The complexity of the institution of payment for environmental services: A case study of two Indonesian PES schemes

Payments for Environmental Services (PES) have been widely adopted worldwide as a new market-based initiative for conservation and environmental management. In Indonesia several PES initiatives exist ranging from watershed and terrestrial to marine ecosystem. Nevertheless, developing and managing PES programs in Indonesia are exacerbated by the complexity of institutional arrangements. Fiscal constraints are still the main obstacle of sustainable financing of PES mechanism. Rules and regulations with regard to PES fiscal mechanism are rather lacking, making it difficult for effective management of PES programs. As a consequence, efficient mechanism between users (firms) and environmental services is rather weak. This paper explores such a problem based on case studies of two existing PES programs in Indonesia. The paper analyzes the complexity of fiscal mechanism as a derivative of regulations and discusses challenges to overcome the constraints.