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Potential For Watershed Services Market Creation In Malawi: Constraints, Opportunities And Modelling Of Scheme Uptake

Congress: 2015
Author(s): Joana Ferreira, Patrick Abbot, Andrew Barnes
Scotland's Rural College (SRUC)1, LTS International2

Keyword(s): Sub-theme 9: Water allocation among competing uses and users,
Oral:
Abstract

Introduction

Sustainable Land management (SLM) practices can significantly improve social welfare in Malawi by improving the watershed services provision to estate farms, urban users, hydropower and industry6. Smallholder farmers are the suppliers of these improved services, and also those that have the most to gain from SLM adoption, as increased soil and water conservation preserves soil fertility and decreases climate change vulnerability, thereby increasing food security6.

However, smallholder farmers lack the financial capital to make the necessary investments in SLM7. Hence, a Payments for Watershed Services (PWS) scheme could provide them with subsidised inputs for SLM adoption, thereby also benefitting downstream water users.

African watershed service markets have been slow to develop, with African PWS schemes constituting only 2 to 5% of the active, in-development and proposed PWS schemes currently identified for developing countries1,8. However, interest in African markets is growing, with many international development agencies and NGO's actively seeking their creation and working on their implementation1,5,8.

Malawi has thus far been the subject of 8 identified PWS schemes, 7 of which are only proposals1-3,5,8,9. Only one has ever been active, and this has since been abandoned8. Despite a potential demand for watershed services in the country, particularly for reduction of silt loads and increased dry season flow for hydropower and irrigation6,10,11 , significant constraints to market creation exist, namely: difficulty in finding willing and able buyers, uncertain property rights, high transaction costs, lack of awareness of market potential by both suppliers and buyers, and the potential for market creation to be defined by the wealthy sectors, further marginalising the poor4. However, Malawi has a considerable advantage regarding a common failing of PWS schemes -- the lack of scientific data on the provision of watershed services -- as recent catchment-level assessments have been made of the country's hydrology and of the impact that different land-use practices can be expected to have on water regulation, soil erosion and on the economy in the next twenty years, under climate change6,10,11 .

This data was utilised in this study to develop a catchment level model to assess the potential for PWS scheme in the Dwangwa catchment, in the Central Region of Malawi, involving a private buyer of the services. The aim was to assess how much the buyer would have to pay for farmers to 'switch' to SLM and how much the payment would return in avoided siltation-costs under two climate change scenarios: wetter and drier climate.

Methods

An exploratory ex-ante assessment tool was constructed for the Dwangwa catchment using Linear Programming (LP). The Dwangwa LP model enables the assessment of the level of payment needed to trigger the adoption of SLM (by upstream farmers) and how much that adoption would translate in terms of avoided siltation-costs to the buyer (a downstream irrigation estate farm). This allows the estimation of the net gains to the service buyer over a 20 year period of paying incentives to smallholder farmers for adoption of SLM practices. The LP model also takes into consideration climate change by assessing how these net gains are affected by a wetter or drier future climate.

Three payment types were included in the model: a fixed subsidy, a percentage of the cost payments, and a tiered percentage of the costs; over four contract time-horizons: 1 year, 3 years, 5 years and 20 years to assess temporal effects of the payments. The model therefore functions as an interactive tool to inform potential scheme design, by allowing different payment scenarios to be tested and their efficiency analysed.

Results and Discussion

All short-term contracts (1 to 5 years) simulations made show that the buyer would have to face a considerable increase in short-term costs (min.: 83%; max.: 498%). Only for the 5 year contracts (i.e. 5 years of payments followed by 15 years of farmers being able to self-sustain SLM practices) is the buyer making a net saving of 35% for the 20-year period; but this is only for the wet climate variant: the equivalent net value for the dry climate variant is a 33% increase in costs.

As for the longer-term contract (20 years) simulations, no net savings for the buyer were produced. However, the 20-year contracts mean that the buyer is paying at the same level during the whole period -- this despite smallholder farmers being able to self-sustain SLM maintenance from the 3rd to 7th year onwards. Reducing the level of payment after that point can increase efficiency for the buyer.

Payment efficiency for the PWS scheme was also always higher under the wet climate variant than the dry, because the key aspect of cost to the private buyer is silt: with a wetter climate, increased run-off will result in increased silt loads, so the investment is more worthwhile. The large differences in costs between climate variants means that there is considerable uncertainty related to climate on the level of returns on any PWS investment made by the buyer.

Additionally, the model does not consider the transaction costs involved with negotiating a scheme with the large and diverse numbers of households throughout Dwangwa, or of securing ways of getting the subsidised input costs to those that need them.

Therefore, our results suggest that it would be more cost-effective for the buyer to deal with the business-as-usual silt-related costs instead of engaging in a PWS scheme with upstream farmers.

Conclusion

This study highlights the need for PWS proposals to assess price-efficiency issues on the buyer side as, although a prospective buyer may stand to benefit from a PWS scheme, these benefits may not be significant enough for a profit maximising company to make the investment in PWS (particularly when the predicted costs of dealing with service deterioration can be considerably smaller).

Furthermore, in this case there are spillover effects from the private buyer to the smallholder farmers adopting SLM practices: as sizeable social and economic benefits to be accrued from the shift to SLM, through improved livelihoods and increased food security that may well justify government involvement.

Encouraging the private sector to participate in such schemes may well depend on it not shouldering the full cost of PWS implementation; in which case, foreign donors and NGO's will most likely be necessary allies in supplementing the government's funds, in order to make a PWS scheme in Dwangwa feasible. 1. Bennett, G., Carroll, N., Hamilton, K., 2013. Charting New Waters: State of Watershed Payments 2012, Ecosystem Marketplace. Forest Trends, Washington, D.C.

2. Chiotha, S., Kayambazinthu, D., 2009. Potential Payment for Ecosystem Service (PES) in Malawi: Report Prepared With Support from Eastern and Southern Africa Katoomba Network, Payment for Ecosystem Service (PES) Inventories. LEAD Southern and Eastern Africa.

3. Ferraro, P.J., 2009. Regional Review of Payments for Watershed Services: Sub-Saharan Africa. J. Sustain. For. 28, 525–550. doi:10.1080/10549810802701234

4. Ferreira, J.G., 2013. Potential for watershed services market creation in Malawi: constraints and opportunities. MSc dissertation. Edinburgh, Scotland.

5. Landell-Mills, N., Porras, T.I., 2002. Silver bullet or fools’ gold? A global review of markets for forest environmental services and their impact on the poor, Instruments for Sustainable Private Sector Forestry Series. London, UK.

6. LTS International, 2013. Land Use Scenario Analysis Task 3 Report: Integrated Assessment of Land Use Options for Climate Change Mitigation & Adaptation. LTS International, Penicuik, Scotland.

7. MVAC, SADC FANR Vulneability Assessment Committee, 2005. Malawi Baseline Livelihood Profiles (Version 1). Malawi Vulnerability Assessment Committee.

8. Porras, I., Grieg-Gran, M., Neves, N., 2008. All that glitters: A review of payments for watershed services in developing countries, Natural Resource Issues. International Institute for Environment and Development, London, UK.

9. Stanton, T., Echavarria, M., Hamilton, K., Ott, C., 2010. State of watershed payments: an emerging marketplace, Ecosystem Marketplace. Washington, D.C.

10. WS Atkins International Ltd., Wellfield Consulting Services (Pty), Interconsult Malawi, 2011a. Water Resources Investment Strategy: Component 1 – Water Resources Assessment (Main Report), Water Resources Investment Strategy: Component 1. WS Atkins International Ltd., Surrey, UK.

11. WS Atkins International Ltd., Wellfield Consulting Services (Pty), Interconsult Malawi, 2011b. Water Resources Investment Strategy: Component 2 - Final Report, Water Resources Investment Strategy: Component 2. WS Atkins International Ltd., Surrey, UK.

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