Costing biodiversity protection: payments for environmental services schemes in Lao PDR

ABSTRACT

A Payments for Environmental Services (PES) scheme that involves setting a ‘pseudo market price’ requires the estimation of demand and supply. This paper presents the estimated marginal costs of anti-poaching patrols designed to enhance biodiversity in two protected areas in Lao PDR. This supply information was used in conjunction with environmental production functions and estimated demand for biodiversity to determine the ‘price’ paid per patrol. Marginal costs were estimated through uniform-price conservation actions: Teams of local people interested in being part of the PES scheme bid for the number of patrols they would like to provide in response to a range of offered prices. The auction process generated a sequence of well-behaved price-quantity pairs that track the individual marginal cost function of each bidding team accounting for both fixed and variable costs. The marginal costs vary across bidders. These variations can be explained by differences in competing employment and income opportunities across bidders, village locations and seasons. The results provide evidence of heterogeneous opportunity costs of supply and suggest an efficiency loss in assuming homogeneity.

KEYWORDS:

• Anti-poaching patrols
• biodiversity protection
• conservation auction
• marginal cost of supply
• payments for environmental services schemes

Acknowledgements

This work was supported by the Australian Centre for International Agricultural Research (ACIAR) under Grant FST-2011-003. We acknowledge Xiong Tsechalicha, Chanthavy Vongkhamheng, Phouphet Kyophilavong, Yiakhang Pangxang, and staff of the Environmental Protection Fund (EPF) for their assistance in estimating the values of the ‘external’ cost components.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Synonymous terms include reverse auctions, procurement auctions and conservation tenders.

2. Informational rent, also called ‘bid shading’, is the difference between actual and stated marginal costs.

3. US$ 2,422 at exchange rate LAK 8,339.42 per US$ (27.1.2017 oanda.com).

4. The data presented in this section were sourced from on a household survey conducted in June 2015 by ‘the National University of Laos within the project “Effective Implementation of Payments for Environmental Services in Lao PDR”.’

5. US$ 2,854 at an exchange rate LAK 8,339.42 per US$ (27.1.2017 oanda.com).

6. An average household consists of about 5 individuals.

7. The data presented in this section were sourced from a household survey that was conducted in November 2015 by ‘the National University of Laos within the project “Effective Implementation of Payments for Environmental Services in Lao PDR”.’

8. The payments to the village development funds contain a fixed component calculated as a fixed amount per household, and a variable component based on a percentage of the patrol payments.

9. For a detailed discussion on group payments see Narloch, Drucker, and Pascual (2017) and Narloch, Pascual, and Drucker (2013).

10. Extensive training was offered to interested villagers before the auctions were performed. To ensure informed bids, only team members who completed the training were allowed to participate in the auctions. A team was allowed to submit a bid in the auction without requiring the presence of all team members. However, the bidding members needed to have the authority to represent the whole team. For bids to become valid all team members had to sign the submitted bidding form.

11. This price equates the marginal costs of supply with the generated marginal benefits.

12. As pointed out by an anonymous reviewer, the rule applied in this multi-unit conservation auction may best be described as an ‘effort-as-bid’ rule compared to a ‘paid-as-bid’ rule used in single-unit conservation auctions.

13. The incentive structure includes penalties for non-compliance to ensure the conditionality of payments.

14. Bonus payments were exclusively offered in PES-1.

15. The equipment costs were calculated without including a budget for replacements and repairs. The insurance is provided by the schemes (covering major injuries, disability and death) and by a commercial company (covering minor injuries and illness). The cost of the scheme-based insurance component was estimated as expected based on data from an anti-poaching patrol scheme in Vietnam. These costs were ignored given their insignificant magnitude.

16. The costs of the bonus payments for snare line removal were calculated on basis of a fixed price per snare wire (LAK 2,000 = $0.24 at an exchange rate LAK 8,339.42 per US$, 27.1.2017 oanda.com) and the predicted snare line densities and associated number of snare wires collected per patrol using a stochastic simulation model (Hay et al. 2017). The costs of the bonus payments for dismantling poacher camps were calculated on basis of a fixed price per camp (LAK 10,000 = $1.22 at an exchange rate LAK 8,339.42 per US$, 27.1.2017 oanda.com) and the estimated number of camps dismantled per patrol (based on expert opinion). The stochastic simulation models predicted a decline in the number of snare wires collected and camps dismantled with an increasing number of patrols. As a result, the probability of additional bonus payments earned by patrol teams is predicted to decline proportionally. The PES scheme is designed such that the price paid per snare wire and camp can be increased with decreasing snare density in subsequent auctions to keep the incentive structure functional.

17. The fixed component is calculated on a household basis. The fixed amount each village receives depends thus on the number of households. The costs of the fixed component are not included in the aggregated marginal costs of supply.

18. Annual equipment costs were calculated through depreciation over three years.

19. The benefits were quantified as the willingness to pay for wildlife protection (Scheufele and Bennett 2017b), which in turn was predicted as a function of, among other factors, deterrence effects, reduction in snare and camp density through anti-poaching patrols. The camp and bonus payments per camp and snare line were fixed on a per unit basis. This means that bonus payments varied across levels of effort. In addition, the associated benefits varied across bids due to different levels of effort. Hence, the bonus payments were added to the market supply curves.

20. The number of additional teams and villages in each season was calculated in ‘equivalent’ quantities to account for the fact that, at each price level, additional teams bid either for both seasons or for the ‘quiet’ seasons only.

21. At the inception of the PES schemes, all costs were variable. Once the schemes commenced with the appointment of the patrol manager, that cost became fixed and sunk.

22. As many of the ‘external’ costs are fixed elements, as more patrols are employed, the marginal component falls.

23. $US1 = ₭8,177.68 (27.01.2017 Oanda.com)

Additional information

Funding

This work was supported by the Australian Centre for International Agricultural Research [grant number FST-2011-003].