A concessional loan or 'soft' loan is credit offered to municipalities at a below market rate of interest. Concessional loans could have lenient conditions, offer differed payments, grace periods, interest holidays or income contingent payments. They could also offer longer amortisation schedules than conventional loans.
Most municipalities are eligible to obtain low-interest (soft) or concessional loans to be able to finance activities that may not be the most attractive financially, but yield fundamental services to society. Municipalities often finance investments with concessional loans offered through national development banks, dedicated funds or European banks and funds (e.g., the European Investment Bank (EIB), European Bank for Reconstruction and Development (EBRD), or the European Energy Efficiency Fund (EEEF)), in cooperation with local commercial banks (Novikova, 2017).
Advantages: Municipalities can access concessional loans with below market interest rates. Capital from debt financing can be combined with money obtained from other financing models, including revolving funds, with minimal administrative requirements.
Disadvantages: Although interest rates are typically low, the municipality must repay the debt. In addition, because the debt is listed on the municipal balance sheet, it weakens the debt-to-equity ratio, which might result in negative effects on the municipality’s access to additional credit.
Projects that can be financed with this model: If a municipality has a positive credit record, its projects can be financed under this model. Concessional loans may be tied to specific project objectives.
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.