Alternative Funding Arrangement: Unlocking Partnerships With Private Capital at USDA NRCS

In May, the Conservation Finance Network spoke to Kari Cohen, Branch Chief at USDA’s Natural Resources Conservation Service (NRCS). Kari explained the Alternative Funding Arrangement (AFA) provision of the Regional Conservation Partnership Program, which will invest up to $50 million in fiscal year 2020. The first cohort of up to 15 projects, to be announced this fall, will seek to capitalize on the increased flexibilities afforded by the AFA in the management of RCPP projects and relationships with landowners. The following is a transcript from that interview that focused on the opportunities this program creates for innovative and unique partner-led approaches to conservation.

The answers below have been edited for clarity and brevity.

CFN: How does your agency view conservation finance?

Cohen: From the NRCS perspective, it is all about growing the overall size of the funding pie of that is available for private lands and working lands conservation. To the extent that conservation finance can bring additional dollars to the table and leverage NRCS funding, that is what we are interested in.

CFN: How did conservation finance as a specialty or discipline emerge at NRCS?

Cohen: Our exploration and support of conservation finance activities really began back in 2015, maybe even 2014. Our Chief at the time was a big proponent of trying to find new partnerships and trying to leverage NRCS funding with new partners. So, we embarked on this effort to find ways to support the development of new conservation finance approaches related to working lands agriculture. Our leadership built relationships with some leaders in the conservation finance movement, and through those relationships we built the practice at NRCS.

CFN: How do you think conservation finance plays a role in some of NRCS’s most popular programs?

Cohen: Good question. You know, conservation finance is defined in different ways by different people. We take a pretty broad definition which is trying to find non-federal funding to complement the work we do out there on the landscape. Whether that funding comes from state programs, institutional investors or private capital, we take this pretty broad view. 
Even things like carbon markets or water quality markets are approaches that conservation finance practitioners can use as one piece of their financing stack when they are trying to put together a deal. For example, our easement programs, and in particular the wetland reserve easement program, have been used to generate carbon credits off some big wetland easement transactions.NRCS easements have been a part of some large carbon deals in North Carolina, for example. And so, NRCS’s programs whether they are easement programs or land management programs can be used for on the ground conservation that can be leveraged to reduce transaction costs or reduce the amount of money that private capital may need to raise for a particular deal. 
When it comes to on- the -ground conservation, that is where our programs really shine. For example, if a conservation finance practitioner is trying to do something around regenerative agriculture, our programs can be used to help finance farmers’ adoption of regenerative practices. It’s not funding that is necessarily transactional, but practitioners can use our funding as leverage to reduce the overall cost of their deal. Conservation Innovation Grants is a program has been a standout for us because we are able to very explicitly target some of our funding towards the development of conservation finance approaches.  We have a cohort of 35-40 projects that are working on all manner of conservation finance approaches.

CFN: Can you give a brief explanation of the Alternative Funding Arrangements (AFA) provision of the Regional Conservation Partnership Program (RCPP)?

Cohen: Most of the funding in the RCPP program runs through what we call the ‘classic approach’ where the partner applies to the program to perhaps get a little bit of funding to do producer outreach and project management, but most of the benefit of participating in RCPP is being able to tell NRCS to spend a certain amount on a certain resource concern in a certain place. So, whether it’s an NGO or a state agency, they can propose to target NRCS funding to complement what they are doing in a given area. Most of the funding in the classic RCPP approach flows between NRCS and a landowner or producer. 
AFAs actually existed in the 2014 Farm Bill but the concept was expanded upon and clarified in the 2018 Farm Bill. The new iteration of AFAs is designed for projects that are taking unconventional or innovative approaches that cannot be effectively or efficiently carried out through the classic RCPP component. So, for example, the 2018 Farm Bill points to pay-for-performance and pay-for-success projects, neither of which NRCS has a mechanism to implement through classic RCPP—we don’t currently have a way to pay for the tons of carbon that are sequestered or the pounds of nitrogen that are eliminated from running off of a farm field. We generally pay farmers by the conservation activity, to put in a grassed waterway or a riparian buffer, for example. 
AFA projects are an opportunity to test drive some of these innovative conservation approaches and leverage private capital. The way we do that is by using a grant-like approach. Let’s say you are a state agency interested in an AFA project; most of the money is going to flow directly to the agency and they in-turn have the responsibility to find the participating producers, making sure the conservation activities happen, and making sure the producers or landowners get paid. It is a different logistical approach the under classic RCPP, where most of the funding is expended through contracts or easements between NRCS and a producer or landowner. 
I’m really excited about it. I have heard from a lot of folks in the conservation finance community who are working on proposals, building partnerships, and coming up with interesting ideas. We have up to $50 million available for AFA and can fund, by statute, up to 15 projects. We are excited to see what sort of boundaries can be pushed here, when it comes to conservation, and what our partners come up with in this first round.

CFN: How do you view the importance of flexibility in developing innovative and non-traditional approaches to projects?

Cohen: We think it is really important - and based on the Farm Bill language, I think Congress does too. What we said in the funding announcement is that AFA is really for projects that don’t fit under RCPP classic. For example, let’s say you want to pay landowners by how much carbon they sequester. We can’t do that, so you would have to come in via the AFA. I think there are a lot of ideas that our partners are exploring that we haven’t even contemplated.  
We want you to tell us what things you want to do differently but it has to be a credible approach that is authorized under the statute and backed up by a record of success with a reasonable valuation of conservation performance. We are looking for partners to come to the table and say ‘hey, this is a little out of the mainstream, but we think it is going to work. And, in fact, it may be a little bit more efficient or successful than how NRCS traditionally does business.’ In some cases, we may need to consult with our Office of General Counsel to be sure that we even have the authority to carry out some of the ideas that may come in.

CFN: How does AFA look to encourage partnerships or multi-stakeholder approaches with private investment?

Cohen: The whole idea of the program is that we’re doing more together than either one of us—NRCS and RCPP partners—could do alone. AFA does allow for some flexibility and innovation that might be more attractive to private investment. Specifically, the ability to carry out a project outside of the RCPP program structure and the ability to pay for performance are often critical for conservation finance approaches. My hope is we see some new, perhaps even unconventional, partnerships form around the enhanced AFA provision. We see that for RCPP in general, whether it’s Environmental Defense Fund teaming up with Smithfield Foods or municipal water utilities working on ag lands upstream in the watershed. 

CFN: What role do you think AFA plays or could play in market development?

Cohen: It can be used to develop proof of concept of a new idea or it can be part of something that is trying to scale up. We have had Timber Investment Management Organizations (TIMOs) participating in RCPP and that is more of a tried-and-true approach, in terms of the history of conservation finance, to conserving land and paying back investors. I think RCPP funding, whether classic or AFA, can be used at any of these milestones - even the mature stage. It’s really just incumbent upon conservation finance practitioners to think about how our RCPP funding can be used to further their objectives.

CFN: Is there anything else you would like to highlight about the program for the conservation finance audience? 

Cohen: This particular provision in the 2018 farm bill is the first time I have seen language specifically related to leveraging private capital within our conservation title. I think it is exciting and it is an opportunity for the community to come together and work within the structure of a Federal conservation program to demonstrate that there are conservation approaches that may be more efficient and effective that what NRCS does with farmers, ranchers and forest landowners on a daily basis. I think it is a real opportunity now that the language is there. If the conservation finance community can figure out ways to be successful, it could open up further doors and opportunities in future farm bills.