Audit is carried out by an independent auditor

PROJECT DOCUMENT

SECTION 1: PROJECT IDENTIFICATION

1.1 Project title: Expanding Forest Stewardship Council (FSC)

Certification at Landscape Level through

incorporating additional Ecosystem Services

1.2 Project number: PMS: 0505

GEFSEC 3851

1.3 Project type: FSP

1.4 Trust Fund: GEF

1.5 Strategic objectives: GEF strategic long-term objective: BD2

Strategic programme for GEF IV: BD-SP5

fostering markets for biodiversity goods and

services, BD-SP4 strengthening the policy and

regulatory framework for mainstreaming

biodiversity in production sectors, and partly BD-

SP8 building capacity on access & benefit sharing

& CC SP 6 management of LULUCF

1.6 UNEP priority: Ecosystem management

1.7 Geographical scope: Global multi-country Chile, Indonesia, Nepal,

Vietnam

1.8 Mode of execution: External

1.9 Project executing organization: Forest Stewardship Council (FSC)

1.10 Duration of project: 48 months

Commencing: 1 October 2011

Completion: 30 September 2015

1.11 Cost of project US$ %

CASH

Asia Network for Sustainable Agriculture

and Bioresources (ANSAB)

150,000 2.2%

Astorga Consultants 9,000 0.1%

Bosques Cautin S.A. 33,000 0.5%

Center for International Forestry Research

(CIFOR)

350,000 5.2%

Federation of Community Forestry Users

(FECOFUN)

10,000 0.1%

FSC Chile 16,500 0.2%

FSC International Center 158,000 2.3%

GFA 75,000 1.1%

Instituto Forestal, Government of Chile 170,000 2.5%

(INFOR) National Trust for Nature Conservation 212,500 3.1% RECOFTC 312,000 4.6% The Indonesian Ecolabelling Institute (LEI) 50,000 0.7% WWF Indonesia 600,000 8.9%

Sub-total 2,146,000 IN-KIND

Asia Network for Sustainable Agriculture and Bioresources (ANSAB)

200,000 3.0%

Center for Forestry Development Control, Ministry of Forestry

115,000 1.7%

Center for International Forestry Research (CIFOR)

350,000 5.2%

Federation of Community Forestry Users (FECOFUN)

90,000 1.3%

FSC Chile 13,500 0.2% FSC International Center 285,500 4.2% Fundacin Pumalin 100,400 1.5% GFA 16,000 0.2% Instituto Forestal, Government of Chile (INFOR)

90,000 1.3%

Ministry of Agriculture and Rural Development

30,000 0.4%

National Trust for Nature Conservation 37,500 0.6% RECOFTC 155,000 2.3% Relief International 50,000 0.7% SNV Netherlands Development Organisation

60,000 0.9%

UNEP Division of Environmental Policy 35,000 0.5% UNEP Regional Office - Asia Pacific 20,000 0.3% WWF Indonesia 100,000 1.5%

Sub-total 1,747,900 Co-financing 3,893,900 57.5% Cost to the GEF Trust Fund 2,880,000 42.5% TOTAL 6,773,900 100%

1.12 Project summary Payment for Eco-systems Services (PES) will be a key element in strategies for mainstreaming forest biodiversity conservation and maintaining essential support services, and for meeting the Millennium Development Goals (MDG). The GEF-supported Millennium Ecosystem Assessment concluded that more than 60% of the worlds ecosystems services are either degraded or used unsustainably. The Stern Report in 2006 highlighted the effect of deforestation on climate change through carbon emissions while the role of forests in watershed protection is critical for water supply services downstream, for agriculture and flood prevention. Biodiversity is closely linked with the functioning of various forest ecosystems services such as soil conservation, genetic resources conservation and carbon sequestration, and as a result depredation of the forest fauna and flora can have severe consequences for human welfare. At the same time, these challenges pose problems for forest management for sustainable timber production as an integrated component of the ecosystem. The forests provide a wide range of services

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and a viable management plan needs to incorporate these fully. Some may have commercial potential while others are of social importance and it is within this holistic approach that the Forest Stewardship Council (FSC) system has a distinct advantage over other certification systems being developed which focus exclusively on one service or another. It also has a track record in biodiversity conservation through its High Conservation Value Forest approach and in fact has one of its Core Principles (Principle 9) dedicated to this. Nevertheless FSC is often seen as being exclusively timber focused rather than addressing the wider ecosystem services. The purpose of this project is therefore to improve and promote sustainable forest management for a range of ecosystem services through the medium of FSC certification. Over the project duration of four years, the application of FSC certification will be tested on the ground for the additional services mentioned above and other allied ones such as recreation. To demonstrate the feasibility of this approach and system, as well as to provide the so needed evidence-base, it will need to be tested and its impacts measured in different socio-political as well as environmental conditions. For this reason, the project will be implemented in four countries, Chile, Indonesia, Nepal and Vietnam, through local and international NGOs and government agencies. Essential to this is the development of suitable measurable compliance indicators which will be incorporated in FSC national standards in the pilot countries and into international standards. At the same time, certification has to be paid for and it is necessary to determine the market demand, both in relation to specific services and also for the concept of bundling a set of such services under one certification process. This in turn requires a feasible business model to be designed for both international and domestic markets. At the international level, a number of actions will take place:

International generic ecosystem service indicators will be developed for approval by the FSC Board

An FSC ecosystem services strategy will be defined Guidance documents for standards development will be published A impact monitoring methodology to track FSC certification impact will be designed New certification business models will be designed and tested in various habitat and

landscapes based on FSC Principles and Criteria Market promotion of ES-based forest certification will be undertaken through

communications campaign, partnership building in countries, training and technical services Information and didactic materials will be produced for public outreach

At the termination of the project, it is expected to have enabled a global system of expanded FSC forest certification targeting a few key ecosystem services with (present or future) market potential, established a few certified sites for ecosystem services and to have successfully proven the (monetary as well as non-monetary) benefits through the mechanism of FSC certification such as revenue generated for forest operations and local communities.

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TABLE OF CONTENTS

SECTION 1: PROJECT IDENTIFICATION ................................................................................................ 1 ACRONYMS AND ABBREVIATIONS .................................................................................... 5 SECTION 2: BACKGROUND AND SITUATION ANALYSIS (BASELINE COURSE OF ACTION) ................. 8

2.1. Background and context ...................................................................................................... 8 2.2. Global significance ............................................................................................................. 16 2.3. Threats, root causes and barrier analysis ........................................................................ 16 2.4. Institutional, sectoral and policy context ......................................................................... 32 2.5. Stakeholder mapping and analysis ................................................................................... 51 2.6. Baseline analysis and gaps ................................................................................................. 63 2.7. Linkages with other GEF and non-GEF interventions................................................... 81

SECTION 3: INTERVENTION STRATEGY (ALTERNATIVE)................................................................... 86 3.1. Project rationale, policy conformity and expected global environmental benefits ...... 86 3.2. Project goal and objective.................................................................................................. 88 3.3. Project components and expected results ........................................................................ 89 3.4. Intervention logic and key assumptions ........................................................................... 92 3.5. Risk analysis and risk management measures................................................................. 93 3.6. Consistency with national priorities or plans .................................................................. 96 3.7. Incremental cost reasoning................................................................................................ 98 3.8. Sustainability ...................................................................................................................... 99 3.9. Replication ........................................................................................................................ 100 3.10. Public awareness, communications and mainstreaming strategy................................ 100 3.11. Environmental and social safeguards............................................................................. 101

SECTION 4: INSTITUTIONAL FRAMEWORK AND IMPLEMENTATION ARRANGEMENTS ................. 103 SECTION 5: STAKEHOLDER PARTICIPATION .................................................................................... 107 SECTION 6: MONITORING AND EVALUATION PLAN ......................................................................... 109 SECTION 7: PROJECT FINANCING AND BUDGET .............................................................................. 112

7.1. Overall project budget ..................................................................................................... 112 7.2. Project co-financing ......................................................................................................... 113 7.3. Project cost-effectiveness ................................................................................................. 114

APPENDICES ........................................................................................................................................ 115 Appendix 1: Budget by project components and UNEP budget lines.................................. 115 Appendix 2: Co-financing by source and UNEP budget lines .............................................. 123 Appendix 3: Incremental cost analysis ................................................................................... 130 Appendix 4: Results Framework ............................................................................................. 133 Appendix 5: Workplan and timetable .................................................................................... 143 Appendix 6: Key deliverables and benchmarks..................................................................... 141 Appendix 7: Costed M&E plan ............................................................................................... 157 Appendix 8: Summary of reporting requirements and responsibilities .............................. 167 Appendix 9: Standard Terminal Evaluation TOR ................................................................ 168 Appendix 10: Organizational chart........................................................................................... 186 Appendix 11: Terms of Reference ............................................................................................. 187 Appendix 12: Co-financing commitment letters from project partners ................................ 193 Appendix 13: Endorsement letters of GEF National Focal Points ......................................... 219 Appendix 14: Draft procurement plan ..................................................................................... 227 Appendix 15: Tracking Tools .................................................................................................... 228 Appendix 16: Selection methodology and spatial mapping of pilot sites ............................... 265

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ACRONYMS AND ABBREVIATIONS

ADB Asian Development Bank ANSAB Asia Network for Sustainable Agriculture and Bioresources BC Biodiversity Conservation BD Biodiversity BISEP Biodiversity Sector Programme BSM Benefit Sharing Mechanism BMU Bundesministerium fr Umwelt, Naturschutz und Reaktorsicherheit

(German Ministry for Environment, Nature Conservation and Nuclear Safety)

CBA Community-based Adaptation CBD Convention on Biological Diversity CBO(s) Community Based Organization(s) CC Climate Change CDM Clean Development Mechanism CF Community Forest CFM Community based Forest Management CFUG Community Forest Users Group CONAF Corporacin Nacional Forestal CONAMA Comision Nacional del Medio Ambiente CPB Cartagena Protocol on Biosafety DANIDA Danish International Development Agency DARD Department of Agriculture and Rural Development DAS Daerah Aliran Sungai (Watershed area) DDC District Development Committees DFID Department for International Development DFO District Forest Office, Nepal DKN Dewan Kehutanan Nasional (National Forestry Council - Indonesia) DNA Designated National Authority DNPI Dewan Nasional Perubahan Iklim (National Council for Climate Change

Indonesia) DoF Department of Forestry Vietnam DPC District People Committee Vietnam DSM Demand Site Management EA GEF Enabling Activity projects ES Ecosystem Services FA GEF Focal Area FAO Food and Agriculture Organization FDS Forestry Development Strategy FECOFUN Federation of Community Forest Users Nepal FES Forest Environmental Service FFI Fauna and Flora International FINNIDA Finland Department for International Development Cooperation FIPI Forest inventory and planning institute FP Focal Point FPD Forest Protection Department FPDF Forest Protection Development Fund FRA Forest Resource Assessment FSC Forest Stewardship Council FSIV Forest Science Institute of Vietnam

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FSPs GEF Full Size Projects GEF Global Environment Facility GEF/SGP Global Environment Facility - Small Grants Programme GMO Genetically modified organism GMS Greater Mekong Sub-region Vietnam GoN Government of Nepal GoV Government of Viet Nam GIZ Deutsche Gesellschaft fr Internationale Zusammenarbeit GmbH ha Hectares HMS Hydro-Meteorological Service HCVF High Conservation Value Forest IA Implementation Agency ICD International Cooperation Department ICIMOD International Centre for Integrated Mountain Development IDA International Development Association IFAD International Fund for Agriculture Development IUCN World Conservation Union IW International Waters JICA Japan International Cooperation Agency KfW Kreditanstalt fr Wiederaufbau KKK-KCR Kon Ka Kinh National Park - Kon Cha Rang Nature Reserve Vietnam LAF Landscape AgroForestry LD Land Degradation LEI Lembaga Ekolabel Indonesia (The Indonesian Ecolabelling Institute) LFP Livelihood and Forestry Programme M&E Monitoring and Evaluation MARD Ministry of Agriculture and Rural Development of Vietnam MDG Millennium Development Goal MEA Millennium Ecosystem Assessment MEA Multilateral Environmental Agreement METT Management Effectiveness Tracking Tool MoF Ministry of Forestry of Nepal MoF Ministry of Finance of Nepal MoI Ministry of Industry of Nepal MONRE Ministry of Natural Resources and Environment of Vietnam MOSTE Ministry of Science, Technology and Environment of Nepal MP Municipality MPA Marine Protected Area MPI Ministry of Planning and Investment MSP(s) GEF Medium Size Project(s) NAP National Action Plan NBF National Biosafety Framework NGOs Non-Government Organizations NEFUG Nepalese Federation of Forest Resource User Group NORAD Norway Department for International Development Cooperation NP National Park NR Nature Reserve NSCFP Nepal Swiss Community Forestry Project NSEP National Strategy for Environmental Protection NTFP Non-Timber Forest Product NTNC National Trust for Nature Conservation, Nepal

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NWRS National Water Resources Strategy OP GEF Operational Program OPS Overall Performance Studies PA(s) Protected Area(s) PARC Protected Areas for Resource Conservation PDF Project Development Fund PES Payment for Ecosystem Services PFES Payment for Forest Environmental Services PL-CP Pu Luong-Cuc Phuong Limestone project POPs Persistent Organic Pollutants PPC Provincial Peoples Committee of Vietnam PPG Project Preparation Grant PPES Pilot Payment for forest environmental service RAF Resource Allocation Framework RECOFTC Regional Community Forestry Training Center REDD Reducing Emissions from Deforestation and Forest Degradation RPP Readiness Plan Proposal (for REDD national strategies) RUPES Rewards for, Use of and shared investment in Pro-poor Environmental

Services SDC Swiss Development Cooperation SFM Sustainable forest management SGP Small Grants Programme SNV SNV Netherlands Development Organisation SPA Strategic Priorities on Adaptation STAP Scientific and Technical Advisory Panel of the Global Environmental

Facility STAR System for Transparent allocation of Resources SUF Special Use Forests UNCC UN Convention to Combat Desertification UNEP United Nations Environment Programme UNDP United Nations Development Programme UNFCCC UN Framework Convention on Climate Change UNIDO United Nations Industrial Development Organization USAID United States Agency for International Development VCF Vietnam Conservation Fund VDC Village Development Committees VFU Vietnam Forestry University VNMRC Vietnam National Mekong River Commission WB World Bank WWF World Wide Fund for Nature WTLCP Western Terai Landscape Complex Project

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SECTION 2: BACKGROUND AND SITUATION ANALYSIS (BASELINE COURSE OF ACTION)

2.1. Background and context 1. Payment for Eco-systems Services (PES) will be a key element in strategies for mainstreaming

forest biodiversity conservation and maintaining essential support services, and for meeting the Millennium Development Goals (MDG). The GEF-supported Millennium Ecosystem Assessment concluded that more than 60% of the worlds ecosystems services are either degraded or used unsustainably. The Stern Report in 2006 highlighted the effect of deforestation on climate change through carbon emissions while the role of forests in watershed protection is critical for water supply services downstream, for agriculture and flood prevention. Biodiversity is closely linked with conservation and climate change, and depredation of the forest fauna and flora can have severe consequences for human welfare.

2. At the same time, these challenges pose problems for forest management for sustainable timber production as an integrated component of the ecosystem. The forests provide a wide range of services and a viable management plan needs to incorporate these fully. Some may have commercial potential while others are of social importance. FSC forest management standards have successfully been applied in the certification of timber and non timber forest products since its inception some 17 years ago. It has achieved social, environmental and economic impact according to many independent studies (see FSC reflected in scientific and professional literature such as Literature study on the outcomes and impact of FSC certification - FSC Policy Series No1/2009).

3. Despite FSCs proven record, it has infrequently been applied to other ecosystem services, evidently because of its utility in all aspects of forest management has not been fully appreciated nor properly communicated globally. Furthermore the development of ecosystem markets such as those for carbon sequestration have neglected the basic question of managing the forests for long term benefits to society. In reaction, new schemes are emerging to meet this felt need, generally concentrating on specific services (for example the Climate, Community and Biodiversity Alliance standards), but these still fall short of addressing the wider requirements for sustainable forest management, independent verification, and international adoption.

4. It is within this holistic approach that the Forest Stewardship Council (FSC) system has a distinct advantage over other certification systems as it integrates all aspects necessary for responsible forest management. For example, its principles address biodiversity conservation through its High Conservation Value Forest (HCVF) concept, and in fact has one of its Core Principles (Principle 9) is dedicated to it. This major FSC initiative has now been taken up by WWF and others through the creation of the HCVF Network. On the social side, FSC covers access to benefits by local populations, respect for indigenous peoples rights and compliance with ILO Conventions. Nevertheless FSC is often seen as being exclusively timber focused rather than addressing the wider ecosystem services.

5. The aim of the project is therefore to test the application of FSC certification to the additional services mentioned above and demonstrate its capacity to deliver on the full range of ecosystem services. At the same time, certification has to be paid for and it is necessary to determine the market demand, both in relation to specific services and also for the concept of bundling a set of such services under one certification process, where one or more marketable ES may be combined with others which have non-monetary benefits. The approach will be to pilot the application of the FSC system in various forest management systems in at least two sites in each of four countries: Chile, Indonesia, Nepal and Vietnam. In parallel, the market prospects for a range of ecosystem services will be researched and tested in both the international and national contexts.

6. In April 2010, the GEF funded detailed project design (PPG grant) was initiated. The following activities have been carried out:

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Collated gaps in existing plans and policies as a baseline for a strategic review under FSP Developed criteria and select pilot site in Vietnam, Indonesia, Nepal, and Chile Agreed on institutional framework for the FSP Identified capacity building needs at international, national, and site levels Secured sufficient co-funding for the activities to be carried out during the FSP

7. The present proposal for the FSP is the main output of the PPG phase. It is planned to start in

the second half of 2011 and last for four years, ending in the second half of 2015.

Chile 8. Chile has been described as a bio-geographical island (Amesto et al. 1995, Smith Ramirez et al.

2005). It extends along the western shore of South America, bordered by the Pacific Ocean and separated for millions of years from the rest of the continent by the Andes, Patagonian Steppe and the Atacama Desert. With a length of 4300 km Chile extends from latitude 18 South to the 54 South. These conditions, combines with the altitude range from sea level up to 5,000 m, have produced an extraordinary diversity of climate, ecosystems, habitats and biodiversity. The pilot sites of the project are located in the forest ecosystems of the south of the country where the biodiversity is particularly exceptional.

9. The native forests represent 18% of the continental Chile surface, and from this only 30% of the total surface are protected by the National System of Wild Areas Protected by Government (i.e., Sistema Nacional de Areas Silvestres Protegidas del Estado SNASPE-). The surface of native forest of Chile is distributed mainly in the Regions: 10th, 35.9%; 11th, 24.4%; and 12th, 16.8%. On the other hand, commercial plantations of exotic species cover 3 % of the Chilean soils (representing 2.1 millions of hectares). Most of the exotic plantations are located between the 7th and 10th Regions of Chile, and they represent mixed areas where plantations occupy the fields where the native forest was eliminated. As a result the natural forest persists alongside plantations as remnants forest of different sizes. Because of the geographical structure of the country more than 60 % of plantation estates are near human access, therefore the natural forest that remains is subjected to urban and suburban pressures, especially for firewood and recreational services. The totality of the commercial plantations belongs to private companies. Six of these companies possess more than 65 % of the planted surface on the whole country.

10. Three pilot sites have been selected for this UNEP/GEF project and each of them will allow testing a number of situations that are complementary to sites selected in other countries of the project. See Appendix 16 for information on the location of pilots. Moreover, contrary to the situation in the three other project countries Chile has already a FSC National Standard endorsed and will be a pilot for testing the national adoption of an ES-based FSC system.

11. Pilot site number 1 Predio Carahue: it is located near Carahue, in the 9th Region of Chile. It has 414 hectares of commercial plantations and 114 hectares of native forest and protection areas, all FSC certified. The site belongs to the private company Bosques Cautn S.A. The characteristics of the estate, the intensive management of the plantation, and the proximity to human settlements are all factors that may affect negatively on biodiversity conservation of the natural forest remnant. Choosing a site with these characteristics is appropriate, because it allows constructing a model and an example for biodiversity conservation in ventures of commercial plantation wood production. Other companies that have in many cases considerable amounts of natural forest in their plantation holdings may follow the model, hence contributing to biodiversity conservation.

12. Pilot site number 2 Cuenca Ro Mechaico: further south, the second selected site in the area of the city of Ancud, Mechaico river basin provides nearly all drinking water to the city. In this case the project will consider the payment for the environmental services of water quality. The watershed is owned by a small set of low-income homeowners whose primary business is the traditional use of native forests, livestock and small farms. Their needs and economic interests are confronted with those of 35,000 consumers obtaining potable water from the basin. Since

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several years there has been a growing problem with the quality and quantity of drinking water in Ancud. Local press reports that the major cause is deforestation and degradation of native forests. This site is of particular interest as it may provide a reference model for developing a well-identified environmental service, which has a real and significant demand, a defined location and clear land tenure by a small group of foresters and farmers. This site has been the subject of previous studies that relate to the payment of environmental services.

13. Pilot site number 3 Parque Pumalin: the third site involves the private sector in biodiversity conservation and maintenance of first growth forests in Chile. Its the Pumalin Park, located in the province of Palena, in the south 10th Region. This is an area of 300,000 hectares of free access forests but subject to strict regulations in the interests of biodiversity and general environmental conservation. The Pumalin Park is one of the rare forest types in the world, the temperate rainforest. This rainforest is limited to only a few thousand square kilometres in very specific areas of the planet. The expansion of urban and agricultural areas and indiscriminate exploitation of some species of trees in this forest has resulted in its dramatic decline around the world. In Chile, the large Fitzroya cupressoides, the most spectacular tree of this type of forest formation due to their size and longevity, were heavily exploited. The Foundation Pumalin Park reacted and created a reforestation plan through a program called "Proyecto Alerce 3000. Today site management includes infrastructures for visitors, and monitoring of compliance with the strict conservation guidelines. The Pumalin Park Foundation is aware of the need to include the residents of this preserved land - who often lack awareness for cultural and historical reasons, and thus creating a shared feeling for the need to protect wilderness areas and biodiversity. Within the park small farms are allowed to test and stimulate green economic activities aimed at generating biodiversity benefits, such as animal husbandry, cheese making, woollen handicrafts and organic gardens; these farms also provide information services and support to visitors. In addition to the protection of forests of high conservation value, other environmental services provided by Pumalin Park can potentially be considered both for Chilean users/visitors, as well as visitors from around the world. This site has been selected in order to pilot test the certification of recreational services as well as biodiversity conservation due to the pioneer biodiversity conservation measures developed on this site.

Indonesia 14. Forest certification in Indonesia has been established for over 15 years in which FSC took a

key role in a close collaboration with the Indonesian Ecolabelling Institute (LEI), with a.o. setting up a national certification scheme and standard applicable to the characteristics of Indonesian forestry. The dynamic relationship between FSC and LEI has led to over 1.1 million hectares forest lands been FSC certified, as well as LEIs certifiers have certified over 1.8 million hectares. Noteworthy, 10 of LEIs and three of FSC certified forest management units are managed by communities.

15. Timber remains the sole product the certified operations offer to the market. This situation to -a large extent- has limited the retention of other potential economic and ecological benefits the forest resources have in nature. A number of programs have demonstrated that environmental services of forest ecosystem, among others: carbon sequestration, water supply & purification, landscape beauty, and genetic resources supply/biodiversity, deliver valuable benefits to human well-being and future generations.

16. The project will work in Indonesia in three pilots, one on Lombok Island Rinjani Mountain, and two on Borneo Island East and West Kalimantan provinces. See Appendix 16 for the location of these. All sites have exceptional high biodiversity levels.

17. Pilot site number 4 Lombok Island: since 2004, WWF Indonesia initiated a scheme on Payment for Environmental Services (water) in Rinjani Protected Area which is a National Park as well, on Lombok Island. The initiative involves a partnership of the municipality of Mataram, the Water Utility Company and individual water consumers in Mataram as buyer, as well as the communities up stream who maintain the water supply and forests as seller. The

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Rinjani landscape covers a total area of 125,000 hectares of semi-evergreen and tropical rainforest. The landscape is zoned into production forest, production forest and national park, including strict conservation sites, stretched among four districts: Kabupaten Lombok Barat, Kabupaten Lombok Utara, Kab. Lombok Timur dan Kab. Lombok Tengah. A PES scheme was developed in 2007 and has been adopted as part of the local governments policy, and has been assessed as an effective model for Lombok Island to both protect forests and watershed functions, as well meeting biodiversity conservation objectives. This sustainable financing model is being implemented since but lacks proper certification and independent verification. The model provides incentives for up-stream communities to implement good forest management in the Mount Rinjani ecosystem. Following local regulations, 75% of the price paid for water services, by consumers of Lomboks Water Utility Company, is allocated to the people in the hills of Mount Rinjani as a payback mechanism to help maintain the intactness of the forest that sustains the natural systems of this small island.

18. Pilot site number 5 West Kalimantan: located in West Kalimantan province, Borneo Island, in the upper Kapuas watershed. The site selected is 73,000 ha wide, this is a rainforest with a high density of Orang-utan. ES considered on this site will be BD conservation, Water Catchment Area, and Eco Tourism. WWF Indonesia has completed a series of studies to set the baseline for equitable payment for watershed services. The studies covered landscape agroforestry systems, local and regional hydrology and community livelihoods. The landscape agroforestry (LAF) study has been successful in identifying the tree-soil-crop-climate-fauna interactions; management of agroforestry units on farm, the value chain and marketing of agroforestry products, existence of landscape-wide linkages in environmental services; as well as multi-stakeholder interactions, including governance aspects, conflict and incentives.

19. Pilot site number 6 East Kalimantan: this site of timber company PT. Sumalindo Lestari Jaya Unit II in East Kalimantan province, Borneo is entering their second period of FSC certification after they gained its first in January 2006. The company manages a 276,600 hectares low-land Dipterocarp forest in the upper watershed of the Mahakam River and enjoys economic benefit from certified timber (as the only product). Along with its commitment in maintaining the certificate, the company has set aside 72,152 hectares of their concession for protected areas, of which 32,932 hectares has been identified and managed as HCVF. The areas also have potential for other environmental services, i.e. soil & ground water conservation, landscape beauty, disaster risk prevention, and watershed protection. These integrated services have not been utilized nor been evaluated in the certification process since the companys management plan has to be in compliance with the government regulation to merely focus on timber production. In collaboration with the Global Forest Trade Network in Indonesia, the company is seeking ways to enhance the variety of (monetary) benefits they can get from being FSC certified. The challenges faced in meeting this opportunity are the modification of its existing forest management plan model and the economic valuation of the environmental services available. In addition, capacity building to their key staffs and field operators are deemed necessary.

20. These two sites in Borneo Island, apart from their success in achieving responsible forestry milestones, are experiencing lack of international recognition for their contribution to the local & global environment and the local community. Forest certification inclusive of key ecosystem services, as a global instrument towards best forestry practices, is seen as an opportunity for the sites to obtain the recognition from and optimizing benefits to the markets. Nonetheless there remain challenges to be addressed in making this opportunity possible. Current capacity of the communities in site no. 5 as well as the timber company in site no. 6 in meeting the certification standards are major challenges. Besides the value of the timber, these certified forests contribute to the provision of water to the local water utilization company. A series of negotiation with the company has resulted in a payment for the water services to communities however thus far the prices paid per unit remain far from the real economic & environmental value of the service. A more thorough approach is needed to fairly reflect the

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contribution of the communities in preserving the vital environmental services in the regions watersheds.

21. Integration of the environmental services into the scope of forest certification is essential to promote and enhance the economic benefits as well as contribution of forest certification towards achieving sustainable forest management. Hitherto -the most credible forest certification at international level- FSC, has not adequately embraced the certification of additional ecosystem services into its principles and criteria. Furthermore, the focus of the current management plan model is primarily on timber production with a set of operational requirements to minimize the negative environmental and social impacts. This too needs elaboration and testing an enhanced management plan model that integrates environmental services into the existing principles and criteria.

22. FSC, WWF-Indonesia, LEI and The Indonesian Ministry of Forestry have come into agreement to collaborate in this project to foster the integration of ecosystem services into the scope of forest certification and bridge the gaps with the market and current forest management practices in Indonesia.

Nepal 23. Supported by geographic and climatic variations, Nepal juxtaposes western and eastern

biologically valuable Himalayan eco-regions (Olson and Dinerstein 19981), with e.g. the longest bioclimatic elevation gradient in the world (Grytnes and Vetaas 20022). There are 35 forest types in Nepal as recorded by Stainton (1972)3. Most of the ecosystems are an important source of livelihood for thousands of community people (especially poor) residing in the areas. These services are suffering according to the economic activities of the local people.

24. Out of many ecosystem services (ES) that these landscapes provide, the potential value of, for example sustaining watershed functioning (water supply & purification), recreational services, biodiversity conservation, supply of genetic resources/non-timber forest products (NTFPs) etc. have not been adequately explored. Nevertheless, there are emerging markets for these ecosystem services, for example - forest carbon in the voluntary markets. But the business transactions for these services severely suffer from a lack of credibility and transparency. One of the reasons for this could be the lack of instrumentation developed for these markets, such as credible independent third party verification such as with Forest Stewardship Council (FSC). As Nepal has gained unique experience in group certification for forest management, such as those being awarded by Rainforest Alliance/Smartwood (FSC), as well as a forest based enterprises certification awarded under Chain of Custody (FSC), it is extremely relevant that Nepal should now explore the potential of enhancing the economic and environmental benefits through expanding forest certification by incorporating additional ecosystem services.

25. The project will work in Nepal in two pilot sites see Appendix 16 for more details on location.

26. Pilot site number 7 Charnawati: Charnawati landscape located at the lower part of Dolakha district. The lower Dolakha covers the south-western part of the district. The site has been selected for the following ES: recreational values for local tourism, disaster risk reduction and carbon as the primary services in lower Dolakha. Water supply is yet another potential ES in this site. The proposed site covers an area of 45,500 ha approximately. The area is bestowed with nine ecological zones. Similarly, there are 7 FSC certified community forests in the area. Kalinchowk temple, Sailung hill, Bhimeshwor temple, etc. are some of the most visited local

1 Olson, DnM and E Dinerstein 1998. The Global 200: A Representation Approach to Conserving the Earth's Most Biologically Valuable Ecoregions. Conservation Biology 12 (3): 502-515. 2 Grytnes, JA and OR Vetaas. 2002. Species Richness and Altitude: A Comparison between Null Models and Interpolated Plant Species Richness along the Himalayan Altitudinal Gradient, Nepal. The American Naturalist 159 (3): 294-304. 3 Stainton, JDA 1972. Forest of Nepal. London: John Murray.

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tourism locations of the area. So, the Charnawati landscape has local tourism, carbon enhancements, NTFPs, and hydrological services as the major ecosystem services. Lower Dolakha is at around 5 hours drive from Kathmandu, hence, it is easy for consultants and study team to make frequent visits to the field. Some of the areas like Kalinchowk temple, Sailung hill, Bhimeshwor temple, etc. are already popular for local tourism with frequent international visitors as well. Kalinchowk, Sailungeshwor and Bhimeswor area are flushed with Hindu and Buddhist pilgrimages during the months of special religious occasions. These areas can be certified and can be developed as international tourists spots too. In addition to that a REDD+ pilot project is running in the area. With the implementation of REDD+ project, the carbon enhancement potential of the area has gone up. Furthermore, there are many hydropower projects in the area, which could potentially lead to hydrological services management in the area. There are seven FSC certified forests in the area and many communities and local people have good understanding of the forest certification. Government bodies, FECOFUN have given positive response for the implementation of the project which is scarce. Similarly, co-finance is also made available.

27. Pilot site number 8 Gaurisankar: Gaurisankar Landscape is located at the upper part of Dolakha district. The upper Dolakha covers the north-western part of the district including a small part of the Gaurishankar Conservation Area (GCA) which is under the management of National Trust for Nature Conservation (NTNC). Supporting international tourism is a major service in the upper Dolakha besides carbon sequestration and -stock contained in its forests and soils, as well as disaster risk reduction (e.g. of floods). Water supply is yet another potential ES in this site. The upper Dolakha pilot sites covers 76,290 ha approximately. The area is bestowed with 15 ecological zones. There are altogether 60 CFUGs in the proposed area covering an area of 11,613.39 ha (CFD 2009) which includes 3 FSC certified community forests. Recently, some parts of upper Dolakha have been declared as Gaurishankar conservation area (GCA) and the management responsibility of the area has been given to the National Trust for Nature Conservation (NTNC). Jiri and Rolwaling are some of the popular tourist destination. Tourism, hydrological services, and NTFPs are the major ecosystem services available. Upper Dolakha is at around 8 hours drive from Kathmandu and 2-5 days trekking. Jiri, Rolwaling and Gaurishankar are major touristic destinations for the region. Similarly, many hydropower projects are in operation. In addition to that the area is rich in valuable NTFPs. Cho-Rolpa lake in Rolwaling has been described as highly vulnerable lake with risks of flooding; this necessitates action and provides opportunity of disaster risk reduction in this area. There are three FSC certified forests in this site and many communities and local people have good understanding of the forest certification. Government bodies, FECOFUN, NTNC in the area have given positive response for the implementing the project. NTNC is also trying to develop the area into good touristic zone and it has already declared some of the areas as conservation area.

28. Even though Nepal is a popular destination for nature based tourism, steps towards certifying ecotourism are lacking behind or do not exist at all. There are no clear definitions and globally agreed standards for it. A self-proclaimed ecotourism business may have ecological, economic and socio-cultural impacts. For addressing such matters of impacts and sustainability, it is necessary that all products and services under tourism or ecotourism be subject to quality assurance mechanisms that provide a reasonable guarantee of compliance with core criteria. Incorporating eco-tourism functions and values under FSC forest certification may offer a more environment friendly and sustainable business for Nepal.

29. As FSC certification has already been piloted in Nepal with some significant achievements been made, the number and area covered by certified forests is however quite negligible in comparison to the total area covered by community forests. There are also some controversial debates about its relevance, achievement and challenges of present forest certification in the Nepalese context. Some of them are that it is not an appropriate time for certification because the awareness level of the people and technicians is rather low, the overall forest management system is difficult and in need of a lot of technical knowledge, the certification process is quite

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costly, and the search for and links to markets are also difficult. However, others argue in favour of certification including that the country is already late for the process and will lose future markets if we do not start right now.

Vietnam 30. Vietnam is considered as one of ten centres of high- or mega biodiversity in the world.

Abundance of ecosystems has resulted in a rich diversity of ecosystems, species of fauna and flora throughout the country. At present, the recorded species include 13,776 plants, about 1,600 terrestrial and aquatic invertebrates, over 5,000 insects, 258 reptiles, 82 amphibians, 828 birds, and 275 mammals. Some groups have a high rate of endemic species such as 7 primates, 33 birds, 48 fresh water crustaceans and 43 molluscs. 6 new mammal species were discovered and described in Vietnam during the last few years.

31. Tropical rainforest and other ecosystems have disappeared at a staggering rate during the last two decades, generating long-term losses to the environment, including the forest ecosystems themselves, the habitats for unique animal and plant species, livelihoods for forest-dwelling ethnic groups, and watershed and nutrients necessary for a larger ecological & human system. The main factors that threaten biodiversity are habitat destruction, over exploitation and unsustainable use of biodiversity resources

32. In 1943 Vietnam had about 14.3 million hectares of forests that comprised 43% of the country's natural land area. By the beginning of 1999, however, the total area of forested land dropped to only 9.6 million hectares (28.8% of total country's area), of which natural forest was estimated at 8.2 million hectares and forest plantation at 1.4 million hectares. This resulted from the continuous clearance of and the unplanned over-logging of natural forests in times past in Vietnam. Most of the virgin forest and forest with rich standing volume had been cleared or degraded to a secondary or poor crop.

33. The causes of deforestation in Vietnam are complex and manifold. Direct drivers comprise forest fires, over-logging, war damage (in the years before 1975), shifting cultivation, collection for fuelwood, grazing of livestock and extension of shrimp farms in coastal mangrove forests. Underlying causes include market failures, government policies to exploit natural forests, extensive internal population movements induced by poverty, economic development, and lack of compliance with the legal framework.

34. In the past ten years, the Government of Vietnam (GoV) has introduced policies and investment programs that severely restricted the logging of natural forests, investing in the protection of natural forests and the expansion of forest plantations. This resolute approach has partly succeeded in controlling deforestation. Up to December 31, 20084, the total forest area across the country was 13.118 million (mil) hectares (ha), including 10.348 mil. ha. of natural forests and 2.770 mil. ha. of plantations, showing a growth in forested area of around 3.5 million hectares. However despite these good results, continuing overexploitation means that the quality of natural forests keeps on declining. Ongoing exploitation of forests and forest land has not been accompanied by effective market oriented policies to manage the environmental effects. Recent improvements in the legislative framework by the government provide a foundation, but a clear and consistent framework of policies, laws and regulations to create enabling conditions for sustainable forest land management is lacking. Moreover, while the government places a high priority on the extension of secure property rights to the users of forests and forest land, the actual allocation of forest land has been slow. This situation is impacting upon the livelihoods of the ethnic minorities as they are much more dependent upon forest lands than Kinh people (majority of the population).

35. The project in Vietnam will work in two pilot sites more details in Appendix 16.

4 SFMI, 2010. Program supplementation for forest protection and development. Document at consultation workshop, Hanoi 15 March 2010.

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36. Pilot site number 9 Quang Tri: Dakrong: the Dakrong-Huong Hoa corridor, Quang Tri Province consists of around 7,000 ha of fragmented forests. Significant threats of deforestation are present in the Dakrong Nature Reserve and north Huong Hoa Nature reserve which are part of the selected area for pilot testing. These threats include agricultural encroachment, illegal logging, over-exploitation of NTFPs and infrastructure developments. Field observations highlighted general stakeholder awareness and interest in certification for a range of ecosystem services including watershed protection, forest protection in the nature reserve areas and recreational services. The Province also has ongoing certification projects by SNV and WWF.

37. Pilot site number 10 Lam Dong: Cat Tien, Lam Dong Province: The site in Lam Dong Province consists of around 30,000 ha of hill and lowland forest which is classified under 3 types of management; National Park, Plantation Forest and Protection Forest. The Cattien National Park, part of the project pilot site, faces considerable threats from deforestation and degradation, as well as poaching of its wildlife. Existing PES and REDD projects are ongoing in the Province, suggesting local awareness of the pressures on ecosystem services and the efforts to protect these is considerable, although awareness of the FSC is low.

39. Specific problems and challenges faced by the Vietnam pilot sites are: (i) forest conservation issues and (ii) institutional development issues. In terms of forest conservation, the sites are facing challenges, including:

The remaining forests are largely concentrated in remote mountainous areas, where people are poor and depend mainly on traditional and rotational upland agriculture, and the collection or trapping of forest resources for their livelihoods. As a result, forest conservation measures need to be tailored to local conditions and address relevant poverty, gender and livelihood circumstances and concerns.

Land and forest allocation is only done with land allocation in mind and fails to account for forest types, resources and assets on the allocated lands. In many places, forest area and lands are not yet allocated, nor leased, and the land use right certificate is not issued yet in accordance with legal regulation. Encroachment, conflicts over land and overlapping land titles have complicated it; while land and forest allocation documents are inconsistent, or land management is not comprehensive.

There is insufficient knowledge about FSC, SFM, PES, REDD, CDM and other additional ecosystem services to plan and implement comprehensive actions to achieve all of these obligations and objectives fully. Additionally, capacity is lacking on strategic principles such as local participation, local sharing of benefits and principles of environmental economics. On the other hand, there is insufficient data on forest cover changes in term of both deforestation and degradation and a system in place to adequately monitor, access and report these changes.

New conservation approaches such as landscape conservation, bioregion conservation, production landscape, biodiversity corridors, agro-ecological farms, forest landscape restoration, Payment for Ecosystem Services (PES) etc. have been introduced in Viet Nam but have not been carefully studied and evaluated at site level. More attention should be paid in the future to draw lessons learned and replicate as appropriate.

40. Among the most crucial policy issues at site level are those related to tenure and equity, particularly regarding access and use rights of lands and natural resources. Another policy implementation issue is the valuation of forests for provision of benefit sharing mechanism in forest protection and management and of environmental services (i.e. biodiversity conservation, watershed protection), and development and testing mechanisms for making transfer payments from the beneficiaries of service to the providers.

41. This Project: Expanding FSC Certification at Landscape-level through Incorporating Additional Eco-system Services will contribute to national programs in the field of natural

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resources management, including sustainable forest management (SFM). The project actions will also support policies and practices conducive to SFM that, simultaneously, generate global environmental benefits while supporting local and national, social and economic development.

2.2. Global significance 42. Climate change and threats to the worlds biodiversity are global phenomena and require global

solutions. FSC is uniquely equipped to tackle forest-related issues. It is a global network with forest management certification occurring in over 80 countries and with some 135 million hectares of forest certified. FSC has a formal presence in 65 countries, split approximately equally in both the Global South and North. It is a multi-stakeholder membership organisation (over 800 members) with a democratic governance structure which gives equal weight to South and North, and between the environmental, social and economic membership chambers. Therefore FSC is ideally placed to introduce and scale-up measures successfully tested at the pilot level in a few countries.

43. FSC Principles and Criteria and the associated standards are internationally applicable, unlike some forest management schemes which are purely nationally based or mutually recognise different sets of management criteria. While maintaining rigour in compliance with these global Principles and Criteria, it encourages the use of locally adapted indicators, endorsed by FSC, to measure compliance. FSC national standards are developed by multi-stakeholder working groups through establishing these indicators which reflect the local context.

44. In this way, the international and national approaches give consistency. This symbiotic perspective is very suitable for incorporating additional ecosystem services in forest certification, so that indicators tested in one country can form the basis for generic international compliance ecosystem services indicators and then adapted to the local context anywhere else in the world. Clearly outreach is required and the necessary communication methodologies followed to achieve scaling up but, within the FSC system, innovation once identified, can quickly spread.

2.3. Threats, root causes and barrier analysis General

45. Despite significant progress, forest certification, especially in tropical countries, has underachieved in its goal to promote sustainable forest management in large areas of forest (Dennis et al. 2008; Purbawiyatna & Simula 2008; Schulze et al. 2010). In April 2008, it was estimated that only 1.5% of the remaining tropical and subtropical forests had been certified (Bennett 2008). The following factors have been highlighted as the main factors inhibiting progress in forest and timber certification in the tropics: lack of skills and adequate management systems in forest management units, barriers in accessing certification services, and limited awareness of the importance of certification and lack of certifiable timber (Purbawiyatna & Simula 2008). Those factors will likely be barriers to the certification of ecosystem services as well, although because of the complexity of those services the challenge to develop a global certification system that fits the specific local forest and governance conditions makes certification of ecosystem services an even more challenging prospect.

46. Another important barrier to ecosystem service certification is a lack of actual demand for certification. Certification for timber seems to be more driven by non-market factors that sellers or producers of timber like to use to improve their business, rather than market factors that originate from the buyers side, although exceptions such as timber certification in the Congo Basin (R Nasi, pers. obs.) are noted. It is difficult to judge what will determine the demand for ecosystem service certification. Is the demand just coming from the verifier organizations, such as FSC, that are actually trying to promote certification? Is the demand going to come from

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governments programs and regulations, such as the Netherlands' Government commitment to source 100% certified timber for its own timber needs. Or is the demand coming from buyers of carbon, water and other services and goods? Or, alternatively, is the demand going to be on the sellers' side, where competition among many ecosystem service projects is creating an incentive to associate with certification systems that benefits those performing more sustainably from those that do not. Additionally there may be the situation that there is a demand however due to institutional constraints, unfamiliarity with certified systems, or lack of awareness, the markets, sellers and buyers are not able to come together. Without clear answers to these questions it is impossible to judge whether there will be sufficient demand for ecosystem service certification and whether there is enough market support to make such certification economically viable. Knowing whether the demand is mostly driven by buyers, sellers, verifiers, or a combination of these is important for determining how increased demand can best be generated. Would that require market pressure, television advertisement to generate public guilt, or policy commitments from governments?

47. There are additional challenges specific to the sustainability of certification of ecosystem service projectsor even to make ecosystem service projects work in the first placeincluding the role of geographic scales and distribution of ecosystem services, issues of land tenure and jurisdiction over specific ecosystem services, monitoring and verification challenges (the evidence-base!), and the role of regulatory frameworks. In the following sections, we reiterate and summarize these issues and look for possible solutions directly or indirectly to be targeted under the project, to overcome these challenges, specifically how these relate to ecosystem service certification.

Chile 48. Understanding the factors that cause changes in ecosystems and ecosystem services is essential

to design interventions that enhance positive and minimize negative impacts. On the selected sites in Chile, the major factors of land use changes and forest biodiversity losses are:

1. Key social development issues:

49. The South of the country is the ancestral territory of all the ethnicities Mapuche that live in Chile. There is nowadays a conflict faced by Mapuche communities with the State of Chile. The communities claim the return of ancient lands as Mapuche communities depend on agricultural and forestry activities. They have a relative low level of development due to being marginalised and a certain degree of segregation. The Government of Chile in an effort towards integrating the communities in their economic development plans, often finds a weak and distrustful response. Agricultural and forest exploitation is still realized by means of traditional methods, which diminishes the profitability. This situation concerns the Site of Carahue (site no. 1).

50. In Mechaico (site no. 2), the basin belongs to several smallholders that conduct forest activities, ranching and agriculture. All these activities are done in a traditional way. Especially, the traditional exploitation of the forests has led to a deterioration of soils and as a result the decrease in water quality of the basin, which influences negatively the development of sustainable activities downstream.

51. In both previous cases it is indispensable to create mechanisms that allow for incorporating sustainable economic development and criteria with participation of the communities of these sites. Management and the certification of ES might contribute to this development. Nevertheless, the major efforts in the matter are in the hands of the State and the communities themselves.

52. In the region of the Pumalin Park (site no. 3), the density of population is very low, whilst its only inhabitants, who already lived there before the park was created, came in the first half of the 20th century as colonists. They have been successfully involved with the activities of the park, such as conservation work, reforestation and prevention.

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2. Key economic development issues:

53. The separation of water use rights and land ownership in Chile has created a complex situation, particularly for indigenous communities. While indigenous communities were given greater control over land resources through the implementation of the system of indigenous development areas, they remain unable to control water use on these lands. Massive forced resettlement of numerous Pehuenche families to build a Dam in Alto Bio Bio, in the 8th Region of the country is a significant example of this situation.

3. Key environmental issues:

54. Biodiversity degradation due to forest loss: according to Catastro y Evaluacin de los Recursos Vegetacionales Nativos de Chile (1999), Chile has more than fifteen million hectares of forest. Native forests in Chile cover an area of approximately 13.4 million hectares, accounting for 17.8% of the national territory. Over the last fifteen years, areas of native forest have been reducing while the area of tree plantation has been increasing. Moreover, dams have decreased the area of native forest. Lara et al. (2000) suggest that the negative effect of exotic plantations is best shown by the fragmentation of the habitat of native flora and fauna. The loss of native forests has negative effects on the level of biodiversity, loss of habitat and increase in soil acidification.

55. Different estimates for the critical status of biodiversity in Chile (OECD 2005; Easty 2005; Figueroa and Calfucura 2006, WWF 2004) indicate that Chile has used its natural resources at a rate far greater than it is capable of renewing, placing it among the 50 nations with low sustainability, with a rate of consumption of natural resources of 2.6 global hectares per person, exceeding the estimated rate of 1.9 global hectares per person that land can support.

56. Inappropriate forest management practices in Chile can generate:

Excessive supply of sediment to watercourses; Excessive runoff; Soil compaction and increased surface erosion; Erosion and mass soil movement; Increased nutrient export from the upper basin; Increase temperature of the water courses.

57. For instance in forest ecosystems of southern Chile a negative management practice is the removal of vegetation along streams. Therefore it is important to maintain the vegetation in the Riverbed Management Area (RMA) because a major change in it may affect the ability of these buffer zones to retain sediments, quality of the aquatic environment, and ultimately taking negatively impact on biodiversity.

58. In the Carahue pilot site (site no. 1), native forest was gradually replaced by exotic species, particularly by Eucalyptus globulus and Pinus radiata. The pressure exerted by the nearby urban populations has been another factor of disturbance of forest, soils and biodiversity. Currently, the land owner does not consider expansion of the new plantations into areas of native forest, leaving these areas as protected forest. While there are no specific reports on the reduction of biodiversity due to expansion of plantations, it is possible to assume this based on studies in the trends in biodiversity loss in similar sites elsewhere.

59. According to INFOR (2009), deforestation has lead to impoverished soils in the basin of Rio Mechaico (site no. 2), including a decrease in the quality of potable water to the neighbouring city of Ancud. Despite this, the basin is still a mosaic of diverse forest consisting primarily of native forests in different stages of development. The dominant vegetation type in the watershed area is evergreen temperate forest, characterized by a rich flora, usually in 4 to 5 vegetation layers, each represented by several species, and under conditions of high humidity and low temperatures.

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60. For the other pilot site, Pumalin Park (site no. 3), there are various areas where the forest was entirely lost as a result of government land use policies. The government settlement policy in the extreme south of the country, led, in 1940's, to the burning of thousands of hectares of temperate rainforest, which were subsequently abandoned or occupied only in a small part. Currently, the Pumalin Foundation has launched a long-term reforestation program (i.e., Programa Alerce 3000), which purpose is to restore the surface of Temperate Rainforests by replanting the indigenous species.

61. The pilot project sites, Carahue (site no. 1) and Mechaico River Basin (site no. 2), are forested areas with different ownership and management strategies, which in the end have different effects on the environment and therefore should be treated in different ways in terms of certification of their Environmental Services. For the Carahue site the owner is a company already certified under the current Forest Stewardship Council standards. We may then expect that the exploitation of the forests of the site be held under a system of sustainability principles. The forests of the Mechaico River Basin belong to 18 different owners, who do not have any certification on forest management standards. Hence their interests are different and practices of forest exploitation do not respond to any common pattern. A real risk of degradation of the forest but also water exists such as in Ancud, where the quality of drinking water provided by the Mechaico River Basin has already decreased.

4. Key threats per sites

62. Pilot site number 1 Predio Carahue:

Insufficient information on ES, PES or certification directed to the community raising the benefits of a certification system.

Lack of basic scientific information to identify potential environmental services tradable on the market.

Lack of integration of different disciplines, expressed in isolated actions and results that show little coordination between these parties.

63. Pilot site number 2 Cuenca Ro Mechaico:

Insufficient information on ES, PES or certification directed to the community raising the benefits of a certification system.

Resistance of small forest enterprises and organized communities to participate by not knowing the system of payment for environmental services and certification.

Insufficient scientific information to identify potential environmental services tradable on the market.

Lack of integration of different disciplines, expressed in isolated actions and results that show little coordination between these parties.

64. Pilot site number 3 Parque Pumalin:

Scientific existing information does not have the necessary degree of integration between the different disciplines

Insufficient scientific information to identify new environmental services capable of being traded on the market

5. Barrier Analysis to sustainable forestry management

65. Institutional weakness on forest governance and environmental monitoring: a powerful institutional framework exists in Chile. Its recently reinforced by the creation of the Ministry of Environment in 2010. In spite of this important fact, a primary weakness persists: there is a serious deficiency in institutional capacity to exert control and supervision to enforce the law. In addition to that, environmental legislation presents many legal loopholes and is insufficient

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to respond to all situations. Moreover environmental legal decision seems to be strongly influenced by economics and political criteria. The management of ecosystems services not only requires information but also informed managers with adequate resources to make decisions, and ensure these are enforced. These aspects show an acceptable development in Chile. However, the ability to make decisions at the regional or provincial level is not sufficiently developed because of a low level of technical knowledge and of political order imposed by the central government.

Indonesia 66. Indonesia is rich in natural resources and biodiversity. A combination of factors including

natural disasters, a low income economy, illegal and unsustainable exploitation of resources and weak environmental governance has led to significant losses of natural capital and environmental services. Poverty is widespread; estimates vary between 10% and 20% of the population live in poverty and close to half the population is living a marginal existence with less than US $2/day spending. Marginal and exposed communities rely heavily on natural resources for their livelihoods and are highly vulnerable to loss of ecological functions that underpin resource-based production. Inequitable access and rights to resources often result in conflict. Indonesia is pursuing the integration of sustainable development into policies and programs but is unlikely to meet the MDGs target of recovering the loss of environmental resources, as forest and their inherent biodiversity continue to decline.

1. Key social development issues:

67. The social impact of depleted forest and forest resources are significant in terms of local livelihoods, poverty and human conflict. With the exception of dry season burning, traditional agronomic practices contribute little to the overall environmental impacts. However, expansion of agricultural production onto marginal areas and steeper slopes is causing serious problems of land degradation in upland areas. Land pressure has driven the rural poor onto unsuitable land and into conservation forests where poor farming practices is causing loss of fertility and soil erosion. Recovery of degraded land is normally possible through good land use management.

2. Key economic development issues:

68. Unsustainable forest exploitation is strongly correlated with corruption, poor political and environmental governance, inequitable access and confusion and conflict over land tenure and rights. Enforcement of laws dealing with illegal trade in timber species or wildlife species & products is deficient.

69. Indonesia forests are extensive, diverse and hugely valuable in terms of the reserves of timber, biodiversity, traditional livelihoods (estimated half the population), and global environmental services. The worlds second largest tropical forest is in a critical state and being depleted at an uncontrollable rate. Some estimates claim that more than 2 million hectares are deforested and degraded each year, largely as a result of illegal logging, forest allocation and conversion to agricultural use, although official government figures are well below that at 1 million hectares lost annually.

3. Key environmental issues:

70. About 50% of the countrys forests are degraded and 54% of that remaining is threatened. Indonesia has an extensive system of protected areas, protection forests and national parks most with a dominant forest vegetation in its various forms. Protected and conservation forest areas are not immune from logging of high value species and incursions for agricultural uses. Serious environmental impacts attending controlled and uncontrolled forest clearance include land degradation and desertification, loss of biodiversity (especially in protected areas), soil and water loss, changes in nutrient cycling, flooding and siltation, air pollution (smoke hazes from set fires) and net CO2 emissions in quantities that significantly contribute to global warming and climate change.

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71. A lucid fact on global climate change, Indonesia is one of the worlds largest emitter of greenhouse gases (reported in the top five). Release of GHGs from forest fires, deforestation and subsequent degradation of organic matter in soils are five times greater than from industrial and domestic use of energy (9% of total national emissions). The likely environmental consequences of global climate change for Indonesia will be greater climate variability including extreme weather events that may result in drought, flooding, unseasonable rains and increasing land and sea temperatures. Sea level rise and extreme rainfall events put islands and coastal regions many barely above average sea level, at risk of inundation, displacing communities and damaging fisheries and agricultural land (saline intrusion).

4. Key threats per sites

72. The pilot sites in Lombok Island (site no. 4), West (site no. 5) and East (site no. 6) Kalimantan represent a significant degree of problems and challenges to which Indonesia is entitled. In Kalimantan, the effect of mining, monoculture plantations, squatters, and fire has set underlying causes to the rate of forest depletion and the decrease in values of environmental services. Irresponsible land-use allocation, weak implementation of applicable spatial planning regulations, and compliance with environmental regulations, has exacerbated the environmental and social impact at landscape level.

Pilot site number 4 Lombok Island:

Water conflicts often emerge because of misunderstandings between upstream and downstream water users. People living upstream often claim property rights over water sources close to them, including rights to use, store, divert, and dispose. On the other hand, people living further downstream also make equally strong claims to their right to clean drinking water even if their bargaining position would seem to diminish in direct proportion to their distance from the water sources.

Sectoral fragmentation of water management. No single agency is responsible for the management of water in its entire hydrological cycle.

Pilot site number 5 West Kalimantan:

Land degradation due to intensive exploitation of the freshwater swamp- and lowland forests in and around the Danau Sentarum National Park, particularly during wet season.

Very intensive fishing activity of national importance, as well as growing of fish in floating fish cages - keramba.

Logging and land clearing activities in and around the national park have caused negative impacts to the water quality of the lakes in National Park

Transportation and the migration of people to the national park has also increased significantly, particularly since an increase in availability of transportation and other support facilities.

Pilot site number 6 East Kalimantan:

Clearance for estate crops such as oil palm and Acacia mangium, coal mining and from wild fires.

Roads being built and fragmenting the forest Increased soil erosion and sediment load in the rivers, and a possible increase in the

severity of river level fluctuations and biodiversity losses. The main cause of these changes is due to opening of the forest and particularly disturbance of the soil during logging operations, the Sumalindos concession is adjacent to several other forest concessions.

The consolidated and biggest threat at landscape level to forests and their biodiversity and ecosystem services contained is deforestation. Deforestation not only leads to the total loss of forest in some areas but also fragments the remaining forest areas. The

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fragmentation of lowland Dipterocarp forest may have impacts on the viability of the remaining forest areas, and populations of wildlife and flora.

5. Barrier Analysis to sustainable forestry management

73. The absence of additional benefits after timber extraction will lead forest-dependent people to shift the forest lands to other extractive uses. For years, people live with cultivation by opening new land and burning it for soil. This will in turn aggravate the loss of forestlands and notably accelerate the carbon releases. A preliminary biomass and carbon counting study on a 1,000 hectares plot of dry low-land forest in the proposed pilot site in West Kalimantan (site no. 5) concludes that with current land cover it stores 36.873 tons of biomass and 18.436 tons of carbon stock. With the trend for stable carbon release in 10 year period at 288 tons annually, the plot will preserve 98,000 tons of carbon for the lowest growth rate scenario designed for a 30 years reforestation project.

74. In the proposed site in West Kalimantan, sustainable forestry management is something that people are not familiar with. Given the fact that the area was one of the biggest sources for illegal logging in the past makes it more challenging in embracing local people to adopting sustainable forest management practices.

- The government gives permit for many oil palm plantations in Indonesia. Forest concessions are actually competing in getting more areas to be managed.

- The high cost for sustainable forestry management process is common problem among forest concessions and community forest in Indonesia.

Nepal

75. With its location in the transitional zone between the eastern and western Himalayas, Nepal stands as one of countries with richest biodiversity with 11 bio-climatic zones ranging from tropical to Alpine within a short horizontal span of 185km. Nepal has been adapting various sustainable forest management approaches for conserving its biodiversity, among them community forestry has been given the highest priority. Essentially, it is a participatory approach that has evolved over the last 30 years. With community forestry at its central approach, Nepal has been able to conserve its forest in the mid-hills. However, the conservation of forest and biodiversity seems to be a huge issue in low-land and high altitude areas. Only with adequate policy and support, can the issues of biodiversity and forest degradation be dealt with properly. This requires incentives to the people and stakeholders who are direct actors of conservation in those areas.

76. Nepal is signatory member of many international conventions like UNCCD, CBD, UNFCCC, Ramsar, CITES, etc. In order to fulfil the obligation under the International Convention on Biodiversity, the Nepal Biodiversity Strategy 2003 and the Nepal Biodiversity Action Plan 2007 have been developed. The Interim Plan of Nepal (2007-2010) also focused on the protection of the biodiversity for the sake of poverty reduction which can be realized through well designed payment schemes of environment services but it is not in operational stage yet.

77. With implementation of participatory approaches like community forest, leasehold forest, buffer zone community forest, and collaborative forest management, the conservation of forest biodiversity in Nepal has achieved some progress. Most of these programs have positive impacts on the quality of the forest and its protection, environment and bio-diversity, leading to increased supply of forest products and sustainable management along with community development benefits for the population dependent on forests. Achievement of gender balance, empowerment of the communities and institutional development are increasing due to community forest users groups. With the project support to PES mechanism and forest certification schemes, the environmental, economic and social benefits can be enhanced in a more sustainable manner.

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78. Even though benefits from PES and environmental services seem highly alluring, it has not been well perceived in Nepal. Even though experiences from some projects (e.g. RUPES Kulekhani) are available within Nepal, they are not adequate. Especially, the capacity of the various actors involved should be enhanced; scientific methods for valuation of various ecosystem goods needs to be developed; efficient payment and governance structures should be in place; and adequate data and baselines for various contexts should be created. Activities of this pilot project will not only avail technical and financial support to the pilot project area but also help in providing guidance to the policy makers and stakeholders to create rules, laws, regulations, and policies.

1. Key social development issues:

79. At least 90% of Nepals people live in rural areas and forests are an integral part of rural livelihoods. They depend on forests for fuelwood, timber, fodder, and medicinal herbs. In the whole country, fuel wood derived from forest constituted 84 percent of the total energy consumed in 2006/07.

80. There is a big difference between castes/ethnicity as well as gender in Nepal in terms of economic, educational and health opportunities. Similarly, there is a big gap between different groups and communities in terms of access in the political and administration fields.

81. Poverty, negative social values, lack of education, poor access of resources and means, and services and facilities still exist in most of the rural communities. These communities are further vulnerable due to unfavourable policies, acts and methods of the State with no clear mechanism for their proper inclusion in the existing Plan (see above) and budget formulation directives and processes.

82. The UN - Human Development Report, 2004, has shown big differences in the Human Development Indices (HDI) of urban and rural areas. HDI for urban areas is 0.581 and for rural areas, where the majority of the population lives, it is 0.452. In the Far and Mid-western regions of Nepal, the Human Development Index is very low (0.4) as compared to other regions of the country. During the period between 1996 and 2001, the difference between the lowest and the highest HDI for the regions has increased from 0.074 to 0.091.

83. Since, most of the population in Nepal depends on forests for livelihood, deforestation and forest degradation is significant in the country. A comparison of forest and shrubland areas of different physiographic regions of Nepal between 1978/79 and 1990/91 shows that the annual rate of deforestation was the highest in the Tarai (1.6 percent), followed by High Himal and Siwaliks. However, degradation increased to about 8% per year within the same time period5.

84. Introduction of payment for ecosystem services through the project in forested rural areas with a high proportion of rural poor can bring positive impact to their livelihood. During the implementation, issues of gender, ethnicity, and should be taken into serious consideration.

2. Key economic development issues:

85. Slow economic growth, skewed farm land distribution, low agricultural productivity and political instability have taken a toll on forest resources. Forestry has historically been given low priority by the state. Changing forest land to agriculture was a main strategy of government in history to generate state revenue.

86. Except for Community Forests, Leasehold Forests and Collaborative Forests, which collectively constitute about 22 percent of total forests and shrub land, the productivity of the remaining National Forests is virtually negative. The remaining National Forests under are in a

5 Acharya, D. (2003): A Review and Synopsis of Information Relating to Natural Resource Management in

High Altitude Areas in Nepal. A Report Submitted to Livelihood and Forestry Project (LFP), Kathmandu, Nepal

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virtual institutional vacuum due to absentee landlordism, and hence no incentive are found towards better management.

87. The whole chain of forest product marketing is so opaque that we could speak of an invisible hand operating in the supply and demand of these forest products. Moreover, multiple government and quasi-government organizations such as TCN, FPDB, DFCC, CFUGs etc. are involved in the harvesting and trade of these products. They also set their own prices. Additionally, formal and informal taxes proliferate in the trade and transportation of these products.

88. The government budget allocation for the forestry sector is very low. About 2.1% of state budget was allocated in the Tenth Year Plan of Nepal but only 1.6% was spent during the period. Obviously there needs to be adequate budget and proper implementation mechanism to support achievement of poverty alleviation and SFM6.

89. Nepal has already piloted FSC certification in community forests of Nepal. It has been quite successful and the products from the forests have fetched a higher price. Nepal government is committed to forest strategies for sustainable and participatory management, which is the principle requirement for FSC certification. Therefore, the demand for FSC products is predicted to increase rapidly in the coming years. However, some common issues requiring further attention include:

a) Strong policies and strategies that guide the certification process that also encourage the private participation should be in place.

b) Greater product variety is needed to better match sites and reduce financial risks of plantations.

c) Strategies for resource mobilisation, benefit sharing, investment and credit, taxation, marketing and pricing of forest products are incomplete and scattered in many legal documents. This combined with a lack of monitoring reduces the capacity of the Government to effectively guide the economic development of the forest sector.

d) The development of infrastructure pose direct challenges to protecting habitat and ecosystem integrity that now serve as critical habitat to globally significant endangered endemic and wide-ranging species to be protected.

e) Inclusion of gender, caste and ethnicity should be taken into consideration while designing certification programs. This will ensure the participation and ownership of the stakeholders.

3. Key environmental issues:

90. Deforestation, soil erosion, decrease in productivity and desertification, floods, landslides, decrease in biodiversity are the main environmental problems in Nepal. Reduction in forest area due to encroachment. Lack of awareness on biodiversity. Lack of knowledge about invaluable NTFP, lack of information on farming technology.

91. Some of the environmental issues are discussed in more detail below:

a) Agriculture expansion: Malaria eradication in the Terai during 1950s has initiated a process of forest conversion into agriculture, which is still continuing. Currently, the DoF says that nearly 88,000 ha of forests are encroached (illegally) for agriculture and settlements. About 81 percent of this encroachment is located in 17 districts of Terai, followed by 6 districts in the Siwaliks (16%), and 10 districts in Hills (3%).

6 Three year interim plan of Nepal (2007-2010)

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b) Resettlement of landless: Forests are often used during rehabilitation efforts after a natural disaster, either in a planned way by the government or illegal by victims themselves in pursuit of new safer land. They start to capture the land by erecting some temporary sheds in the beginning and gradually start to establish permanent con