Social impact bonds and pay-for-success government contracting are rapidly gaining in popularity. As a recent Inside Story article suggests, 'Imagine a world where governments could purchase outcomes'. In the social policy realm, pay-for-success should theoretically improve incentives, give service providers more autonomy in how they meet targeted outcomes, improve accountability, and promote data collection.
So, what about environmental policy? The model is catching on there too. In the US, DC Water has recently issued the country's first environmental impact bond. The water utility sold the $25 million bond to Goldman Sachs and the Calvert Foundation and will use the proceeds to construct green infrastructure to absorb and slow stormwater surges. Depending on the effectiveness of that green infrastructure in actually reducing runoff, DC Water may end up making an outcome payment of $3.3 million to its investors (if reductions are high) or receiving a risk share payment from its investors of the same value (if reductions are low).
Aither will be closely observing global developments in environmental impact bonds and pay-for-success contracting to inform our work on outcomes and performance with Australian governments and environmental policy makers.
The EIB allows DC Water to attract investment in green infrastructure through an innovative financing technique whereby the costs of installing the green infrastructure are paid for by DC Water, but the performance risk of the green infrastructure in managing stormwater runoff is shared amongst DC Water and the investors. As a result, payments on the EIB may vary based on the proven success of the environmental intervention as measured by a rigorous evaluation. By financing this project through the EIB, DC Water seeks to create a model funding mechanism that other municipalities can leverage to advance the use of green infrastructure to address stormwater management in their communities.