The largest estuary in the United States, the Chesapeake Bay, drains water from the states of Maryland, Virginia, Pennsylvania, Delaware, West Virginia, New York, and the District of Columbia.  With such a large drainage area, managing water quality within the Chesapeake has been particularly challenging, as efforts must be coordinated at the federal, state, and local level.  Since the discovery of the first ‘dead zone’ in the 1970s, the health of the Chesapeake has been a focus of environmentalists and a source of contention among stakeholders.  Yet now efforts to clean up the bay must be improved due to Environmental Protection Agency (EPA) mandates.  Finding innovative financing solutions for these necessary cleanups was the focus of the second in the Yale Center for Business and the Environment’s webinar series “Nature’s Returns: Investing in Ecosystem Services”. John Campagna, president of Restore Capital, spoke about the opportunities for public private partnerships for urban stormwater management in the Chesapeake Bay.

Why should municipalities pursue public-private partnerships (P3) to finance projects to meet their stormwater targets, rather than investing in these projects themselves? Campagna offered three main reasons:

1. Public sector resources are limited and can only finance projects on public land, not on private land.  This limits both the amount of money that can be spent and the spatial distribution of the projects.
2. The public sector can raise money through taxes, usage fees, or taking on debt, but their pool of available capital is limited compared to the amount of capital that the private sector can access.
3. Project development and implementation takes a long time to wend its way through the thickets of public sector bureaucracy, yet action is needed now.

Although stormwater trading markets are one potential solution for meeting goals, Campagna stated that they had failed to materialize, making another strategy necessary in order to achieve targets. P3 approaches are common for transport infrastructure and in European and Asian countries, but have been less utilized for water infrastructure.

How does it work? According to Campagna, the basic idea is as follows: The public sector needs to meet a certain target as mandated by the EPA or other environment agency.  They put out a call for proposal for private sector companies to make the necessary investments to meet the targets. These private sector investors can leverage bigger pools of finance, implement multiple projects, act more efficiently than the private sector, and move quickly.  In return, the public sector promises to pay the private sector what Campagna terms “availability payments”, payments designed to pay the private developer back over 30 years for their project costs.  These availability payments can be paid for through water taxes, additional payments from water users, or contributions from private businesses that benefit from the co-benefits of green infrastructure (sounds like investments in watershed services to me!).

What are the risks to this approach?

1. P3 partnerships encourage the development of new technologies and solutions to solve problems – but what if the technology is not effective?
2. Private investors may be inexperienced in managing, maintaining, and implementing water infrastructure.
3. Making “availability payments” may be easier than finding an upfront source of capital to fund a public works project, but finding that sustainable revenue stream over 30 years is still a challenge.