Opportunities for Washington State to adopt Pay for Success
TL;DR: Washington state is primed to adopt Pay for Success to help meet its ecological restoration goals.
Please email Grace Edinger for further information.
What is Pay for Success?
Paying for outcomes, also known as “pay-for-performance” and “Pay for Success” is an innovative approach to procurement that defines desired outcomes and invites the private sector to provide them in advance of most payments. These contracts allow a pound of nitrogen prevented from entering the Chesapeake Bay to be paid for just like governments pay for a ream of paper or any other good–saving money through targeting, competition, streamlining, and innovation.
Context & History
While the concept of pay for success has been around for decades, the past few years have seen significantly more outcomes-based programs come to fruition throughout the country. Maryland is now annually issuing a $20 million solicitation called the Clean Water Commerce Program, and Pennsylvania has a similar $22.5 million program to buy nutrient and sediment reduction outcomes: the Clean Water Procurement Program. Most recently, $25 million was announced as available by the Susquehanna River Basin Commission for outcomes across Maryland, Pennsylvania, and New York. In addition, Maryland counties like Prince George’s and Anne Arundel have used Pay for Success contracts for other environmental and public health outcomes.
But it’s not just the Mid-Atlantic region. Pay for Success programs are operational in North Carolina, Florida, California, and elsewhere. And the federal government is increasingly looking to use this as a tool itself and to incentivize states to do so. The USDA Regional Conservation Partnership Program matched part of Maryland’s first Pay for Success program, and the Social Impact Partnerships to Pay for Results Act (SIPPRA) can double cost savings state and local governments generate from switching to Pay for Success.
Cost effectiveness
One of the most compelling reasons to use Pay for Success contracts is that they tend to be cheaper–sometimes dramatically so. EPIC’s informal analysis of four Pay for Success programs found 63% cost reductions over a five-year period when existing programs switched to using Pay for Success solicitations. These cost savings come from targeting projects to where they’re most effective, creating a single unit ($/lb of nitrogen) that can be compared against different proposals (creating an efficient market), reducing paperwork and other administrative burdens, and allowing delivery partners to create new, better ways of reaching the goals.
Risk shifts
A huge benefit that Washington would realize if these contracts are implemented is a responsible risk shift towards the private sector. Under Pay for Success, contractors risk not getting paid unless they deliver the desired outcomes. For them to take this risk, they need to have flexibility in how those outcomes are achieved and deserve reduced administrative burden. This frees up agency capacity constraints, allowing the government to focus on big-picture progress and results rather than day-to-day management. Put simply, Pay for Success eliminates the risk of contractors not delivering results.
This is a win-win-win scenario. It’s a win for the government, which is alleviating capacity constraints by reducing paperwork and direct project oversight time, a win for the contractors who gain flexibility in how they complete projects and reduce administrative costs, and a win for the environment because there is a strong incentive to achieve the desired results.