A fully integrated approach to water resources means downstream users investing in upstream conservation

Water is everywhere – tumbling down craggy rock faces in long tendrils, dripping from tufted grass stalks, and collecting underfoot in a carbon-rich, spongy soil layer whose function is like that of a giant cistern, capturing, storing and regulating the release of water for use throughout the Andes.

Amid swirling sheets of rain and drifting cloudbanks, Carlos Cabrera explains how these magnificent grassland environments – variously known as páramo, puna or jalca – provide not just farmland irrigation on the nearby mountain slopes but also power for Ecuador’s burgeoning hydro-electricity sector and drinking water and sanitation for the country’s major urban centres.

That, says Cabrera, manager of the Río Paute water fund, is why an unusual coalition of municipal entities and private partners is working to help the Río Paute watershed and its inhabitants adapt.

Though this portion of southern Ecuador hardly seems water-stressed, threats loom large, even here.

Beginning in 1998, lower-lying semi-arid regions further south suffered severe drought linked to climate change – leading to a mass influx of people to the highlands and placing increased demand for water for domestic and agricultural purposes.

That has led to a loss of the natural vegetation and an increase in erosion, which changes water run-off behaviour, reducing the recharging of aquifers. It has also increased sedimentation, which reduces turbine life in hydroelectric dams and requires bottling plants to invest hundreds of thousands of dollars in filtration systems.

In response, the water fund coalition – known as Fondo del agua para la conservación de la cuenca del río Paute (Fonapa) – is hiring rangers to patrol the watershed’s 19 protected areas and two national parks. It is investing in environmental education and it is negotiating restricted land use agreements with small dairy farmer cooperatives in exchange for contracts with big milk purchasers.

The stakes could not be higher: the Paute river basin generates more than a third of the country’s electricity through Paute Integral, Ecuador’s largest hydroelectric project. Competition for use of the water is very high, and with deforestation rates and population growth rapidly increasing, various public and private interests recognise the need for investment.

Big job

But comprehensive watershed management of this kind is a Herculean task.

Cabrera isn’t a businessman; he doesn’t work in the energy or drinks industries. He’s a scientist with a degree in environmental planning and management, and in order to win over deep-pocketed partners he has to not only prove the business case but also get various parties to unite.

Contributors to the water fund – a kind of conservation trust that earns interest and channels payments into upstream conservation projects – have to be cajoled into prioritising areas of investment.

“There are several institutions working in conservation here in Paute but they don’t tend to work together,” Cabrera says. “They know they have to invest in water conservation but they don’t see very clearly the concept of the watershed.”

The fund, now in its third year, stands at $500,000. But because of Ecuadorian president Rafael Correa’s distrust of the private sector, Fonapa’s financial investments are restricted to publicly held institutions, thus limiting the return on investment and the amount ultimately spent on conservation.

Cabrera believes the fund can leverage its endowment to generate additional matching funds, but these are still paltry figures given the size of the Paute – consisting of 18 rivers spread across a 600,000-hectare region that serves nearly one million people, including those living in Cuenca, Ecuador’s second largest city.

And funding is subject to the whims of individual donors. “That’s the reason I don’t have hair,” says Cabrera, 33, pointing to his balding head. “I have to negotiate everything.”

Private sector support 

Success is already a reality, say backers of the water fund concept, pointing to Colombia where water funds in the capital Bogotá and Calí in the Valle del Cauca have respectively won private industry support by brewer SABMiller and a sugar cane growers’ association.

In Ecuador, six water funds have helped protect more than 1.2m acres, of which the most successful is the fund based in the capital Quito – where in only a decade The Nature Conservancy, international development agencies, and partners in the public and private sectors took startup capital of just $21,000 and grew it to $10m. Interest generated by the fund provides for $900,000 a year in investments in local conservation actions.

Launched in 2001, the Quito Water Fund was the first of its kind to induce private companies to invest alongside public entities. Buoyed by a 2% water tax collected by the city’s water utility, and supported by a local SABMiller-owned brewer, a local bottler and a hydroelectric company, the Quito Water Fund nevertheless had its shortcomings, says Aurelio Ramos, head of The Nature Conservancy’s conservation programmes in Latin America.

There was growing demand for watershed protection and the concept of the water fund as a financial mechanism had established a transparent decision-making process. But it lacked accountability, says Ramos.

Without tangible data about key problem sites in the watershed, water fund managers in Quito didn’t know which areas to protect first. The Quito fund also lacked the tools to measure progress. That meant fund managers could not demonstrate that improved results were directly attributable to implemented programmes.

“On environmental services, we have to be very clear on getting the science right,” says Ramos. “We have to show how much they are going to get in return for that investment.”

Under Ramos, the programme began fine-tuning its science-based feasibility and monitoring know-how, using Bogotá as a test case to prove the effectiveness of a payment for ecosystems service (PES) model that it hopes to replicate throughout Latin America, Africa and Asia.

Bogotá, a sprawling metropolis with a growing population of more than seven million, has a single degraded páramo grassland area in Chingaza National Park that supplies most of the city’s drinking water. From 1977 to 2001, pastureland in Chingaza grew 19%, while the páramos shrank by 14%. Both the water utility company and Bavaria, Colombia’s largest brewer, which is owned by SABMiller, were having to spend increasing sums on new water-treatment plants, when in 2008 Ramos came knocking on their doors offering a solution.

Ramos soon persuaded the water utility to come on board but Bavaria’s endorsement was in question. Making the business case was imperative, Ramos says, recounting the pivotal meeting with Bavaria executives. Armed with baseline data – including water, weather and plant-life measurements – Ramos set out the fund’s financial-planning priorities.

Next the data was fed into scientific models to forecast how sediment and water levels might change the new conservation strategies. Ramos’s studies showed that if businesses spent $8.3m on various watershed-protection activities, the companies could cut Bogotá’s water sedimentation by 2m tonnes a year, thus saving roughly $3.5m a year in current water-treatment costs. Businesses would recoup their initial payments in roughly five years.

Before Ramos was half-way through his explanations, Bavaria’s head of environmental services jumped up and asked how much money he needed. “They didn’t allow me to finish,” Ramos says. “They said, ‘these are exactly the kinds of programmes we are looking for. How much money do you want?’”

Beverage bonanza 

Today, SABMiller (Bavaria’s parent company) sits on the board of the Bogotá Water Fund. It plays a prominent role in board dealings in Quito, and it is working with The Nature Conservancy and other stakeholders to create another water fund in Peruvian capital Lima, where municipal and private stakeholders are now in the initial phase of start-up capitalisation.

“The advantage of working with a group like The Nature Conservancy is they can bring a number of companies together to look at the wider geographical area, enabling companies to understand the bigger picture,” says Andy Wales, head of sustainable development at SABMiller. “But to be able to maintain the business momentum, for individual users focus has to be kept on specific intervention that helps the business grow in the future.”

Coca-Cola, another pioneering company in water investment programmes, is participating in the Water Fund programme, but on a more limited, one-off basis. In Quito, for example, it hired the Water Fund to manage a watershed reforestation project, with the funds channelled through its own Coca-Cola Foundation.

“Ultimately, water funds need structuring and accounting systems based on the level of detail of specific water flows and loads – sediment, nitrogen, etc – avoided,” says Greg Koch, managing director of global water stewardship at Coca-Cola. “What we have seen so far is a basic assessment of benefits – investing in filtration systems versus conservation investment – to build initial interest and support for a fund concept followed by opportunistic fund-raising to get the programme started.

“The more mature approach will come and The Nature Conservancy is a leader here.”

In the next five years The Nature Conservancy and its partners are aiming to capitalise at least 32 water funds by leveraging investments of $27m from three main partners: the Inter-American Development Bank (IDB), the Global Environment Facility, and Femsa, the largest Coca-Cola bottling company in the world.

The so-called Latin American Water Funds Partnership has a goal of protecting 7m acres of watersheds in Ecuador, Colombia, Peru, Brazil, Mexico and other countries.

At its launch in June 2011 the IDB president, Luis Alberto Moreno, said the water fund’s key ingredient lay in the application of world-class research and rigorous science. “We will be choosing a small number of watersheds in which to test and perfect conservation techniques related to water quantity and quality. And only then will we implement a replication strategy that will enable a much larger number of cities and countries to adopt these techniques.”

Partnership approach 

It is the scale of the partnership that makes it so pioneering, says Paul Ferraro, a professor of economics at the Andrew Young School of Policy Studies and noted authority on PES programmes.

“In general for these PES funds … the buy-in tends to be a large fixed sum in the beginning and is a small percentage of the overall budget,” Ferraro says. “If this one can bring in more private sector contributions – and make it a greater proportion of the programme – that would be something new.”

Scientific advances are contributing to the push in this direction, but also Ferraro says companies now realise there’s a lot to be gained from investing – not only if the hydrological services appear but also in doing something related to community relations tied in to their business models.

Payments for hydrological services rank second after carbon (climate regulation) and are among 24 ecosystem services identified by a 2005 UN-sponsored report, including categories such as food production (in the form of crops, livestock, fisheries, aquaculture and wild food), fibre (in the form of timber, cotton, hemp, and silk) and genetic resources (biochemicals, natural medicines and pharmaceuticals).

“Hydrological services have the advantage that their benefits can be more easily captured by a private firm,” Ferraro says.

But you are still funding a public good, he adds, and consequently many schemes fail to cultivate buyers among the service beneficiaries, drawing too heavily instead upon external donors’ contributions. There’s also not a great deal of evidence that payments for environmental services induce additional land use changes by contract recipients.

There’s still a lot to learn, says Brian Richter, director of global fresh water at The Nature Conservancy. But the water fund model creates a sustainable source of funding that enables fund managers to implement, evaluate, refine, adapt, and change the allocation of the funding in the watershed.

“The fund enables us to keep trying,” Richter says. “The tragedy of many [PES] investments is that once we’ve learned what we’re doing well enough, we don’t have the ability to put that learning back into the watershed. That’s the real power of the water fund structure.”

Water stewardship 

If companies such as SABMiller and Coca-Cola are leading the way in water management, it does not necessarily follow that others in the drinks industry and beyond will soon join in. Most companies are still in the phase of discovering what they need to do to make the whole supply chain more water-friendly – and at what cost.

Just driving efficiency will not amount to much if the cumulative draw on resources in the watershed is too high, says Stuart Orr, manager of the global freshwater programme at WWF International. Water risk is fundamentally a local issue. Unlike carbon, it’s not just the volume of water used that must be taken into account, but also the stress that the water usage places on the local environment.

“Think of it as two sides of an equation,” says Jason Morrison, technical director of the UN Global Compact’s CEO Water Mandate. “One is the assessment side, including footprinting and other metrics used to assess risk. The other side is the response.”

Morrison and Orr both acknowledge that the science and methodology governing quantification of water risks and benefits are new and developing. But they say that in the past two years a great deal of progress has been made. There is a host of consultancies now well versed in water risk assessment. Getting companies to act proactively at the watershed level is the real challenge.

Morrison credits WWF with showing the business community through its Water Futures partnership with SABMiller just how a company can do that. The logical next step is to scale up the effort to get buy-in from other businesses, governments, development agencies and the NGO community.

Good water stewardship will encompass a range of efforts from water accounting to policy engagement. But, adds Orr, water users ultimately have to share resources and enter multistakeholder collaborations if they are to significantly improve water management.

“Just finding three companies in a river basin doesn’t get you very far,” Orr says. “You need a mechanism whereby you can cooperate, and the [water] fund gives them that mechanism.”

A worldwide model

And with support from big business, water funds could be exported worldwide, though with greater ease in some places.

“Asia has the potential to do a lot with this, Africa less,” Ferraro says, noting Latin America’s advanced institutional support and strong scientific foundation. “There will be opportunities, but it won’t be as broad-based as in Latin America.”

At present there are 12 funds in various stages of development. Four are self-sustaining and the other eight have the seed money establishing the trust fund model, says Vidal Garza Cantu, director of the Femsa Foundation.

“There have been cities that have approached us … wanting desperately to establish a fund but we have to teach them that water funds require not only political will,” says Cantu. “It’s a collaborative process that has to begin from the bottom and the top.”

The agricultural sector accounts for the largest percentage of water use – upwards of 80% globally. That’s where Cantu says partnerships have to focus effort. The model can work in large municipalities where there are deep pockets but it is not well designed for rural watersheds, Ramos says.

Of the six funds launched in Ecuador, only those in Quito and Cuenca – the country’s two largest cities – can be considered successful.

“My concern is we should only create this many water funds if they are sustainable,” says Paola Zavala, the environment officer in Ecuador with USAid, the development agency that first launched the fund concept in Quito in collaboration with The Nature Conservancy. “It’s a model that can be applied elsewhere but it’s not a magic recipe.”

Valuing ecosystems 

Conservation International launched its freshwater programme in 2007, building on a strong foundation of science and field demonstration.

Best known for its work on issues of biodiversity, it has directed much of its watershed management effort towards supporting payment for ecosystem services (PES) mechanisms that assign value for managing natural resources, thereby compensating the communities whose actions enhance or protect those services.

Nutrient runoff from agriculture is a major source of contamination that finds its way into urban environments but can be avoided by conservation of forests or wetlands, says Tracy Farrell, senior director of Conservation International’s Freshwater Global Initiative.

A key problem in targeting large scale watersheds is the lack of a market incentive. “Creating incentives for payment can be local, regional or on a national basis, which is different from the market approach. It’s more from compensation,” says Farrell, citing a project in south-west China in which “incentive agreements” directed a small municipal tax levied on downstream users into a trust fund for training upland farmers in sustainable agriculture.

PES schemes are more advanced in Latin America but they are gaining ground in both Africa and Asia. Currently, Conservation International has eight watershed programmes ranging from the Namaqualand in South Africa and the Atlantic Forest of Brazil, to the highland páramos of Colombia and the Lower Mekong in Cambodia. Corporate partners such as hotel group Marriott International have come on board, but resistance remains, given the private sector’s focus on reducing their own immediate footprint.

“The next evolution is to get them to care about the broader context of where the water is coming from,” Farrell says.