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D.C.'s Social Impact Bond Deal Will Fund Infrastructure

PHOENIX — The District of Columbia Water and Sewer Authority plans a first-of-its kind environmental impact bond using a "pay for success" model to finance infrastructure.

Investors would be rewarded based on how effectively the new green infrastructure controls stormwater runoff.

The authority's board Thursday approved a $20 million to $30 million private placement of 30-year bonds to finance two green infrastructure projects, one in the Rock Creek and one in the Potomac River sewershed.

The bonds will be social impact bonds, a type of obligation combining a performance contract with a contingent loan in which the investors providing the funding are repaid by the government from budgetary savings and societal benefits generated by successful outcomes.

The project must achieve those savings and benefits for the investors to be repaid.

While the handful of previous U.S. social impact bond issuances have focused on homelessness, public health, and other social issues, the DC Water deal will be the first SIB to finance environmental outcomes, with a portion of the payments to the investor contingent on the effectiveness of green infrastructure in managing storm water runoff.

While two-thirds of D.C. is serviced by separate sanitary and storm sewers, one-third is serviced by a "combined" sewer system that dates back to the late-19th century. In a combined sewer system, storm water and sewer flow share a pipe.

During periods of heavy rain or snowmelt, the volume in a combined sewer system can exceed the capacity of the sewer system or treatment plant. In these situations, the combined sewer system is designed to overflow directly into local water bodies resulting in combined sewer overflows.

DC Water has modified its previous plan to use tunnels, or so-called gray infrastructure, to control the runoff, and replace at least sections of it with green infrastructure such as porous pavement and rain gardens designed by proven green infrastructure providers to be selected by a competitive bid process.

DC Water believes that the green infrastructure can improve water quality, enhance air quality, increase property values, beautify neighborhoods, cool extreme summer temperatures, support natural habitats, enhance public space, and support local jobs.

The target for the green infrastructure to be in place is mid-2019. Once the infrastructure is in place, DC Water will then conduct 12-months of pre- and post-construction monitoring of storm water runoff. The agency will then develop a "confidence interval" benchmark to measure project performance, with three tiers of performance based on whether the runoff reduction exceeds the benchmark, falls within the interval, or comes up short.

A Tier 1 outcome would pay investors principal, interest, and an "additional outcome payment." A Tier 2 outcome would pay investors principal and interest. A Tier 3 outcome, which DC Water would consider a failure, would trigger a "risk share payment" by the investors to DC water.

According to DC Water Board minutes, DC Water chief financial officer Mark Kim told the board that the agency would revert back to using gray infrastructure in the event of an unsuccessful outcome. Kim told the board that this financing structure was designed to "manage or hedge the risk" associated with the project.

DC Water hopes to close the deal this month.

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