Back to knowledge

Simple Contracting Model

In this model a private entity is offered the management and implementation of an entire infrastructure project including sourcing capital on behalf of the municipality. The private entity undertakes the project for a mutually agreed fee. This can also include vendor finance, where a private entity provides financing to private end users for investing in their products.

Advantages: The main merit of this model is off-balance sheet (OBS) financing for the city. Contracting models differ from loans in this respect because the latter are normally on-balance sheet for the city. However, the responsible municipal authority should verify the use of an off-balance model. A further advantage is that the tendering process provides an opportunity to select specialised companies that have relevant know-how and experience and offer more attractive prices than those of the city or present operator.

Disadvantages: The main disadvantage of this model is that it is associated with high financing costs from the city's perspective. This is because the capital costs associated with contracting are typically higher than those payable through the city's budget or financing models where the interest rates are low. This happens even in the application of equity or re-financing loans from banks. Such costs may pose challenges to cater to and may not be the most attractive financing option, if other, cheaper funding such as grants is available.  

For the simple contracting model to be a success, municipalities need to invest time and energy upfront to emphasize the planning of the general project governance, as well as the project itself, before proceeding to contract private entities. The cities should also ensure value is added for all shareholders, and also the lack of management and ownership does not become an issue for the municipality (Novikova, 2017).

Projects that can be financed with this model:  For the participation of contractors to be justified to take part in the project, they must meet certain minimum size criteria, which mostly need co-financing by a bank. The majority of the time, there is not a predetermined size criterion; nonetheless, the volume of a project ranging from half a million to a million is considered to be a significant minimum. If, on the other hand, the contractor is also responsible for carrying out activities, then the value should be increased. This is due to the fact that they will be compelled to establish a location, complete with equipment and employees, within or close to the city (Novikova, 2017).

Vendor Finance 

Vendor finance is an off-balance sheet financing option for the municipality in which a vendor provides partial or full credit to the buyer so that the buyer has the financial possibilities to purchase the vendors product. The buyer then pays back the credit in instalments or through energy savings over an agreed time period. To make this model attractive to the buyer, the seller provides the credit at an attractive interest rate. A simple example is high priced energy efficient television sold with zero percent credit. The municipality not only benefits from indirect financing but also engages the community in participating actively in the program. The biggest advantage for cities is that off-balance sheet financing options do not lead to municipal debt and, therefore, do not count toward borrowing capacity. Also advantageous is not having to get the money through another actor such as a bank. Additionally, it generates awareness amongst the community and creates a sense of ownership. 

Projects that can be financed with this model:  

Small scale projects that require local community engagement such as retrofitting of residential buildings.



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.

Comments ()


Under license CC BY-NC-SA
This license allows reusers to distribute, remix, adapt, and build upon the material in any medium or format for noncommercial purposes only, and only so long as attribution is given to the creator. If you remix, adapt, or build upon the material, you must license the modified material under identical terms.