Instrument Overview

Project level equity is the equity provided by sponsors for project finance. Usually, for establishing a special purpose vehicle, a legal entity is specifically set up for a project or joint venture to isolate the financial risk from a parent company. It utilises a non-recourse or limited recourse economic structure [1].

Why it matters for cities

• Cities face large infrastructure investment needs—particularly in climate resilience, energy, and mobility—but often lack the fiscal space or creditworthiness to fund these projects directly. Project-level equity:
• Unlocks private capital by isolating risk in a dedicated project vehicle.
• Enables public-private partnerships (PPPs) without burdening city balance sheets.
• Is well-suited for climate-related infrastructure, which often requires long-term financing and has strong environmental and social co-benefits.
• Helps de-risk early-stage investment, attracting follow-on finance in later stages of construction or operation.

Key features

• Special Purpose Vehicle (SPV): A separate legal entity created specifically for the project.
• Sponsor Equity: Equity is provided by developers or investors, who take on early-stage risk.
• Non-Recourse/ Limited Recourse: Investors/lenders have claims only on project assets and revenues—not the parent company’s balance sheet.
• Bankability Requirements: Often tied to clear revenue models and risk-sharing agreements (e.g., off-take contracts or government guarantees).
• Scalable: Typically used for large, capital-intensive infrastructure projects

How It Works

• SPV Creation: A project sponsor forms an SPV to develop and operate the project.
• Sponsor Equity Injection: Initial capital is injected as equity, often covering feasibility studies, permitting, and design.
• Bridge Loan or Early-Stage Debt: May be used to fund pre-construction or early development (e.g., in the Galapagos project).
• Debt and Equity Structuring: Once the project reaches financial close, equity is combined with non-recourse loans to fund construction.
• Cash Flow Repayment: Future project revenues (e.g., from user fees, tourism, or utility payments) repay debt and generate returns for equity holders.

Benefits & Challenges for Cities [1]

Benefits

• Can fund large infrastructure investments.
• No personal or balance sheet liability 

Challenges

• Due to its complexity, it is not suitable for small projects.
• Generally more expensive than corporate finance.
• Bankability requires long-term project contracts: lenders will frequently ask for government guarantees if state-owned enterprises or public entities are involved.

Use Cases

Gewobag Affordable Housing Berlin [4][5]

The Gewobag Affordable Housing project in Berlin is a large-scale social infrastructure initiative aimed at expanding affordable yet energy-efficient facilities within the city. The EIB has granted the state-owned housing company, Gewobag, a EUR 300 million loan to construct more than 2,165 new flats. The funds will also be used to create around 350 openings at childcare centres and 210 at assisted living facilities, in addition to 650 homes for refugees. Seven construction projects will be completed, largely complying with the level 55 Efficiency House standard of the German promotional bank KfW. Thus, the project also complies with the EU Buildings Directive.

The total project cost is approximately EUR 637 million, and although the construction of some buildings may have already started, the EIB will assess the project costs during appraisal to ensure that most eligible costs are incurred in the coming years.

From a financing perspective, the EIB provides preferential interest rates, which allows Gewobag to reduce financing costs and maintain long-term affordability for tenants. The loan now constitutes the third financing project on which the public housing company and the EIB have collaborated. This cooperation means the creation of additional affordable housing for the capital city of Berlin.

When to Use It

Equity financing is more often used in early stages of developing a project [3].

References

[1] https://citiesclimatefinance.org/financial-instruments/instruments/project_level_equity_

[2] https://www.climatepolicyinitiative.org/wp-content/uploads/2023/06/Improving-Local-Enabling-Conditions-for-Private-Sector-Climate-Investments-in-Cities.pdf 

[3] Intro to Green Finance.pdf

[4] https://www.eib.org/en/press/all/2023-166-eib-grants-gewobag-eur300-million-loan-for-new-housing-in-berlin?utm_source=socialmedia&utm_medium=Social&utm_campaign=EIB%20news&utm_content=Gewobag%20new%20housing%20Berlin&utm_term=Energy-Renewable-Efficiency_Germany&utm_id=2023-04-04_01_en

[5] GEWOBAG AFFORDABLE HOUSING BERLIN

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