The Gray, Green, Blue Continuum Valuing the Benefits of Nature-Based Solutions for Integrated Urban Flood Management in China Marcus Wishart, Tony Wong, Ben Furmage, Xiawei Liao, David Pannell, and Jianbin Wang Contributors Sustainable Development Practice Group The World Bank’s Sustainable Development Practice Group helps countries tackle their most complex challenges by bringing together financing, knowledge and implementation into one platform. By combining the Bank’s global knowledge with country investments, this model generates transformational solutions to help countries grow sustainably. Please visit us at www.worldbank.org or follow us on Twitter at @WorldBank Urban, Disaster Risk Management, Resilience and Land Global Practice The World Bank’s URL Global Practice focuses on developing green, inclusive and resilient cities; managing the urban-rural transition; and assisting in disaster risk management through issues such as urban flood management, disaster preparedness, risk financing, and resilient reconstruction. Please visit us at www.worldbank.org/urban or follow us on Twitter at @WBG_Cities. Water Global Practice The World Bank’s Water Global Practice brings together financing, knowledge and implementation in one platform. By combining the Bank’s global knowledge with country investments, this model generates more firepower for transformational solutions to help countries grow sustainably. Please visit us at www.worldbank.org/water or follow us on Twitter at @WorldBankWater. Development Research Center The Development Research Center of the State Council (DRC) is mainly responsible for conducting research on strategic and long-term issues related to economic and social development in China, as well as key challenges related to reforms and policy options, providing advice to the CPC Central Committee and the State Council Please visit us at http://en.drc.gov.cn Cooperative Research Center for Water Sensitive Cities The Cooperative Research Centre for Water Sensitive Cities (CRCWSC) is an Australian based research-to- practice collaboration that brings together internationally recognized researchers and thought leaders from the public and private sectors to help change the way we design, build and manage our cities and towns. The CRCWSC does this by maximising the contribution water makes to economic development and growth, our quality of life, and the ecosystems of which cities are a part. Please visit us at http://watersensitivecities.org.au The Gray, Green, Blue Continuum Valuing the Benefits of Nature-Based Solutions for Integrated Urban Flood Management in China Marcus Wishart, Tony Wong, Ben Furmage, Xiawei Liao, David Pannell, and Jianbin Wang ©2021 The World Bank International Bank for Reconstruction and Development The World Bank Group 1818 H Street NW, Washington, DC 20433 USA Disclaimer This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Please cite the work as follows: Wishart, Marcus, Tony Wong, Ben Furmage, Xiawei Liao, David Pannell, and Jianbin Wang. 2021. “The Gray, Green, Blue Continuum: Valuing the Benefits of Nature-Based Solutions for Integrated Urban Flood Management in China.” World Bank, Washington, DC. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. Cover photo: Kunshan City Construction Investment & Development Co. Ltd. Cover and report design: kngraphicdesign.com Contents Acknowledgments V The Role of NbS in IUFM 1 Developing a Framework and Methodology to Identify and Value a Broader Range of Benefits 8 Valuing the Benefits of NbS for IUFM: Worked Examples 13 Funding and Financing NbS for IUFM 20 Recommendations for Improving the Sustainable Financing of NbS for IUFM in China 27 The Way Forward 36 References 38 Valuing the Benefits of Nature-Based Solutions for Integrated Urban Flood Management in China _______________________________________________________________________________________________________________________________________________________________________________ Figures figure 1 City Water Resilience Approach 2 figure 2 Typology of Benefits that Can Be Derived from NbS for IUFM 8 figure 3 Framework to Identify, Value, and Realize Comprehensive Values of NbS for IUFM 10 figure 4 Examples of Methodologies for Valuing Benefits Associated with NbS for IUFM 11 figure 5 Considering Project Funding Options 21 figure 6 Cost and Benefit Profiles of Different Types of Flood Interventions 23 figure 7 Local Government Revenue Dependence Ratio on Land Finance, 2014 26 figure 8 Schematic of a Guiding Fund for Facilitating PPPs to Build Sponge Cities 31 figure 9 Schematic of a Potential Asset-Backed Plan for Nature-Based Solutions for IUFM 34 figure 10 Recommendations Tailored to Local Conditions to Improve Financing for NbS for IUFM 37 figure B2.1 Croydon Wetlands 14 figure B2.2 Map of Tarralla Creek Showing the Section to Be Reimagined 15 figure B2.3 Summary of Benefits and Costs of the Tarralla Creek 15 figure B3.1 Location of Futian River 17 figure B3.2 Distribution of Beneficiaries from the Futian River Project 17 figure B4.1 Kunshan Forest Park in the Polder System 18 figure B4.2 Kunshan Forest Park Renovation Project 19 Boxes box 1 Floods in Southern China, 2020 4 box 2 Taralla Creek Naturalization and Wetland Creation in Victoria, Australia 14 box 3 Shenzhen Futian River Ecological Restoration Project in China 16 box 4 Kunshan Forest Park Renovation Project in China 18 box 5 Business Improvement Districts and Tax Increment Financing Districts 24 box 6 Stormwater Retention Credit Trading 25 box 7 The First Stormwater Purchase Agreement in China 30 box 8 China Green Development Fund Company, Ltd. 32 Photos photo 1 Eight Benefits Associated with a Nature-Based Project in Urban Flood Management 7 photo 2 Shenzhen’s Futian River—A Source of Environmental and Social Benefits 13 Tables table B3.1 Comprehensive Benefits of the Futian River Ecological Restoration Project 16 table B4.1 Major Cobenefits of the Kunshan Forest Park Project 19 Maps map 1 Global Flood Total Economic Loss Risk Distribution 3 map 2 China’s Thirty Sponge City Pilots 6 IV The Gray, Green, Blue Continuum _______________________________________________________________________________________________________________________________________________________________________________ Acknowledgments This report is the result of a collaborative effort between the World Bank and the Cooperative Research Centre for Water Sensitive Cities (CRCWSC). The World Bank team was led by Marcus Wishart (Lead Water Resource Specialist) and Barjor Mehta (Lead Urban Specialist) and included Gang Qin (Senior Water Supply and Sanitation Specialist), Guangming Yan (Senior Urban Development Specialist), Liping Jiang (Senior Irrigation and Drainage Specialist), Tian Qi (Water Resource Management Specialist), Xiawei Liao (Water Analyst), David Kaczan (Young Professional) and Anqi Li (Team Assistant); the CRCWSC team was led by Tony Wong (Project Director from CRCWSC) and included Ben Furmage (Chief Executive Officer), Jianbin Wang (International Engagement Manager), David Pannell (Professor of Economics and Director, Centre for Environmental Economics and Policy, University of Western Australia) and Sylvia Tawfik (Research Assistant). The work is a contribution to the broader program on “Evaluating and Realizing the Value of Water in the Construction of an Ecological Civilization for China,” a collaborative venture between the World Bank and the Development Research Center of the State Council of the People’s Republic of China (DRC). The DRC team is led by Dr GU Shuzhong (Deputy Director General of the Institute for Resources and Environmental Policies) and includes Li Weiming (Director of Research Division, Institute for Resources and Environmental Policies), and Yang Yan (Assistant Research Fellow, Institute for Resources and Environmental Policies) along with other researchers from the DRC, the Chinese Academy of Sciences (CAS), the Chinese Academy of Agricultural Sciences (CAAS), the Institute of Water Resources and Hydropower Research (IWHR) and the DRC of the Ministry of Water Resources (MWR). A series of case studies were prepared to validate the methodology within the local context, highlight the change in values within different social, cultural and economic conditions and support the valuation of benefits associated with China’s Sponge Cities. These case studies include the Futian River in Shenzhen (Annex D) conducted by a team from the Shenzhen Water Planning and Design Institute Co. Ltd led by Xiang Sun (Project Manager, Senior Engineer) and including Hang Song (Assistant Engineer) and Penghui Du (Engineer); the Kunshan Forest Park (Annex E) conducted by a team led by Bin Jiang (Principal Investigator, Researcher) from the Jiangsu Institute of Urban Planning and Design and including Jianguo Zhu (Professor-level Senior Engineer), Yongzhou Huang (Professor-level Senior Engineer), Sufang Shenz (Senior Engineer), Yun Kong (Engineer), Bo Feng (Engineer), Yanyan Zhou (Assistant Engineer) and Kun Xie (Assistant Engineer). This work was developed under the leadership of Victoria Kwakwa (Vice President for East Asia and the Pacific), Benoît Bosquet (Regional Director, Sustainable Development, East Asia and the Pacific), Jennifer Sara (Global Director of the Water Global Practice) and Martin Raiser (Country Director for China) from the World Bank and Vice Minister Wang Yiming and Vice Minister Long Guoqiang from the DRC along with his ministerial colleagues from the Government of the Peoples Republic of China. The report was prepared under the guidance of Sudipto Sarkar (Practice Manager, Water Global Practice, East Asia and the Pacific Region) and Francis Ghesquiere (Practice Manager, Urban, Disaster Risk Management, Resilience and Land Global Practice, East Asia and the Pacific Region). The team is grateful for the advice provided by the peer reviewers: Greg Browder (Global Lead for Water and Resilience); Xiaokai Li (Lead Water Resource Specialist); Wanli Fang (Senior Urban Development Specialist) and Boris Ton Van Zanten (Disaster Risk Management Specialist) along with Professor CHENG Xiaotao (Former Director, Research Center on Flood and Drought Disaster Reduction, China Institute of Water Resources and Hydropower Research, Ministry of Water Resources of China) and Dr. MAN Li (Former Deputy Secretary General, PPP Research Institute, Chinese Academy of Fiscal Sciences, Ministry of Finance of China). Valuable advice and guidance was also provided by experts within the World Bank, officials from the Government of the People’s Republic of China, along with various universities and non-government organizations working on nature-based solutions, urban water management and climate resilience. This report was made possible with the financial support of the Global Facility for Disaster Risk and Reduction (GFDRR) under the activity on “Integrating disaster risk management in urban operations in China” and the Global Water Security and Sanitation Partnership (GWSP), which supports client governments to achieve the water- related Sustainable Development Goals through the generation of innovative global knowledge and the provision of country-level support. V The Role of NbS in IUFM Nature-based solutions (NbS) are increasingly recognized as important tools to build resilience, develop sustainable adaptations, and improve disaster risk management. Such solutions have the potential to integrate natural habitats, processes, and services as part of a coherent and holistic approach to water management, particularly in the urban context. They can provide multiple functions beyond conventional flood mitigation, generating a range of benefits by restoring and conserving natural capital, improving the liveability of urban spaces, increasing resilience and contributing to more sustainable outcomes. In doing so, they can enhance overall water security by improving water availability and water quality while simultaneously reducing water-related risks and generating additional social, economic, and environmental cobenefits. Achieving these outcomes requires hybrid urban infrastructure city-wide. Such infrastructure optimizes a mix of blue, green and gray corridors that can integrate NbS into the built urban form at a range of scales and in varying proportions. While the design and implementation of these hybrid assets are relatively well considered, their implementation at scale has been limited. This is due in part to the challenges in realizing the values associated with the full range of market and non-market benefits and comprehending the distribution of these among diverse beneficiaries. This situation makes it difficult to secure sustainable revenue streams and to internalize future returns that can be aggregated to leverage sufficient financing. As a result, improved approaches are required to identify the benefits derived from NbS, evaluate the value of these benefits and to identify the range of potential beneficiaries, to provide a framework that can facilitate co-investment in hybrid infrastructure and ultimately suitable financing models. There are a range of innovative hybrid approaches to building resilience within the context of integrated urban flood management (IUFM). The increasing recognition of hybrid approaches that integrate NbS reflects the changing nature of societies and the increasing aspirations for better environmental quality. This is particularly true of the world’s large megalopolises and rapidly urbanizing cities across Asia, where there is growing recognition of the need to enhance inclusive and sustainable urbanization, improve resilience to floods, and to increase access to safe, inclusive, and accessible green public spaces. Such approaches are needed to foster more positive and sustainable economic, social, and environmental outcomes. Achieving these outcomes requires integrated, participatory, and sustainable planning and management, which are embodied in the Sustainable Development Goals (SDGs), specifically SDG 11, which calls for making cities and human settlements inclusive, safe, resilient, and sustainable. Similarly, the United Nations World Water Development Report 2018: Nature-Based Solutions for Water called on countries to scale up the adoption of NbS to mitigate water-related risks, especially with the prospects of a changing climate. The Global Commission on Adaptation’s landmark report, Adapt Now: A Global Call for Leadership on Climate Resilience, also calls for governments and companies to significantly accelerate action and investment in NbS. 1 Valuing the Benefits of Nature-Based Solutions for Integrated Urban Flood Management in China _______________________________________________________________________________________________________________________________________________________________________________ Many global practices have emerged in support of hybrid city-wide infrastructure and the concept of integrated urban water management.1 These practices share a common element: the integration and adoption of NbS to complement conventional engineering approaches within a landscape-level planning framework. Such integrated approaches to urban flood management take a whole catchment perspective that considers a broad range of social, economic, and environmental objectives. This idea of positioning urban resilience within a catchment-to-coast framework acknowledges the importance of landscape-level hydrological processes along with the integrated solutions required to manage them. Thus, it values the full range of direct and indirect costs and benefits from blue, green, and gray corridors and balances actions before, during, and after flood events across an array of retreat, adapt, and defend strategies to improve the resilience of urban environments to the effects of floods (figure 1). figure 1 / CITY WATER RESILIENCE APPROACH Catchment interventions Specialist services Sources: Arup (2014). Design with Water. https://www.arup.com/perspectives/publications/promotional-materials/section/design-with-water ____________________________ 1 These include water sensitive cities (WSCs) in Australia; low-impact development (LID) in the United States and Canada; sustainable drainage systems (SuDS) and blue-green cities (BGCs) in the United Kingdom; the Active, Beautiful, Clean Waters (ABC Waters) Programme in Singapore; and Room for the River in the Netherlands, among others. 2 Floods are the Most Frequent of Natural Hazards and Cause More Damage than any Other Disaster Globally, floods are estimated to have affected more than 2 billion people between 1998 and 2018, accounting for about 45 percent of all people affected by disasters during that period and an estimated 142,088 fatalities (CRED and UNISDR, 2015). Immediate effects of flooding include loss of human life, demise of livelihoods, damage to property, destruction of crops, devastation of livestock, disruption of services, and deterioration of health conditions because of waterborne diseases, among others. Flooding led to an estimated US$656 billion in direct economic losses during that same 10-year period, but these figures suffer from systematic underreporting, and actual values are likely much higher. Considering indirect effects on human well-being, natural disasters are thought to cost the global economy more than US$520 billion per year (Kundzewicz et al. 2013; World Bank 2017). Increasing exposure to floods and changing climate conditions are expected to escalate economic effects. This increase in exposure stems from continued population growth and urbanization as well as sustained economic growth and growing prosperity, compounded by the effects of a changing climate. Changes in climate are expected to alter water regimes, both in terms of availability and variability, as well as many of the factors that affect the frequency and severity of flood events, such as precipitation and runoff and sea levels. It is estimated that approximately 1.3 billion people (or 15 percent of the global population) will live in flood-prone areas by 2050 (Verwey, Kerblat and Brendan 2017). Given the substantial uncertainties embodied in climate change projections, there is increasing recognition of the need to have more robust approaches. This has led to an increased use of scenario planning and more holistic, resilient approaches to flood management that incorporate NbS and the range of cobenefits they can deliver. map 1 / GLOBAL FLOOD TOTAL ECONOMIC LOSS RISK DISTRIBUTION Risk Deciles: —— 1st - 4th —— 5th - 7th —— 8th - 10th Source: Diley et al. 2005. Note: Total Economic Loss is found by weighting the value of GDP to floods for each grid cell by a vulnerability coefficient to obtain an estimate of risk. The vulnerability weights are based on historical economic losses in previous disasters. The economic loss risks are applied to GDP per unit area exposure to obtain economic loss risks. The weights are an aggregate index relative to losses within each region and country wealth class (classification based on 2000 GDP) over the 20-year period from 1981 to 2000. 3 China is Among the Most Exposed Countries to Floods According to the Global Climate Risk Index for 2017, China is the world’s 31st country most affected by climate-related disasters, with more than 67 percent of people living in flood-prone areas (Ding 2018). Flooding occurs regularly in 641 of China’s 654 largest cities, and recorded flood losses have more than tripled—from about US$7 billion per year in the 1980s to US$24 billion per year in the 2000s, with the largest annual damage recorded in 2010, amounting to a total loss of US$51 billion. A survey by the National Bureau of Statistics of China shows that 62 percent of Chinese cities experienced floods from 2011–14 and the direct economic losses amounted to as much as US$100 billion (National Bureau of Statistics of China 2015). On average, floods annually result in losses estimated to equal 1 percent of the Chinese gross domestic product (GDP) with the losses due to floods in 2020 estimated at US$25.87 billion (Kobayashi and Porter 2012) (see box 1). Rapid urbanization, shifts in land use patterns, and climate change are driving the increase in risks of urban floods in China. Urbanization typically increases areas of impermeable land surface, which reduces infiltration and increases surface runoff and peak discharges during storm events. Urban microclimates and urban heat island effects are likely to cause more thunderstorms. Meanwhile, increasing numbers of people and assets are facing exposure to flood risks because of continued migration to densely concentrated urban areas. From 1978 to 2018, China’s urbanization rate increased from 17.9 percent to 59.6 percent and the number of people living in urban areas grew from 172.45 million to 831.37 million. By 2030, the urban population is expected to account for 70 percent of the total population. Different climate change scenarios project precipitation increases associated with the maximum five-day rainfall in the central, southern, and eastern regions of China. Without large-scale structural adaptation and improved resilience, China is expected to suffer the highest direct economic losses around the world, increasing by 82 percent by 2040 (Willner, Otto, and Levermann 2018). box 1 / FLOODS IN SOUTHERN CHINA, 2020 ____________________________________________________________________________________________________ In 2020, China experienced extreme rainfall and flood events comparable to the major floods in 1998. From early June to mid-August, accumulated precipitation was estimated to be 1.7 times the long-term average and the highest on record since 1961. Intense rains resulted in unusually high-water levels of major rivers and lakes, concentrated in the Yangtze River Basin, Huai River Basin, Lake Tai Basin, Lake Dongting Basin and Lake Poyang Basin in the southern China. The Three Georges Dam in the Yangtze River received 76,000 cubic meters per second at its peak level, the highest ever inflow since the dam was built and at its maximum capacity (Sohu News 2020). By mid-August, floods in 27 provinces had reportedly disrupted the lives of over 63.5 million people, with more than four million residents having to evacuate from their homes, and 219 people had been reported missing or dead. The number of casualties was considered relatively modest considering the severity and magnitude of rains and subsequent flooding (State Council Information Office 2020a) owing to the comprehensive and integrated flood management system developed over the past few decades. This approach is built on an infrastructure platform with improvements in flood forecasting and early warning, coupled with improved coordination and flood response mechanisms. According to the State Council Policy Briefing on August 13 (State Council Information Office 2020b), the floods caused direct economic losses of US$25.87 billion (RMB178.96 billion) (People’s Daily 2020), which does not account for the secondary cascading effects on the economic flows and outputs. 4 The Sponge City Program Was Initiated to Improve Urban Resilience through Integration of Nature-Based Solutions To improve the resilience of China’s urban environments, the Sponge City Initiative was introduced in 2014. This builds on earlier concepts of flood risk management and was launched following the 2010 floods in southern China during which exceptionally heavy summer rains caused major rivers, including the Songhua, Yangtze, and Yellow, to reach catastrophic levels. The Sponge City Initiative reflects a global transition toward IUFM approaches, combining both structural and nonstructural solutions that leverage gray, green, and blue infrastructure to mitigate risks of urban flooding and inundation. The approach addresses flooding by integrating several ideas and practices—such as NbS, community and environmental well-being, and adaptation to climate change—within urban land use planning processes. By leveraging NbS and using natural or seminatural measures to mimic natural water cycles, the Sponge City Initiative addresses surface- water flooding, attenuation of peak runoff, improved purification of urban runoff, and enhancement of water conservation. Through a unique blend of structural and nonstructural initiatives, sponge cities have the potential to strengthen resilience to the many challenges of urban water security and urban liveability, creating recreational spaces around urban water sources, fostering the development of a water culture, promoting greater awareness, and improving water conservation. China aims to have 80 percent of urban areas across the country sponge-like by 2030. Thirty cities were selected in 2015 and 2016 to pilot the construction of sponge cities by a working group made up of the ministries of Finance (MoF); Housing, and Urban-Rural Development (MoHURD); and Water Resources (MWR) (map 1.2). Funding was an estimated US$29 billion (RMB 200 billion), of which central government financing accounted for only 20 percent. For the first 16 pilot cities, the investment requirements were estimated at US$985 million (RMB 6.9 billion), and about US$12.26 billion (RMB 86.5 billion) would be required to meet the national target of having 20 percent of the urban areas “sponge-like” by 2020 (Zevenbergen, Fu, and Pathirana 2018). The unit costs have been estimated as much as US$15 million to US$22 million (RMB 100 million to 150 million) per square kilometer or higher in more economically developed areas, such as Beijing and Shanghai. Investments to develop China’s sponge cities have come primarily from public funding. Each pilot received a central budget allocation, estimated between US$57 million and US$86 million per year for three consecutive years. The investment needed to scale up the program is an estimated US$1 trillion by 2030, with the financing gap expected to be covered by provincial and local governments and financial institutions together with the private sector and local communities. As such, a range of innovative financing options are required that can incorporate more holistic approaches for identifying benefits derived from NbS, evaluating these benefits, and monetizing revenues streams to leverage sustainable sources of financing. There are a number of challenges to integrating NbS for urban flood management. Facilitating the transition from conventional to hybrid approaches requires accounting for technical and physical concerns, legal and regulatory issues, and social and institutional considerations, among other issues. However, financial challenges have been identified as one of the main constraints because of the substantial costs in implementing NbS for IUFM. Despite broad acknowledgment of the range of market and nonmarket benefits, complex interrelationships exist among the values of those benefits associated with water and flood management measures. 5 Valuing the Benefits of Nature-Based Solutions for Integrated Urban Flood Management in China _______________________________________________________________________________________________________________________________________________________________________________ While there have been improvements in integrated planning approaches, these benefits are often coincidental and not optimized within design considerations. It is therefore important to have strategies for ensuring that: • a broad range of possible financing sources are considered • the chosen financing approach responds to the unique attributes of nature-based and nonstructural solutions • benefits and costs are allocated equitably, and activities are funded fairly • the decision-making process is transparent • funding is efficient and effective, and it delivers project benefits over time map 2 / CHINA’S THIRTY SPONGE CITY PILOTS 2015 Pilot Cities 2016 Pilot Cities Source: Original for this publication. 6 The Gray, Green, Blue Continuum _______________________________________________________________________________________________________________________________________________________________________________ photo 1 / EIGHT BENEFITS ASSOCIATED WITH A NATURE-BASED PROJECT IN URBAN FLOOD MANAGEMENT In addition to flood protection, this site provides: 1. Access to green space increasing local property value and encouraging new investing 2. Water for parks and agriculture 3. Improved water quality and road runoff 4. Improved biodiversity 5. More actively connected communities 6. Improved well-being through access to green spaces 7. Improved local multimodal transport 8. Improved air quality Source: Original to this publication, using photo from Kunshan Urban Development Investment Company. 7 Developing a Framework and Methodology to Identify and Value a Broader Range of Benefits NbS for IUFM provide a wide range of tangible, market-related benefits along with intangible, nonmarket- related benefits that are typically not accounted for in conventional BCA. By absorbing, filtering, and slowing stormwater runoff, NbS can help mitigate urban floods and improve water quality. Further, NbS provide a range of additional tangible and intangible benefits by enhancing natural ecosystems and improving aesthetics of the urban environment for the people who live and work in them (photo 1 and figure 2). The benefits include, but are not limited to, enhanced resilience to future climate change, increased amenity values, and increased utility and social values by providing urban green spaces and increased asset values. NbS often require lower capital investments than conventional gray infrastructure approaches and have substantially lower operating expenses. Although there are significant uncertainties in predicting future climate changes and their effects in urban landscapes, NbS offer the potential to increase resilience and to cope with future changes in climate through adaptive management. These are considered “no-regret” measures because they provide benefits even without climate change. Conventional approaches to determining returns on investments in flood management and mitigation projects have largely focused on avoided losses. A benefit to these approaches is that they are simple to calculate and to explain to decision-makers. They can also provide information about the optimal level of flood risk reduction associated with the direct intervention cost. However, such approaches do not reflect the full range and diversity of environmental, social, and economic cobenefits as well as the values of resilience and reversibility that can be realized through integrated approaches to urban water management. Such innovations require new approaches to facilitate the identification and assessment of the full range of benefits to be derived from IUFM. figure 2 / TYPOLOGY OF BENEFITS THAT CAN BE DERIVED FROM NBS FOR IUFM Note: GHG = greenhouse gas. 8 The Gray, Green, Blue Continuum _______________________________________________________________________________________________________________________________________________________________________________ The approach described herein builds on the “Principles for Valuing Water” articulated by the High-Level Panel on Water convened by the United Nations and the World Bank Group. It includes three common types of flooding (that is, fluvial, pluvial, and coastal) via a five-step process (figure 3). This is intended to highlight economic efficiency as a precursor to monetizing these benefits. In doing so, it can help identify different funding options and tap into the variety of financing sources. Broader recognition of the full range of benefits and an evaluation of their value under different circumstances provides the foundation for capturing nonmarket values and leveraging private sector and community financing options. STEP 1 Understand the broader urban socioeconomic context within which the flooding occurs, including the objectives and challenges presented by the specific location. Decision-makers need to consider social, economic, and environmental effects at multiple scales, including local, urban, and catchment. A flood risk assessment, combining both flood hazard assessment and flood vulnerability assessment, is first used to determine the effects. The primary outputs of a flood hazard assessment are the probability or frequency of occurrence, the magnitude and intensity of occurrence, and the average time between occurrences. An assessment of flood vulnerability is characterized as exposure and damage, quantifying the degree to which a system (in this case, a system consists of people or assets) is susceptible to the adverse effects of floods and quantifying the resultant cost of damages. Based on the flood risk assessment, a three-tiered IUFM framework is used based on three strategies: retreat, adapt, and defend. STEP 2 Systematically identify the full range of flood management and mitigation interventions in urban landscapes across the spectrum of “gray” to “green” to “blue” infrastructure solutions, along with other nonstructural measures. Conventional approaches to flood management promote flood defence and mitigation. They primarily address flood hazards through flood control infrastructure that largely involves conventional engineering structures, often referred to as “hard” engineering or “gray” infrastructure. Examples include dikes, levees, dams, pumping stations, diversion channels, stormwater sewer and drainage, and related infrastructure. Complementing gray infrastructure, IUFM increasingly leverages a wide range of green infrastructure or NbS, together with nonstructural measures, including land use zoning, water sensitive urban planning, flood management capacity building, community flood awareness raising, flood preparedness, early warning and response systems, and so on. STEP 3 Systematically identify the full range of potential social, economic, and environmental benefits associated with identified interventions. Twenty broad categories covering a wide range of environmental, social, and economic benefits derived from NbS for IUFM have been identified. Among these, environmental cobenefits of NbS include improvements in natural habitat, enhancement of urban biodiversity, improved water and air quality, reduction of heat island effects, and reductions in sediment and nutrient transport, as well as eutrophication. Social cobenefits can include more active and connected communities, control of noise pollution, psychological benefits and improved mental well-being, and increased employment opportunities, including jobs directly linked to the implementation of NbS. Economic cobenefits include improved local land and property values, increased tourism, avoided losses, and so forth. NbS can also contribute to the reduction of social inequalities because, similar to other natural disasters, urban floods often disproportionately affect women, disadvantaged groups, and the poor because of their locations, the ways floods disrupt their normal lives, and the level of resiliency they need to recover. 9 figure 3 Framework to Identify, Value, and Realize Comprehensive Values of NbS for IUFM The Gray, Green, Blue Continuum _______________________________________________________________________________________________________________________________________________________________________________ STEP 4 Evaluate values associated with benefits from NbS through a more comprehensive benefit-cost analysis. Practices associated with IUFM provide tangible benefits that are easy to quantify (for example, losses avoided from floods). However, IUFM practices also produce tangible and intangible effects that can be difficult to quantify or monetize (for example, biodiversity and the amenity benefits of having access to public green space). While many studies have attempted to quantify a wide range of nonmarket values, these studies can be both expensive and time consuming. An alternative strategy applies the benefit transfer method to reasonably approximate values associated with benefits based on literature (figure 4). The valuation tool of the Investment Framework for Economics of Water-Sensitive Cities (INFFEWS) draws on a database of values to generate monetary values for nonmarket benefits. The current version of the tool contains more than 2,000 nonmarket benefit values across 20 types of benefits. The INFFEWS tool for BCA provides a robust evaluation based on sound economics, transparency, consistency, and quality assurance mechanisms. figure 4 / EXAMPLES OF METHODOLOGIES FOR VALUING BENEFITS ASSOCIATED WITH NBS FOR IUFM 11 Valuing the Benefits of Nature-Based Solutions for Integrated Urban Flood Management in China _______________________________________________________________________________________________________________________________________________________________________________ STEP 5 Identify appropriate financing options to realize values associated with NbS for IUFM. Three principle sources of funding exist: tariffs, taxes, and transfers. Government has traditionally played a key role in providing economic and social infrastructure by serving as financier and by establishing the enabling polices and regulations. However, public investments often do not suffice because of the need to meet future challenges intrinsic to managing urban floods. By facilitating the identification and valuation of a broader range of benefits—beyond conventional flood management measures—the tools can better capture improvements in the urban landscape and provide opportunities to leverage a wider array of financing options to help promote the application of NbS and continuous improvements in the quality of life and urban landscape. Private sector partners and community co-investment have the potential to unlock additional project value and revenue streams, increase the pool of potentially available funding options, and improve project efficiency. Boxes 2, 3 and 4 demonstrate the application of the framework and approach to case studies in Australia and China. 12 Valuing the Benefits of NbS for IUFM: Worked Examples photo 2 / SHENZHEN’S FUTIAN RIVER—A SOURCE OF ENVIRONMENTAL AND SOCIAL BENEFITS Source: Shenzhen Water Planning & Design Institute Co., Ltd. 13 Valuing the Benefits of Nature-Based Solutions for Integrated Urban Flood Management in China _______________________________________________________________________________________________________________________________________________________________________________ box 2 / TARRALLA CREEK NATURALIZATION AND WETLAND CREATION IN VICTORIA, AUSTRALIA ____________________________________________________________________________________________________ Urban Context Tarralla Creek is located in the outer eastern suburb of Croydon in Melbourne, Victoria, Australia. In 2018, GDP of Melbourne was US$102.67 billion, accounting for 7 percent of Australia’s total GDP, with a GDP per capita of about US$70,500. Project Description The INFFEWS BCA Tool was applied to evaluate the Tarralla Creek Project in Victoria. The project was a proposal to convert a section of Tarralla Creek, which was a combination of concrete-lined channel and grassed channel, into a naturalised waterway while also enhancing adjacent natural habitat and open space. The project also proposed to use constructed wetland areas to treat stormwater and harvest some stormwater for irrigation of adjacent open space. Outcome of BCA Analysis Six benefits were identified in the analysis, and all of these were monetized using direct economic benefits or value transfer from reference studies. The net present value of the total benefits was estimated to be AU$20.264 million while the net present value of the total costs, including capital cost and operating cost, was AU$15.607 million, resulting in an overall benefit cost ratio of 1.30, meaning the estimated benefits outweighed the expected costs. Sensitivity analysis in the INFFEWS BCA Tool was used to examine the impact on the overall result of changing key assumptions. This analysis determined that the project benefit cost ratio ranges from 0.49 to 2.53 with an overall probability of 0.7 that the benefit cost ratio would be greater than 1. figure B2.1 / CROYDON WETLANDS ____________________________________________________________________________________________________ Wetlands before rennovation Computer rendering of reimagined Croydon Wetlands 14 The Gray, Green, Blue Continuum _______________________________________________________________________________________________________________________________________________________________________________ figure B2.2 / MAP OF TARRALLA CREEK SHOWING THE SECTION TO BE REIMAGINED ____________________________________________________________________________________________________ figure B2.3 / SUMMARY OF BENEFITS AND COSTS OF THE TARRALLA CREEK ____________________________________________________________________________________________________ —— Potable water savings —— Water quality benefit to the waterway and Port Phillip Bay —— Improved aesthetics —— Improved health from reduced risk of depression —— Improved health from reduced inactivity —— Ecological improvements and improved stream health —— Capital cost —— Maintenance cost Source: CRCWSC (2020) 15 Valuing the Benefits of Nature-Based Solutions for Integrated Urban Flood Management in China _______________________________________________________________________________________________________________________________________________________________________________ box 3 / SHENZHEN FUTIAN RIVER ECOLOGICAL RESTORATION PROJECT IN CHINA ____________________________________________________________________________________________________ Urban Context Shenzhen in southern China is one of the world’s fastest growing cities with a population of 13 million. Gross domestic product (GDP) reached more than US$340 billion (roughly RMB 2.4 trillion) in 2018, with per capita GDP roughly US$28,653 (RMB 189,568) (Shenzhen Statistic Bureau, 2019). In the central area of Shenzhen, the Futian River and its catchment have suffered from ecological degradation caused by rapid urbanization and economic development. Project Description In 2009, the Shenzhen Water Bureau initiated the ecological renovation of the Futian River to address multiple urban water issues, including urban floods, water quality degradation, and so on, in an integrated manner. Main interventions have included a combination of conventional hard infrastructure, such as stormwater collection pipelines, and nature-based solutions (NbS), such as a constructed wetland and a Futian River central park that serves as a flood retention area (photo 2). The project has generated multiple benefits as shown in table B3.1. table B3.1 / COMPREHENSIVE BENEFITS OF THE FUTIAN RIVER ECOLOGICAL RESTORATION PROJECT ____________________________________________________________________________________________________ Benefts Total benefts* Proportion (%) Reduced flood risk 264.58 41.10 Increased property prices from proximity to project 163.53 25.40 Carbon fixation 91.23 14.20 Reduced investment in water storage infrastructures by 90.88 14.10 maintaining surface water level and groundwater level Other benefits 33.47 5.20 *RMB, millions Outcome of BCA Analysis According to the INFFEWS BCA Tool, the project generates an expected NPV of negative 6.34 million RMB for the investment overall with a BCR of 0.99, meaning the benefits generated almost cover all the costs. However, the NPV for the investor, Shenzhen government, is negative 143.39 million RMB with a BCR of 0.76. It is therefore a financially unviable investment for the government, although it already has a higher BCR than most water conservancy projects in the world. This case demonstrates the importance of valuing comprehensive benefits that NbS can provide and, according to the principle of “who benefits, who pays,” identifying beneficiaries enables advocates of NbS to leverage a broader range of financial resources. 16 The Gray, Green, Blue Continuum _______________________________________________________________________________________________________________________________________________________________________________ figure B3.1 / LOCATION OF FUTIAN RIVER ____________________________________________________________________________________________________ Source: Original for this publication based on Google Maps imagery. figure B3.2 / DISTRIBUTION OF BENEFICIARIES FROM THE FUTIAN RIVER PROJECT ____________________________________________________________________________________________________ Developers of nearby area Shenzhen Water Bureau Residents and businesses Shenzhen Housing Bureau Shenzhen Tourism Bureau Shenzhen Public Works Bureau Source: Original for this publication 17 Valuing the Benefits of Nature-Based Solutions for Integrated Urban Flood Management in China _______________________________________________________________________________________________________________________________________________________________________________ box 4 / KUNSHAN FOREST PARK RENOVATION PROJECT IN CHINA ____________________________________________________________________________________________________ Urban Context Located in southeastern Jiangsu Province, the city of Kunshan within the Taihu Lake Basin of the Yangtze River Delta has a dense river network and flat terrain. With a permanent population of about 1.6 million, the cities GDP exceeds RMB 400 billion (Kunshan Municipal Statistic Bureau, 2019), equivalent to RMB 240,616 per person (US$33,975), three times China’s national GDP per capita at just over US$10,000. Project Description The Kunshan Forest Park Company initiated an ecological renovation project in 2016, aiming to improve drainage and storage capacity, to enhance the protection and restoration of urban wetlands and ecosystems, improve water quality, and so on. Project activities included building several artificial lakes and wetlands with water circulation systems continuously pumping water from the lake, through the wetlands, and then back to the lake via small solar pumps to remove water pollutants, such as nitrogen and phosphorus. The lake system also serves as rainwater storage space in the polder area to improve overall capacity and control flooding in the area. figure B4.1 / KUNSHAN FOREST PARK IN THE POLDER SYSTEM ____________________________________________________________________________________________________ Source: Original for this publication based on Google Maps imagery. 18 The Gray, Green, Blue Continuum _______________________________________________________________________________________________________________________________________________________________________________ figure B4.2 / KUNSHAN FOREST PARK RENOVATION PROJECT ____________________________________________________________________________________________________ Lake Wetlands > - Circulation direction Solar pumps = Sluice gate Source: Based on Kunshan Forest Park design documents. Note: E1 to E6 represent the six wetlands in the eastern part of the Park and W1 to W4 represent the four wetlands in the western part of the Park. Outcome of BCA Analysis According to the INFFEWS BCA Tool, the project generated a wide range of cobenefits, including reduced flood losses and improvements in health, air quality, biodiversity, and commercial values. Overall, the total net present value (NPV) is US$57.91 million with a total BCR of 49.63. For the Kunshan Forest Park Company, the total NPV is only US$3.07 million and the BCR is 2.71. In conclusion, accounting for a broader range of benefits makes a stronger case for investment and facilitates leveraging broader financing mechanisms. table B4.1 / MAJOR COBENEFITS OF THE KUNSHAN FOREST PARK PROJECT ____________________________________________________________________________________________________ Type of Benefit Benefits (US$, millions) ____________________________________________________________________________________________________ Health benefits 23.244 Air quality improvement 18.734 Greenhouse gas reduction 07.137 Reduced flood losses 06.843 Increased real estate values 01.963 Reduced water consumption 01.084 Increased commercial values 00.517 Water quality improvements 00.182 Biodiversity improvements 00.049 19 Funding and Financing NbS for IUFM Every context for IUFM faces different issues, involves different solutions, has different sources of funding, and has access to different financing options. Further, it is possible that the range of financing and funding options will increase over time as technologies advance; governments undertake policy, institutional, and sectoral reforms; and local capability increases. Such considerations will influence the revenue streams that can fund NbS and enable new forms of financing and new partnerships among governments, the private sector, and communities. As a result, there is a need to explore a menu of options rather than a prescriptive approach. Identifying a sustainable funding stream is critical for a project’s long-term success. This is particularly so for NbS, which require maintenance and protection of natural processes. NbS for IUFM may have significant public good elements, so government funding may be most appropriate for at least part of a project. Going through the process of identifying, quantifying, and valuing the wide range of benefits provided by NbS can help justify the investment and potentially raise the governmental budget allocation. In addition, NbS can offer private benefits and stimulate additional revenue streams that can be privatized and used to offset the project cost. As such, there are still important roles for the private sector and opportunities for collaboration to deliver both public and private benefits. Three main sources of funding exist for water-related infrastructure, including gray, green, and blue solutions for urban flood management (figure 5). Differentiating among these three sources helps unlock an understanding of funding sources generating cash flows to leverage repayable sources of financing. This differentiation also helps distinguish among sources of direct funding by end users, indirect funding from governments or their agencies, and funding from private sources of finance. The three main sources are: 1. 2. 3. TAXES TRANSFERS TARIFFS _______________________________ _______________________________ _______________________________ A source that comes from the A source that comes from outside A source that comes from users government through the general the government that is providing paying for a specific service. For budget or a dedicated tax to the service. For example, a state example, power companies charge help pay for a service within government may receive a grant customers for the electricity used, its jurisdiction. For example, a from the federal government or an or water companies charge for the municipal or state government international development agency. quantity of water provided. may fund a department to provide flood management services. 20 figure 5 Considering Project Funding Options ___________________________________________ ___________________________________________ ___________________________________________ Distribution of costs and benefits Who should pay? How should they pay? Understand the project’s direct and indirect Establish a benefit-cost allocation Determine the appropriate funding mix. benefits and costs across time, geography, principle (e.g. polluter pays, beneficiary and stakeholders. pays, capacity to pay). Valuing the Benefits of Nature-Based Solutions for Integrated Urban Flood Management in China _______________________________________________________________________________________________________________________________________________________________________________ Several aspects of NbS and nonstructural solutions can affect the relative appeal of some forms and sources of funding and financing. Often, projects that would deliver a net benefit to the community do not proceed because they cannot secure the necessary resources. This may happen for several reasons, such: • Size of investment required. The level of funding required for many solutions (particularly structural ones) is often significant, and it may well be beyond the local or even national government’s capacity to support the project. This is particularly the case in low- and middle-income countries. • Scope of investment required. Effective implementation often requires action by many stakeholders across time. The more coordination needed, the higher the transaction costs and the greater the risk of one partner walking away, unravelling the financing and funding arrangements. • Competing priorities. Flood management often involves up-front investment for long-term projects with uncertain benefits. However, the urgency of short-term issues often crowd out long-term projects and acute events override chronic risks, especially in resource constrained environments. • Inability to sustain benefits and funding. Financial support is often easy to obtain after a flood event. But realizing the full benefits of IUFM projects over time requires sustained funding. Infrastructure must be maintained and renewed over time so that it delivers the promised functionality day to day (for example, maintaining the amenity provided by parks used as retention basins) and during peak events (for example, reducing litter and cleaning drains so that they convey large volumes of water during a flood). Governments and development agencies may provide up-front capital support for construction without ensuring that beneficiaries have the financial or technical capacity to maintain an asset over its useful life. • Ensuring a fair distribution of costs and benefits. The costs and benefits of IUFM projects are distributed across stakeholders, geography, and time. They also often have a significant public good component; that is, the benefits of flood management are often nonexcludable. The challenge is to ensure that those who benefit also bear an equitable share of the costs. BCA can provide insights into the most efficient means of achieving an outcome. It can also make the distribution of costs and benefits transparent, but it cannot judge if that distribution is fair. Ultimately, the distribution of costs and benefits is a decision for the community concerned (or the community’s representatives). It is often more complex to identify who benefits, and hence, who should pay for NbS. Projects in which NbS are used are often multipurpose projects involving a wider range of sectors and stakeholders. This creates several additional challenges in bringing together funding from different sectors and requires a higher degree of facilitation than relatively simple single-sector, one-dimensional projects. Nature-based and nonstructural solutions have different cost, risk, and benefit profiles than conventional structural flood protection responses, such as levees and dams (figure 6). These differences can also affect the cost and appropriateness of different financing options. For example, nature-based projects are often smaller in scale, they can involve lower initial capital investment, and they are more “scalable.” Thus, they may have a lower financing requirement, and investments can be staged as nature-based projects that are prioritized and rolled out over time. 22 The Gray, Green, Blue Continuum _______________________________________________________________________________________________________________________________________________________________________________ figure 6 / COST AND BENEFIT PROFILES OF DIFFERENT TYPES OF FLOOD INTERVENTIONS _______________________________________________________________________________________________________________________________________________________________________________ A wide range of financing instruments exist for Other innovative financing instruments with NbS in cities and include the following: potential include the following: • Public budgets • Business development districts or tax increment • Grants and donations, including development financing districts (box 5) funding, philanthropic contribution, crowdfunding, • Market-based mechanisms, such as credit- and so on trading systems and payments for ecosystem • Revenue from land sales or leases, user fees, or services (box 6) voluntary contributions from beneficiaries • Revolving funds • Green finance, including loans from public or • Public-private partnerships (PPPs) or state-owned private financing institutions, and green bonds, enterprise-public partnerships among others. • Community asset transfers. 23 Valuing the Benefits of Nature-Based Solutions for Integrated Urban Flood Management in China _______________________________________________________________________________________________________________________________________________________________________________ box 5 / BUSINESS IMPROVEMENT DISTRICTS AND TAX INCREMENT FINANCING DISTRICTS ____________________________________________________________________________________________________ Type: Public financing Public financier(s): Localized tax Private financier(s): N.A. Originally developed in Canada, a business improvement district (BID) defines a geographical location where local stakeholders oversee and fund the maintenance, improvement, and promotion of a designated area. Stakeholders within a specific area enter an agreement with the local government to contribute an additional levy to finance improvements in this area. Such a model also has facilitated financing of nature- based solutions (NbS) for integrated flood management. One of the first such BIDs is the Lower Don Valley Flood Defence Project in Sheffield, United Kingdom. The project aims to improve flood defenses at more than 50 locations along an 8-kilometer stretch of the River Don, helping to protect more than 500 businesses and thousands of jobs and ensuring that the valley remains an attractive place for new investments. The funds go toward building flood defenses and maintaining green infrastructure, such as constructed wetlands. The BID applies an annual levy based on businesses’ expected benefits from those projects. A higher levy rate of 2.25 percent per year applies to businesses expected to receive the greatest flood protection from the scheme, and a lower annual rate of 0.75 percent applies to businesses that would benefit significantly but to a lower extent. Similarly, a tax increment financing (TIF) district is set up when tax revenues going to general city services are frozen at a certain rate in the base year. All additional tax revenues (normally because of property value appreciation) directly fund new development or service debts related to new development until the end of the TIF period, which usually lasts 20 to 30 years. For example, a TIF has been used as a special funding tool by the city of Chicago, United States, to promote public and private investments across the city. Source: Sheffield Chamber of Commerce and Industry 2013. 24 The Gray, Green, Blue Continuum _______________________________________________________________________________________________________________________________________________________________________________ box 6 / STORMWATER RETENTION CREDIT TRADING ____________________________________________________________________________________________________ Type: Government regulations Public financier(s): N.A. Private financier(s): Stormwater retention credit purchasers In 2013, the Washington, DC, Department of Energy and Environment (DOEE) introduced standards requiring new developments larger than 5,000 square feet to install green infrastructure, such as green rooftops, to reduce stormwater runoff. Developers in the US capital are required to meet 50 percent of their water retention requirements onsite. For the remaining 50 percent, developers may purchase stormwater retention credits from others in the city who have either voluntarily installed green infrastructure on unregulated sites or have exceeded their retention requirements on regulated projects. The DOEE certifies the stormwater retention credits for up to three years, and sellers are responsible for maintaining the green infrastructure projects, which are subject to DOEE inspections. To reduce the investment uncertainty for credit generators, DOEE has also introduced a price lock mechanism for the stormwater retention credits. As a buyer of last resort, DOEE agrees to purchase credits from the sellers at a price lower than the market price. This encourages the sellers to sell their credits on the market but also provides them with some certainty that their investment will bring them reasonable returns. More than 650 transactions occurred from 2014–19 at an average market price of US$1.82 per credit, which is attractive compared with the equivalent installation fee of US$3.61 as of 2017, estimated by DOEE. Source: Odefey et al. 2019. A series of documents have been developed to provide general guidance on the financing of sponge cities. The China Development Bank and the Ministry of Housing and Urban-Rural Development issued the notice “Promoting the Development Finance to Support the Construction of Sponge Cities” (no. 208 [2015]), which outlines the role of development financing in supporting the construction of sponge cities. It provides details of the project pipeline, credit support, and coordination mechanisms. Similarly, the Agricultural Development Bank of China and the Ministry of Housing and Urban-Rural Development jointly issued “Notice on Promoting Financial Support for Sponge City Construction” (no. 240 [2015]) on the project reserve system, credit support, innovations using public- private partnership (PPP) financing models, and measures to strengthen policies for financial support of sponge urban construction. The “Guidance on Promoting the Construction of Sponge Cities” issued by the State Council of China (no. 75 [2015]) specifically requires sponge city pilots to promote PPPs to attract private sector and the participation of social capital. Several considerations and conditions determine if a project attracts private sector financing. They include: • Generation of sustainable revenue streams • Ability to ensure sufficient collateral • Probability of success and associated risks • Acceptable risk-adjusted rate of return • A clear exit strategy • A clear concept and proven track record. 25 Valuing the Benefits of Nature-Based Solutions for Integrated Urban Flood Management in China _______________________________________________________________________________________________________________________________________________________________________________ Given the challenges, financing and funding of infrastructure and services to support China’s urban growth have relied heavily on government contributions. Subnational governments (that is, provincial governments, municipal governments, and counties and townships) have depended on a wide range of “off-budget” fees, charges, fines, and penalties on local business and households; monetization of state assets, in particular land; and the establishment of local investment corporations.2 Although initially created as a vehicle for loans from international development organizations, these now play an important role as a means of financing investment in local urban infrastructure, including flood protection. Among these, land revenues have been a major source of local revenue. This is because income from land conveyances is not a part of the budgetary revenues and does not need to be shared with the central government (Ding 2003). To overcome restrictions on direct financing, many local governments established local government financial vehicles (LGFVs),3 including Urban Development Investment Corporations (UDICs or Chengtou), and state-owned enterprises (figure 7). However, the heavy reliance on land-based financing can be problematic, and has led to overdevelopment of land in many municipalities. Further, it exposes local governments’ fiscal health to volatility in land prices and inventory of land assets (Campanaro and Masic 2017). figure 7 / LOCAL GOVERNMENT REVENUE DEPENDENCE RATIO ON LAND FINANCE, 2014* —— Land-finance dependent (with related taxes) —— Land-sales dependent Source: MoF, cited by China Policy September 4, 2020, policycn.com. Note: *2020 estimation. ____________________________ 2 The 1994 Budget Law prohibits subnational government from borrowing without explicit permission from the State Council. Local investment corporations were a way for subnational governments to secure investments. 3 The 1994 Budget Law prohibits subnational government from borrowing without explicit permission from the State Council. Local investment corporations were a way for subnational governments to secure investments. 26 Recommendations for Improving the Sustainable Financing of NbS for IUFM in China The range of financing options to support NbS for IUFM are informed by the values associated with the direct and indirect benefits. These are typically context specific and informed by the level of social and economic development, as well as exposure to floods. Given the diversity of urban conditions in China, the realization of these values and the appropriate financing instruments will be further informed by both the affordability and collectability of the associated revenue streams. Where these are limited, public instruments and concessional funding will continue to be essential for promoting NbS for IUFM and leveraging private flows. However, the diversity of determining characteristics across the urban landscape in China creates a range of opportunities for various policy instruments and financing options, particularly in higher-income urban areas. Blended financing options can facilitate the transition of middle-income urban areas toward greener development models with increasing contributions from a diversity of financing sources. Many investments in NbS present unique risks because of their cash profiles that limit access to private financing and social capital. Successful mobilization of private financing and social capital requires certain conditions, including a sizable market for such projects, a good return on investment (compared with alternative investments), and a limited amount of risk (or risk that can be managed without too many complications). Within this context, the major challenges associated with mobilization of private sector financing and social capital for sponge city construction in China are widely recognized as the following: • Large scale and long cycle of investment and construction costs • Lack of clear and sustainable return mechanisms or revenue streams that rely heavily on government or user payments without long-term income guarantees • Inadequate risk-sharing mechanisms in the absence of a comprehensive set of laws and regulations on PPPs (Zhang and Zheng 2019). In order to leverage a wider range of potential sources of private financing and social capital, there is a need to provide a more systematic and comprehensive framework for policy makers, investors, and practitioners to identify and evaluate the wide range of tangible and intangible environmental, social, and economic benefits derived from NbS associated with IUFM. Investments in hybrid infrastructure that bridge the continuum from gray to green and incorporate blue considerations require country-specific policies and instruments led by the public sector and tailored to local conditions. The following recommendations outline a framework for facilitating sustainable funding mechanisms and appropriate financing options to realize those values in support of building an ecological civilization in China. 27 Valuing the Benefits of Nature-Based Solutions for Integrated Urban Flood Management in China _______________________________________________________________________________________________________________________________________________________________________________ 1 2 _________________________________________ _________________________________________ Improve the Recognition and Valuation Enhance the Policy, Institutional, of Benefits Provided by NbS for IUFM and Regulatory Framework Improving access to appropriate financing requires The national government should implement fiscal a robust approach to project preparation and policies to improve incentives for NbS for IUFM. appraisal over the entire life cycle. This should include These policies should improve targeting of public appraising fiscal affordability, assessing social and resources through performance-based subsidies environmental aspects, identifying risks, determining and conditional transfers as well as through financial viability by comparing public and private interest rate support and tax incentives to stimulate options, and sounding out the market. This should demand. China has issued a large number of include identifying the full range of benefits derived departmental regulations and documents, but the from NbS and the values associated with each of the legal basis is not sufficiently robust. Departments benefits, in addition to adopting innovative technology and governments at all levels have different interests, and striving toward environmental and social demands, and administrative processes, resulting sustainability, resilience against natural disasters, and in contradictions and operational difficulties in governance to assure transparency in procurement realizing policy intentions. The national government and robust institutions. It is particularly important to should accelerate the formulation and issuance identify all beneficiaries and to show the distribution of specific financing laws and regulations related of benefits among stakeholders and beneficiaries. to sponge cities. For example, there is a need to Investments aligned with these principles will support clarify risk-sharing mechanisms for PPPs to increase the value-for-money proposition, help extend the life confidence among private sector investors. Provincial of the infrastructure asset, and increase returns on and municipal governments should establish water investment. To do so, a comprehensive database management entities with dedicated offices for of values associated with the each of the benefits guiding the planning and implementation of sponge to be derived from NbS for integrated urban flood cities as core components of IUFM. This would help management should be developed. unite management and supervision of urban water- related administrative affairs, avoid fragmentation of departments and authorities, and promote coordination among departments and levels of government. Given variations in climate, geography, and hydrological conditions, each city in China should be encouraged to develop context-specific guidance that best fits its socioeconomic and natural environmental conditions (Sun 2019). 28 The Gray, Green, Blue Continuum _______________________________________________________________________________________________________________________________________________________________________________ 3 4 _________________________________________ _________________________________________ Improve Targeting of Public Use Market Mechanisms Funds for NbS for IUFM to Promote NbS for IUFM Public financing will continue to play an important role A range of regulatory measures can promote market- in developing hybrid solutions and funding blue and based approaches and create positive incentives green infrastructure. In addition to setting policies that for investing in NbS for IUFM. Systems for trading enable investments in NbS for IUFM, government will stormwater rights have emerged as one such area; continue to have an important financing role. There the government allocates rights to users and allows are a range of sources of public funding, including free trade between owners of these stormwater rights. general revenue along with such dedicated revenues Such regulations typically include onsite retention as levies on water-related services, that can be or detention requirements for new development and directed toward financing NbS. The performance redevelopment projects above a certain size. For of government funding can be improved through example, Kunshan municipality issued a regulation targeted performance-based subsidies and conditional in 2013 requiring all new development to apply transfers for national priority programs. Strengthening NbS, thus laying the foundation for establishing arrangements for managing performance stormwater rights that could be traded if a proper expectations, providing support for improvements, market is established. Urban planners in Shenzhen and monitoring progress can go a long way toward are also gradually introducing a system for stormwater rewarding performance, creating positive incentives management charges and trading of rainwater for facilitating fiscal transfers, and improving discharge rights. The “Planning Guidelines of accountability for results. Such incentives can also Rainwater Utilization System in Shenzhen” requires shift expenditures from postdisaster responses to the retention and use of all rainwater in residential more cost-effective preventive measures, such as areas. Residential areas that do not invest in incorporating NbS into integrated urban planning and facilities to use rainwater—or fail to meet targets for integrated spatial planning at the catchment scale. usage—will be charged a “rainwater discharge fee.” The advent of machine learning provides opportunities Residential areas that exceed the requirement may for mapping city-scale landscapes to a typology of be granted rainwater credits which can be sold to urban characteristics that can provide the foundation residential areas that fail to fully meet the requirements for a performance-based investment framework (see box 7). Where land developers are identified as applicable to NbS for IUFM. major beneficiaries, specific requirements can be used to encourage commitments in investing in NbS, such as linking higher floor-area ratios to commitments by developers to invest in NbS. Such regulations provide opportunities for promoting NbS by enabling property owners or developers to meet a portion of their obligations by buying volume-based “credits” generated through blue and green investments in offsite NbS. To succeed, such initiatives require a strong regulatory foundation and sufficient local development to drive demand for credits informed by guidelines developed according to local conditions, clearly defined program boundaries, and an independent oversight body. 29 Valuing the Benefits of Nature-Based Solutions for Integrated Urban Flood Management in China _______________________________________________________________________________________________________________________________________________________________________________ 5 _________________________________________ _________________________________________ Establish a Revolving Fund for NbS Investments for IUFM A dedicated revolving fund could guide investments box 7 / THE FIRST STORMWATER PURCHASE and make affordable credit available to support AGREEMENT IN CHINA blended financing solutions. The fund could be _____________________________________________ established as a window under the National Green On September 25 2020, Changsha Gaoxin Development Fund established in 2020 (see box District Park Company and the Hunan 8) with a specific focus on NbS. This would allow Yuchuang Environmental Protection Company the close coordination of NbS investments with signed the first stormwater purchase agreement other green projects and leverage the full range of in China at the Hunan Province Green cobenefits and environmental outcomes. Advantages Development Exhibition Sponge City Forum. of a guiding fund include: • Risk-sharing between the government and partners According to the agreement, the Changsha and investors to help build confidence Gaoxin District Park Company will purchase stormwater from the Hunan Yuchuang • Leveraging comparative advantages of the private Environmental Protection Company at a sector, government, and financial institutions 20 percent of the piped water price for and more effectively integrating technical, landscaping and cleaning purposes. The administrative, and financial resources (An 2016) Hunan Yuchuang Environmental Protection • Transparency in definition and distribution Company has worked on rainwater retention of benefits to meet expectations of different and utilization from 2014 and has since utilized shareholders 0.5 million cubic meters of rainwater, which • Flexible and diverse exit methods, including project amounts to 2 percent of the total rainwater liquidation exit, equity repurchase/transfer, securing during the past 6 years, which means there is of assets, and so on, which would eliminate still large potential for rainwater utilization. investors’ concerns about the long investment cycle. Source: Changsha Evening News 2020. National regulations provide for such mechanisms. The approved trust scheme establishes the trust company as the trustee, which can issue infrastructure investment certificates to the public to raise trust funds. The trustee can then use the proceeds to invest in nature-based investments associated with the sponge city initiative in accordance with the approved trust scheme and national regulations (figure 8). 30 The Gray, Green, Blue Continuum _______________________________________________________________________________________________________________________________________________________________________________ figure 8 / SCHEMATIC OF A GUIDING FUND FOR FACILITATING PPPS TO BUILD SPONGE CITIES Fund promoter Policy special fund Policy bank Financial institution Social capital General partner Limited partner Limited partner GP or LP GP or LP 6. Repay the funders. 1. Establish the fund. Preferential policy Goverment support Guiding fond for sponge city authority Social capital Supervision of fund ecological development investment 5. Transfer to the goverment, sell assets, 2. PPP implementation asset securitization, listing Consulting withdrawal. SPV operation firm 3. Franchise agreement User payment Government payment 4. Realize income, included in the SPV income. Operational Subsidy income Resource compensation 31 Valuing the Benefits of Nature-Based Solutions for Integrated Urban Flood Management in China _______________________________________________________________________________________________________________________________________________________________________________ 6 _________________________________________ _________________________________________ Issue Green Bonds Targeting NbS for IUFM The emerging green bond market has the potential box 8 / CHINA GREEN DEVELOPMENT to help mobilize financing for NbS within the urban FUND COMPANY, LTD. context, particularly in areas with strong revenue _____________________________________________ streams. The green bond market has grown more The National Green Development Fund Co., than tenfold since 2013, with US$389 billion in labeled Ltd was established on July 14, 2020 with green bonds issued in 2017, with China recognized a registered capital of RMB 88.5 billion. as a global leader since introduction of its Green The scope of the Fund includes general Credit Policy in 2007. This provides a comprehensive equity investments, project investments, policy, including specific provisions for monitoring investment management, and consulting on and evaluation (IFC 2018), that can further contribute green development, including environmental to mainstreaming NbS for IUFM. The Green Credit protection, pollution reduction, and energy Guidelines issued by the Banking Regulatory resource conservation, among others. It aims Commission in 2012 and the Green Credit Statistics to generate replicable and scalable System introduced in 2014 attempt to define green experiences for green development, particularly credit (including a tool for monitoring environmental in the Yangtze River Economic Belt (YREB). benefits). The People’s Bank of China subsequently required bond issuers to refer to the China Green The Ministry of Finance is the largest Bond Endorsed Project Catalogue, which lists six shareholder with a ratio of 11.30 percent. categories (31 subcategories) of projects eligible for The second largest shareholders are the financing via green bonds. Although the use of bonds China Development Bank; Bank of China has been limited in the financing of sponge cities, the Co., Ltd.; China Construction Bank Co., Ltd., green bond market has developed rapidly, reaching Industrial and Commercial Bank of China Co., about US$7.1 billion (RMB 260 billion) in 2016. The Ltd.; Agricultural Bank of China Co., Ltd.; number of issuances doubled in 2017, with a similar each holding 9.04 percent; the third largest scale, providing promise for investments in NbS is Bank of Communications Co., Ltd. with associated with sponge cities. In May and October of a shareholding ratio of 8.47 percent. The 2018, the Urban Development Company (Chengtou) provinces, related departments and agencies in of Anji county in Zhejiang province issued two Sponge the YREB are among the fund promoters. City Green Bonds of RMB 0.5 billion each, both with a 7-year tenor period, specifically for investments in the Source: Ministry of Finance of the People’s Republic of China 2020. construction of a sponge city demonstration zone in the eastern part of Anji county. 32 The Gray, Green, Blue Continuum _______________________________________________________________________________________________________________________________________________________________________________ 7 _________________________________________ _________________________________________ Develop Special Asset-Backed Programs to Leverage Future Revenues from NbS for IUFM Compared with traditional credit mechanisms Asset-backed programs provide an opportunity to upon which sponge cities rely, green bonds have finance NbS for IUFM by taking future revenues several advantages, including low yields, which from underlying investments and financial subsidies can effectively reduce the cost of financing. They from PPPs as the basic assets to secure financing also lend themselves to promoting green industries (figure 10). Such approaches allow the pooling of because of their long bond cycles that allow for more smaller, often illiquid individual assets to make them effective management of the asset maturity mismatch marketable to potential investors. The advantages of upstream banks. However, most green bonds are of asset-backed financing programs include the issued by banks, and the average tenor of issuances following: is still between three to five years, which may be • Investors pay more attention to the future income too short for investments required to support NbS of the project, and the issuer does not need to pay for IUFM. Lengthening the tenor of such bonds will dividends or interest in the short term, which can require the entry of institutional investors such as effectively save cash flow and reduce the cost of pension funds and insurance companies. These kinds financing. of institutional investors are typically not familiar with NbS for IUFM, so efforts are required to sensitize the • Effective adjustment of the debt structure reduces concept of blue investments and to develop standard the scale of debt and improves the level of asset guidelines. Further, comprehensive assessments of liability management and capital operation efficiency the environmental and ecological benefits of sponge (He 2019). city investments before and after the issuance of Such approaches in China have leveraged the green bonds are required to meet the identification rights to receive service fees in connection with needs of investors. The methodology established in wastewater treatment projects, and they could work this report can be used to facilitate such approaches. for investments in NbS for IUFM. Typically stand- alone investments in NbS for IUFM cannot generate sufficient cash flow from individual benefit streams, but together, they can create an asset-backed security marketable to potential investors for the mobilization of resources (see figure 9). 33 Valuing the Benefits of Nature-Based Solutions for Integrated Urban Flood Management in China _______________________________________________________________________________________________________________________________________________________________________________ ____________________________________________________________________________________ figure 9 / SCHEMATIC OF A POTENTIAL ASSET-BACKED PLAN FOR NATURE-BASED SOLUTIONS FOR IUFM 34 The Gray, Green, Blue Continuum _______________________________________________________________________________________________________________________________________________________________________________ 8 _________________________________________ _________________________________________ Improve Flood Insurance and Risk-Sharing Mechanisms Flood insurance provides another potential source The relatively underdeveloped nature of China’s that could play a more significant role in improving insurance market makes it unlikely that insurance the efficiency and effectiveness of responses to flood companies will develop such products in the absence events in China (Jiang, Zevenbergen, and Ma 2018). of strong demand. Such demand is limited by the high Although there have been several flood insurance pilot cost, particularly in high-risk areas. As such, China projects since the 1980s (Walker, Lin, and Kobayashi should consider establishing an insurance facility 2009), flood insurance remains limited and disaster for flood-related risk. This facility could develop a response continues to rely heavily on government nationwide flood disaster risk pool and serve as a funding. For example, only 2 percent of the damage platform for developing and implementing financing caused by the July 2016 floods are thought to have solutions for risks associated with disasters. been insured, compared with an average of 70 percent of homes covered in the United States (Liu 2016). Where flood insurance is available in China, it is often part of general property insurance, and although several commercial agricultural insurance schemes include flood insurance, these are usually limited to specific locations in high-yield areas where the risks are well understood. Experiences from these pilot programs reflect global experience, demonstrating that flood insurance is most effective when the following occur: • Insurers can assess the risk (including assessment through access to flood data), and they have confidence in the regulatory framework and the effectiveness of mitigation measures. • Insurance purchasers can accurately assess their risk and undertake mitigation measures with appropriate insurance products available to cover the residual risk. • The risk pool is deep enough (for example, through a national scheme or access to reinsurers). 35 The Way Forward The future success and scale of China’s sponge city program and the promotion of NbS for integrated urban flood management will require an appropriate mix of sustainable funding and appropriate financing sources. Recurrent market value-based property taxes typically provide effective revenue streams for local government investments because they are closely tied to public service delivery through property values, their base is immobile, and they are highly visible, which can improve accountability of local officials. However, the experience with property taxes in China remains limited to a few pilot cities, and there is a need to explore other measures for generating local revenues in support of NbS for IUFM. Given the diversity of urban conditions, a range of funding and financing options could be targeted and tailored to local conditions. Determining the appropriate mix of funding and financing will rely on the affordability and collectability of associated revenue streams. Where these are limited, public funding will continue to be essential for the investment in public goods associated with many of the benefits derived from NbS for IUFM. However, the deployment of government funding can be improved through an appropriate mix of public funds, structured incentives, and specific policy instruments to promote the inclusion of NbS for IUFM and the participation of private financing and social capital along a continuum. These measures include leveraging government funds as cost-share, targeting performance-based subsidies and conditional transfers, adopting regulatory measures to promote market-based approaches, creating positive investment incentives, establishing special project vehicles that can issue dedicated bonds marketed to institutional investors, pooling investments across project beneficiaries and promoting new asset-backed instruments, developing blue infrastructure guidelines for the green bond market, and engaging insurance companies in developing appropriate products along with the establishment of flood risk insurance facilities to develop a nationwide flood disaster risk pool. There is increasing recognition of many of the direct and indirect cobenefits that can be derived from NbS for IUFM. However, the value of these derived benefits are not well captured by traditional approaches to project economic analyses. 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