Sri Lanka’s agrarian economy relies heavily on water and land resources that sustain rural livelihoods. However, irregular rainfall have intensified droughts, notably in Hambantota, Mannar, and Puttalam. The 2016–2017 drought, the worst in decades, damaged over 55,000 acres of crops and affected millions. Despite large water-sector investments, drought management remains focused mainly on water access. Many watersheds are now degraded due to deforestation and unsustainable land use, reducing water availability and increasing vulnerability. Innovative mechanisms like Payment for Ecosystem Services (PES) are vital for restoration and resilience.
Background
Water is a vital resource sustaining Sri Lanka’s ecosystems, agriculture, and energy production. Hydropower contributes significantly to national electricity generation, and small hydropower plants (SHPs) are increasingly important for rural energy. Their sustainability, however, relies on healthy watersheds that regulate hydrology, mitigate droughts, and support food security. Decades of deforestation, poor land management, and unsustainable land use have degraded many catchments, threatening both water availability and hydropower generation.
The Ganthuna SHP in the upper catchment of the Gurugoda Oya reflects these challenges. Deforestation and farming on steep slopes have increased soil erosion and sedimentation, reducing storage capacity and clogging turbines. Degraded catchments cause erratic streamflow—runoff during rains and scarcity in dry seasons—while climate change intensifies droughts, undermining both energy production and rural livelihoods.
Socio-economic pressures worsen degradation. Communities depend on tea and smallholder farming with limited income options. Poverty and land scarcity push cultivation into forests and marginal lands. Short-term income outweighs conservation, and without incentives or compensation, upstream communities have little motivation to protect watersheds that mostly benefit downstream users.
Governance fragmentation deepens the issue. Responsibilities for forests, agriculture, water, and energy are spread across multiple agencies with poor coordination. Land-use planning is weak, and local communities are rarely included in decision-making. Conflicting policies—such as agricultural expansion undermining conservation—limit effective watershed management.
Funding is another barrier. Conservation relies on limited government budgets and short-term donor aid. Hydropower companies often view watershed health as beyond their control, despite direct impacts on generation. Sri Lanka lacks financial mechanisms to value and transact ecosystem services. Without incentives like tax relief or carbon credits, private investment remains minimal.
These environmental, socio-economic, institutional, and financial gaps highlight the need for Payment for Ecosystem Services (PES). This pilot initiative links hydropower operators (beneficiaries) with upstream communities (providers), creating a market-based system where those who benefit contribute to conservation. PES aligns incentives, encourages sustainable land use, and strengthens watershed resilience—bridging the gap between recognizing ecosystem degradation and financing its restoration.
Actions taken
The pilot Payment for Ecosystem Services (PES) project for watershed conservation in support of a small hydropower plant in Sri Lanka followed a structured process of decision-making, implementation, and stakeholder engagement. It aimed to ensure sustainable water supply for hydropower generation while incentivizing local communities to adopt conservation practices.
Decisions and Objectives
The project originated under Sri Lanka’s Biodiversity Financing Initiative (BIOFIN), recognizing PES as a sustainable financing tool for watershed protection. UNDP, in partnership with IUCN Sri Lanka, initiated the study to test PES feasibility at the field level. Key objectives were to: (i) pilot PES at the Ganthuna Small Hydropower Plant (SHPP) operated by Vidullanka PLC, (ii) document lessons for scaling, (iii) prepare a watershed restoration plan, and (iv) develop a policy framework for national adoption. Leadership was provided by IUCN with oversight from UNDP, involving experts in ecology, policy, and economics.
After consulting two SHPP developers, only Vidullanka PLC agreed to co-finance the pilot. The Ganthuna site was selected for its ecological suitability and community readiness. A cost-sharing agreement was reached—60% financed by Vidullanka, 40% by IUCN—and a local coordination committee chaired by the Aranayake Divisional Secretary was formed for monitoring and adaptive management.
Actions Taken
Baseline Surveys and Planning: Rapid assessments and GIS mapping identified degradation hotspots. A detailed restoration plan was developed and validated through stakeholder workshops.
Conservation Interventions: Activities included (i) stream bank restoration and check dams, (ii) enrichment planting in secondary forests, (iii) school forest and orchard establishment, and (iv) awareness programs. Over 3,200 trees were planted across 38,000 m² of catchment area.
Institutional Mechanisms: A multi-stakeholder coordination committee—comprising government agencies, Vidullanka PLC, IUCN, and local representatives—oversaw implementation and problem-solving.
Capacity Building: Training sessions were held for officials, estate workers, and students to enhance technical knowledge and conservation awareness.
Policy Development: Lessons learned informed a draft PES policy framework presented to the Sustainable Energy Authority and Central Environmental Authority.
Stakeholder Involvement
Vidullanka PLC acted as the main financier and PES “buyer.” Local communities contributed as “sellers” through land stewardship and restoration work. Government bodies such as the Forest Department, Department of Agriculture, and CEA provided technical and regulatory support, while IUCN served as scientific and facilitative intermediary. Schools and community groups also supported replanting and awareness activities.
Alternatives and Prioritization
Several SHPP sites were considered, with Ganthuna chosen based on ecological condition, community engagement potential, and developer commitment. Restoration activities were prioritized for cost-effectiveness and feasibility—stream bank restoration and school-based planting were favored over large-scale reforestation, which was constrained by COVID-19.
Information and Methods
Implementation drew on scientific assessments, socio-economic surveys, and GIS-based planning. Data on flora, fauna, and community livelihoods guided restoration design. Financial models developed by IUCN economists structured the PES mechanism, while stakeholder consultations ensured continuous adaptation.
Outcomes
The pilot project demonstrated the feasibility of introducing a Payment for Ecosystem Services (PES) mechanism for small hydropower projects in Sri Lanka, linking private energy producers with local communities and national conservation policy. Through baseline studies, restoration work, and policy engagement, the project delivered tangible and institutional outcomes, though some objectives were limited by COVID-19.
Restoration Outcomes
Within the 507-hectare Ganthuna Small Hydropower Plant (SHPP) catchment, restoration focused on key sites due to budget limits. Achievements included: restoring 10,400 m² of riparian land with 450 trees and check dams; enriching 22,000 m² of degraded forest; establishing school-based blocks, orchards, and butterfly gardens totaling nearly 10,000 m²; and planting over 3,200 trees overall. While small in scale, this was a major milestone, funded primarily by private-sector investment.
Social and Institutional Outcomes
The project enhanced stakeholder awareness of PES, with communities recognizing their role in conservation and Vidullanka PLC viewing restoration as a long-term investment. A local coordination committee chaired by the Divisional Secretary enabled multi-stakeholder collaboration and transparency. The project also produced a draft policy framework to integrate PES into Sri Lanka’s small hydropower sector, engaging agencies such as the Sustainable Energy Authority and CEA. Vidullanka’s community support fostered goodwill, while schools became active hubs for environmental education.
Persistent Challenges
Only a small portion of the catchment was restored, limiting hydrological impact. Benefits to hydropower yield will take years, deterring private investors. COVID-19 disrupted key participatory activities, affecting both ecological and community outcomes. Institutional fragmentation persists due to the absence of a formal PES policy, and financial incentives for private participation remain minimal. Without policy reforms, incentives, and sustained investment, scaling up remains difficult.
Implementation Issues
Community participation was high in planting but limited in design and monitoring. Long-term maintenance and monitoring systems were not fully institutionalized. Although a draft PES policy was produced, formal adoption is pending. The model’s scalability is constrained as only one hydropower operator invested.
Achievement of Objectives
The project largely met its objectives: establishing Sri Lanka’s first PES demonstration site, testing private-sector financing (60% by Vidullanka PLC), identifying institutional barriers, and developing a draft policy. However, restoration scale and depth were constrained by external factors.
Policy and Capacity Influence
The draft PES policy created an entry point for national discussions, highlighting incentives like tax breaks and carbon credits. Training programs built community and institutional capacity for ecosystem management, while the local coordination committee strengthened governance and collaboration between public, private, and community actors.
Sustainability and Resources
Ecological benefits depend on tree survival and continued community care. Financial sustainability requires institutionalizing PES within hydropower tariffs or carbon markets. Institutional sustainability hinges on policy adoption, while social sustainability depends on tangible livelihood benefits.
The total project cost was LKR 6.1 million, with 60% financed by Vidullanka and 40% by IUCN. Funds supported restoration, awareness, and policy work, demonstrating the potential of blended public-private financing for conservation. Long-term success, however, depends on scaling and institutionalizing these mechanisms for national replication.
Lessons Learned
The Ganthuna PES pilot illustrates how combining private sector incentives, community participation, strong policy backing, and coordinated stakeholder engagement can create a replicable model for long-term sustainability. Embedding such mechanisms in drought-prone regions can strengthen watershed health, ensure reliable water supplies, and reduce vulnerability to future droughts.
