Blended capital for nature-based

infrastructure

Oshani Perera17 May 2018

The fundamentals on blended capital for nature-based infrastructure:

• There are ‘infrastructure services’ provided by nature-based solutions. They are derived from valuation of ecosystem services.

• Investors and policy makers have little appreciation for the value of nature based infrastructure.

• Valuing nature-based infrastructure in economic and financial terms, is the first step towards crowding in private capital holders.

• Valuing nature-based infrastructure also requires that we compare the value of these services with grey infrastructure alternatives.

Nature based infrastructure includes:

hybrid infrastructure, also referred to as grey-green

infrastructure that combines engineered and nature-

based solutions.

Natural ecosystems that can be conserved, rehabilitated

and maintained in a productive state to deliver a range

of ecosystem services and improve resilience against

extreme weather.

Why is Blended Capital important for nature-based infrastructure ?

Public debt is growing to unsustainable levels. This is worrisome, especially if we are to prepare for a global economic downturn in 2020.

Reducing public budget deficits is the biggest priority for all governments.

Why is Blended Capital important for nature-based infrastructure ?

Governments cannot afford to fund the infrastructure deficit that is apparent in all countries.

If we build grey infrastructure to address this deficit, we will be well beyond the 2 degree warming scenario. We have to de-carbonise, ‘de-meterialise’, build less and do more with less. Nature-based solutions offers a solution.

Why is Blended Capital important for nature-based infrastructure ?

Governments are hard- pressed to fund the protection, regeneration and maintenance of nature-based assets. They see this spending as a waste of scare public money that might be better spent of other urgent priorities.

Pelly’s LakeStephenfield Resevoir

Manitoba, Canada

Valuing nature-based infrastructure

Results from the

Sustainable Asset Valuation or SAVi

https://savi.iisd.org/

IISD’s Sustainable Asset Valuation

(SAVi) demonstrates why sustainable

infrastructure can deliver better value-

for-money for citizens and investors.

SAVi is simulation-based

assessment methodology that

calculate the costs of

environmental, social and

governance risks and externalities.

SAVi combines systems dynamics

and project finance simulation.

SAVi on

Stevenfield

Reservoir

Manitoba,

Canada

Client:

• Manitoba Sustainable Development.

• Manitoba Infrastructure.

Province is overrunning budgets in managing the

repercussions of over irregular rainfall, floods, droughts,

artic forest fires.

Province is seeking to reduce spending on infrastructure

services: water storage, irrigation and municipal water

supply.

We used SAVi to:

• Value the ecosystem services

• Calculate the capital and operating costs of building grey

infrastructure to provide the same services

Summary of SAVi Anlyses on Stephenfield Resevoir

Discounted results Undiscounted results

Category Unit (1) Baseline (2) Climate

change (2) vs (1) (1) Baseline

(2) Climate change

(2) vs (1)

Direct revenues and cost

Revenues from water licences and tourism (from Table 6)

CAD2019 678,413 678,413 0.00% 1,356,793 1,356,793 0.00%

O&M cost of the reservoir (from Table 6)

CAD2019 256,005 256,005 0.00% 160,001 160,001 0.00%

Value of agriculture-related services

Value of agriculture-related services that in turn are linked to irrigation and water storage (from Table 7)

CAD2019 315,419,939 306,590,138 -5.52% 625,205,933 607,812,652 -2.78%

Capital and O&M costs required to build new grey infrastructure to provide the same services currently delivered by Stephenfield Reservoir

Irrigation services (from Table 7)

CAD2019 5,417,056 5,432,542 0.28% 5,718,888 5,734,962 0.28%

Water storage (see Table 7)

CAD2019 208,820 232,765 11.47% 208,820 232,765 11.47%

Comparing the costs of Stephenfield Reservoir with new grey infrastructure that would provide the same volumes of services, 2019 and 2050. All costs are cumulative

The SAVi valuation on the costs, benefits and avoided costs of Stephenfield Reservoir, 2019 to 2050

SAVi on

Pelly’s Lake

(wetland)

Manitoba,

Canada

Client:

La Salle Conservation District

set up by

• private land owners

• municipalities

• provincial government of

Manitoba.

Valuation of Ecosystem Servcies Provided by Pelly’s Lake

Discounted results Undiscounted results

Benefits and ecosystem valuation Unit

(1) Baseline

(2) Climate Change

(2) vs (1) (1.1)

Baseline (2.1) Climate

Change (2.1) vs (1.1)

Direct revenues and cost

Cattail value added CAD2019 97,546 97,546 0.00% 879,534 879,534 0.00%

O&M cost CAD2019 176,416 176,416 0.00% 342,717 342,717 0.00%

Added benefits

Nutrient removal CAD2019 47,497,559 47,497,559 0.00% 92,271,379 92,271,379 0.00%

Carbon sequestration CAD2019 11,925,298 11,925,298 0.00% 23,167,064 23,167,064 0.00%

Flood protection CAD2019 743,279 1,064,505 43.22% 1,386,960 2,157,886 55.58%

Captial Costs of building grey infrastructure provide the same services as Pelly’s Lake

Wastewater CAD2019 13,884,979 13,807,278 -0.56% 25,519,747 25,323,302 -0.77%

Carbon sequestration CAD2019 23,104,923 23,104,923 0.00% 23,104,923 23,104,923 0.00%

Comparing the capital and operating costs of built or grey infrastructure to provide the services currently provided by Pelly’s Lake. (cumulative values from 2019 to 2050)

Breakdown of costs and benefits of Pelly’s Lake (cumulative values from 2019 to 2050)

The Challenges in crowding-in blended capital

Hybrid infrastructure: We face difficulties in forecasting and guaranteeing the performance of the nature-based components in the overall design. We need more mature track records. For example, take the case of an integrated flood defense solution that consists of man-made structures and rehabilitated mangroves. Will the civil engineered component have much more predictability in terms of costs, construction time and performance than mangrove rehabilitation?

Natural ecosystems: These assets can reduce or avoid future spending on a range of public infrastructure/services. We need more comparable forecasts and guarantees on performance. We also need track records.We have just discussed examples from Manitoba. How can future savings can be ‘treated’ as revenues and cashflows ?

Ideas for blended capital to finance nature based solutions: Outcome based financing arrangements or “ Pay for Success”

Examples: environmental and social impact bonds

What we need to work on: • Price the outcomes. • Structure the economics. • Develop evaluation model• Legal instrument to enable Pay for Success. Example: USA Social Impact

Partnership Pay for Success Act

Ideas for blended capital to finance nature based solutions: Energy performance contracting

Examples: energy service companies or ESCOs.

What we need to work on: • Price the future savings • Develop tack records on performance that are comparable and

predictable.• Develop monitoring and verification protocols. • Structure the economics. • Develop the evaluation model.• Need legal instrument to service contracting.

Ideas for blended capital to finance nature based solutions: Fees and trading of credits

Examples: storm water markets, carbon markets

What we need to work on: • Explore the appropriate legal structure for the utility or special

purpose vehicle who might issue the credits.• Determine who should pay a fee.• Pricing the fee.• Making the market.

Thank you

Oshani Perera, operera@iisd.org

Check out the Sustainable Asset

Valuation at

https://savi.iisd.org/