River in the Northern Andes
Erika Nortemann / The Nature Conservancy
Water Funds, such as the Bogotà Water Fund in Colombia, are agreements between stakeholders to deploy natural solutions in source watersheds. They often include protected areas. Water Funds provide: - A revenue mechanism to collect and distribute funding from downstream users for watershed conservation - A governance mechanism for joint watershed planning and decision making - An implementation mechanism to carry out conservation and restoration work.
Last update: 05 Oct 2020
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Context
Challenges addressed
Water conservation
Location
Caribbean, Central America, North America and South America
Caribbean
Central America
South America
North America
Process
Summary of the process
The basic mechanism of a water fund is that water users pay into the fund in exchange for the product they receive — fresh, clean water. The fund, in turn, pays for forest conservation along rivers, streams and lakes, to ensure that the users benefit from safe drinking water. As a foundation, both the essential hydrological ecosystem services that need to be conserved through the water fund mechanism, as well as the beneficiaries, need to be identified (Building blocks 1 & 2). A working group (building block 3) oversees and coordinates preparatory work, such as the setting up of the fund’s legal structure (building block 4), which will lay out responsibilities of all parties. Following that, the strategic plan is prepared, outlining the long-term operations and goals of the fund. Its implementation is overseen by the board of directors (building block 5) and coordinated by a technical secretariat. To ensure that the plan’s implementation is on track, the water fund operates efficiently and meets its defined conservation goals, monitoring protocols must be in place.
Building Blocks
Identification of relevant hydrological service
The identification of hydrologic services that must be conserved or recovered is a very important step that helps set clear goals and objectives for the fund, identify key stakeholders that should be involved and develop strategies for achieving the goals set. Regulation of the Water Cycle, Sediment Control and Water Quality are some examples of hydrologic services that can be identified as goals for a water fund.
Enabling factors
Reliable data for an initial opportunity assessment. Relationship with local organizations and government agencies with relevant data on the ecosystem service.
Lesson learned
This step is key to set clear goals and objectives for the fund, identify key stakeholders, and develop strategies.
Identification of beneficiaries
The identified ecosystem services are linked to a series of stakeholders for which the availability of these services is very important. As a next step in setting up a water fund, it is necessary to analyse the stakeholders present in the area that eventually will have a direct or indirect relationship with the mechanism. This exercise is of the utmost importance as it will help identify who are, or could be, the most interested in maintaining or recovering ecosystem services and, therefore, become partners and contribute financial resources to the fund.
Enabling factors
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Lesson learned
Participation of consumers is key whether for reducing treatment costs or in the interest of guaranteeing the availability and quality of water for a specific use (i.e. industry, energy, agriculture or human consumption). - The private sector must complement the public sector’s responsibility in conserving the watershed. The private sector and organized civil society must ensure through legal channels that the public sector fulfils its obligations. - For academic institutions water funds are a good opportunity to carry out research, conservation or monitoring activities and to develop projects using new technologies.
Working group
A working group is formed to begin assigning specific tasks that will help advance the development of technical studies and facilitate and promote the water fund. The main functions of this working group may be the following: preparing a work plan that includes a detailed timeline with the legal establishment of the fund as its final activity, conducting meetings to coordinate strategies and define next steps, analysing alternatives for the preparation of initial studies, informing stakeholder institutions about the status of the fund’s establishment and analysing and facilitating the incorporation of new members to the working group. The working group’s composition should be duly formalized through a Memorandum of Understanding or similar instrument.
Enabling factors
A solid and comprehensive stakeholder analysis - An identified problem to be addressed and the shared risks/interests of the working group members
Lesson learned
Working group members need to be correctly chosen and vetted. They must also be dedicated to finding and applying a solution to the problem at hand.
Legal and institutional analysis
The water fund’s transparency, independence and long-term permanence must be justified in a study that analyses the different legal and institutional alternatives for its structure and operation. The following are some of the most important topics to be analysed in legal and institutional studies: - Current Legislation - Current Management Plans - Legal Nature of Potential Water Fund Partners - Resource Administration
Enabling factors
Technical capacity. Availability, reliability and consistency of data.
Lesson learned
These studies may be simple (i.e. rapid assessments) or they may be more in-depth studies that require field data collection or the development of hydrologic models. In many cases it may be possible to start with a simple analysis, but good data on the key hydrologic services identified for the fund are essential. These technical aspects should be approached as an ongoing process that starts with design and continually improves during the fund’s operation. Obtaining more and better data at the beginning will help define more precise conservation goals for the environmental services provided. For the hydrologic models, keep in mind these models reflect reality, but they are not the reality under any circumstances. - Clearly define objectives in order to adequately select the type of model that will be used. - Be very careful in scale and validating hydrologic models.
Designing the fund’s structure and governance
In this stage the water fund’s structure and each stakeholder’s responsibilities are determined. A contract signed by the partners serves to formalize their agreement to unite efforts to carry out watershed conservation activities. It is also a guarantee to third parties wishing to contribute financial resources. Negotiating the contract must comply with fundamental legal requirements and corporate purpose of each partner, and must possibly be overseen by a specialized law firm. The fund’s board of directors will be responsible for overseeing the decision-making process. Therefore, it is crucial to prepare internal guidelines outlining the board’s operations, including e.g. decision-making mechanisms. A voting mechanism should be defined to guarantee the balance between the public and private sector, ensuring that decisions are reached in a consensual, independent and transparent manner. Prior to launch, the strategic plan (Goals; Priority Areas for Conservation; Cost Analysis of the Activities to be Implemented and Design of Financial Flow; Strategic Plan Preparation; Preparing Financial Flow) and fundraising strategy need to be designed.
Enabling factors
Solid science and technical studies. Understanding of tradeoffs and willingness to compromise
Lesson learned
Creating a water fund does not necessarily mean the creation of a new organization. Although this may be a solution to overcome legal obstacles, it is important to optimize resources and the use of partners’ available technical capacity, in order to avoid creating new legal bodies. The water fund’s investment decisions must be made in consensus and with transparency. The design of the investment plan and of a fundraising strategy must go hand-in-hand. The latter specifies expected incoming funds, to finance priority conservation activities, but also to establish own capital in order to be autonomous in the long term. The creation and operation of a water fund is an adaptive process that requires modifications, adjusting goals and continuous improvement, especially because many financial, social and political issues may vary from the initially approved investment plan.
Impacts
There are 20 water funds in operation and 42 water funds in design across the globe located around major urban areas. Water Funds developed in Latin America, and are rapidly spreading to the US and East Africa. Water funds ensure the long-term protection of critical terrestrial and freshwater systems while providing a clean, reliable source of water – the key hydrologic services for the downstream water users. The Bogotà Water Fund is projected to generate more than $40 million USD in 10 years for water conservation of 8.5 million people in the Colombian capital. This mechanism will prevent 2 million tons of sediment entering the watershed basin. The city’s water treatment facility could save up to $4 million every year thanks to the filtering services provided by upstream tropical Andean forests. It provides support to protected areas and buffer zones established in the region, addressing budget constraints that restrict their conservation work.
Beneficiaries
Water users (e.g., water utilities, bottling companies), the users are also often the largest financial contributors and upstream communities
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