In the United States, it is estimated that $4.6 trillion will need to be spent to meet our current infrastructure needs. As of the 2017 ASCE Infrastructure Report Card funding may be available for about half of that amount; there is a funding gap of $2.1 trillion. In the 2016 report Failure to Act: Closing the Infrastructure Investment Gap for America’s Economic Future, the ASCE does a nice job in explaining what may happen in case we do not take this funding gap seriously. According to the latest report card, taking it seriously means investing about $206 billion per year. However, it is important to keep in mind that the $206 billion per year does not take into account future damage to our infrastructure due to climate change.
Recently, I posted a blog about the possibility of closing the funding gap using resilience bonds. As I mention in the blog, resilience bonds are an interesting idea that is waiting for the right circumstances. There is growing interest in these bonds, as a way to pay for more resilient infrastructure to reduce climate risk, but the right projects have not been identified.
Environmental Impact Bonds
What seems to have a bit more traction are environmental impact bonds (EIB). One has been issued in Washington DC for stormwater mitigation and a second is being considered in New Orleans.
The EIB is a tax-exempt municipal bond that utilizes a pay for success approach to financing infrastructure. The bond provides upfront capital for innovative resilience-focused projects and shifts downside risk from government agencies to the private sector investors. The public sector repays investors based on the whether the agreed-upon environmental outcomes are achieved. If agreed upon performance is not achieved, the investor covers the loss.
Washington, DC – Storm Water Mitigation
The first EIB was closed in September 2016 with the DC Water and Sewer Authority. This is a 30-year, $25 million bond with a mandatory tender after five years. The interest rate is set at 3.43%. With this bond, DC Water is looking to implement green infrastructure to mitigate stormwater risk but lacked capital. Further, the utility was attempting to implement a new, more innovative approach to stormwater mitigation and was concerned about performance risk. The EIB investors took on this risk and will pay DC Water if the infrastructure under-performs. The investors in this project are Goldman Sachs and Calvert Foundation.
At the five year mark, an additional payment of $3.3 million will be made, either by DC Water or the investors. Who pays will be dependent on actual stormwater runoff reductions. Who gets paid is determined by an independent evaluator. The evaluator set the performance metrics for the project. If reductions in stormwater runoff are greater than 41.3% then DC Water will bay an outcome payment. If the runoff is reduced less than 18.6%, Goldman and Calvert will pay a one-time risk share payment to DC Water.
New Orleans – Wetland Restoration
New Orleans just started down its own EIB path July of 2017. The focus here is on the
restoration of coastal wetlands. The coastal wetlands act as a natural buffer from sea level rise and storm surge. The wetlands have been damaged by natural events, but this damage has been exacerbated by oil and gas exploration activity. It is anticipated that without restoration of these wetlands, approximately 1,750 square miles of wetland could be lost by 2060. This would result in significant economic and community costs.
The desire here is to restore this natural infrastructure. EDF will be working with Louisiana’s Coastal Protection and Restoration Authority to identify the specific coastal restoration project. A portion of this restoration work is expected to be funded by RESTORE dollars. However, additional funding is needed to complete the work. The additional funding will be provided by NatureVest in the form of an EIB pay-for-success bond.
The United States faces significant costs to bring existing infrastructure up to standards, as well as prepare for and recover from natural disasters. Non-traditional financing mechanisms are available to help fund this infrastructure. Earlier, I discussed resilience bonds as a possibility. Reliance on traditional bond funding, and federal and state dollars are not sufficient to manage the existing gap, much less prepare for future climate risks. It is good to see that some cities are taking innovative steps forward to build and prepare for the future.