Page 28 - A U4SSC deliverable - Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects

and superiority, interest rates can be lowered, making the loan cheaper and therefore more
accessible for projects.

Equity finance involves lenders taking a stake in the project they are financing, giving them voting
rights and control. Investors become partners, and receive their return – if any – after outstanding
debts are repaid. Real asset developers commonly use this kind of financing when investing in
public infrastructure.

In short, debt financing allows project managers to borrow money at a set interest rate and a fixed
payment schedule that does not depend on how the project is implemented. Also, the finance
provider does not control the process of the project implementation, so long as the debt is paid on
time. A good analogy is a home mortgage. Equity finance, however, gives the investor the power
to make, or contribute to, decisions about the project while it is being implemented. An analogy
here would be buying a house for cash together with a partner.

Public and private finance

There are two types of lenders: public finance lenders and private finance lenders.

Public finance lenders include governments, non-governmental organizations (NGOs) and inter-
governmental organizations (IGOs). Before describing their impact as investors, it is important
to outline the role of public finance lenders. They usually act as “risk mitigators”, who have the
power, through their involvement, to attract private investors. The role of national and international
institutions is to fulfil the greater needs of society and the environment. They define which areas of
development require investment and, more importantly for the investor, they own or control most
of the land and natural resources. They drive urban development plans and create the legal and
fiscal frameworks that impact directly on investments, from general urban plans to regional/national
economic development agendas. National and international institutions set and influence taxation,
financial and legal frameworks; as such, they set the timing for every development project. Timing
is as important to an investor as the capital itself, if not more. These institutions are therefore the
biggest factor in the investment equation, with the power to reduce the risk that usually prevents
investors from entering a project.

These institutions hold large amounts of capital, which they use to finance and fund projects in
different ways. The three potential types of public finance lenders are:

(a) NGOs: not-for-profit organizations that work independently of governments. They expend
a lot of effort fundraising, and often operate through hybrid approaches, such as partnering
with for-profit businesses. NGOs serve as a neutral guarantor of the goals of a project, so as to
reassure the public of its value to the community;

(b) IGOs: multilateral organizations established by treaty or other agreement. Examples include
the United Nations, the World Bank, and the European Union. The most influential IGOs related
to urban development are the regional development banks, including: Asian Development

10 U4SSC: Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects