Developing Economic Arrangements for Water Resources Management—The Potential of Stakeholder-oriented Water Valuation - Water and Agriculture: Sustainability, Markets and Policies - page 131

Process leading to the establishment of FONAG
The water supply of the city of Quito originates mainly from two watersheds located
in the Cayambe-Coca (4 000 km²) and Antisana Ecological Reserve (1 200 km²) in the
Andes mountains. Although both areas are under environmental protection, the
watersheds are threatened through several land uses such as agricultural production,
extensive livestock grazing (with impacts on both water quality and quantity for drinking
and irrigation water use), power generation, and recreation. Destruction of forests and
grassland ( páramo ) which contributes to the degradation of the high plateau is assumed to
affect the stream flow, causing floods in winter and drought in summer (Kiersch et al.,
2005).
To ensure the conservation of the water resources in the watersheds for the drinking
water supply of Quito, the Nature Conservancy (TNC) and the Fundación Antisana, a
local NGO, launched the idea in 1997 of establishing a fund that would make an explicit
link between the use of water and the conservation of the watershed (Katoomba, 2005).
With the support of USAID and the Quito Metropolitan Area Sewage and Potable Water
Agency (EMAAP-Q), this led to the creation of the FONAG water protection fund in
January 2000. In May 2001, the Quito power company (Empresa Eléctrica Quito) entered
as a constituent, as did the private company Cervecería Andina in March 2003. Recently,
the Swiss Development Co-operation has joined the fund, as well as the Ministry of
Environment, which has an observer status. The constituents contribute to the fund,
varying from 1 percent of drinking water revenues by EMAAP-Q to an annual fixed
amount by others, with written agreements for the 80 years of the fund's constitution. At
the start of 2005, the fund had close to US$2 million, and investment bonds for the year
2005 were estimated at close to 500,000 dollars (Lloret, 2005).
Although this may appear to have been a straightforward process, in fact 'the process
has been slow and painstaking' (Katoomba, 2005). Initially, the city mayor and the
boards of directors of the water utility and the power company had to be convinced of the
potential benefits of the fund (Katoomba, 2005). Once established, field activities
financed by FONAG did not start until 2004, years after the establishment of the fund,
because FONAG works with the interest, not the capital, on the money in the fund
(Katoomba, 2005; Lloret, 2005). In fact, the fund still has to prove that it is really
contributing to improved availability of water resources. The lack of understanding of
linkages between specific watershed protection activities and water flow and quality
makes it difficult to assess how much of the desired service actually reaches the users. As
yet, statements concerning outcomes in terms of environmental improvement or
hydrological returns are not available (Kiersch et al., 2005).
Conclusion from the case
The FONAG payment scheme is based largely on a 'virtual' market for activities that
are expected, but not yet proven, to contribute to the sustained availability of good quality
water resources. It is the result of a process initiated by non-governmental organisations
that lasted several years and that gradually gained more momentum, after its participants
were sufficiently convinced of the value of the services and activities supported by the
fund.