Making Policies Work For Payment For Environmental Services (PES); an evaluation of the experience of formulating conservation in indonesia

415

Journal of Sustainable Forestry, 28:415–433, 2009Copyright © Taylor & Francis Group, LLC ISSN: 1054-9811 print/1540-756X onlineDOI: 10.1080/10549810902791531

WJSF1054-98111540-756XJournal of Sustainable Forestry, Vol. 28, No. 3, February 2009: pp. 1–26Journal of Sustainable Forestry

Making Policies Work for Payment for Environmental Services (PES): An Evaluation

of the Experience of Formulating Conservation Policies in Districts of Indonesia

Making Policies Work for Payment for Environmental ServicesF. A. Prasetyo et al.

FERDINANDUS AGUNG PRASETYO1, ARITTA SUWARNO2, PURWANTO3, and RIDHA HAKIM4

1Forest and Governance Program, Center for International Forestry Research, Bogor, West Java, Indonesia

2Forest and Livelihoods Program, CIFOR and WWF, Nusa Tenggara, Indonesia 3Sungai Wain Management Body, Balikpapan City, East Kalimantan, Indonesia

4WWF Indonesia-Nusa Tenggara Program, Nusa Tenggara, Indonesia

Payment for Environmental Services (PES) is one of several schemesdesigned to conserve the environment by means of a market-basedapproach which also incorporate The PES framework and dependsupon a number of criteria, namely: (a) A voluntary transactionwhere (b) a well defined environmental service [ES, or a land uselikely to secure that service] (c) is being bought by a (minimumone) ES buyer (d) from a (minimum one) ES provider (e) if andonly if the ES provider secures ES provision (conditionality). Thecase studies described are not perfect examples of PES, in thempayments have been made in ways that are not as simple as thosedescribed by the PES criteria. The article attempts to describe les-sons learned from three case studies by comparing the principlesof PES with other conservation approaches. As shown by thesecase studies, to make PES work, the government has an importantrole to play. An initial stage of payments, taxes, and subsidiescould be seen as a rational step toward an increasing willingnessto pay on an individual basis that will lead to conservation on awider scale.

KEYWORDS Conservation, district, environmental, national,payment, policy, service watershed

Address correspondence to Ferdinandus Agung Prasetyo, Jalan CIFOR, Situ Gede, SindangBarang, Bogor, West Java, Indonesia, 16680. E-mail: [email protected], [email protected]

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416 F. A. Prasetyo et al.

INTRODUCTION

The economic value of Indonesia’s production forests is estimated atbetween US$1,283 and US$1,416/ha/yr. The direct value of forest—derivedfrom timber, fuelwood, nontimber forest products, and water consumed byhouseholds—is about 7% of the total economic value of the production forests.This is less than the indirect value of forest as a carbon sink service—andthe contribution from other forest services such as topsoil protection, waterconservation, flood protection, and water transportation (Simangunson, 2003).

For more than two decades, Indonesia’s forests have been managed inorder to produce timber to support the country’s economic development.During the period 1980–2005, about 525,769,000 m3 of timber was har-vested (Ministry of Forestry, 2005). This figure does not include the area offorest affected by illegal logging. As a rough approximation, in 2001, givenan illegal harvest of about 50 million m3 of timber and assuming a harvestrate of 20 m3/ha, illegal logging affected at least 2.5 million ha of forest, result-ing in massive land-use change and forest degradation (Tacconi, Obidzinski, &Agung, 2004). In 2001 it was also estimated that the tax loss from illegal log-ging in 1998 was about US$1.5 billion (Palmer, 2001). This loss of forest hasbeen accompanied by the loss of many of its intangible values, such asbiodiversity loss and other forest services.

During the last decade, measures have been taken to prevent furtherloss by implementing sustainable management in Indonesia’s tropical for-ests and maintaining critical environmental services both within and beyondthe conservation areas. Although by 1999, 157 policies on natural resourcemanagement had been placed on the statute books (Sembiring, Husbani,Ivaleria Feby, & Hanif, 1999), forests remain under severe threat in manyparts of Indonesia. As estimated by Kim (2002), the intangible value lost dueto logging activities is about US$205/ha/yr.

Payment for Environmental Services (PES) is one of several schemesdesigned to conserve the environment by means of a market-based approach(Pagiola, Landell-Mills, & Bishop, 2002). Although this scheme is relativelynew in Indonesia, it has attracted wide interest. However, environmentalservices (ES) have in fact been delivered by means of traditional and socialinitiatives for many years in Indonesia (Leimona & Prihanto, 2005).

This article will discuss the experiences and lessons learned fromimplementing PES for watershed protection by means of benefit transferschemes developed in several districts of Indonesia in relation to the role oflocal and national policies to make PES work and to lead to conservationon a wider scale. The study also discusses the challenges involved, includ-ing how to identify and quantify the type of services that forests supply andhow to provide adequate incentives to districts in the context of national anddistrict government relationships as they make the transition to decentraliza-tion, including adapting institutional frameworks to suit local circumstances,


Making Policies Work for Payment for Environmental Services 417

ensuring fair and equitable cost-and-benefit transfer, and providing for thedifferent stakeholders.

METHODS AND CONCEPTUAL FRAMEWORK

To describe the role of policy in relation to the implementation of PES, threecomparative case studies were employed to examine early experiences ofimplementing PES in several districts in Indonesia. The PES frameworkdepends upon a number of criteria namely: (a) A voluntary transactionwhere (b) a well defined ES [or a land use likely to secure that service] (c) isbeing bought by an (minimum one) ES buyer (d) from an (minimum one)ES provider, (e) if and only if the ES provider secures ES provision (condi-tionality). These criteria, as formulated by Wunder (2005) and Figure 1which categorizes PES according to directness and economic incentives, willbe employed to identify position, status, progress, and obstacles during theimplementation of several PES programs in Indonesia. Further, an analysisof existing conservation policies will be conducted to obtain a “clearpicture” of policy constraints and possible options that need to beaddressed in order to provide enabling conditions that lead to conservationaction on a wider scale. The methodology will be used to answer followingresearch questions: (a) Has funding become an important issue for conser-vation in Indonesia?; (b) Does better funding lead to better conservation?;(c) Can PES mechanisms contribute to solving problems of funding and leadto conservation or contribute to an awareness of conservation?; (d) Cansuch mechanisms be as economically viable as other methods?; (e) How canthese methods be better integrated into conservation and management

FIGURE 1 Comparing PES to other conservation approaches.



plans?; (f) Is it true that “regulation” will be more effective than a market-based approach for environmental services? (Noordwijk, 2005).

THE LEGAL FRAMEWORK FOR PES IN INDONESIA

Law No. 23/1997 (Republic of Indonesia, 1997), replacing EnvironmentalLaw No. 4/1984 (Republic of Indonesia, 1984), describes the authorities,rights, and responsibilities governing the management of the environment,including the delegation of authority to local (provincial, district, and municipal)governments; it also takes spatial land-use planning into consideration. LawNo. 41/1999 (Republic of Indonesia, 1999), followed by the recent GovernmentRegulation 6/2007 (Republic of Indonesia, 2007) on Forestry, provides gen-eral guidance on the management of forest resources with a specific articleregulating the management of environmental services. These laws, com-bined with Law No. 34/2000 (Republic of Indonesia, 2000b) and GovernmentRegulation 65/2001 (Republic of Indonesia, 2001) on Regional Taxation,define PES in Indonesia.

In addition, other types of PES, such as the Clean Development Mechanism(CDM) through carbon trading, are regulated by Law No. 17/2004 (Republicof Indonesia, 2004b) on the Ratification of the Kyoto Protocol. Water servicesare regulated by Law No. 7/2004 (Republic of Indonesia, 2004c) on WaterResources. Both laws underpin the implementation of PES in Indonesia.However, the process of transferring benefits from buyer to provider ofenvironmental services is a lengthy one under the existing legislation, andthis has contributed to the potential loss of funds to finance tropical forestconservation.

CASE STUDIES

The three case studies, which draw on some of the early experiences withPES in Indonesia, will briefly discuss the process of establishing a PESmechanism and identifying gaps in terms of commitment from the commu-nity or local and national government. The first case study comes fromLombok and is a pilot study undertaken by WWF Indonesia–Nusa TenggaraProgram, in collaboration with KONSEPSI, a local non- governmental orga-nization (NGO). The second case study will describe the experience ofestablishing a local management body in the Sungei Wain Protection Forest(HLSW) area in order to strengthen its position to negotiate with local andnational governments and with the state-owned oil company to formulate abetter scheme to transfer benefits that could contribute to improved protectionof the area. The formulation of the concept of “conservation districts” in



several areas of Indonesia will be the third case study. This will completethe review and generate valuable information on how to relate public policyto making PES work.

West Lombok District and the City of Mataram

Lombok is a small island in Nusa Tenggara Province with a total area of 463,243ha; in 2003 its population was approximately 3 million, more than 600,000 ofwhom live in the area around Mt Rinjani. The Rinjani catchment area plays animportant role in supplying water to the people in Mataram District: the supplycomprises 85 springs on 10 watersheds and 5 subwatersheds.

The water supply on Lombok has become critical; by 2003, 40% ofthe springs had disappeared as a result of land-use change for agricultureand forest degradation in the Rinjani area. It was also influenced by theincrease in tourism activities, as building tourism-related infrastructure isvery popular. These activities caused a decline in the number of springsand impacted the water supply to households, industry, agriculture, andother users. As Lombok is a small island, it was suggested that a paymentscheme for water services be implemented in order to conserve water andland resources.

Subsequently, WWF Indonesia–Nusa Tenggara Program and KONSEPSI(a local NGO) worked together to calculate the economic value of waterresources in the Rinjani catchment and, together with the local government,devised a scheme for payment for water services. The main idea was to pro-vide rewards to the upstream community with cash incentives to conservetheir area, focusing initially on the area around the springs. The roles andresponsibilities of the partners were agreed: KONSEPSI would help theupstream community to conserve their area (the sources of the springs), andWWF would formulate an agreement with the district government to formu-late and establish regulations for environmental services that accommodatea payment-for-water-services scheme.

In order to design the reward mechanism, an economic evaluation ofthe water on Mt. Rinjani was undertaken by WWF Indonesia–Nusa TenggaraProgram in collaboration with Nusa Tenggara Barat (NTB) Development Plan-ning Agency (Bappeda), the Forest Agency and Culture and Tourism Agency inNTB Province, Rinjani National Park Bureau, and Mataram University. Theresults of the study showed that the potential economic value of the waterresources in the Rinjani catchment area is high, but that the actual economicvalue was very low (see Table 1).

To support development of the PES program, studies on Willingness toPay (WTP) for water services were also initiated among customers of theDistrict-owned water company (PDAM), at both community and industriallevel, in the city of Mataram and West Lombok District. This study was



undertaken by using a public awareness survey of the water crisis and of thecustomers’ ability to contribute to a conservation fund for water resources.

The results of this study showed that at the community level most customers(95%) were aware of the water-supply crisis and willing to pay Rp. 1,000–5,000(US$0.1–0.6) per month per customer to conserve the springs. This informa-tion was then disseminated to the community and the local council (DPRD).Most customers committed themselves to paying an extra Rp. 1,000 per monthon their water bill for the conservation fund (an average of Rp. 50/m3—about 5% of the price of 1 m3 of water). The dissemination process, supportedby a model of land use and water supply, was developed in collaborationwith CIFOR. The model was used as a visioning tool to explore a scenariorelated to the implementation of PES for water services and the impact on

TABLE 1 Results of Study of Economic Valuation of Water in the RinjaniCatchment

No Component

Value (Rp. billion) (US$ 1 = Rp. 9000)

Actual Potential

1. Gross Benefit of Water ResourceDomestic 120.9 1,453Industry 69.1 838Agriculture 2.5 30.4Other 718.3 9,504.7

2. Total Gross Benefit 1,061.8 11,795.73. Cost Estimate (60%) 637.1 7,077.04. Net Benefit Estimate (40%) 424.7 4,718.35. Net Benefit to Agriculture 939.66. Total Net Benefit 5 657.9

Source: WWF-Indonesia. (2001). Rinjani economic valuation [Unpublished Rep.]. Lombok,West Nusatenggara, Indonesia.

TABLE 2 Breakdown of Number of Customers of PDAM Menang Mataramin West Lombok District and the City of Mataram

No Customer type Number of units

1. Household* 34,2022. Trade and industry 2,1333. Government partners and facilities 54. Offices 2245. Social services 5416. Public services 816

Total 37,921

*) average use 20 m3/month.Source: PDAM Menang Mataram (2003).D

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the ability of the forested area to conserve water supplies and maintainlocal livelihoods in a sustainable way (see Figure 2). The model showedthat there was a positive relationship between the implementation ofPES and the size of the forested area. Maintaining the number of springswould support the sustainability of the water supply to the community inthe city of Mataram and West Lombok District. In relation to the dissem-ination of information about PES, the results of the modeling were usedto support the decision-making process and were presented at a stake-holders’ meeting in Mataram in 2004, as a trigger to increase publicawareness of the water crisis and the importance of the rewardmechanism.

In terms of governance, the results of the study stimulated the localgovernment to begin work on a District Regulation on Payment for Environ-mental Services. The draft of this regulation has now been produced andsent to the council for discussion. As soon as the regulation is finalized, aDistrict Head’s decree will be issued on the level of payment to the conser-vation fund for customers at the community level. For industrial customers,calculation of the payment to the conservation fund is in progress and willsoon be completed.

The flow of water service payments in Mataram and West LombokDistrict began with the additional payments made by community-levelusers to PDAM; PDAM will transfer these payments to Bestari Rinjani, anindependent body formed by stakeholders to manage the PES mecha-nism. Bestari Rinjani will distribute this payment to three communitygroups: (a) the community living around the springs, to conserve theirarea; (b) a group involved in a program to restore/conserve an arearelated to the springs; and (c) the poor in Mataram District who have noaccess to clean water (see Figure 3). Although the proportions of thefund to be distributed to each group are still to be decided, this mecha-nism has been discussed by all the interested parties and is ready forimplementation.

Management of the Sungai Wain Protection Forest

The Sungai Wain (Wain River) Protection Forest (HLSW) was establishedthrough the Ministry of Forestry Decree No. 416/Kpts-II/1995 (Republic ofIndonesia, 1995). In the transition to decentralization, the legal right to managethe protection forest was transferred to the local government (GovernmentRegulation 25/2000; Republic of Indonesia, 2000a). This reaffirmed PresidentialDecrees Nos. 32/1990 (Republic of Indonesia, 1990) and 62/1998 (Republicof Indonesia, 1998) on the management of the protection of forests. Thislegislation was followed by the issuance of City Regulation No. 11/2004, onthe management of the HLSW (Republic of Indonesia, 2004a). The HLSW, a


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tropical lowland dipterocarp forest with a total area of 9,782 ha consisting ofdry land, swamp, and mangrove ecosystems, has played a key role in thedevelopment of the city of Balikpapan in East Kalimantan Province. Notonly does the area have important hydrological functions but it also has arich biodiversity and unique ecosystem and provides good habitat forOrang Utan (Pongo pigmeus), Honey Bear (Helarctos malayanus), andmany other rare animals and plants.

The two major rivers running through the HLSW, the Bugis and the Wain,provide the fresh water used to run the second-largest oil refinery in Indonesia,which produces nearly 30% of the fuels used in the country. The reservoir wasbuilt in 1947 by the Dutch Oil Company and today is used by the state-ownedoil company, Pertamina. The refinery consumes about 15,000 m3 of fresh waterper day—about 25% of the total domestic freshwater consumption in Balikpa-pan. The legal right to use this surface water is regulated by Letter of Decree ofthe Provincial Mining Authority No. 546.2/33/Sub-2/Distamb/2000 (Republic ofIndonesia, 2000c). Although this source of fresh water is protected, by 1998illegal logging, encroachment, and forest fires had caused serious damage toabout 2000 ha of the HLSW (Hoffmann, Hinrichs, & Siegert, 1999).

Concerns began to be voiced when the HLSW area became degradedand the water supply ran into problems: in 1997, the water level in thereservoir, at about 13 cm, was at its lowest for years compared to its

FIGURE 3 Flow diagram of PES (reward payment and distribution) in the city of Mataramand West Lombok District.



normal level of 115 cm. The fall in water level was accompanied by anincrease in the total sediment load deposited into the Wain reservoir as aresult of the decline in forest cover. In addition, some geophysical ele-ments of the watershed of the Wain, such as the high annual rainfall,rather steep slopes and overall circular shape of the watershed, and soiltypes vulnerable to erosion, also supported the sedimentation processes(Hardwinarto, 2001).

Through a multistakeholder consultation involving local NGOs and withthe support of the international projects, Tropenbos and Natural ResourcesManagement (NRM-III), in 2001 local stakeholders signed the “Sungai WainDeclaration” and agreed on the formation of a small team with a mandate toreview the management of the protection forest. Finally the structure of amanagement board (BP HLSW) was agreed: it comprised a multistakeholdersteering committee providing policy direction to and control over a profes-sional management unit called the HLSW Executive Board.

The city government demonstrated its commitment to prevent fur-ther degradation of the HLSW, which might threaten the existence of thereservoir, by allocating the lion’s share of its 2001 and 2002 budgets—Rp.7 billion (US$777,779)—to support BP HLSW; and Balikpapan City Counciladded a further Rp. 2.5 billion (US$27,778) from its 2002 budget. Further-more, the funding mechanism is regulated by City Regulation No. 11/2004(Republic of Indonesia, 2004a), which explicitly states, in Article 21, thatsuch funding should come from the city budget (APBD), and provincialand national budgets, as well as from other sources. In view of the fact thatBP HLSW is not a government body and to avoid complicated bureaucracy,the City Mayor tried to take the initiative to provide funding through ablock grant. However, this is not possible at this time as new GovernmentRegulations—No. 58/2005 on Regional Finances (Republic of Indonesia,2005) and Ministry of Home Affairs Regulation No. 13/2006 on Guidance ofManagement of Regional Finances (Republic of Indonesia, 2006)—will affectthe future funding of management of the HLSW. This problem has yet tobe resolved.

This situation has forced BP HLSW to find alternative funding from its“potential buyer,” Pertamina, whose refinery depends on water from theWain; however, the transfer of benefits from the “user” to BP HLSW as the“provider” has not materialized. The benefit-transfer mechanism is regulatedby Law No. 34/2000 on district taxes and “retribution” (Republic of Indonesia,2000b). According to Article 2, the use of surface and groundwater will becharged as a provincial tax; furthermore, at least 70% of this will have to bedistributed to the district/city. Estimates made by BP HLSW show that, basedon an average daily water consumption of about 15,000 m3 by Pertamina to runthe refinery, the annual value of the water used is about Rp. 30,353,400,000(US$4,895, 000). About 30% is lost as leakage during transportation. Lobbyingis currently underway for Pertamina to pay a contribution for the management



of the forest. However, as regulated by a joint ministerial decree of theMinistry of Mining and Energy and Ministry of Public Works, No. 04/1991and 76/1991, respectively, Pertamina will review the legal process and seekadvice from the Ministry of Finance before making a commitment to pro-vide sufficient funds to finance the management of the HLSW (Republic ofIndonesia, 1991). However, a limited amount of funding has been providedthrough a Corporate Social Responsibility (CSR) program and CommunityDevelopment program.

Although the user and provider have been identified, the actual processof transferring the benefits of environmental services is complicated. Asindicated in Figure 4, if the benefits are transferred in accordance with LawNo. 34/2000 (Republic of Indonesia, 2000b) and Government Regulation65/2001 (Republic of Indonesia, 2001), the transfer will be inefficient andcould contribute to a potential loss of funds.

Conservation District Concept

A “conservation district” can be defined as an administrative area that haspolitical commitment to sustainable development and to maintaining biodi-versity. The district that is being proposed as a conservation district willlimit degradation of natural resources through a step-wise process aiming to

FIGURE 4 Flow of water resources and funds in a potential PES mechanism in accordancewith existing legislation.

HLSW

Flow of water resources

Wain Reservoir

Used by community

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River flow

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City Budget (APBD)

ProvincialBudget(APBD)

National Budget (APBN)

Potential loss of funds & mis-

Services



develop adherence to the established set of criteria and indicators discussedbelow.Conservation District Criteria:

• Conservation areas cover large parts of the district and constitute an integralpart of a larger eco-region

• Multi-stakeholders consensus on conservation as an integral part of districteconomy

• Natural resource conservation adopted as the basis of district economy(conservation-based development)

Conservation District Indicators:

• Legislature declaration of a district as conservation-based• Consistency between development policies and natural resources conser-

vation objectives• Spatial/land-use planning consistent with ecological functions of district

territory• District finance policy taking account of environmental costs associated

with development• Conservation area management an integral part of the performance of district

economy• District Environmental Affairs Bureau is an equal partner among government

bodies and provides meaningful input into district development policymaking

The primary incentives for districts to become conservation-orientedare specific budgetary allocations from central government and govern-ment loan facilities as well as increasingly well defined possibilities forpayments for environmental services. The conservation district programhas been supported by the National Conservation District Task Force; themain remit of the Task Force is to produce a ministerial decree supportingthe implementation of the “conservation district” policy. This ad hoc teamhas the potential to exert significant influence on national and local gov-ernments to formulate enabling policies for good forest governance. Withsupport from the Forest Partnership Program (CIFOR, WWF-International,WWF-Indonesia, and Tropenbos Indonesia Program), in 2004, KapuasHulu District (West Kalimantan) was declared a Conservation District, andwas followed by Malinau and Paser Districts in East Kalimantan. Forestryobservers and policy makers saw this as both a revolutionary and an uncer-tain development—the latter due particularly to the limited incentives inplace for regional governments to pursue conservation. Although thePES systems have not been implemented in these areas, the benefit of



bio-prospecting will be the identification of potential resources to be man-aged according to a PES system, especially in Kapuas Hulu and MalinauDistricts, where three National Parks are located—Betung Kerihun, DanauSentarum, and Kayan Mentarang.

COMPARATIVE ASESSMENT OF THE CASE STUDIES

The PES principles, as described by Wunder (2005), are employed togenerate lessons learned and insight into the implementation of PES inIndonesia.

Voluntary Transactions

The voluntary transaction is defined as an unforced agreement, which notablydistinguishes it from a command-and-control measure. The case study fromLombok showed that the PES process began when the communities realizedthat the water supply was declining as a result of the degradation of upstreamwater resources. Awareness of this crisis was raised as a result of NGOs car-rying out a resources valuation exercise and holding a public consultation,which led to community empowerment.

In this case study, it is difficult to categorize the situation under the vol-untary transaction criteria, because in the early stages of PES command-and-control techniques were employed to protect upland water resources fromencroachment and land-use change were probably inevitable, especially forthose areas belonging to the Forest Protection Zone (Mt. Rinjani). Meanwhile,the water resources in the community-owned area could be protectedthrough a community empowerment program that would lead to voluntaryprotection of the community’s water resources. On the buyer’s sidereal bene-fit transfer would occur if it were regulated by policies. The combination of a“command-and-control” mechanism for the protection area and the supportof enabling policies would be the ideal precondition for implementing PES.

A similar situation occurred in HLSW. This case could not be catego-rized as a voluntary transaction, as the real buyer (Pertamina) was welldefined and the payment mechanism, in the form of taxes, was regulated byLaw 34/2000—no direct transaction materialized (Republic of Indonesia,2000b). Although the regulation exists to force payment through the taxa-tion mechanism, the transfer of benefits has proved to be very complicatedand to generate a potential loss, plus the potential for miscalculation interms of quantity of service, as indicated in Figure 4.

Kapuas Hulu and Malinau Districts are in the very early stages of a PESprogram with the transaction expected to be realized through taxation andsubsidies from the central government with the fiscal balancing mechanismthat is now being proposed by the Conservation Districts Task Force.



Another procedure that might be suitable for voluntary transactions isforest certification, which has been practised in Indonesia for about 10 years.This mechanism allows “voluntary transaction” facilitated by a third-partyauditor. Although, according to Wunder, Dung The, and Ibarra (2005), forestcertification is not considered to be a type of PES scheme because this typeof initiative relates more to forest products than to environmental services.In Indonesia the forest certification scheme has contributed to protecting HighConservation Forest Value (HCFV) inside forest concession areas, and thiscan be considered as indirect protection for the biodiversity of tropical forest.Almost 1 million ha of tropical forest have been certified by the IndonesianEcolabel Institute (LEI), about 30% of which have also been certified by theForest Stewardship Council (FSC; Muhtaman & Prasetyo, 2006).

Well-defined Environmental Services

What is bought needs to be well defined; it can be a directly measurableservice. In these case studies, water is the PES commodity. Although it iswell known that forests help provide water services, the link—both qualita-tive and quantitative—between forest and ecological services is often poorlyunderstood (Chomitz & Kumari, 1998). However, in the specific case of theHLSW tropical forest, the study showed that degradation of the natural forestarea had a direct effect on sedimentation in the Wain reservoir (Hardwinarto,2001) that led to a reduction in the quantity and quality of the water services. Inthe early stages of implementing a PES program, a simple calculation ofwater use by means of a rapid hydrology assessment would help to quantifythe amount of water that can be traded through PES (Noordwijk, 2005).

The case studies showed that there are difficulties in quantifying waterservices. In the Lombok case study, the amount to be paid for water ser-vices was based on public awareness of the water crisis and WTP to providea conservation fund for the community. Perhaps, this is an inappropriatemethod for calculating payments that needs to be revised, starting with thecontribution to the conservation fund to be paid by the tourism sector, suchas hotels and other facilities; according to the survey, this is the sector thatconsumes most fresh water in its daily business. The HLSW case studyshowed that the rate for water services to be paid by Pertamina for therefinery process was Rp. 8,250 (US$0.95)/m3 consumed. This price was setby the local government water service (PDAM).

The case studies also showed that the way in which water serviceswere quantified did not relate to their economic value, and in both theLombok and HLSW case studies attempts were made to quantify waterservices using a very simple methodology. However, in view of theimportance of PES for water services and conservation, the difficulty ofquantifying water services should not be a barrier to implementing a PESprogram.



Environmental Services Provider and Buyer

Who are the environmental service buyer and seller associated with whohas control over the resources generating the services. The issue of “ownership”is crucial in an environmental service benefit-sharing agreement (Pagiola et al.,2002), and very relevant in the Indonesian context because PES is expectedto contribute fully to both poverty alleviation and environmental conservation(Leimona & Prihanto, 2005). On Lombok, private ownership is the dominantland status, and landlessness is a serious issue. The independent body BestariRinjani has provided facilitation to identify the providers and to coordinatethe transfer of water services benefits from the buyers to them. The situationon Lombok is different from that at HLSW: the ownership here is clearerbecause the protection forest is under the management of BP HLSW.

Different types of beneficiaries have been identified in these case studies.In the Lombok case study the existing source of payments is mainly the com-munity in the city of Mataram and West Lombok District (PDAM’s customers).Contributions are made through the conservation fund in order to revitalizetraditional values relating to protecting the existing forest and landscapeand to fund a poverty alleviation program. Meanwhile, the potential buyerin the HLSW is the private sector (Pertamina); the transfer arrangements arebased on Law No. 34/2000 (Republic of Indonesia, 2000b) and GovernmentRegulation 65/2001 on Regional Taxation, the legislation that defines PES inIndonesia (Republic of Indonesia, 2001).

Each beneficiary has a different motivation and rationale. The commu-nity in the city of Mataram and West Lombok District is driven by awarenessof the water crisis, and this has led consumers to provide a conservationfund to maintain the water supply. This situation is different from that ofPertamina in HLSW, which is driven by business ethics and government leg-islation (under the taxation arrangements environmental conservation ispartly the government’s responsibility). The situation of the potential buyers(Pertamina and PDAM customers) in these two case studies differs: aspotential buyers they could fund the conservation effort and therefore policyintervention at the local and national levels is needed. Furthermore, regulationsmust force the public and private sectors to internalize the externalities,to count the “payment” for ES as a production cost (Leimona & Prihanto,2005).

ES Provider Secures ES Provision

PES is to be made if, and only if, the service provider secures the provi-sion of that service continuously over time. Of the situations describedin the two case studies, in two districts (Lombok and HLSW) the focus ison conserving water supplies and watershed functions, and in the other



two (Malinau and Kapuas Hulu) the focus is on biodiversity conserva-tion. The principle that “good watershed function relies on good treecover” is used to negotiate PES benefit transfers for water services. In theLombok case study, this principle is modified by defining the linkagebetween ES provision and land-use change and the protection of RinjaniNational Park, which lies adjacent to the area owned by the communi-ties. In the Malinau and Kapuas Hulu cases, it was found that “conservationdistrict” programs play an essential role in conserving flora, fauna, andlandscape (through bio-prospecting). These programs focus not only onbiodiversity conservation but also on defining alternative sources andoptions for sustainable livelihoods. In this way both the market-basedapproach and legislation play an important role in securing the provisionof PES.

CONCLUSONS

PES schemes are still new in Indonesia, and most are in the phase of con-ceptual development and experimental implementation. Different stakeholdersand institutions are involved at different stages of the process in order todefine the most appropriate scheme for a particular community and thepotential for putting payments/rewards in place.

In defining the best schemes for implementing PES in Indonesia, someof the lessons to be learned can be recognized in the case study areas:

• The concept of “voluntary transaction” should be defined in PES, how-ever, it is difficult to find examples of voluntary transaction in PESschemes in Indonesia. On the provider’s side “command and control” toprotect natural resources (forest, water, biodiversity, etc.) need to be facil-itated under a community empowerment program, and on the buyer’sside real benefit transfer would occur if it were regulated by district, pro-vincial, or national policies. A combination of both the “command-and-control” mechanism and PES with enabling policy support would be thebest means of implementing conservation programs in Indonesia.

• The processes for defining the value of PES (water and biodiversity) inIndonesia have been very simple. This should not be a barrier to PESimplementation, and improvements to these methods are welcome.

• Policy intervention at the local and national levels is needed in order topersuade potential buyers to fund the conservation effort and potentialproviders to conserve natural resources.

• Appropriate funding with less complicated mechanisms for transferring ofbenefit is needed to make PES work.

• Scarcity of resources can be a trigger for the implementation of PES, there-fore in this situation better funding would lead to better conservation.



• In providing security of ES provision, both market-based and regulatoryapproaches play important roles.

• A combination of both the “command-and-control” mechanism and PESwith enabling policy support would be the best means of implementingconservation programs in Indonesia.

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Making Policies Work For Payment For Environmental Services (PES); an evaluation of the experience of formulating conservation in indonesia