By Henry Crochiere and Joshua Ogburn

The mission of the University of Virginia Pay for Success Lab is to identify and advance impactful Pay for Success projects in localities across the nation. One of the Pay for Success Lab’s current projects is to identify communities that can benefit from an Environmental Impact Bond (EIB), a novel Pay for Success (PFS) model recently implemented in Washington, D.C. to address a critical water infrastructure problem. Combined Sewer Systems collect stormwater, domestic sewage, and industrial wastewater in the same pipe and direct it to water treatment facilities. While these systems were an innovation in the mid 1800’s, during periods of heavy rainfall, they overflow excess capacity through Combined Sewer Overflows (CSOs) into surrounding bodies of water. Over the past 150 years, society has recognized that these overflow events represent a significant hazard for the health of communities and the environment.

There are two main methods to address CSO problems. The first and most traditional method is Gray Infrastructure, which often consists of building immensely large, underground water retention tanks that store water during periods of heavy rainfall. The other option is Green Infrastructure, a term for various approaches and technologies that allow rainwater to enter the water table naturally. While Gray Infrastructure is a more certain solution, the underground tanks hold a specific amount of water, Green Infrastructure provides numerous other benefits such as improved cost effectiveness, water and air quality, job creation, and health benefits.[1] Over the past few decades, the lower costs and greater effectiveness of Green Infrastructure has increasingly made it a viable solution for communities.

Types of Green Infrastructure

The Environmental Protection Agency currently provides localities with permits that monitor the amount of allowable CSO levels. To maintain compliance, the EPA issues fines and sometimes Consent Decrees, a court-mandated agreement for the locality to reduce the amount of overflow. Washington D.C. is one of the cities that is facing a CSO problem and a Consent Decree. , CEO of DC Water, wanted to address DC’s overflow problem while also being environmentally and cost conscious. However, Hawkins had a dilemma: how can D.C. justify spending the time, money, and resources on a Green Infrastructure project if it does not work? The answer was an Environmental Impact Bond (EIB), the first of its kind.[2]

The EIB is a performance-based municipal bond that allows localities to implement Green Infrastructure to address their CSO problem while also providing financial protection should the Green Infrastructure fail to meet expectations. While the EIB is a 25-year bond, there is a check-up after five years to measure the success of the GI using predetermined milestones. If it does not meet expectations, the government pays back a lower interest rate. If the EIB reduces CSOs by more than what was expected, the locality pays back a higher interest rate.[3]

The PFS Lab believes this performance-based model is applicable in many communities beyond Washington, DC. We have been working to contact every locality currently under Consent Decree. We have found that while most of the water authorities were unaware of the EIB model, they are often interested once we explain it to them in detail. Of course, the process for a locality to decide whether to utilize an EIB is not short. Over the next several months, we look forward to working with leading Pay for Success advisory firms to advance these projects. If you have any questions or ideas, please do not hesitate to reach out to us.

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Henry Crochiere is a Fellow in the University of Virginia Pay for Success Lab. He is a rising Fourth Year at the University of Virginia studying Economics and Spanish. Henry is the current president of the Inter-Fraternity Council as well as the co-chair of Pancakes for Parkinson's, UVa's largest student-run philanthropy. Henry wants to pursue a career in consulting or impact investing after he graduates.

Joshua Ogburn is Director of the University of Virginia Pay for Success Lab. He has worked to initiate numerous Pay for Success projects in the areas of early childhood education, workforce development, supportive housing, home visiting, and pediatric asthma. Joshua holds a Master of Public Policy from the University of Virginia’s Frank Batten School of Leadership and Public Policy, and a Bachelor of Arts in Public and Urban Affairs from Virginia Polytechnic and State Institute (Virginia Tech).

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What is Pay for Success?

Pay for Success is a performance-based structure that drives financial resources towards serving local needs and measurably improving lives. Through the framework, a private investor pays upfront for an intervention and an end payor agrees to repay that investment should the intervention meet or exceed its predetermined target outcome measures. Pay for Success allows community-oriented organizations to pay for tangible benefits, transfer risk of outcome achievement to external funders, and align their community towards achieving beneficial outcomes.

Benefits of Pay for Success

• Focuses community resources on evidence-based programs and outcomes that measurably improve lives
• Builds a culture of evidence and accountability into community-focused spending decisions
• Transfers the risk of a program not meeting its intended outcomes to risk-oriented funders
• Shifts community-focused spending towards paying for beneficial outcomes instead of inputs or outputs
• More closely aligns the payment of social outcomes to when the outcomes occur
• Provides a framework for multiple community payors to contribute to outcomes of their importance
• Affords service providers upfront long-term funding so that they can strategically plan and adapt

Overview of Pay for Success 

Pay for Success (PFS) projects provide financial resources to pursue community-relevant social outcomes while generating social value and cashable savings to government and other community organizations. A bipartisan coalition of political leaders has endorsed the strategy, including Governor Nicki Haley (R, SC), Mayor Ben McAdams (D, UT), Speaker of the House Paul Ryan (R, WI), and President Barack Obama. Since 2010, when the concept first started spreading across the country, 15 projects have launched and at least 75 localities are currently considering projects in a variety of areas including early childhood education, criminal justice, health care, homelessness, workforce development, foster care, green infrastructure, and land conservation. PFS is most effective when community leaders have the will to address an issue but current strategies:

• Lack preventative investments that would provide long-term benefits,
• Fund local interventions but concerns exist about program performance,
• Provide limited resources to effective local programs that are ready for scaling-up, or
• Could improve by adopting promising interventions or programs from other localities.

University of Virginia Pay for Success Lab

The mission of the UVa PFS Lab is to research and efficiently advance viable Pay for Success (PFS) project models. The UVa PFS Lab works with local stakeholders during the earliest stages of project development to determine whether PFS will benefit their communities. The following blog post will describe the Pay for Success Project Basic Feasibility Components that the UVa PFS Lab undertakes while engaging with local community members. Should local stakeholders decide to move forward with the Project Develop phase, the UVa PFS Lab is able to provide connections to external resources that can facilitate project development.