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Pay for Success: New Resources for Better Conservation Outcomes

This week, the Administration announced new efforts to focus on the long-term problem of water scarcity.

This week, the Administration announced new efforts to focus on the long-term problem of water scarcity to encourage research and investments in water efficiency solutions and innovation in how we finance water supply improvements. The announcement featured a new Natural Resource Investment Center at the Department of Interior which will lay the groundwork for driving additional investment in water conservation and critical water infrastructure, as well as promote investments that conserve important habitat while advancing efficient permitting and meaningful landscape-level conservation.

These announcements build on other actions the Federal government has taken to recognize the growing opportunity for private investment to help achieve public environmental goals. Last month the White House issued a Presidential Memorandum on natural resource conservation that encourages private investments in the health of the nation’s incredible natural resources by recognizing the expanded role private investment can play in achieving natural resource restoration and conservation goals. The President encourages agencies to deploy innovative tools, such as performance contracts and Pay for Success approaches through which the government can set high standards and pay back private partners only when those standards are met.  

Some agencies are already seeking to advance environmental Pay for Success.  For instance, several of USDA’s recent Conservation Innovation Grants are laying the groundwork necessary to use this tool.  Yesterday’s announcement will further advance the ball, as DOI’s Natural Resources Investment Center will explore potential uses of Pay for Success in the context of conservation.

Through Pay for Success, impact investors can provide the upfront capital to cover the costs of delivering services or environmental remediation. In doing so, these investors support proven or promising programs while taking on the risk of loss if the programs don’t achieve results. Because public resources are not spent unless measurable goals specific in advance are achieved, this approach ensures that taxpayers will not have to shoulder the burden of paying for programs that don’t work.

The Administration sees potential for achieving a variety of environmental goals through Pay for Success. For example, stormwater green infrastructure offers an opportunity to reduce water pollution and improve air quality. What’s more, it creates good, long-term jobs, often at a cost that is lower than “grey” infrastructure alternatives. Through a technical assistance grant from the Social Innovation Fund, the Harvard Social Impact Bond Lab is working with the District of Columbia’s Water and Sewer Authority on ways to use Pay for Success to finance innovative, job-creating green stormwater infrastructure projects.

The Presidential Memorandum also highlights opportunities to expand mitigation and conservation bank-based approaches.  These privately-funded banks, which use Pay for Success principles, have proven to be an efficient and market-based means of offsetting harm that a development project causes to a wetland or stream, in order to provide environmental resource enhancement before harmful impacts occur. The concept is simple – a private party acquires and restores a degraded wetland or stream, permanently protects it, and gets a credit from government for this action if it is successful. In turn, they can sell that credit to businesses or any government agency that needs to offset an environmental impact.

For example, the State of Kentucky Transportation department is procuring mitigation credits from the Eastern Kentucky Stream Mitigation Bank for the restoration of 72 miles of badly degraded stream channels. Because success is certified by regulators before the credit is awarded, there is no guesswork.  Private and government purchasers of the credits know they are paying for good environmental outcomes. This is an effective and faster way for the state agency to, for instance, carry out infrastructure projects to improve highway safety and increase economic development while addressing environmental impacts of those projects.

We know we need new innovations to address water scarcity and other persistent environmental challenges; and we know that with new approaches comes risk. Sometimes government leaders are not able to take on that risk, and as a result, breakthrough innovations do not reach scale.  Since Pay for Success enables government to pay only for what works, it reduces the risk of paying for projects that fail to meet their goals, which is a significant barrier to scaling critical innovations. These types of creative partnerships will help ensure protections for our land, water and wildlife for generations to come.