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:
- 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.
- 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.
- 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?