The transition to a low-carbon economy is a complex issue for municipalities and governments, partly addressed through project finance and public-private partnerships. Today, Financing and loans for urban development projects has a strong environmental component while providing economic benefits to residents.
In recent years, European and international discussions have given rise to new concepts of sustainable urban development that require significant sources of long-term financial resources, such as investment loans.
Planning for the sustainable development of cities and the construction of a sustainable urban environment currently requires an increase in the share of capital investments of municipalities and diversification of funding sources.
Given that government in most cases declined the funding for public projects, an important trend in project finance in this context is to focus on innovative financial models, attract private capital, enhance cooperation with international financial institutions and enter into external capital markets to attract additional investment.
Tools for financing and loans urban projects
Investments in sustainable urban environments usually include financial engineering tools, which are most often implemented in the form of project finance and public-private partnerships. Both forms are especially relevant for European cities, given their many advantages over grant funding and the benefits from their implementation.
International practice shows that public-private partnership is the leading tool for financing investments in the construction of public infrastructure facilities and the provision of related services in the absence of the necessary resources in the state and municipal budgets.
Financing of urban development projects by Green bonds
The most common methods of investment project financing by municipalities is direct financing from the capital market through the issuance of debt instruments such as bonds.
between 2008 financial year, green bonds have been an important innovation in the development of municipal debt instruments, introduced in Europe with the first issuances by public institutions such as the EIB and the World Bank, followed by some municipalities to finance sustainable urban development projects.
The growing interest in innovative bonds from issuers, investors and intermediaries requires the application of standards for assessing the environmental friendliness of bonds. The main tool that allows investors and intermediaries to assess the environmental friendliness of bonds is the Climate Bond Standard and Certification Scheme (currently Standard 3.0). Certification confirms that a specific investment project brings significant environmental benefits in accordance with the eligibility criteria.
Financing raised through bonds is used to finance low-carbon and sustainable infrastructure in areas such as transport, energy generation and transmission, building retrofits, industrial energy efficiency, water resources, pollution and waste control, agriculture and forestry.
Project finance of Sustainable urban development project
Project finance is a method of financing sustainable urban projects, public infrastructure and public service projects in which the source of debt repayment and return on equity involved in the project is the cash flows generated by this project.
This concept can be applied in the process of financing investment projects carried out within the framework of financing the development of municipal infrastructure. A specific feature of project finance is a very high share of loans in the financial structure (up to 90% of the project cost). This requires the establishment of an independent company, referred to as a special purpose vehicle (SPV) or special purpose company (SPC).
Project finance for sustainable urban projects and its entities are listed below:
•Operator. The project should be managed and maintained by a specialized company with relevant experience, which, after the completion of the project, will take over the full range of tasks for managing this project, including the current operation of the facility. The operator can be a project sponsor, a specialized municipal company or a contractor.
•General contractor. Project finance schemes usually include a single general contractor who, alone or in cooperation with subcontractors, is responsible for launching the project (such projects may be carried out on the basis of an EPC contract). It should be noted here that the general contractor can simultaneously act as a sponsor of the project.
•Lenders. When financing urban projects, the lenders are most often local banking institutions that provide financial support directly to the Special Purpose Vehicle.
• Sponsors. In essence, these are the initiators of the project (private companies, organizations, municipal enterprises or local government) who promote the investment project and receive support from the authorities and the local community or other key organizations. Sponsors also ensure the integration of the activities of all subjects of the project finance, as well as proper control over the implementation of the project.
The importance of this type of financing and loans for urban development projects is increasing along with the growing interest in the concept of public-private partnership, which contributes to the involvement of private capital in public initiatives. Using flexible project finance schemes, municipalities have additional opportunities to develop the structure of the local economy and increase control over private enterprises operating de facto in the public sector.
Public-private partnership for urban development project
Public-private partnership (PPP) mechanisms tend to be used in the most capital-intensive projects, which would otherwise be a heavy burden on the municipal budget. When it comes to large urban projects, experts identify the following main advantages and potential benefits of PPP
However, grant financing and concessional loans are not available in all countries, and not every project can benefit from international support.
If you are looking for an affordable source of loans for sustainable urban development projects, contact Viola Funding Limited. We provide long-term financing for large projects around the world on favorable terms, accompanying our clients at all stages of project implementation, including financial modeling, project finance, engineering, construction, etc.
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