Such environmentally beneficial storm-water solutions as detention ponds—like this one in Champaign, Illinois—could see a surge if private developers are offered such incentives as fee credits, capital subsidies, and pay-for-performance contracts. Wikimedia Commons/M dorothy
Cities interested in building and retrofitting sustainable infrastructure would benefit from private-sector financing, a new report says.
May 28, 2013—Philadelphia and other cities seeking to better manage storm water by means of “green” infrastructure should enact policies to involve the private sector, according to a recent report from two environmental organizations and an environmental investment and asset management firm. By spurring private investment in green infrastructure on private property through such means as impervious area reduction credits, capital subsidies, and pay-for-performance contracts, municipalities could meet their green infrastructure goals for less than what it would cost to do the work themselves, according to the report.
Released in March, the report, entitled Creating Clean Water Cash Flows: Developing Private Markets for Green Stormwater Infrastructure in Philadelphia, was prepared by the Natural Resources Defense Council, of New York City; EKO Asset Management Partners, also of New York City; and the Nature Conservancy, of Arlington, Virginia. While its conclusions are intended to benefit many municipalities seeking to implement green infrastructure as cost-effectively as possible, the report focuses on Philadelphia as a test case because of that city’s extensive efforts to develop green infrastructure as a means of achieving such goals as reducing storm-water runoff, decreasing sewer overflows, and promoting urban renewal (see “Philadelphia Proposes Ambitious ‘Green’ Infrastructure Plan,” Civil Engineering, December 2009, pages 22–24). The report was developed in consultation with the Philadelphia Water Department (PWD), and its authors aim to work with Philadelphia, as well as with other municipalities, to implement many of the report’s recommendations, says Lawrence Levine, an attorney with the Natural Resources Defense Council’s water division and one of the authors of Creating Clean Water Cash Flows.
During the next 25 years, the PWD sill strive to transform approximately 9,650 impervious acres into “greened acres” capable of capturing the first inch of rainfall. To help decrease the amount of runoff entering its sewer system, the PWD is also requiring that redevelopment projects larger than 15,000 sq ft be designed so as to retain the first inch of rainfall on-site. To cover the costs related to storm-water management, the PWD assesses a service charge on residential and nonresidential properties. Although a uniform monthly charge is assessed on all residential properties, the monthly charge for nonresidential properties is based on total size and the amount of impervious area. To encourage customers to reduce the extent to which their properties contribute to storm-water runoff, the PWD offers credits to owners of nonresidential properties who implement certain storm-water management practices. The credits are applied against the property’s monthly storm-water fee and thus reduce the property owner’s storm-water utility bill. The PWD also awards grants on a competitive basis to owners of nonresidential property to promote the introduction of such green storm-water management features as detention and retention basins, tree green roofs, porous pavement, and rain gardens, and so-called tree trenches in which the trees are connected by an underground infiltration structure.
However, the physical characteristics of many urban nonresidential properties often prevent the construction of cost-effective storm-water retrofits. But even when such impediments are not an issue, the prospect of a reduction in monthly storm-water fees by itself is not likely to prompt many owners of nonresidential property to install green infrastructure solutions, Levine says. “For many projects, the value of the fee reduction by itself will not be sufficient to generate a payback on that investment,” he says. As a result, property owners and potential third-party investors have little incentive to risk capital in pursuit of such projects. For this reason, Levine says, the PWD should consider offering subsidies to private entities that implement green infrastructure practices. By complementing fee rebates, “subsidies could play a role in helping to bring down the effective costs of those projects,” he notes.
Additionally, combining subsidies with such other approaches as off-site mitigation and project aggregation could enable Philadelphia to attain its goals regarding green infrastructure “at a lower cost than could be achieved through investment in projects in the public right-of-way alone,” according to the report. By “off-site mitigation” the report means investing in retrofits on other properties. Although such investment could enable nonresidential property owners to receive credits against their storm-water fees, off-site mitigation is not allowed under the PWD’s current regulations. “Project aggregation” means packaging multiple storm-water projects into an aggregate portfolio. In this way economies of scale could be achieved to help lower project costs, and private investors could better manage risk by having various types of projects in their storm-water portfolios.
Allowing off-site mitigation could stimulate private investment to produce an estimated 658 greened acres, or 7 percent of the city’s goal, in the form of downspout disconnections on residential property, according to the report. Assuming that aggregation strategies could reduce project costs by 10 percent, private investment in vegetated swale projects could generate another 215 greened acres, according to the report. The report also analyzes the extent to which subsidies of $0.50, $1.00, $3.00, and $3.50 per square foot of greened acre would increase the economic viability of various green infrastructure practices. When combined with off-site mitigation and aggregation, the subsidies “could increase the market of economically viable” greened areas so that it would encompass 7,015 acres, or 73 percent of the city’s overall goal, according to the report.
Despite their cost, subsidies and reductions in storm-water charges could benefit Philadelphia financially if they facilitated implementation of green infrastructure for less than what the city pays to construct similar features in the public right-of-way. Through off-site mitigation, project aggregation, and subsidies, the city “could reach its greened acre goals at a lower cost than could be achieved through investment in projects in the public right-of-way alone,” according to the report. At the same time, any transaction costs incurred by the city in establishing an off-site mitigation program would probably be absorbed by the savings realized from lowering its overall costs associated with green infrastructure development, Levine says.
Meanwhile, aggregation of off-site storm-water projects could be conducted by various private entities, including engineering and construction firms, business improvement districts, and third-party developers and financiers, says Paul Davis, a fellow in the Natural Resources Defense Council’s Center for Market Innovation. Other approaches that could encourage participation by the private sector in efforts to implement green infrastructure include credit trading programs, greater use of vacant lands, and pay-for-performance structures, according to the report. Pay for performance would take the form of a public-private partnership in which the PWD would agree to make payments to private entities that deliver and manage a certain number of greened acres for a given period. In addition to finding, developing, and applying the most cost-effective ways of designing, constructing, and maintaining the greened acres, the private parties could seek various sources of funding, including traditional institutional investors as well as philanthropic and environmentally oriented sources of capital. For its part, the PWD could structure the pay-for-performance contracts with its private partners so that the latter would assume some of the risk associated with project performance.
Among the options detailed in the report, the pay-for-performance approach is the one that currently interests the City of Philadelphia most, says Mami Hara, a deputy commissioner for the PWD. “It is something that we’re aggressively pursuing,” Hara says. “We hope to do as much as we can to launch it relatively soon.”
In outlining a number of approaches that could help municipalities supplement their sources of funding for green infrastructure, Creating Clean Water Cash Flows offers a “realistic depiction” of where the municipal storm-water market is headed, says Marcus Quigley, P.E., D.WRE, M.ASCE, a principal for GeoSyntec Consultants, Inc., which has its headquarters in Atlanta. Other sectors, including energy efficiency, military housing, and wastewater treatment, have benefited from an influx of private investment, Quigley says, and this investment offers a new model by which cities could leverage private financing to upgrade their storm-water infrastructure and improve environmental performance. “We can no longer continue to invest in green infrastructure without directly measurable environmental outcomes and paying for performance,” he notes.