In this paper the characteristics and functioning of PES is analyzed from an institutional perspective. While in theory PES is seen as a market solution to environmental problems -- as an alternative to state (hierarchical) and community governance -- a review of a large amount of case studies shows that PES in practice depends rather fundamentally on state and/or community engagement. Hence PES are foremost a reconfiguration of the roles of public bodies and communities becoming core intermediaries or 'buyers'. First, to establish PES, rights to the land that delivers the environmental service must be clarified. This demands public action. Second, transacting over environmental amenities is very costly. Creating 'markets' for environmental services depends therefore crucially on state and community facilitation. Hence 'buyers' are often public agencies. High transaction costs also influence price setting. Payments do not follow the market format as intermediaries frequently are setting the price, with users often being unaware even of the fact that they pay. Finally, the distinction between payments as incentives and as fair compensations is emphasized. While payments may strengthen community relations and simplify action for environmental care, they may also introduce a purely instrumental logic and in some cases worsen the environmental status by crowding out environmental virtues. For the future, greater awareness of these dynamics is warranted.