Environmental Impact Bonds: Could They Help Save America’s Aging Infrastructure?

Every year, nearly 2 billion gallons of polluted water pours into the rivers of Washington, D.C., when heavy rains cause its aging sewers to overflow. Rather than fight nature, DC Water decided to go with the flow, as it were, and embrace green infrastructure, which includes green roofs, permeable pavements, and rain gardens. This approach mimics natural processes to slow down and divert stormwater runoff so that it doesn't overwhelm sewer systems and pollute waterways. D.C. is just one example of a city seeking new, environmentally-friendly solutions for infrastructure problems, but the money for such non-traditional projects can be hard to secure.

Almost three in four Americans (72 percent) believe there should be greater federal funding for infrastructure projects. America’s deteriorating infrastructure is seen as both a hazard to safety and health, and also an opportunity for job creation. Yet funding for infrastructure projects has grown thin, and many times both federal and state governments are hesitant to allocate new funds for unconventional projects that are deemed too risky. To fill this gap, a new source of innovative financing has come to light: Environmental Impact Bonds (EIB).

 

What is an Environmental Impact Bond?

An Environmental Impact Bond is a tax-exempt municipal bond that provides funding for new infrastructure projects. It is based on a “pay-for-success” model—a form of performance-based contracting that ensures governments limit their losses in case projects are unsuccessful, which encourages them to try novel solutions like green infrastructure. In the case of DC Water, the EIB is a 30-year bond with a mandatory tender after five years. The bond, the first-ever EIB in the nation, was placed with two investors, Goldman Sachs Urban Investment Group and Calvery Foundation, and was issued at $25 million with a 3.43 percent interest rate. At the five-year mark, an additional $3.3 million payment will be exchanged between DC Water and the investors—who is paying whom, however, is contingent on how successful the project is.

The specifics of the plan are governed by well-defined performance metrics that represent both economic success and a good proxy for environmental outcomes. If the new infrastructure project produces storm water runoff reductions greater than 41.3 percent of the set baseline (as determined by an independent evaluator), then DC Water will make a one‐time additional Outcome Payment of $3.3 million to the investors (equivalent to 13.2 percent of the initial loan). However, if runoff is reduced less than 18.6 percent of the baseline, the investors will pay the same amount as a one-time Risk Share Payment to DC Water.

 

Why use an Environmental Impact Bond?

Environmental impact bonds allow public entities to manage the financial risk associated with green infrastructure. As a result, cities will be more likely to attempt green infrastructure projects, which is both good for the city, and good for the environment.

Using EIBs ultimately could generate savings on project costs for public entities if their use accelerates project completion rates. Indeed, the benefits delivered by a project that is up and running more rapidly, thanks to private funding, can more than offset the interest paid to the private investors.

EIBs can also impose greater discipline than would otherwise be the case, as they set precise, independently-measured metrics to evaluate a project's success ahead of time. This discipline, and the initial thought put into determining what criteria should be used to determine success, can ensure a project truly delivers the benefits a community is seeking.

 

The potential of green infrastructure

Green infrastructure has the potential to play an important role in mitigating risks associated with climate change—from sea level rise, to the increasing frequency and severity of extreme weather events. American infrastructure systems have already felt the strain of these new challenges. Green infrastructure such as rain gardens, green roofs, planter boxes, permeable pavement, bioswales, and more can aid in mitigating rainwater runoff risks by absorbing water that would otherwise flow into the sewer system. Other projects, like wetland restoration, can aid in reducing flooding from storm surges, help stave off rising sea levels by absorbing excess water, and act as a natural buffer. What’s more, many of these green infrastructure projects have the added benefit of naturally sequestering carbon, so they also help to reduce the amount of greenhouse gases in our atmosphere.

Improving American infrastructure has received solid bipartisan support. With their multiple benefits and lower risk for taxpayers, Environmental Impact Bonds could play an important role in improving our infrastructure while making it greener.

 

Author: Emma Dietz