How do you maintain healthy ecosystems, reduce rural poverty and contribute to broader economic growth all at the same time?

Turning back the tide of environmental degradation that often accompanies development may sound like a tall order. But offering rural inhabitants economic incentives to conserve ecologically sensitive areas could be the answer.

A pilot project in southern Vietnam aims to emulate the success of a mechanism known as Payment for Ecosystem Services (PES), which is already spreading in Latin America.

Over 200 households in Lam Dong province in the Dong Nai river basin have just received their first quarterly payments - a total of 12 billion dong (around $680,000) from two hydropower plants - for protecting 188,000 hectares of forest.

By the end of the year, more than 2,000 households will share $2.8 million pledged by the Da Nhim and Dai Ninh plants.

The payment, excluding the money committed by water and tourism companies, will raise each household's annual income by $730, or 350 percent, according to U.S. development agency USAID.

Most households in this important watershed region are ethnic minorities who eke out a living by farming forest land.

"The people living in these areas are the poorest of the poor," said Jim Peters, chief of party at the USAID-funded Asia Regional Biodiversity Conservation Program (ARBCP), which initiated the scheme.

"We expect to generate incomes that should reach the level of average gross domestic product (GDP) in the country. So it's not just about bringing people out of poverty but putting them in the mainstream."

ENVIRONMENT AT RISK

The Dong Nai river basin, spanning 12 provinces, plays a key role in Vietnam's economic development. It includes the country's largest - and expanding - urban and industrial development areas, provides water to millions of people, and is expected to cover 20 percent of national electricity needs by 2020.

Water quality in the basin has been decreasing due to untreated waste water emitted by industrial operations and cities. With demand set to increase, protecting the watershed is essential for Vietnam's future economic growth.

The payments, made through a non-profit fund run by the province, are conditional on reduced deforestation and sedimentation. This is expected to save utility companies significant amounts of money - dredging costs for Da Nhim would have amounted to $3.75 million per year otherwise, according to ARBCP.

At the same time, residents are being encouraged to plant sustainable and profitable crops such as cacao and bamboo which can be grown under forest cover, rather than crops that require land to be cleared.

The scheme also addresses Vietnam's heavy loss of forest cover and rampant pollution, while reducing the risk of landslides and flooding.

Most of the payments will be borne by consumers, which will be range from $0.0025 per unit of power to $0.004 per cubic meter of water. Local governments receive a percentage of PES payments to cover their administration costs.

ASIAN EXPANSION

The Lam Dong project, which started in April 2008, is the first PES scheme in Southeast Asia, where the method is still in its infancy. Also known as Payment for Environmental Services, it is proving successful in Latin America, where it has been used for watershed protection in countries including Costa Rica, Honduras, Ecuador and Dominican Republic.

Its initial success in Vietnam has prompted the government to adopt the first national PES policy in Asia, with a second pilot project in Northern Son La expected to benefit a further 3,000 households. The aim is to expand the project to 15 provinces, and Cambodia and Laos are also hoping to replicate the mechanism.

A group of agencies, including the regional United Nations office (ESCAP), Asian Development Bank (ADB), ASEAN Centre for Biodiversity (ACB) and ARBCP, are supporting the introduction of PES in Southeast Asia, whose rapid loss of biodiversity has worried conservationists.

Last week, the agencies - together with businesses and policy makers from Southeast Asian countries and China - met in Bangkok to discuss PES mechanisms in the region. Pilot initiatives are also being launched by another coalition in Indonesia and the Philippines.

TACKLING INEQUITY

Despite the high level of interest in PES, challenges remain. Critics of the Latin American schemes say they are based on unverified generalisations - for example, that reforestation increases water availability and reduces erosion. Depending on the tree species, it has been found that reforestation can actually increase erosion, they argue.

In addition, measuring the value of environmental services, setting an economic cost and monitoring the outcomes require scientific research, which takes time. And there can be questions over sustainability, especially if the opportunity cost of PES - the loss of agricultural land and money - is greater than the benefits, as with some Latin American projects.

"The risk in Asia is issues around capacity and weaknesses in governance that actually lead to forest degradation in the first place. Those are still around, and they are going to impact on the implementation of PES," said Sango Mahanty, a research and teaching fellow at the Australian National University who specialises in resource management.

Perhaps most importantly, Mahanty believes that PES needs to address entrenched social inequities for it to be truly viable in Asia.

"Blindness to social welfare could not only fuel the very real risk of adverse social outcomes, it could also mean foregoing the opportunity to improve the circumstances and opportunities of the rural poor," she noted in a recent paper.

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