0351-A2
Natasha Landell-Mills 1
Land and water are intimately intertwined. Appropriately managed land provides a number of water benefits valued by humans. Clean water, regulated water flows, reduced flooding, healthy aquatic habitats are just a few of the most commonly cited gains. Yet, despite the critical nature of these benefits, few land managers have reason to consider their impacts on, often far-away, water users. Markets for watershed protection seek to connect land managers to water users through the use of a payment mechanism. The idea is simple: where land managers deliver desired services by adopting favourable land practices they are rewarded by downstream beneficiaries. In theory, both upstream and downstream communities gain. In practice, however, the precise distribution of benefits and costs is rarely equitable. Where more powerful water users or land managers can craft payment systems to reflect their interests, marginal groups are at risk of being side-lined. This paper seeks to explore the risks and opportunities introduced by watershed markets for disadvantaged groups, and highlights those constraints that need to be tackled before "pro-poor" markets can be introduced.
Widespread flooding in China's Yangtze River Basin in the 1998 left over 3,000 people dead, hundreds of thousands homeless and destroyed billions of dollars worth of property. Rapid siltation in hydropower reservoirs in Malawi threatens the future supply of electricity and poor water quality pushes up turbine maintenance costs to unsustainable levels. Rising nutrient pollution in rivers throughout the USA is disrupting delicately balanced aquatic ecosystems and threatening the quality of drinking water. These are just three examples of water resource problems facing policy-makers around the world. Irresponsible land management plays a critical role in undermining water flows and quality. Yet, the question of how to ensure that land managers internalise the negative impacts they have on water has been barely explored. Ambitious plans for integrated catchment management have frequently fallen short of their targets - often due to a lack of tools for encouraging improved land management.
The failure of governments to deliver solutions has prompted local innovation. Payments by water users for watershed protection are growing in popularity as they deliver results. Improved forest management, revegetation and soil conservation are prominent activities in evolving deals. In a world where one-fifth of the population lacks access to safe and affordable drinking water and half the population lacks access to sanitation (Cosgrove and Rijsberman 2000), improving our understanding of how markets for watershed protection may improve water quality and augment dry season flows is critical.
A recent review by the International Institute for Environment and Development (IIED) begins to shed light on evolving markets for watershed services and their potential contribution to improving local livelihoods (Landell-Mills and Porras 2002). IIED's review covers 61 efforts to establish markets for watershed services in 22 countries from around the world. The review also points to a number of important issues and questions surrounding watershed markets. This paper presents important insights offered by the review. The discussion begins with a brief description of watershed markets, before turning to its principal focus: the impacts of markets for disadvantaged groups. The paper ends by exploring key constraints to market development and their capacity to improve local livelihoods.
Land and water are intimately intertwined. Appropriately managed land provides a number of water benefits valued by humans. Clean water, regulated water flows, reduced flooding, healthy aquatic habitats are just a few of the most commonly cited gains. Yet, despite the critical nature of these benefits, few land managers have reason to consider their impacts on, often far-away, water users.
The basic idea of a watershed market is simple. Where land managers provide critical services to downstream water users they may be able to persuade beneficiaries to pay them to adopt desired land practices. If water users face serious consequences from poor land management, they may be willing to pay for better land management practices. By setting up a payment system that embodies downstream beneficiaries' demands for improved land management and compensates land managers for adopting these practices, both upstream and downstream communities are likely to be better off. A stylised representation of how such a payment system may work is shown in Figure 1.
Figure 1: Watershed market - a stylised illustration
While the real world is rarely so simple as that presented in Figure 1, and important scientific information is often lacking (see Box 1), payment systems are emerging in a variety of forms (Landell-Mills and Porras 2002).
Box 1: Forest-water linkages - science matters
Market development is premised on the fact that particular land management practices are superior to alternative mechanisms for maintaining or improving water supply, e.g. hydrological engineering solutions. Understanding the value-added of watershed protection is therefore vital. Establishing where specific activities play a positive role in the provision of watershed services must be the point of departure for market development. Yet, scientific evidence of the links between land management and water services is often lacking. The problem of misinformation and myths is particularly evident with respect to forest-water linkages (Calder 1999). Complex natural relationships are compounded by poor measurement techniques. The impacts of forests for water flows, quality, erosion, sedimentation, water table levels and aquatic productivity depend on a number of site-specific features, including terrain, soil composition, tree species, vegetation mix, climate and management regimes. Moreover, the extent to which forests offer benefits depends on the alternative land use and management regime employed. Some of the most commonly held beliefs surrounding forest-water relations are often not rooted in sound science: Maintenance of dry season flows. The view that forests act as `sponges' soaking up water and releasing it gradually over dryer periods is widespread, but in practice, forests effect on flows will vary by location (Hamilton and King, 1983; Bosch and Hewlett, 1982). Flood control. High profile stories blaming flooding on deforestation in upper reaches of catchments have captured the public's attention, but the evidence supporting these claims suggests that a relationship may only exist in smaller catchments of less than 50,000 hectares (Bruijnzeel and Bremmer, 1989 cited in Chomitz and Kumari, 1996). Even in smaller catchments, the extent to which forests soak up excess water during rainy periods depends on the forest use and forest type. Erosion control. Theory tells us that natural and mixed forests will reduce erosion by binding soils, protecting exposed earth and by raising infiltration rates. Empirical evidence of forest-erosion links varies significantly by site, and in the case of sheet erosion, forests are often less important than other factors such as ground cover, soil composition, climate, raindrop size, terrain, slope steepness and forest use. Gully erosion may even be exacerbated in forests due to the way tree trunks and roots shape water flows (Forsyth 1996). Sedimentation control. Sediment delivery ratios depend on a range of site-specific factors, including: the size of catchments - larger basins having lower ratios since they have more obstacles for catching sediment, local geology, topology, stability of river banks, and the state of land use and roading (Chomitz and Kumari 1996). Maintenance of aquatic habitats. Forests are thought to be important in controlling sedimentation, nutrient loading, water temperature and water turbidity, all of which have direct and indirect negative consequences for fish populations (Hodgson and Dixon 1988, Hemmingway 2000). However, outside mangrove forests, the evidence provided is often superficial. The problem of scientific uncertainty is not restricted to forest-water linkages. Hydrological information on the interaction of land management with water within catchments is often limited. Recognising these limitations is critical in any evaluation of markets and their potential to raise welfare. While markets may evolve as long as there is a perception that land management is "good" and people are willing to pay for the perceived services that result, where these payments are based on misinformation they will not achieve the desired outcomes. In such instances markets may reduce welfare, and are unlikely to be sustainable. With the above caution in mind, in what follows we focus on market development where land management is known to play a positive role. The aim is not to ignore the issue of uncertainty surrounding land-water linkages, but to focus on the problem of whether and how to go about establishing a market for watershed services where these are found to be positive. |
The literature on watershed protection fails to produce systematic cost-benefit analyses of emerging payments systems. Impact assessments are particularly superficial when it comes to evaluations of costs and benefits for poor households. It tends to be assumed that where benefits accrue to local communities the poor will gain. However, a broader look at the literature on watershed management warns against simplistic assumptions (see for instance Farrington et al 1999). Notwithstanding the paucity of information, in what follows an assessment of potential opportunities and risks facing poorer groups is put forward. An overview is presented in Table 1 below. The Table breaks opportunities and risks down according to six key assets held by poor groups: natural (e.g. land), physical (e.g. local infrastructure), human (e.g. health and education), social (e.g. cooperative institutions), political (e.g. contacts with the political elite) and financial.
Table 1: Impacts of markets for key assets held by poor households
Potential benefits |
Potential risks |
Natural assets | |
Increase land values due to improved management and new market opportunities, e.g. soil fertility and agriculture Where markets lead to regularisation of land tenure, this raises value of natural assets |
Lost access and use rights due to increased competition for resources Lost use values where new land management restrictions imposed, e.g. timber and non-timber forest products |
Physical assets | |
Infrastructure development - transport, market infrastructure, research, health care |
Dismantling of local infrastructure, e.g. roads, to ensure sustained supply of environmental services Increased inequality with investment in physical infrastructure targeted at certain market participants |
Human assets | |
Education and training - environmental management, enterprise development, project management, marketing, negotiations, etc. Improved health - improved water supply (quantity and quality), improved air quality, investment in health clinics, improved disposable income for medical treatment |
Inappropriate, non-transferable, education diverts spending away from broader skill development Poor capture few educational and skill development opportunities since offered menial jobs Reduced health where poor are excluded from land use and lose disposable income (e.g. from grazing, collecting non-timber forest products) |
Social assets | |
Increased tenure security where markets spur rights formalisation Increased managerial and organisational capacity of community-based organisations to tackle common problems Protection of natural resource-based cultural heritage |
Reduced tenure security where markets lead to displacement of poor who lack formal property rights Erosion of cooperative arrangements due to increased divisions between those that gain and lose. Threats to cultural heritage where markets and commercialisation undermine local value system |
Political assets | |
Increased political representation and voice due to improved organisational capacity (see social assets above) and contacts in private and public sector. |
Loss of political representation where markets lead to increased competition for resources and exclusion of poor |
Financial assets | |
Income from sales of watershed services Income from related employment (e.g. non-timber forest products, ecotourism, transport) Improved security and stability of income due to diversification |
High costs of bringing services to market (transaction costs and opportunity costs) means many poor suppliers excluded Income associated with land use may fall due to new restrictions. Poor excluded from new markets since lack necessary skills and assets Reduced security where contract design is inflexible (e.g. long-term contracts do not allow suppliers to respond to short-term shocks) |
The balance of costs and benefits within a watershed can be looked at by considering upstream and downstream communities, i.e. providers and beneficiaries of watershed protection, separately.
If we take upstream landholders first, there are a number of potential benefits for poor communities where they hold land that is targeted under watershed protection payment schemes. Apart from the regular income stream, training in watershed management may yield benefits for the natural capital base. This in turn could mean greater income from other land-based activities, including sustainable timber extraction, non-timber forest products, eco-tourism, or even the sale of related biodiversity or carbon services. To the extent that these new activities help diversify livelihood portfolios of poorer groups, they may reduce income shocks and increase stability. Moreover, where involvement in watershed service markets leads to investment in cooperative institutions such as watershed committees, there are significant potential spin-offs for poorer groups who gain experience in coordination and may use these new groups as a basis for cooperation in other areas.
But the gains experienced by poor upstream communities depend on their ability to negotiate for payments and their freedom to move in and out of the market. Where poor households lack secure property rights in a watershed and protection is imposed by force, these groups have little leverage for ensuring adequate compensation for the loss of land use rights. In extreme cases, poor households will be evicted from protected areas. Similarly, where disadvantaged groups lack the necessary education and political power to bargain effectively with downstream beneficiaries, they may be coerced into unfavourable deals.
With respect to downstream communities, markets also offer new mechanisms to ensure improved and sustainable water supplies. Yet, the extent to which poor communities gain depends on their access to the improved water, the quantities they use and the extent to which they bear the costs of watershed protection. Where access to water is linked to land rights, landless households may not share in the gains. But, where the costs of watershed protection are shared equally across the community, negative equity impacts may be serious. Even where costs are linked to the level of water use, poor people are likely to be disadvantaged since the total will represent a larger share of their income than wealthier users. Moreover, to the extent that wealthier water users do pay most, funds will be channelled towards watershed protection that benefits their interests. This may or may not benefit poor groups.
The discussion above highlights potential opportunities and risks offered by markets. Whether poor people realise the potential, or fall victim to the risks is an empirical question. There are, however, a number of reasons for pessimism. In what follows we consider why the constraints to market development are likely to be most difficult to overcome in poor areas, and access to market opportunities lowest for poor people.
Three broad sets of constraints limit market development: constraints relating to high transaction costs, demand-side constraints and supply-side constraints. These categories are not mutually exclusive. Factors that push up transaction costs, for instance, may also undermine demand. These categories are broadly summarised in Figure 2 below.
Figure 2: Three sets of constraints to market development
The severity of constraints varies between cases. Poor people in developing countries tend to face the greatest hurdles. Reasons why these groups are disadvantaged are many. Key constraints are listed below in Table 2.
Table 2: Constraints to pro-poor watershed markets
Constraint |
Comment |
Costs of organising multiple-stakeholder transactions |
Poor people will tend to hold smaller plots, so the co-ordination of supply will be more complex and costly. Poor water users will also be more numerous and in many cases water use will be informal and unregulated, making it more costly to incorporate them into payment schemes. While costs will tend to be higher for poorer groups, it is often these groups which lack the necessary management, leadership and conflict resolution skills to guide a transaction process. |
Lack of cost-effective intermediaries |
Capacity constraints are likely to be greatest in developing countries where the service sector is under-developed. |
Poorly defined and insecure property rights |
The lack of secure property rights is a major problem in developing countries. Poorer groups tend to be the worst effected as they lack the contacts, power and know-how to formalise their claims. |
Lack of clear and comprehensive regulatory framework |
The lack of adequate capacity to administer and supervise markets, disjointed regulation, overlapping mandates, and a contradictory legislative framework are frequent problems in developing countries. |
Lack of scientific information on land-water linkages |
While the paucity of scientific information is a global problem, information tends to be particularly inadequate in developing countries that lack the technical and financial resources to devote to long term data collection and analysis. |
Lack of stakeholder participation |
In negotiations around market design and payments, poorer individuals and groups are most vulnerable to exclusion. Not only do these groups lack the skills to ensure their voice is heard, but they also tend to lack political representation. Involving smaller participants is costly. |
Lack ability to pay |
Where poor people lack the financial resources to pay for improved watershed protection, they have no influence over the allocation of resources. Markets will allocate resources to meet needs of those that can pay, e.g. dam owners, hydropower companies. |
Low awareness of market opportunities and capacity to exploit these |
Poor people will tend to be least well-educated about market opportunities for watershed protection services, and least able to initiate bargaining with major downstream beneficiaries. |
Lack of credibility in service delivery |
Where landowners' property rights are insecure, they are in a weak position to promise delivery of watershed services. Moreover, where beneficiaries are poor it is more difficult for them to guarantee protection since they will need to maintain flexibility so they can respond to unexpected shocks. |
Inappropriate commodity design |
The provision of watershed services is a long-term commitment - downstream beneficiaries will seek deals that span decades rather than months or years. However, poor communities rely on livelihood strategies that are flexible and able to cope with unexpected shocks. Thus, even where new markets offer opportunities for increasing income, where they require extended commitments they are likely to exclude vulnerable groups. |
While constraints to pro-poor watershed markets are significant, markets are not inherently inequitable. However, because markets evolve within an unequal world and are driven by specific groups, there are risks that they will be designed to benefit more powerful groups. The role of government is to prevent markets that reinforce entrenched inequities, and to promote markets that can offer weaker groups opportunities.
Enlightened land management produces a number of watershed services valued by society. While services vary between sites, careful land managers are credited with, amongst other things, protecting water quality, regulating water flows, preventing floods, controlling soil salinisation and maintaining aquatic habitats. Whereas historically the protection of critical watersheds has been the preserve of governments, this paper highlights the growing role of private companies, individual landholders, NGOs and communities in delivering and financing watershed services.
The emergence of a market for watershed services should not be viewed as competing with cooperative or regulatory systems for managing watersheds. Rather markets are often emerging to support such systems where they have come under strain, for instance due to inequitable benefit-sharing and high costs. By allowing for financial and in-kind transfers between conflicting stakeholders within watersheds, markets can help to ease local tensions. Equally, market development often depends on strengthening cooperative and regulatory arrangements to allow beneficiaries and providers to come together to formulate group payment strategies and tackle "free-riding".
Despite spreading enthusiasm for market mechanisms in the realm of watershed management, little attention has been given to their broader social impacts. Yet, the way in which markets impact on local power balances could have significant implications for their long-term sustainability and success in raising welfare. Initial indications give cause for concern. Even where the gains from trade are significant, the high transaction costs involved introduce serious barriers to entry for anyone lacking financial resources, managerial and coordination skills, technical knowledge and political connections. Moreover, the costs of participating in emerging markets rise the greater the number of individuals living in a watershed, the weaker the government's regulatory capacity, the less reliable hydrological data, and the less secure property rights. While developing countries face severe hurdles in establishing markets for watershed protection, it is the poorest groups in these countries that are most at risk of marginalisation. If government's wish to realise welfare gains from watershed markets, they must play an active role in levelling the laying field to ensure markets benefit of all sections of society not just the most powerful.
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1 Senior Research Associate, International Institute for Environment and Development, 3 Endsleigh Street, London WC1H 0DD, UK. [email protected]