Revolving funds

A revolving fund is a gap financing measure that involves establishing a pool of money that is self-replenishing by utilizing returns or loan repayments from previously funded projects to support new initiatives with an equivalent amount of funds.
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Description

A revolving fund is a gap financing measure that involves establishing a pool of money that is self-replenishing. Revolving funds are typically operated by government agencies at both state and federal level or international organisations, such as UN-Habitat.

Revolving funds operate by utilising returns or loan repayments from previously funded projects to support new initiatives with an equivalent amount of funds. The funds can be used to provide concessionary loans, guarantees, or equity investments to a variety of smart city projects, ranging from energy efficiency projects to modernising public facilities, from projects that improve waste and water management, to financing small and medium-size businesses. The objective and structure of a revolving fund is relatively flexible. It can be established to serve a single purpose for a defined period and then winded down or established for an unlimited duration for an ongoing issue. The initial capital of a revolving fund is usually equivalent to a grant insofar as it does not need to be paid back and can come from a combination of public sources such as local, state, or federal government, and development or donor organisations.

Enabling Conditions and Key Considerations

  • Establishing eligibility and allocation criteria. Establishing the purpose of the revolving fund, including setting eligibility requirements for borrowers, minimum and maximum amounts, scope of use of funds, setting up a committee to review applications and determining administrative duties and staffing needs associated with the program, etc. are some basic requirements for establishing a revolving fund. Creating a pre-application form or checklist can help potential borrowers determine if they are eligible and weed out unsuitable applications.
  • Enforcing repayment mechanisms. It is important for both the borrower and fund manager to comprehend and adhere to the stipulated repayment terms of their contract, to ensure the sustainability of the fund. In instances where borrowers are at high risk of default, the fund manager may need to implement corrective action plans to ensure repayment. It is essential that repayment criteria are enforced fairly and consistently.
  • Reporting requirements for transparency. Accurate and timely reporting provides stakeholders with relevant evaluation of the fund’s effectiveness. It provides stakeholders with insights on the fund’s financial health, impact, adherence to eligibility criteria and repayment conditions, areas of success and areas that require improvement, thereby enhancing the fund’s sustainability.

Potential Challenges

  • Lack of experience in implementing revolving funds mechanisms. A lack of experience in designing, implementing, and monitoring revolving funds can be a challenge for government officials looking to utilise this mechanism to finance smart city projects. Revolving funds, which are essentially recycling resources to finance new projects as old loans are repaid, require a good understanding of financial management, risk assessment, and project alignment. Without adequate experience, officials may struggle to design effective fund structures, select viable projects, and manage the fund’s resources efficiently, which can lead to low productivity of funds.
  • Risk of low productivity for revolving funds. Misallocation of resources and support of initiatives that do not meet the fund’s objectives could potentially limit the fund’s ability to maximise its impact and maintain continuous support. This not only hinders the fund’s effectiveness but also results in lost opportunities to channel resources into more productive ventures. This issue can emerge from a variety of underlying factors, including inadequate planning and goal setting, insufficient oversight and monitoring, poor risk management, bureaucratic inefficiencies, among others.
  • Potential lack of uniformity in reporting and accounting standards. A key challenge in managing a revolving fund is the absence of uniformity in reporting. When stakeholders and project beneficiaries provide diverse or inconsistent reports, it complicates the fund’s oversight and evaluation processes. A lack of standardised reporting formats may hinder the fund manager’s ability to make accurate comparisons between projects, assess overall performance, and identify areas for improvement. Establishing uniform reporting standards is essential to streamline data collection, enhance transparency, and facilitate a comprehensive and cohesive analysis of the fund’s operations.
  • Potential difficulty in conducting effective monitoring. Ensuring that allocated funds are utilised according to the predetermined plans requires continuous vigilance. Challenges may arise from varying project timelines, unexpected expenses, or changes in project scope, making it challenging to maintain real-time visibility into fund utilisation. Effective monitoring demands a robust system capable of tracking expenditures, validating project milestones, and promptly addressing deviations, which officials might not be able to implement due to a lack of experience in operating revolving fund mechanisms.

Potential Benefits

  • Self-sustaining source of finance. A revolving fund is designed to be self-sustaining. As the funds are used for projects or initiatives that generate returns or repayments, this ensures a continuous pool of funds within the structure. When properly managed, a revolving fund reduces the reliance on one-time grants or funding allocation from donors.
  • Access to flexible sources of capital. A revolving loan fund provides access to a flexible source of capital that can be used in combination with more conventional sources. The fund itself can be set up to serve a variety of objectives and projects. Furthermore, as the fund grows through repayments, it can be directed towards emerging or new opportunities.

Sources/Additional Information

Case Study

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