Paper Fynbos Forum 6 Aug


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Paper Fynbos Forum 6 Aug

  1. 1. Keynote address “After all those cosy years of working together, show me the money”: From economic valuation to real-world investment in the fynbos biome1 DRAFT TEXT Key words: economic valuation, ecosystems, fynbos, decision making, institutional processes and arrangements De Wit, M.P. 1* 1 Stellenbosch University, School of Public Management and Planning and De Wit Sustainable Options (Pty) Ltd * The last decade has seen several studies demonstrating the economic value of ecosystems and the fynbos biome is no exception. Despite notable criticism on some of these studies, on average they have succeeded in raising the awareness on the value of well-functioning ecosystems. In some instances this has led to conservation and restoration success on the ground, but what is needed is an institutional system that will translate abstract economic values into real financial investments in ecosystems. With continued increased pressure on the world’s biodiversity on the one hand and shifting agendas towards climate change and a rather reductionist and in practice partial ecosystems goods and services (EGS) analysis on the other, economists and ecologists need to build on their successes and find new meaning in their work on total systems value, as opposed to a focus on total economic value (TEV) or an EGS analysis only. Economists and ecologists would also do well by soliciting the services of those who can assist in the development of new institutional processes and arrangements that can capture the real financial benefits of well-functioning ecosystems beyond the usual short-term and consumptive benefits. Based on a analysis of current bottlenecks to realise real-world investments in specifically fynbos ecosystems, an action-orientated agenda focussed on performing economic valuation studies to better serve the needs of decision makers, an increased understanding of and leverage of total systems value, and a renewed focus on the institutional process and arrangements to capture fynbos ecosystem values, is proposed. 1 Keynote address at Fynbos Forum, 6 August 2009, Bredasdorp.
  2. 2. Introduction A wise man should have money in his head, but not in his heart. Jonathan Swift, Irish essayist, novelist, & satirist (1667 - 1745) Between economic valuation and the actual flow of money lies a mountain so high, but so inviting that many have devoted entire careers on traversing it. Small wonder. The one that can help unlock the formidable forces of true economic value into a stream of income and wealth will be rich, respected, rewarded and powerful. Sometimes there is no real value, just a concoction of abstract ideas and resources that sells easily to unsuspecting buyers. In my mind MacDonald hamburgers fall in this category, but I still have problems convincing my kids. Sometimes there is a lots of value, but often unknown and unutilised. Fynbos ecosystems are an excellent example of such a category, and yes, I also need a lot of time to convince my kids. Why? Because fynbos goods and services does not sell easily. It has a lot of value, but does not provide a stream of services that your kids, your grandma or your banker easily understands. Not as easy at least as the value of the packet of macaroni on the shelf at Pick and Pay. Expecting most bankers to understand that a well managed fynbos catchment yield higher amounts of water then a badly managed one is a big ask (I suspect the kids will do better). I am not saying this out of disrespect to bankers, just as I do not disrespect you for not knowing how a hedge fund works. I am saying this to illustrate why this mountain is so high and why we need to be so thorough in constructing a way across it. Fynbos systems do have considerable economic value. It was estimated earlier that the total economic value from the Cape Floral Kingdom is at least R10 billion per year (Turpie et al 2003). Fynbos products such as wildflowers and thatching reed are harvested, tourists are willing to pay money to experience see and experience fynbos environments, and, despite what some bankers might think, well-managed fynbos areas do provide a better flow of freshwater then those areas infested with aliens (Currie et al 2009, Cowling et al 1997, Le Maitre et al 1996). The global significance of healthy fynbos ecosystems is also illustrated by the willingness of international donors to invest in conserving fynbos. Yet, at present fynbos ecosystems in the Cape Floral Kingdom are inadequately managed for conserving biodiversity and sustaining ecosystem services. The reason for this poor management is not so much a lack of knowledge, but a lack of funding in the face of increasing management challenges. The allocation of insufficient funds for management stems from the perception by policy makers that fynbos ecosystems provide few economic benefits to society.
  3. 3. The problem is that many of these values are enjoyed by everyone and creating no incentive to invest in them (see Pence et al 2003; Turpie et al 2003). The public good character of so many of the fynbos ecosystem services means that mainly governments end up looking after it, either directly or by providing incentives and regulations to make private land owners share the load. This means that investment in fynbos starts to compete with so many other public services such as crime prevention, transport and housing infrastructure, defense, public health care and the alleviation of poverty. By now we have certainly lost the banker who reckons that he or she will never be able to get a return on a loosely defined asset belonging to all, we have lost grandma, who have seen enough muddled arguments in her life to keep paying attention and who prefers to invest her pension in a fund where not everyone can get his or her hands on it, and we might have lost the kids, who are already learning to rather protect their own well-defined assets with their own names on it. We are on our own. Scientists, economists, decision-makers united in their quest to protect the world’s dwindling public assets - assets everyone wants, but nobody wants to invest in. We are not winning the battle. We need to step it up. We need to have a model that impacts on a macro level. One that scales the mountain of complexity between understanding the economic values flowing from healthy fynbos ecosystems and real world sustainable investments. This is no new insight. Many are already working on projects that try to link buyers and sellers of ecosystems goods and services. Others are focussed on the corporate world, often succeeding in augmenting public funding for conservation and restoration. Others are educating and raising awareness on our moral responsibilities to look after this world. Apart from those who have stayed, maybe wisely in the fertile pastures of science and economic valuation, we are straying somewhere on this high mountain of complexity. We tend to start looking for quick trials and hidden footpaths or what is sometimes referred to as silver bullets, which in this unpredictable world remains elusive. There is no neat world of certainty between making an economic argument and expecting investments to start flowing soon after. It is a complex, many times unpredictable, process. This does not mean that nothing could be done. It means that we need to develop a keen sensitivity to the real world around us. In Donella Meadows’ words (Meadows 2008:170): We can’t control systems of figure them out. But we can dance with them!
  4. 4. Most of this work is based on a project we have done for the City of Cape Town in the last year to develop a business case to invest in natural assets. It was focussed on investing in urban natural assets, but I hope that the learning will be useful to managing fynbos ecosystems as well. The mountain of complexity between assessment and actual sustainable investments can be reduced by focussing on the often implicit process from making a good argument to the utilisation of knowledge in investment decisions. Within these steps, we have tried to identify barriers in the cognition used in the argument, in the reception and in the transmission of the argument that ecosystems are valuable to a wide range of beneficiaries. This argument builds on work done on theories of knowledge utilisation in policy- making, systems thinking and communications theory. From knowledge to investment Much have been written on the question how knowledge diffuses into policy choices, budgets and ultimately into real expenditure. The stages of knowledge utilization presented by Knott and Wildavsky (1980) are still being used to explain how research evidence reaches the policy level. These stages are: 1. Transmission – results are transmitted to practitioners and professionals; 2. Cognition – findings are read and understood; 3. Reference – findings cited as a reference by stakeholders; 4. Effort – efforts made to adopt results; 5. Influence – results influences choices and decisions; 6. Application – search led to applications by stakeholders. The important point is that knowledge utilization is seen as a process rather than a one-time transfer. This means that it has to be managed as a process as well. Broadening this framework slightly, one can distinguish between an argument, transmission and a receptor. Steps 2-6 in Knott & Wildavsky’s framework characterise the receptor. Before transmission takes place an argument needs to be constructed. Barriers and solutions in the economic argument An investment in knowledge always pays the best interest. Benjamin Franklin (1706 - 1790), US author, diplomat, inventor, physicist, politician, & printer
  5. 5. A recent UNDP/UNEP (2008) study argued that good data and evidence will have little impact or influence over decision-makers unless packaged carefully and communicated effectively (see Figure 7.1). The key points that should be borne in mind when making an argument for environmental investment is that data should be packaged and presented in such a way that it is targeted, clear, relevant and credible. It is important to be clear on the reasons for environmental investments, and have a target audience who is willing and able to affect change. The main lines of reasoning, the key messages, the steps in the argument, and the supporting data and evidence also need to be very clear. Only relevant information needs to be presented, focused on the needs of a specific audience. Furthermore, the evidence must be credible, based on data from the area or sector the audience represents. The messenger also needs to be credible and could include a champion other than the researchers themselves. One can have a well-packaged argument, but this will have little impact if not heard, understood and acted upon. The package should ideally be a mix of verbal and written materials. Presentations need to be succinct, concise and well illustrated. Technical reports are not effective in getting messages across and need to be supported with shorter summaries such as a 2–3 page brief, clearly outlining key messages and recommendations. Opportunities for follow-up need to be given through alternative means of accessing the information and proactive management of further interaction. Providing economic arguments to invest in natural capital raises the chances of broader acceptance. but is certainly not sufficient. The UNDP/UNEP (2008:39) concludes that: “Making the economic case is therefore rarely sufficient, alone, to influence decision-making in favour of the environment. It does, however, present a series of arguments which are based around indicators and policy goals which have resonance with decision-makers in finance ministries, treasuries, sectoral line agencies and local authorities. It also permits the environment to be considered on a more equal basis with other sectors when policies are formulated, land and resource choices made, investments planned and budgets allocated.” The argument in itself can be the first barrier to investment. In order to to analyse and model a system, we need to describe and categorise it. In this process, some of the systems value is lost. This in itself is not so much of a problem as long as we do not forget that we have only taken a bit out of a larger system to gain more understanding on it, and that we need to interpret our findings within the complexity and dynamics of a broader system. Economic valuation studies are by definition partial and static. At best it can give an indication of total economic value of a system at a certain point in time. Just as the total value of a system is more then the sum
  6. 6. of its parts, the aggregate TEV of an ecosystem’s functions is not equivalent to total system value (Turner et al. 2003). The functioning of any heathy system is more than the sum of its individual functions or components (Meadows 2008; Turner et al 2003). Society may have difficulty expressing certain values in economic terms (such as religious, historical, cultural and symbolic values) and certain systems values, such as the value of underlying ecological infrastructure and maintenance, are not included in the generally accepted typology of use and non-use valuation studies (Turner et al 2003). Economic valuation studies nonetheless are very helpful in conveying the message that ecosystem goods and services are not free and benefit many different people, but it will not tell us whether the flow of these values can be sustained over time or how effective institutions will be in transacting these values. Economic valuation data does provide some support for the hypothesis that the net value derived from ecosystems diminishes with the loss of biodiversity and ecosystems (Balmford et al. 2002). This in itself is a powerful notion in arguing to invest and maintain natural assets, but as Blignaut & Moolman (2006) pointed out, these values need managerial and institutional unlocking. Proving that fynbos has an economic value does not provide the cash. In many times it is only the start of a long institutional process of market creation. A lot more can be done to improve the relevance and credibility of valuation studies and deliver results which is a closer description of the real world experienced by decision makers. This is not an extensive list, but here are some suggestions how to improve valuation studies and the use of valuation studies: • Most valuation work is focussed on single functions, despite the fact that joint products or multiple services are a feature of most of the processes in nature. Trees, for example provide not only timber, but many valuable hydrological, nutrient cycle and climate functions (Turner et al 2003:498). • Valuation studies need to focus much more on the value of ecosystems before and after environmental change. Decision makers mostly work on incremental changes and need support in assessing the marginal changes of a programme or project (Turner et al. 2003) • Very little valuation takes place at different states of ecosystems disturbance. As Turner et al (2003) pointed out ecologists and economists need to work closer together to develop temporal disturbance profiles and causal factors. • The value of an ecosystem is the difference between the benefits and the costs of goods and services. Valuation studies often only focus on the benefit streams, but that does not mean that all ecosystem goods and services are free to access. Decision makers are better served with an assessment of not only benefits, but also the costs to unlock these benefits (Turner et al 2003: 497, Frazee et al 2003). • Values and perceptions change. Just as it will improve estimates of value to include different states of ecosystem disturbance, will it improve valuation studies if different states of social preference and behaviour is documented. One can for example have a healthy ecosystem producing excellent quality
  7. 7. goods and services, but a social system that is too sick, ignorant, poor or rich to fully express value for these services. One can also have a more balanced society that express a high value for ecosystem goods ands services from much lesser quality ecosystems. The context of both the ecological and societal state is important to interpret economic valuation studies. • Embed economic assessment of ecosystem goods and services within a more dynamic framework. It has only limited value to articulate ecological and economic consequences of investing in fynbos ecosystems without simulating how these consequences may develop over time. Higgins et al (1997) made a similar point in relation to earlier studies on the ecological and economic consequences of poor alien plant management (Le Maitre et al 1996; van Wilgen et al 1996). It is no trivial matter to produce a clear, targeted, relevant and credible economic argument to invest in fynbos. This is also what our bankers, grandma’s and kids try to tell us. Before we can expect anyone to show us the money, we must clearly show them the argument. As Suze Orman, prolific writer on financial planning, said in O Magazine, Feb 2003: “It is better to do nothing with your money than something you do not understand”. Barriers and solutions in reception Know how to listen, and you will profit even from those who talk badly. Plutarch, Greek biographer & moralist (46 AD - 120 AD) The receptor cannot be viewed as a homogeneous, economically rational entity that will soak up any scientific research outputs that are pushed in its direction. Receptors are human beings, either operating on their own, but mostly within an organisation. Human behaviour is mostly treated as exogenous to policy design or when included, it is assumed that humans will act according to certain theoretical constructs such as the rational maximisation of profits or an altruistic morality of saving the planet. Human behaviour is far more complex than this, driven by a bounded rationality. Simple heuristic rules followed by individual agents can create very complex outcomes (Beinhocker 2008). Decision makers have to respond to many information flows competing for attention. The reality is that issues tend to be ignored, up to a point where an overcorrection takes place. Empirical work on public budget increases in the United States and elsewhere (incl. France, UK, Canada, Denmark, Germany, and Belgium) indicates that the percentage annual change in budgets show a high concentration of small changes around the mean, with fat tails or big changes on both ends of the distribution (i.e. leptokurtic distribution). One can,
  8. 8. therefore, expect a large number of small, incremental changes in budgets from year to year, followed by sudden rapid changes (Jones et al. 2009; Jones & Baumgarter 2005). It is argued that underlying to this behaviour is an attention-driven decision-making model. Budget choices are not made based on perfectly rational, weighted indices, but rather driven by certain heuristic rules influenced by the positions of party leaders, by interest groups or by a focus on single-focus issues. In such a decision- making context errors of underestimation accumulate over time and lead to sudden rapid adjustments in budgeting when thresholds are exceeded. In this case, internal cognitive, organisational or institutional friction is overcome. Friction is expected to increase with coalition governments, low party discipline and where agreement among multiple governments is needed for single policy decisions. Better incremental budgeting can be expected if cognitive and organisational capacity is increased and institutional impediments to reactive policy-making are reduced (Jones et al. 2009; Jones & Baumgarter 2005). As pointed out in the framework by Knott & Wildavsky the process of knowledge utilisation involves several steps. This may create the impression that such processes are linear, but in most instances this is not the case. The linear process of policy-making (see March & Simon 1958; Simon 1977) can only take place on the basis that sufficient agreement exists on the criteria for choosing among different alternatives. Decision- makers themselves do not follow a perfectly rational approach towards applying normative criteria to alternative choices, and in the process a varied and complex decision-making process unfolds. The realities of the decision-making process itself need to be explicitly included when considering proposals for policy-making (Lindblom 1959; Thomas & Grindle 1990; De Greene 1993). These realities include understanding the interaction of networks and relationships, agency and practice – that is why certain subjects and alternatives are considered for the policy agenda while others are not – as well as knowledge and power dynamics in particular contexts (Keeley & Scoones 2003). This is also the case for the budgeting process. Although more predictable outcomes can be expected in administrative processes than within political processes, complex outcomes still emerge from such processes as well. Barriers and solutions in transmission The most important thing in communication is to hear what isn't being said. Peter Drucker, American (Austrian-born) management writer (1909 - 2005) Being aware of emerging complexity and the realities of the decision-making process adds to the importance of having an effective transmission mechanism. In this section attention is paid to two related issues: natural
  9. 9. divergence between analysts and decision-makers, and a communication strategy to a complex and changing receptor. It is well recognised that analysts and decision-makers generally have difficulty communicating effectively with each other (De Wit 2004; Glover 1993). Where analysts are intrinsically focused on searching some measure of the truth through rational science, or what Lomas (1997) refers to as “enchantment with rationality”, decision-makers are more focused on finding a compromise by using an intuitive model (Choi et al. 2005). Decision-makers are looking for policies that satisfy an electorate or accommodate certain pressure groups. Research on the barriers to the utilisation of research shows that personal relationships and trust between researchers and policy-makers continue to be important facilitators of the use of research evidence in policy- making. Given the complex and changing receiving environment and an inherent divergence between analysts and decision-makers, a well thought through communication strategy becomes increasingly important. This is not only the case in the private sector, but also in the non-profit world (Hershey 2005). Communications is not merely a set of tools that are used if and when required, but it is essential to achieving core goals (IDRC/SDC 2008). According to Harold Lasswell (1948), a communications theorist and political scientist, a communication strategy starts with the maxim: Who Says What In Which Channel To Whom With What Effect? A communication strategy is essential in achieving the core goal of the project, namely to motivate for investment in natural assets. According to Lasswell (1948): “Scholars who study the ‘who’, the communicator, look into the factors that initiate and guide the act of communication. We call this subdivision of the field of research control analysis. Specialists who focus upon the ‘says what’ engage in content analysis. Those who look primarily at the radio, press, film, and other channels of communication are doing media analysis. When the principal concern is with the persons reached by the media, we speak of audience analysis. If the question is the impact upon audiences, the problem is effect analysis.” Discussion and conclusions Fynbos ecosystems have a high value in terms of the services it generate. Yes, large-scale investments in the natural assets providing these flows of services are lacking. An action-orientated agenda towards actual investment in fynbos ecosystems suggests the development of a more focussed and better developed economic valuation argument, a keen interest in how decision makers behave and in the process that is followed when investment decisions are made, and the development of a thorough communications strategy.
  10. 10. The communication terms argument, transmission and receptor as well as a theory on the stages in knowledge diffusion, were used to construct this argument. The main arguments are as follows: First, the economic argument needs to be made within the context of a Total Systems Value, as opposed to the Total Economic Value of a range of Ecosystem Goods and Services only. This was raised earlier by Turner et al (2003), and especially important when informing real-world decision makers. Second, policy and decision makers, as receptors of the argument, follow an attention-driven decision-making model. Budget choices are not made based on perfectly rational, weighted indices, but rather driven by certain heuristic rules. Errors of underestimation accumulate over time and may lead to sudden rapid adjustments in budgeting when thresholds are exceeded. Expectations of incremental increases in response to better arguments for investment need therefore be re-evaluated against this evidence. It will not be enough to just present the economic rationale of investing in fynbos. Decision-makers themselves do not follow a perfectly rational approach towards applying normative criteria (such as economic return, equity or sustainability) to alternative choices, and in that process a varied and complex decision-making process unfolds. Third, the transmission of the argument to invest in fynbos may be hampered to a deep-seated divergence between the cultures of analysts and decision makers. Personal relationships and trust between researchers and policy-makers continue to be important facilitators of the use of research evidence in policy-making. Given the complex and changing receiving environment and an inherent divergence between analysts and decision-makers, a well thought through communication strategy becomes increasingly important. This paper provided some ideas on how to pave a way over the ‘mountains of complexity’ lying between economic valuation and real world investments in fynbos ecosystems. It is an attempt to raise sensitivity and offer some ideas to those who have already left the safer pastures of economic analysis behind. It is also an attempt to dance one step closer to the beat of the fynbos system and be one step closer to communicating this argument in a language that can be understood by the banker, by grandma and by the kids. Acknowledgements I am grateful to Valerie Goiset and Brian Mahumani who assisted in the background research for this keynote address.
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