www.gnof.org/urbanwaterseries 11/10/2018

NatLab: Natural Infrastructure Financing Laboratory Creating Clean Water Cash Flows Developing Private Markets for Green Stormwater Infrastructure June26, 2013 NatLab: Natural Infrastructure Financing Laboratory

Background on Stormwater and Green Infrastructure (“GI”) Contents NatLab Background on Stormwater and Green Infrastructure (“GI”) Key findings from current analysis Financing challenges Fee-based incentives for private investment in green infrastructure Greening vacant lands Pay-for-performance mechanisms Other ideas

Natural Infrastructure Financing Laboratory (NatLab) What is NatLab? NatLab is a collaboration between two of the world’s leading environmental organizations, the Natural Resources Defense Council (NRDC) and The Nature Conservancy, and sustainable asset management firm EKO Asset Management Partners. NatLab’s Mission NatLab is dedicated to advancing innovative financing mechanisms to encourage private investment in Green Infrastructure. NatLab is working to develop multi-stakeholder partnerships between public and private entities to advance municipal Green Infrastructure development plans. NatLab has focused initially on Philly– where stormwater fee structure provides a substantial financial incentive for owners to install GI practices. Similar to energy efficiency finance structures, where investments are made based in large part on future cost savings, NatLab set out to understand potential for greened acre market in Philly. At the same time, GI investment potential is broader than just fee-and-credit structures, and our subsequent report, released later this month, uncovers a range of additional financing concepts. First report in Jan 2012 focused on estimating total market potential– under Philly’s fee and credit structure, what would be max investment need, assuming all owners were responsive to incentives. Second report looked at a broad range of policies to enhance the potential market and in particular focused on project economics. Identified cost ranges for a range of retrofits and under Philadelphia’s stormwater fee and credit structure, modeled project paybacks based on “avoided stormwater costs” (set up for subsequent slide)

Stormwater Runoff Each year, urban runoff generates 10 trillion gallons of polluted water that flows into waterways and oceans, often combined with untreated human sewage Newtown Creek, Brooklyn Image: Riverkeeper

Motivation – Stormwater Challenges Federal “Clean Water Needs Survey” identified $100 billion of infrastructure investment needed over the next 20 years to address stormwater and sewage overflows in order to reach Clean Water Act compliance American Society of Civil Engineers gives U.S. water infrastructure a “D” grade Decline in traditional funding sources for municipal stormwater improvements (municipal budgets and federal funds)

Green versus Gray Infrastructure Traditional “gray” stormwater infrastructure – tunnels and sewage systems – has proven environmentally and economically costly. “Green” infrastructure (GI) helps stop runoff pollution by capturing rainwater and either storing it for use or letting it filter back into the ground, replenishing vegetation and groundwater supplies. GI mimics the way nature collects and cleanses water.

Benefits of Green Infrastructure Reducing costs of Clean Water Act compliance

Philadelphia Stormwater: Challenges and GI Opportunity To comply with the Clean Water Act, Philadelphia will need to install approximately 10,000 “greened acres” over the next 25 years. By greening the public right-of-way only, the city’s estimated cost is $250,000/acre, or $5.74/ft2. Philadelphia can achieve its greened acre goal more cheaply through a combination of policy measures to prime the private GI market than through greening in the public right-of-way alone. We looked at measures to improve retrofit investment returns: project aggregation, creation of off-site mitigation programs, and subsidies. Bars represent percentage of SMPs that become economically attractive under given policy Found that offsite mitigation could help direct dollars to the most cost-effective retrofits, and that by facilitating aggregation of projects and subsidizing retrofits, Philadelphia leverage potential greened acres on private land to achieve a substantial portion of the 9,654 acres it needs to green over the next 25 years at less cost that greening in the public right of way alone.

Challenges and Potential Solutions in Private GI Project Financing Challenges to financing Promising solutions Lack of collateral Utilization of existing revenue collection streams - property taxes and utility bills Existing mortgages on property Unproven track record of project performance Loan loss reserve (or other use of public funds for credit enhancement) to insulate investors from potential losses Policy uncertainty Specify long-term stormwater fee structure However, even with subsidies in place and enabling policy measures such as offsite mitigation and aggregation facilitation, most private owners will still seek outside capital to finance upfront capital costs, and these owners will likely encounter challenges (similar to those found in EE sector). Long term fee schedules can help ease uncertainty about changes in fee structure. EE sector has proven mechanisms such as PACE, on-bill, and loan loss funds that can function to draw early investors to stormwater financing market.

Private GI Investment Return Based on Avoided Stormwater Fees Practice type Retrofit cost /ft2 25-75% quartiles Downspout disconnections $0.33-0.38 Vegetated Swales $0.64-2.13 Infiltration Trenches $1.38-1.58 Rainwater Harvest/Reuse $1.28-5.33 Rain gardens $3.88-4.43 Porous Pavement $4.88-5.58 Green Roof $30.70-63.97 Avoiding fees is key incentive for an owner to retrofit For a commercial property owner utilizing own capital and an assumed payback of four years Project must cost less than approximately $0.40/ft2 For a third-party investor and an assumed ten year repayment at 8% Project must cost less than approximately $0.82/ft2 As we can see in the cost ranges on the right, most GI practices cost substantially more than $0.82 per square foot. Important to note here that these are estimates -- more data is needed on city-specific GI cost ranges. Arc of argument: many projects do not pay back on own within ten years- some public sector intervention is needed. However, even with that, financing options will not be attractive– additional policies needed. Cost ranges can vary greatly on a case-by case basis. These ranges are most useful as points of comparison across types.

Opportunity to Invest in GI on Vacant Lands Overlap between older cities with vacant/abandoned parcels and cities with aging/inadequate stormwater infrastructure GI on vacant/abandoned lands addresses a number of urban issues: Community restoration and beautification Open space development Stormwater management Barriers to overcome Legal and administrative hurdles Ownership and control Creating long-term maintenance plan In light of the challenges of generating city-scale GI installation on private land on an owner-by-owner basis, we also looked at a broad range of GI opportunities on vacant/abandoned land

Pay-for-Performance Strategies Present Opportunities for GI Pay-for-Performance contracts are Public-Private partnerships in which the contract is based on outcomes Evaluations of the early Pay-for-Performance models identify clear success factors including: Support from state and local agencies that view the dual goal of achieving environmental outcomes and better utilizing fiscal resources as a priority Interventions that have demonstrated the ability to achieve measurable environmental outcomes; and Cost-effective access to credible data NatLab believes environmental problems present special opportunities for Pay-for-Performance partnerships

Pay-for-Performance Mechanisms and Philadelphia Pay-for-Performance could capture most cost-effective GI investment opportunities city-wide across full range of land types while facilitating project aggregation Potential benefits to municipality of Pay-for-Performance structure: Lower the costs of construction and maintenance Accelerates project implementation Access new sources of investment capital Preserve municipal balance sheet capacity Incentivize optimal performance by shifting performance risk to private partners where payments are tied directly to performance Finally, we focused on structures that could leverage opportunities for private investment across a wide range of land types and could also draw from the policy measures we identified to help Philly get the most “bang for its buck” on GI investments. Pay-for Performance is where will be focusing our efforts going forward in Philly.