Designing a procurement auction for reducing sedimentation: A field experiment in Indonesia
June, 2010. Beria Leimona, Broke Kelsey Jack, Betha Lusiana and Rachman Pasha. Economy and Environment Program for Southeast Asia (EEPSEA) *
The setting of this study is a watershed area in Lampung, Indonesia, where soil erosion has broad implications for both on-site and off-site environmental damage. Payment for environmental services (PES) is a conditional and voluntary policy option that, in this study, provides incentives for maintaining watershed functions. A key condition of PES is transparency regarding the conditions under which incentives or rewards can be granted. Balanced information and the power of transaction are the basis for any environmental service (ES). A contract procurement auction is an alternative mechanism for extracting information from ES providers on levels of payments or incentives that will cover their costs when joining a conservation program. In this paper we focus on designing a procurement auction method to reveal hidden information on the opportunity costs of supplying environmental services. This is an initial application of a procurement auction method in a rural setting in a developing country. Our study resulted in a set of auction rules for determining how limited watershed rehabilitation funds could be allocated. We examined the applicability of such an auction design in an Indonesian rural setting by testing: (1) auction design factors, such as: participants‘ understanding of auction rules, the ease-of-use of these rules, the appropriateness of the participants‘ bid offered during the auction, and the fairness of the auction process; (2) social factors, such as: impact on relationship between contracted and non-contracted farmers, general interpersonal relationships between communities, and information exchange amongst farmers; (3) environmental factors, such as: awareness of soil and water conservation and the rate of contract completion. Our results show that a sealed-bid, multiple round, second-price Vickrey auction with a uniform price can be applied where most of the auction participants have a low education level, low asset endowment, small plot size, and where market-based competitiveness is not common. Our finding is that farmers‘ bids to be involved in conservation contracts is more dependent on their learning process during the auction than observable factors such as their socioeconomic background, their awareness of conservation, and their social capital state. It was also found that introducing procurement auction as a market-based approach to rural communities does not harm their social relationships and is an applicable method in a rural setting. Nevertheless, this learning process does not guarantee the successful accomplishment of a conservation contract. The rate of contract accomplishment was moderate and this may be influenced by many other factors such as the farmer groups‘ leadership and their institutional arrangements for conducting conservation activities. The implication of these findings is that designing a proper conservation auction method and estimating the ‘right’ value for contracts form only minimal requirements for the success of any conservation contract.
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Keywords: o. Environmental Aspects, Other Publications, s. Economic valuation & PES, Indonesia, payment for environmental services, PES, procurement auction method, sedimentation, soil erosion