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.
