The role of watershed services such as water purification and regulation, erosion control, and river banks stabilization is going to be decisive as water quality and quantity become globally critical issues, and in some places worsen due to climate change. By comparing the costs of protecting a watershed with investments in new or improved infrastructure, in many cases it is more practical and cost-efficient to invest in upstream land-use, hydraulic ecosystem management and protection measures . In this regard, the voluntary, transaction-based instrument known as Payments for Watershed Services (PWS) may also have the potential to enhance resilience to risks such as climate change, water stress and food scarcity.
Payment for Watershed Services: concept, definitions and theory
Payments for Watershed Services (PWS) or Payments for Hydrological Services (PHS) are a subset of the voluntary, transaction-based resource management instruments know as Payments for Environmental / Ecosystem Services (PES). Within the boundaries of a catchment or river basin (watershed), PWS schemes aim to link downstream beneficiaries (buyers) of a watershed service with upstream providers (sellers) of such a service. They strive to achieve economic optimum in watershed management, by reducing the cost of mitigating an externality (external cost) for the beneficiary / buyer as compared to another solution, and by incentivizing the provision of the service to the upstream landowners or land managers for their adoption of new, more sustainable practices.
Link with AWM
These sustainable practices such as Soil and Water Conservation (SWC) often induce gains in food security and carbon sequestration, the payments providing additional income further bolstering this benefit . However, local conditions (weather, land-use practices, institutional environment etc.) inherently vary, there is no universal rule or consistent link between PWS, food security benefits and climate change risks, mitigation, and adaptation. We further elaborate on the water-food-climate nexus in section 2 case studies (see FAO, 2011 for a detailed account of the links between PES and food security).
Who can implement a PWS?
PWS schemes are implemented by public authorities, international organizations and development agencies, NGOs and even private companies such as water bottlers or hydropower generation utilities. Collaboration among various entities is frequent, often necessary, and variations in design models is large; scale, value and results vary widely (see Porras et al., 2008 for the most complete analytical review to date with regard to developing countries; see Bennett et al., 2013  for a descriptive compilation of market-based water payments scheme around the world).
As a rule of thumb, PWS schemes generally need project managers to lead the process, public relations and / or legal advisers for relations with local institutions, economists and / or social scientists to determine opportunity costs and model how modifying incentives could alter behavior, hydrologists and / or agricultural engineers to project how land-use practices will impact water resources and food security, evaluators to determine successes and shortcomings of the intervention and induce iterative learning.
Background on economic theory: PWS as a transaction-based voluntary instruments grounded in the ecosystem services framework
The implementation of upstream land use practices such as soil protection plans or protection services from hydraulic risk have a direct influence on the downstream area, whose users rely on the effectiveness of such services. The rationale for payments is that since changing practices usually implies a cost for them, upstream service providers need to receive a compensation or rewards for the implementation of their actions in order to take appropriate land use decisions and provide downstream users similar services. These rewards can come in the form of monetary (cash) payments; as well as technical assistance or material goods (‘in-kind’)
In this sense, PWS scheme aim to create a positive market environment for the provision of watershed services by identifying buyers who have an incentive to invest in local watershed and land management practices, sellers who need to be incentivized to adequately implement actions. Quantifying in monetary terms the opportunity cost of providing of services is often essential for project design (see for example )
PWS, by contrast to traditional administrative instruments (‘hard’ legislation, regulation… known as ‘Command & Control’) seek a Pareto-optimal improvement through a transaction-based model: no side (buyer or seller) should in theory be worse off, because it is cheaper for the hydropower plants for example, to pay farmers for erosion-mitigating practices, than to remove sedimentation from dams; and it is advantageous for farmers to change practices with compensation than to continue with previous land use techniques. It is thus often a precondition to successful PWS implementation to identify the incentives at play in a watershed.
Proponents of PWS and PES in general claim they have the potential to enhance resilience to risks such as climate change and food scarcity. According to the seminal Millennium Ecosystem Assessment synthesis report , ecosystem services as well as watershed services can be divided into four interrelated functional categories:
- Provisioning services, whose benefits are directly derived from drainage basin products such as food and freshwater;
- Regulating services, whose benefits come from regulation of hydrological and ecological processes, water purification, waste disposal and protection plans from hydrologic and climate risks;
- Cultural services, whose non material benefits affect the users by providing an additional cultural, aesthetical, recreational and/or spiritual value;
- Supporting services, whose benefits overcome the definition of time and space scales and constitute a necessary step for the creation and maintenance of all the above-mentioned services. This category can include, for example, primary production, water cycling and provisioning of habitat for animal and plant species.
The definition of PES that is most widely used an accepted is Sven Wunder’s (2005), involving five criteria, whereby a PES is in operation if it implies a voluntary transaction (1) between at least one buyer (2) and at least one supplier (3) of a well-defined environmental service (4), for which the payment is conditional to the effective supply of said service (5) .
While many case studies and examples of application exist , in practice, however, a “perfect” PES which conforms to all five criteria above is quite rare, especially with regard to the fifth criterion of conditionality, and that claims to fulfill all its stated objectives (see for example ; )
Beyond the semantics and the theory, this article seeks to outline how practitioners can use the main conceptual strength of PWS in order to achieve positive outcomes in food and water security in the context of climate change: achieving win-win outcomes for both managers of agricultural water (service providers) and the beneficiaries of a resulting watershed service (service buyers).
Application, benefits, methods: case studies
In order to point towards the multiple types of arrangements and subsequent benefits which can exist to provide PWS at the nexus of AWM, food security and climate change, we outline two case studies illustrating the possibilities of approaches based on the concept.
Case study - Erosion control in the Upper Tana River basin, Kenya - direct payments for SWC and eco-certification of coffee plantations: Pro-Poor Rewards for Environmental Services project (PRESA) - from Firmian et al. 2011 
The problem: In the Kapingazi catchment, erosion due to heavy rain combined with damaging land-use practices such as deforestation create favorable conditions for high sediment load during the rainy season, while also reducing carbon sequestration. This high erosion is also harmful to the amount of food produced for subsistence and the coffee plantations, the main local cash-crop. Sedimentation is also detrimental to a national hydroelectricity producer downstream (KenGen).
Identifying buyers: As such, KenGen was identified as a potential watershed service buyer by the Pro-Poor Rewards for Environmental Services project (PRESA), funded by the International Fund for Agricultural Development (IFAD) and implemented by the World Agroforestry Center (ICRAF). Funding payments was determined to be a lesser cost option for KenGen, as compared to removing sedimentation on its dams. Coffee and tea certifiers, UTZ Netherlands and Rainforest Alliance are also paying a premium for the coffee and tea produced sustainably and ethically in the area, for example based on an increase in forest cover through planting indigenous trees.
Identifying a seller and a provider: The coffee farmers in the catchment thus receive payments from the hydroelectric power provider, through the project funder (IFAD), in return for the implementation of Soil and Water Conservation (SWC) techniques such as “terracing, grass strips, fanya juu and fanya chini (i.e. cut-off drains and diversion ditches to collect runoff from the hillside)” . They reap price premiums for their coffee in exchange for sustainable forest management techniques which sequester carbon and facilitate biodiversity protection.
Benefits : reduced sedimentation, improved food security and income - In addition to improving yields, benefits in terms of food security materialize for farmers as a safety net income when the volatile prices for the coffee are too low.
Key method: economic valuation - In order to design an incentive scheme that will work, one has to determine the opportunity cost of adopting new techniques for the service providers (here, the farmers), in other words how would they be willing to accept as a compensation. This can be done through methods such as Contingent Valuation, based on surveys and interviews with the local potential providers of the services (for more on the application in this context, see . Conversely, one has to estimate the price willing to be paid by the potential service buyer, here the hydropower producer, however the external price can often be quantified by the buyer himself (i.e. the cost of cleaning up the dam site).
Case study - Increase in water provisioning services and poverty alleviation in South Africa through invasive species removal - Working for Water and Working for Wetlands (WfW) - from Turpie et al. 2011 
The problem: South Africa is a permanently water-stressed country, where constrained water supply is a factor of prevalent poverty, hunger and disease - as is common on the continent and in many developing countries (; ; . Invasive plant species were found to contribute further to water stress, and if left unchecked, the problem of water availability would only worsen.
Identifying buyers: The provision of water is considered to be a public good - the Working for Water programme is therefore publicly funded, although proposed by a group of scientists and natural resources managers. A particularity is that it is funded on budgets related to poverty alleviation - also a prerogative of the state - with taxpayers money and subsequent partnerships with water providers.
Identifying service providers: The high-cost work of clearing invasive species meant that landowners did not comply with a previous regulation that should have forced them to address the problem. With the advent of WfW, the programme would employ unskilled labor for this task, thereby alleviating their poverty.
Benefits: The environmental impact has been hailed as large, securing water supply and therefore broad positive impacts on downstream agriculture. The workers rewarded by the program were able to obtain a regular income, improving their general livelihood. However, this case study exemplifies the fact that although benefits could be found on multiple agendas (water supply for consumption and agriculture, biodiversity benefits, poverty alleviation), positive benefits all around are infrequent - clearing of plant species, invasive as they may, reduces carbon sequestration potential.
Key method - Watershed services as an ‘umbrella service’ for biodiversity conservation: Turpie et al. (2011) argue that invasive species clearing, and ecosystem restoration in general geared towards maintaining or improving water provision services could be conceived as an ‘umbrella’ for biodiversity conservation, as the practices involved generally yield positive results in this regard. As such, institutional acceptance and funding could be sought and obtained with more ease than with a strictly conservationist standpoint. This argument points to the fact that PWS and PES in general, to ensure success should try to analyze local institutional context and policy objectives in order to determine how best to promote their initiative.
Summary of PWS design and implementation good-practices
A general rule of thumb is that PWS initiatives have to rely on targeted water managers’ and users’ participation and commitment. To improve chances of acceptance by the potential buyers and providers of watershed services, new design processes have to be perceived as logical, fair and viable.
Moreover, various scientifically-grounded knowledge sources, methods and implementation techniques should be, when possible, integrated with indigenous knowledge systems . The achievement of a positive compromise between public perception and scientific expertise plays a crucial role in the construction of a successful scheme that can be constituted, according to specific requirements and needs, by the combination of the below listed actions:
- Using economics and social sciences to evaluate water related uses and services that potential buyers are interested in benefiting from (e.g. provision of clean and abundant drinking water, reduced sedimentation for hydropower generation, irrigation and erosion control for improved agriculture yields, recreational use of water bodies etc.);
- Guaranteeing the uphold of specific hydrological service(s) upon which different water users rely on (e.g. maintenance and/or enhancement of river flow, control of water quality and providing of risk management services);
- Using hydrological models to evaluate baseline water consumption and project efficient hydrological service delivery;
- Estimate possible scenarios with and without PWS implementation taking into account socio-economic differences of targeted users, biodiversity and ecosystem stability.
- Setting a price for the provision of the necessary services using valuation methods. A basis can be established by considering costs of land and labor; water tariffs or stated willingness to invest for the improvement of water services. An additional challenge is ensuring that the value of the service exceeds opportunity costs.
At the same time, relations with policymakers and local institutions in matters of funding and enabling environment should often be explored to ensure efficient PWS schemes. Moreover, the building of local institutional capacity usually creates enhanced participation of stakeholders in the implementation amd management of the scheme - public authorities pursuing PWS design should consider the following, while private implementers need to assess the state of these factors in their local setting (from ; ; ):
- Rights to resources and tenurial security. Success probability is improved if communities / service providers have a well-defined right to manage local land
- Funding. PWS schemes can be subsidized by external donors or public authorities in addition to the service beneficiaries (buyers) - for example by retaining a certain percentage of water fee revenues and/or other local taxes.
- Institutions. Involving targeted water users, service providers and buyers in the design process can be bolstered by government-condoned partnerships. Citizen-based partnership or river-basin associations can contribute to greater empowerment in watershed management.
- Institutional / bureaucratic obstacles to PWS schemes: It is vital to understand the existing bureaucratic culture, and to avoid any unnecessary challenge and risk that could make PWS economically inefficient.
- Ensure monitoring, compliance and transparency. Risks of non-acceptance and corruption should be hedged through ensuring that the institutional arrangement for the provision of payments is monitored and transparent.
A key challenge for PWS schemes: proving additionality, or linking benefits to the intervention
One of the key challenges for PWS schemes, and for PES in general, is to demonstrate additional benefits. While numerous case studies claim that certain PWS schemes were successful in achieving desired outcomes, the question of additionality is often left unproven: how can one be sure the results obtained (for example improved food security, revenue, carbon sequestration, water security etc.) were in fact caused by the scheme? Or would the evolutions observed have occurred regardless of the project?
In an empirical review of multiple PES schemes and literature analyzing them, Pattanayak et al. (2010) show that very few of them demonstrate rigorously additional results. They contend this can be solved by incorporating into PES design 4 key elements:
“(1) identify ecological and socioeconomic factors that co-vary with the program and which might influence the outcome measure;
(2) guess-estimate the direction of potential bias in interpreting intervention effectiveness;
(3) construct simple control groups (those that do not receive the program) to represent the counterfactual;
and (4) collect baseline and follow-up data on outcomes and key inputs.”
Integrating these quasi-experimental elements into PWS project design can not only improve management of the mechanism in order to achieve better results, it also can provide enhanced credibility of the project thereby attracting publicity and potentially funding, but also help to determine where and how the design can be replicated elsewhere.
* indicates a highly relevant reading
Asquith, N. and S. Wunder (eds). 2008. Payments for Watershed Services: The Bellagio Conversations. Fundación Natura Bolivia: Santa Cruz de la Sierra. Retrieved from Conversations PWS 2008.pdf http://www.cifor.org/pes/publications/pdf_files/Bellagio Conversations PWS 2008.pdf
* Food and Agricultural Organization of the United Nations (FAO), 2011. Payments for Ecosystem Services and Food Security (300pp.). Retrieved from http://www.fao.org/docrep/014/i2100e/i2100e.PDF
Millennium Ecosystem Assessment, 2005. Ecosystems and Human Well-being: Synthesis. Island Press, Washington, DC. Retrieved from http://www.unep.org/maweb/documents/document.356.aspx.pdf
* Porras, I., Grieg-Gran, M., & Neves, N., 2008. All that glitters: A review of payments for watershed services in developing countries. Natural Resource Issues (Vol. 11, p. 138). London, UK. Retrieved from http://pubs.iied.org/13542IIED.html
* Smith, M., de Groot, D., Perrot-Maîte, D. and Bergkamp, G. (2006). Pay – Establishing payments for watershed services. Gland, Switzerland: IUCN. Reprint, Gland, Switzerland: IUCN, 2008. Retrieved from https://portals.iucn.org/library/efiles/edocs/2006-054.pdf
* Wunder, S., 2005. Payments for environmental services : Some nuts and bolts. CIFOR Occasional Paper No. 42. Retrieved from: http://www.cifor.org/publications/pdf_files/OccPapers/OP-42.pdf
In Spanish: Blanco, J.T., 2012, Pago por Servicios Ambientales. Marco Conceptual y aplicación en Colombia. (“Payment for Environmental Services. Conceptual framework and implementation in Colombia”). Retrieved from http://www.cipav.org.co/pdf/riocali2012/Javier_T_Blanco.pdf
In French: Pirard, R. and R. Billé, 2011, « Paiements pour Services Environnementaux – De la théorie à la pratique en Indonésie » ("Payments for Ecosystem Services – From theory to practice in Indonesia"),VertigO, 11(1). Retrieved from http://vertigo.revues.org/10746
- ↑ USDA, 2009. Watershed Services. http://www.fs.fed.us/ecosystemservices/watershed.shtml. Last accessed on 30-12-2013.
- ↑ International Fund for Agricultural Developement (IFAD), 2012. Challenges and opportunities for agricultural water management in West and Central Africa: lessons from IFAD experience (p. 65p). Retrieved from http://www.ifad.org/pub/pa/field/3.pdf
- ↑ Food and Agricultural Organization of the United Nations (FAO), 2011. Payments for Ecosystem Services and Food Security (300pp.). Retrieved from http://www.fao.org/docrep/014/i2100e/i2100e.PDF
- ↑ 4.0 4.1 Porras, I., Grieg-Gran, M., & Neves, N., 2008. All that glitters: A review of payments for watershed services in developing countries. Natural Resource Issues (Vol. 11, p. 138). London, UK. Retrieved from http://pubs.iied.org/13542IIED.html
- ↑ Bennett, G., Carroll, N., & Hamilton, K., 2013. Charting New Waters: State of Watershed Payments 2012. Forest Trends, Washington, D.C. Retrieved from http://www.ecosystemmarketplace.com/reports/sowp2012
- ↑ Asquith, N. and S. Wunder (eds). 2008. Payments for Watershed Services: The Bellagio Conversations. Fundación Natura Bolivia: Santa Cruz de la Sierra. Retrieved from Conversations PWS 2008.pdf http://www.cifor.org/pes/publications/pdf_files/Bellagio Conversations PWS 2008.pdf
- ↑ 7.0 7.1 Bedru, B., 2010. Assessing landholder preferences for alternative land management schemes and willingness to accept rewards for watershed services provision: The case of Kapingazi River basin, Mt. Kenya East. Final report. Nairobi, World Agroforestry Centre (ICRAF). Retrieved from http://presa.worldagroforestry.org/WP-CONTENT/UPLOADS/2009/11/assessing_landholder_preferences_the_case_of_kapingazi_river_basin_mt-Kenya_east.pdf
- ↑ Millennium Ecosystem Assessment, 2005. Ecosystems and Human Well-being: Synthesis. Island Press, Washington, DC. Retrieved from http://www.unep.org/maweb/documents/document.356.aspx.pdffckLR
- ↑ Wunder, S., 2005. Payments for environmental services : Some nuts and bolts. CIFOR Occasional Paper No. 42. Retrieved from: http://www.cifor.org/publications/pdf_files/OccPapers/OP-42.pdf
- ↑ Laurans, Y., Leménager, T., & Aoubid, S., 2012. Payments for Ecosystem Services From Theory to Practice – What Are the Prospects for Developing Countries? A savoir, (April). Retrieved from http://www.afd.fr/webdav/site/afd/shared/PUBLICATIONS/RECHERCHE/Scientifiques/A-savoir/07-VA-A-Savoir.pdf
- ↑ Pirard, R. and R. Billé, 2011, « Paiements pour Services Environnementaux – De la théorie à la pratique en Indonésie » ("Payments for Ecosystem Services – From theory to practice in Indonesia"),VertigO, 11(1) (in French). Retrieved from http://vertigo.revues.org/10746
- ↑ 12.0 12.1 Firmian, I., Catacutan, D., Gatenya, J., & Namirembe, S., 2011. PES and eco-certification in the Kapingazi watershed , Kenya, in Food and Agricultural Organization of the United Nations (FAO), 2011. Payments for Ecosystem Services and Food Security (300pp.). Retrieved from http://outputs.worldagroforestry.org/record/145/files/BC11071.pdf
- ↑ 13.0 13.1 Turpie, J. K., Marais, C., & Blignaut, J. N., 2008. The Working for Water programme: Evolution of a payments for ecosystem services mechanism that addresses both poverty and ecosystem service delivery in South Africa. Ecological Economics, 65(4), 788–798. doi:10.1016/j.ecolecon.2007.12.024. Retrieved from: http://www.sciencedirect.com/science/article/pii/S0921800907006167 (Requires subscription)
- ↑ Falkenmark,M., 1994. The dangerous spiral: near-future risks for water-related eco-conflicts. Proceedings of the ICRC Symposium Water and War: Symposium on Water in Armed Conflicts, International Committee of the Red Cross, Montreux, Switzerland, 21–23 November. 16 pp
- ↑ Ashton, P.J., Haasbroek, B., 2002. Water demand management and social adaptive capacity: a South African case study. In: Turton, A.R., Henwood, R. (Eds.), Hydropolitics in the Developing World: A Southern African Perspective. African Water Issues Research Unit (AWIRU) and International Water Management Institute (IWMI). 24pp.
- ↑ Bonnardeaux, D., 2012. Linking Biodiversity Conservation and Water, Sanitation and Hygiene: Experiences from sub-Saharan Africa. Conservation International and Africa Biodiversity Collaborative Group. Washington, D.C., USA. Retrieved from http://www.conservation.org/Documents/USAID-CI-ABCG_Linking-Biodiversity-Conservation-and-Water-Sanitation-and-Hygiene_2012.pdf
- ↑ 17.0 17.1 _
- ↑ Smith, M., de Groot, D., Perrot-Maîte, D. and Bergkamp, G. (2006). Pay – Establishing payments for watershed services. Gland, Switzerland: IUCN. Reprint, Gland, Switzerland: IUCN, 2008. Retrieved from https://portals.iucn.org/library/efiles/edocs/2006-054.pdf
- ↑ Porras, I., Alyward, B. and Dengel, J. 2013. Monitoring payments for watershed services schemes in developing countries, IIED, London. Retrieved from http://pubs.iied.org/pdfs/16525IIED.pdf
- ↑ Pattanayak, S. K., Wunder, S., & Ferraro, P. J., 2010. Show Me the Money: Do Payments Supply Environmental Services in Developing Countries? Review of Environmental Economics and Policy, 4(2), 254–274. doi:10.1093/reep/req006 Retrieved from: http://reep.oxfordjournals.org/content/4/2/254.abstract (Requires subscription)