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Payments for ecosystem services are being developed largely as a response to the challenges and constraints that are facing regulatory mechanisms for the management of natural resources. Payments for watershed services (PWS) are a sub-set of payments for ecosystems and specifically seek to establish new relationships between water users and upstream land managers. The number of PWS-based programmes is increasing even though the area over which they operate is relatively small – the exception being the sloping lands conversion programme in China. This review of the PWS literature highlights three substantial debates: the relationship between land use and hydrological functions in watersheds, the impact on the livelihoods of land managers and especially the rural poor, and the means by which PWS programmes are being financed.

In the context of future research by DFID, the review suggests three themes: methodologies and models for determining land use–water relationships; the integration of incentive and regulatory frameworks, and more robust methodologies by which development and resource management programmes and projects can be evaluated.