Instrument Overview
Concessional finance are often loans or grants offered at below-market interest rates, typically with extended repayment periods, longer grace periods, or relaxed collateral requirements. They are usually provided by institutions such as multilateral development banks, DFIs, government agencies or climate funds to support public-interest or climate-related projects. Such loans are usually subsidized through grants or public funding to advance development objectives or climate objectives.
Why it matters for cities
Cities frequently need capital-intensive investments - like building energy efficiency upgrades, urban climate adaptation, or resilient infrastructure- that are not fully viable under commercial lending terms. Concessional finance lowers borrowing costs and improves economic feasibility, helping municipalities deliver high-impact projects that otherwise may not attract private capital
Key Features
- Interest below market rates, often supported by subsidies or concessional elements
- Longer tenors, grace periods, or payment holidays, reducing debt-service burdens
- Flexible eligibility and collateral requirements, easing access for mid-credit municipalities
- Often blended with commercial finance, using concessional finance to leverage additional private capital
- Targeted at developmental or climate objectives, not purely commercial return
How it works
- Identify project needs aligned with climate, resilience, or public service goals
- Screen for and engage concessional funding sources – such as EIB (e.g. InvestEU - through guarantees), EBRD, national development banks to secure low cost terms – to secure low-cost terms
- Structure financing package, often combining concessional financing with commercial loan or equity in a blended finance model
- Agree on concessional terms – low interest, extended tenor, technical assistance etc.
- Disburse and implement project, using savings in financing cost to enable larger scale or improved economic feasibility
- Repayment typically begins after grace period, serviced by project flows or utility/tariff revenue. Comply with reporting requirements tied to concessional funding.
Benefits & Challenges
Benefits
- Lower interest and ”soft” terms improve affordability and feasibility
- Enables higher-impact infrastructure that would not qualify under purely commercial terms
- Blends well with private capital, enabling larger or multi-layered project financing
Challenges
- limited funding caps and highly competitive and complex applications (specific eligibility criteria)
- high reporting requirements tied to donor or fund policies
Use Case
The Green Municipal Fund (GMF), managed by the Federation of Canadian Municipalities and endowed by the Government of Canada, provides grants and low-interest loans to support innovative, high-impact municipal projects in areas such as energy, water, transportation, waste, brownfields, and planning.
Municipalities and their partners can access:
- Grants covering up to 50% of costs for plans, feasibility studies, and pilot projects (e.g., $175,000 for plans, $350,000 for pilots).
- Low-interest loans (up to $5 million or $10 million for high-ranking projects), often blended with grants of up to 15% of the loan value.
This concessional finance structure enables municipalities to develop sustainable infrastructure by lowering borrowing costs, improving access to capital, and incentivizing early-stage project development, particularly where commercial finance alone would be insufficient.
The Town of Comox in British Columbia secured $5.91 million in low-interest GMF loan financing, blended with an $886,215 grant, to implement a water conservation and infrastructure improvement project - totaling $8.49 million in value - aimed at reducing residential water use by over 20% via universal metering, stormwater infiltration measures, and community education.
When to use it
Concessional finance is most appropriate when:
- Projects align with public goods or climate goals, but are not commercially viable alone.
- The municipality has limited own credit capacity or needs to preserve fiscal space.
- The goal is to leverage larger funding volumes, combining concessional and commercial capital.
- Private financing is insufficient or too expensive for early-stage or risk-heavy investments.
References
- Climate Explainer: Concessional Finance
- mdb-dfi-working-group-blended-concessional-finance-private-sector-joint-reoprt-dec-2021.pdf
- Green Municipal Fund
- Project Details . GMF project database
- Catalyzing Green Finance: A Concept for Leveraging Blended Finance for Green Development