Making Policies Work for Payment for Environmental

Journal of Sustainable Forestry, 28:415–433, 2009 Copyright © Taylor & Francis Group, LLC ISSN: 1054-9811 print/1540-756X online DOI: 10.1080/10549810902791531

Making Policies Work for Payment for Environmental Services (PES): An Evaluation of the Experience of Formulating Conservation Policies in Districts of Indonesia

1540-756X 1054-9811 WJSF Journal of Sustainable Forestry, Forestry Vol. 28, No. 3, February 2009: pp. 1–26

FERDINANDUS AGUNG PRASETYO1, ARITTA SUWARNO2, PURWANTO3, and RIDHA HAKIM4

Making F. A. Prasetyo Policies et Work al. for Payment for Environmental Services

Downloaded By: [World Bank] At: 14:58 26 June 2009

1

Forest and Governance Program, Center for International Forestry Research, Bogor, West Java, Indonesia 2 Forest and Livelihoods Program, CIFOR and WWF, Nusa Tenggara, Indonesia 3 Sungai Wain Management Body, Balikpapan City, East Kalimantan, Indonesia 4 WWF Indonesia-Nusa Tenggara Program, Nusa Tenggara, Indonesia

Payment for Environmental Services (PES) is one of several schemes designed to conserve the environment by means of a market-based approach which also incorporate The PES framework and depends upon a number of criteria, namely: (a) A voluntary transaction where (b) a well defined environmental service [ES, or a land use likely to secure that service] (c) is being bought by a (minimum one) ES buyer (d) from a (minimum one) ES provider (e) if and only if the ES provider secures ES provision (conditionality). The case studies described are not perfect examples of PES, in them payments have been made in ways that are not as simple as those described by the PES criteria. The article attempts to describe lessons learned from three case studies by comparing the principles of PES with other conservation approaches. As shown by these case studies, to make PES work, the government has an important role to play. An initial stage of payments, taxes, and subsidies could be seen as a rational step toward an increasing willingness to pay on an individual basis that will lead to conservation on a wider scale. KEYWORDS Conservation, district, environmental, national, payment, policy, service watershed Address correspondence to Ferdinandus Agung Prasetyo, Jalan CIFOR, Situ Gede, Sindang Barang, Bogor, West Java, Indonesia, 16680. E-mail: [email protected], [email protected] 415

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INTRODUCTION The economic value of Indonesia’s production forests is estimated at between US$1,283 and US$1,416/ha/yr. The direct value of forest—derived from timber, fuelwood, nontimber forest products, and water consumed by households—is about 7% of the total economic value of the production forests. This is less than the indirect value of forest as a carbon sink service—and the contribution from other forest services such as topsoil protection, water conservation, flood protection, and water transportation (Simangunson, 2003). For more than two decades, Indonesia’s forests have been managed in order to produce timber to support the country’s economic development. During the period 1980–2005, about 525,769,000 m3 of timber was harvested (Ministry of Forestry, 2005). This figure does not include the area of forest affected by illegal logging. As a rough approximation, in 2001, given an illegal harvest of about 50 million m3 of timber and assuming a harvest rate of 20 m3/ha, illegal logging affected at least 2.5 million ha of forest, resulting in massive land-use change and forest degradation (Tacconi, Obidzinski, & Agung, 2004). In 2001 it was also estimated that the tax loss from illegal logging in 1998 was about US$1.5 billion (Palmer, 2001). This loss of forest has been accompanied by the loss of many of its intangible values, such as biodiversity loss and other forest services. During the last decade, measures have been taken to prevent further loss by implementing sustainable management in Indonesia’s tropical forests and maintaining critical environmental services both within and beyond the conservation areas. Although by 1999, 157 policies on natural resource management had been placed on the statute books (Sembiring, Husbani, Ivaleria Feby, & Hanif, 1999), forests remain under severe threat in many parts of Indonesia. As estimated by Kim (2002), the intangible value lost due to logging activities is about US$205/ha/yr. Payment for Environmental Services (PES) is one of several schemes designed to conserve the environment by means of a market-based approach (Pagiola, Landell-Mills, & Bishop, 2002). Although this scheme is relatively new in Indonesia, it has attracted wide interest. However, environmental services (ES) have in fact been delivered by means of traditional and social initiatives for many years in Indonesia (Leimona & Prihanto, 2005). This article will discuss the experiences and lessons learned from implementing PES for watershed protection by means of benefit transfer schemes developed in several districts of Indonesia in relation to the role of local and national policies to make PES work and to lead to conservation on a wider scale. The study also discusses the challenges involved, including how to identify and quantify the type of services that forests supply and how to provide adequate incentives to districts in the context of national and district government relationships as they make the transition to decentralization, including adapting institutional frameworks to suit local circumstances,

Making Policies Work for Payment for Environmental Services

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ensuring fair and equitable cost-and-benefit transfer, and providing for the different stakeholders.


METHODS AND CONCEPTUAL FRAMEWORK To describe the role of policy in relation to the implementation of PES, three comparative case studies were employed to examine early experiences of implementing PES in several districts in Indonesia. The PES framework depends upon a number of criteria namely: (a) A voluntary transaction where (b) a well defined ES [or a land use likely to secure that service] (c) is being bought by an (minimum one) ES buyer (d) from an (minimum one) ES provider, (e) if and only if the ES provider secures ES provision (conditionality). These criteria, as formulated by Wunder (2005) and Figure 1 which categorizes PES according to directness and economic incentives, will be employed to identify position, status, progress, and obstacles during the implementation of several PES programs in Indonesia. Further, an analysis of existing conservation policies will be conducted to obtain a “clear picture” of policy constraints and possible options that need to be addressed in order to provide enabling conditions that lead to conservation action on a wider scale. The methodology will be used to answer following research questions: (a) Has funding become an important issue for conservation in Indonesia?; (b) Does better funding lead to better conservation?; (c) Can PES mechanisms contribute to solving problems of funding and lead to conservation or contribute to an awareness of conservation?; (d) Can such mechanisms be as economically viable as other methods?; (e) How can these methods be better integrated into conservation and management

FIGURE 1 Comparing PES to other conservation approaches.

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plans?; (f) Is it true that “regulation” will be more effective than a marketbased approach for environmental services? (Noordwijk, 2005).


THE LEGAL FRAMEWORK FOR PES IN INDONESIA Law No. 23/1997 (Republic of Indonesia, 1997), replacing Environmental Law No. 4/1984 (Republic of Indonesia, 1984), describes the authorities, rights, and responsibilities governing the management of the environment, including the delegation of authority to local (provincial, district, and municipal) governments; it also takes spatial land-use planning into consideration. Law No. 41/1999 (Republic of Indonesia, 1999), followed by the recent Government Regulation 6/2007 (Republic of Indonesia, 2007) on Forestry, provides general guidance on the management of forest resources with a specific article regulating the management of environmental services. These laws, combined with Law No. 34/2000 (Republic of Indonesia, 2000b) and Government Regulation 65/2001 (Republic of Indonesia, 2001) on Regional Taxation, define PES in Indonesia. In addition, other types of PES, such as the Clean Development Mechanism (CDM) through carbon trading, are regulated by Law No. 17/2004 (Republic of Indonesia, 2004b) on the Ratification of the Kyoto Protocol. Water services are regulated by Law No. 7/2004 (Republic of Indonesia, 2004c) on Water Resources. Both laws underpin the implementation of PES in Indonesia. However, the process of transferring benefits from buyer to provider of environmental services is a lengthy one under the existing legislation, and this has contributed to the potential loss of funds to finance tropical forest conservation.

CASE STUDIES The three case studies, which draw on some of the early experiences with PES in Indonesia, will briefly discuss the process of establishing a PES mechanism and identifying gaps in terms of commitment from the community or local and national government. The first case study comes from Lombok and is a pilot study undertaken by WWF Indonesia–Nusa Tenggara Program, in collaboration with KONSEPSI, a local non- governmental organization (NGO). The second case study will describe the experience of establishing a local management body in the Sungei Wain Protection Forest (HLSW) area in order to strengthen its position to negotiate with local and national governments and with the state-owned oil company to formulate a better scheme to transfer benefits that could contribute to improved protection of the area. The formulation of the concept of “conservation districts” in


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several areas of Indonesia will be the third case study. This will complete the review and generate valuable information on how to relate public policy to making PES work.


West Lombok District and the City of Mataram Lombok is a small island in Nusa Tenggara Province with a total area of 463,243 ha; in 2003 its population was approximately 3 million, more than 600,000 of whom live in the area around Mt Rinjani. The Rinjani catchment area plays an important role in supplying water to the people in Mataram District: the supply comprises 85 springs on 10 watersheds and 5 subwatersheds. The water supply on Lombok has become critical; by 2003, 40% of the springs had disappeared as a result of land-use change for agriculture and forest degradation in the Rinjani area. It was also influenced by the increase in tourism activities, as building tourism-related infrastructure is very popular. These activities caused a decline in the number of springs and impacted the water supply to households, industry, agriculture, and other users. As Lombok is a small island, it was suggested that a payment scheme for water services be implemented in order to conserve water and land resources. Subsequently, WWF Indonesia–Nusa Tenggara Program and KONSEPSI (a local NGO) worked together to calculate the economic value of water resources in the Rinjani catchment and, together with the local government, devised a scheme for payment for water services. The main idea was to provide rewards to the upstream community with cash incentives to conserve their area, focusing initially on the area around the springs. The roles and responsibilities of the partners were agreed: KONSEPSI would help the upstream community to conserve their area (the sources of the springs), and WWF would formulate an agreement with the district government to formulate and establish regulations for environmental services that accommodate a payment-for-water-services scheme. In order to design the reward mechanism, an economic evaluation of the water on Mt. Rinjani was undertaken by WWF Indonesia–Nusa Tenggara Program in collaboration with Nusa Tenggara Barat (NTB) Development Planning Agency (Bappeda), the Forest Agency and Culture and Tourism Agency in NTB Province, Rinjani National Park Bureau, and Mataram University. The results of the study showed that the potential economic value of the water resources in the Rinjani catchment area is high, but that the actual economic value was very low (see Table 1). To support development of the PES program, studies on Willingness to Pay (WTP) for water services were also initiated among customers of the District-owned water company (PDAM), at both community and industrial level, in the city of Mataram and West Lombok District. This study was

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F. A. Prasetyo et al. TABLE 1 Results of Study of Economic Valuation of Water in the Rinjani Catchment Value (Rp. billion) (US$ 1 = Rp. 9000) No

Component

1.

Gross Benefit of Water Resource Domestic Industry Agriculture Other Total Gross Benefit Cost Estimate (60%) Net Benefit Estimate (40%) Net Benefit to Agriculture Total Net Benefit

2. 3. 4. 5. 6.

Actual

Potential

120.9 69.1 2.5 718.3 1,061.8 637.1 424.7

1,453 838 30.4 9,504.7 11,795.7 7,077.0 4,718.3 939.6 5 657.9


Source: WWF-Indonesia. (2001). Rinjani economic valuation [Unpublished Rep.]. Lombok, West Nusatenggara, Indonesia.

TABLE 2 Breakdown of Number of Customers of PDAM Menang Mataram in West Lombok District and the City of Mataram No

Customer type

Number of units

1. 2. 3. 4. 5. 6.

Household* Trade and industry Government partners and facilities Offices Social services Public services Total

34,202 2,133 5 224 541 816 37,921

*) average use 20 m3/month. Source: PDAM Menang Mataram (2003).

undertaken by using a public awareness survey of the water crisis and of the customers’ ability to contribute to a conservation fund for water resources. The results of this study showed that at the community level most customers (95%) were aware of the water-supply crisis and willing to pay Rp. 1,000–5,000 (US$0.1–0.6) per month per customer to conserve the springs. This information was then disseminated to the community and the local council (DPRD). Most customers committed themselves to paying an extra Rp. 1,000 per month on their water bill for the conservation fund (an average of Rp. 50/m3— about 5% of the price of 1 m3 of water). The dissemination process, supported by a model of land use and water supply, was developed in collaboration with CIFOR. The model was used as a visioning tool to explore a scenario related to the implementation of PES for water services and the impact on

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X

X

Kapuas Hulu

Pasir

X

X

Water consumption × local rate X

WTP; needs improvement

Well defined

District Government (P); National+International (B) District Government (P); National+International (B)

Communities; City Government; Local NGOs (P); Pertamina (B) District Government (P); National+International (B)

Local communities (P); Communities+Industry (B)

Buyer (B) and Provider (P)

(NCDT)

Independent third parties (Bestari Rinjani+ Konsepsi); District BP HLSW and other organizations; City Government National Conservation Districts Taskforce (NCDT) (NCDT)

ES Provider Secures ES Provision

*) Directness (D) (+++); Integrated (I) (− − −); Economic Incentives (E) (+++); Non Economic Incentives (NE) (− − −).

X

Forced transaction by policy

HLSW

Malinau

WTP combined with policy

Voluntary

Lombok

Site

PES principles Category*)

D (+++) NE (−)

D (+++) NE (−)

D (+++) NE(−)

D(+) E(+); Policy needs to be established (D+); Command and Control+PES D (+)

TABLE 3 Comparative Assessment of the Case Studies please remove this table from the Text and Place in a Separate Document



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the ability of the forested area to conserve water supplies and maintain local livelihoods in a sustainable way (see Figure 2). The model showed that there was a positive relationship between the implementation of PES and the size of the forested area. Maintaining the number of springs would support the sustainability of the water supply to the community in the city of Mataram and West Lombok District. In relation to the dissemination of information about PES, the results of the modeling were used to support the decision-making process and were presented at a stakeholders’ meeting in Mataram in 2004, as a trigger to increase public awareness of the water crisis and the importance of the reward mechanism. In terms of governance, the results of the study stimulated the local government to begin work on a District Regulation on Payment for Environmental Services. The draft of this regulation has now been produced and sent to the council for discussion. As soon as the regulation is finalized, a District Head’s decree will be issued on the level of payment to the conservation fund for customers at the community level. For industrial customers, calculation of the payment to the conservation fund is in progress and will soon be completed. The flow of water service payments in Mataram and West Lombok District began with the additional payments made by community-level users to PDAM; PDAM will transfer these payments to Bestari Rinjani, an independent body formed by stakeholders to manage the PES mechanism. Bestari Rinjani will distribute this payment to three community groups: (a) the community living around the springs, to conserve their area; (b) a group involved in a program to restore/conserve an area related to the springs; and (c) the poor in Mataram District who have no access to clean water (see Figure 3). Although the proportions of the fund to be distributed to each group are still to be decided, this mechanism has been discussed by all the interested parties and is ready for implementation.

Management of the Sungai Wain Protection Forest The Sungai Wain (Wain River) Protection Forest (HLSW) was established through the Ministry of Forestry Decree No. 416/Kpts-II/1995 (Republic of Indonesia, 1995). In the transition to decentralization, the legal right to manage the protection forest was transferred to the local government (Government Regulation 25/2000; Republic of Indonesia, 2000a). This reaffirmed Presidential Decrees Nos. 32/1990 (Republic of Indonesia, 1990) and 62/1998 (Republic of Indonesia, 1998) on the management of the protection of forests. This legislation was followed by the issuance of City Regulation No. 11/2004, on the management of the HLSW (Republic of Indonesia, 2004a). The HLSW, a

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2 10.00

1

2

20.00 Years Untitled

1 2

2

30.00 40.00 12:31 PM Tue, Feb 27, 2007

1

Water supply (m3)

Non PES

Forested area (ha)

2: Lowland water

50000 0 0.00

65000 2500000

1

2

1: Forested area 80000 5000000

Page 1

1: 2:

1: 2:

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PES

20.00 Years Untitled

Forested area (ha)

2

2 30.00 40.00 11:36 PM Mon, Feb 19, 2007

1

Water supply (m3)

2: Lowland water

FIGURE 2 Results of modelling in forested area and lowland water supply in relation to PES implemention.

20000 0 0.00

50000 2500000

1

1: Forested area 80000 5000000

Page 1

1: 2:

1: 2:

1: 2:



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FIGURE 3 Flow diagram of PES (reward payment and distribution) in the city of Mataram and West Lombok District.

tropical lowland dipterocarp forest with a total area of 9,782 ha consisting of dry land, swamp, and mangrove ecosystems, has played a key role in the development of the city of Balikpapan in East Kalimantan Province. Not only does the area have important hydrological functions but it also has a rich biodiversity and unique ecosystem and provides good habitat for Orang Utan (Pongo pigmeus), Honey Bear (Helarctos malayanus), and many other rare animals and plants. The two major rivers running through the HLSW, the Bugis and the Wain, provide the fresh water used to run the second-largest oil refinery in Indonesia, which produces nearly 30% of the fuels used in the country. The reservoir was built in 1947 by the Dutch Oil Company and today is used by the state-owned oil company, Pertamina. The refinery consumes about 15,000 m3 of fresh water per day—about 25% of the total domestic freshwater consumption in Balikpapan. The legal right to use this surface water is regulated by Letter of Decree of the Provincial Mining Authority No. 546.2/33/Sub-2/Distamb/2000 (Republic of Indonesia, 2000c). Although this source of fresh water is protected, by 1998 illegal logging, encroachment, and forest fires had caused serious damage to about 2000 ha of the HLSW (Hoffmann, Hinrichs, & Siegert, 1999). Concerns began to be voiced when the HLSW area became degraded and the water supply ran into problems: in 1997, the water level in the reservoir, at about 13 cm, was at its lowest for years compared to its



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normal level of 115 cm. The fall in water level was accompanied by an increase in the total sediment load deposited into the Wain reservoir as a result of the decline in forest cover. In addition, some geophysical elements of the watershed of the Wain, such as the high annual rainfall, rather steep slopes and overall circular shape of the watershed, and soil types vulnerable to erosion, also supported the sedimentation processes (Hardwinarto, 2001). Through a multistakeholder consultation involving local NGOs and with the support of the international projects, Tropenbos and Natural Resources Management (NRM-III), in 2001 local stakeholders signed the “Sungai Wain Declaration” and agreed on the formation of a small team with a mandate to review the management of the protection forest. Finally the structure of a management board (BP HLSW) was agreed: it comprised a multistakeholder steering committee providing policy direction to and control over a professional management unit called the HLSW Executive Board. The city government demonstrated its commitment to prevent further degradation of the HLSW, which might threaten the existence of the reservoir, by allocating the lion’s share of its 2001 and 2002 budgets—Rp. 7 billion (US$777,779)—to support BP HLSW; and Balikpapan City Council added a further Rp. 2.5 billion (US$27,778) from its 2002 budget. Furthermore, the funding mechanism is regulated by City Regulation No. 11/2004 (Republic of Indonesia, 2004a), which explicitly states, in Article 21, that such funding should come from the city budget (APBD), and provincial and national budgets, as well as from other sources. In view of the fact that BP HLSW is not a government body and to avoid complicated bureaucracy, the City Mayor tried to take the initiative to provide funding through a block grant. However, this is not possible at this time as new Government Regulations—No. 58/2005 on Regional Finances (Republic of Indonesia, 2005) and Ministry of Home Affairs Regulation No. 13/2006 on Guidance of Management of Regional Finances (Republic of Indonesia, 2006)—will affect the future funding of management of the HLSW. This problem has yet to be resolved. This situation has forced BP HLSW to find alternative funding from its “potential buyer,” Pertamina, whose refinery depends on water from the Wain; however, the transfer of benefits from the “user” to BP HLSW as the “provider” has not materialized. The benefit-transfer mechanism is regulated by Law No. 34/2000 on district taxes and “retribution” (Republic of Indonesia, 2000b). According to Article 2, the use of surface and groundwater will be charged as a provincial tax; furthermore, at least 70% of this will have to be distributed to the district/city. Estimates made by BP HLSW show that, based on an average daily water consumption of about 15,000 m3 by Pertamina to run the refinery, the annual value of the water used is about Rp. 30,353,400,000 (US$4,895, 000). About 30% is lost as leakage during transportation. Lobbying is currently underway for Pertamina to pay a contribution for the management

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of the forest. However, as regulated by a joint ministerial decree of the Ministry of Mining and Energy and Ministry of Public Works, No. 04/1991 and 76/1991, respectively, Pertamina will review the legal process and seek advice from the Ministry of Finance before making a commitment to provide sufficient funds to finance the management of the HLSW (Republic of Indonesia, 1991). However, a limited amount of funding has been provided through a Corporate Social Responsibility (CSR) program and Community Development program. Although the user and provider have been identified, the actual process of transferring the benefits of environmental services is complicated. As indicated in Figure 4, if the benefits are transferred in accordance with Law No. 34/2000 (Republic of Indonesia, 2000b) and Government Regulation 65/2001 (Republic of Indonesia, 2001), the transfer will be inefficient and could contribute to a potential loss of funds.

Conservation District Concept A “conservation district” can be defined as an administrative area that has political commitment to sustainable development and to maintaining biodiversity. The district that is being proposed as a conservation district will limit degradation of natural resources through a step-wise process aiming to

Flow of water resources River flow

HLSW

BP-HLSW Management

Flow of funds in accordance with Law 34/2000 & Government Regulation No. 65/2001

River flow Leakage

Potential loss of funds & mis-

City Budget (APBD)

Used by community

Wain Reservoir

Provincial Budget (APBD)

Services Used by Pertamina Refinery

River flow

Payment National Budget (APBN) Bay of Balikpapan

FIGURE 4 Flow of water resources and funds in a potential PES mechanism in accordance with existing legislation.


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develop adherence to the established set of criteria and indicators discussed below. Conservation District Criteria: • Conservation areas cover large parts of the district and constitute an integral part of a larger eco-region • Multi-stakeholders consensus on conservation as an integral part of district economy • Natural resource conservation adopted as the basis of district economy (conservation-based development)


Conservation District Indicators: • Legislature declaration of a district as conservation-based • Consistency between development policies and natural resources conservation objectives • Spatial/land-use planning consistent with ecological functions of district territory • District finance policy taking account of environmental costs associated with development • Conservation area management an integral part of the performance of district economy • District Environmental Affairs Bureau is an equal partner among government bodies and provides meaningful input into district development policy making The primary incentives for districts to become conservation-oriented are specific budgetary allocations from central government and government loan facilities as well as increasingly well defined possibilities for payments for environmental services. The conservation district program has been supported by the National Conservation District Task Force; the main remit of the Task Force is to produce a ministerial decree supporting the implementation of the “conservation district” policy. This ad hoc team has the potential to exert significant influence on national and local governments to formulate enabling policies for good forest governance. With support from the Forest Partnership Program (CIFOR, WWF-International, WWF-Indonesia, and Tropenbos Indonesia Program), in 2004, Kapuas Hulu District (West Kalimantan) was declared a Conservation District, and was followed by Malinau and Paser Districts in East Kalimantan. Forestry observers and policy makers saw this as both a revolutionary and an uncertain development—the latter due particularly to the limited incentives in place for regional governments to pursue conservation. Although the PES systems have not been implemented in these areas, the benefit of

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bio-prospecting will be the identification of potential resources to be managed according to a PES system, especially in Kapuas Hulu and Malinau Districts, where three National Parks are located—Betung Kerihun, Danau Sentarum, and Kayan Mentarang.

COMPARATIVE ASESSMENT OF THE CASE STUDIES The PES principles, as described by Wunder (2005), are employed to generate lessons learned and insight into the implementation of PES in Indonesia.


Voluntary Transactions The voluntary transaction is defined as an unforced agreement, which notably distinguishes it from a command-and-control measure. The case study from Lombok showed that the PES process began when the communities realized that the water supply was declining as a result of the degradation of upstream water resources. Awareness of this crisis was raised as a result of NGOs carrying out a resources valuation exercise and holding a public consultation, which led to community empowerment. In this case study, it is difficult to categorize the situation under the voluntary transaction criteria, because in the early stages of PES command-andcontrol techniques were employed to protect upland water resources from encroachment and land-use change were probably inevitable, especially for those areas belonging to the Forest Protection Zone (Mt. Rinjani). Meanwhile, the water resources in the community-owned area could be protected through a community empowerment program that would lead to voluntary protection of the community’s water resources. On the buyer’s sidereal benefit transfer would occur if it were regulated by policies. The combination of a “command-and-control” mechanism for the protection area and the support of enabling policies would be the ideal precondition for implementing PES. A similar situation occurred in HLSW. This case could not be categorized as a voluntary transaction, as the real buyer (Pertamina) was well defined and the payment mechanism, in the form of taxes, was regulated by Law 34/2000—no direct transaction materialized (Republic of Indonesia, 2000b). Although the regulation exists to force payment through the taxation mechanism, the transfer of benefits has proved to be very complicated and to generate a potential loss, plus the potential for miscalculation in terms of quantity of service, as indicated in Figure 4. Kapuas Hulu and Malinau Districts are in the very early stages of a PES program with the transaction expected to be realized through taxation and subsidies from the central government with the fiscal balancing mechanism that is now being proposed by the Conservation Districts Task Force.


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Another procedure that might be suitable for voluntary transactions is forest certification, which has been practised in Indonesia for about 10 years. This mechanism allows “voluntary transaction” facilitated by a third-party auditor. Although, according to Wunder, Dung The, and Ibarra (2005), forest certification is not considered to be a type of PES scheme because this type of initiative relates more to forest products than to environmental services. In Indonesia the forest certification scheme has contributed to protecting High Conservation Forest Value (HCFV) inside forest concession areas, and this can be considered as indirect protection for the biodiversity of tropical forest. Almost 1 million ha of tropical forest have been certified by the Indonesian Ecolabel Institute (LEI), about 30% of which have also been certified by the Forest Stewardship Council (FSC; Muhtaman & Prasetyo, 2006).


Well-defined Environmental Services What is bought needs to be well defined; it can be a directly measurable service. In these case studies, water is the PES commodity. Although it is well known that forests help provide water services, the link—both qualitative and quantitative—between forest and ecological services is often poorly understood (Chomitz & Kumari, 1998). However, in the specific case of the HLSW tropical forest, the study showed that degradation of the natural forest area had a direct effect on sedimentation in the Wain reservoir (Hardwinarto, 2001) that led to a reduction in the quantity and quality of the water services. In the early stages of implementing a PES program, a simple calculation of water use by means of a rapid hydrology assessment would help to quantify the amount of water that can be traded through PES (Noordwijk, 2005). The case studies showed that there are difficulties in quantifying water services. In the Lombok case study, the amount to be paid for water services was based on public awareness of the water crisis and WTP to provide a conservation fund for the community. Perhaps, this is an inappropriate method for calculating payments that needs to be revised, starting with the contribution to the conservation fund to be paid by the tourism sector, such as hotels and other facilities; according to the survey, this is the sector that consumes most fresh water in its daily business. The HLSW case study showed that the rate for water services to be paid by Pertamina for the refinery process was Rp. 8,250 (US$0.95)/m3 consumed. This price was set by the local government water service (PDAM). The case studies also showed that the way in which water services were quantified did not relate to their economic value, and in both the Lombok and HLSW case studies attempts were made to quantify water services using a very simple methodology. However, in view of the importance of PES for water services and conservation, the difficulty of quantifying water services should not be a barrier to implementing a PES program.

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Environmental Services Provider and Buyer Who are the environmental service buyer and seller associated with who has control over the resources generating the services. The issue of “ownership” is crucial in an environmental service benefit-sharing agreement (Pagiola et al., 2002), and very relevant in the Indonesian context because PES is expected to contribute fully to both poverty alleviation and environmental conservation (Leimona & Prihanto, 2005). On Lombok, private ownership is the dominant land status, and landlessness is a serious issue. The independent body Bestari Rinjani has provided facilitation to identify the providers and to coordinate the transfer of water services benefits from the buyers to them. The situation on Lombok is different from that at HLSW: the ownership here is clearer because the protection forest is under the management of BP HLSW. Different types of beneficiaries have been identified in these case studies. In the Lombok case study the existing source of payments is mainly the community in the city of Mataram and West Lombok District (PDAM’s customers). Contributions are made through the conservation fund in order to revitalize traditional values relating to protecting the existing forest and landscape and to fund a poverty alleviation program. Meanwhile, the potential buyer in the HLSW is the private sector (Pertamina); the transfer arrangements are based on Law No. 34/2000 (Republic of Indonesia, 2000b) and Government Regulation 65/2001 on Regional Taxation, the legislation that defines PES in Indonesia (Republic of Indonesia, 2001). Each beneficiary has a different motivation and rationale. The community in the city of Mataram and West Lombok District is driven by awareness of the water crisis, and this has led consumers to provide a conservation fund to maintain the water supply. This situation is different from that of Pertamina in HLSW, which is driven by business ethics and government legislation (under the taxation arrangements environmental conservation is partly the government’s responsibility). The situation of the potential buyers (Pertamina and PDAM customers) in these two case studies differs: as potential buyers they could fund the conservation effort and therefore policy intervention at the local and national levels is needed. Furthermore, regulations must force the public and private sectors to internalize the externalities, to count the “payment” for ES as a production cost (Leimona & Prihanto, 2005).

ES Provider Secures ES Provision PES is to be made if, and only if, the service provider secures the provision of that service continuously over time. Of the situations described in the two case studies, in two districts (Lombok and HLSW) the focus is on conserving water supplies and watershed functions, and in the other


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two (Malinau and Kapuas Hulu) the focus is on biodiversity conservation. The principle that “good watershed function relies on good tree cover” is used to negotiate PES benefit transfers for water services. In the Lombok case study, this principle is modified by defining the linkage between ES provision and land-use change and the protection of Rinjani National Park, which lies adjacent to the area owned by the communities. In the Malinau and Kapuas Hulu cases, it was found that “conservation district” programs play an essential role in conserving flora, fauna, and landscape (through bio-prospecting). These programs focus not only on biodiversity conservation but also on defining alternative sources and options for sustainable livelihoods. In this way both the market-based approach and legislation play an important role in securing the provision of PES.

CONCLUSONS PES schemes are still new in Indonesia, and most are in the phase of conceptual development and experimental implementation. Different stakeholders and institutions are involved at different stages of the process in order to define the most appropriate scheme for a particular community and the potential for putting payments/rewards in place. In defining the best schemes for implementing PES in Indonesia, some of the lessons to be learned can be recognized in the case study areas: • The concept of “voluntary transaction” should be defined in PES, however, it is difficult to find examples of voluntary transaction in PES schemes in Indonesia. On the provider’s side “command and control” to protect natural resources (forest, water, biodiversity, etc.) need to be facilitated under a community empowerment program, and on the buyer’s side real benefit transfer would occur if it were regulated by district, provincial, or national policies. A combination of both the “command-andcontrol” mechanism and PES with enabling policy support would be the best means of implementing conservation programs in Indonesia. • The processes for defining the value of PES (water and biodiversity) in Indonesia have been very simple. This should not be a barrier to PES implementation, and improvements to these methods are welcome. • Policy intervention at the local and national levels is needed in order to persuade potential buyers to fund the conservation effort and potential providers to conserve natural resources. • Appropriate funding with less complicated mechanisms for transferring of benefit is needed to make PES work. • Scarcity of resources can be a trigger for the implementation of PES, therefore in this situation better funding would lead to better conservation.

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• In providing security of ES provision, both market-based and regulatory approaches play important roles. • A combination of both the “command-and-control” mechanism and PES with enabling policy support would be the best means of implementing conservation programs in Indonesia.


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