Watershed management is critical for the sustainable supply of clean water to urban centers, particularly in areas of developing countries where large-scale infrastructure projects are costly to implement. In this paper, we discuss the potential for financing improvements in watershed services in the foothills of the Himalayas through Payments for Ecosystem Services. Through the use of a choice experiment to disentangle household preferences, we show that downstream water users are interested in improvements in water quality through source water protection. Households in Dharan municipality are willing to finance watershed management to the extent of USD 118,000 per year. These payments can be used to incentivize upstream households to decrease domestic livestock grazing, change agricultural practices and reduce open defecation to improve the drinking water quality and quantity in downstream areas. The estimated cost of these activities is less than $50,000 per year. Through discussions with local stakeholders, we propose a tri-partite institutional structure to facilitate transactions between downstream and upstream communities and to improve watershed services.
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