Review and analysis of Pembrokeshire case studies

Over the previous ten years there had been a number of projects developed and funded within Pembrokeshire which appeared to be delivering some form of PES. These were suggested as case studies for review to identify useful information which could be utilised in the development of an eco-bank toolkit.

ADAS undertook a review of five completed or current projects (listed below) and the reports of this work can be found in Appendix C. A summary of the work undertaken and main findings is included in the next section.

The summary outlines the main areas of interest including; costs, effectiveness of schemes, participants and stakeholders, value and innovation. Each of these sections also outlined the potential implications for a PES scheme in the Milford Haven and Cleddau catchments.

The Pembrokeshire case studies analysed for this work were:

• First Milk
• Bluestones
• Llys-Y-Fran
• Deepford Brook
• Castlemartin

Costs / Finances

The review of the 5 case studies has not identified the total costs of any scheme and therefore it is not possible to offer any financial guide at this stage. The Deepford Brook project used a simple maximum contribution of £10k with the average contribution by the farmer exceeding this match fund several fold.  While this scheme is simple administratively, it is not always adequate to incentivise capital works and explains in part the scheme’s disappointing uptake. There were also delays caused by procurement rules. This model is not sufficiently flexible to reflect the varying costs of action across multiple sites.

In addition, the varying revenue foregone as a result of change of management approach or land use is not addressed. There was also a failure to account for the costs of monitoring work. Costs and resources associated with the engagement of stakeholders were also significant and underestimated at inception.

The costs are known for the First Milk scheme, but have not been made available for this report due to concerns of commercial sensitivity. Costs for Bluestone have also been inferred. Where costs are not known, it is not possible to assess value for money. Lack of clarity on financial support can also be caused by allowing payment in kind. Any risk of failure of a project delivering value for money is problematic, especially in cooperative models or where volunteer/third sector organisations are involved.

Implications for PCF Ecobanking

The value of financial contribution, time, equipment, laboratory analysis, training expertise and technical expertise can be overcome. The invoicing profile, costs or value or equivalent for payment in kind should be quantified and measured.  However an agreement needs to be put in place to establish the value, resource and quantity of each service.  This would allow a comparison across the sectors and an open offer of value for each contribution made.  An example would be an hourly rate for each organisation, analysis costs and equipment hire costs.  For many volunteer/third sector organisations, access to IT/phones/cameras/PPE equipment may not be available and may have to be accounted for, and costed, within the proposal.

Appropriate monitoring and allowance for associated costs for data collation, interpretation and dissemination should be incorporated within PES. Realistic costs of participant and community engagement also need to be considered at inception. Revenue or costs forgone should also be part of the pre-deal analysis, and these should have dynamic ranges to reflect variation in input costs.

Use of public sector money creates limits and constraints in terms of what costs can be compensated. Where private sector buyers are engaged there may be more flexibility to allow for costs to be fully offset.

Effectiveness of Scheme

It has been difficult to draw lessons about the effectiveness of each of the case studies as most of the schemes have started relatively recently and as such have not delivered sufficient data to allow evaluation from an environmental perspective. There are however, some initial observations that First Milk and Llys y Fran have been successful but it is too early to be conclusive.

The results for Deepford Brook, which is an older scheme are somewhat disappointing. A follow up inspection found that where capital monies were spent, actions undertaken appeared not to resolve the environmental problems. For example, there was insufficient attention given to the placement of buffer strips (should be at strategic locations and be of a certain width dependent on land topography to prevent run-off to the watercourse). Another problem with this project is that no baseline data was recorded and post-project data was insufficient to show any improvement.  However, even if the results were to be obtained in full, the actual beneficial impact would be small as the area entered into scheme was very low relative to the catchment.

Concerns have also been raised about the effectiveness of using chemical water quality monitoring alone to establish effectiveness. In many of the cases considered, there are also issues around a lack of data sharing, notably with the regulator. The use of other methods of monitoring (such as remote sensing) have been suggested as alternative mechanisms.  The management of environmental information is key in the understanding of the effectiveness of a PES scheme and the task of undertaking this role should be costed within the PES scheme.

It may also be debatable whether the water quality improvements considered and delivered in the case studies meet the additionality criterion of a PES scheme. Payments should only be made above and beyond the legislative baseline. Both Deepford Brook and Castlemartin rely to some degree on government financing, whilst all of the schemes are potentially vulnerable to changes in regulatory requirements.  In theory if any of the catchments becomes a Nitrate Vulnerable Zone (NVZ), the regulations would require farms to reduce the risk of nitrates losses to the river as a statutory requirement and hence they should not be compensated under a prospective PES scheme.

Some of the schemes may also have effects on other ecosystem services beyond those relating to improving water quality. There is potential for some to deliver GHG emissions abatement, habitat provision, bioenergy production and flood risk management. Deepford Brook and Llys y Fran did not consider this potential, but the other schemes have to some degree.

Implications for PCF Ecobanking

Pollution mitigation methods proposed under any future PES scheme should be both appropriate for local farming systems and of maximum beneficial use for the environment. This would include a target for land area and the implementation of the appropriate measures with optimal placement, both spatially and temporally.

The use of a broad suite of monitoring tools is needed to verify schemes’ effectiveness and environmental monitoring techniques are advancing very quickly. The use of an independent auditing tool e.g. First Milk’s use of the Farmscoper modelling tool, within the compliance pack can support the accuracy of monitoring.

The Catchment Sensitive Farming study revealed a need for clear demarcation and guidance between the rules and requirements under environmental regulations, agri-environment schemes (AES) and a PES scheme as any confusion or ambiguity risks seller and buyer participation. Further, environmental legislation and best practice can change within the life of a PES scheme and can vary across regions e.g. England and Wales.  Therefore any future PES scheme must be flexible and adaptable to allow for such changes and differences.

PES interventions or offsets will rarely have an effect on just one ecosystem service in isolation and schemes should consider the potential to bundle services as may open up a wider source of buyers and/or sellers. This has particular advantages for sellers but requires that appropriate monitoring is proposed from inception.

Participants and Stakeholders

The Welsh Government (directly or through NRW) was actively involved in all schemes as a regulator. In some cases it was also the initiator and project driver, and in Deepford Brook and Castlemartin it was also the buyer (which raises questions of additionality). Indeed a common factor in all five cases is the lack of any commercial buyer for the offset or ecosystem services delivered: Bluestone and First Milk are paying for the work themselves to satisfy a permit requirement, whilst the funds for Llys y Fran derive from the private sector (utility company). The sustainability of any of these models is therefore questionable.

There are many opportunities in the literature for private funding. These include power companies as a potential buyer of nitrate credits and water companies in catchments within a source protection zone area. Other models include using tourists for investment in heritage, landscapes. Landowners and businesses in the area may be interested in funding work from a CSR perspective while construction and related sectors may be required to offset the environment impact of development.

While some PES schemes focus on a limited set of sellers i.e. farmers in the relevant catchments, Castlemartin cast the net wider involving the Ministry of Defence, RWE npower, Baker Brothers, Valero and The National Trust but the objectives of this project were also broader.

Only the First Milk scheme made significant use of third parties to facilitate the recruitment of farmers, delivery of nutrient planning on farm and helping to undertake independent audits of the data on all of the participating farms. In the other case studies, the monitoring, design, and advisory work was managed by the scheme instigators or the regulator itself. Deepford Brook did engage with senior figures in the Farming Union and Agri-Food partnership.  There was a strong sense that the use of independent third parties in the engagement and monitoring aspects of these schemes improved the buy-in from farmers and may also improve effectiveness. Indeed, for First Milk there was some regret that an independent third party was not engaged to act as a land agent and deal with some of the planning and land contract issues which arose.

It is noticeable that none of the schemes employed a separate “broker” to put the deal together, which may be perhaps why the commercial buyers were absent and the sellers in some examples were only a small subset of possible participants.

Community engagement could have been improved across all of the case studies. In general this challenge was underestimated and under-resourced in terms of time, personnel and material. Again, this might have improved with the use of an independent third party to manage this aspect of the deal.

Implications for PCF Ecobanking

The roles and responsibilities for each participant within the PES scheme must be clearly defined and referenced throughout the PES scheme. There is a risk of “Project drift” and deals should be well structured with more clearly defined buyer, seller, regulator, and third party roles and contractual responsibility, along with independent monitoring, land agency, and engagement roles.  This intermediary step within the PES scheme needs to be accommodated and costed for as part of the project initiation, duration and closure and in some instances post closure of a PES project.

Engagement of potential buyers, sellers, and the wider community needs to happen earlier and needs to be managed by an appropriate agency. A broader set of buyers and sellers needs to be considered to reduce the reliance on public and charitable funding.

Value

In all the schemes considered, it is possible to identify the value to all the participants of reducing the nitrate load to the river. In particular to the regulator charged with the environmental objectives who can point to legal targets (WFD) to meet, but also to economic values that are associated with improvements in water quality to the general public.  The values to participants vary in the degree to which they are transparent and can be elucidated.

In one case (Deepford Brook) participants are partially compensated up to a point for work they have done to reduce nutrient loading and so can be assessed on a cost basis. In two cases (Bluestone and First Milk) the value is linked to receiving a permit or continuing business operations, which is a more complex consideration, but is still amenable to valuation. In the case of Llys y Fran the value is in terms of the advice received and what it could return the farmer in longer term efficiency savings (reduced fertiliser costs). The main focus of the Castlemartin project is for mapping and so it is perhaps unfair to attempt to assign financial values to it.

A criticism of the schemes is that the financial value was not made explicit to all participants. Despite this, it is encouraging to note that those having to deliver reductions in nutrient loading seemed to have done so, even though in many cases they were not fully compensated for their costs. This suggests some sense of environmental responsibility and/or that PES/offsetting can be consistent with wider business objectives. Even though the First Milk scheme required no financial transaction to take place, as milk suppliers to a farmer cooperative company, both parties have an implicit incentive to make it work; this may be difficult to replicate.

Other schemes could have been improved if there was a more sound financial argument presented at inception. This was particularly true of Deepford Brook where the limit on the funding available and the lack of a cost/benefit justification to farmers reduced the number who were willing to participate. In the case of Bluestone, the scheme owner would require a monetary incentive in place as part of establishing a formal offsetting scheme before additional investment for water treatment could occur. The Llys y Fran case is not yet complete but the value of providing feedback to the landowners should not be underestimated as a measure to encourage future participation. .

A broader question which has not been evaluated in these schemes is to what extent the value created is equitable amongst all the stakeholders. In two of the schemes (Deepford Brook and Castlemartin) government money directly funded some of the work which may have led to benefits in water quality experienced by utilities companies. A similar point can be raised about the private money spent in the Llys y Fran scheme.  This is not an issue for the two permit-related schemes where presumably overall nutrient loading would not be affected.  However, there is a case to argue that the housing development in First Milk is a ‘free rider’ beneficiary from the work done to offset its discharges. How equitable the value created in this last case is between the processing part and the farmers is also not clear.

Implications for PCF Ecobanking

It is possible and advisable to appeal to participants’ business priorities as well as their environmental values when marketing a PES/offsetting scheme. However, it is also important to demonstrate and market the financial justification to those who must incur costs or change practices.  The more straightforward and transparent the scheme, the easier this will be. In this regard, making sure that participants can be fully compensated for their efforts, beyond the regulatory baseline, is important. Certainty should also be created for those incurring costs now, in lieu of future compensation.

Scheme design should also consider issues of value equity. Potential ‘free-riders’ should be identified and encouraged to commit funding.  Cooperative schemes should consider mechanisms to incentivise or financially reward farmers where there may be a risk of dropout.

Innovation

The Catchment Sensitive Farming scheme, or Deepford Brook, was comparable to an agri-environment scheme due to the use of state funding. Castlemartin is an example of collaborative environmental enhancement funded by the Welsh Government’s Nature Fund.  As such, neither can be considered highly innovative in the context of the evolution of PES schemes.  The other case studies did show some element of innovation or novel approach in relation to PES or offset schemes:

Bluestone is an example of a “banking” scheme where work could be done in advance to generate credits which can then be sold at a later stage to those seeking to offset their own pollution. Such banking schemes are not new in the context of offsetting, but this scheme is novel in that there is no guarantee that the credits will be recognised and that the owner will be able to recoup their “investment”.

The Llys Y Fran case study does appear to be a unique partnership between regulator, industry and third sector. Whilst the project is not yet complete, a more formal approach may have avoided some misunderstandings of roles and responsibilities between partners, the confusion associated with the mix of financial and payment in kind contributions and reduced the risk of “project drift”.

First Milk also differed from the standard PES model in that there was no actual financial consideration passing between the buyer and seller, but was instead a cooperative effort where farmers and their buyer (First Milk) both recognised the greater economic rationale of keeping the processing centre in business and were willing to invest their own money to achieve this. However, this arrangement is not necessarily replicable in catchments where there is a weaker (or less monopolistic) relationship between buyer and seller, as well as raising questions of equity.

Implications for PCF Ecobanking

Organisational and contractual certainty are preferable, especially if the scheme is intended to generate credits for future offsetting where those engaging in work now should be assured that their efforts will be eligible.

Cooperative models may appear to be virtuous and may have stronger “buy-in” but may present problems in voluntary schemes if participants lose interest or are dissuaded by better, commercial offers. They may be suitable for sub-schemes within smaller parts of the catchment where relationships between buyer and seller are stronger.

1. Appropriate monitoring and allowance for associated costs for data collation, interpretation and dissemination should be incorporated within PES.
2. Realistic costs of participant and community engagement also need to be considered at inception.
3. Revenue or costs forgone should also be part of the pre-deal analysis, and these should have dynamic ranges to reflect variation in input costs.
4. It is vital that measures funded by scheme funds need to be agreed and planned with the help of experts to avoid issues such as poor placement of buffer strips.
5. The recording of baseline data is vital as is ongoing or post-project data in order to demonstrate improvement.
6. There are concerns about the effectiveness of using water quality monitoring alone to establish effectiveness. The use of other methods of monitoring (such as remote sensing), have been suggested as alternative mechanisms.
7. PES interventions or offsets will rarely have an effect on just one ecosystem service in isolation and schemes should consider the potential to bundle services
8. A common factor in all five projects studied was the lack of any commercial buyer for the offset or ecosystem services delivered, therefore the sustainability of any of these models is questionable.
9. The use of independent third parties in the engagement and monitoring aspects of these schemes improved the buy-in from farmers and may also improve effectiveness.
10. It is noticeable that none of the schemes employed a separate “broker” to put the deal together, which may explain why the commercial buyers were absent and the sellers in some examples were only a small subset of possible participants.
11. Community engagement could have been improved across all of the case studies. In general this challenge was underestimated and under-resourced in terms of time, personnel and material. Again, this might have improved with the use of an independent third party to manage this aspect of the deal.
12. Engagement of potential buyers, sellers, and the wider community needs to happen earlier and needs to be managed by an appropriate agency. A broader set of buyers and sellers needs to be considered to reduce the reliance on public and charitable funding.
13. The value of providing feedback to landowners should not be underestimated as a measure to encourage future participation.
14. It is vital to demonstrate and market the financial justification to those who must incur costs or change practices.
15. Scheme design should also consider issues of value equity. Potential ‘free-riders’ should be identified and encouraged to commit funding.