How Pay for Success Can Improve Water Infrastructure

By Henry Crochiere and Joshua Ogburn

The mission of the University of Virginia Pay for Success Lab is to identify and advance impactful Pay for Success projects in localities across the nation. One of the Pay for Success Lab’s current projects is to identify communities that can benefit from an Environmental Impact Bond (EIB), a novel Pay for Success (PFS) model recently implemented in Washington, D.C. to address a critical water infrastructure problem. Combined Sewer Systems collect stormwater, domestic sewage, and industrial wastewater in the same pipe and direct it to water treatment facilities. While these systems were an innovation in the mid 1800’s, during periods of heavy rainfall, they overflow excess capacity through Combined Sewer Overflows (CSOs) into surrounding bodies of water. Over the past 150 years, society has recognized that these overflow events represent a significant hazard for the health of communities and the environment.

There are two main methods to address CSO problems. The first and most traditional method is Gray Infrastructure, which often consists of building immensely large, underground water retention tanks that store water during periods of heavy rainfall. The other option is Green Infrastructure, a term for various approaches and technologies that allow rainwater to enter the water table naturally. While Gray Infrastructure is a more certain solution, the underground tanks hold a specific amount of water, Green Infrastructure provides numerous other benefits such as improved cost effectiveness, water and air quality, job creation, and health benefits.[1] Over the past few decades, the lower costs and greater effectiveness of Green Infrastructure has increasingly made it a viable solution for communities.

Types of Green Infrastructure

Source: https://www.dcwater.com/green-infrastructure

Source: https://www.dcwater.com/green-infrastructure

The Environmental Protection Agency currently provides localities with permits that monitor the amount of allowable CSO levels. To maintain compliance, the EPA issues fines and sometimes Consent Decrees, a court-mandated agreement for the locality to reduce the amount of overflow. Washington D.C. is one of the cities that is facing a CSO problem and a Consent Decree. George Hawkins, CEO of DC Water, wanted to address DC’s overflow problem while also being environmentally and cost conscious. However, Hawkins had a dilemma: how can D.C. justify spending the time, money, and resources on a Green Infrastructure project if it does not work? The answer was an Environmental Impact Bond (EIB), the first of its kind.[2]

The EIB is a performance-based municipal bond that allows localities to implement Green Infrastructure to address their CSO problem while also providing financial protection should the Green Infrastructure fail to meet expectations. While the EIB is a 25-year bond, there is a check-up after five years to measure the success of the GI using predetermined milestones. If it does not meet expectations, the government pays back a lower interest rate. If the EIB reduces CSOs by more than what was expected, the locality pays back a higher interest rate.[3]

The PFS Lab believes this performance-based model is applicable in many communities beyond Washington, DC. We have been working to contact every locality currently under Consent Decree. We have found that while most of the water authorities were unaware of the EIB model, they are often interested once we explain it to them in detail. Of course, the process for a locality to decide whether to utilize an EIB is not short. Over the next several months, we look forward to working with leading Pay for Success advisory firms to advance these projects. If you have any questions or ideas, please do not hesitate to reach out to us.

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Henry Crochiere is a Fellow in the University of Virginia Pay for Success Lab. He is a rising Fourth Year at the University of Virginia studying Economics and Spanish. Henry is the current president of the Inter-Fraternity Council as well as the co-chair of Pancakes for Parkinson's, UVa's largest student-run philanthropy. Henry wants to pursue a career in consulting or impact investing after he graduates.

Joshua Ogburn is Director of the University of Virginia Pay for Success Lab. He has worked to initiate numerous Pay for Success projects in the areas of early childhood education, workforce development, supportive housing, home visiting, and pediatric asthma. Joshua holds a Master of Public Policy from the University of Virginia’s Frank Batten School of Leadership and Public Policy, and a Bachelor of Arts in Public and Urban Affairs from Virginia Polytechnic and State Institute (Virginia Tech).

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[1] https://www.epa.gov/green-infrastructure/benefits-green-infrastructure

[2] http://www.investinresults.org/sites/default/files/book-chapter/WM_24_Bafford-Kim-Letsinger.pdf

[3] https://www.epa.gov/waterfinancecenter/dc-waters-environmental-impact-bond