Does expected profit predict compliance in auctions for payment

for ecosystem services? A test case in Indonesia

Beria Leimona and L Roman Carrasco

Special thanks to Dr Meine van Noordwijk

C-02 (193) From understanding drivers to gaining leverage at the tropical forest margins: 20 years of the ASB Partnership

Forest for People – Saturday 11th October 2014

XXIV IUFRO World CongressSalt Lake City, Utah, USA

Background

• Farmers’ decisions towards land practices affect environmental services provisionso When private and social costs diverge: environmental

externalities

• Payments for environmental services: performance-based scheme to align private and social costs – Varying at different scales of the landscape

• Global: carbon regulated and voluntary market• National/Regional: payment/co-investment for watershed

services

Conservation Auction• Alternative policy mechanism to extract information on level of

payments or incentives

• Procuring commodities for commodities without well-established markets

• Conservation auction at developing countries (Malawi and Indonesian cases):– (uncertain) understanding the bidding strategy

– information asymmetries• Ex-ante estimates of opportunity cost not well correlate with ex post realized op.

cost

• Hidden information and hidden action

– Power imbalance

Hypothesis

1. A multiple-round bidding for learning and assessing break-even price and expected net benefit;

2. Variation in bid prices reflects variation in estimates of opportunity and implementation cost

3. An auction can lead to a fair and socially acceptable selection process for PES contracts;

4. A bidding process efficiently targets farmers likely to comply as bid price

• explored the level of understanding of the bidding process;

• analyzed the bidding behaviour of the farmers and socioeconomic factors;

• examined the potential predications of eventual compliance of the conservation contract

The analysis

Case Study: Sumberjaya

Coffee-based monoculture and agroforestry

High sedimentation rate reducing water quality for the downstream hydropower company

Context: Low formal education level (< 7 years) Low asset endowment Small plot size (< 0.5 ha) Market-based competitiveness not

common Imperfect market for ES

Soil conservation activities

Sediment pits: 300 per hectare, standard dimensions size: 100x150x40 cm evenly distributed

Ridging: 50 percent of plot Vegetation strips: surrounding pits and

ridging Maintaining all the land conservation

structure above for a year.

Payment schedule

50 percent at inception; 50 percent at one year contingent on performance

Duration and monitoring

One year with monitoring every three months; termination if 50% contracted activities not completed by midterm monitoring date

Cancellation or non-compliance results in: ineligibility for second payment installation friction and conflict among community members indication of corruption

Force majeur provision for contract terms in the event of natural disasters

Conservation Contract

Supply curve from the conservation reverse auction

• Total participants from 2 villages:

82 farmers bidding on 70 hectares

• Participants received contracts for soil conservation:

34 farmers on 25 hectares

• Average price of contract:

USD 171.70 per hectare yearly

– labor requirements of contract based on wages approximately USD 300

– Past investment for soil conservation activities from survey USD 225

Result 1: Farmers’ understanding of auction design and opinion

• 4 % : did not understand and lost

• 32 % understood very well

• Satisfied with the completeness of information

• Relatively easy to understand the rules (winners are better)

• 88 % perceived fair and not causing conflicts

• 78 % fully aware of competition

Result 2a: bidding behaviour model as a function of farmers’ socioeconomic characteristics

Value Std.Error t-value p-value

(Intercept) 15.48 0.31 49.39  <10-4

Plot size -0.20 0.10  -1.99  0.049

Winning the previous round -0.20 0.06 -3.19 0.002

Quality of information received

-0.15 0.07 -2.08 0.041

Awareness of competition among participants

-0.34 0.15 -2.28 0.025

Result 2b: Socioeconomic correlates of eventual compliance

Estimate Std. Error z value

Pr(>|z|)

(Intercept) -6.55 3.3 -2.0 0.045Education 0.26 0.2 1.6 0.109Number of family members

1.35 0.7 2.1 0.039

Number of years owning the land

0.13 0.1 2.3 0.021

Distance to road 0.06 0.0 1.9 0.057Experience in applying conservation techniques in the past

-1.59 0.8 -2.1 0.035

Result 3: Contract compliance

C1: An efficient mechanism to help farmers identifying their opportunity cost

(accept H1 and H2)

• Bidding behaviour of farmers influenced by: – information quality of auction formats

• Simple design, good roles of facilitators

– implementation rules

• Multiple bidding

– perception of competitiveness

• Private costs included when submitting bids: – farm size

– access to and quality of information

– learning behaviour across rounds (i.e. ability to adjust the bids and awareness of competition)

C2: A fair way to allocate contracts(accept H3)

• Auction posed fairly, but higher ex ante cost

– Capturing divergence between private and social cost (consistent with other cases in Indonesia – Skidmore et al 2014 and Tanzania Jindal et al 2013)

• Allocating contracts to farmers who bid lower, not to farmers with power or high-social rank

• Determining whether the farmers understand the auction format and implementation rules

C3: Difficulties in evaluating ex ante and ex post opportunities due to uncertainty (reject H4)

• auction process had filtered out those farmers that lacked a

good understanding and perception of the auction

– no reliable difference of conservation awareness level,

understanding on the auction design (rules, complexity),

information quality and level of satisfaction

• socio-economic characteristics of the farmers were

associated with eventual compliance

• no relationship between final round bids and the eventual

compliance

Final thoughts

• An efficient alternative to identify opportunity cost but not a predictor of compliance

• Beyond the financial contract value, factors for successful implementation:

– information availability to increase farmers’ understanding,

– identification of constraints to contract compliance

– an adequate balance between sanctions and incentives

ReferenceMain Source: Leimona, B., Carrasco, L.R., in review. Does expected profit predict compliance in auctions for

payment for ecosystem services? A test case in Indonesia. Land Use Policy.

Other references:Ajayi, O.C., Jack, B.K., Leimona, B., 2012. Auction Design for the Private Provision of Public Goods

in Developing Countries: Lessons from Payments for Environmental Services in Malawi and Indonesia. World Development 40, 1213-1223.

Jack, B.K., Leimona, B., Ferraro, P.J., 2009. A revealed preference approach to estimating supply curves for ecosystem services: use of auctions to set payments for soil erosion control in Indonesia. Conservation Biology 23, 359-367.

Leimona, B., Jack, B., Lusiana, B., Pasha, R., 2009. Designing a Procurement Auction for Reducing Sediment: A Field Experiment in Indonesia. EEPSEA Research Report 2009-RP10.

Skidmore, S., Santos, P., Leimona, B., 2014. Targeting REDD+: An Empirical Analysis of Carbon Sequestration in Indonesia. World Development 64, 781-790.

Thank you

Contact:

Beria LeimonaL.Beria@cgiar.org

World Agroforestry CentreICRAF Southeast Asia Office