Overview The degradation of watersheds due to overexploitation has been an alarming phenomenon in Viet Nam for decades. To address this problem, the government established a framework for pilot projects that actively involved local communities in protecting watersheds in Lam Dong and Son La provinces in 2008. It implemented payment for forest ecosystem services schemes, which required beneficiaries of watershed services, such as hydropower plants and water distributors, to compensate suppliers of these services. The country developed a relatively complete legal framework and institutional arrangements that enabled the nationwide implementation of payment for watershed services program in 2011. From 2008 to 2016, 42 out of 63 provinces established Provincial Forest Protection and Development Funds for more than 100,000 forest service providers who protect 3.3 million hectares or 27% of the total forested area. The program is a successful case study of using market-based instruments in protecting watersheds and biodiversity in Asia. It helped to reduce the government’s financial burden for forest conservation and protection, as well as improved economic conditions and created sustainable livelihoods for communities protecting and managing the forests. Challenges Viet Nam has abundant surface water and ground water resources. However, regional and seasonal differences cause serious water shortages during the dry season in many areas, especially the basins of the Dong Nai River in the south and in the southeast provinces. In addition, water demand has increased while water quality has deteriorated because of pressure from economic development and urbanization (United Nations Water 2013). Water management in the country is a complex environmental issue since it involves many aspects, including water resources management, water quality control, and watershed management (Loan Nguyen 2013). Watershed areas cover two-thirds of the area (Bunnara et al. 2004). The watershed services provided by forests play an important role in socio-economic development, especially in areas with a high proportion of ethnic minority groups where agriculture and hydropower contribute greatly to the livelihood of the people. However, overexploitation of watersheds has led to serious depletion of forest resources. Context In Viet Nam, forest and forestland are owned by the government and are contracted to individuals and communities for use and management. Forests and watershed areas are managed by the Ministry of Agriculture and Rural Development. In 2008, the Viet Nam Administration of Forestry was established as an agency under the Ministry of Agriculture and Rural Development to assist in managing the country’s forests. In addition, each province has its own Department of Forestry, which is responsible for forest management at the provincial level. Solution Pilot program The government launched two large-scale afforestation projects in the 1990s to (i) increase nationwide forest coverage, (ii) create jobs for poverty reduction, and (iii) provide forest products for domestic consumption and export (Wunder and Ibarra 2005 and Suhardiman et al. 2013). In 2008, the government developed a pilot payment for forest ecosystem services program in Son La province (watershed of Da River) and Lam Dong province (watershed of Dong Nai River). That same year, it set up a fund to mobilize resources for forest conservation and development and support payment for forest ecosystem services implementation at the central and provincial levels. At the central level, the Ministry of Agriculture and Rural Development manages the Viet Nam Forest Protection and Development Fund (VNFF). At the provincial level, Provincial People’s Committees are responsible for the management of Provincial Forest Protection and Development Funds. The pilot was implemented from January 2009 to December 2010. In September 2010, Viet Nam became the first country in Asia to institutionalize a national policy on payment for forest ecosystem services (Pham et al. 2013). National program Under the national program, Viet Nam devolved forestland use rights from the state directly to households. It covered the following types of forest environmental services: watershed protection – for hydropower plants, water supply and quality maintenance – for water supply companies, natural beauty and biodiversity – for tourism companies, carbon sequestration and storage – for combating global climate change, and fisheries nursery, habitat, and other ecosystem services – for aquaculture farmers. Payment for forest ecosystem services for watershed protection requires beneficiaries or buyers of watershed services (e.g., hydropower plants, fresh water supply companies, and tourism operators) to pay a fee to compensate suppliers of these services (e.g., organizations, communities, households, and individuals). Government intermediaries act as the main coordinators of the payment for ecosystem services programs. Most of the schemes make indirect payments to suppliers through the forest protection and development funds. In 2009, only four provinces—Lam Dong, Son La, Lai Chau, and Dak Nong—had forest protection and development funds. By 2016, that number grew to 42 (VNFF 2016). The structure of revenue distribution in Lam Dong and Son La can be summarized through a benefit-sharing mechanism as illustrated in Figure 1. Figure 1: Structure of Payment for Forest Environmental Services Revenue Distribution in Lam Dong and Son La D = dong, m3 = cubic meter. Source: Authors. Results As of mid-2016, $257 million was collected for the protection of 5.6 million hectares of forest, while more than 500,000 households, made up of mainly ethnic minorities and poor households living in the forested area, received money from the scheme (VNFF 2016). A study by Nguyen (2013) showed that the payment for forest ecosystem services policy has contributed to the increase in household income by about 3.9 million dong (about $170) per household per year in the watershed area of Dong Nai River. This income has been used for basic household consumption or investments in in agricultural activities. From 2008 to 2015, the forest area and forest cover rate increased in general across the country, particularly in Son La province, but slightly decreased in Lam Dong (VNFF 2016). The forest area with payment for ecosystem services in Son La is 618,992 hectares, accounting for 98% of the province’s total forest area. In Lam Dong, the forest area covered by the program is 357,412 hectares or only 67% of the total forest area. As of 2015, there were 41,649 households in Son La and 17,073 households in Lam Dong that were providing and being paid for forest ecosystem services (VNFF 2016). The payment for forest ecosystem services program created incentives for forest resource users to conserve and manage natural resources more sustainably. At the same time, it reduced the burden per household as costs for forest environmental services were distributed among stakeholders. The payment for forest ecosystem services policy ensured that service providers, especially vulnerable—the poor, elderly, or landless households, benefited from it (Pham et al. 2013). However, the method of calculating payments under the program could create unequal outcomes among service providers. Communities with watersheds with a higher percentage of forest area receive a smaller average payment rate per hectare, while those with a lower percentage of forest area receive a larger payment under the program. Lessons The success of the payment for forest ecosystem services policy for water management in Viet Nam can be attributed to three main factors. Enabling policy framework. The pilot programs in Lam Dong and Son La Provinces led to the establishment of the payment for forest ecosystem services legal framework and development of a governing system at different levels in the environmental management structure in Viet Nam. This is an important milestone in the policy agenda of adopting market-based approaches for environmental management in the country. Public acceptance. After 10 years of implementation, the policy has gained support from local communities and pay enterprises due to manageable costs and benefits to service providers, especially vulnerable groups. Technical and financial support. International organizations provided technical and financial assistance, shared experiences, and support in formulating the practical and theoretical framework during all stages. A key feature of Viet Nam’s payment for forest ecosystem services program is that forestland use rights were devolved from the state directly to households. This type of reform is distinct from other countries that devolved rights from state to community in the form of community-based forest management. While the individual household contracts for service providers imply high transaction costs, the program demonstrated the high administrative capacity of intermediary agencies to ensure well-defined terms to each contract, an efficient payment scheme, and effective monitoring and evaluation. With community contracts to lower transaction costs, coupled with government capacity, such payment schemes could be even more attainable for other countries and contexts. Resources D. Suhardiman et. al. 2013. Payments for Ecosystem Services in [Viet Nam]; Market-based Incentives or State Control of Resources? Ecosystem Services. 5. pp. 94-101. M. Bunnara et. Al. 2004. Country Status Report on Watershed Management in Cambodia, Lao PDR, Thailand and [Viet Nam]. Phnom Penh: MRC-GTZ Cooperation Programme. S. Wunder, B. D. The, and E. Ibarra. 2005. Payment is Good, Control is Better: Why Payments for Environmental Services So Far Have Remained Incipient in [Viet Nam]. Bogor, Indonesia: Center for International Forestry Research (CIFOR). T. P. Loan Nguyen. 2013. The Legal Framework of Vietnam's Water Sector: Update 2013. Working Paper 116. Bonn: Center for Development Research, University of Bonn. T. T. Pham et. al. 2013. Payment for Forest Environmental Services: From Policy to Practice. Occasional Paper 93. Bogor, Indonesia: CIFOR. T. Y. L. Nguyen. 2013. Evaluating the Pilot Implementation of Payment for Forest Environmental Services in Lam Dong, [Viet Nam]. Los Banos, Philippines: WorldFish/Economy and Environment Program for Southeast Asia. United Nations Water. 2013. Viet Nam: Country Brief. Geneva: UN-Water. V. P. Tran. 2017. Payments for Forest Environmental Services: Experiences and Lessons Learned in [Viet Nam]. Ha Noi: Vietnamese Academy of Forest Science. VNFF. 2016. Assessment Report: Eight Years of Organization and Operation of Forest Protection and Development Fund (2008-2015) and Five Years of Implementing the Policy on Payment of Forest Environmental Services in [Viet Nam]. Ha Noi. Ask the Experts Pham Khanh Nam Dean of the School of Economics, University of Economics Ho Chi Minh City Pham Khanh Nam has published his work in peer-reviewed journals, including Journal of Public Economics, Journal of Economic Psychology, and Land Use Policy. His research interests focus on environmental and experimental economics. Isao Endo Environment Specialist, Climate Change, Resilience, and Environment Cluster, Climate Change and Sustainable Development Department, Asian Development Bank Isao Endo is an Environment Specialist working on natural resource management at ADB. He manages technical assistance to promote natural capital investments with a focus on nature-based solutions and market-based instruments, supporting ADB’s operation to integrate these innovative approaches into project design. He holds a bachelor’s degree in Economics from Sophia University and a master's degree in Environmental Management from Yale University. Asian Development Bank (ADB) The Asian Development Bank is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. Follow Asian Development Bank (ADB) on Leave your question or comment in the section below: View the discussion thread.