Value of Soil Conservation Activities
Attributes
Medium: Land
Country: Indonesia
Analytical Framework(s): Other
Unit(s): bids
Study Date: 2008
Publication Date: 2009
Major Result(s)
| Resource/Environmental Good | IDR (2008) |
IDR (2014)1 |
USD (2014)2 |
|---|---|---|---|
| Contract price per hectare | 1,599,600.00 | 2,129,963.38 | 173.20 |
| Mean bid | 2,445,900.00 | 3,256,862.60 | 264.84 |
About the Inflation Adjustment: Prices in Indonesia (IDR) changed by 33.16% from 2008 to 2014 (aggregated from annual CPI data), so the study values were multiplied by 1.33 to express them in 2014 prices. The study values could be expressed in any desired year (for example, to 2026) by following the same inflation calculation and being sensitive to directional (forward/backward) aggregations using your own CPI/inflation data.
Study Note: In this paper, we focus on designing a procurement auction method to reveal hidden information on the opportunity costs of supplying environmental services. This is the first application of procurement auction method in a rural setting of a developing country, where most of the auction participants have a low education level (less than seven years of education), low asset endowment, small plot size (most owned land of less than 0.5 hectares) and where market-based competitiveness is not so common. Our study resulted in a set of auction rules for determining how a limited budget from the watershed rehabilitation fund could be allocated. We observed if the socioeconomic backgrounds of the participants influenced the submission of the final bids and analyzed the validity of applying this auction design in a rural setting in Indonesia by testing some other factors. These factors were (1) auction design factors, such as: participants' understanding of auction rules, the ease-of-use of these rules, the appropriateness of the participants' bid offered during the auction, and the fairness of the auction process; (2) social factors, such as: impact on the relationship between contracted and noncontracted farmers, general interpersonal relationships between communities, and information exchange amongst farmers; (3) environmental factors, such as: awareness of soil and water conservation and the rate of contract completion.
Study Details
Summary: The setting of this study is a watershed area in Lampung, Indonesia, where soil erosion has broad implications for both on-site and off-site environmental damage. Payment for environmental services (PES) is a conditional and voluntary policy option that, in this study, provides incentives for maintaining watershed functions. A key condition of PES is transparency regarding the conditions under which incentives or rewards can be granted. Balanced information and the power of transaction are the basis for any environmental service (ES). A contract procurement auction is an alternative mechanism for extracting information from ES providers on levels of payments or incentives that will cover their costs when joining a conservation program. In this paper we focus on designing a procurement auction method to reveal hidden information on the opportunity costs of supplying environmental services. This is an initial application of a procurement auction method in a rural setting in a developing country. Our study resulted in a set of auction rules for determining how limited watershed rehabilitation funds could be allocated. We examined the applicability of such an auction design in an Indonesian rural setting by testing: (1) auction design factors, such as: participants' understanding of auction rules, the ease-of-use of these rules, the appropriateness of the participants' bid offered during the auction, and the fairness of the auction process; (2) social factors, such as: impact on relationship between contracted and non-contracted farmers, general interpersonal relationships between communities, and information exchange amongst farmers; (3) environmental factors, such as: awareness of soil and water conservation and the rate of contract completion. Our results show that a sealed-bid, multiple round, second-price Vickrey auction with a uniform price can be applied where most of the auction participants have a low education level, low asset endowment, small plot size, and where market-based competitiveness is not common. Our finding is that farmers' bids to be involved in conservation contracts is more dependent on their learning process during the auction than observable factors such as their socioeconomic background, their awareness of conservation, and their social capital state. It was also found that introducing procurement auction as a market-based approach to rural communities does not harm their social relationships and is an applicable method in a rural setting. Nevertheless, this learning process does not guarantee the successful accomplishment of a conservation contract. The rate of contract accomplishment was moderate and this may be influenced by many other factors such as the farmer groups' leadership and their institutional arrangements for conducting conservation activities. The implication of these findings is that designing a proper conservation auction method and estimating the right value for contracts form only minimal requirements for the success of any conservation contract.
Site Characteristics: The setting of this study was a watershed area in Lampung, Indonesia, where soil erosion has broad implications for on-site and off-site damage. The most direct on-site effect is the loss of topsoil from the coffee farmlands that dominate the watershed, resulting in low agricultural productivity in the long term. Off-site effects include siltation, water flow irregularities, a reduction in irrigation, water pollution and agrochemical run-off. The soil sediment can reduce the capacity of a reservoir located downstream of the watershed, adversely affecting irrigated agriculture and hydro-electricity generation .
Comments: A wide range of innovative mechanisms has been developed for financing conservation in recent years. These have attempted both to access new sources of revenue for conservation and to develop new mechanisms for utilizing any available funds. Receiving considerable attention as a new way of approaching conservation is the payments for environmental services (PES) approach. This initiative has been applied globally, especially for the conservation of biodiversity, with regard to the conservation and maintenance of watershed functions, for carbon sequestration, and in order to protect the beauty of the landscape. At the beginning of its concept development, the PES was defined as a voluntary transaction where a well-defined ES (or a land-use likely to secure that service) was being bought by a (minimum of one) ES buyer from a (minimum of one) ES provider, if and only if the ES provider secures ES provision (conditionality). In principle, those who provide environmental services should be compensated for doing so and those who receive the services should pay for their provision. In other words, a payment by the ES beneficiaries can help make the conservation more attractive for land users. To change their behavior, the payment must obviously be more than the additional benefit which land users can gain from alternative land use and less than the value of the benefit which the downstream populations are willing to pay. Additional sources of income for poor land users that could augment their livelihood were assumed to be advantages of this scheme.