Market and policy assessment of innovative forms of financing in Hungary

We re-assessed the potential of financing forms that can still be called innovative in Hungary, especially if the goal is to renovate public buildings. The forms examined are public private partnership (PPPs), energy performance contracting (EPCs) and community fundings (CFs).

At the border of the two EU planning cycles, it is timely to look beyond subsidies. Unfortunately, not much has changed since the 2018 analysis: administrative conditions in Hungary remained unfavorable, but there is an increasing urgency to promote and encourage the use of innovative forms of financing.

In Hungary, the EPC (better known as: ESCO) scheme is still the best-known form of financing after state subsidies and bank loans. The previously booming Hungarian ESCO market (from 1990 to about 2008) has plunged into recession due to a number of factors: opportunities have narrowed, and the number of ESCO companies has fallen from 20-30 to 6-8 by 2020. There are two reasons for the small number of ESCO investments in Hungary. First, keeping the energy prices artificially low by government action extends the payback period for the private sector to an unacceptable length. On the other hand, mistrust has developed in ESCO market participants, often due to their unfavorable contracts for customers.

The regulatory background of the ESCO scheme is not sufficiently mature and its market perception is variable. Lack of preparatory resources and local expertise makes municipalities vulnerable to ESCO partners.

Investments made in the early 2000s under unsuccessful and / or poor conditions increased mistrust of PPP projects. Moreover the lack of proper regulation and support institutions resulted in an almost dead PPP market.

At the local level, however, some typical forms of PPP are widespread: service and operational agreements are in place (e.g. for waste management) and leasing contracts are used, but renovations with a near-zero level of requirements would require more complex models such as e.g. BOT (building-operation-transfer) or DBO (design-building-operation).

Currently, several commercial banks allow the financing of private partner participation (PPP) developments and investments in the provision of state and municipal public services (e.g. MKB, OTP, Raiffeisen).

It is worth taking advantage of the possibility of community funding: local governments have the opportunity to open a bank account and start raising funds for a specific purpose. Local governments, or other institutions under their control, usually have a non-profit foundation that they can use to launch a community funding campaign. Donation-facilitating platforms can facilitate the technical implementation of campaigns, but local community funding campaigns are successful if local people can identify with their content, goals, and message.

Community funding can complement local governments' own or other resources. Public buildings that mainly serve community functions, such as cultural or educational buildings, or buildings that are very characteristic of a given settlement (historical sites, heritage), are ideal campaign options, i.e., where many residents are expected to be mobilized.

Unfortunately, capital-based community investment and community lending (eg. renewable energy developments) is almost impossible in Hungary due to regulation: it is prohibited by funding regulations and laws, as only dedicated and registered banks and financial institutions can collect and transfer money.

The full “Market and policy assessment of innovative forms of financing in Hungary” is available  bellow in Hungarian and in English.

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Pej Zsófia