Payment for watershed environmental services in Latin America

La Esperanza Hydropower Project, Costa Rica

In Costa Rica, several laws and regulations aim to protect the ecosystems that regulate water resources. These include the Environmental Law (1995), the Forestry Law (1996) and the Land Use and Management Law (1998), which imposes restrictions and limitations on land use in forested areas to preserve vegetation cover and avoid pollution. The Ministry of Environment is responsible for ensuring the conservation of forest cover, imposing fines, and granting water concessions to hydropower stations, such as La Esperanza Hydropower Station (LEHP). The contract with LEHP is based on the Costa Rican concept of payments for environmental services (PES), developed in 1996 to create economic incentives for the conservation of forest and to compensate land users for the environmental services their land or land use generate. There are several government-sponsored PES schemes in Costa Rica.

Water is a limiting factor for LEHP’s power production, and seasonal variations in river stream flow from La Esperanza watershed are of great concern. About 98 percent of the watershed’s 34 km² area is covered with forest. In 1998, LEHP and the upstream landowner of the watershed, a conservation non-governmental organization (NGO) called the Monte Verde Conservation League (MCL), negotiated an arrangement to reduce the risk associated with land-use changes. The main goal of this contract was to conserve forest cover in the upstream watershed, reducing the risk of large fluctuations in stream flow and ensuring regular downstream flow.

The contract was provoked by a landownership dispute between the two parties, revolving around an area of 1.5 ha. This piece of land was of great importance for LEHP, which planned to build the power plant there, but MCL owned it. The contract is private and involved no government intervention. It grants land-use rights to LEHP for a period of 99 years, with MCL retaining ownership. In exchange, the contract stipulates the payments that LEHP must make to MCL as compensation for activities that protect the watershed’s forest cover. In case of delayed payment, MCL can revoke LEHP’s right to use the land, including all existing infrastructure.

Payments increase during the first five years and are then calculated annually using a formula that links the payment to power production and inflation. The values of the NGO’s hydrological services per hectare were determined on the basis of values used in similar schemes implemented by the government. LEHP’s payments contribute 10 to 25 percent of MCL’s annual budget, and increase the power plant’s operational and maintenance costs by 21 percent.

Adapted from M. Rojas and B. Aylward. 2002. Cooperation between a small private hydropower producer and a conservation NGO for forest protection: The case of La Esperanza, Costa Rica. FAO Land-Water Linkages Case Study Series. Rome, FAO.

<p>Download the full-text document<br><br></p> 

A public-private PES scheme in rural Ecuador

Pimampiro municipality has about 20 000 inhabitants, of whom 6 300 are urban residents. Its water supply originates in the forests and grassland of an upstream watershed. In 1987, an agricultural cooperative, the Asociación Nueva América (ANA), started to acquire land in this watershed, and by 1997 it controlled 638 ha of forest, upland prairie and agricultural land. Further encroachment on forests and grassland was expected to put the city’s water supply at risk.

The municipality of Pimampiro and ANA drew up a cooperation agreement with the twofold aim of preserving forest cover and grassland and protecting Pimampiro’s sources of drinking-water. Through its Unit on Environment and Tourism (UMAT), the city makes contracts with members of ANA, based on their land management plans. Compensation is paid per hectare for land uses that are assumed to benefit water provision. The highest payments - US$1/ha/month - are made for conserving primary forest and grassland, secondary forest is paid US$0.75/ha/month, and intervened primary forest or grassland 0.50/ha/month. No payment is made for agricultural land. Payments are made after inspection by an UMAT technician every four months. In cases of repeated non-compliance, providers are excluded from the scheme. At present, payments are made for a total of 638 ha.

The scheme was established in 2001 with an international grant of US$15 000. The municipality directs 20 percent of residents’ water charges into the fund, but this totals less than US$4 000/year, which is barely enough to pay compensation on 638 ha. Administration, oversight and technical assistance costs are borne by the municipality and other parties. Ideally, the scheme should expand to cover all the upstream area that provides water - a total of 4 285 ha - but this would imply a sixfold increase in compensation payments, which is currently beyond the municipality’s reach.

Adapted from K. Ambrose. 2002. Pago por servicios ambientales. Una alternativa que contribuye al manejo y conservación de bosques y páramos. La experiencia de la Asociación Nueva América. Imbabura, Ecuador, CEDERENA.

Transfer of hydropower revenue to watershed management institutions in Colombia

With 47 468 m3/capita/year, Colombia is blessed with abundant water resources. In areas with high population density, however, less water is available, and this has triggered the authorities’ concern about a water crisis in the medium term. Of a total population of 37 million, about 8 million people live in upper watersheds and are already affected by water scarcity. This situation is aggravated by extreme climatic events such as El Niño, which have caused considerable losses in the hydroelectric sector.

Faced with this panorama, the government has implemented a scheme to transfer 6 percent of the gross energy sales of hydroelectric projects to local institutions in charge of natural resource management: municipalities and regional development organizations (CARs). By law (Law 99 of 1993 article 45, and Executive Decree 1933 of 1994 articles 8 and 9), 50 percent of the funds must be invested in activities that improve the watershed areas upstream of the hydroelectric facilities. Of the country’s 23 CARs, 16 have hydroelectric projects in their areas of influence and are charged with formulating and implementing watershed management plans. Between 1994 and 2000, these CARs received US$135 million from hydroelectric revenues.

This scheme is a powerful tool for investing in the continued provision of environmental services from upper watersheds. In 2002, a study by the General Auditor of Colombia found, however, that the payments are increasingly used to cover the CARs’ administrative and other costs, rather than funding activities for watershed protection. To improve this situation, watershed management plans need to identify the watershed areas where interventions would have the greatest hydrological impact downstream. The CARs also need to define clear and verifiable indicators and a monitoring and evaluation system that assess the impacts generated.

There are other examples of innovative financing mechanisms in Colombia. In the Cauca valley, for example, downstream water users contribute to the financing of watershed management plans by transferring shares of their self-imposed water user fees to projects that conserve the upstream watershed.

Adapted from R.D. Estrada and M Quintero. 2004. “Propuesta metodológica para el análisis de cuencas: una alternativa para corregir las deficiencias detectadas en la implementación del pago por servicios ambientales”. In Payment schemes for environmental services in watersheds. Land and Water Discussion Paper No. 3. Rome, FAO.

<p>Download the full-text document<br><br></p> 
last updated:  Tuesday, March 27, 2007