Local and state governments are quickly falling behind maintaining its critical infrastructure. Just check out the American Society of Civil Engineer’s Infrastructure Report Card to see how US infrastructure is not making the grade. One trillion dollars is needed in the next few years just to bring water infrastructure up to standards and meet growing demands. Unfortunately, climate change is adding more stressors to this infrastructure, making matters worse. With these growing infrastructure problems and increasing risk to climate change cities are over-exposed and under insured to climate risk. Fortunately, to help with this failing infrastructure, a variety of funding tools are becoming available including bond instruments such as green bonds, catastrophe bonds and resilience bonds, as well as innovative public private partnerships (P3).
Green bonds are similar to other infrastructure related bonds except that they must demonstrate some type of environmental/climate benefit, i.e a qualified green investment as defined by the Climate Bonds Standard Board. They are typically issued as a use of proceeds bond and are backed by the issuers balance sheet. They are able to fund a large variety of different adaptation/resilient related projects. The Green Bond market appears to be significant, about $100 trillion potential, and is growing rapidly. To date, in 2017 over $35 billion has been issued and estimated to be about $150 billion by the end of the year. This is over develop the issuance of 2016. appear to be gaining a good bit of traction.
Resilience bonds are bonds that allow issuers to build infrastructure to reduce loss or likelihood of loss during a natural disaster event. This can be coastal protection, sea walls, storm water mitigating green infrastructure, etc. They are typically coupled with catastrophe bonds. Cat bonds work as insurance instruments that payout when disaster strikes. Having the Cat bonds covers the city in case of a natural disaster, the resilience bond funded project lowers the overall natural disaster risk to the community, thereby lowering the premium paid for the Cat Bonds. Having this combination of resilience and Cat bonds are key for cities in a time when Federal Disaster dollars are constrained, insurance costs are rising and the number of natural disaster events are increasing. There have yet to be any resilience bonds issued but appear to be getting greater attention as the threat of climate change increases. The Cat bond market churns along separate from resilience bonds with about $1.7 billion issued in Q1 of 2017.
An issue remains, particularly for cities that already have significant debt obligations, as to whether they have the capacity to issue additional bonds, whether they are to improve community resilience or not. The public private partnership (P3) is an option to fund some infrastructure projects that would be off-balance sheet. However, there needs to be an income stream for the private partner. A good fit for this approach could be the funding of combined heat and power (CHP) and District Energy systems for communities. CHP can significantly improve the resilience of critical infrastructure. Very simply, the private organization would own and operate the plant and be paid by the City for these services. There are other ways to set up a P3, but this is the cleanest way to explain it. Essentially, the Community sees an improvement in its resilience by an off-balance sheet funding mechanism. Further, if structured appropriately, the deal would be paid for with operating dollars rather than capital dollars.
Options do exist for communities to invest in their infrastructure. Some communities understand the benefits of these funding instruments and are using them to make their communities more resilient. Most of these projects are in transportation and water infrastructure projects and the communities are largely on the east and west coast. The third coast has yet to take it too seriously. Those that have not begun to realize the potential climate threat to their community and the common sense solutions available may want to begin to educate themselves on these funding opportunities and start taking action.