This study was undertaken in the Sardukhola sub-watershed of eastern
Nepal to illustrate how local policy instruments can be used to supplement
government water supply. We discuss a strategy for using Payments for
Ecosystem Services (PES) to meet water demand in Dharan Municipality
in Nepal. A rigorous process was followed in designing the PES scheme.
Following focus group discussions, a Choice Experiment was carried out to
determine the preferences of municipal water users. In addition, upstream
households were interviewed to understand their requirements to participate
in a watershed management program. Finally, we used a series of formal and
informal stakeholder consultations to help validate household survey findings
and develop an institutional framework for implementing PES. Our analysis
indicates that water quality is the most important attribute preferred by water
users and that upstream households require incentives to decrease domestic
livestock grazing, change agricultural practices and reduce open defecation.
Results suggest that developing a PES scheme would be socially acceptable
and financially feasible and may contribute to a flow of USD 118,000 per
year from water users for watershed management. In concurrence with local
stakeholders, we propose a tri-partite institutional structure to implement
PES. We note that a national PES policy would make it easier to initiate such
integrated and market-oriented approaches for enhancing drinking water
supply.