Conditions for project success: Economic and Social Feasibility of PES
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Presentation by Michael Richards. Conditions needed before a payments for environmental services (PES) scheme begins operating.
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Conditions for project success: Economic and Social Feasibility of PES
- 1. Conditions for Project Success: Economic and Social Feasibility of PES Michael RichardsTraining Workshop on Payments for Ecosystem Services (PES) and Reducing Emissions from Deforestation and Forest Degradation (REDD+) 8 August 2011
- 3. Willingness and capacity to pay
- 4. Resource management actions can address supply problem
- 5. Policy, legal & governance framework, especially compliance
- 6. Clear land tenure and ES property rights
- 7. Low land use opportunity costs
- 8. Strong participation and social benefits
- 10. Underestimation of costs, especially transaction costs
- 11. Weak understanding of opportunity costs
- 12. Poor understanding of additionality (especially carbon)
- 13. Weak impact assessment and monitoring
- 15. Compare to land use opportunity cost (+ profit)
- 16. Resource managers: return to labour and/or capital (resource scarcity?) Effect on risk?
- 17. Cost of alternative source of ES
- 19. Currently high since legal, policy & institutional framework weak or evolving
- 20. Scale is vital - ‘aggregation strategy’ if lots of small suppliers
- 21. Red tape
- 22. Build on existing projects/institutions
- 23. Cost-sharing, e.g., partnership between private/state/local actors
- 25. Help write project proposal (PDD)
- 26. Establish relationships and rapport with potential buyers
- 27. Ensuring contract is in sellers’ best interests (negotiate it?)
- 28. Provide risk management advice / services
- 29. Help ensure equity and other positive social impacts
- 33. Decide criteria
- 34. Score or rank project types against criteria
- 35. Identify highest potential project types
- 36. Brainstorm legal, policy and institutional constraints
- 37. Brainstorm responses to constraints
- 38. Brainstorm potential project sites
- 39. Research study into legal and policy constraints
- 41. ecosystem type
- 42. land tenure and institutional basis
- 45. Uganda ROSE – 7 high potential project types
- 47. Participation: local knowledge in project design; ownership – support; leakage mitigation
- 48. Free, Prior and Informed Consent (FPIC) increasingly demanded
- 49. Market access via CCB and other multiple benefit standards
- 50. Ethical/legal: complying with international laws and conventions
- 53. Respect for rights of autonomy and self-determination
- 54. Free, Prior, and Informed Consent (FPIC)
- 56. independent legal and technical advice
- 58. Cost
- 59. Time
- 60. Independent information and advice
- 61. Community representatives – how representative?
- 63. The Clean Development Mechanism (CDM) http://cdm.unfccc.int/Reference/index.html
- 64. The Katoomba Incubator: Feasibility Assessments http://www.katoombagroup.org/incubator/resources.php
- 66. USAID Forest Carbon Calculator Tool http://winrock.stage.datarg.net/m3/CarbonReporting/Welcome
- 67. The Climate, Community, and Biodiversity (CCB) Standards http://www.climate-standards.org/
- 68. Guidance for forest carbon (REDD+) projects:http://forest-trends.org/publications/building_forest_carbon_projects
- 69. Michael Richards The Katoomba Incubator mrichards@forest-trends.org www.forest-trends.org Asante sana! Questions and Discussion
Notas del editor
- One risk mitigation strategy is to assess a prospective PES site for ‘suitability’ or whether it meets basic ideal conditions, such as (read list)PES deals are most likely to flourish when and where: Demand for ecosystem services is clear and financially valuable to one or more players. PES are most likely to occur when there is at least one beneficiary of ecosystem services with both an incentive to invest in the maintenance of this service and available funds for doing so.Supply is threatened. If resources are clearly diminishing to the point of scarcity because of a declining ecosystem service, then a PES deal holds potential.Specific resource management actions have the potential to address supply constraints. For PES to be a viable option, it is essential to identify what resource management practices could be changed and what ecosystem services results will ensure improvement of ‘supply’ issues.Effective brokers or intermediaries exist who can assist with documenting ecosystem service conditions, identifying specific resource management alternatives, aggregating multiple landowners/resource users (if needed), engaging and negotiating with prospective buyers, and any other activities related to implementation (including monitoring, certification, verification, etc.).Contract laws not only exist but are enforced, and resource tenure is clear. The supplier must have control over the area where the PES agreement is to be implemented, and the buyer must have assurance, and recourse to ensure, that contract provisions of the deal are secure.Clear criteria for evaluating equitable outcomes across partners are established. In the case where partnerships are formed to supply the ecosystem service, clear criteria of fairness need to be designed and agreed by all parties to the transaction.
- Projects should be conservative and run sensitivity analyses on key assumptions. Initial estimates should always strive to be conservative, and projects that are only marginally viable under initial assumptions are unlikely to survive further scrutiny and development.Three recurring pitfalls are:Initial overestimation of project scaleEmission and sequestration numbers are often scaled down Areas are often revised Optimistic assumptions about carbon financeFocusing on higher end of carbon prices in various marketsForward purchase of credits at full price is uncommonDevelopment, validation, verification processes take longer than expected Not defining the project activities clearly Lack of funding not only constraint for reducing deforestation Activities must effectively address deforestation pressures , shrink.
- While price and value are not one and the same, they are related and sellers would be wise to explore a range of approaches to valuing ecosystem services that may be subject of a PES agreement. Illustrative factors in valuing ecosystem services include (see list on slide)Economic value or the quantification of economic benefits of the services from a societal point of view (both direct and indirect),Financial value which is a combination of:- the actual private financial benefits to specific actor(s) that can be estimated based on the costs of replacing an ecosystem service if it were damaged or not available - the costs to the landowner of making needed resource management changes, such as costs of planting trees- the costs of developing the transaction, including creating baseline documentation of current ecosystem services status, developing a plan for - changing practices to improve ecosystem service flows over time, etc. Relative costs of alternatives such as the cost of building a water treatment plant versus investing in natural ecosystem service-based filtration, Market or transaction price which is partly a reflection of perceived risks and uncertainty as well as bargaining power or the existence of co-benefits, andPricing of similar deals.
- While negotiating the agreement, both buyers and sellers may wish to explore ways in which to reduce costs such as through (see list on slide)At one extreme, and in cases where communities and land managers have little prior organizational expertise, start-up and transaction costs can absorb a significant portion of the seller’s hoped for profit. This situation is why it is critical to estimate and review transaction costs throughout the process – a costly activity in its own right, and one made difficult by the fact that all costs will vary not only from project to project, but also throughout the lifecycle of many individual projects. If the costs are too great, the PES deal developers should explore ways of covering them, or even adjust or halt the process to address expenditures. In some cases, transaction costs may be so high that a PES deal is not possible in that area.Extended NotesAggregate projects Streamline sales and negotiations among multiple process and funding mechanismsBuild on existing programsDiagnose local needs, priorities and PES opportunitiesStrengthen community organization and local knowledge related to a PES project“Bundle” environmental service paymentsLink to local or national water and/or conservation projects,Develop multiple payments for different activities on the same piece of land. Create cost-sharing mechanismsSpecialized firms or agencies for community-based projects can solicit contribution from: national or state agencies overseas NGOs (developmental or environmental) private-sector companies municipal utilities local communitiesCreate specialized services from intermediary organizationsSpecialized firms or agencies for community-based projects can: provide technical expertise in project design, - support central negotiations, - establish mechanisms for financial transfer, and- verify PES actions.Establish intermediary management institutionsDraw up and register farmers’ plans related to PES, Assesses plans for ecosystem service contributions, Develop ecosystem service agreements between buyers and sellers, Provide technical assistance, Monitor projectReduce data costsImprove data and methods for project planning, baseline development and monitoringEstablish large-scale, area-wide projectsDevelop project over entire jurisdiction, committing to defined increase in forest cover or area protectedPartner with other small providers to share transaction costs of project developmentSet up a Trust FundServe as central repository of funds, decision making body, multiple stakeholder entity where conflicts can be resolved preemptively,
- Overall, the whole process of putting together PES agreements is sufficiently complex that it is very useful to have honest brokers familiar with details who can assist – particularly sellers. Tasks for assistance may include (see list)
- Why ROSE? REDD Opportunity Scoping Exercise Context & Rationale The Opportunity of REDD:performance-based economic incentive for forest conservationprotection of biodiversity and forest ecosystem services, w/ additional potential to contribute to poverty reduction (e.g. via PFM) Gaps in knowledgeWhat project types would: be most appropriate? have the highest potential for success?What policy, legal and institutional frameworks must be in place in order for REDD projects to succeed?ROSE Objectives Identify potential forest carbon/REDD project types (not sites) that indicate a high likelihood of successFor each type of project, identify the key legal, institutional and policy constraints (or opportunities) to project developmentIdentify any critical legal, institutional, and policy gaps that, if effectively addressed, could result in a major boost for REDD
- Criteria needed to score potential of REDD project types Focus on criteria that indicate technical and socio-economic viability of a potential REDD project Scoring & selection of higher potential REDD types Each criteria ranked 1-3: higher score is more attractive (but a high opportunity cost would score low)Selection of higher project types based on a combination of scores and qualitative analysis: we will look at scores but then decide if there are any “killer assumptions”Desire for a balanced portfolio (e.g., to include the main tenure/institutional arrangements) also affects final selection
- Why should project developers be concerned with stakeholder participation? For project developers, engagement with communities is necessary, not just to comply with project standards, but also to ensure project sustainability. Ensuring the full participation, acceptance and consent of communities does require additional effort, time and money from project developers, but experience has shown that doing so helps to avoid delays, setbacks and conflicts during project implementation. In addition, community engagement helps to reduce risks, especially because non-engagement could lead to increased leakage and reduced permanence (see the Annex on Climate Change and Carbon) when forest-dependent communities are impacted negatively, marginalized or even excluded from project opportunities. Working with community members and other stakeholders also increases the reputation of projects in the marketplace by ensuring that elite capture and other potentially poverty exacerbating effects do not occur. Standards for carbon projects, such as the Community, Climate, and Biodiversity Standard, require community engagement, which increases market access for projects. Finally, projects showing good social practice are often able to access ‘softer’ finance which is aimed at helping protect communities and the poor from adverse climate change impacts more easily.
- Historically, community populations have not always had satisfactory experiences with mechanisms that were created and developed at national and international levels without the consultation of their positions and consideration of their beliefs, conditions and lifestyles. Additionally, in many cases the rights related to the land tenure are still not legally resolved. As such, it is fundamental that whatever mechanism is developed internationally and implemented across the globe should not only recognize the rights of indigenous populations over their territories, but also guarantee compliance with the rights recognized in the United Nations Declaration on the Rights of Indigenous People adopted in 2007. Among the rights recognized in this Declaration, are: Recognition of their rights over their traditionally owned or occupied lands, especially natural resources, and their customary forms of management.Respect the right of autonomy and self-determination, which means that the indigenous populations and local communities have the autonomy to manage their lands as well as the legal capacity to negotiate and make decisions regarding their participation in projects and initiatives that affect them directly and indirectly.Apply the right of free, prior, and informed consent in which the involved communities must have access to all of the information related to the project and principally be consulted BEFORE beginning any activity. (See more information on FPIC below.)Ensure the full and effective participation of the indigenous people in all of the stages of the project.To learn more, see: http://www.un.org/esa/socdev/unpfii/es/drip.html
- FPIC CHALLENGES Time: Sound, consensus-based decisions will only emerge from processes that are iterative, inclusive and allow enough time for systematic consultation, information gathering and feedback. Projects are necessarily iterative since communities have the right to consent (or not) at all key stages of project development.Who has the right to give consent? Consent should be granted by the representative organizations of indigenous groups or other local communities. For some groups, this may be clearer than for others, but it is necessary to ascertain which group has the ability to give consent in order for the project to proceed.How inclusive are ‘collective’ and ‘traditional’ decision-making processes? Though FPIC states the consent derives from traditional and (ideally) collective decision-making processes, there is no guarantee that these systems are genuinely representative and inclusive. In situations where these assumptions do not hold, projects need to find alternative ways of consulting with marginalized stakeholder sub-groups like women and ethnic minorities.Cost of providing independent and comprehensive information: Providing balanced information to community members is a costly process including impact studies to fully understand the costs and benefits of project implementation, making information accessible, providing access to legal advice and participatory mapping to clarify customary rights, areas and rights holders.FPIC is more difficult when outcomes are uncertain: For forest carbon projects especially, there is uncertainty regarding financial outcomes. This makes it difficult to be definitive about financial returns when holding consultations with communities.(See Blomley, T., M. Richards, and B. Borges. Forthcoming. “Good Practice Guidance for Community Engagement in Forest Carbon Projects.” In J. Ebeling and J. Olander (eds.). Building Forest Carbon Projects: A Step by Step Guide. Washington, D.C.: Forest Trends.)EXTENDED NOTES Another key element of community participation in payment for ecosystem service projects is free, prior and informed consent. Free, prior and informed consent (FPIC) refers to the right of local communities to give or withhold their consent to proposed measures that will affect them or the land and resources they own or use. The process of free, prior and informed consent is essential for ensuring that commitments made by communities are made only when the community fully and realistically understands a PES project. For indigenous communities, free, prior and informed consent is included in international law, but it is also recognized as a very important tool for other local communities and smallholder farmers.Free, prior and informed consent does not mean that every single member of a community has to agree with a project, but that a consensus is reached within the community (through a council or tribal government, for example) to move forward. Communities must give their consent before a project begins to implement activities so that they still have the option to refuse project implementation. In addition, they must be presented with complete information on the intent and scope of the project in a language and process which they can easily understand. Coercion or intimidation which forces community members to make a certain decision is not allowed. The process of free, prior and informed consent should also reflect traditional consultation processes and respect customary leadership.