Case Study

District of Columbia Water and Sewer Authority

Learning from successful integration of green-gray infrastructure and use of adaptable financial mechanisms to meet performance standards
Country/Geographic region[i] United States/ North America Local Project
Country Income Level Classification[ii] High-income
Hazard(s) mitigated Stormwater runoff via precipitation (climate adaptation included)
Type of financing[iii] Debt (Environmental Impact Bond)
Type of governance Public Utility
Lever of change Desire to integrate green infrastructure (nature-based solutions)
Main Actors ●        District of Columbia Water and Sewer Authority (DC Water)
●        Environmental Protection Agency
●        Other Washington D.C. government departments
●        Quantified Ventures
Case study Summary DC Water and its partners financed a nature-based solution with the first-ever Environmental Impact Bond (EIB) to remediate stormwater and sewer pollution across Washington D.C.
Key Takeaways ●        DC Water altered the project several times to increase resilience, based on new information and new standards, and to reduce costs
●        Green infrastructure served as a lever of change by presenting an economically viable alternative to grey infrastructure’s high capital costs and by generating sufficient interest to finance an experimental project
●        The EIB was not a ‘brand-new’ financial product, but rather a product adapted from a different sector

Project Rationale

By the early 2000s, Washington D.C.’s joint stormwater and sewer system had begun polluting local waterways to increasing levels. This 19th-century system was not designed to manage the demands of the city’s urban development and population growth. Pollution levels spiked, especially following severe rainfall and flooding events, as increased stormwater runoff overwhelmed the already strained wastewater system.[iv]

In 2005, the U.S. Environmental Protection Agency (EPA) mandated that DC Water develop a plan to mitigate the likelihood and impact of major pollution events. EPA also mandated that DC Water consider green infrastructure and spend $3 million on green infrastructure pilot projects. DC Water developed a $2.6 billion initial project, which relied on the construction of three large tunnels beneath the Anacostia, Potomac, and Rock Creek watersheds.[v]

Project Development

Although DC Water implemented some changes in the first years of the project, progress on the major aspects of the retrofit remained difficult to implement for technical and financial reasons. The project’s initial design faced challenges, as subsequent studies found that it did not account for increased rainfall due to climate change projections. In addition, the project’s repayment structure threatened to overburden taxpayers. The repayment structure initially charged customers artificially low rates per the cost of the project, with rates increasing more than twentyfold over the next nine years.[vi]

DC Water and other city departments collaborated to meet these challenges. DC Water incorporated new climate rainfall projections into its models. DC Water also aligned with other city departments to mitigate the anticipated effects from climate change. Several assessments and plans from this collaboration noted the importance of maintaining infrastructure continuity across a range of climate scenarios.[vii]

DC Water’s collaboration on these initiatives aided in its decision to incorporate nature-based solutions to reduce project costs. Following several years of consideration, DC Water concluded that green infrastructure solutions could replace the Rock Creek Tunnel and shorten the Potomac Tunnel. The new plan replaced these tunnel lines with rain gardens, rain barrels, permeable pavements, bio-retention planters, parks, and other nature-based solutions.[viii]

Project Implementation

The new plan faced challenges with financing, however, which was due to concerns regarding how nature-based solutions would perform. Models predicted that nature-based solutions could reduce pollution by reducing runoff into the system. Nonetheless, verifying the accuracy of the modeling was more difficult given the limited number of green infrastructure solutions, especially for a project of DC Water’s size and scope. A traditional municipal bond would not cover DC Water if the project did not reduce enough runoff.[ix]

DC Water partnered with the advisor Quantified Ventures to develop and issue the first-ever Environmental Impact Bond (EIB) for part of the project (Rock Creek) in 2016. Modeled on a social impact bond, this bond used performance-based metrics to hedge project performance uncertainties for DC Water yet remain attractive to investors.[x]  Goldman Sachs and the Calvert Foundation became investors. The $25 million EIB was structured as a tax-exempt municipal bond with a 30-year maturity. The bond functioned much like a standard bond except for a one-time mandatory tender date at the bond’s five-year mark. At this date, the EIB could pay out based on the project’s performance.[xi]

The EIB employed a 3-tiered payout scheme based on the project’s performance at reducing runoff. In the third tier (‘underperformance’), investors would make a risk transfer payment of $3.3 million to DC Water, which could be used to cover costs. If the project performed in tier 2 (‘acceptable performance’), then no party would make a payment. In the case of project ‘overperformance’, DC Water would make a $3.3 million payment to investors. DC Water still would benefit from a tier 1 scenario since runoff reductions of that scale were expected to reduce costs by more than $3.3 million.[xii]

Table 4 – EIB Performance and Payout Metrics

Tiers Performance Performance-Based Payment
3: ‘Underperformance’ Runoff reduction <18.6% Investors pay DC Water $3.3M
2: ‘Acceptable Performance’ 18.6% ≤ Runoff reduction ≤ 41.3% No payment
1: ‘Overperformance’ 41.3% < Runoff reduction DC Water pays investors $3.3M

The Rock Creek project’s performance in 2019 and 2020 was evaluated against a baseline of no green infrastructure. This project was found to have reduced runoff by nearly 20%, placing it in tier 2. These results indicate that the EIB successfully enabled DC Water to implement a more experimental project.[xiii]  In recent years, other municipalities across the United States from Georgia to California have used EIB to finance a range of projects. It is anticipated that the early successes of EIBs will increase adoption in the years ahead.[xiv]

 Timeline

Date/Period Description Actors Involved
Mid-20th century – Early 2000s DC Water’s combined stormwater/sewer system no longer could handle capacity, especially during flooding events, increasing sewage levels in DC’s rivers, and resulting in lawsuits. Pollution levels eventually violate the Clean Water Act (CWA). DC Water, Environmental Protection Authority (EPA), Various class-action lawsuits
2005 In response to the CWA violation, DC Water develops $2.6B long-term Control Plan to limit pollution. The plan would involve a substantial retrofit of three river tunnel systems.

As part of this suit, the U.S. EPA requires that DC Water consider Green Infrastructure and spend $3M on a pilot project.

DC Water, Greeley, Hansen LLC
2008 EPA study finds that hydrological models developed for the project may have discounted higher expected levels of rainfall due to climate change. DC Water adds additional 20% capacity margin to models as a result. EPA, DC Water
2000s – Early 2010s External groups continue to lobby DC Water to consider green investment. National Resource Development Council (a chief proponent)
2010s – 2016 DC Water begins to consider nature-based solutions aspects of the project. City departments come together to determine ways to make Washington D.C. more sustainable, culminating in a suitability plan in 2013. The Department of Energy and Environment spearheads a plan that highlights the importance of green infrastructure to meet the project’s resilience goals. DC Water, Washington D.C. Government agencies (especially Department of Energy and Environment)
2005-2015 High capital expenditures to retrofit tunnel systems are expected to transfer large burdens on DC residents
2015- 2016 DC Water halts the project to incorporate green infrastructure solutions into the project. In 2016, DC Water issues a new plan that substantially incorporates nature-based solutions. DC Water
2016 DC Water issues first-ever EIB to finance green infrastructure components for the Rock Creek project component. DC Water, Quantified Ventures
2017 – Present Execution of new plan. DC Water
2021 Project performance for EIB found to be within tier 2 (‘acceptable performance’) DC Water, Quantified Ventures

Lessons Learned

DC Water benefitted from a regulatory environment that encouraged or mandated that it meet certain resilience targets. EPA, non-governmental agencies, and public stakeholders highlighted the need for pollution reduction, the importance of climate modeling, and the benefit of nature-based solutions. In addition, DC Water benefitted from being a large municipal provider with national recognition and the ability to raise capital, which probably played a role in its success.

  • Green infrastructure can be a lever of change to move projects forward and encourage investment. Green infrastructure generated significant interest from external sources and from within Washington D.C.’s city government to adapt to climate change. DC Water did not have to incorporate green infrastructure significantly into the design by mandate; however, careful consideration of green infrastructure led DC Water to conclude that it presented the most viable economic option as well. Green infrastructure also produced several co-benefits including green jobs, more than half of which DC Water pledges to be local jobs. The project’s nature-based solutions also have provided co-benefits in terms of recreation and beautification for city residents.
  • Financial instruments from other sectors can be successfully adapted. The development of the EIB to finance a green infrastructure solution shows how a project can adapt an existing financial instrument to meet the needs of a non-traditional project. Traditional financial products could not adequately incorporate project uncertainty or capture longer-term benefits of DC Water’s green solution. The EIB adapted performance mechanisms from a social impact bond to better meet these needs. DC Water shows that innovative financing does not necessitate the creation of a completely new financial instrument, but rather the creative application of an existing one.
  • Collaboration and adaptability are key success factors for good governance. The project also relied on good governance, which is best demonstrated by the project’s collaboration and adaptability. DC Water collaborated with financial advisories, engineering firms, departments, other agencies, and NGOs to ensure regulatory compliance, develop new strategies or solutions, and to incorporate other citywide initiatives. This collaboration highlights the importance of using each stakeholder’s strengths. For example, DC Water relied on external entities for climate change models and financial advisories to develop the EIB.
  • Iterative processes to incorporate better data need to be built in the project. DC Water’s adaptability presents a case study regarding how a municipal department can overcome limited pre-development resources, insufficient knowledge, and changing standards. DC Water developed the project out of necessity to meet EPA compliance. DC Water incorporated new information and new standards that made the project more resilient as climate rainfall models were developed. Their adaptability also enabled them to revise their approach ten years into the project, negotiate new targets with EPA (stormwater runoff), and attract investors to finance the nature-based solutions project.[xv]

 

[i] World Bank, 2022. “World Bank Country and Lending Groups.” World Bank (accessed July 2022). https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-country-and-lending-groups

[ii] Ibid.

[iii] Joyce Coffee, 2020. “Financing Resilient Infrastructure.” Optimizing Community Infrastructure (accessed July 2022). https://www.sciencedirect.com/science/article/pii/B9780128162408000069

[iv] Amanda Rycerz, Will Bugler, Lydia Messling, and Georgina Wade, 2020. “Greening the grey: Why DC Water put green infrastructure at the heart of one of the U.S. Capital’s largest infrastructure projects.” The Resilience Shift (Accessed July 2022).  https://www.resilienceshift.org/wp-content/uploads/2020/06/Greening-the-Grey-Washington-DC-case-study-The-Resilience-Shift.pdf

[v] Greg Browder, Suzanne Ozment, Irene Rehberger Bescos, Todd Gartner, and Glenn-Marie Lange, 2019. “Integrating Green and Gray: Creating Next Generation Infrastructure” World Bank and WRI (Accessed July 2022). https://files.wri.org/d8/s3fs-public/integrating-green-gray_0.pdf

[vi] Rycerz et. al, “Greening the Grey.”

[vii] Ibid.

[viii] Ibid.

[ix] Ibid.

[x] Austin Thompson, “Environmental Impact Bonds: Where are they now?” UNC School of Government: Environmental Finance Center (Accessed 2022). https://efc.web.unc.edu/2020/07/02/environmental-impact-bonds-where-are-they-now/

[xi] Goldman Sachs, n.d. “Fact Sheet: DC Water Environmental Impact Bond.” Goldman Sachs (accessed August 2022). https://www.goldmansachs.com/media-relations/press-releases/current/dc-water-environmental-impact-bond-fact-sheet.pdf

[xii] Ibid.

[xiii]Pamela Mooring, “DC Water’s pioneering Environmental Impact Bond a Success.” DC Water (accessed July 2022).  https://www.dcwater.com/whats-going-on/news/dc-water’s-pioneering-environmental-impact-bond-success

[xiv] Chesapeake Bay Foundation, n.d. “Enivironmental Impact Bonds.” Chesapeake Bay Foundation (Accessed July 2022). https://www.cbf.org/how-we-save-the-bay/programs-initiatives/environmental-impact-bonds-eib.html

[xv] EPA, 2015. “District of Columbia of Water and Sewer Authority, District of Columbia Clean Water Settlement.” EPA (Accessed July 2022). https://www.epa.gov/enforcement/district-columbia-water-and-sewer-authority-district-columbia-clean-water-settlement


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