On May 27th, Quantified Ventures issued a press release regarding the evaluation of the first ever Environmental Impact Bond (EIB). EIBs are innovative pay-for-performance debt-financing mechanisms that have been used to finance green infrastructure projects in DC, Atlanta GA, and Hampton VA. EIBs are unique in that they tend to have predetermined outcome measures that dictate the overall cost of capital. While green bonds also finance environmental projects, they typically do not measure and report outcomes.
About the DC Water EIB
The DC Water EIB funded green infrastructure installments aimed to reduce runoff into DC Water’s combined sewer system, and eventually into Rock Creek. The EIB funded 25 acres of green infrastructure as part of DC Water’s Clean Rivers Project, which aims to reduce runoff into combined sewer systems and combined sewer overflows. The $25 million EIB was sold to Goldman Sachs and Calvert Impact Capital in a private issuance and included three performance tiers. The outcome measure for the project was runoff reduction into the combined sewer system, measured against a flow baseline established before the project was completed.
The idea is that an EIB allows for risk-sharing. If the project underperforms, DC Water receives a performance payment from investors that reduces the cost burden on ratepayers. Because DC Water is required to reduce combined sewer overflows, underperformance might mean future investment to control the problem. The table below summarizes the range of outcomes and performance payments for the DC Water EIB, as outlined by a Goldman Sachs fact sheet.
The current housing market boom leads to large tracts of available land being swept up into the hands of private developers. For many local governments, development is good. It provides access to new tax revenues and tends to perpetuate growth; an area actively developing tends to attract more industries and people. These new revenues can be used for any number of purposes, including adding services, such as land conservation or parks and recreation, to the municipality. The challenge is in protecting land before it falls into the hands of developers, and balancing the open space needs of the municipality and its constituents with the municipal revenue streams.
Any land conserved or turned into a public park is lost property tax revenue. In larger cities with combined sewer systems, land conservation may have a direct return on investment, whereby the open spaces reduce the total impervious surface and associated runoff, and thus prevent or reduce combined sewer overflows. But in municipalities without regulatory drivers, the benefits may be less direct and harder to quantify. Green space does provide many direct and indirect economic benefits to a municipality, including attracting development and increasing property values. Other, less measurable benefits include mental, physical, and emotional wellbeing, which are important to overall quality of life but do not have a market value. In a Benefit Cost Analysis, these values are important, but challenging to meld with dollar values for costs or dollar value benefits in avoided costs for upsizing a stormwater system.
These are unprecedented times. As the COVID-19 pandemic continues, social norms have changed and unemployment has risen sharply across the nation. As states have pushed residents to stay home, water usage patterns have altered for both commercial and residential customers. In many cases, commercial customers have decreased use while residential customers have increased. Schools have been closed for months, some of which are the largest water customers in a small town or county. Executive orders have been passed, mandating that service cannot be cut-off for non-payment.
In short, revenues have changed. The level of change varies based on the makeup of the utility’s customer base and the specific hardships within the area, but the change exists in every case. These changes in revenues are typically associated with losses, meaning that budget predictions are off and the actual revenue collected will be much lower than planned.
Utilities will need time to recover these losses. But how do we measure a utility’s ability to bounce back? Bring in the buzz word: Resilience.
At the EFC, we see this pandemic as both very different than anything the US has ever experienced, and also very similar to some of the short-term shocks experienced by utilities in past emergencies. For example, a drinking water utility serving a coastal community that has been walloped by a hurricane. In both cases, utilities that are more financially resilient are more likely to bounce back faster. Continue reading
In 2017, the EFC wrote about an exciting new financial instrument: the Environmental Impact Bond (EIB). At the time of the original blog post, EIBs were mostly theoretical, the only one in existence being issued by DC Water, but still very early in the process. Modeled after the Social Impact Bond, an EIB was novel and intriguing. Today, EIBs remain exciting, but more of them are beginning to surface. EIBs are tied to a group, Quantified Ventures, that structures the bond and has been pushing the ball forward.
The first EIB, issued by DC Water, aimed to address combined sewer overflows (CSOs) and a consent decree by utilizing green infrastructure, instead of the traditional gray infrastructure. The EIB allowed DC Water to share the risk of an unconventional project with impact investors, in this case Goldman Sachs and the Calvert Foundation. This works through a “pay for success” model, which creates a performance payout system that aligns the interest of the utility/municipality with that of the investors. The EIB creates a situation where otherwise risk-averse local governments can think outside the (gray infrastructure) box. Continue reading
Imagine a town called “Smallville.” Smallville, as you might guess, is small. The town’s water utility needs a new water tank, and they need it now. Like most systems across the US, Smallville’s system is aging and has significant infrastructure needs. Smallville generally knows the assets that are most critical and has assigned a level of risk to each. The numbers say that Smallville needed to replace the tank a few years ago, and failure is imminent. The tank will cost Smallville $400,000.
So, what does Smallville do? The utility does not have a lot of cash on hand and has historically relied on grants to supplement the funding package for infrastructure replacement. The customers are just like those across the county–sensitive to rate increases. Unfortunately, Smallville has felt the reduction in available grant funding and worries that even if the utility does get a grant for the tank that the asset could fail during the “waiting” period between applying for funds and receiving them. Continue reading