Instrument Overview
The revolving fund is a financial scheme used to continuously replenish and reuse capital for specific purposes, such as financing projects or providing loans. As the loans get reimbursed, the capital is reloaned for another project, allowing it to be used repeatedly [1].
In addition to financing projects, revolving funds can also include a technical assistance component. This means that, alongside financial support, beneficiaries receive guidance, training, or expertise to ensure the successful implementation of their project. For example, a municipality using a revolving fund for energy efficiency projects might also provide businesses or homeowners with advice on how to optimise energy use [1].
Why it matters for cities
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.
Key features [2]
- Financial savings through energy efficiency measures are returned to a dedicated part of the municipality budget (Revolving fund) from which new measures can then be financed.
- When municipalities do not have access to other types of loans from financial institutions, or for those that can’t get loans with acceptable rate of interest.
- Preferential interest rate on the loan (for public buildings)
- Municipality can reuse capital with designing a self-sustaining and long-time oriented fund
- Involvement of private investors
- Merging funds if municipalities are small
How It Works
The step-by-step to using revolving funds are as follows [1]:
1) Initial capital allocation: The fund begins with an initial pool of capital, typically provided by a government agency, nonprofit organisation, or financial institution, or through a grant. The capital is then used to finance loans, grants, or specific projects.
2) Distribution of funds: The fund provides financial assistance to recipients and are used for their intended purpose, such as undergoing housing renovations. The funds are provided with specific conditions and obligations as to the return of the loans.
3) Revenue generation or repayment: These projects generate capital – either through revenue generation or savings) – and are re-allocated into the fund. For example, in the case of housing renovations, once the housed are alienated (i.e., sold, rented, or is transferred through inheritance), the money used for the renovation of the house comes back into the revolving fund to renovate other houses in the future.
4) Re-investment into new project: As funds are repaid and returned to the initial pool of capital, they can then be redistributed and reinvested into new projects, ensuring a continuous cycle of financial support.
Stakeholders will depend on the nature of the project. In the case of social housing renovation, stakeholder may include: municipality, renovation partners, NGOs, research institutions.
Benefits & Challenges for Cities [1]
Benefits
- Self-sustaining and revenue generating: A revolving fund ensures financial sustainability by reinvesting repaid funds or generated revenue back into the system. This allows initiatives to continue beyond the initial investment and promote financial sustainability.
- Transferability: Revolving funds can be applied across various sectors, making them a versatile financing tool for urban authorities.
Challenges
- High implementation costs: Setting up a revolving fund requires significant initial capital, which may require government grants or private investors.
- Unpredictable timeline: The uncertainty of loan repayment timings for the return on investment makes financial planning more difficult. Delays in repayment can disrupt the fund’s cash flow, affecting its ability to finance new projects and maintain sustainability.
- Building trust with participants: For a revolving fund to succeed, borrowers must have confidence in the system and their ability to repay loans. Transparency in fund management, clear communication of loan terms, and guidance from financial advisors or social counsellors can help build trust.
Use Cases
San Antonio revolving Energy Efficiency Fund [3]
The Office of Sustainability, at the City of San Antonio (USA), has established a revolving Energy Efficiency Fund. The fund was established in 2011 using $4.6 million of the City’s American Recovery and Reinvestment Act (ARRA) funds. The fund was developed to help the City reduce its $34 million per year utility budget through energy efficiency retrofits at its facilities. The City’s building portfolio is comprised of over 15 million square feet encompassing fire stations, police stations, health clinics, recreation centers, service centers, warehouses, office buildings and parking garages.
With this fund, the City is working to do a comprehensive retrofit of all City facilities where it is economically feasible to do so. The energy efficiency fund allows the city to self-manage all of these retrofits from project design through close-out and measurement and verification of energy savings. Having this fund, and having developed much of the in-house capability, provides improved project economics due to lower management and installation costs, as well as no debt service costs. The average cost of the projects is $20,000 and ranges from $1,000 to $250,000. Also, the City uses the fund to pay the marginal cost of efficiency improvements within larger capital projects. As savings are realized in each project, a portion of the savings is returned back to the fund to be used in future projects.
Savings in avoided cost is supplemented by utility rebates, and the reduced energy use contributes significantly to reduce local air emissions.
The revolving fund was established because the City needed a funding mechanism that would provide it the flexibility and opportunity to implement low cost, high impact projects like exterior and interior lighting retrofits, PC energy management, window film, HVAC control upgrades, pool pump control and retrocommissioning projects. Further, the City saw that there was an opportunity to significantly upgrade the efficiency of its high capital cost mechanical systems, i.e. chillers, air handling units, etc. by leveraging the fund to pay the marginal cost to improve the efficiency of equipment that was set to be replaced under the Capital Improvement Plan (CIP) and through emergency equipment replacement projects. Most recently the fund covered 20% of a $1.3 million chiller replacement project. This 20% allowed the City to purchase high efficiency chillers and equipment controls that would not have been purchased if not for the fund.
When to Use It
Municipalities should use revolving funds when they want to implement cost-saving projects—such as energy efficiency retrofits or housing renovations—that generate measurable financial returns over time. They are especially useful when:
- Upfront capital is limited, but savings or repayments can be captured and reinvested.
- Access to traditional loans is restricted or too costly.
- Projects deliver recurring savings, like lower utility bills, which can be recycled into future improvements.
- Long-term, self-sustaining funding is needed for ongoing programs.
- Cross-sector applications (e.g. energy, housing, water) require flexible, repeatable financing.
- There’s potential for technical support to improve project outcomes (e.g. energy audits, renovation advice).
- Pooling resources with other municipalities is needed to scale impact for smaller cities or towns.
References
[1] https://portico.urban-initiative.eu/key-tools/uia/revolving-funds
[3] revolving-loan-fund_best-practices_final.pdf
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