Innovative Financing for Cities: Pay for Results, Not Process
Who will you meet?
Cities are innovating, companies are pivoting, and start-ups are growing. Like you, every urban practitioner has a remarkable story of insight and challenge from the past year.
Meet these peers and discuss the future of cities in the new Meeting of the Minds Executive Cohort Program. Replace boring virtual summits with facilitated, online, small-group discussions where you can make real connections with extraordinary, like-minded people.
As cities face funding shortages for critical resilience and infrastructure projects, they are looking to new sources of capital—including impact investors. From large multinational banks to traditional institutional asset owners, to foundations and family offices, investors are looking to put their capital to work in ways that generate financial as well as social and environmental returns. The bottom line is: there is no shortage of the impact capital needed to finance innovative, nature-based solutions.
While there is great appetite from investors for “impact” deals, those deals can be hard to come by because they take time, collaboration, and creativity to structure. By matching the needs of cities with the goals of impact investors, places like Atlanta, Baltimore, and Washington, D.C. are taking advantage of a new financing model called the Environmental Impact Bond. It can be used to finance green infrastructure and similar resiliency-oriented projects, which not only protect cities against flooding and pollution, but also create jobs and green underserved neighborhoods. The return to investors of these projects is based on the extent to which the projects produce results; such as the amount of stormwater diverted from flowing into nearby rivers. If the project falls short, investors receive less returns, meaning that the City protects its budget for other projects. If the project overperforms, the investors get an additional return, which the City is willing to provide because it means the projects are more effective than expected, and therefore the City doesn’t have to invest as much capital into similar projects going forward.
Environmental Impact Bonds align incentives, and everyone wins.
Below, we outline the opportunities created, and also the challenges presented. This should help answer the questions around how your city can tap into this source of financing.
Opportunity: Risk-adjusted Innovation.
This is a new model that borrows from learnings and best practices in finance, the social sector, and government. Leaders with foresight and a strategic mindset are being creative, taking risks, and getting noticed for their efforts. In Atlanta, the City will be offering the Environmental Impact Bond publicly via the Neighborly bond issuance platform and using the investment dollars to fund resilience projects in the Westside neighborhoods, which are prone to flooding. “Utilities nationwide are searching for innovative ways to acquire creative financing, and these projects will successfully demonstrate how community partners working together can advance green infrastructure for our communities,” said Kishia Powell, the Commissioner of Atlanta’s Department of Watershed Management, of the recent Atlanta EIB announcement.
The Environmental Impact Bond model is new and different. And change is always hard. As humans (and professionals), we naturally fight against it. So there is need to get everyone educated on these financial mechanisms and what they can do, as well as comfortable with how it works. In Baltimore, it was helpful to have strong internal champions as well as a partnership with the Chesapeake Bay Foundation, which interacts often with the city’s government. “Results matter. Local governments want a solution to this thorny problem of polluted runoff, but they also want to spend tax dollars wisely,” said Chesapeake Bay Foundation President Will Baker. “The use of this unique instrument for private investment offers better insurance that this expensive work will result in cleaner water, and the achievement of other community benefits in cities and towns.”
Opportunity: Get started now.
This new source of capital—impact investing—isn’t going away. And, with the passage of The Social Impact Partnerships to Pay for Results Act (SIPPRA) legislation which appropriates $100 million to a Treasury-controlled fund as part of the federal budget in February, Pay for Results is here to stay as well. The Environmental Impact Bond provides an opportunity to harness the power of these new capital sources and a chance to get to know the players and the potential not only for green infrastructure projects, but also for areas like job creation, public health, and even recreational space. The National Forest Service is looking at working with partners to build an 88-mile single track mountain biking trail in Wayne National Forest — located in the hills of Southeast Ohio — and the potential for an Environmental Impact Bond to finance it. This could create an economic boost for this rural area by drawing new visitors to the Forest, generating tax revenues from tourism for local governments.
Challenge: Finding a fit.
Given the different resilience challenges and regulatory requirements in each city, the first few Environmental Impact Bonds will require quite a bit of customization and a lot of cooperation. The more of these deals that close, the more we will be able to standardize and replicate more aspects of them. For this type of financing to become a real movement, we need to bring down costs and increase efficiency and effectiveness. Fortunately, there has been philanthropic support for some of these projects (such as from the Rockefeller Foundation for the project in Atlanta), which helps us get more of these under our belt and continuously improve given what we learn.
Opportunity: Stay curious. Learn. Repeat.
More than anything, we have to remain open to new ideas. We have enormous environmental, social, and economic challenges ahead, and we’ll need all the tools we can use to address overcome these challenges. The Environmental Impact Bond is just one, but it holds promise for a broader view of financing critical projects that support our communities.
Leave your comment below, or reply to others.
Please note that this comment section is for thoughtful, on-topic discussions. Admin approval is required for all comments. Your comment may be edited if it contains grammatical errors. Low effort, self-promotional, or impolite comments will be deleted.
Read more from MeetingoftheMinds.org
Spotlighting innovations in urban sustainability and connected technology
Housing that is affordable to low-income residents is often substandard and suffering from deferred maintenance, exposing residents to poor air quality and high energy bills. This situation can exacerbate asthma and other respiratory health issues, and siphon scarce dollars from higher value items like more nutritious food, health care, or education. Providing safe, decent, affordable, and healthy housing is one way to address historic inequities in community investment. Engaging with affordable housing and other types of community benefit projects is an important first step toward fully integrating equity into the green building process. In creating a framework for going deeper on equity, our new book, the Blueprint for Affordable Housing (Island Press 2020), starts with the Convention on Human Rights and the fundamental right to housing.
Since the Great Recession of 2008, the housing wealth gap has expanded to include not just Black and Brown Americans, but younger White Americans as well. Millennials and Generation Z Whites are now joining their Black and Brown peers in facing untenable housing precarity and blocked access to wealth. With wages stuck at 1980 levels and housing prices at least double (in inflation adjusted terms) what they were 40 years ago, many younger Americans, most with college degrees, are giving up on buying a home and even struggle to rent apartments suitable for raising a family.
What makes it hard for policy people and citizens to accept this truth is that we have not seen this problem in a very long time. Back in the 1920s of course, but not really since then. But this is actually an old problem that has come back to haunt us; a problem first articulated by Adam Smith in the 1700s.
More than ever, urban transit services are in need of sustainable and affordable solutions to better serve all members of our diverse communities, not least among them, those that are traditionally car-dependent. New mobility technologies can be a potential resource for local transit agencies to augment multi-modal connectivity across existing transit infrastructures.
We envision a new decentralized and distributed model that provides multi-modal access through nimble and flexible multi-modal Transit Districts, rather than through traditional, centralized, and often too expensive Multi-modal Transit Hubs. Working in collaboration with existing agencies, new micro-mobility technologies could provide greater and seamless access to existing transit infrastructure, while maximizing the potential of the public realm, creating an experience that many could enjoy beyond just catching the next bus or finding a scooter. So how would we go about it?