Supporting “Pay for Success” Contracts
Investments in restoration can have a greater impact by leveraging new conservation technologies and approaches, including precision conservation and pay-for-success delivery.
Precision conservation is defined as a process of finding the right place, scale, and time for a best management practice and making sure its working. A pay-for-success delivery contract defines, with detailed metrics, the expected outcomes of a private company’s work, such as the implementation of restoration projects. Payment for services is dependent upon project performance as measured in the field (e.g. meeting or surpassing agreed upon metrics for pounds of nutrient and sediment load reductions). The company funds the restoration from its own sources of capital and is only reimbursed if the project is successfully implemented. So, governments are purchasing outcomes not just funding projects. When precision conservation and pay-for-success are combined, the conservation movement reaches an entirely new era.
This project delivery structure is being implemented in the State of Maryland by the Department of Natural Resources and the Department of Transportation with encouraging results. A version of this has also been in effect in Virginia for several years with sound results. This approach has attracted for-profit firms to partner with nonprofit organizations, including the Chesapeake Conservancy, to support the desire to restore streams and rivers, often on permanently conserved lands, and reduce pollution to the Chesapeake Bay.
Below, please see the “before” and “after” shots of a successful “pay-for-sucess” contract restoration project on Principio Creek.
The following was written by Bill Kilby, president, Cecil Land Trust
Stream restoration project
Early in the summer of 2017, two articles were published that have served as the impetus for this paper.
The Environmental Policy Innovation Center paper “Nature, Paid on Delivery” featured leadership efforts in Louisiana, California, Maryland
and Nevada in creating outcome based opportunities for private investment in natural resource restoration and protection projects. The Maryland portion describes the willingness of the Department of Natural Resources (DNR) to experiment with a “pay for success” approach to pollution reduction in the Chesapeake Bay watershed. Cecil Land Trust (CLT) and Ecosystem Investment Partners (EIP) stepped forward applying for the Chesapeake and Atlantic Coastal Bays Trust Fund grant. CLT and EIP would receive payment for the pollution reduction after the stream restoration was completed and effective with a payment period of five years.
The second article “Coase Call—the theory of the firm” appeared in the July 20, 2017 of the Economist as the first in a series of articles covering “six big ideas in economics.” Ronald Coase, a British born economist, relocated to the University of Chicago in 1964. In 1991, Coase was awarded the Nobel Prize for economics, based on the strength of two papers. The first, a 1937 publication “The Nature of the Firm” expounds on the requirements of business relationships. In the second, a 1960 publication “The Problem of Social Cost,” Coase argued that private input could resolve social problems, such as pollution, as long as private property rights were observed and transaction costs were low. The fact that the theories could be used in 2017 economic and social conditions certainly validates Dr. Coase receiving the Nobel Prize for his work.
In addressing the validity under today’s condition, the question becomes how do you develop a “pay for success” business model that is simple enough to succeed, yet complex enough to be profitable for both our monetary and social goals?
The first step is determining and gathering the expertise needed for the goals of the project which include restoring a stream corridor of 24.8 acres while reducing 6219 lbs of nitrogen, 1850 lbs of phosphorus and 1344 tons of sediment from reaching the Chesapeake Bay. Four of the key players in developing the model had been working together for 20 years on various conservation projects through the Maryland DNR. A mutual trust had been established, a key element in any business relationship, in each individual partner’s ability to deliver on their part of the deal.
The DNR Rural Legacy Land Preservation Program served as a base model. A nonprofit, CLT, was awarded a grant to spend on purchasing conservation easements on priority properties. Grant funds were issued when the easement came to closing, “pay for success.” The twist with stream restoration projects was the cost, engineering, permitting and the expertise required for restoration work. EIP’s history of successful mitigation work proved to be a perfect fit for bringing the business model forward.
The use of private equity funds to front fund costly restoration projects, pencils out as an effective approach. The first submitted project was awarded at a cost of approximately $800 per pound of nitrogen reduction compared to DNR’s cost on traditional projects of $2000 per pound.
The CLT-EIP relationship is one of co-dependency, in a positive way. Neither partner could achieve its goals without the other. CLT as a nonprofit has a social mandate to serve the community in land and water protection efforts. The business model needs these community connections, as CLT has the ability to bring local resources together, including county government, soil conservation, landowners, DNR and local sub-contractors. EIP’s ability to provide front funding for costly conservation projects while providing a return to their investment partners offers a whole new world of opportunity for the nonprofit conservation community.
The following flow chart outlines the benefit chain of this “pay for success” model.
Stream Restoration Projects – Cecil County
Receives job creation, funding of pension system, efficient and effective use of state funds. Cecil County spends less for its WIP credits and most of all the Chesapeake Bay is cleaner and more productive.
Creates an income stream that provides funding for teacher pension systems and other institutions. By using sub-contractors, EIP is creating jobs for the growing environmental economy.
Fulfills its social mission of protecting land and water resources, while receiving an administrative fee.
Lease of the stream corridor provides income for an underused asset and rectifies an erosion problem that the farmer cannot afford to fix due to the cost.
Working with EIP enables soil conservation to enhance its mission of reducing soil erosion without added cost and staff.
Receives the WIP credits generated by the project.
Chesapeake and Coastal Bays Trust Funds are able to meet their restoration goals through cost effective and efficient use of state funds. The cost per pound of reducing nitrogen in this model project is $800 compared to $2,000 per pound in traditional projects.
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