Pay-for-Performance: Bringing the Best of the Private Sector to Realize Wetland Restoration

12.06.2017 | In Funding & Policy

Over the next 15 years, Louisiana will receive billions of dollars for coastal restoration from Gulf oil spill settlements. While this influx will provide a significant, steady investment in restoring Louisiana’s coast, the amount falls short of what is needed to fully implement the wetland restoration projects in the state’s Coastal Master Plan.

One idea to help reduce the funding gap is outcome-based contracting. Often called pay-for-performance contracting, this approach could help the state build wetland restoration projects at a lower cost, more quickly, and with better quality, so that they are more sustainable to erosion and sea level rise. Last spring, the Louisiana Legislature approved the use of outcome-based contracting, and next week, Coastal Protection and Restoration Authority (CPRA) is hosting a public meeting to solicit input on the approach.

Wetland restoration in action.

Outcome-based performance contracting 

Next week’s meeting will be the public’s first opportunity to learn how CRPA plans to approach this recently-authorized method of contracting – and for the public to influence how it’s done.  

A traditional contract would precisely define, with detailed specifications, what a contractor is to do – as opposed to the outcome of their work. For example, it might stipulate the placement of clean sediment in open water areas to a certain elevation and to plant native wetland grasses 3 feet apart. The contractor gets paid for their actions but not necessarily for how successful their product – in this case, wetlands restoration – performs. 

Instead, an outcome-based contract establishes (1) a clear set of objectives and indicators and (2) a means to collect data on the progress of the selected indicators. It can also be used to establish consequences – either rewards or sanctions for the contractor – that are based on the outcome.

Outcomes could be defined in many ways: Does the wetland slow coastal erosion, reduce flooding in nearby properties, or support more fish or birds, etc.? In an outcome-based contract, the expert contractor can determine the most efficient ways to meet the desired outcome and will be held responsible for achieving the desired result. Designed appropriately, these contracts can bring out the best the private sector has to offer to realize effective restoration of Louisiana’s coast.

Environmental Impact Bonds

Developing innovative financing tools that have outcome-based performance contracts embedded in them will attract private sector capital to get projects built efficiently and effectively, lowering the costs of restoration and realizing their benefits sooner.

Environmental Defense Fund and Quantified Ventures are undertaking a study to design an Environmental Impact Bond (EIB) to help finance wetland restoration projects in Louisiana, and pay-for-performance contracting will be an essential aspect of the bond. The EIB will condition its payback to investors based on the project’s performance. Additionally, the state would derive several benefits from this kind of bonding approach, including obtaining up-front capital for wetland restoration from private investors, and sharing with investors the risks inherent with constructing wetlands on a hurricane-prone coast.  

EDF aims to demonstrate that an EIB is a viable means of efficiently funding wetland restoration projects in Louisiana – and possibly beyond. Accelerating construction of wetland restoration is a huge win-win. Each passing day, construction costs and sea levels rise while marshes subside; consequently, the cost of restoring an acre of Louisiana wetlands could double in 10 years.

By securing up-front capital, the state can proceed with restoration sooner, rather than waiting for oil and gas revenues or other funds to fully come in before starting a project. EDF calculated that using an EIB to fund a 6,700-acre wetland project 10 years earlier could lower the costs of its restoration by at least $130 million. Furthermore, the benefits derived from restored wetlands, such as fisheries habitat and flood risk reduction, would also be realized sooner.

Spurring others to invest in coastal resiliency

Because EIBs are focused on the outcomes of wetland restoration, they can better demonstrate the benefits derived from wetland restoration. This will help attract new sources of capital from recipients of those benefits. EIBs could be a model for how the private sector can partner with government to finance coastal resilience projects in Louisiana, with the potential for replication in other parts of the Gulf Coast, U.S. and globally.

EDF’s Environmental Impact Bond feasibility study is funded by NatureVest, the conservation investing unit of The Nature Conservancy, through its Conservation Investment Accelerator Grant, which aims to find and support the best talent and most meaningful work in the field of conservation investment.

Learn more about outcome-based performance contracting, what it is and how it works, at next week’s meeting. More information can be found on CPRA’s website.