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China Mega-City Water Fund

Why a water fund?

Beijing’s Miyun reservoir and its watershed is ever increasing in its importance. This is not something only perceived by a few environmentalists but by a broad range of stakeholders in and around Beijing. Based on this realization, we wanted to create a tool that is accessible and useful for all parties involved and offers an opportunity to combine efforts to improve the water quality and quantity. Hence, the idea for a water fund was born.

How does the water fund work?

The water fund will work as a form of extended “cycle”: Businesses, NGOs, or single citizens donate money to the water fund. The management board, which is consisting of stakeholders from each sector, will identify projects everybody can support and which improve the water quality or quantity. It will use the money to finance only the most promising and cost-efficient projects. The result will be an improvement in water quality and quantity. At first glance it may seem like the fund is only receiving money from stakeholders, but in truth the improved water will benefit the very donors investing in it.


Different Strategies for Different Areas

The China Mega-City Water Fund will distinguish between actions in the water source areas (upstream) and in the areas that are receiving the benefits of the improved water (downstream). Furthermore there will be fundamental operations like watershed database management or stakeholder dialogue that are independent of single projects. While there are two categories, the upstream water source areas will be the clear focus of most of the projects.

Upstream Water Source Area Operations

Fundamental Operations

Downstream of Source Areas

Incentive Payments

There is a number of ways the fund can achieve its goals of improving water quality and quantity, one of them being incentive payments. Incentive payments are monetary contributions designed to change the behavior of a person or a group of people. The amount being paid is determined by either the opportunity cost for the individual or the contingent valuation (CV) method.

Incentive payments will be highly localized and based largely on stakeholder communication in order to increase effectiveness and the trust of the villagers. In the past under massive national programs, incentive payments were often too low or didn’t happen at all, even though promised, so that trust establishment remains a crucial element.

Opportunity Cost vs. Contingent Valuation – an Example

Say that in a given village the herbicides used during crop production are contaminating the water. Stopping to use these pesticides or lowering the amount used leads to a lower crop production, which leads to a lower income. Determining how much income would be lost and paying that to the farmers to stop using the herbicide is paying the opportunity costs. The way to determine how much income would be lost involves different techniques like looking at market prices for a given good.

Alternatively, especially as it’s often hard to pre-determine what the opportunity cost will be, one could also ask for how much money the farmer would be willing to change his current farming practices. However, farmers tend to underestimate their livelihood, so that the CV method may contradict one of the funds interests of improving livelihoods.

Payments for ecosystem services (PES) are incentives offered to farmers or landowners in exchange for managing their land to provide some sort of ecological service. They have been defined as “a transparent system for the additional provision of environmental services through conditional payments to voluntary providers.” These payments will be provided by the Mega-City Water Fund.

(Source: Wikipedia)

Incentive pay, also known as “pay for performance” is generally given for specific performance results rather than simply for time worked. Incentives are not the answer to all challenges, but they can do much to achieve specific environmental results. While a general payment for an ecosystem service can be a reward for existing work, incentive payments target changes that have not happened, yet. Incentive payments can transition into payments for ecosystem services.

The opportunity cost of a choice is the value of the best alternative forgone, where a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made, it is the “cost” incurred by not enjoying the benefit that would be had by taking the second best choice available.

(Source: Investopedia)

Contingent valuation is a survey-based economic technique for the valuation of non-market resources, such as environmental preservation. Contingent valuation is often referred to as a ”stated preference” model, in contrast to a price-based revealed preference model. Typically the survey asks how much money people would be willing to pay (or willing to accept) to maintain the existence of (or be compensated for the loss of) an environmental feature, such as biodiversity.

Cost–benefit analysis (CBA) is a systematic approach to estimating the strengths and weaknesses of alternatives that satisfy transactions, activities or functional requirements for a business. The CBA is often defined as a systematic process for calculating and comparing benefits and costs of a project, decision or government policy (hereafter, “project”).

(Source: Wikipedia)

Cost & Benefits – Avoided Costs

The third way is to think in terms of avoided cost, which is less used to determine how much money to pay, but is crucial for cost-benefit evaluations.

Take a project that, for example, is trying to remove nitrogen from the river stream which has an equivalent worth of 500,000RMB. The project itself costs 100,000RMB. That means the avoided costs are 400,000RMB and in a cost-benefit analysis the benefits outweigh the costs.

Alternative Incentive Schemes

Incentive payments, though widely popular, represent only a small part of the options open to CMWF. Others can be the construction of sanitation facilities or filtration systems that improve water quality and do not negatively affect, rather often even improve, local livelihoods. It can also take the form of knowledge transfer. In the example earlier given earlier, another option could be to provide the farmers with training on how to use less pesticides while maintaining high crop production. Another option is to give people livelihood alternatives, so they can stop harmful practices. Support in eco-tourism often leads to a new income stream that is emphasizing sustainability while at the same time creating learning opportunities for city dwellers.

The main advantage of these activities is that they tend to be more sustainable than sole payments. It has been an issue in multiple state programs that after conclusion of a project, effectively stopping the payments, farmers returned to their former practices as the incentive to behave differently was gone.

How can we make sure we are not wasting contributor’s money? – Cost Effectiveness

Whenever individuals and organizations voluntarily pay into a fund, it is of highest importance that not only some results are achieved, but that the most and best results will be achieved for every dollar spent. Therefore emphasis within the fund is on cost effectiveness. This will be ensured by identifying which projects deliver the most benefit for the lowest cost. The Fund will quantify the effectiveness of each proposed project using appropriate research findings, water quality testing from the Miyun water source area and other means.

Monitoring will play a central role in determining the long-term benefits the CMWF projects will bring. Therefore a monitoring system will be developed for each project.

Our Vision for the Future

The China Mega-City water fund will initially be launched in Beijing but the ultimate goal is to establish a water fund like this in many major Chinese cities. The Chinese Mega-City water fund in Beijing is so to say the pilot project for a further spread in the future.

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