Building a "Blue Bank" for Regional Water Investment
Investment in water solutions in the Western United States continues to be dominated by traditional finance (such as bonds, low interest public loans) for “grey” municipal infrastructure; and early-stage, private equity-driven investment focused on high-potential-return strategies (frequently in emerging technologies or the purchase and transfer of water rights). Neither of these investment strategies are contributing significantly to meeting the challenges facing the water-stressed Colorado River Basin, and in the limited situations where reallocation of water is feasible, “buy and dry”-focused investments in marginal agriculture can have adverse consequences for rural communities.
In an effort to drive innovation in this space, a number of recent efforts have explored options to develop private impact investments that seek to address environmental and social challenges while creating attractive financial returns. Although these efforts have produced some successful examples of impact investment, to a large extent these efforts have demonstrated that the arena of sustainable water finance remains in an early stage of market development and that most emerging strategies have not yet evolved to the point where they can readily support or attract market-rate private capital, due to factors like difficulty in meeting investors’ targeted fund/project size, high transaction costs, low margins, and difficulty in quantifying ecosystem benefits.
One of the most significant investigations undertaken in the context of water management solutions was the Liquid Assets Project, a joint investigation among our parent firm, Culp & Kelly, LLP, Encourage Capital, Trout Unlimited, and other partners. This effort investigated a number of potential strategies, building on foundational research into potential water-based impact investment in the 2015 report Liquid Assets: Investing for Impact in the Colorado River Basin. During this investigation, we identified a large number of potential strategies that could be developed into at-scale, demonstration investments if they were supported by low-return, relatively risk-tolerant capital to move them through the development phase. Simple grant funding to develop concepts and smaller pilots—while valuable as part of a broader development process—will not in itself be sufficient, as the direct leap from a pilot project to market-rate, larger-scale investment is likely always going to be too vast a gap for a single source of funding to close.
To address the financing gap and innovation challenges, and working with our parent firm, Culp & Kelly, LLP, we have proposed the creation of a Colorado River Blue Bank, (“Blue Bank”), which builds from green bank efforts in the climate change mitigation and energy sectors and revolving loan funds in the private sector as well as the at the state level. Recognizing that the development of such an institution for the Basin would take a significant amount of time and investment, we are proposing to develop an initial pilot-scale Blue Bank, as part of a phased approach to developing a larger regional bank.
The pilot-scale Blue Bank would initially focus on supporting approaches that have already been identified as promising strategies, including:
• Restoration of natural storage infrastructure and range lands;
• Commercial and industrial water conservation in major municipalities;
• Supporting conservation in smaller municipalities by addressing system losses and associated non-revenue water; and
• Financing the creation of new processing cooperatives for higher value, lower water use crops.
Through previous work and investigations, we have already identified specific candidate projects in each of these areas that could be supported by an initial deployment of capital from the Blue Bank, using criteria such as committed on-the-ground partners, scalability, measurable environmental outcomes, transaction costs, and potential for economic return to allow for establishment of revolving funds with concessionary capital. If the initial phase is successful, the Blue Bank will work to bring patient private capital into these projects, utilizing a blended capital approach where private capital would be leveraged by low-interest and/or first-loss capital provided by the Blue Bank, and to develop regional analytics that will better evaluate water-related risks and the outcomes of funded projects.