java, Indonesia Before PWS schemes became possible in Sumberjaya, farmers had been evicted from their

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lands for forest conservation and protection in the catchment area of a hydropower scheme . ICRAF successfully facilitated negotiations between farmer groups and government authorities to provide conditional land tenure to farmers willing to protect the native forest remnants and practice multistrata coffee agroforestry 7.The first tenure contracts were for a five-year period, extendable to 25 years depending on their performance. In Indonesia, the law on Environmental Protection and Management supports compensation for environmental services. Since forest restoration in the uplands provided improved watershed services, ICRAF also negotiated with the Way Besay hydroelectric power company (PLTA), which would be a beneficiary of these services to pay upland communities. The contract was made on the condition that efforts by villagers in the uplands would reduce sediment flow into the dam by an agreed threshold. Communities were engaged in data collection to monitor the impact of the SLMP. Sediment yield however, was poorly related to tree cover, but it was more strongly controlled by geology, lithology, soil texture and topography 8. Although the SLMP efforts of villagers were not reflected in the impact on ES up to the agreed threshold, PLTA paid the villagers as goodwill using its corporate social responsibility (CSR) funding 9. Payments were in the form of cash transfers to individual farmers, a revolving fund for goat farming, the development of micro-hydropower installations and tree seeds 10,11. The contract agreed for one year was extended to cover a wider area than was initially negotiated 12. Water consumers in the landscape were also willing to pay raised tariffs for regular water flow 13. However, this option for financing was not followed up. Policy-level stakeholders expressed little interest to engage in PWS 14. Cidanau, Indonesia In the Cidanau scheme, upland farmers adopted SLMPs through integrated watershed management led by the multi-sectorial FKDC forum supported by provincial funding 15. This

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reduced soil erosion and improved quality of water flowing into the low lands. However, the direct beneficiaries (Krakatau Tirta Industri (KTI), a water providing company, and Asahimas Chemical) were not immediately willing to pay, perceiving conservation a government responsibility to be funded with taxes. They also perceived the existing provincial funding to be sufficient. The companies later agreed to pay farmers as CSR 16,17. KTI agreed to pay farmers between 2005–2010 for reforestation 18.

16.5 Government-financed PWS Schemes River Nyando and River Yala watersheds Unsustainable farming practices in the uplands resulted in excessive gully erosion in the watersheds of the Rivers Nyando and Yala impacting poor fishing communities downstream. A consortium bringing together government and non-government stakeholders was formed to raise funds for watershed restoration as well as to make a case for publicly financed PWS. The consortium led by the Kenya Agricultural Research Organisation (KALRO) obtained support from the World Bank to promote SLMPs including tree-based enterprises. Incentives given to farmers included capacity building and provision of tree seedlings and farm inputs 19. Singkarak Indonesia The scheme in the Lake Singkarak watershed was established as a Clean Development Mechanism project to afforest abandoned farms, which had become grassland and shrubland. ICRAF also negotiated the payment of the tree farmers for increased water infiltration and reduced sedimentation by the state-owned hydroelectric power plant (HEP). Part of the revenue from water-abstraction fees paid to provincial and district governments was targeted as a source of the payments to tree farmers. The PWS scheme facilitated the formation of community-level institutions (Nagari) which enabled tree farmers to access some of the revenue paid for watershed services6,20,21. Kapuas Hulu, Indonesia Loss and fragmentation of forest cover due to fire, logging and mining activities, agricultural intensification as well as contesting legal frameworks threatened the hydrological conditions of the Kapuas Hulu basin 22. A public conservation fund from the district was set up to protect watershed services6. Bakun Philippines In the Bakun watershed, ICRAF negotiated for part of the revenue from tax payments made by two hydroelectric power companies (HEDCOR, Inc. and LHC) to the national and local governments to be used to reward upland communities for providing watershed services6,23.

16.6 Co-investment PWS Schemes Sasumua, Kenya Unsustainable farming practices in the uplands were causing sedimentation of the Sasumua reservoir managed by the Nairobi City Water and Sewerage Company (NWSC). The Sasumua reservoir is located within the watershed River Tana. ICRAF sought to facilitate a PWS scheme where the NWSC would pay upland farmers to adopt SLMPs. Upland communities organized in a government-supported Water Resources Users Association (WRUA) were willing to accept Chapter 16

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payments and downstream water users were willing to pay a raised tariff for improved water services 24,25. However, the NWSC lacked the authority to change tariffs. Although ICRAF provided data to demonstrate the potential profitability of PWS, the NWSC was not willing to engage in PWS since water purification costs were not considered to be a big challenge for the company 26. The NWSC was implementing soil-erosion controls on its own land immediately adjacent to the dam and paid levies to the WRMA, which had the mandate to manage the rest of the watershed. An existing Water Services Trust Fund established with public money from water-abstraction fees as well as from donors could not finance PWS either because it did not have the mandate to pay private land owners. There was no legal basis to preferentially use revenue from waterabstraction fees in the watershed it originated from 27. Financing was finally obtained from the Kenya Agricultural Productivity and Sustainable Land Management project (KAPSLM), which paid the Sasumua farmers as incentive for adopting SLMPs. Additionally, The Nature Conservancy brought together various public and private stakeholders to set up a Nairobi Water Fund aimed at ensuring sustainable management of the Upper Tana Watershed. A new project (F3 Life) built on the PWS process initiated to provide Sasumua farmers with green credit at subsidized rate with conditionality of adopting an agreed level of SLMPs. These incentive initiatives for promoting SLMPs were independent of each other.

Overflow stream of Sasumua dam. Investing in upstream soil conservation would help the Nairobi City Water and Sewerage Company avoid sedimentation of the dam, reducing overflow and the risk of flooding downstream. Photo: World Agroforestry Centre/Mwangi and Gathenya (2008).

Kapingazi, Kenya Farmers in the Kapingazi watershed were already benefiting from other schemes with environmental concerns before PWS was introduced. The government provided crop farmers with free tree seedlings under the Mount Kenya East Pilot Project (MKEPP), tea farmers were benefiting from the Rainforest Alliance certification issued to the Mungania Tea Factory and coffee farmers from the UTZ certification issued to the Rianjagi Coffee Factory. Farmer cooperatives also received capacity-building training in governance from Technoserve 28. The scheme sought to build PWS onto these initiatives by gathering evidence on the impacts of the farming practices and potential SLMPs on water quality and sediment flowing into River Kapingazi, a tributary of the River Tana, which supplies the Masinga hydroelectric dam managed by the Kenya Electricity Generating Company Limited (KENGEN) downstream.

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Upland farmers were willing to engage in PWS, but while KENGEN expressed willingness to engage in PWS, it did not decide to reward farmers in the scheme, as the challenges of dam sedimentation originated from a much wider scale than the Kapingazi watershed. The Kenya government was concerned that PWS payments might disrupt the established system of promoting SLMPs under the public watershed management structure 29. KENGEN later joined the Nairobi Water Fund by The Nature Conservancy for conservation of the Upper Tana watershed. Rushebeya-Kanyabaha Wetland, Uganda In Rushebeya-Kanyabaha, Uganda, wetland wise-use initiatives for increasing community benefits from nature-based enterprises including ecotourism and handicrafts also reduced cultivation activities and sedimentation of the Kisiizi mini-hydro dam along River Ruboroga downstream. Through ICRAF negotiation and provision of data, the Kisiizi dam management agreed to contribute to a watershed management plan as part of their CSR 30. Manupali Lantapan, Philippines Unsustainable farming practices in the uplands were causing sedimentation and siltation of a hydroelectric power reservoir operated by the National Power Corporation (NPC). The NPC was implementing its own soil erosion control in the area adjacent to the dam as mandated, but this was not sufficient. In partnership with BENRO, local government and the Department of Natural Resources, ICRAF sought to set up a PWS scheme between upland farmers as ES providers and the NPC as the ES buyer. The Municipal Development Council under the Municipal Ordinance agreed to use local development funds for the incentive mechanism for Sustainable Farming Systems to cover transaction costs, including capacity-building and negotiation with ES buyers through a collaborative agreement including the NPC, the National Irrigation Administration (NIA), the provincial government, the municipal government and the Department of Environment and Natural Resources 31. ICRAF also supported stakeholders with data on potential impacts of SLMPs on soil erosion control and water balance. Building on this, the NPC agreed to engage in a reward scheme for three years, providing tree seedlings and paying farmers according to survival rates. The NPC contracted individual farming families to build trust despite increased transaction costs. The NPC also replicated the scheme in another sub-watershed in Manupali 32. Kulekhani, Nepal In the Kulekhani watershed, deforestation resulting from a government policy alienating communities from forest land led to increased sedimentation in the reservoir of the Kulekhani hydropower plants (KHP). To engage communities in sustainable forest management, a community forestry programme was established, granting forest-user rights to groups of households. ICRAF negotiated for these households to obtain payments for the watershed ES provided from the forests they restored. Part of the revenue from the fees that KHP pays to the government was deposited into the Environmental Management Special Fund to be used to pay community members based on their conservation and development proposals6.

16.7 PWS schemes that failed to secure financing Coyah, Guinea Unsustainable farming practices in the uplands of the River Coyah were causing soil erosion and affecting water bodies in the lowlands. Farmers were willing to accept payments to adopt Chapter 16

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SLMPs. ICRAF gave farmers tree seedlings and made prototype payments to them based on survival rates. The Coyah Bottling Company was tapping water from a declining water table and was willing to engage in PWS provided it could be demonstrated the SLMPs would lead to increased infiltration and improved groundwater recharge. However, because of the past civil instability in the country, records of climatic and river flow data for that landscape were very scanty and not enough to make assessments of potential hydrological impacts. The scheme could not continue. Uluguru Mountains, Tanzania The scheme sought to motivate farmers in the uplands of River Ruvu to adopt agroforestry for controlling soil erosion and reducing sedimentation of water sources downstream. ICRAF provided farmers with tree seedlings and paid them based on seedling survival rates. The aim was to generate data to support decisions of stakeholders and to build capacity for monitoring impacts of land-use change on the supply of ES. Farmers were willing to participate because of the on-farm benefits they expected from trees. The scheme was established in a sub-watershed adjacent to another scheme, the Equitable Payments for Watershed Services (EPWS), run by CARE International and WWF where Coca-Cola Kwanza Ltd and the Dar-es-Salaam Water Supply and Sewerage Corporate (DAWASCO) had agreed to pay another group of farmers for reduced sediment inflows into their reservoirs 33. The expectation was that proof of concept would increase the demand for watershed ES. However, after the first phase of the EPWS pilot, Coca-Cola withdrew from the scheme, possibly due to the change in liaisons at Coca-Cola 34. DAWASCO paid for the second phase of the EPWS pilot as their CSR34,35,36. Although downstream domestic water users in the Morogoro municipality were willing to pay to ensure a reliable water supply, awareness of PWS was very low among other downstream companies and policymakers 37. Kalahan, Philippines Communities in the Ikalahan watershed under the Kalahan Educational Foundation received legal permits to engage in forest conservation and management6. These activities provided watershed ES benefitting mostly lowland rice farmers and the Magat reservoir for irrigation and hydropower generation. ICRAF supported negotiations for the payment of upland communities for watershed ES provision, but reservoir managers were unwilling as the watershed contributed very little to the inflows into the reservoir 38. Water users were willing to pay for watershed services, however this option was not explored.

Table 16.3 Financing sources in watershed PWS schemes piloted by ICRAF in Africa and Asia PWS Scheme

Beneficiary financing from private or semiprivate source

Financing from other private entities

Financing from public sources

Sasumua, Kenya

None

Public-private Nairobi Water Fund by The Nature Conservancy ‘Green’ credit from F3 Life

Kenya Agricultural Production and Sustainable Land Management project (KAPSLM)

River Kapingazi, Kenya

None

Eco-certified coffee and tea

Tree seedlings from Mount Kenya East Pilot Project (MKEPP)

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PWS Scheme

Beneficiary financing from private or semiprivate source

Financing from other private entities

Financing from public sources

RushebeyaKanyabaha Wetland, Uganda

Kisiizi Power Limited

Nature-based enterprises

None

River Coyah, Guinea

None

None

None

Rivers Nyando and Yala, Kenya

None

None

Public and donor support for land restoration through stakeholder consortium

Uluguru Mountains, Tanzania

Coca-Cola Kwanza (1 year) and DAWASCO (2 years)

Manupali Lantapan Watershed Philippines

National Power Corporation (3 years)

None

Local government funds based on ordinance for benefit sharing

Lake Singkarak, Indonesia

None

Carbon payments for CDM afforestation

Hydropower company royalties for water abstraction

Cidanau Watershed Indonesia

State-owned water utility (KTI), drinking water (PDAM) and power (PLN) companies; Asahimas Chemicals (5 years)

Provincial funding under the multi-sectorial FKDC forum

Sumberjaya, Indonesia

State-owned Way Besay Hydroelectric plant (PLN-PLTA Way Besay) (1 year)

Conditional land rights for agroforestry and forest protection

Kulekhani, Nepal

None

Public support for farmer training and monitoring of land use change

None

Part of government revenue from fees for water abstraction deposited on the Environmental Management Special Fund. Community forestry programme—forest user rights

Bakun, Philippines

None

None

Part of national and local government revenue from taxes paid by hydroelectric power companies (HEDCOR Inc. and LHC)

Kalahan, Philippines

None

None

Legal permits to engage in forest conservation and management

Kapuas Hulu, Indonesia

None

None

District government conservation fund to protect watershed services

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16.8 General trends in financing sources for PWS and emerging insights Financing by beneficiary Most PWS schemes were designed to obtain financing through ES commodification where downstream beneficiaries (companies managing water reservoirs) would pay farmers in the uplands for providing defined ES through land-use change. In reality, among the ICRAFinitiated cases, the case that came closest to commodification was Sumberjaya where the beneficiary, a state-owned hydropower company, initially agreed to pay on condition that certain levels of ES were supplied. Monitoring to measure the impact of land-use change on ES outcomes helped to motivate some beneficiaries to finance PWS directly (e.g. Sumberjaya, Cidanau, Ulugurus) or in coinvestment deals (Sasumua, Rushebeya Kanyabaha and Manupali). In Coyah, there was possibility for the company to pay if potential impact of SLMPs in the upper watershed on groundwater recharge could have been demonstrated. However, the cost of monitoring and other transaction costs10, time lags22 and scale of interventions needed to show impact13 proved major challenges. During the pilot stage, ICRAF developed simple, low-cost techniques for monitoring and involved local communities, universities and research institutions in data collection 39. Without support from national-level research institutions and donor funding, monitoring costs would be impossible at project level 40. Evidence on impact of SLMPs helped to build trust that desired ES outcomes would be delivered. Subsequently, payment was made for actions such as tree seedling survival (e.g. Manupali) and area of land covered by SLMPs (Sasumua F3 Life and Sumberjaya), which were easier to measure. Payment for actions based on trust in outcomes of technological packages was also used in the Vittel case where payment was based on compensating for reduced profitability rather than proving levels of nitrogen reduced 41. Besides interest in ES outcomes, good relations with communities and corporate social responsibility were key motivations for PWS financing by beneficiaries (Cidanau, Sumberjaya and Rushebeya Kanyabaha). These commitments, however, tended to be short-term although in the cases of Sumberjaya and Cidanau, they were extended or replicated elsewhere. Revolving funds were built into payments to secure long-term financing. For example, the revolving goat fund in Sumberjaya and the green credit model used by F3 Life in Sasumua. Similarly, in the Fuquene case in Colombia, a revolving fund provided a guarantee for farmers to access commercial loans 42,43. All in all, most beneficiaries were unwilling to pay more than their mandatory fees to government. This could have been due to low incomes their businesses generated, which could barely cover operational costs for watershed management 44,45. In Sasumua, the WSTF strongly depended on donor support. This was also the case in PRONFOR Mexico 46. The public good nature of watershed ecosystem services also makes them unattractive for market development 47,48. Financing from public sources Most of the PWS schemes were founded on public financing. Some schemes relied only on public financing (Nyando Yala, Bakun, Kapuas Hulu and Singkarak). In Bakun, Singkarak and Kapuas Hulu cases, water abstraction fees received at local government level were used and therefore continuous payments to ES providers were possible. In the case of Nyando Yala, funding came from donor sources and was used upfront to provide inputs and capacity building for ES providers.

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However, even in beneficiary-financed PWS schemes in Asia (Cidanau, Manupali and Sumberjaya), the companies which did so were state owned. Most of the other schemes that evolved into co-investment or failed to take off were founded on existing public structures for watershed management (Sasumua) and existing public incentives for SLMPs (Kapingazi, Sasumua, Rushebeya Kyabaha, Kulekhani, Kalahan). Public PWS has been demonstrated to work well in high-income countries, e.g. The New York Catskill and Munich 49 as well as in middle-income countries e.g. Vietnam 50, Costa Rica 51, and Working for Water in South Africa 52. Some Asian cases in this study (Singkarak, Bakun, and Kapuas Hulu) have shown that, although the amount of revenue from water fees is small in low-income countries, public financing is still possible especially where local governments have authority over some of the revenue from water fees. Use of public revenue at local government level allays concerns that have been raised about the unfairness of using public funds to pay for ES that benefit only a few7. Public entities can use lessons from pilots to implement PWS at a wide scale. For example, lessons from small-scale carbon projects were key in development of national-level Reduced Emissions from Deforestation and Forest Degradation (REDD) programmes 53. However, for how long should PES rely on public financing? Public PWS can interfere with development of private contracts 54. For example, in Cidanau, private beneficiaries had low WTP due to availability of public support. Empirical evidence from Nicaragua 55 also indicated a low WTP due to these alternative support sources and in cases where farmers stood to obtain on-farm benefits from the practices for generating ES. Co-investment Co-investment (combining support from public, private and donor sources) emerged when PWS schemes were built upon existing initiatives promoting SLMPs. In these schemes, government financing covered transaction costs or incentives for ES provision, which made PWS more affordable for beneficiaries (Manupali, Kapuas Hulu, Kulekhani). Financing for PWS did not only originate from the watershed sector, but from the agriculture (Sasumua) and forestry sectors (various Asian cases). Similarly, elsewhere, public funds facilitated private investment by providing start-up costs (e.g. Campfire) or providing matching funds (e.g. PSAH Mexico)40,46. While in the Asian co-investment cases (Manupali and Kulekhani) partners worked jointly, in African cases (Sasumua and Kapingazi) co-investment developed as a collection of different small-scale initiatives operating separately within the same landscapes. This could be attributed to the lack of institutional framework for bringing together multi-institutional funds for watershed management33. The Nature Conservancy brought together funds from the different stakeholders as well as from donor sources to set up the first water fund in Africa where public, private and community-level stakeholders worked jointly and covered a large scale. Incomes of individual beneficiary institutions are rarely high enough to shoulder PWS financing and this may explain why cases such as Uluguru PWS collapsed after only a short while. Besides, the interconnectedness of watershed ecosystem services across private and public sectors required joint operations. A number of successful PWS cases in Latin America use co-investment where financing from beneficiaries is combined with support from government, NGOs and donors (e.g. Brazil, PASOLAC El Salvador, Pimampiro and QuitoFONAG Ecuador) 56. Beyond financing, co-investment enables shared responsibility and learning, engagement of social capital and building trust through working together9,12, all of which enable long-term and wider-scale reach 57.

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Enabling institutional set-ups for PWS financing Given the low income in the developing countries, public financing was key in enabling PWS. While in various Asian cases, policies allowed government revenue from water abstraction fees to pay ES providers, in the Kenya and Tanzanian cases, such provisions were lacking and the success of PWS schemes depended on willingness of beneficiaries to pay additional to their mandatory fees. In Kenya and Tanzania, watershed management is centrally controlled unlike in Asian cases where local governments had discretionary authority in their regulations and ordinances to use watershed revenue to pay farmers. In Kenya, the national Water Service Trust Fund could not be used to pay ES providers. Water users were willing to pay raised tariffs in some cases (Sasumua, Uluguru, Sumberjaya and Kalahan) and this could have generated more funds for public PWS as was the case in many projects in Latin America, Europe and North America 58. However, this option was not tapped into, even though government institutions had the mandate to raise tariffs. In the case of Ulugurus, stakeholders were not aware of this option and even of PWS. Similarly, in a study in Japan43, water users had higher WTP compared to the fees the government collected. Besides financing, governments can create enabling conditions for PWS. This could be through top-down regulations that create demand for watershed ES54. For example, the Vittel case42 and the New York Catskills case were driven by strict policy demands on water 59 quality . Alternatively, governments can also nurture PWS financing by responding to bottom-up policy changes demanded by non-government entities seeking to engage in PWS. In this study, for example, policy changes were needed in African cases for using public revenue to pay farmers. In Ecuador, recognition of environmental services from land-use change in the legal system was initiated by industrial and agricultural water users46. Nonetheless, while laws and regulations are not pre-requisites for PWS, legal basis is needed to formalize PWS and standardize how it is to be governed 7,10,13,43. For example, in Costa Rica, a foundation paid for by water companies could only be set up after the Forestry Law was revised46. Legislation has the potential to build trust in the PWS mechanism, enabling replication elsewhere.

Conclusion Financing for PWS in Africa and Asia mostly comes from public sources in co-investment deals. In Asia, this was mainly from revenue from water fees and policies, especially at local government level. In Africa, watershed management is centrally controlled and regulations prohibit the use of revenue from water fees and donor sources to pay private ES providers. The willingness of water users to pay raised water tariffs shows that public water revenue could be increased in both regions. Public funds are also available from other sectors with the mandate to promote SLMP. Private beneficiaries generally lack financial capacity to afford PWS. Direct financing of PWS by beneficiaries is possible in only a few schemes and then mostly in the form of short-term commitments mainly driven by CSR. Beneficiaries are willing to co-invest in watershed management with public and other stakeholders. Nonetheless, local financing sources could mostly only cover areas where pilots had been initiated. To ensure wider coverage and longer terms, strong national support is needed to cover transaction costs.

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