Droughts, floods and toxic runoff are overwhelming the country’s aging water infrastructure.
The $50 billion in funding earmarked for water in the 2022 bipartisan infrastructure law is the single largest amount of federal funding for US water infrastructure – ever. Communities have an unprecedented opportunity to upgrade their facilities to improve the health of citizens, build climate resilience, lower greenhouse gas emissions and lay the foundation for economic growth.
“Water,” says Radhika Fox, who as assistant administrator of the Environmental Protection Agency’s water office fought for the water funding in the infrastructure bill, “is one of the best bets that we can make as a nation.”
But even that historic funding, which includes $15 billion for lead pipe removal and $50 million for technical assistance to help communities access the funds, is just a drop in the bucket, so to speak. The EPA estimates some $630 billion is needed over the next two decades to repair and replace clean water and wastewater infrastructure nationwide. That’s a 33% increase, not including inflation, from the last such survey it conducted in 2015.
Larger cities with financial resources are able to tap municipal bond markets and state and federal funds. Smaller cities, rural towns and communities of color often struggle to access those funds — when they try at all.
Such communities “lack the technical, financial and managerial capacity to be able to access and compete for these dollars,” says Fox. “That’s also a huge opportunity for the impact investing community.”
As water urgency grows, foundations, green banks, intermediaries and private investors are devising innovative funding mechanisms to address the obstacles that deprive disadvantaged communities of badly needed capital to undertake water upgrades.
Fox is advising the Robert Wood Johnson Foundation and others on how to leverage “the tools of impact investing to help prime the pump in some of these communities, so that then they are able to unlock this higher level of resources from the public sector.”
On ImpactAlpha’s Call No. 63 this Thursday, Fox will join Rogelio Rodriguez of Water Finance Exchange and Shaun O’Rourke of Quantified Ventures to discuss how they are blending public and private capital to advance water health and equity in underserved communities. (RSVP here!)
Filling gaps
WaterFX is a nonprofit intermediary that partners with smaller communities to help them build their capacity to finance water and other essential infrastructure. “We work with them to show there are ways to finance this infrastructure affordably,” says Rodriquez. The company, made up of longtime water practitioners, creates financing vehicles to fill gaps it encounters in the field.
In many small communities, projects may be too modest — $10,000 or $20,000 to fix a pump, say — for conventional water financing options. So WaterFX has created a “disadvantaged community advancement fund,” that addresses those smaller needs.
Communities in stronger financial positions may need funding to cover engineering studies and other pre-development needs. For that, WaterFX developed a low-interest pre-development loan fund.
With funding from the Robert Wood Johnson Foundation, WaterFX is now exploring a fund that would pool impact and philanthropic capital to provide bond insurance for small communities. Such insurance is a mainstay for big issuers, but not for disadvantaged communities. (disclosure: RWJF sponsors ImpactAlpha’s muni impact beat).
The Infrastructure and Jobs Act has sparked excitement in communities large and small around water infrastructure, a typically unsexy area. But the funds will not last forever.
“How do you use this excitement around funding to get communities a little more situated so they can access capital from a bank or the capital markets or municipal bonds,” asks Rodriquez. “The insurance product is a way to do that.”
Green banks
The infrastructure law has produced the biggest pot of money for water funding, but the Inflation Reduction Act, a climate-focused law passed the same year, also presents opportunities.
The IRA’s $27 billion Greenhouse Gas Reduction Fund, for example, sets up a distributed green lending network for community solar, building energy retrofits, EVs and other climate-friendly projects.
Less known: clean water infrastructure projects are eligible as well. Projects could range from green infrastructure such as rain gardens and urban tree canopy and projects that reduce harmful run-off to emissions reduction technology for water utilities and efficiency measures to reduce water usage.
Washington, DC-based Quantified Ventures is working with a half-dozen green banks on building water programs and with communities to tee up investable water projects.
“We see green banks as being the catalytic opportunity to really move money into non-traditional water projects such as nature-based solutions,” said Quantified Ventures’ O’Rourke.
With the Coalition for Green Capital, PRE Collective, and support from the RWJF, the organizations have made $50,000 grants to six green banks to help them develop programs for deploying GGRF funds for clean water infrastructure projects in under-resourced communities.
Groundswell Capital is focusing on water conservation in Arizona, an already water-scarce area in the grip of a prolonged drought. Hawai’i Green Infrastructure Authority and Missouri Green Banc will tackle wastewater challenges.
The Connecticut Green Bank, DC Green Bank, and the Solar and Energy Loan Fund, or SELF, will focus on financing stormwater management. SELF, for example, is financing consumer loans for septic-to-sewer conversions and upgrading the private lateral lines that connect homes to sewer systems. It is working in partnership with Martin County as it upgrades its sewer lines.
Water system upgrades like these can reduce the amount of wastewater flowing to treatment centers, reducing costs and greenhouse gas emissions (drinking and wastewater treatment typically account for the biggest chunk of a municipality’s carbon footprint).
There are literally billions of dollars of projects that need to be financed,” SELF’s Doug Coward tells ImpactAlpha.
Quantified Ventures, with support from the Walton Family Foundation, is also working with the Colorado Clean Energy Fund, the Illinois Finance Authority, and Finance New Orleans on green infrastructure programs.
Building a pipeline
GGRF funds and green bank lending can complement traditional public finance —for example, financing renewable energy as part of a broader utility project, and lessening the overall bond burden.
To assess demand and build a pipeline of less traditional green projects, Quantitative Ventures issued a public request for nature-based projects in water, forestry and other areas that might be GGRF-eligible. The response — some $4.6 billion in projects from companies, nonprofits and municipalities — was off the charts.
Quantified Ventures has begun work with an initial batch of projects. Given the demand, it is looking for additional impact-oriented funders. As it works with the project developers, the firm is refining a methodology that it hopes can streamline the due diligence process for water and nature-based projects.
“We’re thinking of it as kind of a FICO score for these kinds of projects,” explains Quantified’s Tee Thomas. “We think that there are models that can make this feel less hard and less bespoke.”
Regional strategies
It’s not all about capital. Technical assistance is often a prerequisite for water projects — one reason why at the EPA Fox insisted on a $500 million TA carveout. And regional collaboration — often around a shared watershed — and governing structures can pave the way for water and other infrastructure to get funded.
In Presidio County, a bone dry region in West Texas comprising the cities of Presidio and Marfa and a smattering of unincorporated colonias, WaterFX convened a 38-member steering committee to brainstorm water projects from basic pipes to rain catchment and green infrastructure to address the county’s water needs.
WaterFX helped them to apply for state and federal funding for some $27 million worth of projects. The steering committee has evolved into a more formalized, community-led utility board.
“We encourage regional partnerships because we know that communities, when they get competitive for water resources, it’s a zero sum game.” Rodriguez.
Communities in Alabama’s Black Belt, a region known for its rich soil and majority Black population, lacks a centralized sewage treatment system, and is ill suited for septic tanks. So a coalition of community groups and universities are devising a decentralized wastewater treatment system that revolves around clusters of households. WaterFX is helping to create a governance system, potentially akin to that in Presidio, and helping think through sustainable financing options.
Towns have also banded together on bond issuances to divvy up capital expenditures for shared water infrastructure.
It requires a holistic approach. “We make sure that we help the community see the connection between water and other issues that are so important to them, such as essential infrastructure like broadband and power, but also job creation and housing,” says Rodriguez.
Adds his WaterFX colleague Hank Habicht, “Water is a linchpin or an enabler for economic development, because if you don’t have the water infrastructure, you’re not going to attract development.”
