SPECIAL REPORT: Taking the 'high road'

How leveraging private sector resources for green infrastructure can achieve multiple public goals

By Issue Media Group

When Nikita Floyd was 11 years old, his father took him to a job site in a low-income area of Washington D.C. and put him to work picking up trash and mowing lawns. At the time, Floyd says he didn’t want to do that kind of work for a living because, “I didn’t get paid for it, it was a chore.”

But when he grew up, Floyd recognized an opportunity. He launched his own landscaping firm, Green Forever, and was eventually awarded “Business of the Year” in 2014 by the Prince George’s County Chamber of Commerce.

One of Green Forever’s signature services is something Floyd’s father likely never would have dreamed of. Floyd specializes in maintaining green infrastructure–the constructed wetlands, porous concrete, and bioswales increasingly being built across the nation to help manage stormwater.

Floyd came to the work through a “Mentor/Protege” program developed by Prince George’s County, Maryland as part of its commitment to assisting local and minority-owned businesses. The program was part of an effort to comply with a federal mandate to reduce polluted stormwater runoff draining to the Chesapeake Bay.

Prince George’s county didn’t just want to comply with a federal mandate. Instead, county leaders sought a more holistic solution to the problem. The county wanted not only to reduce its polluted stormwater, but also to help the community along the way.

The ‘high road’: A community benefits public-private partnership.

According to the American Society of Civil Engineers, the total investment gap for water and wastewater infrastructure in the United States is expected to be $105 billion by 2025. Increasingly, public agencies are looking to the private sector as a new way to help pay for underfunded public services and infrastructure.

Sanjiv Sinha, Ph.D., is a vice-president with Ann Arbor-based consulting firm Environmental Consulting & Technology, Inc. (ECT). With funding from the Great Lakes Protection Fund, Sinha is pioneering the application of market-based business concepts to stormwater work. He is leading market sizing studies and development of business plans for the use of these new concepts in the Great Lakes basin. His work is profiled in at www.p3greatlakes.org, a resource dedicated to assessing and, where appropriate, promoting the use of public-private partnerships (P3s) in the Great Lakes basin.

“Traditionally, looking at private sector has meant working with private investment to pay up-front costs for projects, allowing public agencies to build more quickly than slow public bonds would allow, and hopefully leveraging private sector efficiencies to lower cost”, Says Sinha. “But new P3 models go beyond this to combine private finance with project delivery, management, and maintenance, even linking outcomes to project performance and social goals.”

Prince George’s County entered into a novel kind of partnership agreement with a Rhode Island-based Corvias Solutions, a consulting firm specializing in public-private partnerships for building and managing public infrastructure projects.

The Clean Water Partnership is a Community-Based Public-Private Partnership (CBP3) between the county and Corvias Solutions. Through the 30-year agreement, Corvias executes and performs the finance, design, construction, operation, and maintenance of the Prince George’s County’s stormwater management programs. This means an entirely new approach to building new infrastructure–one that looks beyond water to solving additional challenges identified in the community.

“We sign on to achieve the goals built from a delivery standpoint, but also broader policy objectives, and we assume the risk,” says Greg Cannito, a managing director with Corvias. “For example, in our performance-based system, it’s not just about delivering work on time and under budget. We also have socio-economic workforce development hiring goals.”

Prince George’s County was under a court order to meet EPA Clean Water regulatory requirements, which requires it to treat 15,000 acres of polluted runoff by 2025. As part of this goal, CWP has been tasked with treating up to 2,000 acres of these impervious surfaces by constructing green infrastructure on both public and private land. Prince George’s County set additional requirements to utilize certified local, small, minority and women-owned businesses for 30–40 percent of the total project scope.

“High-road infrastructure is where you’re utilizing infrastructure as a platform in order to achieve greater services and greater outcomes for the community,” says Cannito. “We help develop and design the program, assume long-term management as the private partner with the public entity, and if they want to finance it, we can do the financing as well. Then we procure for the local market, develop programs with the schools with the local subcontractor base, and make sure the work gets done in the way that the public partner is hoping. Finally, we measure that based on the already predefined outcomes they hope to achieve.”

The project has exceeded these goals under budget and on-time, according to Cannito.

“We’ve saved by cutting the costs to achieve about 50 percent savings, and we’ve utilized 80 percent local, small, disadvantaged, county-based contractors,” says Cannito.

Designing the marketplace to gain private sector efficiencies

How was the Clean Water Partnership able to deliver such outstanding results? According to Cannito, it’s all about leveraging the efficiencies of the private sector.

“Stormwater is a highly piecemealed, fragmented type of work that municipal governments or governments do in the traditional design/bid/build mode,” says Cannito. “We were able to aggregate the work and put it into more of a large-scale design/build/operate/maintain kind of manufacturing line. We were able to scale it. That gained us a lot of efficiency and economy of scale.” Part of that process, says Cannito, was about taking the time to design the marketplace and create what he terms a “demand-based pipeline” of qualified labor to get the job done.

“Instead of just running out and designing the project and building it, we assess the subcontractor capacity of the marketplace. It’s a little bit of a ‘go slow to go fast’ approach, but what you’ll find is that the marketplace has the capacity. Nobody really takes the time to connect the dots.”

According to Cannito, many design-build projects undertaken in the public sector are missing opportunities to work with the private sector to leverage private competition and innovation.

“The public sector doesn’t ask enough of the private sector,” he says. Typically in a lot of cases, they’ll do an RFP for a project, and they’ll prescribe so much that the private sector just bids on what they prescribe knowing that they’ll change-order it later. Even if what they prescribe they know is not feasible, they know as long as they can check the box on that RFP, they can get selected and they can change order. This approach is really where instead of prescribing a scope to the private sector, it’s asking the private sector to provide proposals based on the outcomes that they want to be achieved.”

New approaches to green infrastructure financing

Financing is another key area where public-private partnerships can change the paradigm for how public infrastructure projects are executed. According to Cannito, financing should follow project design to allow the public agency to identify clear goals.

“Too many people are so focused on going to get financing, they forget about structuring a really good project,” he says. “The public sector should really be focused on their goals and achieving those outcomes, and allow the private sector to propose innovative solutions. The better you can structure a project’s goals, the public sector can have their pick of any type of financing that they want which can be approached at a later stage.”

That may include a mix of public and private financing. Cannito says that private financing is not necessarily more expensive than public financing if you consider overall costs of execution, and has the advantage of being able to fund a project up-front, which means water quality benefits can be realized right away as opposed to a decade down the road.

“Investors are attracted to project execution and surety,” says Cannito. “Having a program that is goal-oriented based on a broader vision is in line with the newer metrics of investors. And a project where you are getting the private sector to guarantee the surety of execution? Now you’ve taken the risk out of the project… and that makes it much more financeable for investors.”

One novel and promising approach to structuring financing is called an “Environmental Impact Bond” whereby a private financial institution provides financing upfront and then the payer, the government entity who benefits from that solution, pays back the financing based on predefined performance. This type of financing shifts the risk away from the public agency and onto the private investors.

Todd Appel is a vice-president with Washington D.C.-based investment firm Quantified Ventures, pioneering a “Pay-for-success” financing model that links investment performance outcomes.

Appel recently worked with the D.C. Water and Sewer Authority to pilot a project to finance 20 acres of green infrastructure as part of the District’s consent decree to reduce its combined sewer overflows under the Clean Water Act. The District was on the hook to build $2.5 billion in tunnels to reduce CSO volume but got an amendment to substitute 350 acres of green infrastructure to handle some of that reduction.

“So they were embarking on that and they were worried about the performance risk of the green infrastructure, would it actually reduce the volume of stormwater flowing into the sewer system under the consent decree? ” says Appel. “So they decided to do two things. One, start with a pilot. They’ll build green infrastructure on 20 acres initially. And secondly, finance that pilot with performance-based financing. So they issued a municipal bond of $25 million dollars for the design, build and maintenance of the green infrastructure on the 20 acres. And unlike a normal municipal bond, this one is tied specifically to the success of the green infrastructure in reducing the volume of stormwater.”

The investment is modeled based on expected outcomes and assigned probability ranges to create three payment tiers. The middle one is “as expected” or the most likely outcome that covers a wide range of probable outcomes. For this range, D.C. Water pays out their normal cost of capital. But if it’s “below expected” then the investors get close to zero percent interest.

“Effectively the investors are providing an insurance policy to D.C. Water if the green infrastructure totally fails,” says Appel. “And if the performance is “better than expected” the investors get premium. So this environmental impact bond is a way of passing on some of the risks of a green infrastructure deployment to investors.”

To determine payouts, baseline data on performance is being collected in the field and follow-up data will be collected over four years. In year five investors will know what tier the investment ended up based on performance, and will “square up” based on that. This was the first environmental impact bond issued in the country and the first instance of a municipal bond having an outcome-based payment according to Appel.

Quantified Ventures is now looking to replicate the program through a program funded by the Rockefeller Foundation to identify two U.S. cities in which to test this model of financing for green infrastructure. The firm is also working with the Chesapeake Bay Foundation to select four communities in the Chesapeake Bay Watershed to finance their green infrastructure programs with environmental impact bonds. Clearly, while the concepts are new, many thought leaders are rapidly beginning to explore it.

Can this work in the Great Lakes?

So far, public-private partnerships have not been a part of stormwater management in the Great Lakes region, which still relies mainly on public funding to create and implement green infrastructure.

Sinha’s Great Lakes focused team includes both Corvias and Quantified Ventures, as well as other companies that bring in cutting-edge, national expertise to the basin.

“One key challenge to the use of these new concepts to water infrastructure is that there is a significant knowledge gap. So far no one is advising communities or agencies by clearly articulating why they should even consider this approach,” says Sinha.

Sinha’s team has analyzed several P3 frameworks for Milwaukee Metropolitan Sewerage District (MMSD) and Northeast Ohio Regional Sewer District that collectively serve dozens of Great Lakes communities, and has developed prototype business plans for implementation.

“We believe these frameworks are equally relevant in other regions across the Great Lakes and beyond,” says Sinha.” We do know the Great Lakes market has the appetite for large-scale green infrastructure. A report we recently published shows that five Great Lakes states can support well over a billion dollars of investment in green infrastructure.”

Sinha’s work with the MMSD shows that there are significant values to be gained by the use of a CBP3.

The MMSD is a regional wastewater utility with a 411 square-mile service area serving 1.1 million people. The MMSD has built a deep tunnel system and has been able to reduce its combined sewer overflows to a point where they only occur once or twice a year now, meeting its obligations under the Clean Water Act.

Despite this achievement, MMSD is looking to implement green infrastructure within its service area as part of its 2035 Vision, which calls for a goal of 740 million gallons of treatment via green infrastructure to be built

“We’re looking for green infrastructure to add a layer of additional capacity and resiliency where water falls,” says Kevin Shafer, Executive Director of the MMSD. “The benefit of green infrastructure is that it’s not only for stormwater quantity and quality, but that it also produces a whole host of benefits that gray infrastructure can’t. So, whether it’s increased property values, better quality of life, aesthetics, what have you, there are so many other things that green infrastructure brings to the table.”

And Shafer is looking with keen interest at what has been happening in Prince George’s County, Washington D.C. and elsewhere.

“We see green infrastructure, both the infrastructure and the maintenance of it, as a possibility of employing a variety of folks, to be able to give them a living wage to move forward, and as a way to revitalize and improve the quality of life in some of the lower-income areas,” says Shafer. “And we’re finding that gallon for gallon, green is at least cost-competitive with gray infrastructure.”

Shafer is looking into multiple ways of financing and implementing its green infrastructure goal. According to a report by ECT, MMSD stands to save $500 million in costs over 30 years by taking a CBP3 approach. But for Shafer, while compelling in looking out for ratepayers’ interests, the appeal goes beyond dollars and cents.

As chairman of the board at the U.S. Water Alliance Shafer is at the vanguard of a movement to integrate water quality into the entire quality of life of an area.

“It really is looking at this “one water” approach, trying to not just improve water quality, but to improve neighborhoods, the livability of cities, increase economic development, and benefit the quality of life of the entire area,” says Shafer. “That brings with it a lot of efficiencies that can also help meet some of these other social goals that we’re looking for as well.”

A Q&A with Adam Ortiz

Adam Ortiz, Director-Department of Environment, Prince George’s County

Adam Ortiz is Director of the Department of the Environment for Prince George’s County and has been a champion of the Community-Based Public-Private Partnership approach. Here we chat with Ortiz about his goals for the county and why a CBP3 made sense.

How did you get to the point where you were considering the CBP3s?

Adam Ortiz: We like the structure of a CBP3 because we feel it is structured properly and is a thoughtful and efficient way to get work done. We also felt that the private sector brings strengths that the government does not have to achieve goals in a timely manner.

For us, our top priority, countywide, is growing our commercial tax base and developing small businesses, and we felt through this process we could do that more effectively than the conventional government processes.

How does a CBP3 help you reach your goals as far as growing a tax base, growing the economy?

Ortiz: The way that we structured the CBP3, is that the private partner is paid based on performance metrics, and that include community benefits. So for us, that includes aggressive goals for small business procurement, mentorship, and county-based business development.

So in a nutshell, more than 50 percent of the contractors have to be county-based, and we have similar targets for small minority businesses. If they don’t reach them, they don’t get paid.

Our partner in the Clean Water partnership, Corvias, has taken that to heart, and they’ve far exceeded our metrics to the tune of about 90% local contracting. So we’ve seen small minority businesses grow. We’ve seen businesses relocate from other jurisdictions to ours so they can be more competitive in this emerging stormwater economy

How did the county decide what specific community benefits it would be asking for in these projects? What was that process like? How were those needs prioritized?

Ortiz: The county executive set the tone that jobs are a top priority in local business development. And sort of the bigger dynamic is, in this region, Prince George is sort of the underdog county. We have the smallest tax base per capita locally, and most of our working population goes to another county or to Washington D.C. for work, so this is a big drain on our resource base. And it’s something we thought we could help correct through the stormwater program.

What do you think the most successful aspect has been and where do you think improvement is warranted?

Ortiz: We’re always learning about efficiencies and because this is a public type of partnership, where big dollars are involved. We’re able to aggregate projects and contractors in a way that provides a lot of flexibility and selection of project types and in contractors.

But also, we’re finding that we’re in a commanding market position to drive efficiencies and bring costs down. So this is a very young industry, so we’re constantly learning how to do things better, but by far, we’re literally 60 percent more efficient than with the conventional approach.

One area that we just got our heads around was purchasing soil. There is sort of a community of boutique soil blenders, for landscaping projects and stormwater, and because we were able to bring so much money to the table, we were able to generate new mixes and economies of scale that created a tremendous amount of efficiency.

What advice do you give to communities in the Great Lakes who might be considering ways to better overhaul old legacy systems that are failing and build new infrastructure?

Ortiz: We’re seeing a renaissance in sophistication for infrastructure projects. Doing them more smartly, doing them with community benefits. And finding the right mix between private efficiencies and public oversight.

So there’s a lot of literature out there, but a lot of it is fairly new. Pennsylvania, for example, is doing great stuff on bridge upgrades through public/private partnerships. There are new financing models, which are bringing costs down. Particularly for transit and road projects, there are new models that are finally working, where we’re able to provide the surety to the private entity but also guarantee results for the public good.

To what extent can this public-private approach reduce the need for federal infrastructure funding?

Ortiz: Well everybody has their role, and there’s no question that the feds have their role, as well. I’m in an industry that has delegated authority and delegated funding mandates, so that’s why we do it ourselves. But a lot of the major road, bridge, and public transit require a strong federal interest.

I think the CBP3s are an enlightened delivery tool. But they are not a panacea. It will still require dedicated funding, still require an invested and somewhat adventurous public sector, and also require a private entity that is willing to take on risk, but has a genuine social mission that has long-term stake, rather than achieving quick profit.

What advice do you have for Great Lakes entities as they consider how to potentially leverage CBP3s to meet their public infrastructure goals?

Ortiz: Green infrastructure projects are tailor-made for a large portfolio. So they should perhaps be more inclined to scaling up than scaling down, and that provides more flexibility for the private partner.

They should try not to be too prescriptive on the precise locations, because a private partner may be able to mix and match different types of projects in different places that the public entity may not know about.

They should also have a willingness to invest in private properties. There’s only so much work that can be done in the public right of way. If it’s a public benefit, I think it’s justified to spend public money on private properties. That’s a little controversial, not everybody agrees with that.

Make sure to do the politics right. So for us, it was jobs. Another one is revitalization.

Green infrastructure is beautiful, and it’s a great way to improve the aesthetics of neighborhoods that are distressed or not seeing the market drive improved curb appeal.

I think that it’s important not to see the project narrowly. Utilities and governments are public institutions with a broad public mandate, so when they’re spending a dollar, they should see how that dollar can be invested toward multiple public goals such as beautification, such as job creation, such as small business development, such as community engagement, such as education.