Natural-Resource Investing Gets a Federal Jump Start
The new Natural Resource Investment Center at the United States Department of the Interior (DOI) is making strides toward using market-based approaches and innovative public-private partnerships to tackle natural resource and conservation issues.
For years, the nation has been slowly coming to terms with aging water infrastructure, dealing with water shortages in the West, and attempting to revamp species and landscape conservation efforts.
This center is the newest actor coordinating large-scale private capital into a sphere that has historically been funded by the government.
To balance these issues against modern day urbanization pressures, population shifts, climate change, and constrained budgets, Secretary of the Interior Sally Jewell launched the center in December 2015.
The center was inspired by President Obama’s infrastructure and economic growth-focused Build America Investment Initiative. It seeks to facilitate the formation of deals between stakeholders to attract private capital into natural resource and conservation investing.
The center emphasizes increasing investment in critical water infrastructure, facilitating water conservation and transference, and conserving species and habitat.
What does the center accomplish?
The vast mandate to pursue these goals was handed to Jeffrey Klein, who was hired as the center’s first executive director in March. He said he hopes to create pragmatic, economic solutions to the country’s natural-resources conundrum. Potential projects that target this mandate, mostly in the West, are already being created with multiple stakeholders across all levels of government and in the private sector.
Klein said the center’s “role is that of a catalyst and a convenor,” not a funder supporting the resulting projects.
The traditional approach to financing water and conservation agendas through a regulatory regime in the form of government grants and loans needs to be revamped, Klein said. “In the future, economics need to drive where the financing comes from, because there is capital available in the private marketplace.”
How are projects selected?
Since the center is new, almost all project details are still kept under wraps. Klein said he is largely selecting projects based on his 30 years of business leadership experience. He is assisted by Martin Doyle, senior conservation finance fellow; Thomas Iseman, deputy assistant secretary for water and science; and Jim Lyons, deputy assistant secretary of land and minerals management. Together, they use rigorous selection criteria for all projects and partnerships.
The center assesses the core business purpose of any proposed project to determine whether it aligns with the goals. They look for bona fide entities that have private sponsorship and have a proven track record of success.
Equally as important, Klein said, is whether a project is innovative, sizable and precedent-setting. “This is very important to the investor community.” Managing these expectations is extremely necessary for securing private capital.
How can success be determined?
Beyond the concerted efforts in choosing the right projects to focus on, the center has to consider measures of success once projects are underway. That may not be any easier than selecting the projects.
Klein said the Obama administration supports these initiatives. Future administrations may not be as receptive to the center’s goals and activities. “We are going at a great rate of speed on projects that often have very long gestation periods.” He said he doubts the center will be able to reach important milestones or close many projects before the new administration begins.
When asked about project time periods, Klein said, “It really ranges. As an example, the first project that I worked on, which was an existing reclamation project, had been initiated during the Kennedy administration. It is still not completed.”
The fact that these are all multi-stakeholder deals complicates the decision-making process of measuring success even further.
“Almost every transaction that we work on has a federal, state and local component,” Klein said. “And I would say that in many cases the projects we are working on that are serious and real are going to take several years to get to what I would consider a financial close.”
Managing the complexity surrounding the long gestation periods and multiple stakeholders has been helped by a paradigm shift occurring among all levels of stakeholders.
Klein said the center is taking charge of creating a space for public-private collaborations. Historically speaking, this is a relatively new approach.
It takes longer to bring stakeholders together to have meaningful deals when new government funding is not part of the equation, Klein said.
“If we want to solve the water and conservation challenges, which are enormous in the western United States, the private capital markets need to be a partner in that regard,” Klein said. “What we are trying to do is bring private-sector capital market discipline – investor discipline – into the equation, and make sure that projects, beyond being desirable, are also economically viable.”
For example, Klein mentioned a large project involving several irrigation districts that are experiencing drought conditions that threaten regional farmers of high-end, high-margin agriculture. Various stakeholders “are willing to put together a project that would be able to access additional water through infrastructure enhancement and development, which serves as an insurance policy that they hope they never need.”
The farmers are willing to pay a higher price for their water upfront because the underlying economics allows them to continue retaining yield margins that are higher. The result is a win-win situation for all parties involved.
What role does coordination play?
Many projects are in development at the center, all with a focus on economic viability and scalability.
The DOI-based team interacts with stakeholders, universities and NGOs about managing these complex processes. The efforts are coordinated with the United States Environmental Protection Agency and United States Department of Agriculture, both of whom have similar centers concentrating on natural resource investment.
Klein describes the relationship among the centers as symbiotic. They are exploring best practices together, taking measures to ensure that there are no redundancies, and seeing to it that a variety of investment needs are addressed through their work together. “We refer projects to each other when we are approached about projects that don’t fit into our focus areas and might be better suited to the expertise of another center.”
The center is creating a set of market-based mechanisms with targeted multi-level public-private partnerships for conservation purposes. If proven successful, these could drive an expansion of its work into new areas of focus. For now, Klein’s team will continue to drive private-sector engagement within its zone of expertise.
“We are not in the white paper business,” Klein said.
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