Conditions for Project Success: Economic and Social Feasibility of PES Michael RichardsTraining Workshop on Payments for E...
Ideal Conditions for PES<br /><ul><li>ES supply threat - demand
Willingness and capacity to pay
Resource management actions can address supply problem
Policy, legal & governance framework, especially compliance
Clear land tenure  and ES property rights
Low land use opportunity costs
Strong participation and social benefits
Support from honest brokers  </li></li></ul><li>Some common pitfalls of PES projects<br /><ul><li>Overestimation of gross ...
 Underestimation of costs, especially transaction costs
Weak understanding of opportunity costs
Poor understanding of additionality (especially carbon)
Weak impact assessment and monitoring
Ignoring better ways of achieving environmental objectives</li></li></ul><li>Financial Feasibility of Ecosystem Service Pr...
Compare to land use opportunity cost (+ profit)
Resource managers: return to labour and/or capital (resource scarcity?) Effect on risk?
Cost of alternative source of ES
Pricing of similar deals</li></li></ul><li>Transaction Costs<br /><ul><li>Caused by risk or uncertainty – need to mitigate...
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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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  • 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 &amp; 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 &amp; 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:
  • 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.
  • Conditions for project success: Economic and Social Feasibility of PES

    1. 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+)<br />8 August 2011<br />
    2. 2. Ideal Conditions for PES<br /><ul><li>ES supply threat - demand
    3. 3. Willingness and capacity to pay
    4. 4. Resource management actions can address supply problem
    5. 5. Policy, legal & governance framework, especially compliance
    6. 6. Clear land tenure and ES property rights
    7. 7. Low land use opportunity costs
    8. 8. Strong participation and social benefits
    9. 9. Support from honest brokers </li></li></ul><li>Some common pitfalls of PES projects<br /><ul><li>Overestimation of gross revenue: demand, price & volume
    10. 10. Underestimation of costs, especially transaction costs
    11. 11. Weak understanding of opportunity costs
    12. 12. Poor understanding of additionality (especially carbon)
    13. 13. Weak impact assessment and monitoring
    14. 14. Ignoring better ways of achieving environmental objectives</li></li></ul><li>Financial Feasibility of Ecosystem Service Provision<br /><ul><li>Net financial value = sale price less project transaction & implementation costs
    15. 15. Compare to land use opportunity cost (+ profit)
    16. 16. Resource managers: return to labour and/or capital (resource scarcity?) Effect on risk?
    17. 17. Cost of alternative source of ES
    18. 18. Pricing of similar deals</li></li></ul><li>Transaction Costs<br /><ul><li>Caused by risk or uncertainty – need to mitigate or prevent risks
    19. 19. Currently high since legal, policy & institutional framework weak or evolving
    20. 20. Scale is vital - ‘aggregation strategy’ if lots of small suppliers
    21. 21. Red tape
    22. 22. Build on existing projects/institutions
    23. 23. Cost-sharing, e.g., partnership between private/state/local actors
    24. 24. Good practice project cycle management especially M & E</li></li></ul><li>PES Projects need Honest Brokers to:<br /><ul><li>Assess ecosystem service products and values
    25. 25. Help write project proposal (PDD)
    26. 26. Establish relationships and rapport with potential buyers
    27. 27. Ensuring contract is in sellers’ best interests (negotiate it?)
    28. 28. Provide risk management advice / services
    29. 29. Help ensure equity and other positive social impacts
    30. 30. Support validation against Standards</li></li></ul><li>REDD Opportunity Scoping Exercise -ROSE<br />What is ROSE?<br />Tool to prioritize types of REDD+ projects - pre-feasibility analysis<br />Expert workshop followed by research of key legal and policy constraints to project development <br />ROSE studies conducted in Ghana, Tanzania and Uganda<br />
    31. 31. ROSE expert workshop<br /><ul><li> 2-3 day meeting of 15-20 experts from range of sectors and institutions
    32. 32. Not a representative group of stakeholders – not appropriate for community representatives </li></li></ul><li>ROSE stages<br /><ul><li>Define “REDD+ project types”
    33. 33. Decide criteria
    34. 34. Score or rank project types against criteria
    35. 35. Identify highest potential project types
    36. 36. Brainstorm legal, policy and institutional constraints
    37. 37. Brainstorm responses to constraints
    38. 38. Brainstorm potential project sites
    39. 39. Research study into legal and policy constraints
    40. 40. Write integrated ROSE report</li></li></ul><li>Define “REDD+ project types”<br /><ul><li> Combination of:
    41. 41. ecosystem type
    42. 42. land tenure and institutional basis
    43. 43. main deforestation or degradation threats </li></ul>For example:<br /><ul><li>Tanzania: miombo woodland under Community Based Forest Management in Morogoro region with charcoal and farming as main threats
    44. 44. Uganda: well-stocked tropical high forest under Collaborative Forest Management and where illegal logging is the main threat</li></li></ul><li>Criteria – participants should decide about 10<br />Level of deforestation threat (additionality) <br />Opportunity cost of alternative land use<br />Clarity of carbon property rights (tree tenure)<br />Security/clarity of land tenure <br />Size of forest areas/ aggregation potential<br />Biomass or carbon level of forest <br />Poverty reduction or community benefits<br />Potential for replicability or scaling up<br />Governance issues <br />Others<br />
    45. 45. Uganda ROSE – 7 high potential project types<br />
    46. 46. Social Feasibility - participation is in project self-interest<br /><ul><li>Environmental goals depend on social feasibility
    47. 47. Participation: local knowledge in project design; ownership – support; leakage mitigation
    48. 48. Free, Prior and Informed Consent (FPIC) increasingly demanded
    49. 49. Market access via CCB and other multiple benefit standards
    50. 50. Ethical/legal: complying with international laws and conventions
    51. 51. Reduced transaction costs
    52. 52. Publicity (PR)</li></li></ul><li>UN Declaration on the Rights of Indigenous Peoples<br /><ul><li>Full participation in all project stages
    53. 53. Respect for rights of autonomy and self-determination
    54. 54. Free, Prior, and Informed Consent (FPIC)
    55. 55. Customary management practices on traditional lands </li></li></ul><li>Free, Prior, and Informed Consent (FPIC)<br />CONSENT: Communities’ right to give or withhold consent to measures affecting their lives, resources, livelihoods, etc.<br />FREE: independent of project influence<br />PRIOR: before any project implementation<br />INFORMED: Communities must be provided with:<br /><ul><li> project information in native language
    56. 56. independent legal and technical advice
    57. 57. ex-ante social impact assessment</li></li></ul><li>Some Challenges for FPIC<br /><ul><li>Who has right to give consent? (can be unclear)
    58. 58. Cost
    59. 59. Time
    60. 60. Independent information and advice
    61. 61. Community representatives – how representative?
    62. 62. Difficulty of consent to uncertain outcomes</li></li></ul><li>Resources on Carbon Project Feasibility/Standards<br /><ul><li>Verified Carbon Standard (VCS)
    63. 63. The Clean Development Mechanism (CDM)
    64. 64. The Katoomba Incubator: Feasibility Assessments
    65. 65. ROSE:
    66. 66. USAID Forest Carbon Calculator Tool
    67. 67. The Climate, Community, and Biodiversity (CCB) Standards
    68. 68. Guidance for forest carbon (REDD+) projects:</li></ul><br />
    69. 69. Michael Richards <br />The Katoomba Incubator <br /><br /><br />Asante sana! Questions and Discussion<br />