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Conservation Innovations: Pay for Success

Conservation Innovation Grants NRCS Invests in Innovative Funding Model to Get Conservation on the Ground

The Natural Resources Conservation Service (NRCS) often draws upon the talent and innovation of partners to further our mission of helping people help the land.

Working with the NRCS Conservation Innovations Team, partners develop new financing approaches and market-based solutions to the conservation challenges facing landowners. Pay for Success (PFS), one cutting-edge financing model, leverages private investment to achieve outcomes with a public benefit.

This piece is also available as a multimedia story.


 

What is Pay for Success?

Effectively, the investors and service providers take on the risk of the project, anticipating that successful outcomes will bring returns that make shouldering that risk worthwhile. These returns can be financial, but they also include social or environmental outcomes, depending on the goals of the investor.

What is Pay for Success? Below is a series of graphics that explains.
Step 1: The payor - such as a government agency or municipality - contracts with a third part service provider for planning and implementation of a program or project. Graphic courtesy: Environmental Incentives

Step 1: The payor - such as a government agency or municipality - contracts with a third part service provider for planning and implementation of a program or project. Graphic courtesy: Environmental Incentives

Step 2: That third party service provider secures private capital from an investor to cover the initial costs of the project and implements it with a set of quantifiable success measures. Graphic courtesy: Environmental Incentives


Step 2: That third party service provider secures private capital from an investor to cover the initial costs of the project and implements it with a set of quantifiable success measures. Graphic courtesy: Environmental Incentives

Step 3: Once the project has been implemented, an evaluator determines whether the service provider has delivered the agreed upon outcomes, or

Step 3: Once the project has been implemented, an evaluator determines whether the service provider has delivered the agreed upon outcomes, or "success." Graphic courtesy: Environmental Incentives

Step 4: Success triggers a payment from the payor to the service provider. Graphic courtesy: Environmental Incentives


Step 4: Success triggers a payment from the payor to the service provider. Graphic courtesy: Environmental Incentives

Step 5: In turn, this payment provides a return on the initial capital investment. Graphic courtesy: Environmental Incentives

Step 5: In turn, this payment provides a return on the initial capital investment. Graphic courtesy: Environmental Incentives

 

Step 6: If, however, the agreed upon outcomes are not delivered, the government agency (or payor) pays the service provider either a lesser amount or potentially nothing. Graphic courtesy: Environmental Incentives

Step 6: If, however, the agreed upon outcomes are not delivered, the government agency (or payor) pays the service provider either a lesser amount or potentially nothing. Graphic courtesy: Environmental Incentives

Why Pay for Success?

Government agencies pay for outcomes, not practices or interventions, lowering risk and ensuring that public funds go towards effective and proven solutions. PFS projects draw upon private capital, broadening the funding base available for programs and infrastructure improvements. PFS encourages innovation, allowing service providers to adopt new research and program improvements without the risk of wasting taxpayer dollars. Once a PFS approach shows success, the agency or municipality may choose to adopt the now proven approach, with a significantly reduced risk of wasted resources or financial loss. 

If, however, the agreed upon outcomes are not delivered, the government agency (or payor) pays service provider either a lesser amount or potentially nothing. Effectively, the investors and service providers take on the risk of the project, anticipating that successful outcomes will bring returns that make shouldering that risk worthwhile. These returns can be financial, but they also include social or environmental outcomes, depending on the goals of the investor.

Pay for Success in Action

Perhaps the most well-known examples of successful PFS implementation are programs curbing youth recidivism, like the program described in the New York Times article Goldman to Invest in City Jail Program, Profiting if Recidivism Falls Sharply. In this instance, private investors fund programs that help keep young people out of jail, realizing government cost savings because fewer juvenile inmates re-enter the prison system. Other PFS project examples can be found in the healthcare, education and housing sectors.

These innovative public sector leaders use PFS to reduce risk by leveraging a pool of private capital that seeks social and environmental outcomes alongside financial returns.

Pay for Success in Natural Resources

Federal, state and municipal governments are beginning to test PFS solutions to address natural resource challenges. PFS projects are low-risk approaches to implementing green infrastructure, sustainable forest management and conservation practices on farms and ranches in ways that yield long-term cost savings. Fewer risks associated with project failure and the ability to pay for conservation outcomes make PFS projects an attractive opportunity for a government agency like NRCS. Conservation Innovation Grants (CIG) is a Farm Bill program that allows NRCS to invest in innovative conservation approaches--like PFS—that benefit private landowners and rural communities. Over the past three years, NRCS has used CIG funding to help pilot PFS projects addressing a diverse set of natural resource concerns.

Pay for Success in the West

Funded in 2016, a Partners for Western Conservation and Environmental Incentives CIG project is creating a Pay for Success Toolkit for five Western states. The toolkit will provide resources - like customizable contracts and step-by-step guidance - for establishing public-private partnerships that put critical funding onto working landscapes and help ranchers protect their land, generate ecosystem services, and realize financial returns from their efforts.


Throughout the process of developing the toolkit, Environmental Incentives is working with the Nevada Department of Conservation and Natural Resources to develop a “seed-funding” PFS strategy that will help ranchers establish sage grouse habitat to offset habitat losses incurred on public lands during operations such as mining.

The Nevada Conservation Credit System’s long-term vision is to use a full-delivery PFS strategy - as represented in the figure below - that leverages private capital to fund restoration projects such as removing invasive tree species, seeding sagebrush, and implementing adaptive grazing management. Credits, based on sage grouse habitat quality, will be sold through the Credit System and ultimately provide financial returns for ranchers and investors.

CIG Pay For Success Full Delivery Graphic. 1 PFS Contract mechanism defines payment terms. 2 Investor provides upfront capital. 3 Producer implements project. 4 Conservation outcomes are acheived. 5 Credits verify conservation outcomes. 6 Buyer pays based on contract terms. 7 Producer pays investor.CIG Pay For Success: A summary of the process  

  • Step 1: PFS Contract mechanism defines payment terms.
  • Step 2: Investor provides upfront capital.
  • Step 3: Producer implements project.
  • Step 4: Conservation outcomes are acheived.
  • Step 5: Credits verify conservation outcomes.
  • Step 6: Buyer pays based on contract terms.
  • Step 7: Producer pays investor.

Graphic courtesy: Environmental Incentives

Through the CIG project, using a modified PFS strategy, the State of Nevada provided the upfront investment for initial restoration projects to generate early credits for the program. This investment from the state builds landowner confidence in habitat restoration and provides credits for mining companies who can use credits for permit compliance.

Nine projects have already been funded through Nevada’s investment, resulting in more than 800 conservation credits for sage grouse habitat. Credits became available for purchase by mining companies and developers applying for U.S. Forest Service or Bureau of Land Management permits in July 2017, and in November, the first credit sale was completed. Once credits are sold, landowners repay the state’s initial investment, feeding back into a revolving fund for additional restoration projects.

Ultimately, Partners for Western Conservation and Environmental Incentives anticipate that these PFS toolkits will draw private funds to fund habitat protection and enhancement, generating a continuous supply of conservation credits to meet permitting demands. More broadly, the findings and strategies created through this project could be replicated with other natural resource systems throughout the West.

Forest Resilience Bond

The development of the Forest Resilience Bond (FRB) follows decades of research establishing the environmental and economic benefits of forest restoration. Funded in 2016, the FRB CIG project utilizes elements of a Pay for Success model. Within the FRB framework, private capital funds forest restoration treatments while landowners, utilities, private water-dependent companies, and public land management agencies collaborate to repay investors based on both forest management and ecosystem services provided.

The targeted benefits of these restoration efforts include:

  • Decreased fire severity
  • Protected water quality
  • Avoided carbon emissions
  • In some cases, increased water yield.

Through the FRB, these benefits will be monetized in contracts based on a hybridized PFS model that shares cost savings among beneficiaries while providing competitive returns to investors. The project uniquely facilitates cost sharing among different beneficiaries, blending payments for both outputs (e.g. successfully restored acres) and outcomes (e.g. protected water quality, improved water yield, avoided carbon emissions, or even job creation). This lowers financial risk and provides a stable cash flow for investors.

The American Forest Foundation, working with Blue Forest Conservation and the World Resources Institute, is working to identify a pilot landscape for restoration in the Western U.S. for piloting the FRB. This initial assessment will help project leaders to cultivate beneficiaries or payors (those who will see the greatest gains from forest restoration in the area), ultimately allowing them to secure private investors and/or program-related investments from philanthropic supporters.

Addressing PFS challenges, partners supporting the FRB are driving the development of meaningful metrics to facilitate contracted cash flows from beneficiaries to investors while exploring varied payment options for different beneficiaries.

This model allows some payors to transfer their risk to investors in a classic PFS contract, while other payors can enter into a more traditional cost share contract that allows them to pay for a portion of forest restoration activities. While the benefits of forest restoration are widely recognized, putting a dollar value on the realized cost savings in increased water supply or water quality improvements requires extensive, long-term data collection and analysis. CIG funding for pilot projects like the FRB assist in the development of metrics and agreements needed to replicate PFS in natural resource management in the future.

Endangered Species Mitigation in California

California’s Central Valley is the most productive agricultural region in the world, with more than 230 different crops and one third of the produce grown in the United States. And with seventy percent of the land in private ownership, agricultural producers have a major opportunity to restore and maintain local habitat, including ecologically rich riparian areas and wetlands.

With this in mind, American Rivers - in partnership with non-profits, agencies, and utilities - created the Central Valley Habitat Exchange. This PFS program connects producers and landowners with public and private conservation buyers, creating a one stop shop for investment, measurement, and habitat credit sales in the Central Valley. Chinook salmon, Swainson’s hawk, giant garter snake, Monarch butterfly, and a range of riparian songbirds are the threatened species currently included in the exchange.

The Habitat Exchange, funded by CIG in 2016, familiarizes both conservation sellers and buyers with the mechanisms and advantages of PFS transactions. It provides information, tools, and a streamlined environment for both habitat restoration investment on private lands and the generation and sale of credits that offset habitat losses in the Central Valley.

While still in its early stages, this project represents a promising design for scalable habitat restoration and increased investment on agricultural lands.

What's Next - Water Quality

In 2017, CIG funded two projects to use Pay for Success approaches to improve water quality in agricultural watersheds in Delaware and Pennsylvania. The Chesapeake Bay Foundation (CBF) is exploring using a PFS model to reduce nutrient and sediment pollution in Pennsylvania. CBF will design a project that leverages investment capital to help municipal governments meet pollution reduction requirements for stormwater runoff in urban and suburban areas.

i2 Capital’s project, in concert with The Nature Conservancy, Quantified Ventures, and other partners, proposes a PFS framework located in the Brandywine-Christina watershed (a watershed shared by Delaware, Maryland, and Pennsylvania). If successful, private investment will flow to private landowners, with PFS payments coming from downstream beneficiaries such as water utilities and municipalities.

Success in Numbers

Programs like CIG that support innovation in natural resource conservation are critical to the early development of emerging approaches such as PFS. Entities can use CIG funding to help entities pilot PFS projects and surmount the challenges such as:

  • Quantifying benefits
  • Developing accurate success metrics
  • Keeping costs affordable for all parties
  • And developing strategies for federal contracting and procurement regulations.

As grantees pilot PFS projects and actively work to overcome some of these obstacles, they will pave the way for additional projects following the PFS framework, spurring innovation on the landscape.