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Sustaining the regular flow of water from mountain forests is important for downstream stakeholders in seasonally dry tropical countries, and a watershed payment for ecosystem services (PES) scheme that links rural ecosystem service providers to urban water users through economic transfers may help to maintain water supply and forest habitat. A CARE/WWF project in the Uluguru Mountains of Tanzania has established a pilot watershed PES scheme. We trace the development of this scheme and outline its initial impacts. Memoranda of Understanding between companies in Dar es Salaam (the downstream water users) and farmers in the mountains provide the framework to deliver tangible financial benefits to local people, help change patterns of land use and potentially improve water quality. A number of lessons learned from this project are relevant for similar schemes elsewhere in the region. Overcoming the various challenges is essential for expanding the current pilot project to a scale where it delivers measurable changes in water quality for downstream users.

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Balancing ecological and social outcomes of conservation actions is recognized in global conservation policy but is challenging in practice. Compensation to land owners or users for foregone assets has been proposed by economists as an efficient way to mitigate negative social impacts of human displacement from protected areas. Joint empirical assessments of the conservation and social impacts of protected area establishment involving compensation payments are scarce. We synthesized social and biological studies related to the establishment of the Derema forest corridor in Tanzania's biodiverse East Usambara Mountains. This lengthy conservation process involved the appropriation of approximately 960 ha of native canopy agroforest and steep slopes for the corridor and monetary compensation to more than 1100 claimants in the surrounding villages. The overarching goals from the outset were to conserve ecological processes while doing no harm to the local communities. We evaluated whether these goals were achieved by analyzing 3 indicators of success: enhancement of forest connectivity, improvement of forest condition, and mitigation of negative impacts on local people's livelihoods. Indicators of forest connectivity and conditions were enhanced through reductions of forest loss and exotic species and increases in native species and canopy closure. Despite great efforts by national and international organizations, the intervention failed to mitigate livelihood losses especially among the poorest people. The Derema case illustrates the challenges of designing and implementing compensation schemes for conservation-related displacement of people.