United States
Environmental Protection
Agency
Community Based
Public-Private Partnerships
(CBP3s)
and
Alternative Market-Based
Tools for Integrated
Green Stormwater
Infrastructure
p
Public Private Partnerships
A Guide
For Local Governments
ySk)
Green InfrastructureDriven
Urban Stormwater mkof it
ITIATIvfJ
PREPARED BY U.S. EPA REGION 3
Water Protection Division
April 2015
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April 2015
Table of Contents
Page
Foreword v
Executive Summary viii
I. Introduction 1
Urbanization and the Role of Green Infrastructure 1
The Need for New Stormwater Solutions 7
Environmental Regulatory Drivers 8
Traditional Stormwater Program Approaches Cannot Meet Community Needs 10
Potential Economic and Water Quality Benefits of Green Infrastructure
and Innovative Designs and Technologies 10
Advantages to Public Agencies Entering Into CBP3s for Green Infrastructure Retrofits. 11
II. Traditional P3s in the U.S. and Their Use in the Water Sector 12
P3 Contract Structure 12
Traditional P3s and the Water Sector 12
Value and Risk Assessment 13
Federal, State, and Local Regulatory Policies Supporting P3s 14
Transportation, Water Sector, and Energy P3s 19
P3 Investments 21
III. Comparing a CBP3 for Urban Retrofits to a Traditional P3 22
Evolution of the CBP3 Model and Use to Address Urban Retrofit Challenges 22
A Model for the CBP3 24
CBP3s Support an Affordable Green Infrastructure Retrofit Approach 25
Benefits and Potential Cost Savings of CBP3s for Green
Infrastructure Stormwater Retrofits 25
Key Components of the CBP3 28
CBP3 Gl Retrofit Alternative Financing Model Works to Utilize
Drivers and Overcome Barriers 29
IV. CBP3 Highlights for Municipal Leaders 31
Key Considerations 31
Potential CBP3 Pitfalls and Limitations 35
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April 2015
V. CBP3 Highlights for Financing Officials and Advisors...........................37
Finance Strategy & Approach 37
Financially Structuring a Long-Term Government Partnership 39
Relative Cost of Financing 41
Collaboration with a Private Partner to Establish the Right Financing Structure 43
Risks and Benefits of the CBP3 Structure 44
Advantages of this Finance Strategy to a Government Entity 44
Program Reserves that Create Surety of Execution 47
VI. Determining if a CBP3 is Appropriate ....................................................49
Implementation Challenges and Barriers for Local Governments 49
CBP3 Community Considerations 50
P3 Legislative Climate in the Chesapeake Bay- Mid-Atlantic Region 52
VII. Partnership Checklist ............................................................................59
Sustainable and Predictable Revenue Streams 59
Measurement and Verification 59
Other Community Benefits 59
Jobs 60
Outreach 60
Stormwater and Local Building Permit Programs 60
Procurement and Contract Process 60
Policy and Regulations 61
VIII. Establishing the Steps for Developing a CBP3 ......................................62
Key Activities 62
IX. Potential Business Structures for Gl-Driven
Stormwater Management CBP3s ...........................................................64
Partnership Model Using an LLC 65
CBP3 with Municipality in a LLC/Partnership 66
CBP3 - Purely Private LLC in Contractual Arrangement with Municipality 68
Municipality Borrowing Public Capital and Contracting 69
X. Examples of Gl-Driven P3 Approaches in the Mid-Atlantic....................71
Introduction 71
Driver/Need for a New Business Model 71
EPA's National Interest in a New Retrofit Business Model 72
Public Private Partnerships in General 72
Best Fit P3 Model for Urban Retrofit 73
P3 Benefits and Advantages 74
P3 Program Unique Features 77
Lessons Learned 78
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April 2015
XI. Use of Alternative Market-Based Tools 80
,"r ass m w *ปฆ %|T
Gl Implementation at the Operational Level 80
Ro/es at the Operational Level 80
Turn-key Service Providers 81
Market-Based Tools and Private Properties 82
Philadelphia's Greened Acre Retrofit Program (GARP) 85
Incentivizing Green Infrastructure Retrofits with Trading in the District of Columbia 87
XII. Potential Financing and CBP3 Implementation Scenarios
fr EIPifik Rccpin ....................................................................................
Public-Private Partnerships and the Impact on Stormwater Financing 89
Scenario 1: General Fund Financing 90
Scenario 2: Stormwater Utilities 91
Creating Program Efficiencies and Financing Innovation:
State Revolving Funds and Grant Programs 95
Scenario 3: Leveraging Private Investment through the SRF Program 95
Scenario 4: Establishing P3s through Targeted Grant Programs 96
CBP3 Hypothetical Scenarios for Mid-Atlantic Communities 99
Scenario 1: Dedicated Stormwater Fee 100
Scenario 2: VA Phase IMS4 - No Dedicated Stormwater Utility Fee 101
Scenario 3: PA Phase II MS4s - Regional Approach 102
Scenario 4: DC Phase IMS4 and Stormwater Retention Credit Trading Program 103
Scenario 5: DE Phase I or II- PACE or SRF Leveraging 103
Scenario 6: Philadelphia, PA - Grant Funding Leveraging 104
Rc ^6 r^ป ti 06 s..................................................................................................... 106
IV
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April 2015
Foreword
The purpose of the Clean Water Act (CWA) is to restore and maintain the chemical, biological,
and physical integrity of the nation's waters. Passage of this legislation over 40 years ago led to
unprecedented efforts to clean up U.S. waters in order to render them fishable and swimmable.
These efforts, largely driven by funding from the federal government, have resulted in substantial
reductions in the discharge of pollutants from point sources and yielded significant improvements
in water quality throughout the country. These water quality improvements allowed recovery of
aquatic ecosystems and greater public uses of the resources.
While most of the traditional point sources have been reasonably addressed, further improvements
will require addressing non-traditional point sources and non-point sources of pollution
(stormwater) - one of the leading causes of water quality impairment and diminished watershed
health. Both of these pollutant sources will have much greater social and economic consequences
than we have faced in the past. In addition, many of the engineering fixes which controlled point-
source pollution are now reaching the end of their useful life. This will require even greater
financial resources than those committed during the first four decades of the CWA. Pollution
associated with stormwater runoff has increased in many watersheds across the country, including
the Chesapeake Bay watershed. It represents the major challenge to this country's water quality in
the twenty-first century. According to EPA's National Water Quality Inventory: Report to
Congress (U.S. EPA, 2010a), nonpoint source pollution from agriculture and urban runoff is the
primary reason that more than 40 percent of surveyed rivers, lakes, and estuaries are not clean
enough to meet basic uses such as fishing or swimming.
While agricultural pollution is of significant concern, stormwater runoff is the fastest growing
source of pollution to the Chesapeake Bay. This growing source of water pollution ties to the pace
of urban and suburbanization. Between 1990 and 2007, impervious surfaces associated with
growth in single-family homes are estimated to have increased about 34 percent, while the
watershed's population increased by 18 percent. Moreover, one percent (1%) or less of existing
impervious land was developed prior to the establishment of stormwater management
requirements and currently has very little infrastructure in place to manage against impacts to water
quality. Considering this trend, impacts from impervious cover will continue to degrade our
nation's waters. This calls for a significant amount of effort to retrofit existing infrastructure
systems in urban areas. Regulatory requirements reflecting this need are likely to be incorporated
into Total Maximum Daily Load (TMDL) thresholds as well as plans to reduce the frequency of
Combined Sewer Overflow (CSO) events.
Rising coastal waters, an increase in the frequency of localized flooding, and the need for resilience
due to changing climatic conditions are additional critical considerations that communities must
address. During a time of economic constraints at the local level and limited federal funds, many
communities must consider alternative ways to finance, construct, operate, and maintain their
stormwater management systems in ways that provide multiple versus singular benefits. The
management, administrative, and fiscal responsibilities required to operate the extensive amount
of construction for regulatory compliance, management of stormwater runoff, and protection of
public and private properties from localized flooding is a significant burden for many
communities.
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April 2015
The use of a Green Infrastructure (GI) retrofit approach based upon volume control and other Low
Impact Development (LID) stormwater best management practices (BMPs) can restore water
quality through on-site retention and infiltration and/or rainwater harvesting. GI has many co-
benefits beyond water quality improvements such as job creation, economic development
/revitalization, public health enhancements through air quality improvement, and reduced energy
costs (Kloss, 2008; Wise, 2007; Currie and Bass, 2005; Wise et al. 2010). Many communities have
concerns about the costs associated with the operations and maintenance (O&M) of GI systems as
well as the long-term treatment performance of these systems. Many traditional stormwater
programs do not have the administrative or financial capacity to meet the management and project
procurement requirements associated with the integration of GI systems and conventional "grey"
stormwater management. Regardless of what approach a community takes, the size and type of
urban retrofit needed to meet desired water quality goals will require major capital investments,
long-term commitments to O&M, adoption of affordable, higher performing, innovative
technologies, and faster procurements; and will likely result in greater administrative burdens for
local governments.
Public Private Partnerships (P3s) have the potential to help many communities optimize their
limited resources through agreements with private parties to help build and maintain their public
infrastructure. P3s have successfully designed, built, and maintained many types of public
infrastructure, such as roads, and drinking water/wastewater utilities across the U.S. Until recently,
there have been no P3s specifically developed for stormwater management or Clean Water Act
requirements. The U.S. Environmental Protection Agency (EPA) Region 3 Water Protection
Division (WPD) has been researching, benchmarking, and evaluating P3s for their potential
adaptation and use in the Chesapeake Bay region. On December 6, 2012, the EPA Region 3 WPD
hosted a P3 Experts Roundtable in Philadelphia, PA (U.S. EPA, 2013a). The goal of the P3
Roundtable was to provide a forum for a targeted group of private sector representatives to discuss
in detail the feasibility, practicality, and benefits of using P3s to assist jurisdictions in the finance,
design, construction, and O&M of an urban stormwater retrofit program. The results of this
Roundtable are the foundation and approach for applying a stormwater P3 model across the
Chesapeake Bay watershed.
This guide will provide communities with an opportunity to review the capacity and potential to
develop a P3 program to help "close the gap" between current resources and the funding that will
be required to meet stormwater regulatory commitments and community stormwater management
needs. In addition, this guide and the tools presented are a continuing effort, commitment, and
partnership between EPA Region 3 and communities in the Chesapeake Bay region. We believe it
will help to raise the bar and further advance the restoration goals and objectives for the
Chesapeake Bay.
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April 2015
Acknowledgements
Our sincere thanks and appreciation go out to all who helped in the production of this guide book,
including the numerous practitioners and experts consulted throughout this process.
We especially thank the following for their leadership, support and significant contributions:
JonM. Capacasa, Director, U.S. Environmental Protection Agency (EPA), Region 3 Water
Protection Division (WPD),
Dominique Lueckenhoff Deputy Director, U.S. EPA, Region 3 WPD, EPA Lead,
Seth Brown, US EPA Contractor
Jada Goodwin, Executive Assistant, US EPA Region 3 WPD
Thanks also to Denise Rigney, US EPA, Contracting Officer Representative and Lee-Anne Tracy
ofSRA, Inc., an EPA Contractor.
For additional information, please contact:
Dominique Lueckenhoff, Deputy Director, Water Protection Division
US Environmental Protection Agency Region III
1650 Arch Street (3WP00)
Philadelphia, PA 19103
Lueckenhoff.dominique@epa.gov
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Executive Summary
This document presents a model Community
Based Public Private Partnership (CBP3) Communities will need neu- approaches to
, , , funding stormwater management programs in
program, with a variety of emerging market-based order t0 protect and restore water qualjtv in
tools, that will help municipalities in the accordance with the Clean Water Act while
Chesapeake Bay region meet their Stormwater meeting the challenges of climate adaptation and
management regulatory and community infrastructure redevelopment for the
development municipal stormwater management 21st Century...
program needs. A key foundation of this approach
is the establishment of a long-term operating space for shared interests between the local
jurisdiction and the private sector partner, whereby partners can share risks and take advantage
of what each partner does best in order to achieve desired performance goals and objectives.
The primary audiences for this document are municipal officials; program managers; procurement
officials; environmental, legal and financing experts; and decision-makers that are interested in
providing their communities with new and innovative ways to implement and finance large-scale
stormwater retrofit programs and efforts. A traditional P3 is a performance-based contract between
the public sector and the private sector to arrange financing, delivery, and typically long-term
operations and maintenance (O&M) of public infrastructure. Communities of all sizes across the
country have been using the P3 approach to meet their transportation, solid waste, energy and
drinking water/wastewater infrastructure needs. The CBP3 includes many features of the
traditional P3 model, but has modifications to meet the unique requirements of stormwater
management systems. These modifications include a focused effort to invest in Green
Infrastructure (GI) approaches that provide for local economic growth and improved quality of life
in urban and underserved communities.
The U.S. Environmental Protection Agency (EPA) Region 3 Water Protection Division (WPD)
synthesized the CBP3 approach for sustainable stormwater management through an extensive
effort to research, benchmark, and evaluate P3s and determine how they can be adapted to meet
the unique requirements of the Clean Water Act (CWA), Watershed Implementation Plans (WIPs),
and local water quality needs in the Chesapeake Bay. EPA Region 3 WPD is assisting local
communities in developing sustainable approaches to meet stormwater retrofit requirements.
Many communities will face significant investments in stormwater infrastructure driven by
regulatory requirements, such as meeting goals to retrofit up to twenty percent (20%) of urbanized
areas. Beyond regulatory drivers, others are exploring full integration of GI approaches into their
stormwater retrofit programs. Fully integrating GI into stormwater programs would allow
communities to leverage multiple development and infrastructure benefits, and potentially to use
stormwater funding for other community and environmental programs. The use of GI will create
a tremendous opportunity for communities to conquer the fiscal, administrative, regulatory, and
capacity issues that are associated with retrofit programs. A CBP3 model is ideally suited to meet
the programmatic requirements of a GI approach.
* Respecting that the use of CBP3s for Gl-driven investments is nascent, this document should be
regarded as the '1.0.' version with updated versions expected in the future reflecting the changing
nature of this dynamic sector.
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On December 6, 2012, EPA Region 3 WPD hosted a P3 Experts Roundtable in Philadelphia, PA.
The goal of the P3 Roundtable was to provide a forum for a targeted group of private sector
representatives to discuss and make recommendations for the feasibility, practicality, and benefits
of P3s to assist jurisdictions in the finance, design, construction, and O&M of urban stormwater
retrofit programs using GI. The outcome of the meeting helped provide the foundation, guidance,
and motivation for the development of the CBP3 (U.S. EPA, 2013 a).
Partnerships between the public and private sectors have created a range of strategies to finance,
plan, design, construct, operate and maintain public assets and/or deliver services. Partnering with
the private sector has been identified as viable alternative solution that will improve and sustain
the ability of local governments to protect and restore our nation's waters by:
Creating economic feasibility for stormwater retrofits,
Helping to leverage local government resources,
Fostering the development of cutting edge LID and GI strategies and technologies, and
Expediting project delivery.
Using market forces to drive down costs for design, construction, and maintenance accelerates the
implementation of long-term LID/GI infrastructure retrofit programs (U.S. EPA, 2013a).The
information presented in this document will help decision-makers to determine if a CBP3 is right
for their community. The document sections provide background information, examples,
checklists, scenarios, case studies, and metrics to determine if investment in a more thorough
investigation and evaluation of a CBP3 is appropriate. The document organization includes the
following:
Section 1: Introduction - Background on the need for a stormwater-based P3. It includes
descriptions of critical stormwater infrastructure program needs and regulatory drivers. The
section also presents some of the key reasons why a P3 model is ideal for integrating GI into
urban stormwater retrofits, which will be a critical tool to help communities meet their
regulatory obligations and stormwater infrastructure needs.
Section 2: Traditional P3s in the U.S. and Their Use in the Water Sector - Examination
of key elements of a traditional P3, and its use in the transportation, drinking water and
wastewater, and energy sectors. Information on financing, regulatory requirements,
procurement and contract issues, and other key considerations and elements that are required
to establish a P3.
Section 3: Comparing a CBP3 for Urban Retrofits to a Traditional P3 - Overview of the
key infrastructure financing issues that create the need for a stormwater P3. Additionally, this
section includes a description of the military's Residential Communities Initiative, which is
the basis for many of the CBP3 elements discussed; and this section presents key elements and
unique features of a CBP3, including a comparison of the CPB3 to a traditional P3.
Section 4: CBP3s Highlights for Municipal Leaders - Summary of the background, key
facts, and outcomes related to using a CBP3 approach targeted for municipal program
managers and elected officials.
Section 5: CBP3 Highlights for Financing Officials - Highlights and adaptability of a CBP3-
driven finance strategy and platform for finance officials, advisors and investors.
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Section 6: Determining if a CBP3 is Appropriate - Listing of key questions and
requirements that a community can reference to evaluate whether a CBP3 model is appropriate
for the community to undertake. It also includes an evaluation of current state regulations and
legislation in the Chesapeake Bay region that affect the establishment of P3s. Hypothetical
scenarios illustrate applications of the CBP3 in EPA Region 3.
Section 7: Partnership Checklist - A series of critical issues and requirements that should be
addressed in the development of a CBP3 to the right focus and success for partners.
Section 8: Establishing the Steps for Developing a CBP3 - A series of checklists, key
program elements, and sample activities to help communities further define and shape the
foundations of a CBP3. This information helps communities conduct more in-depth
investigations and feasibility studies related to using a CBP3 approach.
Section 9: Potential Business Structures for GI-Driven Stormwater Management CBP3's
- Multiple options for establishing the long-term contractual, management, governance, and
financial relationships between the local government and the CBP3 Partner.
Section 10: Examples of GI-Driven P3 Approaches in the Mid-Atlantic - Highlighting a
number of innovative approaches being undertaken by Region 3 communities to facilitate
stormwater retrofits in partnership with the private sector, through regulatory, community, and
market drivers.
Section 11: Integration of Alternative Market-Based Tools into the CBP3 Approach -
Trading and cost-threshold grant funding frameworks layered under a CBP3 program can
enhance efficiencies, cost-savings, and overall value as well as helping to operationalize GI
implementation at the site level.
Section 12: Potential Financing and CBP3 Implementation Scenarios for EPA Region 3
- The wide-range of financing mechanisms that are currently and potentially available to fund
planning, construction, and operations of the partnership activities.
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I. Introduction
A Community Based Public Private
Partnership (CBP3) is a partnership between
a local government and a private entity. The
partnership provides flexibility, implements
advances in technology, addresses dynamic
community development trends and goals,
and instills long-term financial and
regulatory commitments for integrating
Green Infrastructure (GI) into stormwater
management programs.
This section discusses why communities in
the Chesapeake Bay region, of which a vast
majority is located within U.S. EPA Region
3 (see Figure 1), will benefit by taking
advantage of this new model to finance and
manage stormwater regulatory and
infrastructure programs. Included in the
discussion are:
A description of the impacts of
stormwater runoff on downstream waters
and an overview GI practices, costs, and
the benefits associated with these
practices;
A review of the critical regulatory,
resource protection, stormwater, and
fiscal and capacity programs that
communities need to address;
An explanation of why traditional grey
infrastructure stormwater management
program approaches will not allow
communities to meet requirements; and
A discussion of the emerging value of GI
for urban stormwater management
retrofits and why this new financial and
stormwater program approach is
successful.
The goal of a CBP3 is to create a transparent
framework that aligns public, private, and
community stakeholders in a long term legal
arrangement and governance structrure that
is founded on the spirit of stewardship and
common objectives. This creates a
partnership that allows contractors to act
efficiently and achieve the regulatory and
community goals more effectively.
PA
/ O V DE
WV VA IHmd
DC
Figure 1 - U.S. EPA Region 3 states
(Source: https://clu-in.ore/ecotools/reeiais/reeiai3.cfhi)
Urbanization and the Role of
Green Infrastructure
Impacts of Urbanization and Early
Stormwater Management Efforts
A landscape comprised primarily of
hardscape (impervious surfaces), which is
closely associated with typical urban
development, leads to increased flooding,
reduced air and water quality, loss of
aesthetic value, and increased temperatures
through the "urban heat island" effect
(Konrad, 2003, Vingarzan and Taylor, 2003,
Kloss, 2008).
The standard method of practice in the U.S.
to address the impacts of urban stormwater
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runoff in the 1970's and early 80's focused
on reducing peak flows of moderate and low-
frequency storms, such as the 10- and 100-
year storm events (National Resources
Council, 2009). Peak flow management was
often addressed through the use of retention
or detention basins to capture flows at a
regional or a land development project level
(National Resources Council, 2009).
Research has shown that the use of retention
or detention facilities without regard for other
basins or sites can actually exacerbate
downstream flooding impacts and channel
erosion because volume is not controlled
(McCuen, 1979, Ferguson, 1991, Traver and
Chadderton, 1992, U.S. EPA, 2005d).
Regarding the protection of streams from
erosion, MacRae (1996) showed that stream
bed and bank erosion occurs more frequently
and during smaller streams than those
traditionally detained in stormwater
detention/retention facilities. Further,
Hawley et al. (2013) has documented that the
action of detention facilities to increase the
duration of erosive flows to receiving waters
provides additional stress and destabilization
of downstream waters.
A well-known study, known as the National
Urban Runoff Program (NURP), was the first
large-scale effort to document pollutant
loadings associated by land use. A significant
result from the NURP study was that runoff
generated by storm events between 0.5 and
1.5 inches represented a majority of the total
runoff generated on a site (EPA, 1983). An
additional finding of the NURP study was
that a strong relationship exists between
cumulate runoff volume and pollutant
loading. Specifically, the conventional
wisdom is that a majority of pollutant loading
occurs within the first one-inch of runoff
generated from a site (National Resources
Council, 2009). This spawned this concept of
capturing and treating the "first flush" of
runoff. Many stormwater programs have
targeted this runoff volume as the "water
quality volume" to be captured, detained,
treated and released. This led to the concept
of "extended detention" facilities treat the
water quality volume. Further research has
shown that the first flush varies more the
previously thought (City of Austin, Texas,
1990).
Due to the recognition of the adverse impacts
of impacts of detention on receiving waters
as well as a desire to meet broad watershed
goals in stormwater management efforts, the
recent goal in the stormwater management
sector has focused on the retention of urban
runoff (National Resources Council, 2009).
The use of GI in the urban environment
provides this retention-based performance.
Additionally, GI has been shown to mitigate
the effects of urbanization by not only
reducing runoff through infiltration, but also
reducing airborne particulates, reducing
energy costs, lowering ambient air
temperatures, and enhancing the social and
economic value of urban areas (Miller 2007,
Wise 2007, Currie and Bass, 2008, Wise et al.
2010).
Overview of Green Infrastructure
Practices
When presenting information on GI, EPA
states that this type of infrastructure, "uses
vegetation, soils, and natural processes to
manage water and create healthier urban
environments" (U.S. EPA, 2014a). The
universe of GI practices varies between
regulated entities, but there are common
categories that have emerged. The following
is a subset of GI practices listed by U.S. EPA
(2014a) along with a brief definition of each.
More information on these practices can be
found at the following website
http://water.epa.gov/infrastructure/greeninfr
astructure/.
Downspout disconnection
Rainwater
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April 2015
Rain gardens (bioretention)
Planter boxes
Bioswales
Permeable pavements
Green roofs
Differing types of GI practices are more
suitable for specific situations and
landscapes, reflect varying treatment levels,
and provide unique benefits. For instance,
green roofs are well-suited for high-density
urban areas, such as on large industrial or
office buildings (U.S. EPA, 2014a), can
reduce total annual runoff from a building
envelope by 60 to 70 percent (Kohler, 2006),
and can reduce temperatures on building
rooftops by between 40-60 degrees
Fahrenheit (Gaffin, et al. 2005). These
practices are generally categorized as being
extensive or intensive in profile, with the
former being considered "thin" and defined
as having a substrate of 5-15 centimeters with
the latter having a more robust profile of
greater than 15 centimeters (Carter and
Butler, 2009). In Germany, where green roof
technology is widespread (Pederson, 2001)
over 80 percent of green roofs are extensive
(Harzmann, 2002). Due to the ubiquitous
nature of extensive green roofs, that this will
be the default considered when discussing
green roofs.
The typical extensive green roof includes
four components: a waterproof membrane, a
drainage layer, a growing medium, and a
vegetative covering layer (see Figures 2 and
3). A study by Li and Babckock (2014)
illustrates how green roofs used widely in an
area has, "the potential to mitigate flash flood
risks, reduce stresses on downstream storm
drainage structures, and return to a more
natural, pre-development hydrological
cycle." More specifically, this study
illustrates that storm water runoff volume can
be reduced by 30 to 86 percent and reduce
peak flow rate by 22 to 93 percent. Costs for
green roofs typically range from $30 to $40
per square foot (U.S. EPA, 2009).
Figure 2 Typical cross-section of an extensive green roof
system (Source: Berghage eta I, 2007)
Figure 3 - Typical green roof application (Source: Evan
Bindenglass, CBS New York)
In urban areas, it is common practice to
hydraulically tie rooftop and building
drainage directly to receiving separate or
combined collection sewer systems. These
systems are commonly referred to as
downspouts. Breaking this connection
between building and site drainage from
downstream receiving collection system
infrastructure is referred to as "downspout
disconnecting". The purpose of this practice
is to eliminate direct connections between
impervious areas, which allows for
opportunities for on- or near-site retention
through rainwater harvesting or infiltration
practices. A common configuration is to
divert rooftop or building drainage to a
bioretention facility or a cistern. See Figure 4
Vegetation
Drainage Layer
Waterproof Membrane
and Root Harrier
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April 2015
for an illustrative example of a downspout
disconnection.
Figure 4 Typical downspout disconnection configuration
(Source: LID Center, 2005)
Studies have shown that disconnecting
downspouts can mitigate volumetric-driven
dynamics for drainage systems. Salim et al.
(2002) showed that a downspout
disconnection program in Detroit, Michigan
will reduce the directly connected impervious
area by between 40 and 44 percent.
Additionally, this study showed that
approximately 2 billion gallons of combined
sewer overflow (CSO) would be avoided
annually due to downspout disconnections.
The City of Portland, Oregon disconnected
over 56,000 downspouts between 1993 and
2011 leading to a reduction of CSO volume
of 1.3 billion gallons per year (City of
Portland, 2011). Carmen et al. (2014) showed
a runoff volume reduction between 59 and 99
percent by coupling downspout
disconnections and directing to residential
lawns in the Durham, North Carolina area.
Rainwater harvesting (RWH) is the capturing
of runoff generated from impervious areas
(most commonly rooftops) in a storage
facility. The American Rainwater Catchment
Systems Association (ARCSA) highlights
that although rainwater harvesting systems
have been used for thousands of years, there
is a renewed interest in this practice. ARCSA
notes this interest is due to the concern for
access to high quality water, the rising cost of
potable water distributed by a central
resource, health concerns related to the
treatment of potable water, and the cost
efficiency associated with rainwater
harvesting (ARCSA, 2012).
RWH systems can range from 40-gallon
"rain barrels", used most commonly in
residential applications, to 10,000-gallon
cistern systems. The two most common types
of RWH approaches when addressing
storm w ater management are shared and
integrated systems (Reidy, 2010). A shared
system holds a harvested amount of rainwater
to be used for on-site purposes with a
detention volume made available to address
runoff generated by precipitation events. The
detention volume is used as "buffer" volume
for storm events and is drained through a
controlled discharge. The harvested volume
is used between storm events for on-site
purposes. An integrated system combines the
two volumes together (detention and
harvested) with an automated system to
discharge harvested rainwater as needed
(Reidy, 2010).
Volume captured for a RWH varies
depending upon purpose. For instance, if
meeting a regulatory requirement for on-site
retention, a system may be sized to meet this
volume. Reidy (2010) points out that typical
systems accommodate the volume generated
from a 2-inch rain event, which can account
for most retention standards (if they exist
locally) along with a harvested volume. For
instance, in Washington, D.C. the on-site
retention requirement for new construction is
to capture runoff from the 1.2-inch rain event.
A system accommodating the 2-inch storm
would meet this regulatory requirement with
additional storage for non-potable uses.
Harvested water associated with RWH
systems are most commonly used for non-
potable uses (irrigation, toilet flushing, etc.).
These non-potable uses comprise
approximately 30 percent of potable water
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uses for residential properties (Vickers,
2001) and up to 86 percent for office/business
properties (Frye, 2009). The cost for a typical
RHW ranges between $2 and $5 per gallon
captured, which roughly translates to $2 to $5
per square foot of impervious treated
(assuming 1.6 inches of runoff is captured per
square foot of impervious area treated).
Figure 5 illustrates urban and residential
RWFt applications.
Figure 5 - Typical Rainwater harvesting tank in an urban
setting (top) (Source: ~www.sswm.info) and typical rain
barrel application (bottom) (Source: www.rambatrel.org)
Rain gardens/bioretention facilities capture
runoff and provide enhanced water quality
treatment while also providing aesthetic
value to landscapes. These facilities can be
adapted for suburban as well as urban
settings, making bioretention facilities a
common GSI practice (Hunt and Lord, 2006).
Rain gardens generally comprised of small
depressed areas capturing small areas of
runoff (between 0.25 and 1 acre) that use a
mixture of sand and organic filter media to
treat pollutants that is aided by woody and
herbaceous vegetation (U.S. EPA, 1999a).
These facilities provide relatively high
treatment capacity for a variety of pollutants
including heavy metals, nutrients, sediment,
and oil/grease (Low Impact Development,
2007). Additionally, these facilities can
provide significant water quantity treatment
through infiltration into surrounding soils
(where in situ soils have infiltrative capacity)
or underground detention (Low Impact
Development, 2007). Costs associated with
rain gardens typically range from $3 to $4 per
square foot of impervious area treated
(Coffman et al., 1999), which is an order of
magnitude less than the typical per unit cost
for green roofs. See Figure 6 for a typical
urban bioretention application.
Figure 6 - Typical bioretention application (Source:
Venmmt Watershed Management Division, 2013)
Planter boxes, also known as stormwater or
infiltration planters, are bioinfiltration-based
structures with vertical walls normally
located in transportation corridors or parking
areas. Planter boxes can be depressed to
readily capture and retain urban runoff
generated on sidewalks and roadways, or
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they can at ground level to capture runoff
from downspout disconnection efforts. These
practices can exfiltrate directly to underlying
soils or can be tied into drainage
infrastructure. Due to their linear and
compact design, planter boxes are ideal for
dense urban areas (Philadelphia Water
Department, 2014). The design and function
of planter boxes mirrors bioretention
facilities. The cost for planter boxes, ranging
from $3.80 to $7.70 per square foot of
impervious treated (Natlab, 2013), tends to
be slightly higher than a rain gardens since
they are often located in challenging areas
with high amounts of existing infrastructure
and other site constraints. See Figure 7 for a
typical planter box application.
Figure 7 Typical planter box (Source: Philadelphia Water
Department, 2014)
Bioswales are channels lined with grass or
vegetation with a relatively flat longitudinal
slope (normally <2%) and flat side-slopes
(normally < 1:3) (U.S. EPA, 1999b). While
these practices provide runoff conveyance,
they are configured to be less hydraulic
efficient than traditional drainage swales in
order to provide water quality treatment
through filtering and infiltration. Check dams
are used in some cases to enhance infiltrative
capacity, and filtering media can be used
under the bioswale for added pollutant
removal efficacy (U.S. EPA, 1999b).
Bioswales can be used in many settings, but
are particularly well-suited for linear
applications, such as roadway medians or
shoulders and parking lots (U.S. EPA,
1999b). These practices can be used in
suburban as well as urban applications, and
are relatively inexpensive, as the cost to
construct these practices range from $1 to $2
per square foot of impervious area treated
(Natlab 2013, King and Hagan, 2011). Figure
8 shows an urban bioswale.
Figure 8 Typical urban bioswale (Source: American
Forests. 2012)
Permeable pavements allow water to soak
through paved areas, such as parking lots,
roadway shoulders or basketball courts.
Pavement types vary from porous asphalt to
pervious concrete, which allow runoff to
drain through the pavement, and include
permeable pavers, which are blocks of solid
pavement spaced apart to allow for
infiltration to occur. Other pavements include
open-matrix pavements constructed with
plastic cells filled with crushed stone. A
study by Brattebo and Booth (2003)
investigated the durability as well as
infiltrative capacity and pollutant removal
efficacy of four types of permeable
pavements (two open-matrix and two paver
applications). The investigators found little
sign of wear after six years of used in a
parking facility. Additionally, almost no
surface runoff was generated from these
systems and the incidence of heavy metals
was lower compared to a traditional
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pavement parking stall in the study area.
Construction costs for permeable pavements
range from $5 to $7 per square foot of
impervious area treated (Natlab 2013, King
and Hagan, 2011). Figure 9 shows porous
asphalt and paver applications (Adapted from
Brown, 2014).
Figure 9 - Typical porous asphalt (top) and pemieable
paver (bottom) applications (Source: Philadelphia Water
Department, 2012)
The Need for New Stormwater
Solutions
Citizens and municipalities in the U.S. are
beginning to realize the large effort necessary
to restore and protect water bodies in or
adjacent to urban areas. The NRC report
previously cited identified key urban
stormwater management issues and
challenges facing communities across the
country (NRC, 2009). These issues and
challenges include:
Thousands of water bodies listed as being
impaired under Section 303(d) of the
Clean Water Act.
Increased volume, frequency, and
velocity of stormwater discharges cause
significant stream bank erosion and loss
of habitat.
More frequent urban flooding at higher
elevations, causing significant economic
impacts to properties and disrupting
transportation services.
Estimated costs of addressing the impacts
of stormwater runoff around the country
to meet regulatory and program goals is
estimated to be $5 billion per year over
the next 20 years, as noted in the 2008
EPA Clean Watershed Needs Survey
(U.S. EPA, 2010a)
Meeting Water Quality Goals
Accommodating growth and redevelopment
and addressing climate change will require
new and innovative solutions. The magnitude
of the scale and cost of stormwater
requirements preclude the use of the
conventional infrastructure financing and
implementation approaches.
The anticipated cost of meeting Chesapeake
Bay urban retrofit Total Maximum Daily
Load (TMDL) goals is perhaps the most
important challenge facing communities
throughout the Chesapeake Bay region. This
issue has been widely recognized by
regulated communities, who have compiled
Watershed Implementation Plans (WIPs) to
address the TMDL requirements and have
determined that these mandates will be
financially burdensome (Commonwealth of
Virginia, 2011; State of Maryland, 2013;
Commonwealth of Pennsylvania, 2011).
In addition, communities face challenges to
maintain, repair, and reconstruct much of the
aging stormwater conveyance systems
constructed in the last century and are nearing
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or at the end of their effective lifecycle.
Reconstructing the storm drain system to
accommodate both existing and future urban
redevelopment is expensive, intrusive, and
disruptive. In communities that have
combined sewers the costs and constraints
are even greater.
Given the unprecedented scope and
magnitude of the requirements associated
with the Chesapeake Bay TMDL, many local
governments may lack the economic and
institutional capacity, technology, and
financing models to construct and manage
new urban stormwater infrastructure.
Environmental Regulate ivers
A variety of regulatory frameworks and
trends impact the stormwater and wet
weather sector, which expect to drive the
demand for GI investment within EPA
Region 3 and beyond. A notable regional
driver is the Chesapeake Bay TMDL, while
nation-wide drivers include combined sewer
overflow (CSO) mitigation and integrated
planning, the inclusion of municipal
separate storm sewer systems (MS4s) into
TMDL waste load allocations, and the
strengthening of stormwater permits at the
state and local level. Appendix A provides a
brief overview of the regulatory history
associated with urban stormwater runoff.
The following section provides a summary
of key regulatory drivers in Region 3
impacting stormwater runoff and GI
implementation potential.
Chesapeake Bay TMDL
The most significant water quality regulatory
driver in EPA Region 3 is the Chesapeake
Bay TMDL. The required nutrient and
sediment reductions associated with this
TMDL are greater and more stringent than
any previous regulation, and the timeframe
for meeting these requirements is relatively
short. Actions to meet WIPs are projected to
cost billions of dollars for some jurisdictions,
such as Prince George's and Montgomery
Counties in Maryland. Other jurisdictions are
estimating costs close to one billion dollars,
such as Fairfax County, Virginia, which
expects to spend $900 million to meet
stormwater requirements (Fairfax County,
2014). The ability to meet these fiscal
challenges is compounded by the aggressive
schedule associated with the WIPs, which
requires that all practices to fully restore the
Chesapeake Bay be in place by 2025. It is
unlikely that using traditional procurement
processes to generate the scale of stormwater
infrastructure investment to meet this
timeframe is realistic. However, the CBP3
approach can enable communities to scale up
quickly and meet the Chesapeake Bay TMDL
requirements.
CSO Mitigation and Integrated
Planning
While a major driver in EPA Region 3 is the
Chesapeake Bay TMDL, other significant
regulatory drivers exist. A growing trend is
the use of GI to reduce CSO events and meet
consent orders for wet weather flows. This
"integrated planning" approach is: "a process
that has the potential to identify a prioritized
critical path to achieving the water quality
objectives of the CWA by identifying
efficiencies in implementing competing
requirements that arise from separate
wastewater and stormwater projects,
including capital investments and operation
and maintenance requirements" (U.S. EPA,
2014a).
A memo released in October 2011 from the
EPA Office of Enforcement and Compliance
Assurance (OECA) promoted the use of
integrated planning and stated that this tool
can, "facilitate the use of sustainable and
comprehensive solutions, including green
infrastructure" (U.S. EPA, 2011).
The shift by the regulatory communities
towards integrated planning suggests that
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comprehensive approaches to control CSOs
and address other water quality-related
infrastructure needs are becoming accepted
and preferred.
Traditional grey infrastructure investments,
such as wastewater treatment plants, are
becoming economically challenging. Many
utilities find a diminished return on
investment in pollutant removal technologies
or wet weather infrastructure. (DC Water,
2012). Investing in GI is seen as a lower-cost
alternative and one that generates many co-
benefits not provided by grey infrastructure
investments, such as increased public health,
enhanced property values, and an economic
stimulus for urban redevelopment and
renewal (Gaffin, 2010; Lovell and Taylor,
2013; Center for Neighborhood Technology,
2011; Clements and St. Juliana, 2013).
Metropolitan areas in EPA Region 3 (i.e.,
Washington, DC; Baltimore, MD; Pittsburgh,
PA) are considering GI as part of the solution
to reducing the frequency and scale of CSO
discharges. Other communities, such as
Lancaster, PA, have gone further and
proposed large-scale implementation of GI to
meet their consent decree (Congressional
Research Service, 2014). Philadelphia, PA
has made the largest commitment and
investment in GI. The Green City, Clean
Waters program set a goal of replacing
("greening") close to 10,000 acres of
impervious cover with GI by 2036 (NRDC,
2012). The goal of this effort is to retain the
first inch of rainfall from each storm event,
reducing the volume of runoff entering the
traditional stormwater system and lessening
the burden on utilities. The Green City, Clean
Waters program is estimated to cost more
than $1 billion over its 25-year
implementation period, with predicted
savings of over $8 billion in traditional, gray
infrastructure. Philadelphia's CSO mitigation
program (City of Philadelphia, 2011) has
similar goals to the Chesapeake Bay WIP,
requiring large-scale stormwater
infrastructure investment at low cost on an
accelerated schedule.
MS4 Inclusion in Waste Load
Allocation
The components of a TMDL program in the
Chesapeake Bay include Load Allocations
(LAs) from unregulated sources and Waste
Load allocations (WLAs) from regulated
sources. The LAs and WLAs collectively
represent the total daily load of a pollutant
that can be delivered to a water body while
still maintaining the water quality criteria for
the designated water body. The WLA
component of a TMDL has historical ties to
traditional point discharge sources, such as
industrial and wastewater discharges due to
the convenience of identifying and
monitoring loads from point discharge
sources. Advances in treatment and
monitoring technology for discharges from
point and non-point sources are shifting this
historical trend. This is most notably
highlighted in an EPA memo that suggested
past policy regarding the aggregation of
stormwater discharges should be revised due
to "better data...and more experience"
acquired in the stormwater sector, and that
stormwater discharges should be
"disaggregated into specific categories
...separate WLAs for MS4 discharges"
(EPA, 2010b).
Strengthening Existing Stormwater
Programs
In 2010, EPA began a significant effort to
update and strengthen the national
stormwater program, including the
development of a national performance
standard for regulated communities and
entities. This effort was officially deferred in
March 2014, EPA noted that efforts would
now be focused upon strengthening existing
programs (U.S. EPA, 2014b).
Presently, a quarter of Phase I communities
and nearly half of all Phase II communities
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are operating under expired permits (U.S.
EPA, 2014c). While the federal rulemaking
process was in progress, a number of states
moved forward to update their stormwater
permitting programs. Others put off updating
their programs to review the results of the
rulemaking. Communities that waited may
have created a build-up of demand for
program updates, and the deferment on the
rule now provides an opportunity for those
communities to move forward to update their
programs. Anticipating an increase in the
number of updates to stormwater programs in
the near future may provide an opportunity
for communities in EPA Region 3 and across
the country to integrate GI into their
stormwater management programs.
litional Stormwater Progr '
Approaches Cannot Meet
Community Needs
Considering the growing funding gap in the
stormwater sector, the traditional program
management and financing approaches that
have been used to develop and maintain
stormwater systems appear to be insufficient
in providing the capital and administrative
capacity necessary to achieve successful
water quality protection and stormwater
infrastructure goals (U.S. EPA, 2010a). For
example, multiple studies have shown that
the cost of asset management and
maintenance throughout the lifecycle of most
long-term infrastructure is roughly equal to
construction costs (EPA, 2012b). In addition,
many local governments may assume that
current asset management and maintenance
resources will hold steady over time. This
assumption may lead staff to spend more to
adopt traditional infrastructure maintenance
programs without considering a more
proactive stormwater management program.
Potential Economic and Water
Quality Benefits of Green
Infrastructure and Innovative
Designs e togies
Many communities are beginning to
incorporate a GI approach to meet their
program and regulatory needs
(Congressional Research Service, 2014). The
use of GI is allowing communities to
accelerate their stormwater management
programs through the retrofitting of targeted
and priority areas within a watershed in an
incremental fashion (New York City
Department of Environmental Protection,
2010). These efforts often occur through the
engagement of multiple public sector
programs with limited initial capital outlays
as well as through private sector
development.
The standard procurement method used by
many local governments is to evaluate
design, construction and maintenance needs
for individual projects. This piecemeal
approach is sensible for small programs that
have a limited number of projects to
maintain. However, for larger and more
demanding programs, such as a GI urban
retrofit effort, individually based
procurement may not be the most efficient
process. As the number of capital
improvement projects associated with retrofit
programs increases, communities should
decide on the most efficient and least costly
procurement approach. The consideration
and integration of GI into stormwater
management programs and the use of P3s by
communities in the transportation and
drinking water and wastewater utility
financing sectors has created the foundation
and potential for CBP3 programs at the local
level.
The most cost-effective large-scale
implementation of GI will require a non-
traditional approach to project delivery such
as a P3 in which multiple entities are
constructing projects through multiple
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municipal programs or private sector
development projects.
Watershed planning and design based on GI
has created an integrated and multi-objective
approach to managing stormwater
infrastructure systems. Some of the key
components of the GI approach include the
following:
Promoting and recognizing technology
innovation and flexibility in the
regulatory process.
Creating community development value
for the incorporation of green
technologies for infrastructure projects
and private developments.
Creating opportunities for the new green
economy, including job creation for
construction, maintenance, and work-
force development.
Leveraging stormwater dollars for other
environmental programs, such as air
quality and energy.
Creating opportunities for integration
with and capacity enhancements for
traditional grey infrastructure.
The following chapters will expand on the
details of these aspects.
Adwantag : Agencies
Enterir ฆ m
Infrastructure Retrofits
Long-term, large-scale projects with multiple
benefits and numerous scenarios for
implementation, management, and financing
will require the flexible and adaptive
management approach provided by a CBP3.
Some of the key advantages to local
governments entering into a CBP3
arrangement for GI retrofits include:
Increasing the ability to leverage public
funds while minimizing impacts to a
municipality's debt capacity.
Accessing advanced (possibly
proprietary) technologies not available
through standard procurement
approaches.
Improving asset management and the
scientific application of lifecycle cost
practices.
Drawing on private sector expertise and
the widest range of private sector
financial resources, including new
sources of private capital, thereby
eliminating the need to wait for future
budget cycles to pay for needed
infrastructure projects.
Benefiting local economic development
by creating a marketplace where small,
minority, and disadvantaged businesses
can grow and thrive.
Relieving pressure on internal local
government resources, using the private
sector as a force multiplier.
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II. Traditional P3s in the U.S. and
Their Use in the Water Sector
A P3 is a performance-based contract between
the public sector (any level of government)
and the private sector (usually a consortium of
private companies working together) to
arrange financing, delivery, and typically
long-term operations and maintenance
(O&M) of public infrastructure.
This section presents an introduction to the
key procurement elements of a conventional
P3, reviews some of the legislative policies
that allow for the implementation of P3,
explains how P3s are typically used for large
infrastructure projects, and provides a brief
description of some case studies.
P3 Contract Structure
P3 contracts, referred to as project
agreements, are typically awarded through a
competitive bidding process. The private
partner is contractually obligated to fulfill the
project agreement (at the risk of losing its
investment).
P3s differ from conventional procurements
where the public sponsor controls each phase
of the infrastructure development process
design, construction, finance, and O&M. In
the P3 approach, a single private entity or a
consortium of private entities assumes
responsibility for more than one of these
development phases.
Public partnerships with the private sector
have the potential to reduce costs, improve
quality control, and expedite delivery of
services (Brookings Institution, 2011).
Benefits identified for local governments are
listed as follows:
Allocating responsibilities to the party
that is best positioned to control the
activity is more likely to produce a
desired result.
Producing economic value through
private sector participation; injecting
business ingenuity, energy, efficiencies,
and capital into infrastructure; and
applying a "funding multiplier" to
leverage local government investment.
Solving a complex, costly public problem
critical to watershed protection with more
efficient and cost effective outcomes
compared to conventional programs and
procurement methods.
Substituting private resources and
personnel for constrained public
resources.
Traditional P3s and the Water
Sector
The P3 model is not a one-size fits all
approach, but a range of potential structures.
The right structure selected for a P3 depends
on many factors, such as project complexity,
public policy goals, private sector interest,
and the potential P3's "value for the money,"
also known as a cost advantage. The desire
and ability to transfer various risks from the
public sector to the private sector is also a key
consideration for determining the most
appropriate structure. P3 structures include
the following options (arranged from least
risk transfer to most risk transfer):
Design-Build-Finance (DBF) combines
the innovations of design-build with some
amount of private sector capital (debt or
equity). Often, this model will combine
private sector funds with existing public
sources, allowing private capital to fill any
gaps in funding and enabling projects to be
built faster.
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Design-Build-Operate-Maintain
(DBOM) is similar to the DBF approach,
but also includes a short- to medium-term
operational and maintenance
responsibility for the private partner.
Design-Build-Finance-Maintain
(DBFM) is similar to the DBF approach,
but also includes a short- to medium-term
financial and maintenance responsibility
for the private partner. Unlike DBOM the
public sector retains the responsibility for
operations.
Design-Build-Finance-Operate-
Maintain-Availability Payment P3
(DBFOM-AP) is similar to the DBOM
approach, but the private partner is also
responsible for financing. In this
approach, operations and maintenance
are covered by the private partner for the
long-term while the public sector
maintains control over fees and revenue
collection (if applicable) and makes
periodic, pre-established payments to the
private entity in return for project
delivery and performance commitments.
Design-Build-Finance-Operate-
Maintain-Revenue Concession
(DBFOM-RC) is a DBFOM model
where the private partner assumes
revenue risk or the risk that project
revenues will be sufficient to cover
project costs. Under a revenue concession
model, the private partner develops the
asset (for example, a toll road) and enters
into a long-term lease with the public
sector that allows it to collect some or all
project revenues over the contract term.
Monetization transfers substantial risk
and control to the private partner,
normally occurring in relation to an
existing tolled asset and typically
involving a long-term lease of the asset.
In addition to the opportunity to generate
proceeds from a competitive procurement
process, assets are often monetized in
order to reduce the burden of long-term
operating, maintenance, and major
capital maintenance costs on the public
sector.
Build-Own-Operate (BOO) is a model
that represents the greatest transfer of
responsibilities to the private partner. In
this instance, the private partner
develops and operates a new asset on
land that it owns or controls.
1 Risk Assessment
P3s are complex transactions. Demonstrating
that a P3 will provide a better result than a
conventional approach is not a simple process.
There are many factors that must be
considered when determining the best
procurement approach for a given project,
including long-term costs, uncertainty, short
and long-term risk, complex funding, and
Value for Money (VfM).
Value for Money Analysis
A VfM analysis compares the total estimated
lifecycle costs of traditional public
procurement to the total estimated lifecycle
costs of a P3 procurement system. The
estimated lifecycle cost for traditional
procurement becomes a "public sector
comparator" (PSC) against which to compare
the total lifecycle cost of a P3 procurement.
If the estimated costs of the P3 procurement
are less than the estimated costs of the
traditional public sector procurement system,
then there may be positive value for money,
and the potential P3 project would warrant
further consideration.
Risk Analysis and Assessment
Management of risks requires a public
agency to proactively address potential
obstacles that may hinder project success, as
well as take advantage of opportunities to
enhance success or save costs. P3s are
considered to be a form of risk management
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as the public sector and private sector parties
seek to achieve optimal risk allocation for
each party.
Project risk management is an iterative
process that begins in the early phases of a
project and repeats throughout the project's
lifecycle. It involves systematically
considering possible outcomes before they
happen and defining procedures to accept,
avoid, or minimize the impact of risk on the
project. Under a P3 transaction, risk
allocation tends to be "by exception," so the
concession agreement contains a finite list of
"relief events" and "compensation events"
that are tightly drafted and highly
constrained. Everything else is allocated to
the concessionaire. Conversely, under a
conventional delivery approach, if a
circumstance or situation not contemplated
up-front arises, that risk (whether or not
anticipated) is owned by the public sector.
Risk management follows a clearly identified
process, which includes:
Risk identification;
Risk analysis;
Risk response planning (including
transfer of risks to the private sector); and
Risk monitoring, controlling, and
reporting.
Risk analysis is used in the development of a
P3 project for a number of reasons:
To develop agreement provisions that
optimize value for money;
To calculate risk adjustments as part of
value for money assessments;
To help determine project contingency
amounts; and
To identify and monitor mitigation
actions (i.e., risk management).
Figure 10: States with P3 Enabling Legislation
FederalState, and Local
Regulatory Policies Supporting P3s
Many states specify the type of projects that
can be part of a P3 framework. Most of these
specifications focus on transportation
projects, facilities, construction, and
management of educational institutions.
Boards or authorities that will enter into the
P3 agreement often govern these projects.
Some new classes of projects eligible under a
P3 agreement include public water supply
and wastewater. The appropriate state board
or authority or the local government may also
oversee these classes.
State Enabling Legislation
Statutory authority ties to policies potentially
affecting the feasibility and success of a P3 in
a community. One of the barriers to using a
P3 approach is the lack of enabling
legislation at the state level (Geddes, 2013).
Currently, 33 states have enabling legislation
for the creation of P3s. Several other states
are either considering or have pending
legislation to enable the formation of, or
expand the applicability of P3s. Figure 10 is
a map of states that currently have legislation
enabling P3s.
There are still legislative challenges for the
adoption of a P3 approach for stormwater.
Not all adopted legislation clearly designates
a path to adopt P3s at the local government
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level due to lack of direct guidance in the
enabling language, include the following:
Procurement processes and methods;
Agreement provisions;
Review and approval processes for
proposed P3 arrangements;
Project eligibility;
Use of private consultants;
Length of concession;
Bid selection, and
Authority to enter into P3 arrangements.
Procurement Methods
An organized procurement process for the P3
prime contractor and its subcontractors to
follow is critical to the success of a P3.
Transparency in the bidding, award of
subcontracts, and reporting processes are also
necessary. A recent trend in P3 legislation is
the inclusion of provisions to allow
unsolicited bids, which can help to drive
innovation; however, this may encourage the
private sector to select projects that produce
high profitability rather than focusing on
those with strong social benefits (ACEC,
2014).
Evaluating bids by "best value" or any other
metric that captures the quality of the
proposal, rather than simply most cost
effective, will help to drive the success of P3
projects. The facilitation of innovation
through sole source contracts, particularly
those implementing new and emerging
stormwater technologies, is critical in order
to enhance system performance.
Agreement Provisions
There is often significant risk associated with
the uncertainty of obtaining environmental
permits. Most often, this uncertainty can
affect the amount of funding, time, and
resources available to accomplish a
stormwater management project. Agreement
provisions, which spell out the conditions of
an agreement, often shape a P3 arrangement
and can vary depending on the infrastructure
sector and level of prescriptiveness in
enabling legislation (ACEC, 2014).
Legislation may specify the allocation of risk,
especially whether the public sector is able to
transfer risks for items such as, but not
limited to, cultural, historical, or
environmental impacts, or requirements of
the Americans with Disabilities Act (ADA).
Payment /Revenues
Some states specify the manner in which
revenues are generated and how payments
are made to the private party. While
traditional P3 transportation projects focus on
revenues from tolls, there have been
instances where inaccurate demand
forecasting has affected the projected
revenue stream from tolls. This has resulted
in renegotiation of many contracts in order to
close the gap in funding for operation and
maintenance of the toll facility (ACEC,
2014). An "availability payment" can be used
to address this deficiency. This is a regular
payment to the private partner based upon the
condition that the facility meets the defined
performance specification. This structure
reduces or eliminates the "revenue risk" to
concessionaires and specifies the minimum
public costs (and private revenues) as well as
potentially spurring innovation since
efficiencies in delivering performance may
help drive profitability and/or overall revenue
and product output. Performance monitoring
is a key factor in an availability payment
framework, especially as it can be used to
evaluate the project goals and deliverables
and the regulatory requirements. This
arrangement can easily be used for
stormwater P3 contracts.
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Financial Instruments
Financial instruments for infrastructure can
include, but are not limited to, revenue bond
and Transportation Infrastructure Finance
and Innovation Act (TIFIA) loans. TIFIA
loans are limited to transportation projects.
There are recent adaptations of the TIFIA
model for infrastructure in the water sector
(AWW A, 2014), referred to as the Water
Infrastructure Financing Innovation
Authority (WIFIA). This program seeks to
leverage Federal dollars based upon the low
default-rate in the water sector for overall
increased infrastructure spending. Private
activity bonds are often used in the water
sector and may be a model for the financing
of a stormwater P3.
Public financing for stormwater is likely to be
associated with dedicated public funding
sources, such as water utility fees for
stormwater management or a pay in-lieu of
fund. Dedicated amounts of general funding
may augment these sources. Having various
options for generating funding will provide
assurance to the private sector that there is
reduced risk associated with the project,
resulting in lower-interest loans for the
private sector partner. More information
related to financing is covered in Chapter 5
(CBP3 Highlights for Financing Officials and
Advisors).
Non-Compete Clauses
A P3 project may be subject to competition
from other similar projects. This may affect
available revenue. For example, a toll road
based upon a projected travel demand may
see diminished toll revenue if other roads are
built or improved by a public or private entity
to relieve congestion within the service area.
Proposals for new projects contain non-
compete clauses to prevent reduced revenue
to current projects. However, many
partnerships are moving away from these
clauses or are incorporating other avenues to
similar projects. This may affect available
revenue. For example, a toll road based upon
adequate revenue streams (ACEC, 2014).
Development of a stormwater P3 should
address the construction of projects through
the Capital Improvement Program (CIP) or
by private developers.
Authority to Enter into Arrangements
In many states, transportation agencies are
the only entities allowed to enter into P3
arrangements, which reflects the high priority
for funding and management of the
transportation network across local county
and municipal governments in order to meet
the state transportation needs. States are
increasingly allowing municipalities to enter
into P3 arrangements that are not limited to
transportation projects (The Surety and
Fidelity Association of America, 2013). This
may be recognition of the role local
governments play in P3 projects. As Istrate
and Puentes (2011) note that, "while states
have the capacity to develop PPP projects,
these projects happen in the jurisdiction of
cities and counties," and further that, "states
need to better connect with the lower levels
of government to ensure a broader
understanding of the benefits and drawbacks
of P3 projects."
One avenue for empowerment for local
governments is through "home rule" status.
Home rule "refers to the ability of a local
government to manage local affairs without
oversight from the state legislature"
(Richardson et al., 2003). A 2009 study by
Allen and Overy finds that one of the benefits
of home rule is that municipalities, "can
'control their own destiny' when negotiating
a P3 and therefore avoid the delays and
legislative complexities that arise in
jurisdictions where state-level approval of a
P3 is necessary." This report goes on to note
that 27 states have authorized "meaningful
levels of home rule," and highlight the
numerous P3 transactions that the City of
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Chicago has executed without state-enabling
P3 legislation by relying on its home rule
powers. Further, the authors point out P3
investors can increase their yield by investing
in home rule municipalities as they provide
for more flexible arrangements. This
flexibility is of particular importance for GI
stormwater projects due to the variability of
needs related to these investments.
The Limits of Local Authority (Based on "Home Rule" and "Dillon's Rule"t
*
am V Home rule
~ Types of both
n Dillon's rule
Neither
Figure 11: Limits of Self-Governance at Local Level
Contrasting with home rule is "Dillon's rule,"
a "rule of 'strict' construction" where the
state legislature grants as little power to local
governments as is reasonable (Richardson,
2003; Owens, 2000). There are a small
number of states following a pure home rule
or Dillon's rule governance structure, while
most states apply aspects of each. Richardson
et al. (2003) points out "the literature
provides wildly varying estimates of the
number of states that adhere to Dillon's
Rule," which illustrates the complexity of the
role of self-governance by local
governments. Figure 11 is a map of the
different types of local authority in the
continental United States.
In the U.S., P3 arrangements are often made
at the state level, and considering the
complexity of local self-governance, the
ability to enact a P3 at the local level may be
challenging (or not feasible) without
clarifying legislative language in some states
or a strong home rule authority. The ability of
local governments to enter into P3
agreements is critical and appropriate in the
context of stormwater infrastructure
investments because the funding and
management of stormwater programs reside
at the municipal level.
Review /Approval of Arrangements
Some states require a board or other
governing body to review and approve P3
arrangements. This is done to ensure that
public interest is protected and contracts and
conditions are consistent with provisions set
forth in the enabling legislation (ACEC,
2014). This process may impede the interest
of private investments. Identification of an
increased number of issues for review
lengthens the amount of time before a P3
arrangement is approved. However, studies
have shown that these potential impediments
have not been significant barriers for
developing and implementing P3 programs
(ACEC, 2014).
Use of Private Consultants
Legislation may specify whether public
sponsors can retain experts or consultants in
the development of a P3 arrangement. Due to
the specialized nature of the P3 industry,
there is concern that conflicts of interest with
consultants may arise; however, existing
state statutes may provide adequate conflict
avoidance assurance (ACEC, 2014).
Length of Concession
Some states specify the length of concession,
or maximum timeframe for a P3
arrangement. Timeframes are often
incorporated into the contract language to
protect both parties from long-term
uncertainties, such as urban development and
changing environmental conditions, or to
reduce the potential for change orders or
contract renegotiations (ACEC, 2014).
For example, in Florida, there is a 50-year
limitation for P3 projects, requiring
approvals by a legislative body for projects
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beyond this timeframe. Generally, a
concession length of 30 to 50 years should be
used (ACEC, 2014). This timeframe is
adequate for a stormwater-focused CBP3 as
it is consistent with the design life of a well-
maintained stormwater/green infrastructure
system.
Changes to stormwater regulations over time
may require modifications to the objectives
of a P3. Advances in BMP technology
impacting the durability of a GI practice or
product as well as the evolution of
monitoring technology may also affect the
treatment of concession arrangements. These
considerations should also be reflected in the
concession length.
Environmental Streamlining
A significant requirement for many infra-
structure projects, especially stormwater
infrastructure projects, is environmental
permitting. This process can take many years
and is often expensive and unpredictable
because of the wide-range of environmental
impacts and issues. Stormwater project
mitigation requirements can be defined and
benchmarked using many different metrics
and goals. These include, but are not limited
to, acres of impervious surfaces treated and
percent of pollutants removed. Meeting these
mitigation requirements may not always
ensure that the watershed is adequately
protected because of the unique
characteristics of each watershed.
Regulations are beginning to require more
sophisticated monitoring and performance
requirements for mitigation. This results in a
potentially more complex, costly, and
lengthened timeframe to obtain construction
permits. Many construction contracts also
have limits on the number of modifications to
the mitigation plan just after construction.
Long-term P3 arrangements between state
regulators and local stormwater officials
could help reduce the number of environ-
mental reviews, oversight, and approval
processes by the use of approved standard
designs, well-developed metrics of
performance, and a well thought-out
monitoring plan. The costs and requirements
to adjust the mitigation plan throughout the
contract performance period would be greatly
reduced; and the mitigation could be more
effective through this adaptive management
approach.
Value for Money Analysis
Some legislation specifically requires a VfM
for P3 arrangements. Although VfM analysis
is used widely outside the U.S., only a
handful of states (e.g., Virginia, Florida,
Texas, and Oregon) are using this approach.
As previously described, the purpose of VfM
is to compare the P3 framework to the PSC in
order to illustrate the relative advantage of
the P3 arrangement over traditional
procurement and project delivery
approaches. Parameters such as discount rate,
discounted cash flow, and net present values
are used in an effort to provide an "apples-to-
apples" comparison. In the U.K., six
categories for VfM are considered including
risk transfer, long-term nature of contract
(including whole lifecycle costs), use of an
output specification, competition,
performance measurements and incentives,
and private sector management skills
(ACEC, 2014). Considering that P3s in
stormwater are novel and not well
understood, the use of VfM may help to
illustrate advantages over traditional
procurement and project delivery approaches
regardless of statutory requirements.
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4
x
35
Jง
I 3
o
c 23
o
=s /
f 2 /
o ซ *-K-
1990 1995 2000 200S 2010
Year of financial closure |
Figure 12: P3 Investments in the U.S. Transportation
Sector
(Source: Public Works Financing, 2010, Brookings
Institution, 2011)
Transportation, Water Sector, and
Energy P3s
All levels of government have employed P3
approaches extensively for other
infrastructure needs. The most prevalent
types of infrastructure P3s have been in the
transportation sector, while other
partnerships include investments in drinking
water/wastewater infrastructure, energy,
educational facilities, public safety, and
public parks (NCPPP, 2013). Described in
the following sections are some key
characteristics that are unique to each sector.
Transportation
State and local governments have long
employed P3s to achieve transportation
infrastructure investment goals. Figure 12
illustrates the growth of P3s in the
transportation sector. Transportation P3s use
two basic structures or types:
1) New build facilities add capacity to the
system by building something new; and,
2) Existing facilities improve capacity or
performance of the current system
through a P3 arrangement.
Hudson-Bergen Line, New Jersey - $
2.2 billion total cost. 21st Century Rail
Corporation was responsible for the
entire Hudson/Bergen Light Rail project
under a design, build, operate, and
maintenance arrangement (ACEC, 2014).
JFK Air Train, New York $1.9 billion
total cost. Air Train JFK is an 8.1-mile
rail system in New York City that
connects John F. Kennedy International
Airport (JFK) to the city's subway,
commuter trains and airport parking lots
(ACEC, 2014).
Drinking Water and Wastewater
Infrastructure that provides user-fee based
services, such as drinking water and
wastewater utilities, are well suited to a P3
approach.
Partnerships between the public and private
sectors in the drinking water and wastewater
industry range from providing basic services
and supplies to the design, construction,
operation, and ownership of public utilities
(U.S. EPA, 2014d). Private entities can often
build and operate systems at lower cost and
can also provide capital for system upgrades
when public funds may not be available.
Private groups also often have quick access
to personnel trained in the latest drinking
water and wastewater technologies and
environmental compliance rules. These
capabilities can make compliance with
environmental standards possible, while
minimizing rate increases for essential
services (American Legislative Exchange
Council, 2013). Examples of these
partnerships include the following:
Carlsbad Desalination, California: $1
billion total cost. This investment is based
upon a 30-year purchase agreement between
the San Diego County Water Authority and a
private entity to construct, operate, and
maintain a desalination plant to deliver
approximately 50,000 acre-feet of potable
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drinking water to the community per year
(Carlsbad Desalination Project, 2014).
Santa Paula Wastewater Treatment
Plant, California. $62 million total cost.
The City of Santa Paula was facing $8
million of non-compliance fines
requiring swift action to meet regulatory
needs. Plant upgrades and expansions
include membrane bioreactors, aerobic
sludge digestion and ultraviolet
disinfection.
Multiple Municipal/Utility Investments,
Virginia, varying total cost. Several
examples of private investment have
occurred in Virginia associated with the
Public-Private Educational Facilities and
Infrastructure Act (PPEA legislation,
including investments in water and
wastewater infrastructure in the cities of
Chesapeake, Fredericksburg and
Petersburg as well as the counties of
Caroline, Southampton, and Bedford
(Bryant, 2014).
Cranston, RI Wastewater Lease
Program: on March 7, 1997, the City of
Cranston, RI entered into a long-term lease
arrangement designed to provide an
innovative solution to meet the city's
intermediate and future wastewater needs
(Water & Waste Digest, 2000). Cranston
was a cash-strapped city carrying a sizable
debt and its wastewater system was out of
compliance with the Clean Water Act. It
appeared that an outright sale of the system
with a major rate increase would be
necessary, and a new facility or a facility
upgrade had the potential to become a
political football. Cranston chose another
option: a public/private partnership (P3)
with Triton Ocean State, a subsidiary of
Poseidon Resources Corp. Triton agreed to
modify a 23 million gallon per day
treatment plant, 21 pump stations, 190
miles of sewer pipeline and provide
advanced wastewater treatment to meet
effluent standards, operating and
maintaining the system under a 2 5-year
operating lease. This partnership was one
of the first of its kind under new federal
guidelines. The arrangement also included
a front-end concession payment of about
$48 million that Cranston used to decease
(retire) outstanding bonds and pay back
sewer system loans from other city funds
(Forman, 1997).
Energy
In recent years, P3s have been used
increasingly and with great success to attract
private financing for energy efficiency
investments (International Energy Agency,
2011). Governments in most countries face
challenges with respect to the sustainable
development of their energy systems. An
important goal in meeting these challenges is
transitioning to an energy efficiency
economy that is moving from a fossil-fuels-
based economy to a less carbon-energy-
intensive economy (International Energy
Agency, 2011). Many recent studies have
identified financing barriers as a major
impediment to large-scale implementation of
energy efficiency programs. Financing
barriers arise because energy users are
generally unwilling to invest their own funds
in energy efficiency projects (International
Energy Agency, 2011). As a result,
policymakers have become more aware of
the potential and flexibility that P3s can
provide, especially when applied to energy
efficiency financing.
There are many different structures for P3s in
the energy sector, which are used mainly for
generation and transmission. The
methodology used varies, depending on the
place, the government, and the specifics of
the operation; therefore, each P3 is tailored to
the energy needs and circumstances present
at the time when the partnership is created
(World Bank, 2014).
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estments
The total value of P3 investments in the U.S.
(excluding design-build projects) between
1985 and 2011 is $68.4 billion (Public Works
Financing, 2012). Dollar amounts have been
accelerating over this timeframe, as
evidenced by the fivefold increase in P3
infrastructure investments in the U.S.
between 1998 and 2010 (Brookings
Institution, 2011). However, this is a
relatively low investment value, considering
that the total P3 investments between 1985
and 2011 in the U.S. is only 50 percent (50%)
greater than P3 investments in Canada, which
has an economy ten times smaller than the
U.S. (Brookings Institution, 2011).
Nevertheless, this increase illustrates the
upwards trajectory of P3 investments and
tremendous need for infrastructure
investment in the U.S.; these are reasons to
conclude that the potential for P3 investment
in the U.S. market is significant.
P3s come in many forms and structures. The
architecture of a P3 may vary based on the
sector as well as the project. The amount of
risk and reward potential varies as well based
upon the nature of the agreement and the
goals of the parties involved. These
variations reflect the complex structure that
P3 arrangements can take. Tools, such as risk
assessment and VfM analyses, can help to
provide clarity on the performance and
potential advantage of a P3 arrangement over
traditional public sector investments.
The specific architecture used in a P3
arrangement is often dictated by statutory
demands. Legislation at the state level often
dictates aspects of a P3 framework, such as
concession length, ability to include non-
compete clauses, and option to submit an
unsolicited proposal. The number of states that
have adopted P3 enabling legislation has
increased in recent years. This diffusion of
statutory authority to promote P3 investments
has played a significant role in the rise in P3
investments in the U.S. over the last two
decades. A similar trend is expanding the
scope of investments beyond the
transportation sector, which will likely lead to
a greater potential for P3 investment in other
sectors, including the water, wastewater and
storm water sectors as well.
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III. Comparing a CBP3 for Urban
Retrofits to a Traditional P3
A CBP3 program uses many of the same
financial and procurement arrangements as a
traditional P3; however, there are differences
as well. The long-term nature of the contract,
the wide-range of retrofit opportunities, the
flux in economic and community
development conditions over time, and the
need for flexibility are the key differences
between a CBP3 and a typical infrastructure
P3. In a CBP3 the conditions must be
appropriate for the community and the
contractor so that both receive equitable
benefits for all actions and that both partners
gain from the efficiencies and reduced costs
of adaptive management and advances in
technology. Because of the need to negotiate
multiple subcontract agreements, evaluate
and make rapid implementation decisions,
and coordinate with multiple stakeholders,
the community must have a significant
amount of trust that the contractor will act as
an agent for the community throughout the
long-term partnership.
Evolution of the CBP3 Model and
Use to Address Urban Retrofit
Challenges
In 2012, EPA Region 3 Water Protection
Division (WPD) hosted a national roundtable
of experts on financing, stormwater
programs, green infrastructure, stormwater
retrofit planning and design, and developing
recommendations for approaches to reduce
the cost of urban stormwater retrofit
programs through the use of more efficient
LID/GI techniques and privately financed
P3s (U.S. EPA, 2013a).
Communities should consider the use of
a P3 structure for:
Technically complex projects and
infrastructure requirements, where scale
and maintenance are equally important.
Projects that are part of a codified
capital plan.
Situations where expedited delivery
is essential.
Situations where cost mitigation and
reduction are essential for project
completion and financing.
Areas where local jobs and wealth building
are highly desired.
The roundtable process identified many
regulatory, technological, programmatic, and
financial strategies that local governments
can employ to drive down costs and
accelerate attainment of the Chesapeake Bay
TMDL pollutant reduction goals. Some of the
key results and conclusions of the roundtable
include the following:
Nationally, the use of LID/GI
technologies has been shown to be the
most cost effective approach for urban
retrofits in most instances. This is
primarily due to the multiple "triple
bottom line" benefits (i.e.,
environmental, economic, and social)
derived from LID/GI.
The Chesapeake Bay Program should
focus its efforts on advancing LID/GI
technologies and benefits to help
accelerate the implementation of the
WIPs.
Crucial to the implementation of WIPs is
the removal of regulatory roadblocks that
are disincentives to the development and
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use of innovative advanced LID/GI
technologies.
The current approved practice designs are out
of date and not current with the latest and
most advanced designs and research. Urban
runoff volume reduction should be the
primary strategy to achieve the Chesapeake
Bay TMDL. Volume reduction is a much
more effective, reliable, and simpler way to
account for reducing annual pollutant loads,
stream erosion reduction, and restoration of
ecological services.
Improvement to all current technologies can
reduce construction costs, increase value,
reduce long-term costs, and improve
efficiency. These improvements are
achievable through a number measures
including:
Use of more robust design, construction,
and maintenance standards;
Use of more robust Quality
Assurance/Quality Control (QA/QC)
practices;
Use of best available research and
technology from both the public and
private sectors;
Optimization of market forces
(competition) to drive innovation through
performance based contracting; and
Optimization of LID/GI values and
benefits to improve the triple bottom line.
Furthermore, there must be a much greater
effort in training, certification, and ongoing
education of industry professionals (e.g.,
consultants, contractors, inspectors, and
permit reviewers) to eliminate costly failures
and improve the effectiveness of retrofit
practices.
The Roundtable panel recommended that the
Chesapeake Bay Program partners develop
new design guidance that specifically
addresses the unique engineering, economic,
social, and site constraint challenges of an
urban environment. Some of the
recommendations on standards and
regulations for best management practices
(BMPs) include:
Development of more flexible design
standards, or a shift towards
performance-based standards;
Improvement, consolidation and
streamlining of the state and local
technology verification processes to
accelerate and encourage innovation; and
Development of special "work around"
regulations for urban retrofits.
Private Sector Participation
The private sectors (e.g., manufacturers,
developers, property owners) are overlooked
and underutilized in the sharing of expertise
and economic resources with regard to
research and development, alternative
financing, assessment management, program
administration, and outreach. The private
sectors need to be engaged in a more
collaborative manner to more cost effectively
implement urban retrofit programs.
The Roundtable recommended that alternative
financing programs need to be implemented to
encourage greater investment by the private
sector to better leverage public funds. This
could include use of P3s, trading and banking
programs, alternative private financing (e.g.,
modeled after energy and water audit
businesses), developer participation,
refinancing opportunities to get the best rates,
state revolving loans, and the development of
service fees.
Local, State, and Federal
Governments
In order to meet Chesapeake Bay TMDL
targets and other regulatory drivers, local
governments should consider working to
streamline and improve current retrofit
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program planning, design, procurement,
contracting, and asset management policies
and practices to reduce cost and time delays.
Use of P3s can achieve the desired results by
financing, planning, constructing and
maintaining the urban retrofit infrastructure.
Adequate dedicated funding sources are
critical to the success of any ongoing urban
retrofit program and must cover the cost of
financing, planning, design, construction and
long-term asset management. Costs
associated with asset management and
financing will generally double the original
construction costs over the life of a practice.
It is essential that revenue sources cover all
program costs, not just construction.
State and federal grant programs should shift
their focus from demonstrating pilot practices
to developing comprehensive urban retrofit
pilot programs that encourage technological
innovation, seek more private partnerships,
and develop model performance contracting.
In other words, programs should encourage
the development and advancement of more
economically and environmentally
sustainable programmatic changes.
Conclusions of the Panel
Finally, it is clear there are many
technological, programmatic, and financial
options and solutions to driving down urban
retrofit costs. However, there are many
challenges to widespread dissemination and
implementation of new solutions. The biggest
challenge is the typically slow process of
changing institutionalized thinking and
approaches, which are codified and
memorialized by rigid regulatory
requirements and/or programmatic processes.
CBP3 for Urban Retrofits
The common theme discovered at the P3
roundtable is that very few communities have
mastered the art of designing successful
partnerships between the public and private
sectors, as the complexities involved cause
businesses and government leaders to avoid
them while critical community needs remain
unmet. The key to designing a partnership
between the public and private sector is to
create a long-term shared stake in solving the
public problem. The partnership should also
provide a fair and equitable financial return
to the private sector versus designing the
project to maximize the private sector's
return while allowing the private sector to
minimize their risk.
To design a CBP3 for urban retrofits, public
and private partners must create a transparent
framework that aligns public, private, and
community stakeholders into a long-term
legal arrangement with an outlined
governance structure founded in the spirit of
stewardship and common purpose.
Partnerships should avoid an adversarial,
contract-oriented management structure.
This requires a change in mind-set from
government contractor to business partner.
fGefe! for
A successful program used as a model for the
CBP3 is the military's Residential
Communities Initiative (RCI). The RCI
program, created in 1996, helped address
challenges in military housing for the U.S.
Army. This program has helped to reduce
costs for the construction of housing as well
as improve overall housing quality and drive
innovation in sustainability (Apgar, 2011).
The RCI program used a qualification-based
procurement process to select a private sector
partner to share the investment, risk, and
reward for improving quality and quantity of
military housing. This initiative proposed the
formation of a private organization that
invested both public and private dollars to
oversee the construction and enhancement of
residential development projects on a number
of military bases.
An important element of the RCI program
has been the use of long-term, low-risk
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incoming revenues (i.e., military housing
stipends) to gain highly favorable interest
rates from the private investment community
(Ellis, 2009). Economies of scale along with
innovative construction practices effectively
drove down costs while meeting the desires
of military families to a much higher degree
than past programs.
Another hallmark of the RCI has been the
investment made in the community served.
An example of this investment is the use of
surveys by Corvias to identify the aspects of
military housing of greatest need and interest.
This helped make the most meaningful
investments possible in terms of well-being
and satisfaction. Use of on-going surveys
ensures that systems are maintained properly
and provide feedback to improve future
investments in housing.
CBP3s Support an rtfable
itivctL Profit
Approach
CBP3s are ideally suited for implementation
of a GI approach to stormwater or wet
weather management; and for combining
grey infrastructure with GI.
The use of GI for stormwater retrofits will
require flexibility in management because of
the multiple objectives, reporting
requirements, and array of options for LID
techniques available for selection. The
program structure must factor in flux in
economic conditions and community
development needs. In order to be
successful, the GI approach requires a
consistent long-term adaptive management
approach that can incorporate advances in
technology and changes in conditions within
the watershed and the community.
Recent advances in modeling and monitoring
are now allowing communities and
regulatory agencies the ability to recognize
and quantify the stormwater management
benefits of GI at the site and watershed scale.
This includes more accurate projections and
demonstrated results for the reduction of
pollutant load concentrations and volume
reductions from proprietary LID
technologies or techniques. These advances
can be seen as a "currency" or commodity
that can be used to develop a market. It is
projected that demand to quantify pollutant
loads will drive advancement in monitoring
technology, decrease the costs of reporting,
and allow for development of better designs
and construction.
Benefits and Potential
Cost Savings of r Green
Infrastructure Stormwater Retrofits
The impetus for the development of
storm water-based CBP3s is that they will
allow local governments to regulate and
competitively bid urban stormwater retrofit
performance contracts to private consortiums
so that they will oversee implementation of
the capital improvement and asset
management portion. A major benefit of
CBP3 structures is that through greater
private involvement and use of market forces
(e.g., competition, efficiencies, flexibility,
economy of scales), urban retrofits can be
made more affordable, technology can
improve, and overall costs can be reduced. In
many respects, existing government business
models are too expensive, time consuming
and generally lack incentives to drive down
costs.
The CBP3 model for GI stormwater retrofits
has a number of distinct benefits and
advantages when compared to traditional
infrastructure financing structures, including
opportunities for:
Economies of scale in the provision of
critical services or activities;
To promote, develop, and reflect
advances in reporting, verification, and
cost effectiveness; and
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For mutual learning and implementation
between partners on procurement, job
development, management, outreach, and
reporting activities.
Costs and Benefits
CBP3s are specifically designed to result in
long-term project efficiencies that ultimately
reduce project costs to local governments and
communities. This is, however, in direct
contrast to many of the perceptions
associated with private sector financing.
A commonly stated belief among local
officials is that P3s will be more expensive
than traditional procurement. This belief is
often reinforced by misperceptions related to
P3 costs, including:
The perceived loss of public control;
The assumption that private financing is
more expensive than using public debt;
and
The belief that contract negotiations for
P3s are too difficult and costly to yield a
positive outcome.
However, each of these perceptions is often
false, especially as they relate to CBP3
structures (NCPPP, 2012). Although there
are added costs associated with utilizing
private funds for public projects, savings are
often derived from P3-based projects in the
long-term. For example, the public sector can
share the risks and responsibilities of the
project with the private sector. In addition,
long-term planning measures utilized as a
part of the P3 development process can lead
to cost savings (NCPPP, 2012).
There are several short- and long-term cost
savings opportunities that can be realized
through the use of a CBP3. The costs of
stormwater management programs can be
organized into five program categories. Each
of these costs has unique requirements and
savings opportunities including:
Capital investment and financing
(including engineering, design, and
planning);
Operations and maintenance;
Permit compliance (including regulation
and enforcement);
Administration (including billing and
finance); and
Education and outreach.
Flexibility in Financing
Large-scale stormwater retrofit programs will
need an alignment of dedicated public and
private funds that are consistently available for
projects.
GI retrofits will require flexible project
financing and delivery methods, as
communities are constrained in their
approach to procuring infrastructure. P3
approaches can provide this flexibility to
local governments. In addition,
infrastructure can be financed without the
need for local bonding authority or the use
of capital bonds.
A key motivation for governments
considering CBP3s is the possibility of
bringing in new sources of financing for
funding public infrastructure and service
needs. In effect, there are three key
infrastructure-financing options available to
local governments: 1) self-financing through
government funding, 2) corporate or "on-
balance sheet" financing, and 3) project
financing. Determination of the most
appropriate financing options depends on the
unique dynamics within each community,
including the maturity of their stormwater
program, the status of existing capital and
operations budgets, and the long-term cost
evaluation associated with the stormwater
program.
Government Funding
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The most basic or traditional financing
approach is self-financing through
government funding. In this case, a
government may choose to fund some or all
of the capital investment in a project and look
to the private sector to bring expertise and
efficiency. This is generally the case in a
Design Build Operate project where the
operator is paid a lump sum for each
completed stage of construction and then
receives a fee to cover operation and
maintenance of the project. Another example
includes the government choosing to source
the civil works for a project through
traditional procurement and then bring in a
private operator to operate and maintain the
facilities or provide the service. Even where
government jurisdictions prefer that
financing is raised by the private sector,
increasingly these jurisdictions are
recognizing that there are some aspects or
risks with projects that may make more sense
for the government to finance (ACEC, 2014).
Corporate or On-Balance Sheet
Finance
An alternative approach to government
funded or financed projects is corporate or
on-balance sheet financing. In this case, the
private operator may accept to finance some
of the capital investment for the project and
decide to fund the project through corporate
financing, which would involve getting
finance for the project based on the balance
sheet of the private operator rather than the
project itself. This is the mechanism used in
lower value projects, specifically, where the
cost of the financing is not significant enough
to warrant a project financing mechanism or
where the operator is so large that it chooses
to fund the project from its own balance
sheet. (It should be noted that on-balance
sheet financing from the corporate
perspective is the equivalent of off-balance
sheet financing from the public agency
perspective.)
The benefit is that the cost of funding will be
the cost of funding for the private operator,
which is typically lower than the cost of
funding to finance the project. It is also
probably less complicated than project
finance. However, there is an opportunity
cost attached to corporate financing, because
the company will only be able to raise a
limited level of finance against its equity
(debt to equity ratio,) and the more it invests
in one project, the less there will be available
to fund or invest in other projects.
Privately financed P3s are commonly used to
build a wide array of vital components of
urban infrastructure such as water supply,
wastewater treatment, solid waste
management, highways, mass transit,
bridges, electricity, waste-to-energy
facilities, recycling facilities, light rail
systems, and more. P3s can be community
based such as a small wastewater facility, or
regionally based such as an electric or water
utility. They can be fully private, semi-
private, or government chartered publically
owned. In whatever form a P3 may take, it
will encourage private investment for a
reasonable return on that investment and can
build infrastructure more quickly and more
affordably than governments can on their
own (U.S. DOT, 2008).
Project Finance
One of the most common, and often most
efficient, financing arrangements for P3
projects is "project financing," also known as
"limited recourse" or "non-recourse"
financing. Project financing normally takes the
form of limited recourse lending to a specially
created project vehicle (Special Purpose
Vehicle or "SPV"), which has the right to carry
out the construction and operation of the
project. Typically, it is used in a new build or
extensive refurbishment situation and so the
SPV has no existing business. The SPV will be
dependent on revenue streams from the
contractual arrangements and/or from tariffs
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from end users, which will only commence
once construction has been completed and the
project is in operation. It is therefore a risky
enterprise and before they agree to provide
financing to the project the lenders will want to
carry out extensive due diligence on the
potential viability of the project and a detailed
review of whether project risk allocation
protects the project company sufficiently. This
is known commonly as verifying the project's
"bankability" (ACEC, 2014).
Effective Risk Mitigation
Storm water management is an increasingly
complex local government-financing
obligation, and the financing implementation
risk can be significant. Appropriately
structured P3 arrangements effectively
transfer much (though not all) of the program
risk, including financial risk, to the private
sector. Risk mitigation examples include:
Increased project performance:
Collaborative partnerships between
local government and the private sector
have a demonstrated success in
improving the delivery of vital services
to the community. This will be
especially important in regards to
stormwater investments that will be
significant, varied, and highly technical
in nature.
Expedited delivery of services: P3
structures offer the potential for faster
project completion and reduced
implementation delays.
Higher return on investment: Innovative
design and financing approaches result in
a higher return on investment, both
financial and environmental.
Funding Sources
There are other funding sources besides
private sector funding that can play an
important role in urban retrofit. These
sources include grants, banking and
trading, SRF, user fees, service credit fees,
multi-jurisdictional funding, and cost
sharing with other public programs. A more
comprehensive discussion of funding and
financing is provided in Chapter 5.
importer , 1
The CBP3 utilizes or adapts many of the
conventional P3 approaches for financing,
procurement, contract, and program
management. The significant difference is
that a CBP3 is a "relational contract" built on
long-term trust and confidence that both
parties will act as partners. A conventional P3
approach uses a "transactional" contract
approach with discrete and static metrics for
reimbursement that cannot address the
flexibility and complexity required for
stormwater retrofit programs. Though CBP3s
are based on the traditional P3 model, there
are some distinct differences between the two
structures, including:
Alignment of goals: Common goals
among the private and public partners
create shared results.
A ccountability: Partners share
responsibility for project governance and
major decisions, but the primary partner
is responsible for performance-based
implementation.
Transparency: Private sector partners
operate under a fixed performance fee.
The partnership is managed through
adaptive management by regular partner-
ship meetings where major decisions
necessary to ensure the project meets its
intended goals are governed.
Sustainability: Programmatic long-term
focus aligns the initial design and build
with O&M. All excess cash flow from
savings or efficiencies is reinvested into
the project or returned to the local
government.
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Efficient use of funds: Use of private
capital, expertise, and efficiencies
leverages public investment with
efficient long-term operational cost
savings that are reinvested back into the
project.
Commitment: The private partner will
commit to the local community through
community stewardship and economic
development of small and disadvantaged
businesses.
Value driven: The public partner bases its
selection of a private partner on
qualifications and long-term value versus
price.
The CBP3 model provides benefits
for the public and private sector
partners through opportunities
including:
Economies of scale (and perhaps critical
mass) in the provision of critical services
or activities;
To promote and develop, and reflect
advances in reporting, verification, and
cost effectiveness; and
Mutual learning and implementation
between partners on procurement, job
development, management, outreach, and
reporting.
4mflt Alternative
Financing Model Works to Utilize
Drivers ai 11 mvon' niers
The long-term financial advantages and
benefits to both parties of a CBP3 are perhaps
the most compelling reason for
consideration. A major premise and basic
assumption in the development of the
financial model is that cost efficiencies and
ancillary benefits are best optimized through
market-based forces. This has been the
experience in other industries such as
recycling and waste management where both
have transitioned from government run
initiatives to privately run businesses. The
focus is on the national lessons learned in
urban stormwater management and how
successful technologies and business models
from other industries (e.g., such as
transportation, waste management, energy,
wastewater and water supply) are directly
applicable.
Growing Local Jobs and Community
Development through a Gl-Driven
CBP3
The role of community is central to the CBP3
approach, as exemplified by its name. From
economic revitalization to local jobs creation,
to enhanced social well-being, the community
benefits of this framework, designed to
accelerate large-scale implementation of GI
are clear. Unlike other forms of infrastructure,
such as that of a toll road or a power plant,
green infrastructure is also intimately tied to
the social aspects of a community. A GI
practice or system may be an amenity used in
a community to recreate, for instance.
Additionally, numerous studies show that
social well-being increase for urban dwellers
located near vegetated or otherwise "green"
infrastructure, such as parks, street trees or
vegetative practices. Another significant
social benefit are the public health
enhancements, such as reduced occurrence of
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asthma rates for children as well as a reduction
in heat-related deaths in peak summer months
in urban area. Moreover, stormwater
management practices built around natural
hydrologic functions and increased use of
vegetation can dramatically reduce energy
consumption. Green roofs, street trees, and
increased urban green spaces have the effect
of making individual buildings more energy
efficient by reducing heating and cooling
demands. On a neighborhood or community
level, the shading and insulation provided by
these techniques cools urban heat islands,
again reducing the energy required to cool
indoor spaces during summer months.
Additionally, by re-using harvested rainwater,
some green infrastructure approaches
decrease the need to use potable water for
landscaping, toilet flushing, or other industrial
uses. In turn, this reduces municipal and utility
expenditures to transport, treat, and deliver
potable water. (Banking on Green, 2012).
However, the dimension of "community"
goes beyond these types of benefits to local
residents, as it also includes commercial and
business health and sustainability that, in
turn, helps to create more local jobs. A
hallmark of the CBP3 approach is the long-
term commitment between the public and
private partners, as well as the partnership's
relationship with community stakeholders,
such as religious and educational institutions
and non-profit groups, such as watershed-
related stakeholder groups. This long-term
commitment allows the private partner to
cultivate and develop local businesses and
industries supporting the GI sector through
stewardship and economic development of
small and disadvantaged businesses, for
example. Work anticipated within a GI-
driven CBP3 framework that helps to ensure
compliance with Clean Water laws, includes
not only design and construction skills, but
operations and maintenance (O&M), as well.
The focus on O&M in stormwater programs
has historically been lacking; however, as
more research is done in this area, it is evident
that maintenance is necessary for the overall
health of GI practices and systems, and
ensures for successful performance. The
O&M service sector is also uniquely suited to
match up with disadvantaged communities
who may have access to the local available
labor force. As a Gl-driven CBP3 program
matures, the effect of greened streets and
parking lots will help to enhance property
values through hedonic effects. Regression
analyses performed on real estate sales have
shown that the increase in land values for
properties adjacent to open space more than
offsets the property tax revenue loss
associated with acquiring open space for
preservation. (Case Studies Analyzing the
Economic Benefits of Low Impact
Development and Green Infrastructure
Programs, USEPA, 2013)
This dynamic may help to drive increase of
green infrastructure and related jobs in the
land development sector, as well as overall
interest in the topic long-term stormwater
management.
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IV. CBP3 Highlights for
Municipal Leaders
A successful CBP3 program can help a
community realize many important
environmental, financial, and community
development goals. It is important for
municipalities to understand that there are
distinct and potentially significant limitations
to this program model, which need to be
addressed in the earliest stages of development
or consideration of the approach.
Key Considerations
This section presents an overview of the key
considerations before deciding to take on a
private business "partner" and engaging in a
relationship that falls within the spectrum of
the P3. A balanced partnership between the
public and private sectors can:
Allocate the responsibility to the party
best positioned to control the activity and
manage the risks;
Produce local economic value through
private sector participation;
Solve a costly, complex public problem
with faster, less expensive solutions and
better outcomes
Substitute private resources for limited
public resources;
Employ private industry to drive
innovation and operational efficiencies,
ultimately lowering future costs; and
Enhance the community's involvement
and participation in municipal functions.
One-off Project Partner versus Long-
Term Programmatic Partner
The most critical issues a public entity needs
to consider are the purpose, goals, and
objectives of the partnership. The
municipality needs to identify whether the
private partner is engaged in a specific
individual program, such as WIP compliance,
or for a more holistic long-term and
comprehensive storm water program that is
also concerned with the implementation and
management of all public assets and
responsibilities. Examples include flood
control, system capacity, and drainage
system maintenance and repair. The private
partner engages primarily as a one-time
source of capital for implementation and
operations in the case of a specific program.
If a more comprehensive program, the private
partner engages primarily as a means of
sharing or completely transferring
construction and operating risk for a related
group of municipal assets and
responsibilities. This distinction is important
and dictates the appropriate legal structure,
length of term, ownership of revenue stream,
and public entity oversight and control.
Request for Proposal versus Request
for Qualifications
The Request for Qualifications (RFQ)
approach is appropriate for many
communities that do not have significant
experience or expertise with a P3. This
approach will allow the community to
evaluate a range of options and suggestions
for contract structure, procurement,
financing, and operations. It will also allow
the community to develop a contract that
reflects the requirements and potential
benefit for the community as well as the
private partner so that it is truly a
collaborative effort where both parties
equally share in the risk and rewards.
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Improved Access to Capital
Defining the municipalities return on
investment is critical to ensuring the judicious
use of public funds. A P3, if done correctly,
maximizes the return on investment for the
community through creative goals that spur
economic investment and development in local
jobs and resources. A P3 provides a
municipality with access to capital, particularly
startup capital for new projects that is not
otherwise available. In this current climate of
diminishing public resources, operating dollars
for municipalities are becoming increasingly
scarce. Many local governments are running up
against public debt ceilings and taxing
limitations. Capital Investment Program (CIP)
funds are even scarcer. Private capital in CBP3
programs can be used for upfront costs such as
feasibility studies, predevelopment activities,
and design services that are needed to take a
proposal from concept to a distinct project with
finite cost and time parameters. The CBP3 will
also create a revenue stream that is directly
generated from the creation of the capital asset
or municipal service. This revenue stream
provides a stable and long-term source of
funding for future operations, repairs and
maintenance, and without the burden of
uncertainty and changing priorities of annual
public appropriations. CBP3 projects provide
tremendous benefit to the public participant by
freeing the public entity from a long-term
financial commitment; and at the same time
assuring to the public sector a viable operation
over its useful life and a predictable return on
its investment.
Access to Highly Specialized
Expertise
The municipal staff at local governments,
especially smaller ones, have had limited
exposure and experience with P3 projects. Staff
training, availability, and capacity may be
significant impediments to evaluating and then
eventually managing and overseeing P3
projects. The involvement of experienced
private partners is an absolute necessity to
assist the municipality's staff on the
implementation of the program. A long-term
training program where the municipal staff
have direct access and exposure to the activities
associated with the CBP3 program is essential
to the success of the program.
Accelerated Project Development
Traditional CIP approaches to infrastructure
take years to determine the feasibility to
program, plan, finance and construct. There
is often unpredictability on performance
issues because of uncertainty on O&M and
different phases are often funded under
different programs.
The private development process is
streamlined because of the emphasis on
expedited project delivery times, value
engineering, cost control, and efficiencies in
staffing and management. In addition, the
private development process treats each
project as an investment, rather than a
requirement that must be funded. The costs
and the need to implement and successfully
operate as many projects as possible is
critical to the financial success of the
partnership.
Access to Private Development
Incentives
Many large-scale development projects
include some form of public financial
assistance in order to provide an incentive for
the developer to select the project site and
reduce the competition for the development
by other jurisdictions. These can take many
forms, including outright grants or payments,
full or partial real property tax exemptions,
low-interest loans, payments in lieu of taxes,
infrastructure subsidies, and state and federal
tax credits. Publicly funded programs do not
usually qualify for these types of
development incentives.
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Many CBP3 projects will most likely involve
development and ownership of the storm-
water capital assets through a separate entity.
This can be a for-profit or not-for-profit
entity. Municipalities can use this separate
ownership structure to their advantage by
accessing government incentive programs
not otherwise available or allowed for public
construction. This option can make funds
available to other programs through the cost
savings.
Pooling and Leveraging of Resources
through Entities with Common
Objectives
CBP3 programs can be structured to address
a wide range of public challenges and can
take on many shapes and sizes with various
private industry partners. In discussing the
concept, there is a tendency to think of the
prototypical CBP3 as a development project
between a public entity and a private real
estate developer. The reality is much more
benign, and much more complicated. The
CBP3 approach starts with a development
project, but often includes community
outreach and economic development
components and usually involves long-term
collaborations between public entities and a
wide range of private industry partners such
as hospitals, research institutions, and non-
profit entities. These collaborative efforts
allow municipalities to partner with
organizational entities and pool limited
resources toward a common objective.
Properly structured as a true partnership, a
CBP3 program can achieve traditional
project-based objectives, such as cost savings
and expedited construction, and more
importantly at the same time, it can maximize
community-based objectives.
Project Delivery Flexibility
Municipal entities are often limited by law to
use design-bid-build delivery models or
through turnkey or bids on construction
documents with fixed items and prices. The
CBP3 model provides alternative delivery
models such as design-build, construction
manager at risk, and provisions for long-term
operational sustainability. These alternative
delivery models offer the public sector
participants greater flexibility, the ability to
transfer some or all of the construction and
operating risks associated with programs to
private partners and the possibility of
significant cost and time savings when
compared to design-bid-build projects. A key
benefit, besides flexibility and adaptable
management, is that the municipality can still
maintain control over the construction and
operation of the facilities.
Participation in Operations and
Performance Decisions
It is often difficult for a municipality to have
sufficient funding and resources to operate
and maintain a facility or system once it is
commissioned and turned over by the
contractor. A CBP3 arrangement will allow
the municipality to participate in the long-
term ownership through a separate for-profit
or non-profit entity. This includes input and
involvement in decisions for maintenance,
funding, and return on investments over the
long term.
Ability to Obtain Conventional Bank
Financing
Projects associated with a CBP3 program
may be used as a revenue stream or as
collateral for project financing. CBP3
projects are constructed on either privately
owned land or publicly owned land and is
leased or otherwise made available to the
CBP3 project on a long-term basis. This may
allow the CBP3 project owner to grant a
mortgage on the capital asset and pledge the
revenue stream generated by the asset to the
program and financial institution. This
enables CBP3 projects to utilize construction
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and permanent bank financing, which has
typically excluded municipal sectors.
Eligibility for Off-Balance-Sheet
Treatment
The public entity may be able to treat
investment and liabilities of the partnership
on an off-balance sheet basis. This will
enable the municipality to exclude CBP3
projects from its financial statements and
financial covenant calculations. Public credit
markets and credit rating agencies may
include these projects in their analysis of
municipal debt and obligations. In addition,
they may consider the revenue generating
aspects of the assets.
Potential Exemptions from Real
Property Taxes and Local Land-Use
Approvals
CBP3 may provide significant tax benefits to
the private partner. The facility constructed on
private property through the venture may be
exempt from real estate taxes due to the
relationship with the local government. If a
CBP3 project is undertaken on municipally
controlled land, the project may also be
exempt from taxes. Many municipal codes are
exempt or have special "lenient" provisions in
the land development process or the zoning
codes for municipal projects. This may help to
expedite projects, relieving them from many
difficult zoning and land development
requirements that are prevalent in
redevelopment and retrofit projects.
Ability to Transfer Risk to Private
Partner
Most CBP3 structures involve some degree
of risk transfer to the private participant. This
includes risks related to construction cost
overruns, construction delays, operating
deficiencies and future capital repairs, and
replacements that are required for the long-
term sustainability and operations of the
facilities. The public sector participant can
mitigate and in some cases completely
insulate itself from these program related
liabilities. The private sector partner benefits
because they receive more revenue through
the reduction of risks and for the efficient
operation of the system.
Ability to Address Critical Water
Quality Issues
The challenges in water quality within EPA
Region 3 have been previously described,
and it is clear that the needs in this area are
great. An advantage of the CBP3 approach is
the ability to adapt a program to meet the
needs of the community. Regarding the
Chesapeake Bay TMDL requirements that
represent the major water quality issue for
many MS4 communities, the CBP3 approach
brings the ability to greatly accelerate the
implementation of GI to meet WIP goals.
An additional advantage of the CBP3
approach exists for those MS4s with a retrofit
requirement, as the CBP3 approach seeks to
replace the project-driven mindset in
stormwater programs today with an outcome
or output-focused view. Currently, the status
quo method of meeting MS4 permit
requirements is by identifying specific
stormwater projects that can help attain
regulatory goals. The CBP3 approach looks
beyond the project level and seeks to address
the ultimate outcome needed to meet
permitting goals, such as total impervious
acreage retrofitted or total pounds of
phosphorus reduced. By focusing on the end
goal, the CBP3 approach can identify ways to
gain cost-efficiencies in this context, such as
economies of scale, BMP standardization,
and reduced transaction costs associated with
a cumbersome procurement system.
Beyond the MS4 needs, many communities
face the added challenge of reducing CSO
discharges. Most CSO consent decrees have
a 20 to 25-year window in which a long-term
control plan (LTCP) can be enacted. More
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recently, there has been a push for 30-year
timeframes for consent decrees, especially
for those communities who may be
considering an integrated approach to
addressing wastewater and stormwater
investment needs. These timeframes align
very well with the typical 30-year window
envisioned for CBP3s. A hallmark of the
CBP3 approach is the long-term nature of the
relationship between the private and public
entities. The ability to enter into a long-term
contract to implement a Gl-driven CBP3
program to address CSOs fits hand-and-glove
with the nature and intent of the timeframe of
an LTCP associated with a consent decree.
The tie between CBP3 and IP reaches beyond
timeframes, as a basis of IP is cost efficiency.
EPA defines IP as a process that "has the
potential to identify a prioritized critical path
to achieving the water quality objectives of
the Clean Water Act by identifying
efficiencies in implementing competing
requirements that arise from separate
wastewater and stormwater proj ects,
including capital investments and operation
and maintenance requirements." In short, IP
is about achieving outcomes in a more cost-
effective manner, which is consistent with the
spirit of the CBP3 approach. Additionally,
the IP framework lends itself well to GI. In a
memo released in 2011, EPA states that
"Integrated planning... can lead to the
identification of sustainable and
comprehensive solutions, such as green
infrastructure, that improves water quality as
well as support other quality of life attributes
and enhance the vitality of communities."
EPA goes further in this memo by stating that
they "strongly encourage the use of green
infrastructure and related innovative
technologies," and they cite that employing
GI not only protects water quality, but also
has an influence on, "improving property
values, saving energy and creating green
jobs." While the IP approach is new and
evolving, the fact that it is a long-term and
outcome-oriented framework that strongly
encourages the use of GI to cost-effectively
address water quality issues creates a strong
linkage to the CBP3 philosophy.
Potent " 1
Limitations
The complexity and nuances of a CBP3
arrangement can create many administrative
and procurement challenges for the first
venture for a community. Described below
are some potential challenges and areas of
concern that may be encountered in the
development and delivery of the program.
Potential for Void Contracts
Perhaps the biggest potential problem with
all CBP3 arrangements is the fact that one of
the participants in the venture is a public
entity. This means the foundation of the
arrangement contains one or more contracts
with a municipality. Therefore, at the
inception of any CBP3 project, attention must
be paid to whether or not the municipality has
the requisite legal authority to make the
contract or contracts required for the venture.
It is also important to confirm the venture
complies with state law public procurement
requirements. Generally, if the public entity
lacks municipal power to enter into the
contract or they have not complied with state
law-contracting requirements, under the law
of most jurisdictions, the contract is void or
voidable. This puts the municipality, the
CBP3 partner, and any entity lending or
providing capital to the partner or the
venture, at tremendous risk.
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Potential Need for Special Legislation
CBP3 arrangements can be structured
through a combination of leases, operating
agreements, affiliation agreements,
occupancy agreements, or other contractual
arrangements between the public entity and a
private partner. This can be done in the form
of a limited liability company, or a
constructed partnership through a contract
depending on the basic powers of the
municipality. It is still not a traditional
partnership (or "limited liability
corporation") because of the unique
requirements of stormwater programs.
Special enabling legislation may be
necessary to meet the requirements of the
partnership. This may take a significant
amount of time and effort to go through the
state and the local approval process.
Public Contract Oversight
Local requirements for construction of public
facilities may have to be modified to prevent
restriction of the types of contractual
arrangements available for the CBP3. These
requirements vary widely across state and
local governments. They can include
measures such as prevailing wage laws;
multiple prime contractor requirements; work
hour restrictions; mandatory public bonding;
mandatory project labor agreements; public
officer conflict of interest provisions; freedom
of information obligations; small, local, and
disadvantaged business requirements; and
dispute resolution limitations. These
requirements may reduce or restrict many of
the CBP3 financial benefits and may require
significant resources for reporting and
compliance.
Restrictions on Public Officer
Involvement
Local governments need to make sure that
state law allows its officers to engage in
partnerships with private entities. Some
states expressly prohibit municipal officials
from becoming officers or directors of
private entities. This may restrict the ability
of the municipal program managers to
participate directly in critical decisions.
Public Perception and Labor Force
Stakeholder, business, property owners, and
citizen perception and their understanding of
the process are critical to the success of the
program. Collective bargaining agreements
with labor forces within the local
government, union participation with con-
tractors, and impacts on consultant contracts
are important factors when determining
participation requirements.
Legal Challenges and Insights
Legal issues related to the CBP3 approach
reflect the unique nature of this innovative
framework. Traditional P3s have well-
understood statutory and legal aspects, and
some of these are applicable to the CBP3
approach while others do not fit as easily in
this context. For instance, both traditional
P3s and CBP3s are impacted by issues related
to procurement methods, environmental
streamlining/permitting, and agreement
provisions. However, a CBP3 in the context
of green infrastructure investments are
uniquely linked to aspects of the Clean Water
Act (CWA), specifically the NPDES and
TMDL programs. Considerations should be
made to ensure that legal teams supporting
CBP3 efforts are well-grounded in CWA
issues as well as land development,
environmental permitting/planning, and local
stormwater regul ati on s/ ordi nances.
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V. CBP3 Highlights for Financing
Officials and Advisors
The goal of the CBP3 approach is to provide
a framework that results in a low-cost, low-
risk, private financing partnership with the
municipality or local jurisdiction's long-term
goals and objectives as the driver versus
private sector investors' priorities. It is
critical to take an independent view of each
jurisdiction's challenge, evaluating all
possible public and private financing options,
assessing the associated risks and constraints,
and then customizing an approach based on
communities' goals and objectives that
balance the regulatory, financial, and
community objectives desired by any one
local jurisdiction.
Finance Strategy & Approach
Counties and municipalities are not required
to follow a specific model to meet their
regulatory guidelinesthe intent of the
CBP3 approach is to develop a customized
financial model that will evolve through a P3
process that is tailored to meet the
municipality's needs for the long-term. In
this way, local jurisdictions can maximize
their funds when and where they are needed
through evaluation of financing strategies
and transfer the risk from the local
government to the private sector partner.
Development of a Long-term
Financial Sustainability Strategy
In addition to funding all O&M over the life
of the program (assumed to be 30 years in this
chapter), the capital structure also provides
for all residual cash flow to either be returned
to the municipality or deposited into a
Residual Return Reserve (RRR) to provide a
significant source of funds for future projects
rather than be returned to the private partner
as in other P3 structures. These elements
ensure that at the end of the 30-year program,
the infrastructure aligns with future 30-year
standards and is not just well-maintained 30-
year old infrastructure.
CBP3 GI Retrofit Financing Model
S Flexible & Adaptable to Meet Needs of the
Partnership Structure
^ Attractive Platform for Lenders
^ It is important to recognize that the financing
doesn't influence the structure of the CBP3.
Rather, CBP3 financing programs are intended
to be flexible and tailored to meet the particular
construction demands and needs of the
partnership structure.
^ In other words, CBP3 financing programs are
reactive to the unique needs of each
development project and partnership
requirements. Bonds can be issued to provide
both construction inancing and long-term fixed
rate financing.
^ The financing can also include interest-only
periods during construction to leverage the
amount of funds available for construction and
amortization terms of 30 years and up to 40
years to minimize annual debt service
expenditures. All the funds needed to complete
the project can be issued at closing or
periodically throughout the development
period.
^ The partnership can also elect to conduct a
public offering or private placement of the
bonds to finance the project.
^ To further lower the cost of funding for the
partnership, the use of public funds such as
federal State Revolving Loan (SRF) funds and
or WIFIA enhances investor participation and
the cost of funding by replacing higher cost
private equity dollars and demonstrating public
sector commitment to the project.
^ SRF and WIFIA dollars also lower the amount
of debt the project needs to raise creating
improved cash flow and lower leverage.
S These dollars will also be a positive
consideration if the partnership chooses to
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CBP3 GI Retrofit Financing Model
obtain ratings from the rating agencies to attract
private capital.
Partnership Structure - Creating
Financially Accountability for
Stormwater Retrofits
The use of P3s to support water infrastructure
is not new to EPA, as P3s have been used for
both drinking water and wastewater
treatment facilities. EPA is generally
supportive of an organization structure in the
form of a partnership between a county or
municipality and the private sector for the
purpose of achieving affordable and effective
water quality compliance through long-term
stormwater management, including proper
operation and maintenance, for a period of 30
years or more. This ensures the local
jurisdiction is an active partner in all
governance and decision-making since it is
not separated from the managing entity. This
type of partnership construct would act as a
separate entity with independent financial
accountability and rights of access to
implement the actual work for contract and
project performance. It would ensure a
bankruptcy-remote construct that protects the
local jurisdiction from potential financial
challenges or failure by the private sector.
The structure allows for access to low-cost,
private financing, which will provide debt to
the project at very low interest rates and,
more importantly, does not impact the local
jurisdiction's debt rating or debt ceiling,
leaving the local jurisdiction free to pursue
other challenges that may require public debt
financing. It also transfers financial risk
while still allowing the local jurisdiction, as
Designated Member (DM), to retain
influence and control over the program
funding through lender-appointed, third-
party lockboxes setup on behalf of the
partnership and managed according to a
mutually agreed to Servicing and Lockbox
Agreement (SLA). This agreement governs
the use of all project funds and ensures funds
are used for their designated purpose of
meeting regulatory stormwater requirements.
Whether utilizing a dedicated local
jurisdiction revenue stream, or general
obligation revenue, the partnership entity
consisting of both the local jurisdiction and a
private partner will leverage the funds and
raise the debt required to implement the
program with no recourse back to the local
jurisdiction. Similar constructs have
historically raised capital at 10-to-l leverage
ratios. It is critical to reinforce that within this
P3 construct loan proceeds and equity
proceeds, along with all cash flows, are
retained in lockbox accounts within the
partnership controlled by the local
jurisdiction. This gives the local jurisdiction
the needed oversight and control of funds as
well as regulators the confidence that the
necessary funding needed to ensure
execution and long-term maintenance of the
stormwater infrastructure is protected from
potential competitive uses and needs within
the local jurisdiction for the long term.
In this finance structure, construction
payments are made according to an
Availability Payment Structure (APS).
Payments are made from funds within the
partnership lockbox structure and paid out
only after inspection and acceptance of work
put in place to the satisfaction of the lender
and partnership. This is in contrast to a
traditional construction contract where the
local jurisdiction would be required to
directly fund construction, but replicates the
typical construction invoicing process in
which the local jurisdiction retains oversight
and assurance that payment is only made for
work completed and accepted by the public
partner. Eliminates any concerns of private
sector overbilling and or finding out about
cost overruns after they have occurred.
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The private partner acts as a managing
member of the partnership, versus a
contractor at an arm's length reach only
accessible through contract clauses, that is
responsible for management, coordinating
and implementation of the stormwater
infrastructure program from construction
through operations and maintenance over a
30-year program and is responsible to report
back to the local jurisdiction and any
stakeholders, including the local community
via regular monthly or quarterly meetings.
Performance-Based Incentive Fees (PBIF)
can be incorporated that give approval rights
by the local jurisdiction based on the
achievement of Key Performance Indicators
(KPI) determined in advance by the
partnership and will only be paid if the
private partner performs. Unpaid fees that the
private sector loses based on nonperformance
is invested back into the program to be used
as a source for construction or for future
infrastructure upgrades at the discretion of
the local jurisdiction. Such a payment
structure ensures all interests are aligned with
the municipalities' goals.
Strategy and Approach for Financing
on a Long-term Basis
Private capital can easily be raised, but
raising it in the best interests of a local
jurisdiction is the focus of this approach. It is
critical to take an independent view of each
and every program as no two are alike. It is
critical to understand the specific goals and
objectives of a P3 program, identify and
address potential risks, assess challenges, and
provide a customized financing solution
based on the needs of the local jurisdiction to
meet both regulatory, financial, and
community goals for the long-term.
An approach that will aid a municipality in
meet these objectives starts with the private
partner forming a formal partnership with the
local jurisdiction to invest in infrastructure
using the design-build-finance-operate-
maintain (DBFOM) model. In this
arrangement, the private partner will be
responsible for implementing this long-term
program with oversight and approvals from
the local jurisdiction. It is the uniqueness of
the partnership structure proposed by private
partner that allows the local jurisdiction to
separate itself from the financial risk of the
program while still maintaining an
appropriate amount of control and oversight.
Financially Structurir
nment Partnership
Based on the goals and objectives of the local
jurisdiction, a long-term debt financing
structure that allows upfront private capital to
be supplied immediately to fund construction
costs, eliminates the need for a large
contribution or investment by the local
jurisdiction during the initial construction
phase. This initial phase is normally when a
majority of execution risk is realized. Instead,
payment is repaid over the life the program
including the maintenance term though a
long-term fixed revenue stream (based on
size of the program) that not only repays the
long-term financing, but also funds long-term
O&M. This ensures the long-term
commitment to the regulatory community
that a goal is to maximize the life cycle
benefits of GI/LID practices installed and
constructed. The long-term fixed payments
are the only financial commitment to be made
by the local jurisdiction under the proposed
partnership structure.
This fixed annual payment from the local
jurisdiction is leveraged in such a way as to
maximize funds available to the partnership
in the short-term for construction to address
the stormwater backlog while also ensuring
funding for the long-term sustainability of the
program through the creation of reserves, the
funding of long-term O&M, and at the local
jurisdiction's option, returning all savings in
the form of residual cash flow back to the
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local jurisdiction or reinvesting it into the
program.
Under this structure, the local jurisdiction has
the financial flexibility to utilize savings to
invest towards potential changes in
environmental regulations and investment in
new technologies versus contractor profits.
Municipality's Participation is Key
Input from the local jurisdiction is crucial to
establishing the most appropriate financing
structure. The options outlined below exhibit
the range and number of terms open for
discussion and evaluation in order to ensure
that the long-term interests of the local
jurisdiction are met.
For example, the debt raised must be
determined only after taking into
consideration O&M costs and the level of
service desired by the local jurisdiction.
Further, these costs also must consider
investments in upgrades based upon expected
improvements in stormwater technology to
ensure the highest quality infrastructure is
retained by the local jurisdiction over the 30
years. Simply meeting minimum O&M is
likely not in the best interest of the
municipality, and thus it is critical to
determine and solidify the expected
maintenance costs during the negotiation
period and ensure they are fully funded for 30
years.
It is critical to size and scale the financing to
ensure that the required level of funding to
complete the 30-year scope of work is met.
This helps to ensure the transfer of risk away
from the local jurisdiction and provides
surety of funding and execution by having all
funds available for construction at the start of
the program. Aspects of this approach
include:
S 30 year-fixed rate debt that has no
recourse back to the local jurisdiction or
impact to debt capacity
o No equity - due to very high cost
of equity, any equity
contributions increases the cost of
private capital considerably.
S Capital and revenue sizing
o Fund both initial construction and
all O&M for 30 years
S Residual Cash Flow (RCF) to the local
jurisdiction
o Capture savings from private
sector efficiencies to be
reinvested for capital
improvements versus being
returned to private equity
providers and investors.
The private markets will underwrite the debt
raise to ensure the P3 partnership has access
to the widest range of sources for the
program. To ensure the lowest interest rate,
thus the lowest cost of capital, resulting in
maximum funds for the program, the debt
will be sized to keep coverage levels in line
with "Investment Grade Financing" (a credit
rating that indicates that a bond has a lower
risk of default) and utilize the private sector's
experience with P3 programs to work with
rating agencies to obtain that high credit
rating. Note that coverage levels are normally
based upon ratio of income to debt payments
where the higher the coverage, the larger the
buffer between cash available for O&M and
debt payments.
As the private partner only receives a fixed,
incentive-based fee for their role in the
partnership, any and all RCF is returned to
the local jurisdiction or the program
throughout the life of the project. This is very
different from other P3 structures where the
majority of residual cash flow goes back to
the private partner through shared cash flow
agreements or additional returns to equity
providers. The flexible financial structure
allows for RCF after initial construction to be
reinvested back into the infrastructure
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through a controlled RRR. Under a
reinvestment scenario, the local jurisdiction
can direct funds into capital improvement,
new green technologies, BMP upgrades, or
performance testing for TMDL loads as they
see fit. This approach ensures that at the end
of the 30-year program, the infrastructure
aligns with future 30-year standards and does
not simply reflect 30-year old infrastructure.
These reserves further serve as a contingency
in the event there are gaps in financing due to
unforeseen circumstances or the timing of
expense.
Further Financing Strategies
Additionally, it is important to protect against
interest-rate risk through a long-term fixed-
rate debt structure. Bonds have a call feature
that allows the partnership to refund bonds
after 10 years at its option. This could be
desirable if interest rates in the market
decrease, allowing the partnership to
refinance the debt at a lower rate, allowing
more savings to be reinvested into the P3
program.
Furthermore, debt payments can be interest
only for the initial construction phase of the
program, helping to reduce the amount
needed to be contributed to the capitalized
interest account, which helps to fund initial
debt payments during the construction phase,
thus lowering the required debt raise and the
revenue stream required. A cash-funded Debt
Service Reserve Fund (DSRF) can be put in
place to ensure the ability to meet short-term
principal and interest obligations on the debt.
This has the effect of lowering the program's
risk profile, further protecting against
downgrades in rating on the debt, and
securing the lowest cost of capital.
Relative Cost of Financing
In the financing sector, the phrase, "the cost
of money" is used to describe the overall
costs (including interest payments) for
varying financing approaches. The "cheaper"
the money, the lower the interest rate is that
is associated with the funding source, which
leads to an overall lower cost of financing.
As has been previously noted, an advantage
of the CBP3 approach is the ability to tailor
the financing strategy to the needs and
constraints of the municipal partner. For
instance, it has been noted that public
financing options, such municipal bonds and
the SRF program, have lower interest rates
when compared to private financing options.
However, a community may not have
bonding capacity or the ability to generate
bonds at all. In these instances, a mixture of
public and private financing may be
"stacked" in order to drive down the cost of
financing relative to a private-only financing
option.
Another way the SRF program can lower the
cost of financing is by lowering rates for
projects not considered to be high-grade
investments. A report from the EPA's
Environmental Financial Advisory Board
(EFAB) titled, "Utilizing SRF Funding for
Green Infrastructure Projects," provides a
scenario where a 20-year GI project that is
considered to be "minimum investment grade
quality (triple-B)" that has an estimated
financing interest rate of 5.75 percent can
lower this interest rate through the "benefit of
SRF financial assistance" to 3.50 percent,
which represents a 2.25 percent saving
(USEPA, 2014e). This difference represents
an annual savings associated with financing
of 39 percent. The EFAB report goes on to
note that lower rated investments would
realize an even greater amount of savings.
Additionally, this report goes into great detail
on how the SRF program can not only reduce
financing costs, but greatly expand the pool
of capital available through leveraging of
funds associated with the program that are
estimated to range from a minimum of 3:1 all
the way up to 14:1. While GI and stormwater
projects represented less than one percent of
all SRF dollars prior to 2008, there has been
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an increase in funding in this area more
recently. This increase coupled with a rarely-
used leveraging approach illustrates the great
potential that the SRF program has to
accelerate the implementation of GI projects
across the country.
It should be noted that other bond options
have arisen recently. Qualified Green
Building Sustainable Design Project Bonds
("Green Bonds") have been created to
generate increased investment in LEED rated
building projects and redevelopment of
brownfield sites. The White House
announced in January, 2015 the creation of a
new type of bond vehicle, the Qualified
Public Infrastructure Bond (QPIB), which
has been tailored to enhance P3 investments.
Specifically, QPIBs are similar to Private
Activity Bonds; however, they will have no
expiration dates, no issuance caps and the
interest on these bonds will not be subject to
the alternative minimum tax with the overall
effect of lowering financing costs for private
participation in public infrastructure
investments (U.S. EPA, 2015). More detailed
information is expected from the White
House in the near future. Concurrent with the
announcement of QPIBs, the White House
outlined the creation of an EPA-led Water
Infrastructure and Resiliency Finance Center
(U.S. EPA, 2015). It is expected that this
entity will be the focus of continued
innovation in the effort to aid communities in
their efforts to fund and finance water-sector
projects.
Another innovative financing approach in the
water sector is the Green Century Bond. DC
Water announced the issuance of $350M in
taxable, Green Century Bonds in July, 2014,
which expand the usual maturity length of 30
or 35 years for municipal bonds in the water
sector to 100 years. The benefits of this
approach for DC Water is that it aligns
financing goals with the long-lived nature of
water infrastructure, respects the multi-
generational benefits of water infrastructure
benefits, and locks in historically-low interest
rates.
DC Water innovativeness in infrastructure
funding and financing goes beyond that of the
Green Century Bond. In March of 2015, DC
Water announced it had received one of five
grants from Harvard University to develop an
innovative financing model for GI through
the use of Social Impact Bonds (SIBs). The
DC Water approach will be to use a "Pay For
Success" (PFS) model that will allow
"governments to partner with private sector
investors who provide up-front funding to
promising service providers," with the
investor being repaid only after the
implemented GI has been shown to be
"measurably successful" (DC Water, 2015).
The DC water utility states that their goal in
pursuing this approach is to, "reduce the
scope, scale and cost of the mandated grey
infrastructure tunnel system," through an
approach that, "promotes accountability and
smart programming" (DC Water, 2015).
While the SIB approach has been more
commonly used in the prison and other social
welfare sectors to tie investment returns to
the ability of the private sector party to reduce
re-incarceration rates and similar metrics, the
principle of tying a return on investment to
performance has clear applications in the GI
sector. One concern stemming from
wastewater utility rate payers who are
involved in a CSO consent decree is the
uncertainty of long-term performance
associated with GI; however, as the DC
Water General Manager points out the SIB
model is "measureable, so our investors and
public stakeholders can objectively quantify
results, which promotes accountability and
smart programming" (DC Water, 2015).
Ranges for typical interest rates associated
with these various are listed in Table 1. The
range of interest rates illustrates the
opportunity in engaging in capital stacking to
optimize the mix of public and private
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financing options for a least-cost solution for
the municipal partner.
Collaboration with a Private
Partner to Establish the Right
Financing Structure
As summarized in Table 2, there are several
alternate financing options that may be
evaluated by the partnership. There are many
options to consider when developing a
financing strategy with the private sector.
Table 1: Financing Interest Rates for Various Options
Municipal Bonds
Typical interest rate = 3-4%
CWSRF (Federal Loans and Grants)
Typical interest rate = 1-3%
Private Bonds/Equity
Typical rates = 5-15%
Green Bonds
Typical rates = 2-4%
Green Century Bond (DC Water)
Rate = 4.814%
Table 2: Impacts of Alternate Financing Structures
Potential
Financing
Impact to Program
Structure or Term
Fixed versus
Variable Revenue
Stream
If the revenue stream committed by the municipality were to be in a fixed amount on
an annual basis (versus variable amounts), such a structure could receive a credit
rating one notch below the municipality's current rating, as a result of lower
perceived risk.
Gross versus Net
Revenue Pledge
If the revenue stream committed by the municipality is determined before operating
expenses, it is likely to be perceived as a lower risk to investors ultimately resulting
in better financing for the program.
Investment of
Loan Proceeds
Unutilized loan proceeds could be invested into high-quality/low-risk investments to
preserve capital while at the same time receiving a small return. This provides
another potential source of funds for the project while putting unutilized loan
proceeds to work. One investment vehicle used successfully under the Military
Housing Privatization Initiative (MHPI) is Guaranteed Investment Contracts (GICs).
GICs can be provided by investment. These pay out a specified rate on the principal
for a predetermined period of time and can be structured to be flexible in the timing
of draws, so the project is never penalized.
Equity
Contribution
If required by the lender, or requested by the municipality, a private partner can also
contribute cash equity. Depending on the needs, contributions can be made at the
start of the program, at the end of construction, or no equity contribution at all. This
equity will earn a fixed market-rate return paid only after all initial construction is
completed. All payments are subordinate to all operational expenses.
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Potential
Financing Impact to Program
Structure or Term
Construction-to-
Permanent
Financing
Debt is paid out in stages, rather than up-front as modeled, charging an
administrative fee to do so, and only on an as-needed basis during construction. At
the end of construction period, a permanent loan must be obtained to finance the
remainder of the program. This adds interest-rate risk to the project as the
construction loan is subject to variable rates and the permanent loan will be closed
based on the market in several years unless the project pays for a rate lock, which
could be costly. In additional, by not having all funds available at the start of the
program, this puts the project at risk to obtain funding and ultimately, execution.
Use of Grant
Funds
Using grant monies to fund all or a portion of the program could result in a loss of
control by the partnership due to the influence of third parties that govern how grant
funds will be used. Grant funds may not materialize if payment is dependent on the
achievement of certain measures or milestones.
100% Equity
Financing
Investors or equity providers can either take a share of the profits or a high, fixed
preferred return (9%-15%) or some combination, thus requiring partner to act in
favor of the investors). This structure leaves fewer funds available for project scope.
Under a 9% preferred return equity scenario, the municipality would need to pledge
30% more in funds versus the debt structure proposed by Private Partner to meet the
same scope. A 15% scenario would require a pledge that is 60% higher.
Risks and Benefits of the CBP3
Structure
The CBP3 approach provides assurance to
municipalities that revenue will be used
solely for the purpose of stormwater
management and will be maximized to meet
the size of the backlog. The financial and
credit risk associated with a long-term
contract of this magnitude is also transferred
to the partnership relieving a municipality
from this burden. Additional risks of the
CBP3 structure are outlined in Table 3.
Advantages of this Finance
Strategy to a Government Entity
This strategy is advantageous because it
offers:
Surety of Funds
Minimized funding risk by having all
debt proceeds available for construction
use by the partnership at the start of the
program to be drawn upon over time from
a lockbox account.
Maximized funds available to the project
through:
- Surety of funding from private debt
financing,
- Option for interest only debt
payments during construction, and
- A fixed, performance-based fee
model that reverts all savings as RCF
to the local jurisdiction control for
reinvestment versus profit.
Having all private funds deposited into
lender-appointed, third-party lockboxes
that are managed according to a mutually
agreed to SLA with governance by the
municipality.
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Table 3: Local Jurisdiction Benefits and Risk Mitigation Associated with CBP3 Aspects
Transfer of Risk
Financial risk is transferred to the private sector through the new partnership which will bear the burden of debt
and default. The municipality's only financial contribution to the program is a committed revenue stream.
Because of this separation of financial risk, no impact to the municipality's credit rating is to be expected. The
municipality gets oversight and ultimate control of spending inside a private vehicle that is bankruptcy remote
and has no recourse to the municipality. Additionally the framework and project debt remains intact if the
private partner is removed.
Surety of Funding
Private capital that creates a firm commitment of 100% of debt proceeds are available for construction at the
start of the program. In addition to O&M requirements being fully funded through the life of the program, the
private partner model returns Residual Cash Flow (Savings) to the municipality or to the program through
deposits into a RRR which can be used for additional investment in the program, to address unforeseen
conditions, and/or meet additional regulatory requirements.
Surety of Execution
Private partner is a partner industry experience, efficiencies, and best practices executing P3s on every level,
including:
Financing
Designing
Developing
Managing
Maintaining
The proposed structure protects the municipality and taxpayers by ensuring all funds will be used solely for
long-term stormwater management. The structure includes a third-party lockbox agent to oversee the
distribution of funds per a servicing agreement.
Long-Term Viability
Unlike traditional construction contracts with a fixed investment and effort toward creating additional profit
from cost savings, this approach focuses on the goals, objectives, and best interests of the stormwater program.
The proposed financing structure provides for maximum funding for construction the start of the program,
stable O&M cash flow for the full 30-years, and savings in the form of residual cash flow to be returned to the
municipality or reinvested at the discretion of the municipality. This allows for the local jurisdiction to control
the level of capital investment throughout the life of the program, ensuring a current and modern infrastructure
at the end of 30 years rather than infrastructure that reflects outdated and aged GI.
Financial Transparency
Private partner only earns a fixed, incentive-based fee, based upon KPIs as agreed to by the partners. In addition
to approving fees, the municipality also has approval rights on annual budgets, and will receive regular progress
reports and updates from the partnership.
Flexibility of Partnership
In the CBP3 partnership structure, the municipality remains an active participant in the program in all aspects
of the project through the 30-year term. Despite the transfer of risk to the partnership, the municipality retains
the ownership of the infrastructure and also is responsible for directing the use of RCF (Savings).
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Surety of Execution
The transferring of financial risk from the
local jurisdiction to a private, bankruptcy
remote and non-recourse to the
municipality, LLC without having to give
up control, allowing the local jurisdiction to
own the infrastructure, and also influence
and enforce standards on the long-term
development and management project
within the community.
Keeping the infrastructure sustainable and
modernized throughout the 30-year
program through the continual funding of
O&M, and at the municipality's option: the
reinvestment of residual net cash flow into
future infrastructure projects.
Aligning interests of all contractors to that
of the municipality through utilizing a
fixed-fee model that is heavily
performance based with incentives
awarded by the achievement of certain
KPIs to be determined by the municipality.
Separation of Financial Risk and
Program Control
Under the proposed Partnership structure, all
of the financial risk is transferred to the
partnership. It is the partnership that bears
the burden of debt, while the only financial
contribution by the municipality is the
committed revenue stream. Even in the
unlikely event of default, the funds remain
available to the program within the
partnership. The municipality will continue
to retain the right to manage and maintain
the stormwater infrastructure and direct use
of RCF.
Cost Accountability Standards
including Recording and Budget
Requirements
The approach is to create a P3 structure that
meets all cost accountability standards with
built-in checks-and-balances to ensure
compliance with financial reporting and
funds management. A third-party Lockbox
Agent (LA) will be appointed by the lender
to oversee the management of funds and will
work with the Managing Member (MM) and
DM of the partnership as part of an approval
process for timely and accurate recording,
budgeting, and cost accounting. The approval
process involves both members of the
partnership. In addition, periodic meetings
will be held between the private and public
sector members to monitor progress and
implementation of the program.
Reporting requirements include construction
costs, progress reports, and Financial
Statements. The partnership will also
produce audited Financial Statements in
compliance with Generally Accepted
Accounting Principles (GAAP) and will be
made available to the public. Approvals by
the public sector partner for the forecasted
construction budget, as well as a long-term
O&M budget, will be made for the P3
structure prior to implementation. Annually,
the municipality, as a DM, will review and
approve these submitted budgets. This annual
budget process ensures that the municipality
has visibility and can revisit the level of
maintenance and the amount of planned
improvements for each year based on the
evaluation of the Stormwater Management
Plan's (SWMP) effectiveness to ensure
compliance with water-quality standards.
The overall structure is intended to be one of
redundancy, providing security and
assurance in the event of unforeseen
conditions or overages. All funds will be
deposited into a lockbox account to be
managed by a lender-appointed third-party
LA in accordance with the SLA ensuring that
all municipality revenue and partnership
funds are spent as directed and approved by
the partnership.
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Private Sectors Financial Return and
Approach to Ensuring that the Assets
are Preserved and High Service
Levels are Maintained
The proposed P3 payment structure provides
the municipality and its residents with the
comfort of knowing that the private sector's
return is capped and performance -based.
Private partner only receives incentive fees if
the parties perform according to established
KPIs. Limiting and incentivizing return, as
opposed to sharing in the overall profitability
of the project, accomplishes several
important goals: aligned interests rather than
competition for cash flow, maximized project
funds to be reinvested, a sustainable
financing structure, and a flexible
approachall combine to offer a powerful,
long-term solution to the municipality's
stormwater management needs.
Procedure for raising private debt
once a financial structure for the
partnership has been determined
The timeline for private debt financing is
dependent on when the partnership structure
and terms are finalized and how the payment
from the municipality to the program will be
setup. Once that is completed, the private
partner and selected financial underwriter
will work with the rating agencies to receive
a credit rating on the proposed debt.
Following that, the private partner will work
on placing the debt through the previously
described debt competition. Once the
structure with the municipality is
documented and finalized, it securing the
debt financing should not take longer than 60
days. At close, 100 percent of the loan
proceeds are available to the program to be
drawn upon over time from the LA via
approvals of annual budgets and monthly
construction draw requisitions.
Proj ' seives tl te
ution
This program does not require additional
funding from the municipality. It also
protects against change orders.
All debt will be deposited into project
lockboxes at the start of the program thereby
ensuring that 100 percent of the funds are
available to be drawn from the very
beginning of the project with no additional
requests for funding required from the lender.
The program as part of the debt raise
projected cost savings from private sector
implementation establishes reserves accounts
(controlled by the municipality through the
partnership) for shortfalls or issues that stem
from unforeseeable or force majeure events.
This creates surety that the project does not
skip a beat or stall due to extreme social,
environmental, or weather related events.
The program carries reserves that could be
tapped if needed and agreed to by both the
private and public partners for unforeseeable
and force majeure events. These reserves
include the debt service reserve, which can be
drawn upon to make any debt payments if
there is a shortfall in available cash, and the
operating reserve, which can be drawn upon
to cover any shortfall in operations or O&M
thus keeping cash flow stable. In addition,
construction estimates include construction
contingencies, which are there to protect the
program against construction cost overages.
The overall structure is intended to be
redundant, providing security and assurance
in the event of unforeseen conditions or cost
overages. Additional reserve accounts can be
added depending on the risk exposure the
partnership deems necessary taking into
consideration the type of work being
implemented.
Transparency of Financial Fee Model
The fee structure is envisioned to maximize
funds available to the program, while
properly incentivizing the private partner to
deliver the project concept in alignment with
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the partnership goals. The fees are negotiated
and agreed with the municipality, but the
APS proposed will be based upon industry
standards, includes a majority of Incentive-
Based Fee components, and provides
quantifiable KPIs to determine the award of
fees. The fee structure is more heavily
weighted toward the performance incentives.
The result is a structure that places the private
partner's fee income at risk if it does not
perform to the level agreed to by the
partnership. The incentive portion of Fees is
based on objective and specific criteria such
as: performance, delivery, safety, quality,
economic development, and behavior. These
incentive-based fees ensure that the interests
of both the public and private sector are
aligned. Any unearned incentive fees will
flow directly into the RRR Account,
providing an additional source of funds for
the out-years if any fees are not earned.
Performance Based Incentive Fees to
Ensure Good Service and High-
Quality Maintenance
As discussed above, the proposed incentive
fee is designed to ensure that the interests of
public and private sector are aligned. The
performance measure criteria can be
modified prior to closing and throughout the
life of the program to align with changing
goals and objectives of the public sector.
Performance based incentive program
ensures private partner's commitment to the
long-term success of the program and the
sustainability of the infrastructure.
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VI. Determining if a CBP3 is
Appropriate
This section presents information on some of
the key considerations and conditions that
make the use of a CBP3 appropriate. It
includes information on program
management, financing, and the status of
enabling legislation in each of the
Chesapeake Bay states.
Implementation Challenges and
Barriers for Local Governments
The flexibility, adaptability, advancement of
technology, economic benefits, and
leveraging resources across different
economic, environmental, and community
development programs of GI creates
tremendous opportunities as well as
challenges. Though P3s hold great promise
for improving and enabling greener
stormwater management performance and
efficiency, there are limitations and
important considerations when establishing
new private sector collaborations. It is
important while determining the suitability
for P3 structures to look at both the public
sector's goals and the private sector interests
in achieving those goals. Potential limitations
to P3 structures include:
P3s have risks involved and local
government will pay a premium to
transfer those risks to the private sector.
As a result, it is essential to do a full cost
evaluation to determine the validity and
value of a P3 arrangement.
P3s are not a financing panacea, nor are
they suitable for all infrastructure
projects.
P3s that are effectively designed need to
be managed by highly skilled personnel
and contracting experts within the public
sector.
The CBP3 is based on establishing a
relationship based on trust that all the
decisions the local government and the
contractor will make are equitable and
promote the overall economic, community
development, and environmental health of
the community. This is required to make the
long-term commitment and evolving
conditions of the partnership successful.
The goal is to design a transparent framework
for a CBP3 that aligns the public, private, and
community stakeholders into a long-term
legal arrangement that outlines a governance
structure founded in the spirit of stewardship
and common purpose versus an adversarial,
contract-oriented management structure. This
requires a change in mind-set from
government "contractor" to business
"partner." Moreover, a program must be
developed based upon a fair and equitable
financial return to the private sector versus
designing the project around a goal of
maximizing the private sector's return while
allowing the private sector to minimize their
risk.
Partnerships with the private sector represent
a dramatic and comprehensive departure in
philosophy, administration, and contracting
practices from the traditional stormwater
industry business model. With such dramatic
changes and level of effort needed to affect
change, the adoption of long-term
programmatic partnerships with the private
sector will not happen rapidly without
considerable collaboration and support from
the public and private sectors to demonstrate
their effectiveness.
Traditionally, private sector participation has
been limited to separate planning, design, or
construction contracts on a fee for service
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basisbased on the public agency's
specification. Expanding the private sector
role allows the public agencies to tap private
sector technical, management, and financial
resources in new ways to achieve certain
public agency objectives such as greater cost
and schedule certainty, supplementing in-
house staff, innovative technology
applications, specialized expertise or access
to private capital, and long-term program
sustainability.
The private partner can expand its business
opportunities in return for assuming the new
or expanded responsibilities and risks.
Various arrangements categorized as
privatization, P3s, or a combination of both
have all been utilized to create a relationship
between a public agency and private sector
entity to allow for greater private sector
participation in the delivery of public sector
projects that neither can solve independently.
There is also a concern that while there may
be multiple ways to set up a productive
public-private relationship, there are key
elements that need to be set up correctly and
not all partnership models will be equal, nor
should they be, but rather dependent upon the
needs and interests of the partners. As in
other sectors, P3s take on many different
variations, such as services provided by the
private sector, and levels of financing, risks,
and governance that is shared. The following
are some examples of public-private
arrangements the public sector has used to
build and operate needed social infrastructure
such as, housing, highways, drinking water,
and wastewater facilities. In each case, the
level of risk/responsibility transferred to the
private partner varies. Not all true
partnerships are transparent contractual
relationships, and have the potential to
confuse establishing long-term successful
storm water programs. Care should be taken
to ensure that local governments and
stakeholders are provided with proven
successful models of established P3's as well
as, pitfalls.
The foundation for the CBP3 model is based
on a long-term commitment by the
municipality and the CBP3 contractor, with
each side having equity, or benefit, for all
decisions. This requires confidence that both
sides will act as partners sharing in the risk
and rewards of both short- and long-term
decisions and actions. It would not be
feasible, or practical for the municipality or
local government to manage, scrutinize, and
be involved in all the numerous
implementation options, including
construction, maintenance, verification, job
creation, and reporting activities for which
the P3 contractor will be responsible. It
would also be impractical to require that the
P3 contractor wait for approval on all
decisions, when incentives for the contractor
include the efficient construction and
verification of hundreds of BMPs in the
watershed.
A conventional P3 model would not be able
to meet these demands because they have
primarily been used for large single objective
and well defined project steps.
immunity Considerations
P3 tools provide governments at all levels
with a variety of benefits over traditional
procurement and contracting systems,
including:
Access to financing for municipalities
that have difficulty using traditional
financing sources, such as municipal
bond markets;
Increased project and program efficiency
as a result of inherent economies of scale;
and
Ability to bring new infrastructure online
faster than traditional public
procurements because private companies
have more flexibility (GAO, 2010).
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The use of a P3 system is most appropriate in
those situations where traditional contract
arrangements are complex and the costs of
designing, letting, monitoring and enforcing
those contracts are high. In these situations,
government agencies might well be better off
developing and executing a more "relational
contract" such as a CBP3 (Bovaird, 2004).
Given the increasingly complex nature of
stormwater management requirements and
the associated costs of achieving regulatory
compliance, it is clear that CBP3
arrangements will have tremendous utility in
many urban communities. However, to
ensure that a CBP3 is an appropriate
structure, two key questions must be
addressed:
1) Will a CBP3 reduce costs?
2) Will a CBP3 effectively mitigate the
risk associated with private sector
contracting and financing?
The Role of Public and Private
Partners
The specific roles of the public and private
partners are what distinguish P3 structures
from traditional financing structures. In
addition, the specific role of each partner is
dependent on the unique needs of each
community and project. There are four
project functions associated with stormwater
financing projects that are the basis of P3
arrangements:
1) fee collection and revenue
generation;
2) project financing;
3) design and build services; and
4) O&M
Fee collection and revenue generation: The
need for more aggressive and effective
stormwater management programs at the
local level has led to the development of fee-
based stormwater programs. There are now
more than 1,500 stormwater utilities or
enterprise programs across the country
supporting a variety of stormwater
management activities and functions. The
existence of these fees and the long-term
sustainable revenue flows they represent
create the rather unique opportunities to
leverage the private sector through P3
structures. The role of a P3 agreement private
partner in collecting fees varies from direct
involvement (e.g., operations of a toll road or
a water system) to more passive involvement
role (e.g., those in renewable energy
programs). The role of private partners in
generating stormwater fees will depend on
state and local laws, which govern enterprise
programs. In many if not most communities,
the local government will be responsible for
assessing and collecting stormwater fees.
Project financing: One of the most
fundamentally important roles of any
infrastructure development effort is project
financing. In addition, there are a variety of
potential relationships and partnerships
available to the project partners.
Design and build: The most basic
infrastructure function, and the most
common role for the private sector, is
providing design and build services. In fact,
most local governments and communities
have been relying on the private sector to
design and build infrastructure projects for
years. As stormwater management programs
grow in the coming years, the need for private
firms to construct new infrastructure will
grow significantly. P3 structures will expand
and codify those relationships.
Operations and Maintenance
An increasingly important role and function
in stormwater management programs is the
O&M of existing and future infrastructure.
Traditional procurement involves the planning
and design of a project, appointment of
advisors to issue public debt, and, after
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securing funds, selection of a contractor to
complete the project. Once the construction
phase is complete, assets are turned over to the
public for continued O&M. The costs of
O&M then become subject to annual
appropriations debates, opening up the
potential for budget cuts, deferred
maintenance and repairs, and politicized
concerns about the use of adequate user rates
or tax increases to cover continuing costs. All
of this usually occurs in sequence, with O&M
often financed only after construction is
complete. There are significant costs
associated with deferred maintenance, repair,
and replacement. Studies demonstrate that
deferring timely maintenance to the point of a
breakdown event can increase the total cost of
repair by a factor of at least 15-to-l and at
times as high as 40-to-l (NCPPP, 2012).
One reason for expanding the role of the
private partner in a P3 is the guarantee of
continued maintenance, repair, and
replacement of the public asset. As noted
previously, deferring maintenance can cause
the total cost of improvements, once finally
made, to be 15 to 40 times the original cost.
Thus, decision makers must consider future
maintenance when determining whether to
proceed with new projects. Because future
maintenance costs are accounted for within
P3 contracts, they are removed from the
general budget debate. This means the project
O&M costs are guaranteed and continued
maintenance is not in jeopardy with each
budget cycle (NCPPP, 2012).
Role of a Stormwater Fee Program
Under a stormwater fee program, a rebate
program is typically provided, allowing
property owners to get reductions in their
fees, creating economic incentives for
property owners to retrofit their properties.
Thurston (2012) illustrated that for a typical
stormwater utility and fee/rebate program,
the fee (and corresponding rebate) is rarely
large enough to compensate for the cost of
on-site retrofitting. While this lack of
incentive may limit the potential for activity
in a rebate program, there may still be a
number of property owners who will take
advantage of the opportunity to retrofit their
properties, especially in specific situations
where retrofit costs are extremely low or the
environmental or social ethic of the property
owners is particularly strong (or both).
However, there are other opportunities to take
advantage of a fee/rebate program. For
instance, a CBP3 entity could provide the
capital investment to retrofit a property with
the incentive of payment based upon
completion of the project while the property
owner can realize a cost savings through the
rebate associated with the retrofit on their
property. Those with relatively high fees
would have a strong incentive to engage in this
type of arrangement. This "win-win" situation
may provide a strong basis for a CBP3 to
engage in robust outreach to those property
owners who may signify the biggest "bang for
the buck" in terms of retrofit investment.
'lislath ฆ Date in the
Chesapeake Bay- Mid-Atlantic
Region
P3 Legislation in EPA Region 3
With the recent passage of Pennsylvania
House Bill 3, authorizing Public Private
Partnerships for transportation projects, all
states within EPA Region 3 now have
enabling legislation for P3s. This final
commitment by states within EPA Region 3
to implement P3s further strengthens the
ability of local governments to implement
successful stormwater programs integrating
GI. While this signals to the P3 investment
community that the Mid-Atlantic may be a
fertile market for investment, the statutory
variability between Region 3 states (i.e.,
Delaware, District of Columbia, Maryland,
Pennsylvania, Virginia, and West Virginia)
illustrates that some states may be better
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suited to the CBP3 model for urban retrofits
than others. For instance, some states have
recently adopted P3 legislation that limits
arrangements to the transportation sector. In
other instances, the limitation of home rule
may stifle P3 arrangements with local
governments. Characterizations of key
aspects of state legislation related to P3
investments are summarized below.
Virginia
The current P3 enabling legislation in
Virginia is the Public-Private Educational
Facilities and Infrastructure Act (PPEA),
which was modeled after the Virginia Public-
Private Transportation Act (PPTA) of 1995.
PPEA is the "social" counterpart to the PPTA
(Bryant, 2014). The law authorizes a private
entity to develop and/or operate a qualifying
transportation facility, subject to approval
from and a comprehensive agreement with
the responsible public entity. The law also
authorizes government agencies to use P3s
for education facilities, technology infra-
structure, and other public facilities.
Qualifying public projects include, "any
building or facility that meets a public
purpose and is developed or operated by or
for any public entity," and "any
improvements necessary or desirable to any
unimproved locally- or state-owned real
estate" (Commonwealth of Virginia, 2014).
A legal challenge regarding this legislation
has arisen. The Virginia Department of
Transportation (VDOT) entered into a P3
arrangement with Elizabeth River Crossing
Op Co, LLC for a 58-year agreement to build
and operate the Midtown Tunnel and Martin
Luther King Freeway Extension. A private
citizen sued VDOT and the Elizabeth River
Crossing Op CO, LLC claiming the toll was
an unconstitutional tax. The circuit court
found for the private citizen, but the Virginia
Supreme Court overturned the ruling in
November 2013 stating that the toll revenue
collected is a fee and not a tax (Babst and
Calland, 2014).
Approximately 200 projects have been
funded through PPEA since 2003, including
at least seven water/waste water projects.
(Bryant, 2014). The legislation allows for
solicited and unsolicited proposals, and it
should be noted that the PPEA law has been
adopted in whole or in part in the following
states: Florida, Texas, Utah, Maryland,
Arizona, California, and Michigan (Bryant,
2014).
Considering that PPEA has been used to
finance proj ects in the water sector, and that
the Chesapeake Bay TMDL and is driving
needs for stormwater retrofits in several large
regulated communities in the state, Virginia
may be a prime market for P3 investments in
stormwater infrastructure. A presentation
was made by a former high-ranking official
in Virginia state government at a March 2014
event focusing on innovative stormwater
financing that highlighted PPEA as a strong
funding opportunity for storm-water
investments.
Maryland
House Bill 560 was passed and signed into
law in July, 2013, which amends 2010
legislation that represents the state's first
attempt at enabling P3s for both
transportation and non-transportation
infrastructure investments. The updated law
authorizes state agencies to enter into a P3 for
various public infrastructure projects
(Maryland Reporter, 2014).
The term "public infrastructure asset" is
defined as "a capital facility or structure,
including systems and equipment related to
the facility or structure intended for public
use," which reflects the expanded coverage
beyond transportation (State of Maryland,
2014a). While the bill explicitly states that
"only reporting agencies in the bill may
establish a P3," and that "reporting agencies
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include the Department of General Services,
MDOT [Maryland Department of
Transportation], MDTA [Maryland
Transportation Authority], and State higher
education institutions," partial home rule
allows local governments, such as Prince
George's County to form a P3.
A review by a Board of Public Works (BPW)
is required whether a bid is solicited or
unsolicited, both are accepted (State of
Maryland, 2014a). Concession length is
limited to 50 years, but can be extended upon
review and approval of BPW. The law also
relaxes the definition of a "public notice of
solicitation" by allowing for the development
of Requests for Qualifications (RFQs) as well
as Expressions of Interest (EOIs) and
Requests for Proposals (RFPs) (State of
Maryland, 2014a).
One important piece of legislation indirectly
related to P3 adoption for stormwater
infrastructure investment is House Bill 987,
which was passed and signed into law in
2012. This legislation, referred to as
"Stormwater Management - Watershed
Protection and Restoration Program,"
requires National Pollution Discharge
Elimination System (NPDES) MS4 Phase I
communities (there are ten such "large" MS4
communities in Maryland) to "adopt and
implement local laws or ordinances
necessary to establish a watershed protection
and restoration program." In the context of
this legislation, this is a requirement that
Phase I communities develop a stormwater
utility (State of Maryland, 2014b). The
significance of this statutory requirement is
based upon the ability for a potential P3
investor to leverage private dollars at a low
interest rate due to a dedicated public funding
source, which should act as an attractor for P3
investment opportunities. The surety
provided to the private sector through House
Bill (HB) 987 is that public dollars will be
available in major stormwater markets in
Maryland, which could act as a catalyst for
P3 investments in stormwater beyond Prince
George's County.
It should be noted that at the time of
publication of this document, the Maryland
State House overwhelmingly passed and the
Senate unanimously passed Senate Bill (SB)
863, which calls for the repeal of HB 987
(Maryland Reporter, 2015a). While this may
seem like a setback to stormwater funding,
the details of SB 863 reveal the opposite
(State of Maryland, 2015). The major
differences between HB 987 and SB 863 is
the lack of a requirement to establish a
stormwater fee at the local level; however,
unlike HB 987, the new bill requires each
local jurisdiction to establish a fund to invest
in infrastructure needed to meet Chesapeake
Bay TMDL goals and lists out significant
penalties for failing to do so (Maryland
Reporter, 2015a). Based upon recent remarks
by the Maryland Governor, it is expected that
SB 863 will be signed into law.
It may also be significant to note the political
challenge to pass and implement a storm-
water utility, even when it is statutorily
required. Some Phase I communities in
Maryland have either actively pushed back
against the development and implementation
of a stormwater utility or have passively done
so by developing a utility that charges
absurdly low rates. Similar political and
public challenges are seen across the country
from St. Louis to Los Angeles to Jackson
County, Michigan (WEF, 2014). A strategy
that could help overcome these challenges is
to couple the use of a proposed stormwater
utility with a P3 program for stormwater
investment by highlighting that a utility may
be a strong attractor for private investment
through a P3 framework. This could disarm
opponents by highlighting that a P3 would
reduce public investment costs and risks
while generating local jobs and private
investment, all while helping to restore and
protect local waters.
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Delaware
Enabling legislation in the State of Delaware
has been in place since 1995 and has gone
through a number of updates. The current
legislation is referred to as the "Public Private
Initiatives Program in Transportation" act
(State of Delaware, 2014). The focus of
Delaware statutes has been in the
transportation sector. Current law authorizes
the Secretary of Transportation to enter into
agreements with private entities to study,
plan, design, construct, lease, finance,
operate, maintain, repair, and/or expand
transportation systems. While current statutes
focus on transportation infrastructure/
facilities, a Clean Water Advisory Council
(CWAC) has been established to authorize
P3s for water infrastructure (Strategic
Partners, Inc., 2014). This group is associated
with the Clean Water State Revolving Fund
(SRF) program, and therefore focuses on
wastewater infrastructure.
The maturity of P3s in Delaware is unclear.
For instance, a 2011 peer-reviewed
publication by Papajohn et al. (2011) that
employed a survey questionnaire of states
and P3 programs concludes that, "Delaware
is not considered experienced or currently
practicing because of its variation in response
to the questionnaire. The response from the
state of Delaware indicates that they were
disappointed with their PPP projects and
could not find real value in most of the
proposals for a variety of reasons." To
contrast, a 2009 report by the California
Partners for Advanced Transit and Highways
(PATH) group refers to Delaware as a state
with "more extensive PPP experience"
(California PATH, 2009).
Similar to Maryland, the Delaware program
limits concessions to 50 years and has a
review and approval process (State of
Delaware, 2014). Unlike Maryland, the
review and approval process is directed by
the state legislature (State of Delaware,
2014), which may be more of an impediment
for investments in the stormwater sector than
in other states in the region, especially when
considering the additional review required by
the CWAC. Additionally, local communities
have an ability to veto P3 projects approved
by state officials and legislatures (State of
Delaware, 2014).
Pennsylvania
As previously described, Pennsylvania is the
most recent adopter of enabling P3
legislation. This legislation (HB 3) passed
into law in November 2013. Unlike Virginia
and Maryland legislation, the Pennsylvania
program is limited exclusively to the
transportation sector, which is reflected in the
legislative text that defines P3s as "public-
private transportation partnerships (PPTPs)"
(Pennsylvania General Assembly, 2014a).
Similar to most other states, a body (the
Public-Private Transportation Partnership
Board) must review and approve
arrangements. Solicited and unsolicited bids
are allowed and concession lengths may be
up to 99 years (Toll Road News, 2012).
While the current law is limited to
transportation projects, legislation (HB 1838)
was introduced in the current 2013-2014
session to expand eligible projects to include
educational facilities, a building to be used by
a government agency, and "a building or
facility used for public water supply or
treatment, stormwater disposal or waste
treatment or used for public parking
facilities." (Pennsylvania General Assembly,
2014b). This legislation was not passed into
law during the 2014 session; however, a
similar version of this bill has been
introduced in the current (2015) session.
House Bill 382, referred to as, "Local Agency
Public-Private Partnerships for Water and
Sewer Projects," was introduced and referred
to the Committee on State Government on
February 9, 2105 (Pennsylvania General
Assembly, 2015). Specifically, this
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legislation allows for both solicited and
unsolicited proposals for P3 agreements;
however, proposals are limited to RFPs (as
opposed to RFQs), but the legislation states
that selection should be done to provide "the
best value for and the best interest of the local
agency and the general public." Revenue can
be generated through "service payments",
which may take the form of availability
payments, potentially. Most significantly,
this legislation expands the current P3 project
eligibility in Commonwealth from
transportation to include other projects, and
like the new enabling legislation in the
District of Columbia, stormwater is
specifically spelled as an eligible project.
If HB 382 is successfully passed and signed
into law, Pennsylvania will be a good
candidate for P3 investments for stormwater
infrastructure, especially considering
progressive communities, such as
Philadelphia and Lancaster, who are studying
the feasibility of a P3-like program for
stormwater. Also, there are a high number of
regulated communities (MS4s) in
Pennsylvania, which furthers the potential for
meaningful P3 investments in stormwater.
District of Columbia
Until recently, the status of P3 statutes in the
District of Columbia was unclear. Legislation
known as "Public Private Partnership Act of
2013" (B20-0595) was introduced. The bill's
findings indicate the District does not have
"clear enabling legislation" regarding P3s;
however, the bill goes on to note that even
without enabling legislation, the District has
entered into P3 arrangements previously,
including a performance-based road
maintenance contract (District of Columbia
City Council, 2013b). A December 3, 2013
(District of Columbia City Council, 2013a)
press release specifically cites $2.4B of needs
for sewers among other non-transportation
infrastructure needs (e.g., schools, Metro
improvements), which indicated the
allowance for non-transportation projects in
anticipated in enacted legislation. After being
introduced, the bill was referred to the
Committees of Whole for review.
There is a recent history of "public private
development construction projects"
(PPDCPs) to not meet CBE requirements.
For instance, an auditor's report found that of
the 247 PPDCPs in the District, only 25 had
successfully met the 35 percent (35%) CBE
threshold (Office of the District of Columbia
Auditor, 2013). Legislation (DC Act 20-76)
was passed in May 2013 requiring non-
compliant PPDCPs to submit new CBE plans
in an effort to illustrate good will and intent
to comply (District of Columbia City
Council, 2013c).
The most recent chapter of P3s in the District
was launched in early December, 2014, when
the D.C. Council unanimously passed the
Public-Private Partnership Act of 2014
(District of Columbia, 2014). The Mayor
approved the bill on December, 29, 2014,
with a 30-day congressional review period
required under the D.C. Home Rule Act
(Ballard Spar, 2015). Provisions in the bill
includes streamline the procurement process
for P3 projects and establishing an Office of
Public-Private Partnerships (OP3), which is
to be led by an Executive Director who
reports to the Mayor (District of Columbia
City Council, 2013a; Ballard Spar, 2015). P3
projects are specifically exempted from the
Procurement Practices Reform Act of 2010,
as that act is "ill-suited to the P3 model"
(District of Columbia City Council, 2013a).
P3 projects must still comply with First
Source, Fair Wage, CBE (Certified Business
Enterprise)-hiring, and environ-mental laws.
Transparency will be provided by thorough
oversight. The OP3 has 90 days to develop
rules, policies and procedures and submit to
the Council for a 45-day review period.
Funding will be generated through fees and
revenues collected on the review, processing
and evaluating P3 project proposals.
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P3 project proposals can be either solicited or
unsolicited, and the OP3 may gather input or
proposals through either Requests for
Information (RFIs), RFPs or RFQs, when the
project is deemed necessary to require
prequalified proposals with criteria for
prequalification including financial
resources, capacity and expertise and ability
to conduct business in the District. Projects
less than $50M or 10 years in length require
a 10-day review by Council while projects
greater than $50M and more than 10 years in
length require 45-day review period. The
OP3 must prepare a report on the selection of
any P3 proposal for Council review that
includes information such as the identity of
the private partner, the terms of the P3
agreement, the total cost of the project, and a
Value-for-Money and Public-Sector
Comparator analysis. The legislation also
allows the District to enter into agreements
up to 99 years in length and to enter into
regional P3 agreements with other local and
state agencies.
Regarding stormwater, one of the most
significant aspects of the newly-enacted
legislation is that stormwater is specifically
spelled out as an acceptable infrastructure
project. Considering the recently adopted
MS4 permit requiring new
development/redevelopment sites to retain
1.2 inches of rainfall events on-site as well as
the growing emphasis on GI in DC Water's
vision of CSO mitigation, the District is
likely to be a target for a Gl-driven CBP3 in
the near future. Additionally, the Stormwater
Retention Credit (SRC) trading program
recently created by the District Department
of the Environment may be a strong
incentive-based driver for storm-water
retrofits on its own merit; however, the new
legislation could help to augment the cost-
effectiveness of the CBP3 approach through
aggregated stormwater retrofit projects in an
effort to reduce transaction costs when
engaging in the SRC program, as described
in greater detail in Chapter 11. Considering
the many drivers and tools to encourage
stormwater retrofits, the District may be a
strong market for future P3 investments in
stormwater.
West Virginia
P3 enabling legislation titled, "Relating to
Public-Private Transportation Projects
Funding," was passed in March 2014. This
law, otherwise known as the "Public-Private
Transportation Facilities Act," (HB 4156 -
SB 190), authorizes the DOT to use P3s for
the construction of any transportation
facility, which includes any public inland
waterway port facility, road, bridge, tunnel,
overpass, or existing airport used for the
transportation of persons or goods, and the
structures, equipment, facilities or
improvements to such facilities (West
Virginia Legislature, 2014). This legislation
builds upon prior legislation that established
the general enabling of P3s; however, this
legislation was more general in nature. A
report by the Appalachian Transportation
Institute (2012) on the potential for P3s in
highway infrastructure in West Virginia
conclude that, "creating or modifying new
legislation to encourage P3s will take time
and should be considered a long-term goal,"
which further indicates the need for more
advanced legislation related to P3s in West
Virginia.
The newly passed law clarifies that approval
of P3 arrangements are required from the
Department of Highways, which reflects that
this legislation is limited to transportation
projects. Another limitation is the allowance
of solicited bids only in project development.
Considering these limitations, the ability to
utilize a P3 approach for stormwater
infrastructure in West Virginia may be
limiting; however, the passage of legislation
that provides additional clarity and openness
on issues such as concession length and
unsolicited bids as well as addressing the
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needs of non-transportation sectors will
provide a more inviting environment for P3
investments in stormwater in the state.
Table 4: Stormwater CBP3-Centric Characteristics ofP3 Legislation in EPA Region 3
(Adapted from "Moving Forward on Public Private Partnerships: U.S. and International Experiences with PPP Units " by
Emilia Istrate and Robert Puentes, Brookings-Rockefeller Institution - Dec 8, 2011).* Pertaining to P3 legislation.
State
Availability
Payments
Allowed?*
Local Authority
Provided?*
Home Rule
State?
Allows for Non-
Transportation
Projects?*
Delaware
No
Yes
No
Yes
District of
Columbia
No (but
"performance-
based" described)
Yes
N/A
Yes
Maryland
No (but
"performance-
based" described)
No
Yes
Yes
Pennsylvania
Yes
Unclear
Yes
No
Virginia
No
Yes
Yes
Yes
West
Virginia
No
No
No
No
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VII. Partnership Checklist
This section presents a series of issues that
communities may be required to address in
the development of a CBP3. Each issue
includes a brief description and a checklist
that describes the key elements or
requirements that should be considered or
satisfied for the CBP3 effort to move
forward. The following topics are included in
the checklist:
Sustainable and Predictable Revenue
Streams
Measurement and Verification
Other Community Benefits
Job Creation
Outreach
Stormwater and Local Building Permits
Procurement and Contracts
Policy and Regulations
Sustainable and Predictable
Revenue Streams
Unless a dedicated and reliable revenue
stream is available, it will not be possible for
local governments to sustainably fund
construction, operations, reporting, and
maintenance. A community should have
access to one or more of the following
sources to maintain any significant retrofit
program:
S Can funding streams be generated
from property taxes, utility fees, or
fee-in-lieu of programs?
S Are there significant grants, state
revolving loan funds, banking and
offset programs, trading programs,
and user fees?
S Are there opportunities for multi-
sector grants and loans (e.g.,
stormwater and energy)?
Measurement and Verification
A goal of the contractor will be to develop
cost effective and efficient implementation
strategies and BMPs that achieve the required
reduction in pollutant loads. This will require
innovation and adaptive management for
planning and design of the BMPs. There must
be a system in place to evaluate, verify, and
report on the progress of the effort that can
quantify the results and satisfy the
requirements of regulatory agencies.
S Are there stormwater credit programs that
can be used to recognize the reduction in
loads for innovative practices?
S Are there established monitoring pro-
grams that can be used to accurately
determine load reduction benefits for
innovative and conventional BMPs at the
site and watershed level?
S Is it possible to make distinctions be-
tween new sources of pollutant and
pollutant reduction approaches and
legacy pollutants in the watershed?
S Are there established factors of safety and
the ability to refine and gain recognition
for more efficient BMP construction and
operations?
S Can stormwater credits be given for
retrofitting and enhancing existing
systems?
Other Community Benefits
An advantage of GI is its use to satisfy the
requirements of other infrastructure and
regulatory programs and community
development needs. In addition, the funding
of GI projects can be leveraged or integrated
into other efforts, which can lower the overall
financial burden to communities.
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ฆS Are there opportunities for water
reuse and conservation?
S Can the program be integrated with
other utility programs such as
drinking water and wastewater?
S Are there potential air quality
benefits?
S Can the program be targeted to areas
of underserved communities?
S Can the reduction in flows and
volume from the P3 effort be used for
resiliency planning and to preserve
infrastructure capacity?
Jobs
The creation of local green jobs, workforce
development, and the more efficient
management of local government storm water
programs are critical to the partnership. The
demonstration of the benefits to the
community in the number, quality, and
predictability of benefits to the local job
market and economy are essential.
S Can the work be done by local
management, planning and
engineering, construction, and
maintenance firms?
S Is there a certification and training
process for local companies?
S Can the CBP3 contractor receive
benefits for hiring local firms?
Outreach
The CBP3 model is a partnership between
contractor and all of the key stakeholder
groups in the community. This partnership
requires timely communication on progress,
feedback, and forward planning.
Transparency and participation must be
effective and well documented.
S Are there opportunities for
stakeholders, property owners,
businesses, and institutions to become
partners in planning and
implementation?
S Do stakeholders have access to all
relevant documents, plans, meetings,
and reports?
S Can the progress of the outreach
effort be measured and evaluated?
S Can storm water credits be obtained
by implementing outreach programs?
Stormwater and Local Building
Programs
There must be a process in place to allow the
contractor to obtain permits as quickly as
possible so that the partnership can realize the
benefits of fast tracking the construction.
There must also be the opportunity to refine
and advance new technologies and
construction practices so that the GI system
operates as efficiently as possible.
S Can projects be streamlined or fast
tracked through the system?
S Can innovative practices for
enhanced stormwater treatment be
permitted and credited?
S Is there a certification and verification
program for new stormwater products
and technologies?
S Can municipal program management,
administrative, project management,
and staff engineering jobs be shifted
to the private sector?
Procurement ai mtract
Process
The CBP3 program must allow the
community and the contractor to have equity
in the contracting and procurement process.
This requires flexibility, financial rewards for
performance, and recognition of performance
in the contract evaluation process.
S Are performance-based contracts
allowed?
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ฆS Are there provisions for including and
developing local businesses?
S Are negotiated and sole source
contracts allowed?
S Can long-term contracts be allowed?
S Can the contractor realize benefits for
lowering construction and
maintenance costs?
S Can the community realize benefits of
lowering revenue streams from fees
and taxes if the contractor operates
more efficiently?
S Can private entities act as agents for
the municipality for right-of-way,
maintenance, and construction
easements and agreements?
S Can the contract be used to respond to
Capital Improvement Projects, in
addition to storm water management/
compliance projects?
Policy and Regulations
The state and local government must have
enabling legislation and a regulatory process
that allows for the formation of a P3. The
regulatory agencies must also be vested in the
approach and allow for flexibility in the
development of innovative BMPs and
recognize the pollutant load reduction
benefits.
S Does your state have enabling P3
legislation?
S Does enabling legislation allow for
non-transportation projects (or more
specifically, does it allow for storm-
water infrastructure or other public
works projects) in a P3 arrangement?
S Is your state a home-rule or Dillon
rule state that specifically allows for
the creation of P3 entities?
ฆS Does enabling legislation allow local
governments to enter into P3
arrangements?
S Does enabling legislation allow for
availability payments as a method to
pay financing entity?
S Does enabling legislation allow for
(or not preclude) streamlining of
environmental permitting?
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VIII.Establishing the Steps for
Developing a CBP3
The development of a CBP3 requires a series
of activities that engage a wide-range of
partners and stakeholders in order to be
successful. Some of these activities may be
relatively straightforward and easy to
accomplish, while others may be quite
complex and require significant resources.
Listed below are the key activities and a
summary of the goals and objectives that
must be accomplished to support the
community and partnership efforts.
Ttivities
Document Local Legislative and
State-wide Enabling Legislation
Boundaries Conditions
Most communities will have unique local
codes and regulations that will impact the
method in which the CBP3 is developed. A
thorough analysis of the local enabling
legislation, contracting methods, and
procurement regulations must be evaluated
to determine the approval process and to
make sure that it is consistent with state
enabling legislation.
Develop Procurement Requirements
and Opportunities
The local procurement process should
include or be modified for performance-
based contracts, flexibility, and long-term
commitments. Provisions should be made to
allow for improvements and refinements to
the contract language so that both parties can
benefit from lessons learned in sub-
contracts, procurement of goods and
services, and operations. The use of local
firms and businesses should be rewarded.
Propose Potential Revenue Streams
Dedicated Fees, Loans, and Hybrid
Funding Combinations
There may be numerous public and private
sector funding streams and opportunities
that are available to the community. This
funding stream includes federal grants and
local financial institution sources. All viable
options and mix of predictable and dedicated
funding streams should be considered for the
short-and long-term funding of the retrofit
effort.
Meet with the Regulatory Community
and Resource Agencies
The regulatory and resource agencies at the
local, state, and federal level are also
partners in this effort. They must be assured
the contract language, monitoring, and
reporting methods meet the regulatory
requirements, are transparent, scientifically
sound, and can be reviewed and reported to
the public as efficiently as possible.
Compare and Coordinate with Similar
Communities in Size and Resources
that have Adopted a P3 Approach
Partnerships between local communities
within and outside of the watershed can be
formed to share information and resources.
This includes contract and procurement
language workshops on progress, training,
local products; and monitoring resources.
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Develop Internal Capacity Staffing
Outside Training and Resource
Needs
The transition between the conventional
program approach and the partnership and
interface with the CBP3 contractor may
require a long-term resource and capacity
plan in order to insure that the contract can
be properly managed and that the overall
governance goals and requirements of the
local government infrastructure needs are
met.
Conduct a Study to Determine Cost
Saving and Program Efficiencies
Value for Money
The potential short- and long-term fiscal
benefits to the community (e.g., fee
reductions, lowering of capital needs, job
creation, triple bottom line, and community
development benefits), needs to be
determined and demonstrated to the public
and property owners in the community.
Conduct Workshops with
Stakeholders and Interested Parties
A strong partnership must be established
outside of the agreements between the local
government and the contractor. The long-
term commitment to the community will
require the identification of key stake-
holders, property owners, local businesses,
developers, and other parties. The
involvement and interest of these groups
may be very dynamic so that there needs to
be an open and continual process for
communication that is accessible to all
groups.
Develop a Request for Qualifications
(RFQ) to Evaluate the Capacity and
Track Record of Interested
Contractors
The RFQ process will allow for an
evaluation of the capacity, previous success,
and commitment of potential contractors to
the community. It will allow for an open
dialogue and will help the community to
begin the procurement and contract process.
Negotiate with Contractor
The contract process should allow for input
and negotiation with the contractor so that
the optimal structure of the contracting and
subcontracting procedures for both parties
can be established.
Check In and Verification Process
and Adaptive Management Process
The contract should be based on an
adaptive management approach where the
performance of the system and the
efficiency of the contractor can be
evaluated at key points throughout the term
of the contract.
Develop a Comprehensive Reporting
System that Allows for Stakeholder
Input
The long-term and extensive nature and
impacts of the GI retrofit approach will
require that progress on compliance, costs,
community development, job creation, and
financial benefits to the community be
reported to all vested partners and
stakeholders. This will allow for input, buy-
in, and improvement in the program over the
contract period.
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IX. Potential Business Structures for
Gl-Driven Stormwater
Management CBP3s
A CBP3 can have many potential types and combinations of business and contractual arrangements
that will allow both parties to be flexible and adaptable to the long-term requirements for
implementation and maintenance of the program. Figure 5 presents a schematic of a model for a
Limited Liability Company (LLC) that could be used as a partnership between a municipality and
a developer/contractor. The model illustrates the relationship of the key partners, including
community stakeholders and financial organizations and the activities of the partnership for the
implementation of the stormwater retrofits.
Partnership Model - General
COMMUNITY BASED PUBLIC PRIVATE PARTNERSHIP (CB3P)
Municipality
Designated Member
Private Developer
Managing Member
Community Based
Advisory Board
CB3P
- Upfront private capital that leverages public
funding
- Aligned goals and common purpose
- Long-term commitment to maintenance and
sustainability
- Driver of small business and economic
development
Financing
Figure 13: Partnership Model -General
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Partnership Model
Community
Based
Advisory
Board
Partners, LLC
50 Year S(4) Developments Maintenance Plan
Raises upfront capital for uprgrades/retrofits
Assumes MS4 permit obligations related to
scope
Debt
Payment
Financing
r
Design & Build
Services
1
Compliance &
Inspections
Services
Operations &
Maintenance
Services
Figure 14: Partnership Model Using an LLC
Partnership Model Using an LLC
The municipality and the developer have
formed a LLC. The developer is the
managing member in the LLC. The term of
the agreement is over 50 years and the
developer is responsible for raising the up-
front capital as well as meeting the
obligations of the MS4 permit. The main
activities of the partnership can be
categorized as Design Build, Compliance and
Inspection, and Operations and Maintenance.
The developer reports these activities to the
municipal partner and then the reports and
activities are forwarded to the regulatory
agencies, stakeholders, and financial
institutions for monitoring and confirmation
of compliance. The partnership relies on
input from a community advisory board that
insures decisions are transparent and reflect
the needs of the communities. The financial
institutions secure an adequate funding
stream and ensure that the construction risks
are appropriate. (Figure 5)
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The types of partnerships and contracts that
can be used to implement and maintain a
CBP3 are as follows.
A CBP3 between a municipality and
developer in a LLC;
A CBP3 through a privately held LLC;
and
A municipality borrowing public capital
through conventional contracting
mechanisms.
These approaches are further described in the
following sections, including descriptions of
issues relating to: governance, financing,
program and asset management,
compensation, contracting, and future
activities.
CBP3 with Municipality
LLC/Partnership
This structure is highly flexible, and creates
true partnership relationships with aligned
interests between public and private entities.
The partnership provides the following
benefits:
Lowest cost of private capital;
Greatest amount of control and
governance by public entity;
Greatest amount of flexibility for the
program to achieve both typical project
goals; and
Ability to address complex local
economic development and community
goals.
Described below are some of the key features
of this arrangement that distinguish the LLC
from other types of arrangements.
Governance
Each member has designated powers and
responsibilities, such as the managing
member and municipal member). The
partnership (which can be technically in the
form of a LLC or a limited partnership) can
be defined as the pooling of resources like
labor and money by organizations that share
decision-making power, risks, and benefits in
the pursuit of common objectives and goals.
It is this sharing that distinguishes a LLC-
based partnership from other relationships
between the public and private sectors,
including the traditional contractual
arrangement whereby a public organization
pays for the delivery of products or services.
Partnerships involving power-sharing are
often termed "real," or "collaborative,"
partnerships, whereas those involving a
sharing of only work or resources are
described as "operational" partnerships.
Major actions that would impact the
partnership are governed by decisions
outlining the level of agreement needed of
both members, and in the absence of such an
agreement, the LLC will not act. Major
decisions taken within the partnership/LLC
context, are easily amendable, allowing the
municipality greater flexibility and control of
those decisions or areas that they deem most
important to now and in the future. Provisions
can be made for particular situations that
require special handling. Decisions are not
based on nominal majority interests. The
LLC can make decisions through
management committees and boards,
including such public participants as the
municipality may choose to include. Subject
to financing requirements, the municipality
can be given rights to: 1) terminate the LLC
at will, 2) remove the managing member
without cause, or 3) terminate all service
agreements with the LLC, in each case
compensating the private partner for costs
and lost income. Removal of the managing
member will permit the LLC to continue as
the borrower under financing without
retaining the private partner. The managing
member can be removed for cause.
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Financing
The LLC carries out financing as a Special
Purpose Entity (SPE) or SPE subsidiary.
Payment sources can be LLC earnings plus
either capital contributions from the
municipality member or contractual service
payments from the municipality. The
municipality payments can come from either
a designated source (e.g., stormwater fund) or
general fund. If the LLC defaults on a debt,
the lender/trustee can either foreclose under a
security instrument or remove the managing
member from the LLC, substituting its own
managing member. In the latter case, the
LLCs status as the borrower and the
municipality's standing with the borrower
would be unaffected. The debt would not be
treated as a municipality borrowing and
limiting any investor recourse to the
municipality.
Program and Asset Management
Program and asset management is identified,
implemented, and maintained through
agreements between: 1) the municipality and
the LLC, and 2) the LLC and specified
service providers, some of which could be
entities related to the managing
member/private partner. These agreements
would clearly outline the scope and delivery
of the identified work. Private partners are
paid for performance, with a portion of the
compensation tied to meeting specified
incentive criteria. These actions provide
flexibility to adapt scope and incentive
criteria to continue to meet and support
municipality objectives as they evolve. The
municipality may provide for such
competition for future scope beyond the
initial scope among other potential providers
as it finds desirable.
Compensation of Private Partner as
Program and Asset Manager
Compensation is through fixed fee payment
for services (including incentive fees based
on performance metrics), contracted through
program and/or asset management
agreements/task orders, without a share of the
LLC cash flow or LLC profits. All excess
cash flow and profits are owned by the LLC
for project reinvestment and not the private
partner.
Subcontractor Contracting
Subcontractor contracting is carried out by
the LLC, and is not subject to municipality
procurement rules (except to the extent
required by the LLC in either its operating
agreement, program agreement, or as a matter
of the member agreement). The LLC
evaluates contractor performance. If the
contractor is related to the managing member,
the evaluation can be made by the
municipality member. Sanctions, rights and
responsibilities of parties are not subject to
municipality procedures. Contracting rules
are customized through the LLC, specifically
to encourage and allow for the participation
of local, small, and minority business
enterprises.
Future Activities
These activities are at the discretion of the
municipality or as provided by program
agreements. The municipality and LLC may
decide to engage in additional activities.
Excess revenues are retained within the LLC
for any activities subject to municipality
control. These revenues can be used for
future activities, whether newly added to
LLC authority or in furtherance (or O&M) of
existing activities. In addition, revenues can
be paid out to municipality for competitive
solicitation under municipality procurement
rules. If retained within the LLC, funds would
likely not require further appropriations
action or be subject to municipality
procurement rules.
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sly Priva ' i
Contractual Arrangement with
Municipality
This structure creates a constructed partner-
ship relationship with aligned interests
between public and private entities, but can
achieve just about all of the same benefits as
a true partnership if structured appropriately.
If structured appropriately the arrangement
can still provide lowest cost of private capital;
continue to give control and governance to
the public entity while still divesting risk; and
provide flexibility for the program to achieve
both typical project goals and more complex
local economic development and community
goals.
Governance
Established primarily within the context of
the program and asset management
agreements; and includes authority of the
municipality and the private partner as per the
contractual agreements. Established by the
partners within an evolving program that
defines and sets common goals and
objectives throughout the life of the program.
Heavily focused on the scope of services and
resources, and described as an "operational"
partnership. Most major actions/decisions
require agreement of both the municipality
and the privately controlled LLC.
Management committees and boards,
including such public participants, can be
brought into municipality decision-making.
Termination of agreements is a contractual
matter, subject to negotiation.
Financing
The LLC carries out the financing as a SPE.
Payment source can be LLC earnings, which
come from contractual service payments by
the municipality. Municipality payments can
come from either a designated source (i.e.,
storm water fund) or a general fund. If the
LLC defaults on debt, lender/trustee can
foreclose under security instrument
effectively terminating the borrower. It may
be possible to use a "springing member"
structure, under which a lender party (or a
municipality party) could become the sole
member or managing member of the LLC,
but that would complicate the borrowing.
Debt would not be treated as a municipality
borrowing and would most likely not be tax-
exempt.
Program and Asset Management
Identified, implemented and maintained
through agreements between 1) the
municipality and the LLC, and 2) the LLC
and specified service providers, some of
which will be entities related to the private
partner. Pay providers for performance, with
a portion of compensation tied to meeting
specified incentive criteria. The municipality
designates projects to be assigned to the LLC
through various program and service
agreements requiring more internal
municipality contract administration and
overhead expenses. Agreement processes
will provide for pricing rules and
determinations.
Compensation of private partner as
Program and Asset Manager
Compensation is through fixed fee payment
for services (including incentive fees based
on performance metrics), recognized as LLC
cash flow or profits. The LLC may be
authorized to generate and carry out
additional business. Because the municipality
is not a member of the LLC, it would not
ordinarily benefit from additional profits
generated by the LLC.
Subcontractor Contracting
Depending upon rules established by the
program agreements, contracting may be
carried out by the LLC, and is not subject to
the municipality procurement rules (except to
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the extent required in the program
agreements). Evaluation of contractor
performance would be made by the LLC,
subject to such municipality determinations
as may be required by the program
agreements. Sanctions, rights, and
responsibilities of parties may be subject to
municipality procedures. Contracting rules
are customized through the LLC, specifically
to encourage and allow more participation of
local, small, and minority business
enterprises.
Future Activities
These activities are at the discretion of the
municipality or as provided by program
agreements. The municipality and LLC may
decide to engage in additional activities
including reinvestment of excess revenues
subject to contractual negotiations of
constructed partnership. Any additional
utilization of funds will require further
appropriations and be subject to the
municipality procurement rules.
Municipal mvwii 1 ;
Capital ai ntracting
This structure is less flexible and does not
create a partnership relationship with aligned
interests between public and private entities.
In addition, it does not achieve the leveraging
of private capital. In addition, the public
funds and municipal procurement rules have
limitations that can impact the ability for the
program to effectively achieve stormwater
infrastructure project goals and more
complex local economic development and
community goals, let alone the address of
retrofits on private properties.
Governance
These provisions include rights of parties
established through explicit contract terms
within various service contracts.
Financing
Carried out by municipality and recognized
on its books. The payment source can be from
either a designated source (i.e., stormwater
fund) or a general fund, and can be limited to
those sources. If the municipality defaults on
debt, it would likely have an adverse impact
on the municipality's bond rating. Debt
would be tax-exempt (as governmental
bonds, not subject to the volume cap) and
subject to various constraints on use.
Program and Asset Management
Identified, implemented, and maintained
through agreements between the municipality
and specified service providers, some of
which will be entities related to the private
partner. (Bond rules would likely prevent
long-term service contracts with a private
partner LLC.) The municipality takes on
more surety of execution risk and
construction default risk. The municipality
may provide for such competition among
potential providers as it finds desirable.
Providers should be paid for performance,
with a portion of compensation tied to
meeting specified incentive criteria.
Compensation of Private Partner as
Program and Asset Manager
Compensation to all contractors is through
fixed fee payment for services (including
incentive fees based on performance
metrics).
Subcontractor Contracting
Carried out under municipality procurement
rules. Evaluation of contractor performance
made by the municipality. Sanctions, rights,
and responsibilities of contract parties are
subject to the municipality procedures. A
more formal process may produce greater
procurement barriers to local, small, and
minority businesses to participate and
compete for work.
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Future Activities
These activities are at the discretion of the
municipality. Excess revenues are
determined through contract negotiation.
Excess revenues are less predictive due to a
more volatile cost structure with the private
partner having reduced ability to drive down
market pricing.
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X. Examples of Gl-Driven P3
Approaches in the Mid-Atlantic
The "Clean Water Partnership"- Prince George's County GIStormwater Retrofit
Model: "An Affordable Alternative to Finance, Construct and Maintain Water
Quality Infrastructure"
By Larry Coffmcm, Prince Georges County Department of Environment
Introduction
Prince George's County, Maryland is using an innovative 30 year-long Public Private Partnership
(P3) business model to finance, design, build, operate and maintain (FDBOM) a massive urban
stormwater retrofit program to meet EPA's Chesapeake Bay TMDL requirements. This is not a
typical design build contract. This P3 program has been purposefully designed to promote
innovation and create a true partnership between the County and the private sector to: share
financial and legal risks; drive costs down through technological innovations; obtain greater
efficiencies through market forces; and stimulate economic development by creating new
sustainable business opportunities, jobs and building community wealth. This is not a privatization
program but, rather a long-term teaming agreement with clear standards to ensure the interests of
the County and the private sector are very closely aligned. The magnitude and longevity of the
program provides an unprecedented opportunity for long-term economic development gains and
job creation. This paper provides an overview of the P3 program's impetus, goals, benefits and
organization.
Driver/Need for a New Business Model
The County is under a Phase I MS4 permit and required to operate a comprehensive urban
stormwater water quality control program to prevent water quality degradation from new
development and to take remedial retrofit and prevention measures to restore locally impaired
waters. Local water quality restoration is accomplished by meeting a Total Maximum Daily Load
(TMDL) pollutant load allocation standard. Generally, this is accomplished through pollution
prevention programs and construction of retrofit water quality treatment mechanisms to address
existing uncontrolled development.
However, since the County is located in the Chesapeake Bay watershed, EPA Region 3 has
established an unprecedented additional TMDL requirement for local governments to restore the
Bay by 2025, see the link: http://www.epa.gov/chesapeakebavtmdl/ . EPA and the Bay states
established waste load allocations and milestones for the MS4 local jurisdictions for sediment,
phosphorus and nitrogen. In Maryland, ten jurisdictions including Prince George's County were
assigned waste load reduction goals and required to develop a Watershed Implementation Plan
(WIP) to show they intended to meet the Bay TMDL goals, see link:
http://www.princegeorgescountvmd.gov/sites/Sustainable/ServicesAVaterQualitvAVIP/Pages/def
ault.aspx
Prince George's County's WIP requires retrofit of approximately 15,000 acres of uncontrolled
impervious surfaces by 2025 at an estimate cost of $ 1.2 billion. A critical evaluation of the
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County's capabilities indicated the County could not meet the milestones or afford the program as
described in the WIP. In general, the County's highly structured capital improvement program
implementation process makes mass production, speedy construction or optimizing cost
efficiencies impossible. Every step of the conventional capital improvement process (planning,
design, permitting, construction, operations and maintenance) is lengthy, adds complexities and
costs and more importantly prohibits innovation to gain efficiencies of any kind.
In order to meet the compressed time frame and drive costs down a more efficient business model
was needed. A new model was required driven by innovation to accelerate the implementation,
increase affordability though market forces, advance highly efficient lower cost technologies and
reduce long-term operation and maintenance costs. The P3 model seemed to be the best fit as it
utilizes the private sector's ability to innovate and use market forces to more rapidly and affordably
build and operate needed public infrastructure. Although a P3 model has never been used to
implement a comprehensive stormwater retrofit program, there was enough experience with other
infrastructure projects such as highways, solid waste facilities, and water / wastewater treatment
plants that a model could be developed for stormwater. It seemed reasonable the P3 business model
combined with more streamlined permitting could reasonably meet the time constraints and drive
costs down significantly. Early indications were a P3 program could drive down cost by as much
as 40% thus saving the County over 400 million dollars over the life of the retrofit program.
iional interest slew Retrofit Business Model
Across the country, local governments are increasingly investing in sustainable Low Impact
Development (LID)/Green infrastructure (GI) practices to retrofit urban areas for improved
stormwater management to restore impaired waters and meet CSO requirements. This use of
LID/GI for urban stormwater retrofits is expected to significantly increase as the multiple
economic, environmental and social benefits of LID/GI over traditional gray infrastructure
practices become more widely known, see the link:
http://water.epa. gov/infrastructure/greeninfrastructure/index.cfm. Despite these benefits, the scale
of urban retrofit required to meet desired water resources goals will require major capital
investments; long-term funding commitments for asset management; and, create additional
administrative burdens for local governments. Local governments need affordable solutions as they
are generally ill-equipped to meet the long-term financial requirements to build and maintain an
extensive LID/GI infrastructure. EPA believes the P3 business model will significantly improve
the economic feasibility, and practicality of retrofit programs to better leverage public sector
resources by encouraging private investment and shared risk to implement sustainable LID/GI
practices, see the link: http://water.epa. gov/grants funding/cwf/privatization.cfm
Pub Vai tnerships in eral
There are a wide variety of P3 models. Please see the link for the National Council of Public Private
Partnerships for more information: http://ncppp.org/howpart/ppptypes.shtml. In exploring how to
adapt a P3 model to the Bay TMDL retrofit requirements, the County evaluated a number of
models. First, the County has used a long-term P3 business model for landfill gas-to-electricity
facilities at our two landfills. The County contracted with a private entity to finance, design, build,
operate and maintain the infrastructure as well as market both gas and electricity to purchasers. So
our own experience with P3 contracts has been very positive and has worked well for over 20
years.
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Another important model evaluated was the United States Department of Defense's Military
Housing Privatization Imitative (MHPI). This P3 program began in 1996 to deal with all of the
DOD's housing needs. The DOD's P3 performance based MHIP experience clearly demonstrates
that a well-planned program provides: significant cost savings and greater affordability; enhanced
capacity to leverage public funds and expand services and benefits; a significant shift of program
responsibilities and risks to the private sector; and, expedited delivery of quality services and
projects, see the DOD's website with more details on the success of their P3 program:
(http://www.acq.osd.mil/housing/mhpi.htm).
Best Fit P3 Model for Profit
A variation of the DOD's MHPI model looks to be well suited to meet the County's needs. In this
model the private partner would act as the general contractor and program manager in partnership
with the County through a limited liability company (LLC) framework. Program transparency is
maintained through joint program administration and decision making expressed in the LLC
operations. The private partner would provide all or part of the initial capital costs and the County
would pay the private partner a monthly fee that would include the debt service plus costs for
operation and maintenance from the County's water quality retrofit fund. When necessary the
private partner would provide all upfront costs with an affordable extended payback period.
Under this contract the private partner gets a base fee plus an incentive fee. The base fee is 50% of
a project cost and is paid on a monthly basis. The incentive fee is 50% of the project cost and is
only paid if all performance standards are met. The performance standards include meeting cost
saving targets, delivering project on time, meeting economic development goals (creating local
businesses) and optimizing local job creation. The private partner doesn't get paid and can lose the
incentive payment if the performance goals are not met. This performance fee based approach
ensures the private partner's first priority is to meet the County's program / performance goals and
not optimization of profits.
The basic P3 organization structure is shown below. This general model is quite flexible but
required work to adapt and customize it to the County's unique procurement process, funding
availability, permitting process, compliance issues and local water protection / sustainability needs.
The use of a limited liability corporation or LLC ensures a close partnership with the private partner
and is important to transparency of all operations. There is also the possibility of greater
community input into the planning and implementation of the retrofit program as the public can be
part of the LLC board.
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Figure 15: P3 Organization Structure
P3 Benefits and Advantages
The P3 business model provides a wide range of benefits to the County primarily through the
transfer of some risk and most of the responsibility to the private partner to implement all aspects
of the retrofit program. The benefits include:
1. Better program oversight. The LLC P3 model permits the County to be a partner with direct
involvement in the oversight of the LLC operations and management. Further, the County's
LLC representatives could include municipal officials, residents and environmental groups
to allow public input by impacted communities.
2. Off the books debt. The private financing and debt is issued to the LLC. This allows the
County to increase its overall debt load and structure the debt in a more affordable manner.
For Local governments without bonding authority this will allowing borrowing and use of
private bonds.
3. Less staff required. No need for the County to hire new staff for program administration,
enforcement, project management, inspection or maintenance. All these functions are
transferred to the private partner.
4. More affordable. The private partner pays the initial startup costs and County payments do
not begin until projects are in the ground and approved. The cost to the County will be very
low initially and increase over time at a rate that can be controlled.
5. Drive costs down through market forces. There are many options available to the private
partner to increase affordability beyond competitively bidding contracts, these include:
leverage the scale and long-term timeframe of the contract to negotiate lower costs for
materials and services; requiring innovation to improve technology; development of more
efficient construction practices, maintenance and program administration practices; greater
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adaptability to lower costs and improve efficiencies based on lessons learned; and, time
savings due to reduced administrative burdens, overlapping design and construction
scheduling, and reduced need for redesign or reconstruction.
6. Creation of new local jobs and businesses. This P3 retrofit program is unique in the scale
of work and its long-term nature thus providing sustainable incentives to develop new local
businesses. Once a contractor is part of the P3 program and performs well, they are
guaranteed predictable work for many years. This long-term sustainable cash flow provides
an incentive and resources for long-term financing and business growth not currently
achievable through the County's conventional piecemeal bidding of contracts.
7. Designed for adaptive management and flexibility. The contract will evolve over time to
improve efficiencies and to incorporate additional services as needed to adjust to lessoned
learned, financial constraints and changing regulations. The LLC partners can modify the
retrofit program requirements on the fly as needed without renegotiating fees or services as
long the changes meet the performance goals and the LLC board's approval. Flexibility is
needed by the private sector to take advantage of all the possibilities to gain cost and
performance efficiencies; optimize leverage to obtain lower cost financing, products and
services; expedite permit reviews; use performance standards; encourage innovation to
reduce the cost of technology, design, construction and maintenance.
8. More streamlined program administration. Using typical local government contracting and
procurement process to manage this program would have been nearly impossible as there
would have been multiple contracts with many firms. Under this P3 model the County only
contracts with the private partner on a one-time basis. This drastically reduces the time
spent on procurement, project management and contractual entanglements between
multiple service providers.
9. Private contracting practices. The private sector has more ability to leverage business
relationships, allowing flexibility to better adapt to change in order to achieve cost savings,
efficiencies and improve performance. Private parties adjust to unforeseen circumstances
through more informal, less costly or time-consuming processes. In contrast, traditional
public sector contracting practices make it difficult to achieve lower costs or deliver
services in a timely manner. Public contracting is often characterized by very rigid
formalized procedures, standards and time consuming red tape requiring frequent costly
formal renegotiations and change orders.
10. Many options to gain efficiencies to lower costs. The scale and long-term of the program
allows the private partner to reduce costs through standardization of design, construction
and maintenance practices. This P3 model encourages:
a. Sustainable maintenance programs to become more cost efficient because
economies of scale can be applied. For example, the per unit maintenance cost will
fall as the number of units increase. The private sector can better leverage
procurement of supplies, services and use of equipment. Efficiencies can also be
achieved by standardizing practices and optimizing scheduling of routine
maintenance. As the cost per unit for maintenance goes down it then becomes more
cost effective to begin a proactive rather than a reactive maintenance program. The
long-term nature of the P3 program also provides market incentives and greater
competition to drive down maintenance.
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b. Economies of scale also allow the P3 private partner to leverage both the project
scale and time frame to achieve cost savings in financing, professional services and
service providers. In large scale programs, technology cost savings can be achieved
where products can be standardized, mass-produced and materials discounted.
c. Competitive bidding for P3 contracts will be keen. The long-term predictability and
large scale of the urban retrofit program represents a unique business opportunity
for the private sector for guaranteed long-term revenues. A long-term guaranteed
revenue stream is highly desirable. However, the P3 contractor selection will not be
based solely on lowest bidder but also qualifications and experience to ensure
performance standards can be met.
Brief Comparison of Traditional and P3 Retrofit Programs Benefits
The table below is a comparison between traditional capital improvement programs and a P3
approach. In general, much of the County's responsibilities can be transferred to the private partner
thus eliminating the need to hire and carry additional staff. The private partner will handle all
procurement services.
Table 5: Comparison Table of County vs ,P3 Program Retrofit Program Aspects
Item
Traditional
County
Traditional
Description
P3 Approach
P3 Description
Staffing
Project
Management
15
Each project
manager oversee
several projects
1
Only one project
manager need to
track P3
Inspectors
10
Each to oversee
several projects
3
P3 will be
required to inspect
and certify
Field Engineers
0
None proposed
2
Needed to
approve field
modifications
Professional
Service Contracts
13
Consultants need
to design projects
3
P3 provides
consultants
Funding
Funding Options
Bond sales / tax
Could reduce fees
for bond sale
Private financing /
tax
Perhaps better
rates and terms
Contract Terms
Retrofit Cost per
Acre
$100,000
Piecemeal costly
designs
$70,000
Optimized BMP
to reduce costs
Project
Procurement Time
12-18 months
Typical bid
process time
2-4 weeks
Up to P3 general
contractor
Planning Time
Months
Several months
Days to Weeks
Site visit for BMP
placement
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Item
Traditional
County
Traditional
Description
P3 Approach
P3 Description
Maintenance
County maintains
Additional burden
to County
P3 maintains
P3 takes all
responsibility
Retrofit Practices
Use Maryland
standards
Costly and not
optimized for
retrofit
Optimized flexible
standards
Only a few
techniques will be
used
P3 Program Unique Features
As this is the first comprehensive urban stormwater P3 program, there are many unique features
of the program. Some of these features are below.
Pilot Program - The County is implementing this P3 program as a pilot program in collaboration
with EPA and the State to demonstrate the affordability and efficacy of using a privately financed
public private partnership contract to implement a comprehensive urban retrofit program. It is
EPA's goal to use this pilot program to demonstrate a viable approach to accelerating the
restoration of the Chesapeake Bay by reducing urban retrofit costs through innovation in
technology, alternative financing and use of private market forces.
Innovation and Standardization - The
County and private partner will jointly
develop and approve 6 or 7 basic generic
retrofit practices that will allow easy
integration into existing urban roadways
with low cost long-term maintenance
burdens. The private partner will be
given a general permit to implement
these practices to allow for minimal
approvals, planning and design work to
help drive cost down and expedite
implementation. The goal of
standardizing and simplifying the types
of practices is to better achieve optimum
performance, reliability and lower costs.
Standardization of materials, design,
construction, operation and maintenance
will allow market forces to drive down
cost through economies of scale and leveraging long-term contracts. The basic retrofit practice for
roadways will play off of a basic / standard system theme for "urban bioretention design" with a
high flow media /vegetation filter and volume underground storage for retention and reuse/
infiltration or detention, see Figure I. This basic design is infinitely variable to allow maximum
flexible to integrate a practice into an urban setting to achieve performance goals. The final practice
configuration (size of filter surface are and volume storage) will vary by site constraints such as:
available surface area, utility locations, proximity to structures, adequate drainage area,
elevations/depth, etc. One example is the use of street trees. This practice will require greater soil
Figure 1.
High Flow Filter
Plants
Mulch
High-flow Media
Bridging Stone
FocalPointMesh
RT Mini Modules
Geotextile Separation Layer
and Optional Impermeable
Liner Not Shown
Figure 16: High-Flow Filter Diagram
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depth to physically support the tree and allow for future root growth. The street tree configuration
where site constraints are tight will take the shape of a tree box system with limited storage.
Where there are fewer site constraints and more space, an entire block may be retrofitted converting
the green space between the curb and side walk to a filter storage area. The idea is to use a basic
treatment approach of high flow filters in combination with underground storage and vary as
necessary. The final standards and specifications will be worked out jointly between the County
and private partner.
Provide other sustainability services - It will be possible to collaborate with a private partner to
provide other services to County residents while working on retrofit projects in a community. For
example, the County could develop a variety of "Advanced Sustainability Franchises" as a general
environmental and economic benefit for County residents that would provide incentives to
conserve energy, save water, use solar and/or wind power and recycle or to retrofit private
properties for stormwater management. The County could provide the private partner with
exclusive marketing advantages to make available to residents' energy/water audits and to offer
performance contacts to residents to perform the improvements. The exclusive marketing
advantages may include only allowing the authorized agent(s) of the private partner to offer County
rebates or tax credits. The County could charge a small franchise fee for every property owner who
enters into a contract with private partner's agents. This franchise fee would only be enough to pay
for the County's administration cost to provide rebates. The private partner would work with
service providers to find and offer the most efficient and cost effective sustainability services.
Other sustainability programs may also be developed to incentivize and encourage stormwater
retrofits on private property to install rain gardens, rain barrels, down spot bioretention systems,
rain water harvesting, solar power systems, and tree planting and special recycling programs. We
would expect the private partner to work with the private sector to find and offer the most effective
and cost effective sustainability services.
s or irned
Developing any P3 program to ensure success is inherently complex and challenging and may take
several months to negotiate. Some of the most challenging issues are selecting the right partner,
financing, governance, performance incentives and fees, legal issues and ensuring flexibility and
innovation. These are described in more detail below.
Select the right partners. Selecting the right partner is the most important step. You will need to
find a true partner to help solve problems, act in your interest, and work within your financial
constraints and accept as much legal and financial risk as possible. This is not easy. You will need
to: a) do your homework to have a good foundation in P3 fundamentals to assess the general
capabilities of a potential partner; b) use a Request for Qualifications process to find the best
qualified firms and best ideas to compare approaches; c) select a firm with a known track record
and references; and, d) look for optimum flexibility and use of adaptive management measures
needed to adjust to changing politics, regulations and economic conditions.
Get experienced technical and legal counsel. If you're entering into your first P3 agreement you'll
need good technical and legal advice. Establishing sound performance and technical requirements
for governance, planning, design, permitting, construction, maintenance, inspection and approval
processes is difficult and complex. You'll need a consulting firm with both engineering and P3
work experience. The same is true with the legal aspects of the P3 contract and negotiations. You
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must be sure that you have appropriate authority to enter into a P3 agreement, obtain private
financing, develop appropriate governance and the agreement is legally sufficient to provide the
adequate contract administration tools.
Understand and incentivize objectives. Much time is spent in articulating program objectives and
then memorializing those objectives in the master program agreement in a fashion that ensures the
private partner remains incentivized through the length of the contract. The success of the program
will depend on how successful the negotiations define the objectives and ensure long-term
performance.
Financing - Private financing is generally more expensive than public financing through municipal
bonds. However, there are advantages to private financing that allow the private partner to better
take advantage of market conditions and achieve greater savings through market forces. This
involves fully funding reserve funds to ensure that subcontractors are paid timely to avoid carrying
charges and inflated prices due to late payments. Further, when you look at the total cost of a
privately financed P3 program, the cost savings generated by the private sector can completely
offset any increase in private financing costs. Another advantage of using an LLC special entity is
the debt is assigned to the LLC and not the public entity thus increasing the amount of debt
available to the public entity. For local governments without bonding authority, a P3 program with
private financing may be the most viable option to raise capital to implement needed public
infrastructure.
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XI. Use of Alternative Market-Based
Tools
A variety of funding and financing options
are currently available for GI investments.
Common funding sources include general
funds, stormwater utilities, grants, special
taxing districts, bonds, State Revolving Fund
dollars, and traditional loans. While funding
is a critical component of any infrastructure
investment program, the ability to gain
efficiencies at the operational level through
market-based alternatives is key to driving
down the high costs of urban GI retrofits. A
strength of the CBP3 approach is the ability
to capture these market-based approaches
under one umbrella that can be overseen and
coordinated by the CBP3 entity.
This section explores the relationship
between the CBP3 entity and operational
market-based alternatives within the CBP3
context. Additionally, this section will
present concepts that use non-traditional
market-based options, such as credit
trading/offsets, banking, and stormwater
fees/rebates, within the context of a CBP3
environment to illustrate the complementary
role these options can play in a CBP3.
GI Implementation at the
Operational Level
The focus of the subject of CBP3s in this
document up to this point has been primarily
on the architecture and funding/financing
aspects of this programmatic approach, and
the advantages associated with innovative
approach. However, flying at the "100,000-
foot" level in this discussion does not address
how GI will be sited/identified, designed,
installed/constructed, and
inspected/maintained on the ground level.
This connection between the CBP3 entity and
on-the-ground operations is key to
understanding how GI implementation can
occur. Additionally, there are approaches
available to the sector that could harness
market-based forces to further drive down
costs and increase efficiencies.
As has been previously discussed, a CBP3
can increase efficiencies through economies
of scale, streamlining design and permitting,
and a less onerous procurement program. All
of these aspects tie into GI implementation;
however, the actual path and approach to
implementation is not addressed in these
elements. For instance, the unit cost of a
material component of a standard GI
approach in a program may be driven down
due to economies of scale; however, the costs
associated with actual construction using this
material has not been addressed. With this
said, there are examples of implementation
approaches that can be layered under the
CBP3 umbrella to gain further savings and
acceleration of implementation. The previous
section provides some of these examples
(Washington, D.C.'s SRC and Philadelphia's
GARP programs).
Roles at the Operational Level
A premise of the examples provided in the
preceding section is that there are "low hanging
fruit" for GI implementation. Specifically,
some sites are well-suited for quick and easy GI
implementation at a relatively low cost due to
site-specific conditions, such as soils,
landscape features (slopes, etc.), land use type,
opportunity costs, downstream conditions,
existing infrastructure constraints, and other
limiting factors. For those sites where
implementation falls into the
"easy/inexpensive" category, the economics of
GI implementation are favorable when
compared to other sites where constraints are
high and land use types do not favor low-cost
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GI solutions. For instance, an abandoned
parking lot in a socioeconomically-challenged
area that lies on well-draining soils with few
infrastructure constraints and mild slopes that
drain to waterway that is not considered "high
value" or protected would be likely candidate
for a low-cost site for GI implementation. To
contrast, a high-rise condo complex in a high-
value urban area may be an order of magnitude
more expensive in terms of unit cost (dollars
per impervious acre treated/"greened"). This
heterogeneity in conditions (reflected in costs
for implementation) provides additional
opportunities to drive down costs for GI
implementation, and is the basis for the DC
SRC trading market.
Another cost-saving dynamic is project
aggregation, which is the focus of PWD's
GARP program. The premise of aggregation is
that scale (economics of scale) can drive down
costs, as has been previously discussed.
Additionally, aggregation can provide cost
savings by reducing per project transaction
costs. Transaction costs include "soft" costs of
a project including administrative, legal,
procurement, and similar non-construction
costs that can comprise between 10-40 percent
of total project cost (Natlab, 2013). The CBP3
program will reduce some of these costs
(procurement, some legal, etc.); however, it is
anticipated that by grouping or aggregating
projects together, those transaction costs not
captured by the CBP3 program can be spread
out across several projects, thereby further
reducing per project cost.
Considering the efficiencies that can be
gained by market-based forces, as described
above, layered on top of those already gained
through a CBP3framework, there is an
overall synergistic cost-reduction from this
"nested" approach to GI implementation.
i-k , rvh wiclers
In a CBP3 context, one can envision the
organic development of "turn-key" provider
private entities who provides an array of
implementation services, including project
identification/siting, performing feasibility
analyses on identified sites (for financial
viability), full site/project design, project
management, construction, and inspection
and maintenance services. Multiple "turn-
keys" could be unleashed by the CBP3 to
operationalize the effort to implement GI
widely.
For example, in a trading program that
employs a limited number of approved
standard GI practices (Coffman suggests 6-7
standard design/approaches for Prince
George's County, MD) that can be used to
generate credits. These credits could be
purchased by the CBP3 entity, and having
multiple providers would generate cost-
reducing competition to the benefit of the
CBP3 entity (and the municipality). It is
anticipated that turn-keys would represent
profit-maximizing entities who employ top-
level specialists in GI implementation who
could most efficiently scan the landscape for
scenarios providing the lowest-cost
opportunity for GI implementation. Some
turn-keys could potentially specialize in land
use types/scenarios to further increase
efficiency. For instance, one turn-key may
focus retrofitting of large commercial strip
malls or church parking lots, while another
turn-key may deal only with large
institutional or industrial sites. This
specialization could allow turn-keys to
become familiar with specific land use types
in order to lead to cost-optimized/maximized
"harvesting" of stormwater credits on sites.
In an incentived grant program, such as the
GARP program, the CBP3 entity could set
cost thresholds for projects they would invest
in. As with the credit trading approach,
multiple "aggregators" could work to identify
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the best grouping of sites that would meet, or
exceed, the cost threshold set by the CBP3
entity. Also, specialization of GI
implementation in this context could occur if
the CBP3 potentially set varying cost
thresholds that could vary by land use type or
scenario, thus recognizing the cost variability
associated with GI in different contexts. This
could help to ensure that a mix of land use
types/scenarios experience "greening", rather
than just the "low-hanging fruit" scenarios.
Market-Base lis and Private
Properties
A challenge for GI retrofitting efforts is
related to the installation of GI on private
properties. The usual course of action in a GI
plan by a utility or municipality is to target
readily-available publically-controlled
properties (e.g., roadway ROWs). The reason
for focusing on public spaces upfront is
related to the complications in engaging with
specific private property owners on various
project-related issues. Additionally, there
may be challenges in using public funding
sources (SRF as an example) for use on
private properties. While there are challenges
in implementing GI on private properties,
there is a limited amount of available public
space in which to retrofit, and in some
situations, the regulatory requirements
associated with GI retrofits far exceeds this
capacity. This is the situation in Philadelphia
and Prince George's County, MD, and it is
likely that there will be an increase in permits
and consent decrees that reflect these
conditions in other areas as well. Considering
this trend, the topic of how CBP3s and
market-based tools work with private
property holders.
As has been discussed, stormwater programs
for MS4 permit holders are funded in
multiple ways, with stormwater utilities
being one of the most common approaches
after general funding use. Similarly,
wastewater utilities who are faced with CSOs
can charge rate payers to specifically address
their wet weather program. One model for an
incentive-based market approach is to
provide a rebate on a fee related to
stormwater or wet weather costs. This type of
approach is commonly provided by
stormwater and wastewater utilities;
however, these are often not substantive
rebates. One example is Philadelphia, which
provides an 80 percent rebate on their
stormwater fee. Another example is
Washington, D.C., who provides a 55 percent
rebate on their MS4 stormwater fee and a 4
percent rebate on their wet weather program
fee. A turn-key provider who would handle
all aspects of GI implementation and
maintenance could use this rebate as a selling
point. More specifically, a private property
owner could alleviate a cost simply by
allowing a turn-key to use their property to
implement GI. This incentive could work in
either the aggregating or the trading contexts.
One challenge in relying on fee rebates as an
incentive is the relatively low fee level
associated with storm water-related programs,
especially stormwater utilities (Thurston,
2012). In other words, fees are often not high
enough to drive private property owners to
take action in an incentive program because
either the rebate is too small, the cost of GI
implementation is too high, or both.
Considering this challenge, a turn-key
provider could potentially construct a deal
with a private property owner to allow them
access to their property for the sake of
installing/constructing GI for a portion of the
profits generated from the project after the
turn-key is paid by the CBP3 entity. This
arrangement would likely include a
maintenance agreement to allow
inspection/maintenance staff (employed by
the turn-key) to access the site as required to
maintain the GI as dictated by the
municipality/utility. Table 6 summarizes how
the strengths and limitations of various
market-based frameworks described above as
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well as how a CBP3 program could enhance
the impact of these frameworks. Figures 17
and 18 illustrate the relative cost-
effectiveness and overall values of traditional
and innovative approaches to GI
implementation.
Table 6: Aspects of Market-based Tools and How These Can Be Strengthened by CBP3
Definition
Provides low-level incentives
for on-site GI investment for
private property owners
through relief from a user-fee
funded stormwater charge
Allows for a portion of required
runoff retention or treatment to
be purchased through credits on
an exchange or trading house
platform or though bi-lateral
transactions from off-site
sources of excess retention or
treatment
Public entity pays a private entity
(turn-key) to design, build, and
maintain a project or set of
projects based upon cost-
effectiveness
Private Property
Owner Benefit
Reduction of stormwater fee (if
fee exists) and water or energy-
related utilities
Payment by turn-key for
use of property to generate
credit
Potential for stacked
incentive by reducing
stormwater fee (if a fee
exists) and water or
energy-related utilities
Payment by turn-key for use
of property to implement GI
Potential for stacked
incentive by reducing
stormwater fee (if a fee
exists) and water or energy-
related utilities
Strength of
Approach
Provides an incentive for
property owners to implement
GI on site
Trading can help to use cost
heterogeneities to lead to more
cost-efficient GI
implementation - these cost-
efficiencies can be greater if
used in a watershed-based
context rather than confined to
single jurisdiction
Awards private entities who
can provide GI
implementation more cost
effectively
Can leverage power of
project aggregation to lower
costs
Limitation of
Approach
Limited to programs with a
stormwater utility
Likely limited to capturing
early adopters
Difficult to make the
economic case for these
programs in most cases
Credit generators may act
as "lone entities" required
to gain capital financing
for each project
Credit generators may
work at a relatively small
scale (parcel,
neighborhood) when
targeting GI projects
Turn-key services providers
will act as "lone entities"
required to gain capital
financing for each project.
Turn-key services providers
will work at a relatively
small scale (parcel, grouping
of parcels, neighborhood)
when targeting GI projects.
Turn-keys may "game" the
program by developing
projects that meet the
required grant/subsidy cost
threshold rather than most
cost-efficient possible
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How CBP3 Can
Enhance
Drives efficiencies and
innovation in the designs
and technologies used
By lowering GI costs via
economics of scale, the
fee/rebate program may
become more economically
viable/feasible
With more "agents" in the
field engaging with the
private sector, there is an
opportunity for public
outreach/engagement and
education on fee/rebate
programs
Drives efficiencies and
innovation in the designs
and technologies used
Can leverage economies of
scale to reduce costs for
standardized GI practices
implemented by turn-key
credit generators;
Can reduce the need for
lone entity turn-keys to self-
finance
Reduces the burden on the
public partner to run a
trading program
(clearinghouse, etc.)
With more "agents" in the
field engaging with the
private sector, there is an
opportunity for public
outreach/engagement and
education on stormwater
issues and GI program
Drives efficiencies and
innovation in the designs and
technologies used
Can leverage economies of
scale to enhance cost
reductions based upon project
aggregation for standardized
GI practices implemented by
turn-key private entities
Can reduce the need for lone
entity turn-keys to self-
finance
Reduces the burden on the
public partner to run a
grant/subsidy program
With more "agents" in the
field engaging with the private
sector, there is an opportunity
for public
outreach/engagement and
education on stormwater
issues and GI program
Table 7: Relative Cost-Effectiveness of Various Approaches to GI Implementation Approaches
Cost-Effectiveness of GI Implementation
Traditional
Market-based Alone
CBP3 and Market-based
Least Cost-Effective
Piecemeal approach
Inefficient costs of materials, etc.
Inefficient procurement programs
Death by a thousand cuts (change
orders, add-ons, etc.)
Enhanced Cost-Effectiveness
Increased economies of scale
Reduced transaction costs
Somewhat piecemeal still
disconnected to regulatory
requirements.
Most Cost-Effective
Full economics of scale
Further reduced transaction costs
Programmatically holistic
(regulatory requirements)
Integrated design-build eliminates
"change order" dynamics
Table 8: Relative Value to Communities of Various Approaches to GI Implementation Approaches
Community Benefits
Traditional
Market-based Alone
CBP3 and Market-based
Lowest Overall Value
Slower implementation
Most costly/less efficient
Piecemeal implementation
Enhanced community aesthetics
Increased property values
Increased Overall Value
Faster implementation and lower
costs compared to traditional
Less piecemeal than traditional, but
still elements of piecemeal
approach
Enhanced community aesthetics
Increased property values
Greatest Overall Value
Fastest implementation
Significantly lower costs (40% or
more)
More green/local jobs
Support for local small businesses
Attracts public/private investment
opportunities Enhanced
community aesthetics
Increased property values
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Philadelp. 1 ied Ac itmfit Progr '
By Erin Williams, Philadelphia Water Department (PWD)
Background and Overview
PWD transferred what was originally a water use-based stormwater fee to a parcel-based fee that
established a rate for non-residential property owners based upon the amount of impervious cover
at the property level. For some non-resident private property owners, this shift represented a
significant increase in fee payment. To incentivize fee payers to adopt green stormwater
infrastructure, PWD has established the provision that up to 80 percent of the fee could be
eliminated assuming the installed practice met the requirements of controlling at least the first inch
of stormwater runoff on site. The intent was that the cost-avoidance motivation associated with GI
adoption would provide the incentive to implement GI on private properties.
A report released in January, 2013 titled Creating Clean Water Cash Flows, authored by a
collective of the Natural Resource Defense Council, the Nature Conservancy, and EKO Asset
Management Partners, investigated innovative approaches to finance large-scale investments in
stormwater infrastructure. Results from these efforts have highlighted that the costs associated with
stormwater retrofits in the Philadelphia area are generally higher than the return on investing in
stormwater infrastructure construction for a majority of non-residential property owners.
Specifically, the report states that when considering avoided stormwater fees as the only metric of
project payback, "the discounted payback periods of most green infrastructure retrofits on private
parcels stretch beyond ten years, which is longer than most investors would be willing to accept."
Considering this, it was clear that PWD should consider options beyond simply relaying on
avoided stormwater fees to generate significant investment in stormwater infrastructure on
privately-held non-residential properties.
The result of this pivot was PWD's launch of the Greened Acre Retrofit Program (GARP), which
provide grants to those who can retrofit a parcel below a specified cost efficiency threshold.
Generally, this program provides grant funding to companies or contractors to construct
stormwater projects across multiple properties in Philadelphia's combined sewer area. GARP
combines engineering/construction quality with client management to maximize greened acres and
benefit to PWD, while still providing benefit to the property owners via credits.
Engineering/construction quality and experience are nothing new here. GARP's core element is
project aggregation, which is an approach that groups projects together under a single retrofit effort
to reduce transaction costs, by spreading this cost over many projects, and by gaining economies
of scale, thereby transforming projects with unreasonable costs and return-on-investment (ROI)
horizons to be more financially attractive efforts when viewed as a whole.
Eligibility
Funding for GARP is reserved for stormwater retrofit projects on private property in the
combined sewer area only. Properties undergoing redevelopment are not eligible for GARP
funding and must comply with PWD's Stormwater Regulations. Recipients of the grant funds
are limited to companies and project aggregators that can assemble large areas, often over
multiple properties, for stormwater management projects. The recommended minimum project
size is 10 acres.
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Evaluation Requirements
GARP applications will be evaluated based on a variety of criteria including total area
managed, cost to PWD, and quality of long-term maintenance plan and availability of matching
funds. Competitive applications will limit grant requests to $90,000 per impervious acre
managed or less. Agreements or contracts with any participating property owners must be
included in the application.
Process and Initial Results
Applications can be submitted electronically to PIDC at any time. A selection committee
comprised of PWD staff evaluates applications and issues decisions at the close of each fiscal
quarter. Selected grantees will enter into a subgrant agreement with PIDC to move forward
with project design and implementation. Owners of properties participating in the GARP grant
project are required to execute an Operations and Maintenance Agreement with PWD. Project
aggregators are required to execute an Economic Opportunity Plan as part of the subgrant
agreement.
To date, PWD has awarded one application worth $8.3 million for 90 acres across 8 unique
properties. All sites are expected to be constructed by the summer of 2015. Currently, two sites are
completed with an additional two site under construction.
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Incentivizing Gree rue ฆ tofits wit ding in tt 1 trict of
Columbia
By Evan Branosky, DC Department of Environment
Overview
The Stormwater Retention Credit (SRC) trading program in Washington, DC provides incentives
for the voluntary installation of green infrastructure that reduces stormwater runoff. Revenue from
SRC trades can help to finance the cost of installing and maintaining projects.
New stormwater management regulations provide the basis for trading. On July 19, 2013, the
District Department of the Environment (DDOE), the environmental agency for Washington, DC,
issued regulations that require major land disturbing projects1 to retain the volume from the 1.2
inch storm. Similarly, major substantial improvement projects2 must retain the volume from the
0.8 inch storm. Once these projects retain 50% of their Stormwater Retention Volume on site, they
may achieve their remaining volume off-site. The off-site retention volume (Offv) is an ongoing
obligation and must be met on an annual basis.
Projects have two options for achieving Offv. They may pay in-lieu fee equal to $3.50 per gallon
per year or buy and use SRCs, which achieve one gallon of Offv for one year. Whereas in-lieu fee
is paid to the District Government, SRCs are traded in a private market. Properties generate SRCs
by reducing stormwater runoff through the installation of voluntary green infrastructure. Owners
trade their SRCs in an open market to others who use them to meet Offv obligations.
Program Benefits
DDOE's program is designed to provide flexibility for regulated sites while maximizing the benefit
to District waterbodies. DDOE cites two hypothetical scenarios to illustrate the potential for cost-
savings and flexibility. In one scenario (Scenario A), a 0.25-acre site (Site 1) with 100%
impervious cover (assumed to be a high-rise residential building, for example) controls the entire
1.2-inch storm volume onsite through relatively high-cost controls, such as a green roof or a
stormwater harvesting system. The estimated cost for Site 1 is $3.25/gallon, or $25,152. In the
second scenario (Scenario B), Site 1 retains 0.75 inches on site with the remaining 0.45 inches of
runoff retention achieved by use of SRCs generated at an off-site location (Site 2, also 0.25 acres
and 100%) impervious), which is located on a site that allows for less costly practices, such as
bioretention or permeable pavement. The cost for retention on Site 2 is $0.65/gallon, which results
in a total cost of $17,603 for the combined retention provided at Site 1 and 2 in Scenario B.
Compared to Scenario A, Scenario B results in a 30% cost savings to provide the same amount of
runoff retention.
In addition, DDOE's Scenario B provides an increased benefit to District waterbodies by retaining
more stormwater on an annual basis than would be retained in Scenario A. Using 2009 rainfall
data, DDOE calculated a 53% increase in annual stormwater retention in Scenario B, as compared
to Scenario A. The reason for this has to do with the fact that many of the storms that occur in a
Major land disturbing projects are development projects that disturb 5,000 ft2 or more of land area.
2 Major substantial improvement projects are development projects where the cost of improvement equals at least 50% of the assessed value of
the structure priorto improvement and the combined footprint of the improved area and land disturbance is >5,000 ft2
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year in the District are smaller than 1.2 inches (90th percentile storm for the District) and the fact
that the smaller retention practices in Scenario B receive drainage from two sites (more impervious
area) than the larger practice in Scenario A. Consequently, the practices in Scenario B fill to their
capacity much more frequently than the practice in Scenario A.
Beyond achieving a higher rate of overall retention, the SRC program should help to drive the
implementation of GI in socioeconomically challenged areas outside of the urban downtown core
area where opportunity costs related to land value are relatively low. This driver can help to
facilitate a catalyzed "greening" of areas that are most need of the social and economic benefits of
GI. Additionally, higher rates of GI implementation outside of the downtown core area may help
to provide enhanced protection to headwater tributaries who are most impacted by flashy urban
storm discharges.
Credit Certification and Maintenance Requirements
DDOE is the sole SRC-certifying authority, and eligibility requires that projects achieve retention
above existing retention or requirements, be designed in accordance with a DDOE-approved
stormwater management plan, complete final and ongoing inspections by DDOE, and document
the ability to maintain the project over the certification period. DDOE certifies up to 3 years' worth
of SRCs, and will re-certify every 3 years as long as eligibility requirements are met.
A unique feature of this program is that one SRC equals 1 gallon of runoff retention for 1 year.
Likewise, the in-lieu fee corresponds to one gallon of runoff retention for 1 year. The one-year
lifespan of an SRC and the 3-year certification cycle ensure that retention performance is
maintained and provides flexibility for SRC generators who decide to pull out of the market and
use their land in other ways.
Initial Activity
DDOE certified the first SRCs in April 2014 and approved the first trade in September 2014. As
regulated projects finish their construction phases and more people learn about SRC trading
opportunities, DDOE expects trading activity to increase. For current information on the SRC
trading program, including the registry of SRCs and participation instructions, visit
ddoe.dc.gov/src.
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XII. Potential Financing and CBP3
Implementation Scenarios for
EPA Region 3
This section presents a range of financing
scenarios that illustrate potential pathways
communities can adapt and modify for their
local needs to fund a CBP3. In addition, the
section provides scenarios on how these
financing options operate within the context
of the contractual, management, and
regulatory arrangements encountered within
EPA Region 3 states (i.e., Pennsylvania,
Maryland, the District of Columbia,
Delaware, and Pennsylvania).
Public-Private Partnerships and
the Impact on Stormwater
Financing
One of the most important attributes of P3
structures is the impact on infrastructure
financing. By effectively partnering with
private firms, local stormwater programs are
in a position to jointly mitigate financing risk
and more efficiently allocate and distribute
fiscal resources. Most importantly, the
positioning of stormwater management
programs link program revenue directly to
capital improvements and O&M services and
functions.
Revenue and Funding Options and
Criteria
The potential impact and innovation
associated with P3 financing structures ties
directly to the capacity for establishing
sufficient and sustainable program revenues.
Public or private partners assume the
responsibility for allocating and distributing
revenues and the government retains ultimate
responsibility for insuring that social needs
and objectives are met. Therefore, in deciding
which funding source, or combination of
sources, to use, local officials can apply
criteria for their choice by answering the
following questions (NAFSMA, 2006):
1) Is it legal?
2) Is it equitable in the sense that: (a) it
is proportional to the level of services
that payers receive; and, (b) that it
takes into consideration the needs of
special groups of payers?
3) Is it sufficient to meet anticipated costs?
4) Is it flexible (i.e., adjustable to
changing conditions)?
5) How costly is it to administer during
the initial set up and for ongoing
oversight and maintenance (e.g., what
are the data requirements, and how
compatible is it with existing data
processing systems)?
6) How consistent is it with other local
funding and rate policies?
7) How stable a source of revenues is it?
8) Can it be used to create opportunities
and incentives for payers to reduce
their contributions to stormwater by
changing their behavior?
Of course, the unique nature of P3 structures
and the interaction between public and private
institutions will influence the answer to each of
these questions. Although there are a variety of
resources and funding tools available to local
communities for supporting stormwater
programs, the foundation of local programs is
based on local revenue generation in the form
of taxes and fees.
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Table 9. CBP3 Financing Scenarios Summary Table
Scenarios Description
Scenario 1: General
Fund Financing
Traditional Approach to Stormwater Management
Scenario 2:
Stormwater Utilities
Many communities are creating stormwater utilities to provide dedicated funding
for stormwater management. This dedicated revenue source creates greater
opportunity to use P3s for leveraging more DBOM and other local needs.
Scenario 3: Leveraging
Private Investment
through SRF Program
The benefits provided by the SRF program, coupled with the fee-based financing
systems, can create incentives that can effectively incentivize more effective
private engagement and participation in stormwater financing systems. For
example, SRF programs nationwide generate significant cash flows every year
that could be used to establish innovative loan guarantees for urban stormwater
management and green infrastructure projects.
Scenario 4:
Establishing P3s
through Targeted
Grant Programs
Grant programsfederal, state, and philanthropicremain popular at the local
level and are often the focus of initial program development efforts. Although a
fundraising strategy will never be sufficient to support stormwater programs in
the long-term, they can be very effective at both launching nascent programs and
advancing innovative new approaches for addressing stormwater and green
infrastructure efforts. P3s create a very effective opportunity for leveraging grant
resources.
Scenario 1: General Fund
Financing
Most communities have traditionally funded
stormwater management from taxes paid into
their general funds. The general fund is a
government's basic operating fund and
accounts for everything not accounted for in
other funds, such as a special revenue fund or a
debt service fund. There are advantages to
using general funds to support stormwater
programs. The majority of local governments
across the country have existing revenue and
debt programs, which makes the process of
supporting new and expanding programs
familiar and uncomplicated. In addition,
financing through the general fund allows local
leaders to consider stormwater financing
relative to other community priorities. There
are, however, several significant drawbacks to
expanding storm-water management activities
through general fund financing (Favero, 2014).
In most communities, there is great competition
for general fund dollars between municipal
programs; using the general fund revenues to
support growth in stormwater obligations
requires communities to either increase taxes or
divert existing resources to the stormwater
program. Compounding resource availability
issues is the fact that stormwater management
improvements typically have a low priority in
many communities, unless the municipality is
reacting to a recent major storm event or
regulatory action.
Another deficiency of financing stormwater
management through the general fund is the
lack of transparency of the general fund
financing system. The total cost of stormwater
management is not readily apparent when these
costs are dispersed among general fund
departmental budgets. This is especially true in
those communities that do not have stormwater
programs with clear budgetary authority, which
makes it difficult to determine where financing
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decisions related to stormwater management
are being made. In addition, as stormwater
management costs increase, general fund
budgets are often not increased in parallel to
meet those needs.
There is also the issue of equity and fairness in
the financing system. Tax-exempt properties
do not support any of the cost of stormwater
management, even though many of them, such
as governmental properties, schools, colleges,
and universities are major contributors of
stormwater runoff. Finally, general funds are
primarily supported through property taxes,
which are based on assessed property value.
The cost of stormwater service to individual
properties bears no relationship to the assessed
value of the property. Therefore, this method of
recovering stormwater management costs is
more often than not inequitable (Favero, 2014).
Public-Private Partnerships
As discussed in Scenario 2, stormwater
management is uniquely appropriate for fee-
based financing, thereby linking the service and
function of the infrastructure with revenue
generation and investment. However, P3
structures have been used effectively within
general funding financing systems, including in
support of stormwater management. In
addition, these contracts have traditionally been
supported through general fund revenues as
part of local capital improvement plans and
associated capital budgeting processes.
Scenai wmwater Utilities
Many local governments that are responsible
for stormwater management continue to face
escalating costs at a time when general fund
revenues are either stagnant or declining. To
address this challenge, many communities
are creating stormwater utilities to provide
dedicated funding for this critical community
service (Black and Veach, 2012). It is the
existence of these utilities, and the codified
revenue streams they represent that
establishes much of the private sector interest
in P3s, stormwater management
notwithstanding. In addition, the direct
connection between revenue generation and
the function of the financed infrastructure
creates the opportunity for long-term
efficiencies and innovations within the P3
structure. For this reason, P3s have become
very common in industries that are
appropriate for fee-based revenue generation,
including:
Transportation (through the collection of
tolls);
Drinking water supply;
Wastewater management; and
Energy delivery and production.
For this reason, the need to accelerate and
scale stormwater management programs
creates unique opportunities to establish
innovative P3 structures based on stormwater
utilities and enterprise programs.
Stormwater Utilities
A stormwater utility is a financing
mechanism that imposes user-service fees on
owners of properties that create runoff; the
utility is administered separately from
general property taxes. Many local
governments across the country are shifting
their stormwater financing from management
from (often) disaggregated general fund
supported programs to fee-based enterprise
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programs and/or utilities. In the 1970s
stormwater utilities were viewed as novelties
in a few western states; by 1994 there were
about 100 utilities; and by 2013 the number
had increased to more than 1,400 utilities,
across 39 states and the District of Columbia
(Western Kentucky University, 2013). With
the number of MS4 permits growing, and in
the Mid-Atlantic Region where Chesapeake
Bay restoration requirements are imposed by
the Bay states, the number of stormwater
utilities can be expected to grow at an
increasing rate (Favero, 2014).
Stormwater utilities and enterprise programs
provide several distinct advantages over tax-
supported programs. Unlike taxes, utilities
(Favero, 2014):
Are more equitable in the sense that they
can be used to link fee levels to the
service benefits that payers receive;
Can provide an opportunity and
incentives for payers to reduce their fees
by installing BMPs on their properties;
Can be dedicated to stormwater services
only, and need not compete for
allocations with other programs and
obligations; and
Can be designed to obtain payments from
tax-exempt properties, such as churches,
hospitals, public properties, and schools.
In most states, stormwater utilities are legal,
although in some, they require special voter
approval. The legality of utilities has been
challenged in courts of law, but when the
utilities meet certain legal standards, almost
invariably their lawfulness has been upheld.
The operative legal standards are: 1) the fees
charged must be fair and reasonable; and 2)
the fees must bear a substantial relationship
to the cost of services and facilities
(American Public Works Association, 2003).
Structuring user fees is a technical effort that
involves considerations of the bases for fees,
fee levels, approaches to different types of
property, exemptions, and credits. Of course,
the process becomes perhaps more technical
when coupled with the formation of a public-
private partnership. Generally, however,
experiences across a variety of utilities and
documented by the American Public Works
Association (2003) provide guidelines for
structuring fees. The guidelines are that fees
should:
1. Be tied in a reasonably accurate and
technically defensible manner to a
measure of the impervious area or other
indicator of runoff volumes from
property parcels;
2. Utilize an accurate database for
determining charges and preparing bills;
3. Distinguish among classes of properties
such as residential, commercial, and
industrial - to reflect differences in
stormwater services they require;
4. Distinguish within classes to set fees in
proportion to the contributions that
parcels make to the total runoff generated
by their class;
5. Be legally and politically acceptable;
6. Provide a procedure for appealing
charges;
7. Be flexible in the sense that they can be
modified with a reasonable amount of
effort;
8. Generate adequate revenue to meet
program costs; and
9. Require no more than reasonable
expenses to implement.
When forming a stormwater P3, each of these
guidelines must be considered in terms of
how fees will support the partnership and
conversely, how the partnership will impact
the local community's program goals and
requirements. How these guidelines are
interpreted will vary thereby reflecting local
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community values and unique P3 structures.
In short, there is not a one-size rate structure
to fit all communities (Favero, 2014).
Benefits of Fee-Based Financing
By establishing storm water fees,
communities can realize multiple financing
benefits, including:
Sustainable revenue flows: Most
importantly, fee-based financing systems
establish consistent revenue flows
thereby ensuring support for capital
investments and long-term operations and
maintenance of stormwater systems. In
addition, the establishment of stormwater
utilities results in the reorganization of
stormwater activities at the local level,
which in turn creates program
efficiencies.
Reduced cost of capital: Codified
revenue flows result in higher credit
ratings and more favorable borrowing
terms for local governments. This in turns
creates incentives for private investment,
specifically through P3 structures.
Innovative financing mechanisms
targeting the private sector: Fee-based
systems allow communities to establish
innovative financing mechanisms that
can ultimately incentivize engagement by
private landowners, investors, and project
managers, including:
/ Direct owner funding from cash or
from financing made available by
traditional creditors where project and
performance risk resides with the
owner.
S Third-party off-balance sheet
financing whereby a project
developer takes the project,
performance and operating risks in
exchange for annual payments
representing a portion of the
estimated fee savings.
/ Application of the Property Assessed
Clean Energy ("PACE") financing
model that involves non-recourse
debt financing by a sponsoring
municipality that is secured and
repaid by an assessment on each
property's GI improvement.
S On-bill financing sponsored by water
and sewer utility and/or third-party
investors where on-bill collections are
used to repay the sponsor's project
financings (U.S. EPA, 2014e).
Enterprise Fund Accounting in a P3
Environment.
A stormwater utility relies on an accounting
system or process known as an enterprise
fund. An enterprise fund is a form of
accounting that utilizes a separate fund or
cost center for a specific purpose (Wayne
County, 2014). Revenues generated within a
specific department (e.g., a stormwater
program) are generally sustained by
enterprise funds. Under enterprise
accounting, the revenues in expenditures of
services are partitioned into separate funds
with individual financial statements, rather
than commingled with the revenues and
expenses of all other government activities.
Common types of enterprise funds are public
utilities including drinking water,
wastewater, trash disposal, and increasingly
stormwater management.
Traditionally, establishing an enterprise fund
does not create a separate or autonomous
entity from the municipal government
operation. The municipal department
operating the enterprise service continues to
fulfill financial and managerial reporting
requirements like every other department.
However, P3 structures can often result in
more autonomous reporting, accounting, and
financing systems. Exactly how autonomous
these new programs become will depend on
the community, the specific program and
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financing needs. It is essential, however, that
each new P3 address key programmatic,
revenue, and cost issues when negotiating
and establishing stormwater P3 programs,
including:
Revenues: Similar to any operating
department, it is essential that potential
public and private partners effectively
estimate and determine revenue and
anticipated revenue requirements. As
discussed above, these revenues will
primarily be based on stormwater user
charges and fees. Enterprise revenues are
often required for use in support of the
expenditures of the enterprise fund only,
rather than to support ongoing municipal
operations or subsidize the general fund.
However, this restriction varies from state
to state. In some jurisdictions, enterprise
revenue can be transferred to the
community's general fund with the
support of the appropriate governing
bodies. The decision to restrict enterprise
revenues to the enterprise expenditures
has a direct impact on potential P3
structures and the engagement and
application of private capital. Part of the
role of the private sector in P3 structures
is to help mitigate program and financing
risk. However, as risk goes up, the cost of
capital goes up, and the required
compensation to the private firm
increases. One of the best ways to reduce
financing risk, thereby reducing the cost
of capital and long-term implementation
is to codify revenue streams and restrict
them to enterprise activities.
Finally, an important consideration for
establishing stormwater P3s will be the
relationship between the public and
private partners in generating and
allocating program revenues. Though
there are many examples of private firms
or partners managing and administering
revenue generation and allocation
privately managed toll roads for
examplethe use of P3s in a stormwater
setting is in its nascent stages and it is
unclear whether or not private entities or
firms will be appropriate for actually
establishing and collecting fees. This is an
especially important issue in
communities where the application of
stormwater fees is still relatively
controversial. It is likely that in the short
term, the responsibility for establishing
and adjusting fees will remain with local
governments; it is equally likely that that
role will be transferred to private firms in
certain communities in the future.
Costs: The costs associated with
operating a stormwater enterprise fund
and the associated P3 vary; and
encompass a broad spectrum of
administrative, environmental, legal, and
capital functions. These costs include
direct costs, indirect costs, employee
benefits, legal and borrowing costs, and
capital expenditures. All of these
programmatic cost requirements must be
considered when negotiating the P3
structure. For example, if a private firm
will be responsible for capital
investments as well as long-term
operations and maintenance, many of the
direct, indirect, and even capital cost
requirements will be the responsibility of
the private firm. This, of course, creates
an opportunity for significant program
efficiency by transferring these
responsibilities to firms that are more
equipped to establish cost efficiencies
than those associated directly with the
enterprise fund.
The Advantages of Enterprise Fund
Accounting and P3 Structures.
A community may account for a certain level
of services in the general fund, special
revenue fund or an enterprise fund. The
advantages of using an enterprise fund rather
than the other two methods, especially in
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regards to establishing P3s are potentially
significant.
For example:
Demonstrate total cost of service: With
all the direct, indirect and capital cost of
providing the service in a consolidated
fund, establishing P3-based enterprise
programs will enable communities to
identify the true cost of providing a
service, in this case, stormwater
management.
Provide useful management
information: With the consolidation of
revenues and the cost of services and
information on the operating performance
(positive or negative) of the fund, public
and private entities will have useful
information to make decisions on user
charges and other budgetary items. The
community will be able to analyze how
much the user fees and charges support
the services, and to what extent if any tax
levy or other available revenues are
needed to subsidize the enterprise fund
and the P3. The community will also be
able to include the fixed assets and
infrastructure of the enterprise as assets in
the financial statement and recognized the
annual depreciation of these assets.
Retain investment income and surplus:
Unlike services operating in the general
fund or a special revenue fund, all
investment earnings and any other
operating surplus is retained in the
enterprise fund rather than returned to the
general fund at year-end. In addition,
many P3s establish provisions for
ensuring the cost savings generated
through efficiencies are invested back
into stormwater management programs.
Once a surplus is certified as available
(similar to free cash), it may be used to
fund operating, capital, or debt service
costs associated with the enterprise.
Provide better ability to implement
capital improvements: P3 structures and
enterprise funds will potentially result in
better service to the community, and will
enable public leaders to better plan for
and implement capital improvements,
because these needs can be forecasted and
integrated into the long-term financial
management of the enterprise.
Creatir ฆ. ' 'encies a
Finane wation: State
Revolving Funds and Grant
Programs
Though revenue generation is the foundation
of stormwater financing systems, as well as
stormwater P3 structures, there are other
mechanisms and resources that have the
capacity to reduce program costs, create
efficiencies, and accelerate program
investments. Two specifically are important
to new stormwater programs: State
Revolving Funds (SRF) borrowing and
environmental grant programs.
Scenai aging Private
Investment through t
Program
One of the more interesting financing
opportunities available to new local P3
partnerships is the Clean Water State
Revolving Fund (CWSRF). Specifically,
there are unique opportunities for the
CWSRF to be used to leverage private
investment, especially through the
establishment of formal public-private
partnerships, in support of green
infrastructure programs and projects in urban
communities.
The CWSRF is the Federal Government's
largest water quality-funding program.
Although the CWSRF program has been
most closely associated with supporting local
wastewater infrastructure investments, SRF
funds are increasingly being used to finance
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other water quality efforts and programs,
including nonpoint source pollution
reductions and green infrastructure
improvements. As a result, more than $3.8
billion in CWSRF funding has supported
projects such as septic conversions,
agricultural best management practices, and
sanitary landfill construction and
improvements. As the local need for urban
storm water management financing tools
continues to build, the CWSRF will become
an even more important financing vehicle.
CWSRF Financing Flexibility
Since its establishment in 1988, the CWSRF
has funded more than $90 billion in water
quality infrastructure projects. These
investments have taken a variety of forms,
including (Code of Federal Regulation,
2010):
Project Loans: the most common
application of the SRF program has been
the use of subsidized infrastructure loans
to communities and utilities. Specifically,
SRF programs offer interest rates at or
below market rates, with some offering
interest-free loans.
Purchase of Debt or Refinance: SRF
programs may purchase or refinance a
community's existing infrastructure-
based debt. This program is targeted to
disadvantaged communities.
Loan Guarantees and Insurances: one
of the most potentially innovative uses of
the SRF program is the use of credit
enhancements or loan guarantees. SRF
programs can issue loan guarantees (often
referred to as credit enhancements) or
insurance; the result is improved access to
credit markets access and/or reduced loan
interest rates.
The benefits provided by the SRF program,
coupled with the fee-based financing
systems, can create incentives that can
effectively incentivize more effective private
engagement and participation in stormwater
financing systems. For example, SRF
programs nationwide generate significant
cash flows every year that could be used to
establish innovative loan guarantees for
urban stormwater management and green
infrastructure projects. Specifically, the
innovative private sector financing
mechanisms described above, including
PACE financing and on-site water quality
mitigation could be effectively incentivized
and financed through an SRF credit
enhancement or loan guarantee program.
(U.S. EPA, 2014e). In addition, the use of P3
structures where private capital is the
foundation for stormwater investments would
result in significant leveraging of public
resources, both through the SRF program and
local stormwater utility fees and revenues.
Scenai " list
throug* jeii : " Tarns
In the long-term, local stormwater financing
efforts must be supported through local
revenue tools and resources, either through
general fund taxes, or better yet, stormwater
utilities and enterprise programs. However,
grant programsfederal, state, and
philanthropicremain popular at the local
level and are often the focus of initial
program development efforts. Although a
fundraising strategy will never be sufficient
to support stormwater programs in the long-
term, they can be very effective at both
launching nascent programs and advancing
innovative new approaches for addressing
stormwater and green infrastructure efforts.
P3s create a very effective opportunity for
leveraging grant resources.
The majority of public grants, specifically
those supported through federal programs,
are designed to advance new and innovative
ideas and approaches for addressing
environmental and social issues. In addition,
the grants are designed to leverage non-
federal resources as a means of
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demonstrating the commitment of multiple
institutions the project outcomes. P3
stormwater programs, especially those that
are predicated on private financing, create
tremendous opportunities to leverage public
dollars with private investment. As a result,
communities with established P3 structures
will presumably be well positioned to
receive grant funding. Though there are
myriad of grant opportunities that can
potentially support local stormwater
management in general and P3 programs
specifically, three are uniquely important:
Clean Water Act Section 319 Grant
program; Environmental Justice Grants;
and, the Transportation Investment
Generating Economic Recovery, or TIGER
Discretionary Grant program.
Clean Water Act Section 319 Grant
Program
The 1987 amendments to the Clean Water
Act (CWA) established Section 319
Nonpoint Source Management Program.
Section 319 addresses the need for greater
federal leadership to help focus state and
local nonpoint source efforts, such as
stormwater management. Under Section 319,
states, territories, and tribes receive grant
money that supports a wide variety of
activities including technical assistance,
financial assistance, education, training,
technology transfer, demonstration projects,
and monitoring to assess the success of
specific nonpoint source implementation
projects (U.S. EPA, 2013b). Section 319(h)
specifically authorizes EPA to award grants
to states with approved Nonpoint Source
Assessment Reports and Nonpoint Source
Management Programs. The funds are used to
implement programs and projects designed to
reduce nonpoint source pollution (U.S. EPA,
2012a).
A state may use Section 319 funding for a
variety of activities, including urban
stormwater management programs. The
funding is often used to advance innovative
efforts to reduce nonpoint source pollution,
with a focus on fostering the development
and implementation of innovative approaches
such as pollution prevention, ecosystem
management, and community-based
environmental protection strategies.
Stormwater P3 programs would be uniquely
appropriate for this type of funding. In
addition, the 319 program requires non-
federal matching funds; as a result, support of
P3 structures through the 319 program would
provide significant leveraging opportunities.
TIGER Grant Program
Another potential opportunity for stormwater
P3 programs is the Transportation Investment
Generating Economic Recovery, or TIGER
Discretionary Grant Program, which
provides a unique opportunity for the DOT to
invest in road, rail, transit, and port projects
that promise to achieve critical national
objectives. Since 2009, Congress has
dedicated more than $4.1 billion for six
rounds to fund projects that have a significant
impact on the Nation, a region or a
metropolitan area (U.S. DOT, 2014).
The TIGER program enables DOT to
examine a broad array of projects on their
merits, to help ensure that taxpayers are
getting the highest value for every dollar
invested. In each round of TIGER, DOT
receives many applications to build and
repair critical pieces of our freight and
passenger transportation networks.
Applicants must detail the benefits their
project would deliver for five long-term
outcomes: safety, economic competitiveness,
state of good repair, livability, and
environmental sustainability (U.S. DOT,
2014). Clearly, stormwater P3s would
potentially address many of these issues,
especially for those communities where
transportation infrastructure is a critical part
of the stormwater infrastructure.
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Environmental Justice Small Grants
Program
Finally, the Environmental Justice Small
Grants Program provides an interesting
opportunity for communities establishing P3
structures to address critical social needs. By
definition, urban stormwater management
efforts focus on communities that have
traditionally been disenfranchised in a variety
of ways; effectively addressing stormwater
management needs creates a unique
opportunity to allocate resources in
communities that have often been overlooked
in regards to infrastructure investments.
Though the Environmental Justice Small
Grants Program would not generate
significant revenue for implementing P3s, it
would provide communities with an
opportunity to ensure that P3s are being
developed in a way that addresses the needs
of all parts of the community. In effect, the
establishment of the P3, and potentially
leveraging these grant resources, creates an
opportunity to dramatically change how
disenfranchised communities engage in the
financing process.
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CBP3 Hypothetical Scenarios for
Mid-Atlantic Communities
The following are a series of sample
scenarios that illustrate the fiscal, regulatory,
and partnership approaches that communities
in EPA Region 3 may encounter. This section
was developed to show how a community
may solve some of the potential barriers and
demonstrate some of the benefits for partner-
ship approaches. A summary of these
scenarios is provided below in Table 10.
Table 10: Mid-Atlantic CBP3 Scenarios Summary Table
Scenarios Description
Scenario 1: Dedicated
Stormwater Fee
This scenario is based upon a community with a stormwater utility. An RFQ for a
P3 would be developed and tailored to fit the needs of the community. A new and
separate private entity ("CBP3 LLC") comprised of informed professionals from
both the P3 private party as well as the municipality would be established.
Scenario 2: VA Phase I
MS 4 -
No Dedicated Stormwater
Utility Fee
Non-fee revenue generation can come from a variety of sources, including general
funds, pay in-lieu of programs, and grant funding. This scenario is assumed to be a
large (Phase I) regulated stormwater community within the Commonwealth of
Virginia. Virginia has very favorable P3 enabling legislation that allows for a
variety of infrastructure projects (including non-transportation); and while being a
home rule state, Virginia has not provided such home rule authority to its local
governments, current legislation lias illustrated the applicability at the municipal
level, therefore, the proposal to use a CBP3 in this scenario is very favorable.
Scenario 3: PA Phase II
MS4s - Regional
Approach
While the topic of stormwater financing often focuses upon large. Phase I
communities, the need for funding goes beyond these approximately 700
communities and impacts the nearly 7,000 Phase II communities. Considering this,
the use of CBP3s by Phase II communities may be an attractive option, especially
in states with large numbers of Phase lis, such as Pennsylvania, which lias nearly
1,000 of these communities in their MS4 program. This scenario will consider the
adoption of a CBP3 by group of Phase lis in a coordinated fashion within
Pennsylvania.
Scenario 4: DC Phase I
MS4 and Stormwater
Retention Credit Trading
Program
To illustrate the flexibility of a CBP3, this scenario will focus on the unique
opportunities available for District of Columbia and private investment. A CBP3
could be established in the fashion described in Scenario 1. A difference between
this scenario and Scenario 1 is that a heavier emphasis could be placed on
leveraging the incentive-based programs available in the District for on-site
retention retrofits.
Scenario 5: DE Phase I or
II - PACE or SRF
Leveraging
This scenario investigation is based upon a hypothetical framework proposed in the
State of Delaware. Specifically, this framework is comprised of a conglomeration
of multiple funding sources and programs.
Scenario 6: Philadelphia,
PA - Grant Funding
Leveraging
In this scenario, there is recognition from the municipality that publicly controlled
land available for retrofits may be limited in the context of meeting regulatory
requirements. Further, this recognition respects that retrofits done on privately held
land reduces the burden on the public sector when addressing regulatory
requirements. The example used in this scenario is the Philadelphia Water
Department's Stormwater Incentives Management Program (SMIP) and Green
Acre Retrofit Program (GARP).
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Scenai
Dedicated StormwaU
A fundamental element for a CBP3 is a
dedicated revenue source. A leading frame-
work for consistent and dedicated revenue
targeting stormwater infrastructure investment
is a stormwater utility. Today, approximately
1,300 stormwater utilities exist (Western
Kentucky University, 2012; Black and
Veatch, 2013), which represents
approximately 17 percent of all regulated
stormwater entities. Considering the strong
complementary role a stormwater utility
would play in a CBP3, a "low-hanging fruit"
scenario would be a community with a
stormwater utility.
In this scenario, an RFQ would be developed
and tailored to fit the needs of the community.
The effort to develop this RFQ would be led
by a group experienced practitioners in
assembling P3 arrangements. The RFQ would
be based upon regulatory driver(s) as well as
input gained from key stakeholders, such as
watershed groups, religious institutions, and
business leaders. Teams comprised of
professionals with experience in leading P3
efforts, infrastructure finance, and technical
aspects (design, construction, maintenance) of
stormwater infrastructure would submit bids
based upon information provided in the RFQ.
After the preferred team was chosen based
upon a best-value metric (as opposed to
lowest-bid), negotiation efforts would occur to
address details not covered in the proposal
stage. Critical aspects of the RFQ would
include schedule, payment terms, and
monitoring requirements, among other details.
A new and separate private entity ("CBP3
LLC") comprised of informed professionals
from both the P3 private party as well as the
municipality would be established. The CBP3
LLC would gather funding from both parties
as determined in the negotiation effort. This
funding, along with the dedicated revenue
source (stormwater utility fees) would be
leveraged to attract low-interest loans from
private financing parties to underwrite the
CBP3 LLC.
The LLC would then start the work of putting
stormwater infrastructure in the ground
following the terms of the negotiated contract
by identifying areas of most cost-effective
treatment and prioritizing design and
construction efforts based upon the results of
these initial investigations. For areas located
in the public ROW, the LLC would likely
follow steps agreed upon in the contract to
install stormwater infrastructure. For
installations proposed in privately controlled
areas, the LLC would likely engage in public
outreach efforts and work with property
owners or community groups (e.g.,
homeowner associations) to convey the need
for stormwater infrastructure and ascertain
acceptance of stormwater infrastructure in
communities. The LLC may also leverage
any incentive-based programs the
municipality may provide to attract private
property owners in high-priority areas.
Capitol for these efforts would be taken from
the pooled funds from both the public and the
private partners, including funds from
underwriters.
Once in the ground, efforts to monitor
infrastructure performance would be based
upon negotiated conditions to ensure that
practices are providing services as needed.
Payments to the LLC would come from
stormwater fees collected over time and
would be based upon the availability of the
infrastructure to meet the conditions of the
contract (following the "availability
payment" paradigm forP3s). Ongoing efforts
would confirm the performance of installed
infrastructure over time through monitoring
efforts. Additional investments would
address infrastructure not meeting
performance requirements.
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Due to the ubiquitous nature of stormwater
utilities throughout most parts of the country,
a municipality with a stormwater utility in any
state with enabling legislation could apply to
this scenario.
Many of the steps laid out in this scenario
regarding the development of an RFQ,
selection of team, and negotiation of contract
are similar or the same as those associated
with other scenarios presented in this section.
Differences between those presented in
Scenario 1 and other scenarios will be
highlighted.
Scenario No
Dedicated Stormwater Util
While stormwater utilities represent the most
stable form of dedicating funding in the
stormwater sector, there have been
challenges to the formation of these entities
based upon issues such as equity of
legitimacy. For instance, some states or
localities regard the fees charged by
stormwater utilities as a tax based upon a
variety of legal and regulatory reasons
(MLive Media Group, 2014, St. Louis Today,
2014). In other instances, the use of
impervious cover as a basis for stormwater
fees has been deemed as unfair to certain
types of property owners who may incur
relatively high fees based upon the assertion
that other factors exist, such as soil type or
connectedness of impervious cover, which
are not captured in fee determination in most
cases (WEF, 2013).
For these reasons, and others not listed
here, the formation of a stormwater utility
may be statutorily impossible or politically
infeasible. As previously mentioned, less as
20 percent (20%) of regulated stormwater
entities rely on fee-based revenues, which
leaves the majority of these entities to use
other means to address funding needs for
stormwater infrastructure. Non-fee revenue
generation can come from a variety of
sources, including general funds, pay in-
lieu of programs, and grant funding. In
these instances, the revenue generated from
these frameworks can be considered as
dedicated funds if they are established to
pay for services directly associated with the
design, construction/installation,
operations and maintenance, and the
monitoring of stormwater infrastructure.
An example considered for this scenario is
the development of a dedicated funding
stream tied to property tax valuation (for
instance, five cents per $100 of property tax).
Proponents of this type of funding stream
point out that the administration of a
stormwater utility requires significant
overhead expense and property taxes are tax
deductible while utility payments are not
(Fairfax County, 2009).
This scenario is assumed to be a large (Phase
I) regulated stormwater community within
the Commonwealth of Virginia. Virginia has
very favorable P3 enabling legislation that
allows for a variety of infrastructure projects
(including non-transportation); and while not
being a home rule state may limit authority,
current legislation has illustrated the
applicability at the municipal level, therefore,
the proposal to use a CBP3 in this scenario is
very favorable.
The mechanics of this scenario are very
similar to Scenario 1 in terms of developing
an RFQ and negotiating a contract. It should
be noted that the PPEA legislation allows
specifically for local authority control, for
public sector to hire own technical and legal
consultants, and state legislature approval is
not required, all of which are favorable for P3
investments for stormwater (Brookings
Institution, 2011). A drawback of the PPEA
legislation is the lack of availability payments
(Wagner, 2011), which may limit the ability
for the public sector to limit risk in a CBP3
arrangement.
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Regarding leveraging private funding, there
is a potential that since the dedicated revenue
source being tied to a value (property
assessments) that has proven to be volatile in
the recent past may adversely impact the
ability to obtain low-interest loans. If this
does not end up being an impediment, the
framework regarding the establishment
would be the same or similar
to Scenario 1.
Scenario -
Regional Approach
While the topic of stormwater financing
often focuses upon large, Phase I
communities, the need for funding goes
beyond these approximately 700
communities and impacts the nearly 7,000
Phase II communities. Large communities
often have more resources and financial
capabilities than small- and mid-sized
communities. Considering this, the use of
CBP3s by Phase II communities may be an
attractive option, especially in states with
large numbers of Phase lis, such as
Pennsylvania, which has nearly 1,000 of
these communities in their MS4 program.
This scenario will consider the adoption of a
CBP3 by group of Phase lis in a coordinated
fashion within Pennsylvania. Benefits to an
aggregated approach would be the ability to
share resources and to address common
challenges. Considering the regulatory
landscape, it may be more advantageous for
grouping these communities together in an
"umbrella" or a watershed permit.
Another advantage would be for all
communities to have consistent revenue-
generating frameworks. For instance, all
communities may have developed a
stormwater utility based upon similar
attributes and generating consistent levels of
revenue. This would ease the ability of a
CBP3 LLC to shop for private funding, and
would place the LLC in a position of strength
when negotiating the terms of private
borrowing compared to a patchwork varying
revenue-generating frameworks. In terms of
developing support for a clear dedicated
funding source for stormwater infrastructure,
a community may wish to join with others to
realize the potential cost savings associated
with a CBP3 program but may not have a
utility or other similar program to provide
significant and consistent revenue dedicated
for stormwater infrastructure. In this
instance, the financial advantages of
leveraging dollars gained through a fee to
attract private dollars as part of a coalition of
other Phase lis might be a good selling point
to overcome opposition to the development
of a robust revenue-generating vehicle.
For a group of Phase lis with consistent
stormwater finance programs and regulatory
goals, the use of a CBP3 may be an attractive
option. The mechanics of establishing a
RFQ, selecting a team, negotiating a
contract, establishing a CBP3 LLC, and
launching/running a program are similar to
those presented in the previous scenarios.
However, the bureaucracy associated with a
coalition may provide unique challenges
during the various steps in the process of
establishing a CBP3 program. Strong
coordination would likely overcome this
challenge, so bureaucratic challenges
associated with establishing a multi-
jurisdictional CBP3 should not be
considered a barrier.
Perhaps the more significant challenge of
establishing a coordinated CPB3 program in
Pennsylvania is the lack of proper enabling
legislation, which currently is limited to
transportation projects. However, the
significant stormwater needs in a state like
Pennsylvania may provide the driver for
legislation that broadens P3 programs.
Considering that this type of legislation was
recently introduced in Pennsylvania, it is
conceivable to think that similar legislation
would be introduced again. The lack of home
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rule authority may impede the ability for local
governments to have the autonomy needed to
develop unique arrangements to address their
challenges. Further investigation is needed to
determine the ability for different types of
municipalities to engage in P3 arrangements.
Scenai " ha&
Stormwater Retention Credit
ling Program
To illustrate the flexibility of a CBP3, this
scenario will focus on the unique
opportunities available for District of
Columbia and private investment.
Drivers for stormwater infrastructure
investment in the District are the Chesapeake
Bay TMDL as well as the need to comply the
recently enacted MS4 permit requiring 1.2"
on-site retention for new development. In an
effort to find cost-efficiencies, the District
Department of the Environment (DDOE) has
established the Stormwater Retention Credit
program, which allows property owners and
site developers to generate Stormwater
Retention Credits (SRCs) by providing on-
site stormwater retention beyond those
required for respective sites. These credits
can be purchased (in an open market run by
DDOE) by developers who are required to
provide half of the requisite on-site with the
option to meet the remaining retention
volume through credits obtained through the
SRC program. Expectations are that this
incentive-based program will lead to high
amounts of retrofits in socio-economically
challenged and environmentally sensitive
areas. Beyond the SRC program, a
stormwater fee has been established with
credits/rebates given to those who provide
retention onsite.
A CBP3 could be established in the fashion
described in Scenario 1. A difference
between this scenario and Scenario 1 is that a
heavier emphasis could be placed on
leveraging the incentive-based programs
available in the District for on-site retention
retrofits. These strong incentive programs
may provide the interest needed for many
property-owners to allow a CBP3 to design,
construct, install, and maintain BMPs on their
property based upon a pre-determined
sharing of revenue generated based upon the
sale of SRCs. In this way, the CBP3 LLC may
act like a pseudo-Energy Service Company
(ESCO), which installs energy efficient
appliances and fixtures in return for a fee paid
by the property who realize a cost savings due
to reductions in energy usage (Bullock and
Caraghiaur, 2001).
Scenai : ' II -
feraging
This scenario investigation is based upon a
hypothetical framework proposed in the State
of Delaware. Specifically, this framework is
comprised of a conglomeration of multiple
funding sources and programs. As stated
previously, the Delaware P3 enabling
legislation is focused primarily on
transportation projects with some allowances
for other types of infrastructure investments.
The governing body required to approve of
Clean Water-sector P3s (CWAC) is the same
body that leads the Clean Water SRF program
in the state. This bridge of responsibilities,
along with other funding sources, may
provide an opportunity for the use of a CBP3
approach for stormwater.
There are significant efforts and costs
required to establish and provide initial
funding for a CBP3. In Delaware, this upfront
cost could be provided through the SRF
program. The use of SRF dollars for
stormwater and GI is on the rise, and has been
pioneered by communities such as Onondaga
County, New York (Syracuse) who have
successfully received SRF funding for
stormwater by grouping together GI projects
and illustrating the benefits of this investment
through technical analysis (NYS
Environmental Facilities Corporation, 2014).
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April 2015
A proposal to use a P3 framework for
stormwater infrastructure investment in a
community, based upon initial infusion of
capital from SRF dollars could be coordinated
and facilitated by the CWAC.
However, a CBP3 program requires a
dedicated funding source. As has been
detailed previously, a stormwater utility
program could provide this dedicated funding
source. It should be noted that some
communities in Delaware currently have a
functioning stormwater utility that include a
credit/rebate program to incentivize property
owners to construct/install stormwater
infrastructure voluntarily. Another option to
complement a user-fee based stormwater
revenue program, if fees provide an adequate
stream of dedicated funds or in lieu of a
stormwater utility program, is the use of the
Property Assessed Clean Energy (PACE)
program. This 2008 program has been adopted
through legislation in 31 states. Virginia,
Maryland, and the District of Columbia are the
only EPA Region 3 states with PACE enabling
legislation currently (PACENow, 2014).
PACE programs give local governments the
authority to establish financing districts.
Property owners may then fund energy-
efficient and renewable energy investments
with funding security by a tax lien on the
property with the owner repaying the money
as a special line item on the annual property
tax over a varying length of timeoften
between 5 and 20 years (PACENow, 2014).
Some PACE programs allow for water
conservation measures to be included; and in
other programs, the energy savings associated
with GI (e.g., green roofs) have been included
in PACE portfolios (NRDC, 2012). A study
focusing on the NoMA (North of
Massachusetts Avenue) business district in
Washington, DC and the ability to
successfully incentivize private land owners to
adopt GI on-site illustrated the utility of the
PACE program used in conjunction with other
incentive-based programs such as SRCs and
reduction in stormwater fees (District of
Columbia, 2011). If PACE enabling
legislation existed for Delaware, and other
financing programs were properly aligned
(CWAC approved of stormwater infra-
structure investment through P3 as well as
through the SRF program), there is a strong
possibility that a CBP3 could be successfully
implemented in a Delaware municipality. It
should be noted that Delaware has partial
home rule authority, which may provide
authority for local governments, but further
research is needed to determine if statutory
conditions would limit or complicate the
ability for local governments to adopt a CBP3.
As with Virginia and other partial and non-
home rule states in Region 3, this potential
barrier can be removed through targeted state
legislation specifically allowing for public
works projects to be included in the allowable
P3 investment projects defined in statutes, as
well as providing the authority for local
communities with stormwater infrastructure
investment needs, the autonomy to establish
CBP3s.
Scenai iladelj
nt Fundij weraging
A final scenario is the use of significant grant
funding associated with a municipal
stormwater program leveraged by a CBP3
program to incentivize on-site stormwater
infrastructure investment on private properties.
In this scenario, there is recognition from the
municipality that publicly controlled land
available for retrofits may be limited in the
context of meeting regulatory requirements.
Further, this recognition respects that retrofits
done on privately held land reduces the burden
on the public sector when addressing regulatory
requirements.
The example used in this scenario is the
Philadelphia Water Department's
Stormwater Incentives Management Program
(SMIP) and Green Acre Retrofit Program
(GARP). These programs will fund retrofit
104
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April 2015
programs that are cost-effective while
capturing and retaining at least the first inch
of runoff. Eligible projects for SMIP can be
located within the combined or separate
sewer areas, and are limited to projects
costing $100,000 per impervious acre or less
and has no minimum project size. The GARP
program is similar; however, it is confined to
the combined sewershed and has a maximum
per acre cost of $90,000 and a minimum
project size of 10 acres. The reason for this
difference is to accelerate the "greening" of
impervious acres within the combined
sewershed by capturing the cost efficiencies
related to project aggregation. By combining
potential retrofit projects together or
identifying large properties who can benefit
from retrofitting, the cost associated with
identifying, design, permitting, and
administration (commonly known as
"transaction costs") can be spread across
multiple projects and area (NRDC, 2012).
Commonalities between the program is that
projects that are shown to control runoff
generated in the public ROW are given
preference, and that projects awarded grant
funding are also eligible for a reduction in
stormwater fees through the Philadelphia
Water Department (PWD) stormwater credit
program. Rewarding more cost-effective
retrofit projects reduces overall costs
associated with program retrofits.
An established CBP3 entity could utilize this
type of robust incentive-based grant program
by working with property owners to help
identify eligible projects. As previously noted,
one type of transaction cost is searching for
and identifying cost-effective projects. An
established CBP3 entity would be in the
community meeting with potential project
owners on a large scale as well as engaged in
robust analyses to identify retrofit projects
making this entity a welcomed complement to
a SMIP or GARP-like program. Additionally,
private property owners would be appreciative
of a CBP3 who may identify their property as
an eligible project considering that work
would be done at no cost to them and they
would receive the on-going benefit of a
reduced stormwater fee. The dedicated
funding source for this scenario is a storm-
water utility.
105
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April 2015
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