Originally published by Seth Brown, P.E.
The next time you head to the grocery store, I dare you to pick up a gallon of milk and offer a $20 bill to the clerk. You will certainly get some odd looks – and this is for good reason. Why would you want to overpay by almost an order of magnitude? It’s a valid and obvious point, but it’s one that needs to be considered as we look to invest in more green stormwater infrastructure (GSI) in our urban areas. If we don’t question this, we may end up buying our own very expensive gallon of milk, too.
Last week, Bloomberg BNA released an Insights article focusing on funding and financing GSI titled, ” Financing Integrated Green Stormwater Infrastructure to Improve Community Health and Resiliency – Getting the Best Deal for the Money!” While other reports and documents cover the topic of financing for investments in green infrastructure, this article uniquely looks at not just how financing can be done, but how to do so in a way that places communities – not private investors – as a top priority.
The Need for Community-Centered GSI Investments
Placing communities at the center of investment strategies is important for two main reasons. First, complex infrastructure financing is relatively new to many stormwater programs (keep in mind that a dedicated funding source exists for only approximately 20% of communities who have stormwater programs), so programs may end up unknowingly spending more than they need to when investing in large-scale GSI programs. Second, there are many disadvantaged communities across the country who could profit greatly from the social and economic co-benefits associated with GSI, yet these are the communities least able to take advantage of the low-cost financing opportunities in the Clean Water sector, such as the Clean Water State Revolving Fund (SRF) and the Water Infrastructure Financing Innovation Act (WIFIA), due to a lack of technical resources, experience and seed funding.
In a vacuum of information on these advantages, challenged communities may decide they simply cannot invest in GSI due to a lack of dedicated funding for stormwater and/or a lack of bonding capacity or a poor bond rating. Another alternative for challenged communities would be to enter in arrangements with private investors through new schemes, such as “Pay for Success” (PFS) using “Social Impact Bonds” (SIBs) (they aren’t really bonds at all), which is a great concept honed for the social sector targeting issues such as asthma rates in urban areas or homelessness that rewards successful outcomes, not just service provided – and who can’t be against that? But it is unclear on the success of the PFS approach, especially in the stormwater context. Even the first socially-focused PFS, which focused on recidivism rates for Rikers Island prison in NYC, has been discontinued.
In a recent article in Nonprofit Quarterly (NPQ) on the release of a guide to evaluate PFS and SIBs, experts point out there have been, “no true success stories,” and that “PFS interventions don’t recognize that fixing complex social programs typically requires investments and policy changes on multiple levels.” The article goes on to note that in the Rikers Island PFS program specifically, there was a focus on one “fix” for recidivism, moral cognation therapy, rather than a holistic approach that considered many other areas, such as community-based treatment, re-entry planning and intensive supervision. NPQ notes that the more holistic approach is likely the better path forward, but “because these interventions are difficult, if not impossible to measure, these interventions would not be considered in the PFS deal.” In other words, the tail wags the dog on these deals by choosing solutions not by effectiveness, but on ability to measure, as that is the mechanism for payout to investors.
Considering the complexity of stormwater systems and the ability to measure performance and defining “success” across a watershed, it is likely that the use of PFS or SIBs in the context of GSI investments would be very site- or system-specific. The current PFS for DC Water to fund $20 to $30 million for two GSI projects, for instance, may provide a setting where the measurement of “success” is workable and aligns with overall system performance. Other systems may not afford that ability to be “metricized” with reasonable outcomes. If PFS were to be used in such a system in a disadvantaged community, the chances are that higher risks associated with this system may require equally higher rates of returns by investors. And to burden these communities with high-interest debt is not only unnecessary – it is a moral wrong.
A Path Forward for Low-Cost Financing and Efficient Project Delivery
In a recent blog featuring a review of the Bloomberg BNA article by Tracy Mehan, former EPA Office of Water Administrator and current Executive Director of Government Affairs for the American Water Works Association (AWWA), he points out that the U.S. has, “a fundamental problem for the coming century…how do we finance the next generation of environmental progress while being mindful of the fiscal challenges facing the federal, state and local governmental sector?” Looking more specifically at the stormwater sector, Scott Taylor, the Vice Chair of the National Municipal Stormwater Alliance (NMSA), describes stormwater programs in a recent blog regarding the Bloomberg BNA article as being “chronically underfunded since the mid-1990’s,” and that the, “funding gap will approach a crisis level in the next decade.”
The BNA article attempts to address these issues head-on by presenting discussions on financing investments that include those mentioned above as well others from municipal bonds to “social investments” to private equity, and highlights that there is a way to blend these varying sources together to create a package that provides the lowest-cost option for municipalities and utilities interested in large-scale GSI investments, which is illustrated by multiple examples provided in the text.
Other issues of concern are control by the public sector and scale. When outside private investments are made, there is the fear – real and/or perceived – that there is a loss of control by the public entity of their program – and more importantly – their infrastructure assets. As Mr. Mehan states in his blog regarding the Bloomberg BNA article, there are ways to finance GSI while “the public entity remains the controlling partner”. Regarding scale, the NPQ piece cited above notes that a McKinsey report on SIBs states that, “SIBs are a more expensive way to finance the scaling for preventive programs than if the government simply went to service providers and paid them to expand an intervention to more constituents,” but that the value of SIBs are to provide scale in sectors where preventative programs are rarely at scale. A New York Times article on the Rikers Island project notes that, “the biggest promise of SIBs might lie more in their ability to impose discipline on government programs than in their promise to draw private money.”
So what if we had a program that offers public sector control over assets and finances as well as providing at-scale infrastructure investments potential for GSI – and also provides a performance-based approach for fixed-fee service, a cost-efficient project delivery method, and a vehicle for blended low-cost financing? We do have such a program, and it is referred to as the Community-Based Public-Private Partnership (CBP3) program approach, which is outlined in this Bloomberg BNA Insights article from July, 2015 and discussed in greater detail via a report from EPA Region 3 titled, ” Community Based Public-Private Partnerships and Alternative Market-Based Tools for Integrated Green Stormwater Infrastructure: A Guide for Local Governments.” Regarding fiscal matters, the CBP3 provides the perfect platform to develop blended financing packages to facilitate investments in GSI at a low cost and at low risk to the public sector emphasizing public financing options, such as municipal bonds and SRF assistance, to reduce the long-term debt burden for communities who want to invest in GSI beyond the pilot or demonstration level. Additionally, CBP3 uses an integrated service model (design-build-finance-operate-maintain), which reduces frictional and in-field change order costs, and the service is provided at a fixed-cost, which eliminates risks for the public sector. And best of all, the public sector retains control over infrastructure assets and financial resources in the partnership.
So the next time you find yourself in the dairy section at your local grocery store, think of those communities who pay too much to access capital for a local investment that could drive jobs and local economies, enhance urban resilience in the face of changing precipitation patterns, improve public health and property values – and oh, by the way, it’s a good way to treat and retain stormwater runoff. And like them, if you see a gallon of milk priced at $20, know that you don’t have to settle for a cost that high for something so fundamentally positive for the economic, social and environmental well-being of your community.