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Milestone 01


The Wyre Catchment Natural Flood Management Project


Initial Project Scoping


Green Finance Institute / GFI Hive / Investment Readiness Toolkit / Initial Project Scoping / The Wyre Catchment Natural Flood Management Project

 Project Overview

The Wyre Catchment NFM project is the first example in the UK of private investment enabling the delivery of natural flood management. The project will deliver more than 1,000 targeted measures to store, slow and intercept flood water and prevent peak flow in a catchment in England, with the interventions hosted by local farmers. Beneficiaries of the reduced flood risk are paying for the interventions, and the Project’s Community Interest Company has successfully raised a nine-year £850k private loan facility to help fund the interventions.

 

Milestone 1: Initial Project Scoping

Often the initial task is to understand the site(s) you want to use and the land use change needed for nature restoration or creation. This includes considering the goals of the land managers involved, the vision within the wider catchment or neighbouring area, and whether there are permits or planning consent needed for any proposed changes.

At this stage, you can also conduct a high-level assessment to determine which revenue streams can be generated from ecosystem services , e.g. carbon credits, flood reduction cost savings, or biodiversity units, which will be crucial for identifying buyer interest.

Finally, it is useful to have an idea of the costs of the project and potential grant funding that may be available to support initial development.

Milestone 2: Identify and Work with Sellers

Initial ownership of the ecosystem services will belong to the landowners or, in some cases, the tenants of the sites that the project is using. However, these can be passed onto others, such as third-party project developers, with appropriate legal arrangements and compensation. In some cases, there may be a sole seller of the ecosystem services, where the site or landholding is large enough that it delivers the volume of ecosystem services needed to cover the costs of the project and attract buyers.

However, in order to achieve scale and impact, a project will likely involve multiple sellers, such as neighbouring farmers and estate managers. Scale of land is often needed to deliver significant environmental outcomes, and also to attract private finance. Project developers must plan how they initially contact and engage with these sellers going forward, building their wants and needs into the project.

Milestone 3: Baseline and Estimate Ecosystem Services

At this point, you will have understood the vision for the project and identified a particular ecosystem service or set of services to be sold. The next step will be to carry out detailed analysis – baselining each ecosystem service and quantifying what will be able to be delivered from the interventions, as well as planning how to monitor and maintain these interventions. You will need to rely heavily on ecological expertise for this more scientific Milestone.

At this step, standards, verification and accreditation methods will be considered in more depth.

Milestone 4: Identify and Work with Buyers

Based on your earlier market analysis in initial project scoping, you will have identified one or more groups of beneficiaries who may be willing to ‘buy’ or pay for the ecosystem service(s) to be created, restored or maintained. Buyers vary – as do their requirements – but at this step, greater buyer engagement is now needed to develop a deal that channels money towards the nature-positive outcomes that your project wants to deliver.

 

 

Milestone 5: Develop Business Case and Financial Model

You’ll have started building your business case and financial model in earlier steps – laying out your project’s vision, the market proposition and estimating costs and income. This step offers a review, in addition to providing details needed to build out the financial model and business case more fully. Both of these key documents will be iterated throughout project development, and will likely be altered during project delivery as new information emerges. These documents are interlinked and, if developed correctly, will ensure your project’s viability and help you with discussions with stakeholders – including sellers, buyers and future investors.

The financial model will also enable you to better understand the type of structure your project may take to attract investment (i.e.a loan, an equity investment, a bond) and what sort of returns you can afford to pay/offer.

Milestone 6: Develop a Governance Structure

A governance structure will inform the way in which the project is run when fully operational and for what purpose. It identifies appropriate decision making processes, who is responsible for what actions, and what controls are in place to make sure that the project is meeting its stated goals, all while abiding by the risk appetite of its engaged stakeholders. The legal entity to host the project will be a key driver in this, and the appropriate choice of entity will be dependent on several factors that are outlined below.

Your governance structure should align with and underpin your business case, as a necessary component of how the project will deliver its environmental outcomes and other strategic targets.

Milestone 7: Identify and Work with Investors

It is important to note that not all projects will need up-front investment, but for those that do, this section provides a framework for thinking around the development of the investment model. This does not constitute financial advice – as the GFI is not licensed to do so. However these considerations are based on the insight offered by project developers and other market stakeholders.

An investor will be a new core stakeholder in your project, and it’s just as important to think of what you require from investors, as much as what they require from you – so that you can build a positive and collaborative relationship with them.

This entails defining the investment ask (in line with the financial model), the strategy for approaching the right investors, and the negotiation of terms that can then be formalised in contract development (Milestone 8).

 

Milestone 8: Establish Legal Contracts and Closing

When all relevant stakeholders have been engaged and their terms of engagement are clarified as much as possible, this is the time to develop the legal contracts and close the deal. This stage is last because legal fees are expensive, and it is generally advised to determine as much as possible in previous stages before starting to draw up contracts in earnest.

Note: The information in this Milestone does not constitute any form of legal advice but instead serves as practical advice on how to manage engagement with lawyers and the process of contract development.

The Green Finance Institute is not a firm of solicitors or connected in any way with the courts. The information and opinions we provide in this section and across the Toolkit do not address your individual requirements and are for informational purposes only. They do not constitute any form of legal advice. We recommend that appropriate legal advice should be taken from a qualified solicitor before taking or refraining from taking any action.

Community Engagement

Community engagement is highly advisable for any project that aims to sell ecosystem services, to ensure fair outcomes for local communities and the long-term success of the project. Project developers can build connections with local stakeholder groups early on to spot both risks and opportunities.

Policy and Regulation

Project developers and enterprises will need to keep a continuous check on how current and future policy may affect the project, and also opportunities for the project to inform policy. The role of private finance for nature across the UK is being encouraged by the UK government and its devolved administrations, and new rules, standards and markets are being developed.

 
Acknowledgements 

 

With many thanks for their time and insight on this case study:

Dan Turner, Technical Lead, Land Management and Market Creation, The Rivers Trust

 

The Rivers Trust - Wildlife and Countryside Link

 

Dan Hird, Principal and Founder, Nature Finance

 

Thomas Myerscough, General Manager, Wyre Rivers Trust

 

Date published: 08/12/2022

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Origins of the project

The Wyre Catchment NFM project was started after Storm Desmond hit the UK in 2015, flooding 5,200 homes. In 2016, United Utilities, Flood Re, the Environment Agency (EA), and The Rivers Trust started to explore how to implement natural flood management (NFM) solutions on a wider scale as a potentially more cost-effective alternative to ‘grey’ infrastructure like reservoirs and weirs.

The Wyre catchment in North Lancashire was chosen for several reasons. Namely, it faced a high-flood risk, with a one-in-50-year flood event occurring four times in the last 20 years. Furthermore, ‘grey’ flood defences would not provide any significant reduction in flood risk, as demonstrated by a prior feasibility analysis by the EA. Whereas, the upper catchment, predominately consisting of upland farming, provided significant opportunity to deliver a catchment scale NFM intervention. Furthermore, the Wyre Rivers Trust had already been delivering NFM in the area, building strong, trusted working relationships with farmers and land managers.

A core scoping team was put together from across the Rivers Trust, the Wyre Rivers Trust, Triodos Bank UK, the EA, United Utilities, Flood Re, Co-Op Insurance and the Esmée Fairbairn Foundation.

 

Funding for Project Development

Some early scoping costs were covered by members of the project team, such as the initial hydrological study (see below). However, when the project team was confident that this project could feasibly benefit from private finance, it sought external development funding.

In 2018, the EA, Defra, Esmée Fairbairn Foundation and Triodos Bank UK put together a pilot programme to fund nature projects that aimed to attract private investment. Wyre NFM was one of the four projects, and a package of development grant funding was announced in 2020. In conjunction with Natural Course, a 10 year EU LIFE Integrated project, this funded the development of the project to ‘investment readiness’.

 

Early intervention scoping

United Utilities commissioned a hydrological study of the catchment by Viridian Logic, an ecological consultant based in Brighton. This took three months to complete. The study showed that interventions in specific areas, such as hedgerow planting and leaky barriers, could reduce the flood risk of the area. This data underpinned the project’s scientific model that mapped the NFM opportunities.

Other ecosystem services, such as carbon sequestration and biodiversity were discussed, but the focus at this stage remained on flood risk reduction. This was due to the overall ambition of the project, and the indication from the data that potential revenue streams from other ecosystem services would be minimal.

Dan Turner, Technical Lead at the Rivers Trust, advises that project developers should keep time spent on early modelling proportionate to the size of the project, as this can take a long time and there are many ways to analyse ecological data.

An initial desk-based study of the hydrology model took around one month. After ruling out interventions that were not feasible through constraints checking (e.g., tree planting in protected sites), the team focused on those interventions within the top 5% of flood risk reduction effectiveness.

 

‘Ground truthing’ interventions

The Wyre Rivers Trust then led a ‘ground truthing’ exercise on these interventions. This meant more detailed scoping, including the direct (on the ground) observation of the sites where the interventions were proposed. This exercise took around three months. The Wyre Rivers Trust’s catchment knowledge and existing relationships with local land managers made it best positioned to undertake this.

Some of the ground truthing included desktop research, for example determining the sites under protected status. However, much of the activity was based on site inspection and talking to the land managers, who were mainly farmers. A common topic of discussion was agri-environment schemes, which many sites were under, and therefore there were constraints as to whether they could implement the interventions within existing schemes (See Milestone 2).

Turner comments that early engagement with land managers is essential, but it is important not to raise expectations prematurely. Mindful of this, the Wyre Rivers Trust instead developed a broader farm plan for each farmer that set the potential to diversify income streams with nature-based projects. This included flood risk reduction but also carbon credits, nutrient mitigation and biodiversity net gain. Farmers were receptive, and the plans confirmed where interventions were possible and what constraints needed to be addressed. The farm plans also supported another pipeline of projects for the Wyre Rivers Trust to consider outside of the project, such as potential nutrient mitigation opportunities.

 

Cost and Income Scoping

To develop a cost base, the project team again used the Wyre Rivers Trust’s local knowledge and experience. As it had been delivering interventions in the catchment over many decades, the Wyre Rivers Trust was able to provide estimates of both upfront costs and maintenance costs of the interventions. Land managers would need to be paid to host these interventions, but figures on these were less clear and were developed later in the project (See Milestone 2).

On the income scoping side, the majority of buyers were involved at the project’s start and had a strong interest in paying for reduced flood risk. However, Turner comments that revenue figures were not discussed until much later, as the project took a ‘reverse engineering’ approach to the financials. “Instead of starting by sizing demand, we focused first on the target reduction in flood risk, the capital cost of the interventions, what we would need to pay farmers, how much it would cost to operate a special purpose vehicle and then the costs of servicing the initial investment required. This reverse engineering process developed through a fairly simple integrated financial model then made it possible to discuss a specific annual revenue requirement with the buyer group directly,” he says.

Triodos Bank UK also acted as a financial advisor, in line with the development funding that the project received. It focused on the commercial elements of the project, immediately starting to build the financial model and the business plan (See Milestone 5).

 

 

Photo credit: the Wyre Rivers Trust

 

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