Amid inflation and the cost-of-living crisis, cities face difficulties in making the investments they need in environmentally sustainable projects that will provide dividends in the future. Allison Lobb, Executive Director at Bankers Without Boundaries, shares a banker’s perspective on gathering finance and investment for such projects. One important stream for many cities is European funding. However, Lobb underscores that “the EU offers a lot of help to Cities, but navigating the system can be challenging given the number of facilities and application processes.”
Navigating the system can be challenging
The NetZeroCities Project, in which Eurocities and Bankers without Boundaries are key partners, works with Cities to help them plan their Net Zero investments and then access the necessary funding in a timely fashion. Lobb points out the project’s potential to bring all the information together in one place will hopefully transform the planning and funding process for Cities.
Nevertheless, cities will not be able to meet their needs by relying on funding and subsidies alone. Attracting investors, as well as innovative methods of financing local initiatives, including ‘revolving funds,’ ‘energy performance contracting’ and crowdfunding are new territory for cities. For this reason, the EU-funded Prospect+ project is currently inviting cities to join its last learning cycle, which includes peer mentoring and study visits (click here to register for the webinar that will launch the last call for applications). Cities can also join the online Community of Practice to share their experience with, and learn from, other cities exploring the field. If you work in this area, click here to discover more.
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Focusing on the critical aspect of investor engagement, Lobb discusses the significance of project bankability in sustainable urban development. “Investors are very keen to look at projects… once you have got that project to a bankable level,” she remarks, meaning that in order to attract investors, municipal plans must achieve a certain of level initial viability.
Lobb poses the question striking many cities: “What does bankability mean, and when is it bankable?” Answering that “Projects have to be financially viable and do have to generate a return for investors.”
Projects have to be financially viable and do have to generate a return for investors.
One of the first steps here is risk assessment. Lobb stresses the importance of rigorous financial analysis: “Risk and scenario analysis is very important when thinking about whether a project is bankable.” A practical framework for assessing financial health must include analysis of “cash flows, costs, and payback profile.” This approach is vital for city authorities and developers to align their projects with investor expectations.
Debt and equity
Lobb also underscores the critical distinction between different types of financial support. “Understanding the difference between debt and equity is another important concept to get behind,” she notes. Debt financing, commonly through issuing municipal bonds, involves borrowing money that must be repaid with interest. This method carries a defined repayment obligation, but it allows municipalities to retain full control and ownership of their projects. The risk primarily lies with the municipality, as failure to repay can lead to legal and financial repercussions, and taking on debt can impact the municipality’s credit rating and future borrowing costs.
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On the other hand, equity financing, less common in municipal contexts, involves raising funds by selling a stake in a project or asset, often seen in public-private partnerships. This method can distribute the risk more evenly, as investors share in the project’s success or failure. While equity financing does not increase municipal debt or directly affect credit ratings, it can mean ceding some control and ownership to investors, impacting decision-making and project management.
In choosing between these two, municipalities must weigh factors like risk tolerance, control and ownership needs, and the impact on credit and budget. While debt financing offers predictability and full control, equity financing provides risk sharing but may involve more complex arrangements and potential revenue sharing.
Crowdfunding and beyond
Lobb also advocates for a more expansive understanding of potential investors in sustainable city projects. She questions traditional perceptions, asking, “Who are the investors across the investment landscape?” and expands the definition to include various stakeholders with diverse interests, such as financial institutions, industry, and the public sector. Highlighting the potential of crowdfunding, she states, “We need to make [crowdfunding] more mainstream.” Currently, few cities are experimenting with this promising possibility.
We need to make [crowdfunding] more mainstream
Crowdfunding is a collective effort by individuals, groups, enterprises, or organisations to pool money, supporting initiatives of common interest. This method of citizen financing has seen significant growth thanks to technological advances and widespread internet access, using digital platforms to promote initiatives and gather contributions.
One of the key advantages of crowdfunding is that it fosters a sense of community involvement and ownership among contributors, enhancing public engagement in municipal projects. Furthermore, crowdfunding allows for the fast and simple implementation of initiatives, streamlining the process and reducing the time from conception to realisation. It improves financial efficiency by cutting down on intermediaries and agents needed for project implementation, which can lead to cost savings.
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Crowdfunding is ideally employed for small-scale projects and short-term initiatives, making it a great option for municipalities looking to fund specific, community-oriented projects. This method’s scalability means that the size and scope of a project can be adjusted to match the interests of multiple private investors.
The city of Bologna experimented with crowdfunding for green spaces as part of Eurocities’ EU-funded ROCK project, and is now using the method again to help gather funds to prevent the collapse of a local monument. Examples of successful crowdfunding ventures in the municipal context include the Green Energy Cooperative in Križevci, Croatia, which launched a crowdfunded initiative to install a solar PV system on a local administrative building, and platforms like Windcentrale in the Netherlands and Abundance in the United Kingdom, which focus on green energy investments.
Lobb also points out the role of corporate investment in financing sustainable projects, noting, “Most large companies will have sustainability or impact budgets… great ways to get projects financed.” Lobb points to non-traditional financing models like marketing and sponsorship opportunities, while stressing enforceable contracts and clear objectives to establish economic viability.
Most large companies will have sustainability or impact budgets... great ways to get projects financed.
Lobb shared these insights as part of the EU-funded Prospect+ project, where Eurocities leads the Community of Practice and Policy Dialogue, and cities interested in learning more about alternative sources of funding and finance for urban projects can still join Prospect+ communities of practice to share and discover more.
The Prospect+ Policy Dialogue survey reveals key challenges faced by European public authorities in adopting innovative financing instruments. A primary concern, as indicated by 96.7% of respondents, is the need for increased capacity – both in terms of knowledge and time – to effectively use these financing options. Alongside this, 73.3% cite the necessity for legislative and regulatory changes at the national level, suggesting that current frameworks are not fully conducive to innovative financing.
Choosing private partners
Concerns about transparency in choosing private partners and the complexity of obtaining funds through these new instruments are also prevalent, with 40% of respondents noting each issue. This highlights the need for clearer guidelines and simplified processes. The underdevelopment of the market in finding appropriate private partners is another significant concern, indicating a need for broader market development to fully leverage the potential of innovative financing in public projects.
Overall, these findings emphasise the necessity for targeted efforts in capacity building, regulatory adjustments, and market development to facilitate the adoption of innovative financing methods by European public authorities.
Upcoming opportunities from Prospect+ will go some way towards meeting this need. On 22 January, Prospect+ holds a webinar on innovative financing instruments and the last call for applications (register). Consultations on cities’ financing needs are ongoing (add your feedback here).