Caught between ambitious sustainability goals and the challenges of implementation
The public sector is increasingly confronted with goals related to sustainability, decarbonization, energy efficiency and renovation. In the last decade, a number of voluntary initiatives at the national as well as at the European level have gained increasing support from municipalities (e.g. Covenant of Mayors with Sustainable Energy and Climate Action Plans (SECAP) as a tool). In addition, as a result of Art. 5 and 6 of the Energy Efficiency Directive some of the targets will become compulsory not only for central governments but also for regional and municipal authorities. Article 5 prescribes that public bodies in a Member State shall reduce the final energy consumption by 1,9% annually, starting from 2025. Article 6 requires that each year 3% of the public building stock undergo deep renovation.
Deep renovation projects can be understood as having a few of the following typical characteristics:
- They are comprehensive, i.e. they cover an entire building, or possibly even a group of buildings (neighbourhood) – this distinguishes deep renovation from partial renovation or a mere repair investment.
- They are capital-intensive.
- They usually increase the building value over a longer period of time, as they cover future issues in a forward-looking manner.
- They are often connected to the repair cycle and to functional adjustments of a building.
- They are usually economical when viewed over their life cycle.
- They don’t just provide immediate operating cost savings, they also offer a range of additional benefits, such as improved comfort, new building functions, productivity, risk minimisation, among others.
Implementation challenges for deep renovations
Experience shows that deep renovation projects which are planned in sustainable energy plans are often victims of an “implementation gap” meaning that their implementation is repeatedly postponed, mainly due to the following reasons:
- Municipalities and other public bodies are very often underfinanced and are thus not able to increase the volume of deep renovation work to the required extent without exceeding the existing debt limits.
- Public bodies frequently do not have enough staff to prepare and follow up the implementation an increased number of deep renovation projects.
- Public bodies are also confronted with a knowledge deficit about the complex topic of sustainability in the construction sector, both in terms of technical content and the necessary adaptation of planning and construction processes.
All these barriers play a major role in public sector practice. At the same time, it is also true that solutions have been developed, tested and implemented in recent years. In this blog post we put the spotlight on the barrier of debt limits and underfinancing – the other barriers will be addressed in later blog posts.
Limits of public funding require a blend with private funds
If despite the use of all available budget lines (including shifting between budget lines), the financial resources are not sufficient to increase the implementation rate of deep renovation projects, or if additional human resources cannot be built up internally, then the use of “outsourcing models” helps to fill the gap. Meaning that additional financing will have to come in the form of private financing.
Outsourcing models, which are also discussed under terms such as PPP models or energy service models, are characterized by external third parties (“service providers”) implementing and (pre-)financing the investment in order to then refinance themselves from regular fees for the provision of a long-term services (building operation, achieving a cost saving, energy supply, etc.). The technical responsibility for the investment thus shifts to the external third parties, who usually also have to bear a large part of the economic risk. According to the Eurostat Guidance Notes on the recording of energy performance contracts and PPP-models in government accounts, the shift of economic risk to the third party is also a major precondition for off-balance accounting the investment, i.e., in this case the investment does not (fully) increase the public debt. However, depending on the details of the contract, the public body can retain extensive control options. Even if the financing conditions themselves are generally less favourable in an outsourcing model in comparison to conventional self-financing by the public sector, outsourcing models can serve to ensure that deep renovation projects do not have to be postponed or have their investment volumes reduced, in other words: they enable investments to be made earlier and to their full extent.
While the use of outsourcing models, especially PPP models, is already common practice for the construction of new public buildings, they are unfortunately still relatively rarely used for deep renovations. Nevertheless, successful examples (e.g. from South Tyrol, Belgium and the Czech Republic, which we will present in following blog posts) show that they are fundamentally suitable for deep renovations – and it can be observed that the number of early movers has increased in recent years.
How the LEVERAGE Accelerator supports the implementation of deep renovation in public buildings
The LEVERAGE Accelerator provides support in the early stages of a deep renovation project (the so-called pre-investment phase), i.e. when a municipality or other public body realises that a deep renovation project cannot be implemented within the existing financial framework and begins to take an interest in innovative financing models.
After an initial pitch on the advantages and limitations of these models, the LEVERAGE Accelerator develops an outline of how innovative financing can work for a specific investment project by means of an outsourcing model. In several feedback loops with representatives of public bodies, relevant supervisory authorities, potential financing institutions and technical service providers, a detailed concept is developed , which ultimately forms the basis for the subsequent public procurement process to be implemented by the public body.