Instrument Overview
A Concessional Loan is a loan that is offered on more favourable terms than a standard market loan. It is often used for projects that contribute significantly to market development within climate action related sectors, such as energy or transport. In many cases, the financing aims to help overcome a market failure and provide returns to society beyond the investors' returns.
Why it matters for cities
Concessional finance is an efficient and highly targeted financial tool, explicitly designed to bridge the gap to private sector capital; it can scale high-priority projects that impact the collective climate and development objectives.
Key features
- Softer terms than market loans (Lower interest rates, extended repayment periods and/or income-contingent repayment)
- Typically offered by institutions such as development banks
How It Works
The most common financial products used to deliver concessional finance come in the form of loans, grants and, to some extent, equity investments. How these products are delivered must remain flexible to the unique needs of each development challenge. For example, concessional finance can be applied as grants, funding technical assistance to prepare a region’s policies for industry decarbonisation. Concessional finance can also come in the form of a first loss guarantee whereby a third party compensates lenders if the borrower defaults; having such a guarantee in place can help a renewable power plant, for example, crowd in private sector investors. Concessional finance could be a low interest loan financing a health system improvement that needs to be paid back in 15 years instead of 5, or an equity investment into vaccine development asking for less value in shares than the investment is actually worth.
The focus of concessional finance is not on a specific method or solution – It is about becoming a flexible and accessible tool to bridge the gap from the limited pools of philanthropic and public sector funding to the much larger private sector funding opportunities that enable such projects to scale.
Benefits & Challenges for Cities
Benefits
- Mitigate political and commercial risks of lending.
- Mitigate political and commercial risks for exporters.
- Support short-, medium- and long-term investments.
Challenges
- Restricted by mission statement and objectives.
- Risk premiums are charged for supporting transactions.
- Deal complexity.
Use Cases
Green infrastructure and biodiversity through Natural Capital Finance Facility in Athens, Greece
The urban fabric of Athens is made up of dense constructions that cover 80% of the city’s surface. All that asphalt and concrete retains the heat during the extended heatwaves to which the city is increasingly exposed. These urban heat islands in the city centre can be more than 10°C warmer than the suburbs. But asphalt and concrete are not just a liability when the weather’s hot. They also stop water seeping away into the ground during rain storms. The result: frequent local floods.
The city set out to solve these problems, which are exacerbated by the impacts of climate change. Athens is entering into four innovative climate adaptation projects with €5 million financing from the Natural Capital Finance Facility, a programme run by the European Investment Bank in cooperation with the European Commission that focuses on nature conservation, biodiversity and adaptation to climate change through nature-based-solutions. Athens is the first city to be financed under the Facility.
The Natural Capital Finance Facility element is part of a €55 million loan from the European Investment Bank, the EU bank, signed in December 2018. It is intended to support Athens’s “2030 Resilience Strategy,” which was drawn up in 2017. The main part of the loan will finance energy upgrades and earthquake fortification of municipal buildings, as well as development and waste management initiatives. Moreover, the Facility also includes technical assistance granted to the municipality to pay for an international consortium of consulting firms to support the city in designing and developing these green infrastructure elements. The consulting team is managed and guided by both the municipality and the EIB.
Athens has put forward four initial projects to be financed under the Natural Capital Finance Facility portion of the loan:
- The revival of Lycabettus hill, an urban forest that has been a notable part of the Athens landscape for centuries, where soil and biodiversity will be stabilised through water management and erosion control;
- The creation of green corridors between Lycabettus and Strefi hills;
- Greening and pedestrianizing Plato’s Academy area; and
- Extensive greening and opening up of surfaces near Lambrini Square, connecting different parts of the city, while lowering temperatures and improving air quality in these densely built neighbourhoods.
Barriers addressed:
- Access to finance for adaptation projects: The EIB is playing an important role in catalysing investment in vital climate adaptation projects in Athens, which are otherwise difficult to finance due to low returns on investment. Cheaper loans and longer repayment terms makes this more feasible for the city government.
- Leveraging private sector investment: The EIB loan can only cover up to 75% of the costs, encouraging either in-kind contributions from the city government, or investment from the private sector. Private investors are likely to be much more confident to invest alongside the EIB and based on the foundations of robust technical assistance.
- Access to technical expertise: The EIB support also covers technical assistance, via a grant, which enables the projects to be based on appropriate planning, design and financing.
When to Use It
Concessional finance works best when it is used alongside long-term strategic engagement and technical assistance with a country.
References:
[2] Climate Explainer: Concessional Finance
[3] Case Study Details - Playbook of Solutions - Concessional Loans
[4] Athens gets green and blue infrastructure to adapt to climate change
[5] Cities Climate Finance Leadership Alliance
Comments ()