Financing green infrastructure through environmental impact bonds

DC Water Environmental Impact Bonds

In 2005, DC Water entered into an agreement with the EPA, establishing a 20 year plan worth c. USD 2.6B in planned investments to reduce 1 Combined Sewer Overflows (CSO) by 96%
Washington DC's sewers were releasing an average of c. 9.5B litres of sewer water annually dumping bacteria, trash and heavy metals into the Potomac River disrupting the ecosystem and contaminating DC's water

DC Water’s 2005 plan focused on grey infrastructure; however, by 2015 it sought to re-design its agreement with the EPA and include c. 81k square meters of green infrastructure (GI)
GI was an unproven solution and risky, thus DC Water sought a concessional solution to finance the pilot project to help meet its overall goal of reducing CSOs by 96%

DC Water financed the 81k square metres of green infrastructure by issuing Environmental Impact Bonds (EIB),an innovative form of pay-for- success debt financing where investors purchase bonds that offer repayments linked to the achievement of a desired environmental outcome
DC Water issued 30 year, tax-exempt bonds, valued at USD 25M. Depending on the project’s success3, a USD 3.3M contingent payment is made to either DC Water or investors, acting as risk-mitigation for investors should the project fail to deliver the desired outcome

DC Water – Water supply and wastewater management system authority and issuer of EIB
Institutional investors – Bond issue was placed with Goldman Sachs Urban Investment Group and Calvert Foundation
Quantified Ventures – Functioned as the transaction intermediary
Environmental Protection Agency (EPA) – Directed DC Water to invest in infrastructure to manage CSOs

Washington DC’s residents will benefit from additional green spaces, cleaner drinking water, a reduction of the urban heat island effect and the creation of jobs, 51% of which are reserved for Washington DC's residents
Being the first successful use of EIBs, DC Water's GI project has triggered the use of EIBs in Atlanta, GA (USD 14M), Baltimore, MD (USD 6.2M), Athens, OH and Camden City, NJ
Usage of the EIB allowed DC Water to hedge a portion of the risk associated with GI investment, ensuring that it will receive at least USD 3.3M as compensation should it fail to deliver the desired results

The use of innovative mechanisms, such as EIBs, enables government entities and the private sector to experiment with unproven, high-potential infrastructure investments and accelerate the implementation of GI at the city-level
Despite their potential, EIBs and other similar financial instruments may have limited functionality in less developed markets as they are reliant on the availability of sophisticated debt markets and reliable, abundant data–which is used to measure KPIs that inform contingent payment outcomes and measure a project’s success
EIBs can be particularly useful to sub-national governments who wish to pilot relatively small-scale projects while minimizing their reliance on the national government