NatLab has been analyzing the economics of green infrastructure investment on public and private land in order to identify strategies for cities to leverage private capital to attain their clean water goals.

NOTE: On Thursday, March 28 3-4:30, Living Cities will be hosting a webinar with NatLab on the findings of this work described in this blog. To register to participate, please click here.

As Living Cities has written about several times over the past year, urban storm water runoff is a serious problem, causing flooding, overloading sewage treatment plants, and polluting waterways (see our previous blogs here, here, and here). The resulting problems – mold and moisture infiltration, tainted water, and associated health consequences – disproportionately impact the most vulnerable populations – low-income people, people of color, and the elderly. With climate change-related storm events on the rise, without intervention, the problems will only intensify.

In response, many US cities are creating innovative green infrastructure plans – including such initiatives as rain gardens and roadside plantings – that mimic the way nature collects and cleanses water. Cities that are including private land in their green storm water runoff plans can face challenges funding these initiatives through traditional means such as federal or state funds or municipal bonds. To address this challenge, the Natural Resources Defense Council, EKO Asset Management Partners, and the Nature Conservancy jointly created “NatLab” – the Natural Infrastructure Finance Laboratory. NatLab has been analyzing the economics of green infrastructure investment on public and private land in order to identify strategies for cities to leverage private capital to attain their clean water goals.

As mentioned in earlier Living Cities blogs, the City of Philadelphia has adopted one of the most comprehensive green storm water management plans in the country. The city has pledged to “green” over 9,500 acres (nearly one-third of the city’s land that drains into its network of sewers) over the next 25 years. With such a strong commitment to green storm water management, NatLab conducted its initial research in Philadelphia. The city presents a particularly interesting opportunity for testing innovative approaches to organizing and financing green storm water management programs. In addition to its comprehensive plan, the city assesses a storm water fee that correlates to the volume of storm water runoff from a property and offers a rebate or credit for reducing that runoff. The more typical structure is to charge fees based on the amount of water used by a property, which has no relation to the amount of runoff. This fee structure creates an economic basis for private investment by allowing storm water fee reductions for property owners who capture the first inch of rainfall onsite.

In a newly released report, “ Creating Clean Water Cash Flows,” NatLab identified multiple strategies governments can pursue to attract private capital to reduce the need for public investment in maintaining healthy waterways. Three practices that Living Cities finds particularly promising include:

1) Reduce regulatory uncertainty : An important consideration for public storm water utilities is the need to create an environment that is conducive to private investment. Uncertainties regarding long-term fee and credit policies, approval and permitting processes, and appeal procedures, create unpredictability that discourage private investment. Every municipality that hopes to attract private investors to its green storm water program needs to address policies and procedures that might discourage private capital involvement.

2) Aggregate small and distributed projects : Projects that reduce runoff are often small and distributed, making implementation challenging. Packaging numerous projects into an aggregate portfolio will reduce transaction and project costs through economies of scale.

3) Implement pay-for-performance public-private partnership structures: NatLab strongly encourages the use of public-private partnerships (P3) to finance and implement a green storm water infrastructure plan. When used appropriately, P3s allocate risks and responsibilities to the partner (city or investor) best equipped to handle them, while maintaining public control. The benefit of the P3 approach is that it has the potential to lower the costs of construction and management, attract new sources of capital, and shift performance risk to private partners when payment is tied to performance. A pay-for-performance structure will allow the private partner to focus on the most cost-effective technical designs and property types, minimize lifecycle costs by combining design and maintenance obligations, and achieve economies of scale by sequencing and organizing a large portfolio of work.

Though the study focused exclusively on Philadelphia, the analytical and strategic framework it presents can also be used by other cities seeking to attract private capital to address their storm water management challenges. It is expected that cities across the country will increasingly look to the private market for assistance given the tremendous gap between funding needs and available public sources.

On Thursday, March 28 3-4:30, Living Cities will be hosting a webinar with NatLab on the findings of this work. To register to participate, please click here.