Hey H2Ohio- buy outcomes, not practices!

By Grace Edinger

Note: This topic will be covered in depth in an upcoming white paper by EPIC’s Restoration Economy Center. Join our newsletter list to make sure you are notified when the full paper is published. 

__

Ohio is home to a water quality improvement program, H2Ohio. First funded in 2020 with an investment of over $170 million from the state, H2Ohio funds projects that restore wetlands, reduces nutrient loads, addresses failing septic symptoms, and replaces lead service lines (among other activities). Right now, H2Ohio uses traditional procurement primarily through grants given to NGOs. While grants for environmental projects are widely used across the US, Ohio is uniquely positioned to switch to an alternative procurement model that’s less work for them, is a more responsible use of funds, and is often much cheaper than what they’re doing now. Let me explain. 

Pay for Success contracting (PFS), also known as Pay for Performance or Outcomes-Based contracting, is a procurement strategy that defines desired outcomes and invites NGOs and the private sector to deliver those in advance of payment to ensure outcomes are achieved. Instead of traditional invoicing and payment that happens on a regular basis (monthly, quarterly, etc.), a significant amount of the total payment for Pay for Success contracts are paid only when the project has been completed (verified outcomes have been measured, often by a 3rd party evaluator). They help create positive economic pressure, allowing the private sector to take on the risk of achieving project outcomes, and that new funding goes as far as possible. 

We purchase things all the time using this strategy. When I go to the grocery store to buy a loaf of bread, I exchange a predetermined dollar amount for 1 loaf. My payment isn’t an itemized reimbursement for the baker’s time, the ingredients used, etc. I instead pay for 1 unit of bread for $x. Simple. 

A PFS model provides an assurance of success that grants do not. Since many of the projects H2Ohio funds could use straightforward outcome quantification (particularly for water quality measures like nutrient reduction), it would not be a stretch for H2Ohio to adopt a PFS model. Private sector interest in PFS would likely drive down project costs, allowing the H2Ohio budget to have a larger impact overall. 

I can hear you thinking, “Ok, Grace. That makes sense. But why Ohio? There are state programs like this all over, why call out this specific program?” 

Ohio has a uniquely perfect storm of legislative ambiguity, available support, and geography that has not only piqued my interest, but the interest of the private restoration sector as well. Let’s break it down.

<— Ohio @ me

Legislative Authority

Ohio government employees have confirmed for me that any state agency can legally enter into a Pay for Success contract. Legislation is ambiguous, giving explicit authorization to only the Treasury Department (we’ll get to them later). That being said, other state agencies are not explicitly prohibited from doing so either. For the Ohio Department of Natural Resources (the state agency primarily responsible for H2Ohio) to use PFS, legislative action is not required. 

Available Support

Ohio’s General Assembly passed a bill in 2019 that created the ResultsOhio program, a PFS program for state projects, housed within the Treasury Department (told you we’d talk about them again). Under the program, a state agency, nonprofit, or other organization can propose a project to the ResultsOhio program. ResultsOhio staff analyze projects to determine whether or not they are well suited for a PFS contract structure, or if traditional procurement methods are preferable. Projects selected to continue are presented to the Ohio legislature during state budget discussions, requiring approval from the legislature in order to issue the contract.  

In addition to executing PFS contracts themselves, they act as a support wing for others, offering advice and expertise to state agencies that want to use their own funds to enter into PFS contracts. Ding ding ding! An in-house support team that’s already familiar with the nuances of PFS, and state government procurement, how incredibly helpful. 

Geography

As the country realizes that ecological restoration needs to be an important element to meeting our climate and natural resource management goals, interest in the Great Lakes region has intensified. As a Michigander myself, I may be a little biased towards the region; however, between the Great Lakes, inland habitat, and land use for both industry and agriculture, there is no shortage of restoration opportunities within the Midwest. 

The northern coast of Ohio sits upon Lake Erie, which has had a sordid past with algal blooms and pollution problems that continue today. A major river that flows into the lake, the Cuyahoga River, is famous for having literally caught fire in the 1960s. While we’ve improved a lot since then, it’s well understood that the road ahead is still a long one. 

These problems, largely resulting from industry efforts intensifying around WWII, have created legacy effects that we’re still dealing with today. Government agencies like the EPA, NOAA, as well as initiatives like the Great Lakes Restoration Initiative and Great Lakes Protection Fund have helped move the needle. A steady influx of funding available and the understanding that these projects need to get done create an excellent atmosphere for restoration firms to get to work. 

So What’s Next? 

It is our impression that H2Ohio is hesitant to consider PFS. And to their credit, I’m making this transition sound easier than it likely would be. It would require a state government agency to overcome their internal inertia, cultural biases, and foray into the unfamiliar. However, they wouldn’t be the first to take the plunge (look out for our upcoming white paper) without explicit legislative authorization. Plus they have a ton of in-state support.

By calling out this possible connection, I hope H2Ohio will consult ResultsOhio to help reshape their procurement strategy. We at EPIC have also expressed interest and availability in providing expertise, context, and case studies to help facilitate a connection as well. 

What I hope for long term, is that the Ohio legislature will explicitly permit state agencies to issue their own PFS contracts, rather than leaving it unmentioned. Explicit authorization may help lower the activation energy needed for state agencies to take on something new. It’s more powerful to say ‘this is allowed and you should do it’ than to say ‘well..nothing’s saying you can’t’.  

In the meantime, I think the H2Ohio program is ripe for change. There's a great opportunity here to make their funding stretch farther, spend it more responsibly, and make it easier on their staff to manage.