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Creativity Is Key in Finding Funds for Water Infrastructure Projects

Funding water infrastructure projects can be hard, especially when they are of an environmentally friendly nature. But a group of Stanford researchers are mapping the innovative ways in which water agencies are making it happen.

Written by Tara Lohan Published on Read time Approx. 6 minutes
Stanford’s living map shows communities across the country that are implementing creative funding solutions for water infrastructure projects.Stanford

Every four years, the American Society of Civil Engineers grades the country on the state of its infrastructure. This year, the U.S. received a dismal grade of D+ for the country’s overall infrastructure and an even worse grade of D for drinking water systems specifically. The group estimated $1 trillion would be needed in the next 25 years for the country’s water systems to adequately meet demand.

In order to face threats such as aging infrastructure, population growth and climate change, we’ll need not just more money but more innovative solutions, such as green infrastructure and smaller, decentralized systems. Getting those projects funded can be tough, but not impossible.

A group of researchers from Stanford has collected a series of case studies from efforts across the country that show innovative ways to finance these projects. Their “living map” has outlined seven such projects to start – ranging from green bonds in San Francisco to a “reverse auction” in Cincinnati to a stormwater credit trading program in Washington. Researchers plan to add new case studies to the map, said Newsha Ajami, director of urban water policy at Stanford’s Water in the West program and leader of the project.

Water Deeply recently spoke with Ajami about which creative financing solutions are most promising, why they’re needed and what’s driving the innovation.

Water Deeply: What are some of the water infrastructure challenges the U.S. is facing right now?

Newsha Ajami: We obviously have aging infrastructure. In addition to aging infrastructure, we have climate change that’s undermining the way we operate our current system. The population is growing and we have stricter water-quality regulations that impact our water availability and reliability.

All these things are creating this new world that we have to face. On top of that, there’s a big movement trying to focus more on green infrastructure and infrastructure that works with the environment and nature, rather than trying to conquer nature.

These low-impact development and green infrastructure solutions and other distributed solutions are hard to finance.

However, we also know that they’re really going to help us because they can extend the life of the centralized systems we already have. They can also meet some of our water-quality and quantity demands. That’s why we looked at how you would finance these solutions because they are not what normally is considered part of our infrastructure portfolio.

Water Deeply: So it seems that we need to add new kinds of infrastructure as well as new funding strategies for those projects?

Ajami: Right. To give you an example, when you are looking at the centralized or very engineered solutions like a wastewater treatment plant, it is going to provide service to people in this community. This is an engineered solution. It’s very easy to figure out what’s the capacity, how much wastewater do you generally get, and what kind of service you can provide. It’s easier and more certain. When you’re dealing with natural systems, there’s a lot more uncertainty. It’s a little harder to say how they will perform.

When you come to these kind of solutions, it’s a little bit more challenging because it’s harder to say, “OK, every dollar I spend, I got this much capacity.” That’s why these kind of solutions have been a lot harder to fund. Water agencies are still trying to wrap their head around how they would fund such projects.

Water Deeply: One of the projects you highlighted was stormwater trading credits in D.C. Can you explain a little bit about how that works?

Ajami: It’s very similar to climate trading. They basically have different communities that need to meet a certain level of wastewater quality improvement. They can build infrastructure that would do that or they can go to the end users and say, “Hey, we’re going to provide you with some sort of a platform to invest some of your own money and we’re going to give you grants or rebates for you to implement something at your house or at your business that would decrease our stormwater flow.”

When it rains, stormwater collects a lot of pollutants. Those pollutants end up in the wastewater system, and they need to be treated. [Treatment plant operators] are trying to minimize the amount of stormwater that ends up in the wastewater treatment plants. For them, the best thing is to increase the pervious areas using natural systems to clean up the water and to actually prevent the water from becoming more polluted. So they told property owners that they could do multiple things: Use rain barrels; increase the pervious areas in their property, and by doing that, they are preventing some of that stormwater from ending up flowing into the treatment system. For that, they would give them credits.

Water Deeply: I noticed that three of the seven projects that you profiled in this map are from the D.C. area. What’s driving the innovation there?

Ajami: I think they just got into this whole stormwater regulation much earlier and they were trying to come up with more creative ways of dealing with it. They were having a lot of stormwater overflows, especially during wet periods. That impacted the water quality of Chesapeake Bay. There is a commission that focuses on Chesapeake Bay and improving its water quality. The catalyzer is often some sort of a regulatory push. In D.C., there definitely has been a regulatory push that’s basically trying to focus on improving the quality of Chesapeake Bay and they have to deal with their stormwater, because of that.

Water DeepIy: I was wondering if there were any specific policy changes that were helping to spur these kind of innovations along.

Ajami: Yes, absolutely.

Water Deeply: Closer to home here in San Francisco, you wrote about the green bond. It looks like D.C. has an environmental impact bond. Are those different?

Ajami: We highlighted the green bond in San Francisco just because it certainly was highlighted a lot and everybody’s talking about it. It’s still is in its infancy. It’s very hard to say how impactful it will be. Both D.C. and San Francisco are doing this, and the characteristics of these impact bonds and social bonds and climate bonds is that they are trying to attract people who are interested in investing in sustainable solutions and it creates a pool of funds that can be used to implement green infrastructure.

Water Deeply: What’s the role of private capital in trying to get these more innovative projects off the ground?

Ajami: I think that’s what we’re trying to highlight here. Social impact bonds, especially. We have multiple versions of that. We have the forest resilience bond as well with Blue Forest Conservation. There’s this new group of investors who are willing to put their money into some of the solutions without necessarily wanting to have a big rate of return. That’s the role they are playing right now in this market when there is very limited capital available to the agencies to implement the solutions locally.

These private capital investors provide this new flow of funds that can actually be used to leverage other funds.

Water Deeply: From the research that you’ve done so far on the living map, do you have any favorite projects?

Ajami: I think my favorite is definitely these new public–private partnerships, which include the D.C. Water environmental impact bond and the Blue Forest Conservation forest resilience bond. I find those very interesting. I think they’re very fresh. They are engaging private entities without necessarily needing to compromise public priorities and public good. I find it very interesting and, I think, the way to the future.

One thing I want to mention is also a lot of these solutions are trying to engage people from outside of the traditional group of stakeholders that contributed to implementing the solutions. For example, private investors are one of them. The others are the end users, like you and I. They’re trying to bring more people to the table and engage with new stakeholders in the process. I find that very interesting because, in a way, it’s disrupting the traditional way we approach water management and funding water.

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