Entities from the public or private sector may set up a revolving fund to increase available capital to ease the financial strain on taxpayers. Under this financing model, a municipality would "invest" debt or equity in a project, for example an energy efficiency program that lowers energy costs and frees up part of the budgetary resources that were utilised to pay utility bills. These funds can then be used to repay the prior investment and to reinvesting in new projects. Therefore, a model with a rotating structure is developed in which capital recovered can be reinvested in other initiatives or it can be used to pay off the original investment.
Revolving funds can be set up in many different forms and at different levels. Although these funds are typically organised at the national levels, they can also be established at the municipal or at regional levels. They can be created as internal revolving fund (fully financed through municipal budget) or an external revolving fund, funded through external funding agencies, financial institutions or private investors (Novikova 2017).
Most municipalities choose to do one of the following:
a) Set up an internal revolving fund and outsource project implementation to service providers and ESCOs;
In this model, the municipality provides the seed capital and acts as a fiscal manager. ESCOs and other external service providers can access financing for the execution of energy efficiency projects through the revolving fund. This funding can come in the form of loans, grants or other financial instruments. The amount of energy that is saved together with the capital that is refilled is then put back into other new initiatives that are designed to save energy. In situations in which municipalities are little and do not have adequate funding to set up an individual fund that is owned by the municipality, the required resources could be consolidated by multiple small municipalities to produce a prevalent method of generating funds with shared operation and management expenses. This would be an option in situations in which municipalities are small and do not have adequate resources to set up an individual fund that is owned by the municipality.
Advantages: The huge merit offered by this model is availing a sustainable and long-term orientation. When a revolving finance has been entrenched and energy savings have been accumulated from the first phase of investments, those cost reductions in energy consumption can be put toward the financing of new projects. Ideally, energy costs, service charges, fees and interest rates cover all operational costs of the fund (ESMAP 2014; Limaye et al. 2014). Organisations that have minimal or restricted access to borrowing capabilities may benefit from utilising an internal revolving fund as an alternate vehicle for the acquisition of cash. (European Commission 2017b).
Disadvantages: The creation of revolving financing needs a significant political commitment and a sizeable investment of adequate time, institutional and human capacity. The cash inflow will accrue only after some years; therefore, regaining finances and operating costs may be lengthy. Hence, it is very important to consider financial sustainability as it would ensure the presence of progressive cost-effectiveness of the finances and the long-term strategy for managing to mobilise resources. Additionally, a revolving fund needs an entity to control the funds to guarantee administration and leadership. Coming across experienced and dedicated staff to facilitate the operation of good administration and leadership can be complex and difficult, especially in small municipalities (ESMAP 2014).
Projects that can be financed with this model: The model could be applied within medium-sized to large cities or groups of smaller municipalities that need to finance long-term and multi-objective projects, including those for building energy efficiency improvements, street lighting, combined heat and power plants and renewable energy. The maximum project size depends on the size of the total budget available from the fund. However, cumulative energy savings should be significant enough to justify the complex set-up required for the fund and its operating costs.
b) Set up an external revolving fund with multiple financiers, service providers and ESCOs.
Revolving funds may draw into external financing mechanisms to make money available to local governments for energy efficiency projects. Any number of potential funding avenues might provide the means to raise the required investments and the capital can be made available for the first and subsequent projects (European Commission 2017a). Loans and grants from private or public investors such as capital providers, energy service businesses, utilities, banks and even state or federal governments are all possibilities. Capital returned to other funds and initiatives, interest paid back on loans, and operating expenses covered by service fees are all potential outcomes should the fund eventually become self-sufficient (Limaye et al. 2014). The majority of the funds that have previously been established as being external are administered by a specialised fund manager, irrespective of whether it is a newly formed utility or company, an ESCO or another organisation completely (ESMAP 2014).
The success of an alternative funding plan, in comparison to internal funds for energy saving, depends on the scale of accessible capital and the project's programming goals.
Advantages: One common merit of this model is that by combining private investors and financial institutions, it makes it easy to access larger amounts of capital. Investment can also be scaled in phases depending on the performance of the fund. The outreach of the program can be slowly expanded. Additionally, the participation of private investors is welcome in urban development initiatives that highlight the benefits of energy efficiency to both individuals and society (ESMAP 2014).
Disadvantages: The process for creating an external revolving fund, in particular, involves a large number of partners working together across several stages, which adds complexity to the financing model as a whole. When funds have the ability to behave in a monopolistic manner, this function of a private business can be a concern since it might operate as a funding manager for a public fund. This can pose a political risk (ESMAP 2014). Since most of the duties connected to a revolving fund are moved from donors to fund managers, there is an increased risk of conflict when using public and private resources in a revolving fund (Oxfam 2017).
Projects that can be financed with this model: As is the case for internal energy efficiency funds, the success of this financing model depends on the available funding and programmatic priorities of the specific project.
Prepare a needs assessment report
Review the required capital, period of investment, available own budgetary resources, available human resources and technical expertise and the urgency of the project
Review available grants, low interest loans and other external financial investors
Research whether revolving fund financing exists at the national, state or regional level. If existant explore financing from the revolving fund. If not proceed to point 5
Develop a financial plan for the revolving fund to identify the required initial capital, recovery time, reinvestment and the period for complete execution of the project
Based on the initial capital required review whether an internal or an external revolving fund is the most suited choice
Review the various options of setting up a revolving fund (internal or external) based on legal restrictions
Review whether revolving fund is the best suited option based on the above analysis
2. The KredEx Revolving Fund Estonia (Page 27)
ESMAP. 2014. "Financing Municipal Energy Efficiency Projects."
European Commission 2017a. "Innovative Financial Instruments (blending)."
European Commission 2017b. "ManagEnergy."
Limaye, Dilip, Singh, Jas and Hofer, Kathrin. 2014. "Scaling Up Energy Efficiency in Buildings in the Western Balkans. Establishing and Operationalizing an Energy Efficiency Revolving Fund." (World Bank Group Guidance Note).
Novikova, A., Stelmakh, K., Hessling, M., Emmrich, J., and Stamo, I. 2017. Guideline on finding a suitable financing model for public lighting investment: Deliverable D.T2.3.3 Best practice guide. Report of the EU-funded project “INTERREG Central Europe CE452 Dynamic Light”, October 2017