There quite a buzz these days about significant private investment flowing into cities to build green stormwater infrastructure. It is a noteworthy trend, and after Harvey, more than one group has asked me about how they might help make that happen in Houston.

The question is why is this happening in other places and not so much in Houston?  What makes a private equity firm or an institutional investor jump at the chance to finance some green public infrastructure projects?

To be clear, this is different than private philanthropists making grants to Houston area projects, like the Bayou Greenway, the Museum of Fine Arts, Discovery Green, or Memorial Park. Those are pure gifts where the grantor does not expect to be paid back.

This post is about private investors lending money for green stormwater projects, getting paid back, and earning a reasonable amount of interest on their money.

PHOTO CREDIT: Organisation for Economic Co-operation and Development

Some recent examples are illustrative:

1. District of Columbia Water and Sewer Authority (DC Water) Environmental Impact Bond: In 2016, Goldman Sachs and the Calvert Foundation announced that they would purchase the first environmental impact bond (EIB) issued in America to fund the construction of $25 million of green stormwater infrastructure (GSI) in the Rock Creek sewershed. DC Water agreed to build GSI in public rights of way, with investor oversight through their independent technical agents. The GSI performance risk will be shared by DC Water and the investors. Everything depends upon the volume of stormwater runoff reduction achieved. If runoff volume reductions are higher than forecast, DC Water will pay a 13.2% premium to investors. If runoff volume reductions are lower than forecast investors will pay a 13.2% risk-sharing payment to DC Water, and if runoff volumes are in expected ranges than no contingency payment will be made and the bond will be paid back at the nominal 3.43% discount rate.
2. Maryland’s Prince George’s County “First of its Kind” Public-Private-Partnership:  In March 2015, Corvias and the county signed a $100 million, 30-year partnership contract with great fanfare. Their “Clean Water Partnership” was created to assist the county to achieve federally mandated reductions in pollutant discharges in urban stormwater runoff to the Chesapeake Bay. The county will use its own traditional design-bid-build approach to deliver green stormwater retrofits on 2,000 acres of publicly owned land while Corvias will be responsible for delivering an additional 2,000 acres. This will allow a direct comparison of the speed, effectiveness, and overall costs of using both delivery methods.  The combined effort will achieve 50% of the federally mandated retrofit requirement of 8,000 acres, with the balance of the work to be completed later using the winning process. These details are from the program FAQ.
3. City of Baltimore and the Chesapeake Bay Foundation “Pay for Success” Model: In March 2018, the City of Baltimore, Quantified Ventures, and CBF announced that they will work together to create innovative Environmental Impact Bonds (EIB) to help pay for more than 90 green stormwater retrofit projects in the city. Baltimore will issue up to $6.2 million worth of EIB financing. The proceeds will be used to implement the retrofit projects and the repayment of the bonds would be based on the effectiveness of the projects.  The city is under a federal mandate to reduce the volume and pollutant loads of water flowing to the Chesapeake Bay.

All of these examples of private investment in green stormwater systems are successful because the private investors have a high degree of confidence that the revenue stream will continue and that they will be paid back, with interest.  The investors have a high confidence level because in all of these examples the green stormwater projects MUST be built because of regulatory mandate that is memorialized in a consent decree issued by a federal court.  This provides a much higher level of funding certainty than the normal annual political budgeting process that most municipal governments undertake.

The future revenue stream in the DC Water example is driven by a court-ordered mandate to mitigate combined sewer overflows. DC Water MUST reduce runoff volumes. Prince George’s County is subject to a settlement agreement stemming from a federal lawsuit over the Chesapeake Bay restoration, therefore, that revenue stream is all but certain. Baltimore also is subject to the terms and conditions of a federal combined sewer overflow mitigation consent order.

Does this revenue certainty exist in Houston?

In a word: no.

The ballot language for the city’s celebrated “lock-box” for streets and drainage that was producing about $400 million each year – known as “Rebuild Houston” – was defeated in court and now must be reaffirmed by voters in November 2018. The result of that election is not certain. Even if that election was a “sure thing,” the appropriation of funding to any particular green stormwater project, or set of projects, is still subject to the political process and, frankly, bureaucratic resistance to change.

The city is not subject to any type of stormwater quality mandate, other than to comply with its stormwater quality permit, which imposes only narrative provisions that don’t drive the construction of public green infrastructure projects.

The city also (thankfully) does not have a combined sewer system and, therefore, the city does not have any mandated need to invest in combined sewer overflow mitigation projects using green stormwater infrastructure.

So the challenge for Houston is this: Can we create a business model that produces a reasonable return on investment for green stormwater infrastructure project financing?

On June 21, 2018, Zurich Insurance Group released a new report called “Houston and Hurricane Harvey: A Call to Action.”  Prepared by The Institute for Social and Environmental Transition–International (ISET-International), the American Red Cross Global Disaster Preparedness Center, and the Zurich Insurance Group, the report includes a five-page executive summary along with sections summarizing hurricane event statistics, why Houston is so flood-prone, various methods of risk reduction, information about the region’s initial response and recovery, priorities and gaps in long-term recovery and resilience, lessons learned, and specific recommendations.

The report includes recommendations that relate to the social and cultural aspects of resilience that I thought were noteworthy. Regular readers know I normally discuss engineering or regulatory issues.

Buy Flood Insurance

The report calls for efforts to “make flood insurance more universally appealing for homeowners and businesses.” The report suggests that our communities should undertake “awareness campaigns” to increase the demand for flood insurance – even in lower risk areas, outside of the regulatory floodplain, where insurance is relatively inexpensive – to enable policyholders to recover more quickly and to thus be more resilient.  [A higher number of lower risk policyholders would also help with the ongoing fiscal defects in the National Flood Insurance Program.]

The term “appealing” is an interesting word choice – I’m not sure we could ever make buying insurance appealing, but maybe? There are probably some smart social scientists and public relations firms that could use the power “social norms” to increase the number of flood insurance policies purchased in this region, but that effort would need to be nearly continuous to influence all of the new people moving here each month.

I snapped a photo of this poster in the tunnel just outside 611 Walker, home of Houston Public Works, in July of 2017, before Hurricane Harvey:

This is at least one example of local communities making some effort to encourage citizens to purchase insurance. The report indicates that Harris County Flood Control District is planning to promote insurance coverage with a billboard campaign (p. 38).

Culture of Awareness

The report also calls for us to “build a culture of awareness around risk” and to “incentivize incremental small decisions by residents and businesses that collectively reduce exposure and risk…to reduce the surprise element of flooding.”  The report suggests installing public markers indicating previous flood inundation levels and road signs indicating that “You Have Entered a Flood Control Reservoir,” and similar measures (p. 40).  I’m not sure that this type of information disclosure would be embraced by the larger community.  According to Jim Blackburn, inundation level signs were installed in at least one Galveston Bay area neighborhood that is subject to storm surge; but the signs were removed after about 30 days due to complaints from realtors (see time-stamp 26-minutes, 50-seconds in this video).

The report suggest that the Houston region, like Galveston, “wear its [flood] battle scars with pride.” The authors suggest that homes that flooded should be encouraged to “mount a plaque … proclaiming: ‘This home survived Harvey; the water was x feet deep.’ ”

Business Continuity Plans

The report acknowledges that “even the best … grey infrastructure [and] green solutions … will never reduce flood risk to zero” and it goes on to encourage the development of business continuity plans and household level preparedness plans to help further reduce risks. The report includes a good overview of the key elements of a business continuity plan – which is intended to increase the likelihood that a business might stay in operation throughout a disaster or at least, get back to full operation more quickly. The main elements are:

1. Identify Key Assets: For a consulting firm, it might be ensuring that employees have continued remote access to all files and intellectual property. For a coffee shop, this might mean protecting the espresso machine.
2. Consider Preparedness as Business as Usual:  Incorporate a “disaster day” into the regular schedule of work. Run drills or practice days on a routine basis.
3. Implement Infrastructure Solutions: Install floodgates. Store documents and materials at a protected location. Relocate items after receiving notification.
4. Use Existing Assets: Use security systems to track and evaluate conditions in inaccessible work locations.
5. Assist with Employee Preparedness: Household preparedness plans help business employees return to work more quickly.  A robust communication system is needed to allow the business employer and employees to communicate updates to each other. Employers can prompt employee action with a series of awareness questions related to supplies, backup power, and backup lodging plans.
6. Purchase Insurance: Businesses should obtain insurance. They should consider the full range of options available after speaking with experts. Costs should be evaluated against the full cost of both damages and lost revenue during an extended closure.
7. Support Employees and Community with Recovery: Businesses should support both employees and the larger community with recovery. This might include providing equipment, foods, access to showers or facilities, assistance with clean out / muck out work, and offering paid time off for employee victims.

Recovery Priorities

The report provides an almost accurate picture of our current priorities. It correctly notes that Houston and Harris County both strengthened their floodplain regulations. It indicates that buyouts are underway, but are taking too long and are underfunded. It notes that we are having lots of discussion about a third reservoir to address the Cypress Creek overflow, but it does not fully acknowledge how that project was proposed to mitigate future development and not necessarily to reduce flood risks for downstream properties. The report points out the general lack of state funding for recovery, especially from the state’s “rainy day fund.” ($150 million has been provided for debris removal and to avoid a property tax hike.) The report accurately indicates how recovery support has been distributed inequitably. The report suggests that we are not talking about general drainage infrastructure improvements and maintenance.  I think this was likely just due to the timing of the report; they must have gone to press before the authors heard the announcement of the $2.5 billion Harris County Flood Control District Bond Election scheduled for August 25th and the placement of a reauthorization of the Rebuild Houston program back on the ballot this November.

Overall, the report is a good addition to the growing list of post-Harvey literature and studies. Worth a read.

The Urban Resilience Program of the Urban Land Institute (ULI) just published “Ten Principles for Building Resilience,” with funding from The Kresge Foundation and The New York Community Trust.

The report emerged from a workshop of ULI members who had previously participated in volunteer, pro-bono, group consulting assignments (called advisory panels) to help various communities with resiliency questions or challenges. Workshop participants included a multi-disciplinary group from around the country.

The publication provides the following ten principles:

1. Understand Vulnerabilities
2. Strengthen Job and Housing Opportunities
3. Promote Equity
4. Leverage (Existing) Community Assets
5. Redefine How and Where to Build
6. Build the Business Case (for Resilience)
7. Accurately Price the Cost of Inaction
8. Design with Natural Systems
9. Maximize Co-Benefits
10. Harness Innovation and Technology

It also includes a good definition of resilience, which states that resilience is:

the ability to prepare and plan for, absorb, recover
from, and more successfully adapt to adverse events.

When I read this definition my big take away was this: this definition acknowledges that some future adverse event WILL happen.  This definition does not shy away from the reality that we can’t reduce the risk of a future adverse event occurring to zero.

The graph below illustrates this point.  The horizontal axis is the amount of time you are willing to wait to see if a rare event will occur.  The vertical axis is the probability of that rare event occurring over during that time duration.  Each colored line indicates the annual chance of the adverse event occurring.

This graph illustrates that if the finished floor of the living room of your house is 1-inch below the 100-year floodplain water elevation (which has a 1% annual chance of happening – the red line) you have a 26% chance of having 1-inch of water in your home during a 30-year mortgage period.  If you read the horizontal axis of the graph over to the 30-year duration mark (the second line to the right of the 10-year mark on this log scale), you will see it intersects the red line at exactly 26% on the left axis.

I support resiliency planning and thinking about our response to Harvey and other adverse events as a risk reduction effort and as a process to reduce the negative outcomes. This approach is much better than the old-school thinking that suggests that we can use engineered infrastructure to “control” nature, flooding, or other adverse events from occurring in the first place.

We can use planning, engineering, and architecture to reduce risks, to prepare for adverse events, to stage recovery efforts ahead of time, and to adapt to the eventual (certain) arrival of the next adverse event.

We can use insurance, reinsurance, and catastrophe bonds to hedge against residual risks that are not possible to eliminate.

I think I like where this is going…