Lessons for Conservation from Social Pay for Success

by Phoebe Higgins and Timothy Male

 

The Nonprofit Finance Fund just published a comprehensive overview and set of lessons learned from the first 25 Pay for Success projects to be initiated in the US. Just one of the 25 projects has an environmental objective (reducing stormwater runoff and improving water quality). The remaining 24 have social objectives such as reducing recidivism, ending homelessness, improving access to employment and reducing child abuse. Pay for Success (PFS) got its start in the social service sector, but we support growing this procurement approach to speed up, and scale up, environmental conservation.

Some key lessons include:

  1. PFS is useful in unproven situations – scenarios where government doesn’t already have data or evidence of success.
  2. The high public profile and challenging nature of projects places high demands on service providers to invest in public relations to respond to public scrutiny – this means bigger businesses and nonprofits win contracts.
  3. Investors consider PFS projects to be high risk, so they prefer to see subordinated capital provided by philanthropic funders; lack of subordinated or ‘first loss’ capital can slow progress.

How can we apply lessons from the first 25 projects to the conservation sector?

  1. PFS is useful in unproven situations – scenarios where government doesn’t already have data or evidence of success.

The report notes that, “we now know that PFS projects are best used to help us to learn…. The projects are not ends in and of themselves. They are a means to research and develop local solutions to local problems, bring community members together to define and address critical needs, and help government partners orient around outcomes.”

This may be an artifact of how social PFS was designed – with a heavy and costly focus on research and statistical sampling design.  That research comes with significant costs and also has implications for the pacing of work.  Neither social nor environmental PFS contracts have to be designed with such a research focus – although it’s a good idea, when projects really are speculative.

The use of the PFS model for generating evidence of successful programs and approaches is particularly helpful to the service providers in need of data and test cases. And on top of gathering quantitative data, qualitative process evaluations are also a valuable way to answer the question, “what works?” The question for the conservation sector is, Can Pay for Success help speed up and scale up conservation? We think the answer is yes. PFS can be used to demonstrate how government can ask for, and the private sector can deliver, environmental outcomes, more cheaply and effectively than traditional restoration contracts. Check out EPIC’s overview of four states using PFS to speed up and scale up conservation in our paper on Conservation & Impact Investment.

  1. The high public profile and challenging nature of projects places high demands on service providers to invest in public relations to respond to public scrutiny – this means bigger businesses and nonprofits win contracts.

Pay for Success projects are demonstrating faster outcomes: “While the complexity of PFS projects has drawbacks, the high-stakes, high-scrutiny environment, where money and reputations are on the line in a very public and sometimes controversial way, have expedited delivery of critical services in many cases.” Our question is whether the public scrutiny and communications requirements are an inherent unchanging feature of PFS programs or whether over time, people will get used to this approach and the need for and costs of significant public relations and communications work will decline.  If so, it would allow smaller, newer, and likely more diverse, organizations to play a bigger role in delivering contracts.

  1. Investors consider PFS projects to be high risk, so they prefer to see subordinated capital provided by philanthropic funders; lack of subordinated or ‘first loss’ capital can slow progress.

The report doesn’t make clear—partly because so many projects are new and still in progress—whether investors are right to see PFS as risky.  If more than 20 of these social PFS projects work and investors make the return they expect, will it change the risk perspective and the need for subordinated capital?  In conservation, there are a number of examples of PFS or PFS-like programs that are already functioning and where risks are relatively well-defined.  These include wetlands mitigation banking, stream restoration banking, development of carbon credits for California’s carbon offset market, and a handful of smaller initiatives.  It’s our belief that investors’ fears will abate as they take a closer look at successful projects. We worry more that design constraints in PFS programs will contribute to high administrative costs that make projects less attractive.

PFS is not synonymous with a social impact bond or environmental impact bond. In fact, PFS doesn’t even require an outside, return-seeking investor. It just refers to projects in which there is a government payor willing to pay for particular outcomes provided by a goods provider—a goods provider with the capital to fund projects before that payment occurs—and outcomes verified by a third party. Most of the 25 PFS projects were structured as direct loans with a combination of senior and subordinate lenders who might have different repayment terms.

The biggest benefits of PFS in conservation are dramatically increasing the speed, and reducing the costs, of conservation.  It will provide an alternative contracting pathway for government to buy environmental outcomes as goods, not services, from the diversity of for-profit and not-for-profit organizations that already excel at producing great outcomes under conventional procurement.

Leave a Reply

Your email address will not be published. Required fields are marked *