BBSR-Online-Publikation, Nr. 03/2009 Urban

Transcription

BBSR-Online-Publikation, Nr. 03/2009
Urban Development Funds in Europe
Ideas for implementing the JESSICA Initiative
Imprint
Published by
Federal Ministry of Transport, Building
and Urban Affairs (BMVBS), Berlin
Federal Institute for Research on Building,
Urban Affairs and Spatial Development (BBSR)
within the Federal Office for Building and
Regional Planning (BBR), Bonn
Editing
Arbeitsgemeinschaft Prof. Nadler/FIRU (Contractor)
Hochschule Albstadt, Sigmaringen
Prof. Dr. Michael Nadler (Direction)
Dr. Claudia Kreuz
Forschungs- und Informationsgesellschaft für
Fach- und Rechtsfragen der Raum- und
Umweltplanung mbH (FIRU), Kaiserslautern
Andreas Jacob
Dr.-Ing. Hanno Ehrbeck
Federal Institute for Research on Building, Urban Affairs
and Spatial Development (BBSR), Bonn
Dr. Peter Jakubowski
Reprint and Copying
All rights reserved
Quotation
BMVBS / BBSR (Eds.): Urban Development Funds
in Europe. Ideas for implementing the JESSICA Initiative,
BBSR-Online-Publikation 03/2009.
urn:nbn:de:0093-ON0309R152
The views expressed in this report by the author are
not necessarily identical with those of the publisher
ISSN 1868-0097
urn:nbn:de:0093-ON0309R152
© BMVBS / BBSR, February 2009
A project within the research programme „Experimental Housing and Urban
Development” (ExWoSt) conducted by the German Federal Ministry of Transport,
Building and Urban Affairs (BMVBS) and the Federal Institute for Research on Building,
Urban Affairs and Spatial Development (BBSR) within the Federal Office for Building and
Regional Planning (BBR).
2
Urban development funds in Europe – ideas for implementing the JESSICA initiative
CONTENTS
TABLE OF FIGURES
5
PREFACE
8
EXECUTIVE SUMMARY
9
1
THE JESSICA INITIATIVE – “JOINT EUROPEAN SUPPORT FOR
SUSTAINABLE INVESTMENT IN CITY AREAS”
16
1.1 Structural policies of the EU....................................................................... 16
1.2 New financing instruments under the JESSICA initiative ....................... 16
1.3 Areas of application .................................................................................... 18
1.4 Studies at the European level..................................................................... 19
1.5 Research questions..................................................................................... 19
1.6 Research approach of the present study .................................................. 20
1.7 Criteria for the analysis of case studies.................................................... 22
2
LEGAL FRAMEWORK FOR IMPLEMENTING THE JESSICA
INITIATIVE
24
2.1 Introduction.................................................................................................. 24
2.2 Legal specifications for urban development funds.................................. 24
2.3 Holding funds............................................................................................... 26
2.4 Clarification of open legal issues............................................................... 26
2.5 Further Proceedings.................................................................................... 28
3
CASE STUDIES WITH ELEMENTS OF JESSICA FINANCE IN
EUROPEAN URBAN DEVELOPMENT PROJECTS
30
1.1 United Kingdom ........................................................................................... 30
3.1.1 The “Priority Sites Limited” urban development fund ...................... 30
3.1.2 The Evolution urban development project in Newcastle-underLyme .............................................................................................. 35
3.1.3 Analysis of the case study............................................................... 40
3.2 France ........................................................................................................... 43
3.2.1 Equity investments by the Caisse des Dépôts ................................ 43
3.2.2 The Foncière Camus urban development project in Sarcelles ....... 46
3.3 Germany ....................................................................................................... 55
3.3.1 The equity investments of the city of Frankfurt in urban
development................................................................................... 55
3.3.2 The Westhafen urban development project in Frankfurt am Main .. 58
3.4 Portugal ........................................................................................................ 68
3.4.1 The ParqueExpo 98 SA development company ............................. 68
3.4.2 The Parque das Nações urban development project in Lisbon ...... 69
Content
BBSR-Online-Publikation No. xx/2009
3
3.5 Italy................................................................................................................ 79
3.5.1 The Monteluce urban development fund, Perugia .......................... 79
3.5.2 The Monteluce urban development project in Perugia.................... 83
4
JESSICA FUNDS FOR FINANCING INVESTMENTS IN HOUSING IN
88
THE NEW EU MEMBER STATES
4.1 Introduction.................................................................................................. 88
4.2 Possible financial engineering instruments ............................................. 88
4.3 Types of funding.......................................................................................... 89
4.4 Involving the private sector ........................................................................ 89
4.5 Financing examples .................................................................................... 90
4.6 Turnover rate of fund .................................................................................. 91
4.7 Considering management costs and defaults .......................................... 92
4.8 Interim remarks............................................................................................ 92
4.9 Housing Funds in the new EU Member States ......................................... 93
4.9.1 State Housing Development Fund (Czech Republic)...................... 93
4.9.2 National Housing Fund in Slovenia ................................................. 95
5
URBAN DEVELOPMENT FUNDS – AN INSTRUMENT FOR
IMPLEMENTING INTEGRATED URBAN DEVELOPMENT POLICY?
101
5.1 Integrated urban development plans....................................................... 101
5.1.1 Integrated urban development plans under the JESSICA initiative101
5.1.2 Indications from the case studies.................................................. 102
5.1.3 Conclusions for implementing the JESSICA initiative ................... 103
5.2 Financial business activities .................................................................... 105
5.2.1 Systematisation of UDF activities.................................................. 106
5.2.2 Differentiating the four business models for UDFs........................ 116
5.2.3 Evaluation of the rewards and risks of financing instruments in
the diverse business models for UDFs ........................................ 125
5.2.4 Recommendations for setting up pilot funds ................................. 127
Content
BBSR-Online-Publikation No. 03/2009
4
ANNEX 1 – LIST OF WORKING GROUP MEMBERS
129
ANNEX 2 – CONCLUSIONS AND RECOMMENDATIONS OF THE
WORKING GROUP ON THE IMPLEMENTATION OF THE
JESSICA INITIATIVE
130
ANNEX 3 – STATEMENT OF THE MINISTERS IN CHARGE OF URBAN
DEVELOPMENT ON JESSICA (MINISTERIAL POLICY
PAPER)
136
ANNEX 4 – FINAL STATEMENT BY THE MINISTERS IN CHARGE OF URBAN
138
DEVELOPMENT
ANNEX 5 – FIRST COCOF-NOTE
144
ANNEX 6 – SECOND COCOF-NOTE
152
Content
5
TABLE OF FIGURES
Figure 1 – Operating mode of JESSICA initiative................................................17
Figure 2 – New instruments in financing urban development projects ................17
Figure 3 – Source of PSL's Capital (Equity and Liabilities) (in GBP)...................32
Figure 4 – Allocation of PSL's Capital (Assets) (in GBP).....................................34
Figure 5 – Income Statement of PSL (in million GBP).........................................34
Figure 6 – Excerpt of Statement of Cash Flows (operating cash flows) of PSL
(in million GBP) ..................................................................................34
Figure 7 – Lymedale Business Park and Extension (Source: Staffordshire
County Council, captions and marking of project site done by
authors)..............................................................................................36
Figure 8 – "Evolution” plan (Source: PSL) ...........................................................37
Figure 9 – Planned Commercial Units (Source: PSL) .........................................37
Figure 10 – Forecast Costs for the "Evolution" Project (in GBP) .........................38
Figure 11 – Planned Sales Price for the “Evolution” Project (residual value
method) ..............................................................................................39
Figure 12 – Net Payments from EP to PSL (in million GBP) ...............................42
Figure 13 – Business divisions of the CDC .........................................................43
Figure 14 – CDC Projets Urbains fund model (Source: CDC).............................45
Figure 15 – Forecast performance of fund capital until 2020 (in million €) ..........45
Figure 16 – "Lochères" (DIV) housing estate with indication of location of
"Foncière Camus" project ................................................................46
Figure 17 – Le Grand Ensemble Lochères..........................................................47
Figure 18 – Foncière Camus office building ........................................................48
Figure 19 – Planned balance sheet for the SARL Foncière Camus real estate
company (in thousand €)..................................................................49
Figure 20 – Planning income statement for the SARL Foncière Camus real
estate company (in thousand €).......................................................50
Figure 21 – Selected PPP of the city of Frankfurt as public partner ....................55
Figure 22 – Organigram of the Westhafen ..........................................................56
Figure 23 – Westhafen planning concept (Source: WPG)...................................59
Figure 24 – Residences in the Westhafen...........................................................59
Figure 25 – Total costs of the Westhafen project in € (from GWG’s perspective)60
Figure 26 – Balance sheets of the private Grundstücksgesellschaft Westhafen
(GWG) (in €).....................................................................................61
Figure 27 – Calculation of shares of project profit (in €) ......................................62
Content
6
Figure 28 – Industrial use of Parque das Nações before 1993 (Source:
ParqueExpo) ....................................................................................70
Figure 29 – Parque das Nações plan after 1998 (Source: ParqueExpo) ............71
Figure 30 – Use of Parque das Nações space ....................................................71
Figure 31 – Office and residential use in Parque das Nações.............................72
Figure 32 – Total investment Parque das Nações (Source: ParqueExpo) ..........72
Figure 33 – ParqueExpo 98 SA 1993–2006 Income Statements (in million €)....73
Figure 34 – ParqueExpo 98 SA 1993–2006 Balance Sheets (in million €) .........74
Figure 35 – Umbria holding fund with sub-funds (Source: BNL) .........................79
Figure 36 – Management structure of Monteluce fund (Source: BNL) ................80
Figure 37 – Shares of Monteluce fund.................................................................81
Figure 38 – Timeline of Monteluce fund (Source: BNL).......................................82
Figure 39 – Cash flows of Monteluce fund (Source: BNL)...................................83
Figure 40 – Perugia and Monteluce (Source: BNL).............................................84
Figure 41 – Monteluce project (Source: BNL) .....................................................84
Figure 42 – Zoning map of Monteluce project (Source: BNL) .............................85
Figure 43 – Housing Development Fund of the Czech Republic: Available
Funds from 2003 to 2008 .................................................................93
Figure 44 – 4-field matrix of potential business segments for UDFs .................105
Figure 45 – Stages in the real estate lifecycle ...................................................106
Figure 46 – The correlations between the costs and the ability to influence
(urban development) projects in the real estate lifecycle ...............107
Figure 47 – Income and expenses of (urban development) projects in real
estate lifecycle................................................................................108
Figure 48 – Land value increases in real estate development stages...............108
Figure 49 – Financial arrangement parameters of the JESSICA initiative.........110
Figure 50 – Project funding in the JESSICA initiative........................................110
Figure 51 – Project financing via venture capital funds .....................................111
Figure 52 – Project financing via loan funds......................................................112
Figure 53 – Project financing via guarantee funds ............................................115
Figure 54 – EU Notice on state aid for guarantee programmes ........................116
Figure 55 – Four business models for urban development funds......................116
Figure 56 – Classification of cases to four business model types for UDFs ......122
Figure 57 – Acceptance of costs and risks in the cases studied .......................123
Figure 58 – JESSICA financing parameters in the cases studied .....................123
Content
7
Figure 59 – Possible JESSICA financing component at the project level..........123
Figure 60 – JESSICA financing structures in the cases studied........................124
Figure 61 – Assessment of JESSICA financing components in UDFs ..............126
Content
8
PREFACE
Cities in Europe have to master a multitude of demographic, economic, social and environmental challenges, for which there is considerable need for investment. As many cities do
not have the required funds for financing this investment, a financing gap has arisen which
could be at least partially filled through private investment, as well as by increasing the efficiency with which public financing is spent.
In order to more strongly mobilise private capital for investment in urban development, to increase the efficiency of public funding and to create long term financing instruments based
on integrated concepts, the EU has created the possibility under the JESSICA initiative to
promote and finance urban development projects using “revolving” instruments such as
bonds, equity and guarantees in lieu of grants. As these instruments were newly introduced
at the beginning of the 2007–2013 Structural Fund period, there are numerous open questions about the implementation of the initiative in the Member States. During the informal
ministerial meeting on urban development in May 2007 in Leipzig, the ministers encouraged
that a working group composed of the interested Member States, the European Investment
Bank (EIB), the European Commission, the European Parliament, and the Council of Europe
Development Bank (CEB) be established to examine and answer the open questions regarding implementation of the JESSICA initiative. The working group took up its task in September 2007 and presented its results at the end of 2008.
This study was compiled on behalf of the Federal Ministry of Transport, Building and Urban
Affairs (BMVBS) and the Federal Office for Building and Regional Planning (BBR) to support
this working group.
Preface
9
EXECUTIVE SUMMARY
The “Joint European Support for Sustainable Investments in City Areas” (JESSICA) initiative
the European Union provides additional financing instruments to the classical promotion by
grants: projects, which are developed on the base of urban development plans, can receive
loans, guarantees and equity from EU Structural Funds via urban development funds (UDFs)
in the 2007–2013 programme period. Once the resources are returned to the UDFs (revolving resources), they can be reinvested in further urban development projects. The EU Structural Funds do not make additional resources available; they rather allow using the resources
already provided in a different manner.
One aim of the JESSICA initiative is to enhance the efficiency of the public support (including
long-term use of the resources). Moreover, private capital for the implementation of urban
development projects shall be attracted on a larger scale. JESSICA particularly enables projects to be implemented, which, despite a high common public interest, would otherwise not
be realised because the risks are too high, or the proceeds for private investors too low
(market failure). Thus, new markets can be opened. The JESSICA instruments can be combined with grants, too. The preconditions for the use of JESSICA financial engineering instruments, however, are financial returns from the projects being promoted.
Since the resources used through JESSICA stem from the Structural Funds, the latter’s regulations on eligibility also apply, so that e.g. specific investments in housing stock can only be
promoted in the new EU Member States. Accordingly, typical areas for the application of
JESSICA instruments are the promotion of technical infrastructural measures, the expansion
of social infrastructure, redevelopment of brownfields, the promotion of the supply of business and industrial premises for IT and R&D companies (especially SMEs), of recreational
facilities and of measures to improve energy efficiency and to employ renewable energies. In
order to sustain the Structural Fund resources given to the urban development funds longterm, the promoted projects have to show returns in order to cover expenses and, at best, to
(partly) cover interests on equity and loans or fees for guarantees. It is not necessary that the
project profitability equal market going rates; when private financiers become involved, the
risk/reward distribution may be asymmetrical (market rates only for the private capital) under
the EU state aid laws.
The UDFs receive the EU Structural Fund resources, plus the national co-financing, at the
beginning of the programming period (Declaration of Expenses – without naming concrete
projects). The conditions for contributions form Operational Programmes to the funds are laid
out in the financing agreement between the managing authorities and the UDFs. The exact
expenses and their eligibility for funding do not need to be proven until the Operational Programme is concluded. Private financiers may also deposit resources into the UDFs. Revenues (the public’s share) have to be reinvested in urban development measures.
It is also possible to set up a holding fund between the managing authority and the UDF. The
managing authority negotiates with the holding fund the conditions for the award of the funds
to different UDFs (after a tender procedure), whereby several UDFs with diverse thematic
and geographic focuses can be financed.
Executive Summary
10
The introduction of JESSICA instruments in the Structural Fund 2007–2013 programme period raised questions regarding the rules on applying revolving financial engineering instruments in the Structural Fund regulations. In response, the European Commission provided
some indications in the form of two “Guidance Notes on Financial Engineering” and a catalogue of answers to the legal questions of the JESSICA Expert Working Group. The following
points are a few examples of these indications:
-
To calculate the eligible expenditure for JESSICA projects, the project income may
not be deducted from the investment costs, as this would be contrary to the practical
implementation of the idea of the JESSICA initiative (loss of fund resources within the
short-term).
-
Of the resources returning to the fund, only the public’s share needs to be reinvested
in urban development projects; private contributions can be returned to the private investors (pursuant to EU state aid regulations).
-
The form and content of integrated urban development plans are not defined in detail
under European law and may be determined by each Member State.
-
Resources from UDFs may also flow into those projects, which are partially ineligible
(e.g. housing as part of comprehensive neighbourhood development in the old EU
Member States), as long as the bookkeeping of the eligible and ineligible parts of the
project is done separately and the ineligible expenses are not financed by EFRE
monies.
Other legal questions still unanswered will gradually be clarified.
In order to be better able to assess the advantages and application potential of JESSICA instruments, the present study investigated urban development projects already being implemented in the EU, in which revolving financial engineering instruments are being employed in
accordance with the JESSICA philosophy (as JESSICA instruments were first introduced in
the 2007–2013 programming period, there are as yet no examples with JESSICA). An effort
was made to gather information on the financial engineering instruments applied and their
forms/conditions, the distribution of risk between the public and private investors, alternative
forms of organisation at the fund and project level, and the set-up of integrated urban development plans. A cross-section analysis should yield findings on the most important areas of
JESSICA application, on the current use of revolving instruments, on alternative organisational forms at the fund and project level, on the role of JESSICA in financing housing investment in the new Member States and on the optimal tuning of instruments to certain forms
of investment.
The selection of suitable case studies was based on the following criteria:
-
public interest: motivations of public authorities for becoming economically involved;
readiness of private parties to undertake similar activities;
-
integrated urban development: form and extent of interconnections in the plans made
between diverse sectoral concerns;
-
revolving allocation of resources and profitability: form (loans, guarantees, equity) and
with economic result;
Executive Summary
11
-
capital employment and distribution of risk in the public-private partnership: distribution of project risks and returns between the public and the private investors;
-
Effect of the measures: The significance of the projects for urban development (creating jobs, improving neighbourhoods, etc.)
Against this background, five case studies from the United Kingdom, France, Germany, Portugal and Italy were selected, enhanced by two studies of subsidised housing investments in
the new EU Member States (the Czech Republic and Slovenia).
The assessment of these case studies in Chapters 3 and 4 showed that there are financing
and fund solutions in several Member States, which already include many of the aspects
promoted by the JESSICA initiative.
The assessment of the case studies in regard to planning law in Chapters 3 and 4 showed
that there were no integrated urban development plans (yet). Accordingly, a multitude of diverse plans were implemented in the case studies. In addition to differences in the legal setup and spatial relations, there were also differences in the quality of coordinated planning.
The majority of plans addressed the utilisation of the ground and integrated statements on
environmental concerns (stipulated by the Strategic Environmental Assessment (SEA) guidelines). Social aspects were mostly minor, although the projects were viewed in connection
with social concerns. In the examples from Germany and Portugal, it was attempted to improve problematic neighbourhoods by attracting high-quality land use. The combination of
various plans with diverse contents meets the requirements of urban project development. In
the end, however, the form and concrete contents of integrated urban development plans
must be designed at the national level.
In connection with the employment of urban development funds, the following aspects lend
themselves to be considered when drafting integrated urban development plans:
-
Contribution to integrated urban development, whereby the public interest in the implementation of the project should be explained.
-
The plan should be coherent with existing plans and strategies – including those of
sectoral planning.
-
The involvement of citizens and participants should be safeguarded to increase the
acceptance of measures and the social cohesion.
-
The plan should address all different pillars of sustainability, esp. the impact on the
job market and the local economy (economic), the improvement of the social infrastructure and integration of disadvantaged groups of the population (social), as well
as the reduction of traffic, emissions and energy consumption (environmental).
-
Indications on specific concerns of urban development, especially the architectural
quality of new buildings and public spaces.
The comparative economical analysis of the case studies shows that two fundamental criteria for systematising the business fields of urban development funds can be derived. The first
criterion relates to the state of development of real estate in its lifecycle. A distinction is made
between the development phase of real estate (further differentiated by land or project development) and the subsequent operating phase. The second criterion includes the form of
financial engineering instrument employed by the UDF. Here the main aspect of differentiaExecutive Summary
12
tion is whether the fund invests equity into the project or not. When equity is invested, the
fund should be established as an independent company with its own legal personality; otherwise, it can be part of a bank or regional promotional institution.
The combination of the two defined criteria yields four possible fund models. In Models I and
II, the fund does not use equity to support the projects being promoted. They differ in terms
of the stage in the lifecycle of the property. As a “funding lender”, Model I addresses the operating phase of already existing real estate. Such a UDF could, for example, finance the
energy-efficiency upgrading of real estate portfolios, by issuing loans at preferential interest
rates which are paid back over a certain term, resulting in a revolving capital inflow as an essential element of JESSICA for the UDF. As a “development loan guarantor”, Model II relates
to the development phase in the lifecycle of real estate. For the urban development projects,
the result of issuing a guarantee, which implies the UDF takes on part of the risk of project
default, is often that it is only because of this guarantee that comprehensive project development loans are granted and thus it is even possible to finance projects in the first place.
Furthermore guarantees facilitate extensions for interest or repayments.
The advantage of Models I and II is the quick and inexpensive establishment and administration of the UDF as part of an existing bank. Nevertheless, the returns achieved on capital invested in funds with Models I and II are normally less than the required returns for private investors (otherwise an intervention of the state would not be necessary), which means the refinancing must take place using (at least partly) public capital. In addition, it is necessary to
make additional capital (especially venture capital) available to finance projects. In the case
of Model II, it is even necessary to completely finance the project without any capital from
UDFs, as the funds do not invest any capital in the project, but rather take over part of the
default risk through the guarantee.
Models III and IV are distinctive, because here the UDFs invest equity in the projects. Once
again, the two models focus on different stages of the real estate lifecycle: Whereas Model III
as a “financier of land developers” invests in the financing of development and preparation of
greenfield and brownfield areas for construction, Model IV invests in existing real estate as a
“long-term property investor”. Because of the high risk involved in every equity investment, a
separate fund company must be established in each model, which also requires more time
and costs. The decisive advantage of fund Models III and IV is the far-reaching influence the
public authorities have on the land and portfolio development because of their equity investment. For this reason, public authorities are often willing to agree to an asymmetrical distribution of profit and loss from fund activities. They waive competitive returns in favour of having
this influence and of generating positive impacts on urban development through the projects,
so that in return, the (higher) return requirements of private investors can be met. In this
manner, new sources of (private) capital for UDFs are tapped. Another major advantage of
equity finance in comparison to grants is the participation in project revenues, which means
that at best revenues not only cover the equity invested in the project but also generate additional yields.
When ordering the analysed European case studies according to this systematisation grid,
the dominance of the equity-investing fund models can be seen: Except for the housing
funds in the new EU Member States (see Chapter 4), all five other funds (see Chapter 3) invest equity to finance projects. Four of these five case studies best match the financier of
land developer model (Model III); solely the French case study represents an example of
Executive Summary
13
long-term property investor (Model IV). In contrast, the housing funds in the new EU Member
States function as an example of funds as funding lenders (Model I).
Each of the analysed case studies yields valuable information for the conception of urban
development funds.
The German and the Portuguese cases solely refer to the first stage of the real estate lifecycle, the development of land (for construction). The German case study examines the land
development in Frankfurt’s Westhafen, an inner city brownfield area, using a public-private
partnership (PPP) between the city of Frankfurt as the public partner and three private partners organised into the Grundstücksgesellschaft Westhafen property development company.
The aim of the PPP was to decontaminate and develop the former port area and subsequently to sell the prepared land to end investors or project developers for construction. By
focusing exclusively on land development, the fund avoided the high risks of project development. The PPP is characterised by its efficient contractual structure, which results in the
public authorities not only gaining the desired influence on the land development, but also
being able to participate in the profits from the sale of the land prepared for construction expost. The PPP earned a profit (without extending any grants) not only because of the central
location of the land, but also due to the very high share of cash flow financing, which lowered
the financing costs: By gradually selling off the already developed portions of the land, the
sales proceeds could successively be reinvested in the development of additional portions of
the land, so that more than three quarters of the total capital requirement could be covered
by internal project cash flow financing.
The Portuguese example Parque das Nações demonstrates the creation of an entirely new
neighbourhood in Lisbon. A project company consisting of purely public lenders undertook
the decontamination and preparation of the area for construction – initially to carry out the
world’s fair EXPO ’98. Consequently, no private but only public equity was invested in the
project, although (aside from a nearly ten percent grant) more than half of the capital requirements were raised through loans from private banks. The Portuguese example clarifies
the important function of guarantees in financing urban development projects, as the loans
from private banks were only issued based on the state guarantees, which shifted the entire
project risk onto the public sector. Without the guarantees and the high degree of public equity, land development could not have been effected to this extent alone through private
parties because of the high capital requirement and the high degree of risk.
The British and Italian cases also relate to the real estate development stage, though not to
land development but rather to the project development of property on already developed
land. The risk of project development is many times higher than that of land development
due to the higher capital requirements to develop buildings, such that UDFs should either restrict themselves to the lower risk land development or have so much fund capital that they
can diversify the risk by carrying out several different projects. A partnership with commercial
banks at the fund and project level lends itself to this regard.
As a PPP between the state development company English Partnerships and the private
Royal Bank of Scotland, the Priority Sites Limited (PSL) operates as a trader developer in the
British case study who has already realised several projects. In the Evolution urban development project viewed in more detail herein, a part of a business park was developed with
mixed office and industrial use. In the British case study, the rules regarding extending grants
are as follows: PSL may always apply for public grants when the ex-ante project calculation
Executive Summary
14
determines a project return below 15 per cent and the high risk of project development would
thus not be sufficiently remunerated. If, however, the actual return exceeds 15 per cent expost, a claw-back provision stipulates that part of the public grant must be repaid. In this way,
projects, which are disadvantageous from the private investors’ viewpoint, can be carried out,
while profitable projects return part of the public aid to the party extending the grant.
The Italian urban development fund Monteluce was established to redevelop selected public
property and buildings (no longer used hospital premises). The public equity investment into
the fund was purely a contribution in kind, consisting of the property. The fund shares were
sold to private investors, from which the public authorities received capital inflows. In order to
maintain co-determination rights in the redevelopment of the area in spite of selling the
shares, two types of fund shares were issued: the “normal” fund shares (Class A), which securitised a portion of the fund capital, and separate (Class B) fund shares with codetermination rights, which were given to the public authorities and which ensured public codetermination throughout the entire duration of the fund. In the Italian example, the high
share of internal cash flow financing can also be regarded as efficient, as – analogous to the
German case – it reduced the financing costs. Here the public profited from its participation
in the fund without having to invest cash.
The French case is the only one that (also) focuses on the real estate operating phase and
thus shows similarities to Model IV. Nevertheless, the PPP, consisting of the Caisse des Dépôts as the public partner and one private investor, also undertook the project development
of an office building in this example. Both partners have committed themselves for a term of
15 years for the PPP, so that rental incomes from the office building during this period flow
back to both partners according to their share. In addition to limited public and private equity,
the project was financed through a grant and lower-interest loans from external banks, which
first have to be repaid during the operating phase. The French case study therefore represents a good example of the sustainable investment of an urban development fund in the
real estate operating phase (Model IV). In contrast to pure land or project development, the
returns to the fund are a regular rental income here, which is subject to much lower default
and volatility risk than fund returns solely from sales proceeds, as in Model III.
Finally, as the last case study, the housing funds in the new EU Member States were investigated using the concrete examples from Slovenia and the Czech Republic (Chapter 4). Here
the real estate utilisation stage is also in focus. No equity is invested in the project by the
fund; but lower interest loans are extended (see Model I). Many residential buildings in the
new Member States are in considerable need of (energy-efficiency upgrades and) renovation. However, most homeowners are unable to finance such renovation because they lack
capital. Even when banks declare themselves willing to extend loans to this target group,
these bank loans can often not be repaid at going rates because income is too low. A UDF
following Model I can make a crucial contribution to renovating entire city neighbourhoods by
making long-term loans available to homeowners under sustainable conditions (with preferential interest rates). The capital of such a UDF can, however, only be maintained (in real
terms) if the loan default rate is low, the fund administration fees are lower than the loan interest rates, and the inflation rate is as low as possible.
In conclusion, a comparison of the three revolving financial engineering instruments which
conform to JESSICA – equity, loans and guarantees – shows that equity financing is especially important. From the public’s viewpoint, two features of equity financing are seen to be
Executive Summary
15
extremely significant: Only with equity the public can ensure long-term influence on the project development and only as an equity investor it is possible to get a share of the project
profits. The other side of the coin is that this also means taking on project risks and sharing
in the losses. From the point of view of a UDF, however, equity investment, especially by the
public authorities, is critical for another reason: In many cases, through the investment of
(public) equity as a buffer to risk, do private investors have the incentive to invest. Likewise,
private banks are only motivated to extend credit when there are enough recoverable assets.
Insofar, the recommendation for setting up a JESSICA pilot fund would especially emphasise
the significance of the equity fund and, specifically, the Model III of the “financier of land development”. This model particularly distinguishes itself by the strong degree of influence the
public authorities have in the land development, whereby private (equity and loan capital) investors can be won over through flexible fund statutes in the form of an asymmetrical distribution of profit and loss, resulting in high capital returns. In addition to the private capital, the
urban development fund and the financed projects also benefit from private know-how during
the development and marketing stages.
From the perspective of private investors, Model III offers the advantage of lower risk than
purely private land and project development. The risk is lowered not only by the public venture capital invested and the asymmetrical distribution of earnings, but also, for example, by
the accelerated approval processes resulting from the influence of the public partner. Overall,
this urban development fund model can therefore be regarded as efficient from both the public and private viewpoint.
Appreciating the advantages of an urban development fund following Model III, however, requires the public authorities to fundamentally rethink their role: They must view themselves
as entrepreneurs, as investors, who always bear the risks tied to their investments, too. Because of the revolving capital approach inherent to JESSICA, the income-generating projects
take the focus of the public. Conversely, this means that projects without income must continue to be promoted through grants. Therefore, urban development funds should not be
viewed as a substitute for traditional grant aid, but rather as a supplementary instrument;
where applicable, a combination of UDF and grant financing within one integrated urban development project can be implemented.
Executive Summary
16
1
THE JESSICA INITIATIVE – “JOINT EUROPEAN SUPPORT FOR SUSTAINABLE
INVESTMENT IN CITY AREAS”
1.1 Structural policies of the EU
The structural policies of the European Union support the economic and social cohesion of
communities and, in particular, promote growth and employment in the economically weak
regions of Europe. While the European Funds for Regional Development (ERDF) helps those
areas which are lagging behind in their development and which have structural problems with
real investment, the European Social Fund (ESF) strengthens the competitiveness and
adaptability of workers to economic change by investing directly in people.
During the 2007–2013 programming period, the Structural Funds were realigned toward the
three goals of “convergence”, “regional competitiveness and employment”, and “European
territorial cohesion”. The goal of convergence is aimed at regions where the per capita gross
domestic product is less than 75 per cent of the Community average (based on the EU-25).
Transitional regions with a per capita gross domestic product below 82.19 per cent of the
Community average (based on the EU-25, equals 75 per cent of the average of the EU-15)
are also promoted. The convergence goal accounts for 81.5 per cent of the budget of the EU
structural policies. The goal of regional competitiveness and employment covers all other areas of the European Union. This goal comprises 16 per cent of the budget of the EU structural policies. Under the goal of European territorial cohesion, transnational cooperation in
various fields is fostered. Only a small portion of the budget of EU structural policies is available for this goal.
1.2 New financing instruments under the JESSICA initiative
Under the European Structural Funds (especially ERDF), investment can also be made to
promote urban development. At present, mostly grants are used to cover unprofitable costs.
In addition to public investment, private projects and PPP models can also be supported.
The JESSICA initiative – Joint European Support for Sustainable Investment in City Areas –
adds new financing instruments to the previous funding possibilities. In lieu of grants, it
makes it possible to finance and promote urban development projects through loans, guarantees or equity capital on the base of urban development funds (UDF). The projects have to
be part of integrated urban development plans; furthermore, the urban development funds
must comply with certain regulations. Since, when using loans, equity and guarantees, the
funds are returned and sustained, and can therefore be granted multiple times, one refers to
them as “revolving” instruments. There are no additional funds for JESSICA available; the instruments only allow a different application of the present Structural Funds. The Managing
Authorities of the Structural Funds, who can adopt the option to use the new instruments in
their operational programmes, will determine the extent to which these instruments are applied. Furthermore, managing authorities may decide to establish holding funds, which then
distribute the Structural Fund resources to several urban development funds.
1. The JESSICA initiative
17
ERDF/ESF Managing Authority
Holding Fund
Urban D
Public/Private
Project
public/private
Project
public/private
Project
public/private
Figure 1 – Operating mode of JESSICA initiative
In the environment of increasing investment needs due to global competition, climate change
and the necessity of integrated urban development, it is the aim of the JESSICA initiative to
handle the use of funds more efficiently, to leverage private capital for the implementation of
urban development projects, and to enable the sustainable use of Structural Fund financing
in the area of urban regeneration.
private
private
public
grants
grants
grants
JESSICA
JESSICA
private
private
public
private
private
CONVENTIONAL FINANCING OF
FINANCING USING
URBAN DEVELOPMENT PROJECTS
NEW INSTRUMENTS
Figure 2 – New instruments in financing urban development projects
The use of JESSICA financing instruments requires, however, projects have sufficient financial inflows. In order to realise projects without or with low revenues, grants are still necessary. Revolving instruments, however, can be used in projects, which do generate income
but, due to high project risk or too low amount of revenue, still cannot be implemented by private parties. For example, projects with earnings which do not cover the market rate of interest may be financed through (reduced interest) loans. High risks can be limited to a degree
acceptable to private parties through guarantees and/or public equity. These types of
JESSICA intervention, however, are only justified if the investments have a sufficiently high
impact on integrated sustainable urban development. The public involvement then makes it
18
possible for new markets to be created in areas hitherto untouched by private investors. In
this way, the JESSICA instruments can contribute to overcoming market failure.
With the provision of new instruments for fostering urban development projects, the number
of possible project financing arrangements increases. There are now alternatives to purely
private, purely public, and private project financing supported by public grants; the different
instruments can be combined, as well. In many cases, it makes sense to combine the
JESSICA instruments with grants. An unprofitable project can be made profitable via grants.
It would also be possible, however, to use the allocation of capital to both reduce the risk to
private investors in the project and, under certain circumstances, to lessen the need for
grants. The practical relevance of JESSICA is thus mainly dependent on the quantitative significance of urban development projects with sufficiently high income.
1.3 Areas of application
The public funds used within the scope of the JESSICA initiative come from the Structural
Funds. Accordingly, the Structural Fund regulations for eligibility for assistance, particularly
Articles 3–8 of the ERDF regulations 1 , are also valid for these funds. For example, the regulations strongly limit the use of Structural Fund financing for housing. In Member States,
which had acceded to the European Union before 1 May 2004, such expenditures are not
eligible at all; in the other Member States, they are only eligible under certain conditions and
are limited to a minor percentage 2 . While housing can be part of a larger urban development
project promoted through the JESSICA initiative, in this case the expenditures for housing
must be financed through other means.
Within the scope of the JESSICA initiative, for example, the following activities are potential
fields of investment 3 :
-
Technical infrastructure like transport, water/waste, energy,
-
Social infrastructure like kindergartens, schools, tertiary education institutions, hospitals,
-
Development of brownfield areas, decontamination and new construction,
-
Office space for SMEs, IT or research and technological development companies,
commercial parks, research and technology centres,
-
Sports facilities, art and concert facilities,
-
Improvement of energy efficiency, renewable energies,
-
Investment in the housing stock in the new Member States.
As UDFs offer loans, equity and guarantees, they can only invest in projects with revenues,
because loans and equity must be paid back with interest and fees must be paid for guarantees. It is not necessary, however, that the interest rates correspond to market rates. Market
rates have only to be paid for the invested private capital. Insofar, the demands on the profitability of the project increase with the amount of private capital involved. This can at least
1
2
3
Regulation (EC) No 1080/2006 of the Council of 11 July 2006 on the European Regional Development Fund.
See art. 7 paragraph 2 of the ERDF regulation.
Eligibility must be verified case by case.
19
partly be offset through an asymmetrical distribution of risk and profit – though the requirements of the laws for state aid must also be observed. In cases where revenues are too low
or the risk or costs are too high, the JESSICA instruments can be combined with grants.
UDFs are funds investing in public-private partnerships (PPPs) and other projects included in
an integrated plan for sustainable urban development (Article 44 paragraph 1 of the General
Regulation).
1.4 Studies at the European level
On behalf of the Directorate General for Regional Policy, the EIB conducted a study between
September and December 2006 on the implementation of the JESSICA initiative. This study
investigated the possible uses of the initiative and evaluated its potential in individual Member States. The United Kingdom, Hungary, the Netherlands, Italy, Poland and Spain were
studied and summarised. The national context and existing structures and institutions in each
nation were taken into account. Individual projects, however, were not analysed. In particular,
the individual markets for urban renewal were examined and assertions made regarding the
applicability of the concept in the individual countries, as well as recommendations for its implementation. 4
The EIB also offers the individual Member States more detailed studies on the implementation of concrete UDFs. In June 2008, three studies (for Germany, Greece and Spain) were
drawn up; 15 additional studies were being prepared.
1.5 Research questions
During the ministerial meeting on 6–7 December 2005 in Bristol, the responsible ministers
decided to form a working group composed of the interested Member States, the European
Investment Bank (EIB), the European Parliament and the European Commission, to consider
the current and future role of the EIB in the provision of loans and capital for sustainable urban development projects.
The findings of this working group were presented during the German 2007 presidency at the
ministerial meeting in Leipzig. In its conclusions and recommendations, the working group
indicated that the operation of JESSICA in urban development financing should be clarified
rapidly (Recommendation No 13). The following points were in particular need of address:
4
-
The role that JESSICA could play in different national contexts to build the financial
market in urban development and cover the investment need.
-
How to build on the experience of existing urban development or similar funds.
-
The clarification of projects, which would be eligible for funding under the JESSICA
initiative.
-
The role and management of the proposed holding funds.
-
The implied means to achieve social and environmental, as well as physical outcomes.
European Investment Bank: JESSICA Preliminary Evaluation Study. January 2007.
20
-
The extent to which JESSICA can contribute to meeting the housing reinvestment
challenges in particular in the new Member States?
-
The scope and scale of the financing instruments that might be developed.
-
The potential role of international financial institutions and other public and commercial banks.
-
The long-term requirements to meet the flexibility needed to make JESSICA work. 5
1.6 Research approach of the present study
To clarify these issues, the ministers encouraged another working group be formed. On behalf of the BMVBS and the BBR this study was compiled to support the thus established
JESSICA Expert Working Group.
The working group focused on the issues raised above. As the JESSICA initiative involves
the application of rather new and unusual urban development instruments, however, there is
not much experience of their advantages and potential uses, nor of the problems of implementing them in practice. The 2007–2013 Structural Fund programming period has just begun; meaning that there are not yet any concrete examples of the implementation of
JESSICA. This study was therefore unable to analyse any existing JESSICA projects.
Nevertheless, there are already urban development projects in many Member States which
use revolving financing instruments, meet the main elements of the JESSICA philosophy and
are thus able to give some information about its potential advantages, disadvantages and
possibilities of implementation.
The following information was available for analysis:
-
The legal framework of the JESSICA initiative as put down in the Structural Funds
regulations as well as
-
Urban development projects in individual Member States using revolving financing instruments and which correspond greatly to the JESSICA philosophy.
Against this background, the decision was taken to analyse the potential value added of
JESSICA on the base of such projects including issues of urban development policy, innovative concepts and of the legal aspects. The research questions and topics, which were to be
answered and discussed with the support of this case study, include:
5
-
Which financing instruments (especially loans, equity, guarantees) are currently being
used in practice – also in combination with grants? How do they look in detail (e.g.
credit conditions)?
-
What does each instrument contribute to risk bearing and to the distribution of risk between private investors and the public?
-
Where are the most important areas of JESSICA application?
See Recommendation No 13 of Conclusions and Recommendations of the Expert Working Group on European Investment Bank (EIB) Loan Finance for Building Sustainable Cities and Communities. Leipzig 24–25
May 2007.
21
-
What are potential roles of JESSICA in housing reinvestment financing in the new
Member States?
-
Which alternative organisational forms of UDFs and projects (e.g. UDFs with or without private capital, private capital only at the project level, formation of a development
company) can be found?
-
Which instruments are appropriate to which types of investment?
-
How can open legal questions in the implementation of JESSICA be clarified?
-
How can integrated urban development plans be shaped?
Some of the above listed questions raised by the EIB working group with respect to JESSICA
were not answered, as their clarification would have gone beyond the scope of this study.
For example, the case studies conducted did not make it possible to judge the role the initiative could play in different national contexts to build the financial market in urban development and cover the existing investment needs. However, there are clues to this in the Preliminary Evaluation Study of the EIB, which analyses the initial situation in the different Member States. Also other questions could not be conclusively answered, like potential role of international financial institutions and other public and commercial banks, as it is too early in
the JESSICA initiative to estimate its future development.
This study will begin by taking inventory of the legal framework (chapter 2) as regards the inclusion of UDFs in European Structural Fund programming, as they were introduced as a financing instrument of the latter. These legal regulations set down the conditions under which
EU Structural Funds can finance urban development projects and UDFs. As the legal regulations included in the Structural Fund ordinance raise numerous questions, and as JESSICA
funds cannot be set up without answers to those questions, one focus of the work of the expert working group was the clarification of the legal framework of the JESSICA initiative. Legal questions of the individual Member States were gathered and communicated to the Commission. The Commission set down its responses in the second COCOF Note (COCOF
08/0002/03) including its catalogue of answers to the legal questions of the JESSICA Expert
Working Group (see Annex 6).
This is followed (Chapter 3) by an examination of which practical development projects can
be financed through UDFs. Five urban development projects, set up in a manner analogous
to the JESSICA philosophy, implemented in different Member States will be analysed. Where
they exist, higher-level funds or organisations are also included. With this approach, the focus of the investigation lies on the concrete projects and their financing. Through these projects, one can examine whether and, if possible, how financing from UDFs could have been
applied. This makes it possible to draw conclusions about the practical advantages of the
JESSICA initiative at the project level, and to evaluate in which projects JESSICA can be applied. The initiative will be all the more convincing if the advantages of the use of UDFs, or
more precisely, JESSICA financing, have been made clear through concrete projects. A list
of criteria for the evaluation of the impact of JESSICA instruments on project finance and urban development policy has been developed for this purpose and is shown in the following
paragraph.
Based on the mentioned projects (Chapter 3), the existing experience in the area of housing
funds (Chapter 4) and the legal framework (Chapter 2), the final analytical step (Chapter 5)
attempts to form some conclusions regarding the possible activities of UDFs. This includes
22
propositions on the form of integrated urban development plans on the one hand, and the
possible business areas of UDFs on the other. The latter comprises the potential use of financing to promote various real estate projects through different financing instruments. Here
both the assets (project funding) and the liabilities (financing) of UDFs are distinguished with
an eye toward concrete business purposes.
1.7 Criteria for the analysis of case studies
JESSICA links the demands of revenue generating project development with the aims of integrated urban development. The economic sustainability of projects and their integration
into urban development are thus the two central topics of the study. Using a total of five criteria, the two central issues in the case studies (see Chapter 3) are applied to the organisational forms and the planning background of urban development projects. The criteria are
shown below:
Public interest
Within the scope of this evaluation, the public motivation for becoming financially involved in
the project is scrutinised. This question is all the more important, as the projects have to earn
revenues. This raises the question then, to what extent private investors would have been interested in comparable projects and why the public has got financially involved, including the
bearing of risks.
Integrated urban development
JESSICA can only be used to finance projects, which are part of an integrated urban development plan. Given the different planning conventions, however, there is no unified definition
of integrated urban development planning. Even within the individual Member States, there is
often no clear definition, which can be used to evaluate the plans. The underlying plans can
therefore not be assessed using a single basis of comparison or evaluation. This analysis
thus scrutinises the way and extent to which the plans link the various sector concerns.
Revolving allocation of resources and profitability/efficiency of business operations
One primary element of the JESSICA philosophy is the use of public funds in the form of
loans, guarantees and equity to finance urban development projects. The analysis must
therefore examine the way in which revolving financing instruments are used in the case
studies and with which economic results.
Mobilisation of private capital and distribution of risk in the public-private partnership
One main task of UDFs is to mobilise private equity, e.g. by distributing project risks between
the public and private investors. One of the uses of revolving financing instruments is to simplify the mutual public-private financing of projects. The essential question here is the ratio to
which the development risk and returns are distributed between the public and the private investors. Another possibility for the employment of private capital is by financing through
loans from commercial banks, if necessary secured with public guarantees.
23
Effect of the measures
One of the central questions surrounding the discussion of UDFs is the significance of urban
development projects, which generate considerable cash inflow but do not yield a market return. In order to measure the success of the JESSICA approach, the effect of urban development projects has to be examined. The impact of individual projects on urban development is difficult to measure in many cases. Whether a project has brought about the desired
effect can often not be judged until a considerable period of time has passed. At the same
time, the projects and their surroundings are usually functionally and spatially interlinked to
the city itself and the region. The developments to be observed in an area are thus dependent on numerous other developments, which have an effect on the project and its surroundings from outside the immediate area. While a causal relationship between individual projects
and urban development processes can be illustrated using multiple arguments, it cannot easily be empirically proven.
Based on these criteria, the working group chose five examples, which were each examined
as case studies. The projects were visited and documented by the research team between
February and April 2008 (see Chapter 3). Several discussions were conducted on site with
the parties involved. The discussions were used to examine the urban development projects
themselves, their financing and their integration in urban development. Furthermore, it was
investigated to what extent there are structures, which can be used to implement similar projects.
In addition to the five case studies, the study is augmented with the summary and illustration
of various financing structures for housing investment in the new Member States (see Chapter 4).
24
2
LEGAL FRAMEWORK FOR IMPLEMENTING THE JESSICA INITIATIVE
2.1 Introduction
The legal framework for the use of revolving financing instruments is laid out in the following
EU legislation:
-
Council Regulation (EC) 1083/2006 of 11 July 2006 laying down general provisions
on the European Regional Development Fund, the European Social Fund and the
Cohesion Fund – hereafter “General Regulation”
-
Regulation (EC) 1080/2006 of the European Parliament and of the Council of 5 July
2006 on the European Regional Development Fund – hereafter “ERDF Regulation”
-
Commission Regulation (EC) 1828/2006 of 8 December 2006 setting out rules for the
implementation of Council Regulation (EC) 1083/2006 of 11 July 2006 laying down
general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund and of Regulation (EC) 1080/2006 of the European
Parliament and of the Council of 5 July 2006 on the European Regional Development
Fund – hereafter “Implementation Regulation”
In addition, the European Commission issued the following advice on their implementation:
-
Note of the Commission services on Financial Engineering in the 2007–2013 programming period dated 16 July 2007 (ref. COCOF/07/0018/01) – hereafter “First
COCOF Note”
-
Guidance Note of the Commission services on Financial Engineering of September
2008 (COCOF/08/0002/03) – hereafter “Second COCOF Note” – including the Catalogue of answers of the Commission to the legal questions of the JESSICA Expert
Working Group dated 22 December 2008.
2.2 Legal specifications for urban development funds
Urban development funds (UDFs) are the organisational framework for the employment of
new financial engineering instruments. UDFs are funds investing in public-private partnerships (PPPs) and other projects included in an integrated plan for sustainable urban development (Article 44 paragraph 1 of the General Regulation). The Structural Funds aid and individual national co-financing are deposited in these funds. Private investors may also deposit monies in the UDFs. UDFs invest their capital in the form of revolving financial engineering instruments such as venture capital, loan and guarantees fund, per Article 46 paragraph 1 of the Implementation Regulation.
Directly after launching the UDF, the total expenditure paid in establishing it can be listed in
the statement of expenditure, which forms the basis for granting the Structural Fund aid (Article 78 paragraph 6 of the General Regulation). The UDF thus receives the Structural Funds
at the start-up of its activities. It is not until the closure of the operational programme that the
expenditures and their eligibility for assistance have to be proven.
2. Legal framework for implementing the JESSICA initiative
25
Urban development funds shall be set up as independent legal entities or as a separate
block of finance within a financial institution (Article 43 paragraph 3 sentence 1 of the Implementation Regulation). Where the UDF is established within a financial institution (e.g. a national or regional development bank), it shall be set up as a separate block of finance subject
to specific implementation rules within the financial institution, stipulating, in particular, that
separate accounts are kept which distinguish the new resources invested in the financial engineering instrument, including those contributed by the operational programme, from those
initially available in the institution (Article 43 paragraph 3 sentence 2 of the Implementation
Regulation).
Management costs for the UDF may not exceed, on a yearly average, 3 per cent of the capital contributed from the operational programme or the holding fund (see below) (Article 43
paragraph 4b of the Implementation Regulation).
No concrete project needs to be named when a UDF is set up. However, Article 43 paragraph 2 of the Implementation Regulation requires a business plan, which at least specifies
the following:
-
The target market of urban development projects and the criteria, terms and conditions for financing them;
-
The operational budget and ownership of the UDF;
-
The co-financing partners or shareholders and the by-laws of the UDF;
-
The provisions on professionalism, competence and independence of the management;
-
The justification for, and intended use of, the contribution from the Structural Funds;
-
The policy concerning exit from investments in urban development projects;
-
The winding-up provisions of the UDF, including the reutilisation of resources returned from investments or left over after honouring all guarantees, attributable to the
contribution from the operational programme.
According to Article 43 paragraphs 5 and 6 of the Implementation Regulation, the terms and
conditions for contributions from operational programmes to the UDF shall be set out in a
funding agreement, to be concluded between the management authority and the urban development fund, which shall at least specify the investment strategy and planning, monitoring
of implementation, an exit policy and the winding-up provisions for the UDF, including the reutilisation of resources returned from investments. To ensure the political control of funding
activities, the managing authority may demand a seat on the supervisory board of the UDF.
Urban development funds shall not invest in projects which include the creation of venture
capital, loan and guarantee funds (Article 46 paragraph 1 sentence 2 of the Implementation
Regulation) but they shall directly invest in the financing of urban development projects. The
former business activity is the exclusive domain of holding funds.
The funds concerned shall not refinance acquisitions or participations in projects already
completed (Article 46 paragraph 3 of the Implementation Regulation), though they may support urban development projects receiving grant assistance from an operational programme.
This opens the possibility of combining various financial engineering instruments, which in
practice should make a considerable contribution to increasing efficiency.
26
Resources returned to the UDF – even after the liquidation of the UDF – shall be used for the
benefit of urban development projects (Article 78 paragraph 7 sentence 2 of the General
Regulation); in contrast, private fund capital may be paid back to the investors.
Returns from equity investments and loans, less a pro rata share of the management costs
and performance incentives, may be allocated preferentially to investors operating under the
market economy investor principle up to the level of remuneration laid down in the by-laws of
the financial engineering instruments (Article 43 paragraph 7 of the Implementation Regulation). It is thereby fundamentally allowed to set up asymmetrical distribution of the profits of a
UDF.
2.3 Holding funds
Pursuant to Article 44 paragraph 2 of the General Regulation, holding funds may be set up to
manage and award the resources stipulated for urban development funds. They receive the
financial resources from the managing authorities and award them on the basis of calls for
proposal to diverse UDFs. Setting up holding funds as a link between the managing authorities and the actual UDFs is optional. Holding funds allow the managing authorities to delegate at least part of the responsibilities associated with implementing the JESSICA initiative.
The terms and conditions for managing resources through holding funds are laid out in a financing agreement between the managing authorities and the holding fund, which in particular specifies the terms and conditions for contributions from the operational programme to the
holding fund, the terms and conditions for awarding the resources, how to monitor the implementation of investments, the exit policy and winding-up provisions of the holding fund
(Article 44 paragraph 2 of the Implementation Regulation).
Management costs for the holding fund may not exceed 2 per cent of the capital contribution
from the operational programme to the holding fund (Article 43 paragraph 4a of the Implementation Regulation).
The use of holding funds presupposes that there are already UDFs to apply for the resources
tendered by the holding fund.
2.4 Clarification of open legal issues
Since the JESSICA instruments were newly introduced with the 2007–2013 Structural Fund
programming period, the Structural Fund regulations raise numerous issues which needed to
be clarified before UDFs may be established without considerable hurdles. Therefore the
working group made an intense effort to clarify the legal framework of the JESSICA initiative.
Open issues within the Member States were collected, submitted to the Commission and
discussed within the working group. The Commission laid down its responses in writing in the
second COCOF Note including its catalogue of answers to the legal questions submitted by
the JESSICA Expert Working Group (see Annex 6). The following points of discussion are
shown by way of example:
27
Mandatory call for proposal
Article 44 paragraph 2b of the General Regulation stipulates that – if a holding fund is set up
at the EIB or the EIF – the ERDF managing authority may award a grant to the EIB/EIF without a call for proposal. It was unclear, however, to what extent the public procurement rules
apply to all other cases, e.g. to the selection of the UDFs. Here the EU Commission indicated
that the relationship between the Member States and the EIB is only determined by the EU
primary legislation und and thus does not deal with public procurement rules. In all other
cases, it is the responsibility of the national ERDF managing authority to decide whether, according to national and/or EU law, each case is a public contract award and therefore a call
for proposal is required. The Second COCOF Note gives various indications for differentiating between a public contract award and awarding a grant, which can be done without a call
for proposal (points A.1 and A.2).
Deduction of revenues
Article 55 of the General Regulation stipulates that the eligible expenditure on revenuegenerating projects by the Structural Funds shall not exceed the current value of the investment cost less the current value of the net revenue from the investment. The application of
this regulation to revolving financial engineering instruments would be contrary to the idea of
the JESSICA initiative. If the revenues earned were to be subject to deductions, the UFD
would rapidly run out of resources; it would no longer be possible to reallocate the resources.
The Commission has now clarified that Article 55 paragraphs 1–5 of the General Regulation
are not applicable to the financial engineering instruments of Article 44 of the General Regulation (Second COCOF Note, point B.4).
Paying out returning resources to private investors
Resources returned to the UDF shall be reused for the benefit of urban development projects, pursuant to Article 78 paragraph 7 sentence 2 of the General Regulation. The Commission clarified, however, that this does not apply to the resources of private investors,
which can be returned to them after the completion of the project (Second COCOF Note,
point A.3). If an asymmetrical profit distribution in favour of the private investors is foreseen
(which is permissible following Article 43 paragraph 7 of the Implementation Regulation), the
type and amount of the distribution must conform to EU state aid law.
Granting interest subsidies
The Commission clarified that revolving financial engineering instruments may be combined
with interest subsidies (Second COCOF Note, point B.1). In this event, the interest subsidies
shall be regarded as part of the financial engineering instruments in the sense of Article 44 of
the General Regulation and are not subject to any separate legislation. Nevertheless, the
granting of interest subsidies must conform to EU state aid law.
Integrated urban development plans
Projects supported by Structural Fund resources must be part of an integrated plan for sustainable urban development (Article 44 paragraph 1 of the General Regulation). EU law does
not define the form and content of such plans more precisely, so this must be done at the na2. Legal framework for implementing the JESSICA initiative
28
tional level. As a starting point for shaping these plans, the Commission refers to the Strategic Guidelines on Cohesion 2007–2013 6 , of which 2.1 sets out:
“Second, the preparation of a medium- to long-term development plan for sustainable urban
development is generally a precondition for success as it ensures the coherence of investments and of their environmental quality. This will also help to secure the commitment and
participation of the private sector in urban renewal. In general, a multi-disciplinary or integrated approach is needed. For area-based actions, for example, to promote social inclusion,
this requires that actions seeking to improve the quality of life (...) or the level of services to
citizens be combined with actions to promote the development of new activities and job creation in order to secure the long-term future of the areas concerned. The new JESSICA initiative is designed to promote and facilitate the development of financial engineering products
to support projects included in integrated urban development plans.”
As an additional hint, the European Commission mentioned the following terms used in Article 44 of the General Regulation:
-
Integrated Plan: a comprehensive approach incorporating especially financial, social
and environmental aspects
-
Development Plan: implies a longer period and the inclusion of several projects
-
Sustainable: implies, for example, that damage to the environment should be avoided
-
Urban: includes reference to an area.
The Member States shall now examine whether the already existing plans for part of, or the
entirety of, urban areas may be regarded as integrated urban development plans.
Combination with ineligible measures
The Commission clarified that the projects supported by UDFs may include parts, which are
ineligible for Structural Fund aid (e.g. housing investments in the old EU Member States). In
order to be able to audit the eligible parts according to Structural Fund rules, the accounts for
the eligible and ineligible parts must be kept separately. Details can be found in the Second
COCOF Note (point B.3).
2.5 Further Proceedings
In spite of the clarification of some open, central issues, there are still legal questions awaiting answers.
For example, it is still unclear how far urban development funds are subject to the Structural
Fund rules (e.g. eligibility, accounting) when reallocating resources. Once the resources
have been returned to the UDF, may they be invested the second time in a housing project?
In this regard, the Commission only recommended that returned resources be reemployed in
the area targeted by the operational programme (point A.3).
Article 8 of the ERDF Regulation stipulates the eligibility of measures in the area of sustainable urban development. Accordingly, the ERDF may support the development of participative, integrated and sustainable strategies to tackle the high concentration of economic, envi6
Council Decision of 6 October 2008 (2006/702/EC), Official Journal L291 of 21 October 2006.
29
ronmental and social problems affecting urban areas (Paragraph 1). These strategies shall
promote sustainable urban development through activities such as: strengthening economic
growth, the rehabilitation of the physical environment, brownfield redevelopment, the preservation and development of natural and cultural heritage, the promotion of entrepreneurship,
local employment and community development, and the provision of services to the population. However the terms and conditions and scope of eligible concrete projects such as
shopping centres, offices and hotels are not clear yet.
The Federal Ministry of Transport, Building and Urban Affairs will also strive to clarify open
legal issues after the working group has concluded.
30
3
CASE STUDIES WITH ELEMENTS OF JESSICA FINANCE IN EUROPEAN URBAN
DEVELOPMENT PROJECTS
1.1 United Kingdom
In the following the British company “Priority Sites Limited” acts as a possible model of realisation of an urban development fund.
3.1.1 The “Priority Sites Limited” urban development fund
3.1.1.1 Goals
Priority Sites Limited (PSL) was established in 1997 to develop property on brownfield land
for industrial purposes. The company is meant to be especially active in areas of weak economic development, where private development companies do not invest. In its first ten
years of operation, PSL has developed 3 million square feet (sq. ft.) of property. This space
has been responsible for creating or preserving 6,000 jobs.
PSL operates as a so called "trader developer", which usually purchases, develops and then
sells the land. Projects are maintained in the portfolio when, in particular, the public match
funding stipulates this (i.e. to ensure the land's officially intended use). The company assumes all of the project development risk.
At present, PSL is focusing development on three different types of commercial land. For
one, the company develops land parcels up to 30,000 sq. ft. on a speculative basis for industrial operations. Larger spaces are developed if the property is pre-let. For another, it develops so called "hybrid" units, which link industrial and logistics space with office space. Finally, PSL develops office buildings, which, in some cases, fit into larger urban development
projects.
In this market segment, though investment is profitable from the interview partners' point of
view, private companies do not do it. This is primarily due to the high risk of non-owneroccupied commercial property in rather weak economic areas, the overly high capital needs,
and the lacking market transparency in terms of the actual targeted land and property
prices 7 . The development of employment space is crucial for promoting the economy from
the perspective of the national regeneration agency English Partnerships (EP). In particular,
the market has only been offering a small number of units for small and medium-sized enterprises (SMEs). Because of the economic trend of the last few years, individual private companies have also begun to operate in this segment. Nevertheless, public authorities still feel
there is a need to be active in this area. Local authorities primarily find that PSL works with
strong reliability and high standards of quality.
7
In order to minimise this lack of market transparency, English Partnerships in cooperation with IPD and Morley Fund Management developed the IPD Regeneration Index in 2002, which was last published in 2007
and which studies the performance and revenues of various types of property in urban regeneration areas
(see IPD, English Partnerships, Morley Fund Management, Savills: IPD Regeneration Index 2007).
3. Case studies with elements of JESSICA finance
31
3.1.1.2 Investors
PSL is owned by the second largest banking group in Europe, the Royal Bank of Scotland
(RBS), (51 per cent) and English Partnerships (EP) (49 per cent).
Since being established 300 years ago, the RBS has become one of the most significant financial service providers in the retail and business-banking segment. It is active in the segments of personal finances, wealth management, business and commercial financing and
advice for SMEs, and global corporate banking for international conglomerates.
EP is the national urban regeneration agency in England. The agency in its current form was
created in 1999 through the merger of the Commission for the New Towns (CNT) and the
Urban Regeneration Agency (which also previously carried out its activities under the name
of English Partnerships). The central aim of the agency is to achieve high-quality, welldesigned, sustainable places for people to live, work and enjoy. Together with various partners, it promotes high-quality sustainable urban regeneration in areas experiencing economic restructuring, works to increase the supply of high-quality affordable housing, makes
best use of the nation’s scarce supply of land, and seeks to increase the quality and quantity
of private-sector investment in housing and regeneration. Aside from supporting strategic
projects such as the Greenwich Millennium Village in London, the agency is also responsible
for the National Coalfields Programme to develop now vacant mining land and for the development of public land.
The integration of the former English Industrial Estates Corporation (“English Estates”) also
brought EP experience in the development and administration of industrial property. In the
1930s, English Estates developed numerous commercial and industrial areas in England and
let out industrial property there. In the 1980s, it began to privatise these areas. English Estates together with its remaining industrial property portfolio was transferred to EP on its establishment in 1994.
EP’s budget for financial year 2006/2007 amounted to approximately GBP 586 m. As the national urban regeneration agency, EP is a non-departmental public body sponsored by the
UK’s Department of Communities and Local Government (DCLG).
3.1.1.3 Legal and organisational structure
PSL is established as a private company limited by shares. This is the typical form of organisation for SMEs in the UK, with approximately 1.5 m companies currently established as
such. It is basically a private type of stock corporation whose shares may not be traded on
the stock exchange 8 . The minimum capital investment is GBP 1; shareholders are fully liable
up to their total investment, but their private assets are not at any risk.
PSL has a Board of Directors composed of representatives of the two owners. A management team directly employed at PSL with a Chief Executive, however, runs day-to-day busi-
8
Except for registering in the commercial register – the Companies House – there are no other formal requirements (such as consulting a solicitor or notary) for setting up an Ltd. In comparison to publicly traded
stock corporations, there are fewer disclosure requirements. Aside from filing an annual return with the
Companies House, the company only has to submit annual financial statements.
32
ness 9 . The management does not have any employment relationship to the owners (though
it was hired by them). Management is not, however, authorised to make decisions on its own
regarding the implementation of new projects. As the basis for all decisions to pursue a new
project, a feasibility study is carried out which analyses not only the location and market but
also examines the economic feasibility and risks. A business plan is compiled for each potential project and submitted for appraisal to the representatives of the owners, who have the
right of veto. Thus, only those projects are pursued which have the approval of both owners,
as well as approval from PSL itself. It is not necessary to get any official approval, e.g. from
the federal or local government (other than the general statutory requirements, such as planning permission, which will apply to all developers).
Including management, the company has a staff of 23 directly employed at PSL. The headquarters is in Glasshoughton (Yorkshire), with additional offices in Redruth (Cornwall) and
Garston (Liverpool).
3.1.1.4 Source of funds
RBS contributed 51 per cent and EP 49 per cent of PSL's GBP 5.812 m in equity. The capital
invested by RBS was in the form of cash. In contrast, EP made a contribution in kind in the
form of a portfolio of let industrial property worth GBP 8.61 m in 1998 10 . Of this amount, GBP
2.848 m made up its 49 per cent of PSL's equity and the difference was provided to PSL as
non-current loans, known as “loan stock”. The invested property portfolio was transferred into
the wholly owned subsidiary of PSL named Priority Sites Investment Limited. 11
2006
Current Liabilities
- trade and other payables
- trade creditors
- accruals and deferred income
- taxation
- Development loans (RBS)
Non-current Liabilities
- Loan Stock (until end 2007)
- RBS
- EP
- Development loans (RBS)
Equity
- share capital (51%/ 49%)
- retained earnings
Total
9.133.520
7.370.595
854.601
908.324
904.000
2005
2004
3.909.970 10.506.489
2.689.217 3.700.170
902.158 2.008.301
318.595
789.018
7.183.000 3.100.000
2003
5.865.610
379.976
1.781.112
704.522
0
2002
6.497.654
1.273.904
1.733.236
490.514
4.107.000
2001
5.161.169
2.462.540
20.290
678.339
5.628.000
2000
2.158.143
2.135.795
11.094
11.254
3.340.000
1999
742.189
607.307
0
134.882
479.000
1998
297.434
295.141
0
2.293
0
19.000.800 19.000.800 19.000.800 19.000.800 16.777.800 12.062.000 10.062.000 10.062.000 10.062.000
8.120.000 8.120.000 8.120.000 8.120.000 7.170.000 5.154.700 4.300.000 4.300.000 4.300.000
10.880.800 10.880.800 10.880.800 10.880.800 9.607.800 6.907.300 5.762.000 5.762.000 5.762.000
16.021.000
0
0
0
0
0
0
0
0
5.812.000 5.812.000 5.812.000 5.812.000 5.812.000 5.812.000 5.812.000 5.812.000 5.812.000
5.834.672 4.578.210 1.834.654 1.178.632 1.050.183
918.019
336.458
326.591
-336
56.705.992 40.483.980 40.253.934 31.857.042 34.244.637 29.581.188 21.708.601 17.421.780 16.171.098
Figure 3 – Source of PSL's Capital (Equity and Liabilities) (in GBP)
Aside from the equity, both owners also provide long-term loan stock to PSL. As discussed
above, EP subscribed for its loan stock by transferring tenanted industrial property; RBS
subscribed for its loan stock in cash. RBS also provides development loans to PSL. These
9
10
11
In general the shareholders of every private company limited by shares – unless they hold a management
position themselves – appoint a director and a company secretary. The latter is responsible for the official
tasks such as signing the Directors' Report in the annual financial statements. Basically, every company also
has to appoint an auditor.
According to EP, the reason for the contribution in kind was that EP had received a large real estate portfolio
from English Estates, which, due to realigned corporate policy, would have been gradually sold off. Therefore, it wanted to use the property to invest in a PPP and, at the same time, reduce its own property inventories.
This was done for tax reasons, as the subsidiary has tax advantages over a project development company.
In addition to financing projects, the funds of PSL were used to extend a long-term loan to the subsidiary
(2006: GBP 11.7 m, see Figure 4, Allocation of PSL’s capital), for which PSL receives interest income of 5.8
per cent to 8.25 per cent of the principal (depending on the market interest rate).
33
are granted under current market conditions (i.e., thus no interest subsidy to the joint venture) and are normally mortgage-backed.
Finally, another source of financing is the possibility to apply for a grant from EP. This grant
is applied for when the potential projects of PSL do not, ex-ante, i.e. in the developer’s project appraisal calculation, meet PSL’s internally set minimum profit margin of 15 per cent (of
total project costs) 12 . The decision whether to give a grant is made by EP on a case-by-case
basis after evaluating the project. Of the total funds EP makes available for grants, approximately GBP 11 m p.a. is earmarked for the projects of PSL. PSL has no claim to these funds
and, if it does not apply for money for suitable projects, EP is free to use these funds for
other projects which fulfil its remit.
The repayment schedule for the individual sources of capital is set up in such a way that the
first to be serviced are the project development loans taken out from RBS. The remaining
funds are then used to pay the interest on the non-current loans (loan stock) from both owners, which were granted at a 7.75 per cent rate of interest, before servicing equity. PSL distributed GBP 4 m in dividends in both 2005 and 2006 to both partners in equal measure. This
was an equivalent payout ratio of 76 per cent in 2006, for example. Retained earnings have
been gradually stockpiled in the nearly ten years of PSL's business operations and reached
the level of subscribed capital in 2006 (both items came to GBP 5.8 m). This corresponds to
an equity ratio of 20.54 per cent. When EP has provided gap funding to PSL (i.e. a grant)
clawback provisions will apply. Under clawback provisions, when the returns of a project
have exceeded the ex-ante expectations (because, for instance, costs have been reduced or
revenues are higher than anticipated) then a proportion of the grant is returned to EP as
clawback.
3.1.1.5 Appropriation of funds
PSL has carried out 97 projects to date. No project companies were formed for any of them,
which means all the projects are fully accounted for within the accounts of PSL. As a trader
developer, PSL primarily purchases urban brownfield land, develops it on its own and sells
the completely developed land, so that the entire project development risk remains with the
company. Still unsold projects in the development stage are thus posted under "development
properties" in current assets. The number of projects in development at Priority Sites has
steadily grown over the years and in 2006 came to GBP 27.4 m.
Under non-current assets, the "due from subsidiary" item includes the long-term equity investments of Priority Sites in its wholly owned subsidiary Priority Sites Investment Limited.
The relatively high amount of “receivable for the sale of property” is primarily a result of developed projects already sold to clients (but not yet paid for); the "grants receivable" is made
up of grants already approved by EP but not yet paid out for projects in the development
phase.
12
According to EP this 15 per cent is a typical profit margin in the industry for speculative property development. In comparison to the margin in the published IPD Regeneration Index, it appears to be plausible. As
the index demonstrates, the total returns seen on all commercial property in regeneration areas in the UK for
the 10-year period to 2006 averaged 13.7 per cent (and even 16.2 per cent in 2006 alone, cf. 2007 IPD Regeneration Index published on the home page of EP, p. 6). Both owners agreed that this return is necessary
to cover the development risks.
34
2006
Non-current assets
- Investment in subsidiary
- deferred tax asset
- due from subsidiary
Current assets
- development properties
- trade and other receivables
- receivables for the sale of property
- grants receivable
cash and cash equivalents
Total Assets
2005
2004
2003
2002
2001
2000
1.000
1.000
1.000
1.000
20.203
21.698
23.777
27.597
11.726.680 11.387.832 11.807.861 10.014.374
1.000
23.066
8.550.175
1.000
0
8.880.009
1.000
0
7.968.300
1999
1998
1.000
1.000
0
179.397
7.766.046 14.332.005
27.399.100 24.254.955 21.355.593 16.961.588 19.563.628 18.478.029 12.087.328 7.746.338 1.386.727
15.716.414 3.227.744 4.455.913
581.489 3.261.896 1.635.067 1.558.348
227.077
0
14.226.858 1.354.651 2.880.827
15.960
279.339
709.751
612.930
227.077
0
1.489.556 1.873.093 1.575.086
565.529 2.982.557
925.316
945.418
0
0
1.842.595 1.590.751 2.609.790 4.270.994 2.844.872
587.083
93.625 1.681.319
271.969
56.705.992 40.483.980 40.253.934 31.857.042 34.244.637 29.581.188 21.708.601 17.421.780 16.171.098
Figure 4 – Allocation of PSL's Capital (Assets) (in GBP)
3.1.1.6 Empirical fund analysis
PSL compiles annual financial statements, which include a cash flow statement on top of the
balance sheet and income statement. The company was founded in autumn of 1997, though
the actual business activities, project development, were first begun in 1999. From 1999 until
today, the income statements of PSL have shown positive earnings and net income every
time, since 2001 even regularly in the seven-digits. So far, 2006 has been the most successful year, with operating profit of GBP 7.48 m.
Income
Revenue
- Sale of properties
- Property rental income
- Cost of sales
= Gross profit
- Administrative Expenses
= Operating profit/ loss
+ non-operting profit/ loss
- Income tax expense
= Profit/ Loss for the year
2006
40,42
0,24
31,32
9,34
1,86
7,48
-0,40
1,83
5,26
2005
28,23
0,14
21,94
6,44
1,31
5,13
-0,21
1,18
3,74
2004
29,50
0,25
22,70
7,06
1,15
5,91
0,31
1,57
4,66
2003
22,38
0,00
16,29
6,08
0,93
5,15
-0,70
1,33
3,13
2002
2001
16,77
0,00
11,91
4,86
0,92
3,94
0,13
0,94
3,13
12,06
0,00
8,50
3,56
0,65
2,90
0,36
0,68
2,58
2000
2,95
0,00
2,06
0,89
0,67
0,23
-0,19
0,02
0,01
1999
2,21
0,00
1,46
0,74
0,30
0,45
0,02
0,13
0,33
1998
0,00
0,00
0,00
0,00
0,43
-0,43
0,43
0,00
0,00
Figure 5 – Income Statement of PSL (in million GBP)
Cash Flow
2006 2005 2004 2003 2002 2001 2000 1999 1998
Operating profit/ loss
7,48 5,13 5,91 5,15 3,94 2,90 0,23 0,45 -0,43
+ Decrease/ (Increase) in creditors
5,62 -1,12 4,50 -0,84 1,45 0,29 1,53 0,07 0,12
+ (Increase)/ Decrease in deptors (incl. loans to subsidiary) -12,49 1,23 -3,66 2,68 -1,30 0,01 -1,53 6,62 -14,51
- development property expenditure
13,51 11,37 13,79 1,46 9,13 15,65 8,38 9,26 1,61
- taxation paid
1,24 1,65 1,47 1,85 1,15 0,01 0,15 0,00 0,00
= Operating Cash Flow
-14,13 -7,79 -8,50 3,68 -6,19 -12,45 -8,30 -2,12 -16,43
+ EP grants received
10,36 8,48 9,23 4,45 8,05 9,26 4,04 2,90 0,22
= Operating Cash Flow (incl. EP grants)
-3,77 0,68 0,72 8,13 1,85 -3,20 -4,26 0,78 -16,21
Figure 6 – Excerpt of Statement of Cash Flows (operating cash flows) of PSL (in million GBP)
Nearly all earnings (see above figure) stem from the sale of completed projects ("sale of properties"). Despite acting mainly as a trader developer, PSL also has the ability to retain completed properties in its portfolio to generate "property rental income" and will make a commercial decision based on the current market and the operational resources needed by the
company. Three quarters of the “administrative expenses” are personnel expenses, including
all management costs. For any further financial analysis, it is essential to augment this positive picture of the company's earnings situation to include the grants received from EP. In
contrast to the Evolution project analysed in the following chapter, these grants are used for
the other projects, because the internal target of at least 15 per cent profit margin in terms of
total project costs could not otherwise be maintained. Since PSL uses the net method of accounting for grants, which is set out as an option in the British accounting guidelines, the
35
"Statement of Standard Accounting Practice" (SSAP) 13 , the amount of annual grants cannot
be seen in the income statement and the balance sheet, because the development properties (see Figure 4) posted under the assets as well as the cost of sales (see Figure 5) are not
accounted at their full values but rather directly at the value less the grants received. Nevertheless, the amount of the grants can be seen in the statement of cash flows (see Figure 6).
The figures from the statements show that PSL posted millions in negative operating cash
flows every year (except 2003). This means that PSL managed to generate higher pay-ins
(through sales) than pay-outs (for the costs of project development) through its own business
– project development – only in the year 2003. Only with the received EP grants at least in
half of the years (1999 and 2002–2005) PSL achieved a positive operating cash flow and
therefore the ground for possible dividend payments to its shareholders (as it has been done
in the years 2002–2006).
Therefore, it can be said that, without the grants, the projects carried out by PSL would not
normally be profitable and would thus, without grants, gradually eat into cash and cash
equivalents. However, this negative cash flow/profit reduction is acceptable as the principle
reason for the company’s existence is to develop areas of economic need and create inward
investment and ultimately jobs. Other private developers have avoided these areas due to
market failure and a lack of available profit. PSL, however, would simply not commit to a
loss-making project without grant support to give the prospect of a reasonable (i.e. at least
15 per cent) return.
3.1.2 The Evolution urban development project in Newcastle-under-Lyme
The following is an example of a more detailed analysis of one of the 97 projects implemented by PSL so far; this one is in Newcastle-under-Lyme (Evolution project).
3.1.2.1 Location
Newcastle-under-Lyme in the northern part of county Staffordshire borders directly on the
city of Stoke-on-Trent. The borough has a population of approximately 122,000. To the north
of the borough, among several coal mines, is the Holditch Colliery mine belonging to stateowned British Coal; it was shut down in 1986. There are several communities around the
mine whose social structures are still strongly influenced by the former mining. Two examples are Knutton to the south and Chesterton to the north of the former Holditch Colliery.
Knutton is in the top 10 per cent of socially disadvantaged communities in England. The residential districts of Silverdale and Chesterton, which directly abut the project, are in the top 20
13
SSAP No. 4 deals with the accounting treatment of public grants and borrows heavily from the international
accounting standards in IAS 20. According to the principle of matching and the prudence concept, grants are
first recognised as income over the period necessary to match them with the related costs, for which they
are intended to compensate. As EP extends grants for each individual project, and these projects are developed over a period of years, these grants are initially booked as a reduction to the value of the development
properties, and later impact the company's profit when the projects are sold. According to EP the value of
the development properties has been adjusted by the net grants. This means the grants from EP to PSL
were already corrected to include the clawback from PSL to EP.
36
per cent of socially disadvantaged communities in England 14 . The former mine is approximately 3 km north of the centre of Newcastle-under-Lyme and near the M6 between Birmingham and Manchester.
3.1.2.2 Project
The Evolution project marks the end of comprehensive land development efforts and therefore has to be viewed in the context of the overall development. After being fully let, the Lymedale Business Park was expanded to include the Lymedale Business Park Extension. The
Evolution project is a part of this extension.
Chesterton
Extension
Expansion
"New Look"
"Evolution"
New business
t
Lymedale
Business
Park
Figure 7 – Lymedale Business Park and Extension (Source: Staffordshire County Council, captions and marking
of project site done by authors)
Development of Lymedale Business Park 1995–2006
The Staffordshire County Council purchased the approximately 31 ha of land of the former
Holditch Colliery in 1995/1996. In the following years, the County Council rehabilitated the
land and redeveloped it into the Lymedale Business Park. The conditioning and development
of the brownfield land was mostly unprofitable at that time and was thus mostly financed
through public grants.
In the following years, numerous logistics companies resettled to the business park. Given
the strongly risen property prices, Staffordshire County Council made an unexpected profit in
the sale of the properties and had to pay back some of the grants.
Lymedale Business Park Extension 2006–2008
Because of the successful sale of property in the Lymedale Business Park the County Council decided to develop approximately 10.5 ha of neighbouring land belonging to the Council
and an extension of the business park.
The extension of the original business park contains three different elements: A large plot of
land to the west of the park was acquired and developed Gladman Developments Ltd and
leased to a high street clothing retailer. To the east of the park, the County Council had a
14
The Department for Communities and Local Government (CLG) regularly compiles a study encompassing
various social indicators nationwide. The so-called Indices of Deprivation of 2004 also indicate the particularly strongly affected regions. The indices are currently being updated.
37
new business centre constructed with grants from the regional development agency Advantage West-Midlands. The remaining space is to be made available for SMEs in order to promote the creation of start-ups.
Given the high property values, it seemed possible to develop the land without public grants
from the beginning. The community anticipated net income of approximately GBP 1.5 m after
deducting the development costs for the park extension.
The Priority Sites Project: "Evolution"
A new tender procedure was carried out in 2006 for the land on which commercial space for
SMEs should be created, after the private investor chosen from the first tender was unable to
meet the requirements of the County Council. In the second tender procedure, PSL was chosen to be the investor. Aside from the purchase price, the proposed development concept,
the organisation and the reliability of the bidder were important criteria.
Figure 8 – "Evolution” plan (Source: PSL)
The Evolution project is made up of two construction phases. In the first phase, covering approximately 1.5 ha, a total of 17 units will be constructed. Six units are foreseen for industrial
companies. Four units are composed of industrial space on one floor and an equal amount of
office space on another. Seven additional buildings will all contain office space. The 17 units
were completed in April 2008.
Figure 9 – Planned Commercial Units (Source: PSL)
38
Once the units are complete, they will either be let out or leased for 999 years (virtual freehold). PSL only lets out or leases the building and land on which it sits, but maintains possession of all common area. Ownership of the total area can either be sold afterwards or outsourced to a subsidiary of PSL. As the Evolution project was financed without grants, it is not
necessary for PSL to keep possession of the property even longer.
3.1.2.3 Financing
As no project companies have been established for any of the 97 projects PSL has completed to date, all projects are accounted on balance sheet. The consequence of this is that
no project-specific instruments have been used; rather capital has strictly been provided internally from the sources of equity and debt listed in PSL's balance sheet.
The capital needs for the Evolution project mostly came from the purchase of land and from
construction costs. The 3.7 acres of land were purchased from the local authority at the market price, including fees, of GBP 985.246, equivalent to a purchase price for PSL including
fees of GBP 657,976 (€ 832,011) per ha 15 . The construction costs (including 1 per cent contingency) were calculated to be GBP 71.07 per sq. ft. (= € 967.36 per m2), resulting in total
costs of approximately GBP 4.457 m. Adding other fees and costs, as well as the interest
expense for the interim financing of the land and buildings during construction (assuming vacancy of five months) yields total costs for the project of GBP 6.156 m.
Total project costs:
Site acquisition 3.7 acres (incl. fees): 253,784 GBP/acre
Construction costs (incl. 1 % contigency): 71,07 GBP/sq feet
Professional fees
Interest: 7,65% with 5 month void
Other costs
+ Developers Profit (15% on project costs)
+ Purchasers Costs
= Total investment
Minimum price for sale property
6.156.282
958.246
4.457.424
170.719
364.337
178.556
923.234
423.438
7.511.954
7.511.954
Figure 10 – Forecast Costs for the "Evolution" Project (in GBP)
The ex-ante developer calculation of PSL followed the residual value method, whereby the
required sales revenue is calculated backward from the project costs plus the profit margin
for the developer. Adding the total project costs and the profit margin for PSL of 15 per cent
of these costs, plus the purchaser’s costs for the buyer, yields a total investment sum of
nearly GBP 7.512 m, which simultaneously represents the minimum sales price for the 17
units in the Evolution project. In order to be able to get the minimum sales price, it has to sell
the units at an average price of nearly GBP 131 per sq. ft. (= € 1,783.09 per m2). The sales
price, however, is staggered depending on the intended usage – office, hybrid or industrial –
and lies in a range between GBP 79.52 and GBP 172.73 per square foot.
In order to examine the feasibility of reaching this sales price, the rent level for the 17 units
can be calculated by multiplying the sales price (total or per square foot) by the rental return 16 , which PSL set at 8.25 per cent in line with the market. As it was presumed before beginning the project that the calculated minimum price for reaching the targeted total sale
15
16
1 acre is equal to 0.4047 ha, 1 GPB in March 2008 was worth € 1.2645, 1 square foot is equal to 0.0929 m2.
The rental return is calculated as a ratio of the attainable NKM (basic rent without heating or building maintenance costs) per year divided by the sales price; the reciprocal value is the sales factor.
39
price on the market was achievable, and thus it appeared feasible that the necessary profit
margin of 15 per cent of project costs could be earned, the Evolution project was carried out
without applying for grants from EP.
Unit
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Total:
Use
Office
Office
Office
Office
Office
Office
Office
Hybrid
Hybrid
Hybrid
Hybrid
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Sq. Ft.
2.550
5.100
3.824
4.250
4.250
1.913
1.913
2.920
4.500
4.500
6.000
2.000
2.000
2.830
2.830
3.000
3.000
57.380
Rent/ Sq.ft
14,25
14,25
14,25
14,25
14,25
14,25
14,25
10,00
9,90
9,90
9,90
6,57
6,57
6,57
6,57
6,57
6,57
Rent p.a. Price/Sq.foot
36.338
172,73
72.675
172,73
54.492
172,73
60.563
172,73
60.563
172,73
27.260
172,73
27.260
172,73
29.200
121,21
44.550
120,00
44.550
120,00
59.400
120,00
13.140
79,64
13.140
79,64
18.593
79,64
18.593
79,64
19.710
79,64
19.710
79,64
619.736
Price of Sale
440.455
880.909
660.509
734.091
734.091
330.427
330.427
353.939
540.000
540.000
720.000
159.273
159.273
225.371
225.371
238.909
238.909
7.511.954
Figure 11 – Planned Sales Price for the “Evolution” Project (residual value method)
Whether the sales price set ex-ante is actually attainable cannot be determined until the 17
units are sold during the course of 2008. Based on the minimum sales price currently in the
sales brochures of PSL (Unit 1–7: GBP 165/square feet; Unit 8–11: GBP 120/square feet;
Unit 12–17: GBP 75/square feet), the prices are slightly lower than previously assumed (see
figure above, “Price/sq. ft.”).
3.1.2.4 Urban development and planning
The Newcastle-under-Lyme Local Plan 2011 is a legally regulated, comprehensive urban
land usage plan designed to guide the development of settled and undeveloped land over
the long term. The Local Plan stipulates commercial and industrial usage for the area of the
Lymedale Business Park and the Lymedale Business Park Extension and maps out requirements and planning specifications for the development of the space. One such specification
is that the development of the land may not disrupt the operational capability of the
neighbouring stadium nor impair the visual quality of bordering land.
On 30 October 2003 the Borough Council granted the Staffordshire County Council as landowner Outline Planning Consent for the extension of the Lymedale Business Park. This approval included the final approval for earthworks and urbanisation works and a master authorisation for industrial and commercial usage. At the same time, the authorisations included
numerous specifications for additional courses of action and stated concerns to be considered in additional planning.
Staffordshire County Council and Newcastle-under-Lyme Borough Council together drafted a
so-called design brief. This is composed of detailed content and qualitative targets for the
developing of construction plans. The design brief was resolved by the County Council as the
40
Supplementary Planning Guidance SPG in October 2003 and thereby amends the specifications in the Local Plan.
In the following years, a total of three (construction) permits based on previous planning
documents and authorisations for individual phases of the overall development were granted.
3.1.3 Analysis of the case study
3.1.3.1 Public interest
Within the Evolution project, the development of employment space for SMEs is a part of the
economic strategy of the Council and the Borough. Making commercial space available for
this group is aimed to promote new companies. This is meant to strengthen the economic
basis of the city and increase employment opportunities for its residents. This public interest
in the Evolution project is laid out and implemented by the Council as landowner and the
Borough as planning authority. As the investor, PSL fulfils these specifications in the concrete planning development and is thereby obligated to meet the same guidelines as private
competitors. The provision of space for SMEs is thus carried out not so much through the
public authority's planning rights as through the purchase contract, subject to private law. As
the landowner, the Council has a lot of freedom regarding how to set this up. The public interest is therefore not ensured in the Evolution project through public investment in PSL, but
rather through the Council and the Borough.
The business objective of PSL particularly includes the development of commercial property
in economically weak regions and urban regeneration areas. The company's operations
promote the economic development in these areas and hence support the central goal of urban development. There is a public interest, because there is insufficient activity from private
companies in these areas from the point of view of EP. The Evolution example is not representative of this, as there were other private competitors in this case. The alignment of the
operations towards economically weak regions and urban regeneration areas is ensured
through English Partnerships, which has to approve the annual business plan as shareholder. PSL is not bound to any formal territorial structures or designations.
3.1.3.2 Integrated urban development
The Evolution project was prepared using several plans and legal documents. These deal
with the land usage and prepare the concrete project development. In this regard, the construction development is tied to the development of bordering undeveloped land. The Business Park Extension will be linked to the neighbouring public park by walking and bicycling
paths as well as specifications for landscaping. The plans themselves, however, do not include any social or ecological goals. There is therefore no integrated urban development
plan in the sense of comprehensive plans, which interlink construction, social and ecological
measures. Nevertheless, the project is part of a politico-economic strategy to lower unemployment in those city neighbourhoods hit hardest by structural change. The integration of
different concerns is thus implicit in the varying political methods for the economic and spatial
development of the community.
41
PSL is obligated to fulfil the usual planning guidelines in the development of its projects. Beyond this, even internally, there are no further specifications for existing plans or the integration of the project in the urban development.
3.1.3.3 Revolving allocation
tions/efficiency
of
means
and
profitability
of
business
opera-
The Evolution project is a rather unusual project for PSL in terms of financing because it was
not necessary to grant any subsidies. The (ex-ante) targeted profit margin of 15 per cent of
project costs will most probably be met with the currently set purchase prices. The profit
margin of 15 per cent, without public aid, is slightly below the British standard for urban regeneration projects. If the return on total investment published in the IPD Regeneration Index
is used as the benchmark, the average of the last three years comes to 18.0 per cent p.a. for
office property and 17.5 per cent p.a. for industrial property 17 . A private investor operating
under purely commercial criteria could have carried out the project, too. In this case, there
were even private competitors who were eliminated from the tender procedure.
In the analysis of PSL it becomes however clear that most projects would have been unprofitable without grants. PSL was therefore dependent on the subsidies granted by EP. These
are only granted after examination of each case and there is incentive to use funds efficiently. As the capital is set aside exclusively for the projects of PSL, however, it is not clear
whether other companies with comparable or fewer grants would also have entered these
areas of operation.
3.1.3.4 Capital employment and diversification of risk in the public-private partnership
The risk for the development and sale of the commercial property in the Evolution project lies
entirely with PSL. Therefore, EP and the RBS together only bear the risk of their share of investment. Given the fact that subsidies are granted for projects with a lower profit margin
than 15 per cent, however, PSL could be wrongly motivated, due to overly high cost estimates in the ex-ante developer calculation, to apply for grants for projects, which are in fact
profitable without them. Nonetheless, this risk is counteracted through two arrangements. For
one, EP conducts a rigorous appraisal of every developer calculation before approving the
amount of grant (if any) that will be made available to PSL. Furthermore, the clawback is designed so that cost savings do not flow back 1:1 to EP; rather, they are divided between EP
and PSL in such a way that PSL has its own interest in the most efficient project development possible.
The distribution of the profits of the company is also done according to the ownership ratio. In
2005 and 2006 PSL distributed GBP 4 m in total as dividends to the shareholders. This distribution ratio is an essential element of PSL, since it provides a return to the shareholders
(both public and private sector) for their investment in the equity of PSL, and the risks that
this investment carries.
PSL's successful leveraging of public funds should be highlighted positively. An analysis of
equity and the long term debt of the company shows that the initial ratio of public to private
17
Compare to the IPD Regeneration Index published in 2007 on the home page of EP, p. 8.
42
capital in the year after founding of the company was 55 per cent to 45 per cent, whereas in
2006 it was 35 per cent to 65 per cent and thus more than two thirds of equity stemmed from
the private partners (see Figure 3). Still, this ratio worsens to 46 to 54 per cent if the inflow of
grants is excluded.
Looking at the public partner EP, if the cash outflow in the form of grants and the cash return
in the form of interest and dividends are combined, there are two points of discussion: For
one, there could be problems implementing the JESSICA Initiative, as it is prohibited under
EU state aid legislation for the equity investor and outsider creditor to be one and the same
institution. In the case of financing PSL, this is the situation for both EP and RBS. Both thus
receive dividends and interest payments according to their equity and debt capital employed
(see Figure 12).
EP Grants paid out to PSL projects
- Interest received (on loan stock)
- Dividends received (according to share: 49%)
= Net payment from EP to PSL
2006
10,36
-0,82
-1,96
7,58
2005
8,48
-0,82
-0,49
7,17
2004
9,23
-0,82
-1,96
6,45
2003
4,45
-0,81
-1,47
2,17
2002
8,05
-0,72
-1,47
5,86
2001
9,26
-0,52
-0,98
7,76
2000
4,04
-0,59
0,00
3,45
1999
2,9
-0,48
0,00
2,42
1998
0,22
-0,42
0,00
-0,2
Figure 12 – Net Payments from EP to PSL (in million GBP)
For another, the high degree of public aid given to PSL is apparent. Except for the first year,
1998, when PSL did not carry out any projects, PSL has had net inflows between GBP
2.42 m and GBP 7.58 m from EP (see figure above). EP, however, only extends PSL the
grants for projects with insufficient cash return (based on the ex-ante project planning), which
is not the case for the Evolution project. The PSL fund was not subsidised in any way. It
raises its equity and debt capital at market conditions.
3.1.3.5 Effect of the measures
The already developed land in the Lymedale Business Park had already created approximately 3,000 jobs by the end of 2007. The extension of the business park will presumably
create another 800 jobs. According to the estimates of the public Audit Commission, the created jobs are appropriate for the qualifications of the surrounding population. However, there
is no information regarding the extent to which residents in the especially disadvantaged
communities have found work here 18 . Overall, the interview partners felt it is difficult to determine the effects of the business park development on urban development. The relocation
of the companies and jobs created are viewed as signs for the success of the project.
As the Evolution project is still under construction, the effect of the project cannot be definitively assessed. The space in the Evolution project should primarily promote the creation of
SMEs. The project is part of a long-term politico-economic strategy to promote the economy.
The number of jobs created short term is thus not a suitable criterion for evaluating its effectiveness.
The impact of the overall operations of PSL cannot be judged. The individual projects are too
different, as is their framework. The longstanding operations make it clear, however, that
PSL has managed to construct and let or sell commercial space in economically weak regions and urban regeneration areas. The impact of these projects on the city and the surrounding neighbourhoods can only be determined on a project-by-project basis.
18
See Audit Commission: Economic Regeneration, Staffordshire County Council. 5/2005. Audit Commission:
Environment inspection – planning. Newcastle Under Lyme Borough Council. 3/2006, p. 20.
43
3.2 France
The implementation of urban development projects in France is supported in various ways.
Capital set aside by the Caisse des Dépôts public bank for urban development projects is
especially relevant for the JESSICA initiative.
3.2.1 Equity investments by the Caisse des Dépôts
3.2.1.1 Aims of the Caisse des Dépôts
The Caisse des Dépôts (CDC) was established in 1816 after the Napoleonic Wars as a public credit institute. Their original purpose was to invest the savings of citizens and protect
them from government access. One of the main sources of financing for the CDC is the taxsheltered Livret A savings account, which generates savings totalling € 74.5 m p.a. 19
Business Divisions of CDC
Creditor
- Urban regeneration loans
- Urban project loans
-…
Financial Services Provider
- Management of public service
pension system
- Management of pension
reserve fund
-…
Investor
- Profit-oriented
shareholding
- Non-profit urban
development projects
-…
Figure 13 – Business divisions of the CDC
The CDC has operations in three different business divisions. In addition to other credit
products, they grant so called urban regeneration loans on behalf of the state 20 . As a financial services provider, the CDC manages the public service pension system and the pension
reserve fund of the French pension institution. In addition, however, the CDC is active as an
investor. As a for-profit company, they invest in numerous companies, particularly in France.
Furthermore, they are also obliged to invest a part of their annual net profit in non-profit urban development projects, which do not generate standard market returns.
The focus of this case study is on the non-profit investment of the CDC in urban development
projects. Here the company pursues various goals. For example, the CDC invests in the development of residential buildings to make inexpensive rental flats available in regions with
19
20
The maximum savings per person amount to € 15,000 (see Alich, H. (2007): “Immer nah am Staat”, in Die
Zeit, dated 15 November 2008).
The prêts renouvellement urbain (PRU) urban regeneration loans are tax-advantaged loans with a term of
20 years. The CDC has the exclusive right to grant these loans to (public and private) debtors who invest in
disadvantaged neighbourhoods. The prêts projets urbains (PPU) urban project loans are granted to municipal bodies at an interest rate, which is 35 basis points below the standard, so that they may implement
measures toward urban regeneration policies.
44
an especially tight rental market. To revitalise city centres and neighbourhoods, the CDC invests in the development and restructuring of shopping centres. Additional investments are
done in facilities to support the social infrastructure, such as hospitals and nursing homes, as
well as tourist and recreational properties. Finally, the CDC also invests in office buildings
and commercial urban development projects designed to promote economic development.
These investments are intended to accelerate the process of structural change and attract
private investors as well. With these diverse investments, the CDC supports local authorities
in urban regeneration and development. Moreover, the real estate companies of the CDC
own the majority of large urban housing estates and are therefore interested in increasing the
value of these areas.
3.2.1.2 Legal and organisational structure of the Caisse des Dépôts
The CDC has a special legal status. The bank was legally established in 1816 and designed
to increase the savings of French citizens and protect them from government access. A supervisory board consisting of four parliamentarians thus monitors the CDC. The managing director is appointed by the state president and sworn in by the Supervisory Board.
In addition to the three operating divisions, the CDC has numerous subsidiaries. Among
them are CNP Assurances, the market leader for life insurance policies in France, as well as
the ICADE real estate company, which has built numerous large housing estates in the last
few decades and which still owns them today.
3.2.1.3 CDC Projets Urbains fund
On January 1, 2005, the CDC set up a CDC Projets Urbains fund from which all future nonprofit investments in urban regeneration and urban development projects should be financed.
In detail, the fund capital is meant to be invested in five main areas: Rental flats (41 per
cent), office property (17 per cent), shopping centres (15 per cent), property for tourist usage
(9 per cent) and health and social facilities (8 per cent). 21
The fund was set up with starting capital of € 10 m; it was planned to add a total of € 219 m
by 2009 from the annual net profit of CDC. The fund model was designed so that, for each
project to be financed, an individual real estate company would be established which is a
public-private partnership (the latter in the form of a fund). The purpose of the real estate
company is to see the property completely developed, from the purchase and, if necessary,
conditioning of the land, to the actual construction, and all the way to marketing the completed property. Because of the intended, long-term commitment, the property should initially
remain in the hands of the real estate company and generate rental income during this time.
On the basis of the equity made available to the real estate companies, they are able to borrow outside capital in the form of mortgage-backed bank loans in order to finance the complete development:
21
The remaining 12 per cent of the fund capital is intended for investment in urban recreational facilities and
environmental measures, among other things.
45
Figure 14 – CDC Projets Urbains fund model (Source: CDC)
The CDC Projets Urbains fund was dissolved in June 2007, however, due to a strategic realignment in the organisational structure of the CDC in the area of non-profit operations.
Nevertheless, this restructuring purely involved the set up and therefore did not affect the
content of the financing in any way. Urban development projects continue to be financed in
the same way, as public-private partnerships; they are simply no longer recorded as special
assets in the form of a fund. Every already begun fund project (including the project in Sarcelles, which will be examined in more detail below) was reintegrated into the CDC, so that
the fund performance was no longer separated from the consolidated balance sheet and income statement of the CDC from that point forward. In the fund performance forecast in
2004, it appeared possible that, even in the worst-case scenario, all cash invested in the fund
would return after 15 years in 2020:
in T Euro
Cash Flow of found (t-1)
Property rental income
+ Other non-rental income
+ Sale of properties
= Total inflow of found
- Total outward flow of found
= Surplus/ deficit
- Financing costs (3 %)
= Cash Flow of found (t)
2006
0
840
0
0
840
77.000
-76.160
0
-76.160
2007
-76.160
1.804
0
0
1.804
84.190
-82.386
-2.285
-160.831
2008
-160.831
4.028
1.225
0
5.253
84.190
-78.937
-4.825
-244.593
2009
-244.593
6.541
2.485
0
9.026
89.400
-80.374
-7.338
-332.305
2010
-332.305
9.074
3.745
1.000
13.819
91.370
-77.551
-9.969
-419.825
2011
-419.825
11.854
5.005
1.000
17.859
95.880
-78.021
-12.595
-510.440
2012
-510.440
13.445
6.265
2.000
21.710
0
21.710
-15.313
-504.044
2020
in T Euro
2014
2015
2016
2017
2018
2019
Cash Flow of found (t-1)
+ Other non-rental income
+ Sale of properties
= Total inflow of found
- Total outward flow of found
= Surplus/ deficit
-494.468
14.212
7.525
48.700
70.437
0
70.437
-438.865
13.208
7.525
51.309
72.042
0
72.042
-379.989
10.914
7.525
51.309
69.748
0
69.748
-321.641
8.470
7.525
55.876
71.871
0
71.871
-259.419
5.987
7.525
99.895
113.407
0
113.407
-153.794
3.308
7.525
104.857
115.690
0
115.690
-42.718
1.706
6.300
43.200
51.206
0
51.206
- Financing costs (3 %)
= Cash Flow of found (t)
-14.834
-438.865
-13.166
-379.989
-11.400
-321.641
-9.649
-259.419
-7.783
-153.794
-4.614
-42.718
-1.282
7.206
2013
-504.044
15.172
7.525
2.000
24.697
0
24.697
-15.121
-494.468
Figure 15 – Forecast performance of fund capital until 2020 (in million €)
The payments to the fund are generated from current rental income and additional annual
cash inflows from the five real estate areas. The properties are held on average for eight
years. Afterwards, the fund plans to dispose of its investment, leading to additional income
from the sales 22 . The fund calculation was initially limited to investments until 2011, which is
22
For those rental flats, which are first sold after 12 years on average, a value-added of 20 per cent has been
applied; the remaining properties were calculated with a value-added of 5 to 15 per cent.
46
why there are no further disbursements from investments applied after that time 23 . No financing costs have been applied in calculating the forecasts of the CDC for the fund. If one considers, however, that the fund capital of the CDC is not available without cost and applies an
interest on debt of 3 per cent to each negative fund capital movement in the prior year 24 ,
then the fund will not be amortised until 2020 with net profit of € 7.206 m.
3.2.2 The Foncière Camus urban development project in Sarcelles
3.2.2.1 Location
Sarcelles lies approximately 6 km north of Paris in the southern part of the département Val
d’Oise. Between 1954 and 1974, several large housing estates were planned and built here,
as in all of France. These large housing estates were designed to lessen the housing shortage caused by the destruction during the war and by population growth, and create housing
for immigrants from Algeria. Many of these large housing estates were built by subsidiaries of
the CDC and are still in their possession today. Some 38,000 residents live in these large
housing estates, making up more than 60 per cent of the inhabitants of Sarcelles. These
large housing estates are comprised of approximately 60 per cent social housing and offer little space for commercial and service use. Today, many of the large housing estates are
plagued by social problems and a lack of economic activity.
Figure 16 – "Lochères" (DIV) housing estate with indication of location of "Foncière Camus" project
The Foncière Camus project is located on the western edge of the Lochères housing estate
near a shopping centre. This section of the estate contains mostly owned flats, in contrast to
the other sections.
23
24
Disbursements for feasibility studies and profitability analyses for individual projects are already considered
in the investment disbursements.
According to the interview partner, the projection of 3–4 per cent of the costs of capital appears appropriate
for the CDC.
47
Figure 17 – Le Grand Ensemble Lochères
3.2.2.2 Project
There is a former young women’s residence on the boulevard Albert Camus from the 1970s,
which was in need of repair and was vacant for more than ten years. During a compulsory
auction in 1997 several private individuals originally from the housing estate jointly acquired
the building and its parking places on another plot of land for approximately € 305,000 (2 m
FF). The owners’ plans to redesign the building as a retirement home or office building failed
because of the costs related to the transformation of the building.
Together with the government of the département and the CDC, the owners developed the
concept of a new office building. The legal and organisational framework for the project was
consequently planned and contractually agreed. The central points of discussion in the negotiations between the département, the CDC and the private partners were the value of the
property and the construction and equipment standards of the building. The private landowners formed the SARL 25 GECO Promotion and transferred the property to the newly founded
SARL Foncière Camus. Four private individuals hold 67 per cent of this company via the
SARL GECO; the CDC holds the other 33 per cent. The owners of the SARL GECO Promotion all originate from the neighbourhood and are partly rooted in the large Jewish community
there. The SARL Foncière Camus is the legal framework of the development project. On behalf of the SARL Foncière Camus, the GECO Promotion is responsible for the day-to-day
management of the project.
After tearing down the old building, a new, seven-storey office and commercial building was
constructed. The building has approximately 900 m² of space for commercial use on the
ground floor and approximately 5,000 m² of space for office usage above. The foyer in the
entry area is manned all day, which adds to security in the building.
25
A société à responsabilité limitée (abbr. S.à.r.l. or SARL) is the legal form of a limited liability company in
France.
48
Figure 18 – Foncière Camus office building
The building is presently 95 per cent let. The ground floor is currently occupied by a restaurant, a bank branch, various businesses (optician, massage parlour, beauty centre), doctor’s
practices and a fitness studio. The office floors are let to diverse companies (solicitors, auditors, telecommunications). The approximately 800-m² first floor is leased to the city of Sarcelles and only partly in use at present. Because of the flexible construction, the smallest
leasable office space is approximately 50–60 m². This has enabled 40 companies with a total
of approximately 200 jobs to settle there. Approximately 60 per cent of the companies have
moved into the building from different parts of Sarcelles. The other companies have moved
here from outside the area. The majority of the companies residing in the building belong to
the neighbourhood’s Jewish community.
3.2.2.3 Financing
The SARL Foncière Camus project company was established specially for the development
and financing of this property; between the two investors, the CDC holds 33 per cent and
GECO holds 67 per cent 26 . The CDC’s equity investment of € 278,850 came from the CDC
Projets Urbains fund, which existed until mid-2007. GECO Promotion’s investment was in the
form of property worth € 450,000, including the value of 75 parking places for the property
(also in the possession of GECO and located outside the property), plus a cash investment
of € 107,778, so that the real estate company began with a total of € 836,628 in equity.
The SARL Foncière Camus real estate company purchased the property from SARL GECO
in 2005 at a price of € 800,000. The construction costs for the new office building were
planned at € 7.57 m, including € 300,000 to demolish the old building. Together with the accompanying fees, insurances and other costs totalling € 19,000 and the parking places
(€ 450,000), the total investment costs in 2006 came to € 8.839 m. These investment costs
were fully recognised in 2006 as tangible assets and were subject in the first 10 forecast
26
Hence, the investment ratio does not correspond to the 50/50 ratio targeted in the fund model. According to
information from the interview partner at the CDC, the 50/50 ratio had been rejected by GECO.
49
years to regular depreciation of € 520,000 p.a., so that the balance sheet for 2007 showed
(€ 8.839 – 0.52 =) € 8.319 m:
in T Euro
Tangible Assets
Trade receivables
Cash and cash equivalents
Total Assets
Share capitall:
- GECO
- CDC
Statutory reserve
Grant reserve
Accumulated deficit
Net profit/ loss for the year
Total Equity
Longterm loans:
- PRU CDC
- LOan Crédit Mutuel/Banque Pop.
- Additional loan Crédit Mutuel
Rent deposits
Trade accounts payable
Taxation payable
Total liabilities
Total equity and liabilities
2007
8.319
23
59
8.402
2008
7.800
42
531
8.373
2009
7.280
43
646
7.969
2010
6.761
44
786
7.590
2011
6.241
45
944
7.230
2012
5.721
46
1.090
6.857
2013
5.202
46
1.249
6.497
2014
4.682
47
1.426
6.156
2015
4.163
48
1.623
5.834
2016
3.643
49
1.840
5.533
2017
3.454
50
2.043
5.547
2018
3.264
51
2.204
5.520
2019
3.075
53
1.938
5.065
2020
2.885
53
1.618
4.556
2021
0
54
8.778
8.832
450
0
0
1.248
0
-729
969
557
279
0
1.196
-729
-148
1.155
557
279
0
1.144
-877
-29
1.074
557
279
0
1.092
-906
-1
1.021
557
279
0
1.040
-907
30
999
557
279
0
988
-877
25
972
557
279
0
936
-852
57
977
557
279
0
884
-795
89
1.014
557
279
0
832
-706
123
1.084
557
279
0
780
-584
158
1.190
557
279
0
728
-426
465
1.604
557
279
2
676
0
347
1.861
557
279
19
624
0
371
1.851
557
279
38
572
0
373
1.819
557
279
57
0
0
3.921
4.814
3.250
3.250
800
110
18
5
7.432
8.402
3.126
3.105
763
199
17
8
7.217
8.373
2.998
2.953
724
203
8
8
6.895
7.969
2.867
2.795
683
207
9
9
6.569
7.590
2.733
2.630
640
211
9
9
6.231
7.230
2.595
2.458
595
215
13
9
5.884
6.857
2.453
2.278
548
219
13
9
5.520
6.497
2.307
2.091
498
224
13
9
5.142
6.156
2.157
1.896
446
228
14
10
4.750
5.834
2.002
1.693
391
233
14
10
4.343
5.533
1.844
1.480
334
237
19
30
3.944
5.547
1.681
1.259
273
242
19
184
3.658
5.520
1.514
1.028
210
247
20
196
3.214
5.065
1.342
787
143
247
20
197
2.737
4.556
1.166
535
73
252
20
1.971
4.018
8.832
Figure 19 – Planned balance sheet for the SARL Foncière Camus real estate company (in thousand €)
The project financing is itemised among the liabilities and equity on the balance sheet of the
real estate company. In addition to the mentioned capital investment of the two partners, the
company also received an EFRE grant of € 1.3 m in 2006 (= 15 per cent of the project investment sum), which is amortised equally over 25 years pursuant to French accounting
guidelines and is thus booked in 2007 at (€ 1.3 m – € 0.52 m =) € 1.248 m under the equity
item “Grant reserve”. According to the CDC, this is a very risky project from their perspective.
Because of the very low equity of the private partner, GECO, and the very low risk-related investment sum of the CDC, the project would not have been realised without the EFRE grant
of 15 per cent of the investment sum. This is why the CDC could not stick to its targeted financing structure of 30 per cent of equity (see Figure 14) here.
The project is financed with 88 per cent debt. € 7.3 m came from long-term bank loans, including € 3.25 m from the CDC in the form of a prêts renouvellement urbain (PRU) urban regeneration loan. Another € 3.25 m loan was granted by two commercial banks (Crédit Mutuel
and La Banque Populaire) 27 , plus an additional loan of € 0.8 m from Crédit Mutuel alone.
The PRU to the real estate company was granted at an effective interest rate of 3.03 per cent
p.a. and its interest rate is linked to the savings interest rate of the tax exempt Livret A savings accounts, and therefore variable. The commercial loans from the Crédit Mutuel and the
Banque Populaire effectively cost 4.48 per cent p.a. for superior collateralisation of the loans
with the property; the additional loan cost 5.00 per cent p.a. Both are fixed interest rates.
Guarantees are tied to the PRU. For example, in general 50 per cent of the amount of the
PRU is guaranteed by the local authorities, i.e., if the debtor is not able to make its annual
payment, this will be paid by the guarantor. This guarantee is granted free of cost by the local
authorities. Another condition of the guarantee of a PRU is that the remaining 50 per cent of
the loan amount must be guaranteed by a bank. In the case of the Sarcelles project, no
commercial bank was willing to grant this guarantee 28 . In this extraordinary case, a special
27
28
The loan was given as a first mortgage with additional transactions costs (taxes, notary, registration) of
€ 35.000.
According to information from the interview partner at the CDC, the banks did not feel certain that, in the
event of insolvency, there would be any cash left after satisfying the senior loans of the Crédit Mutuel and
the Banque Populaire, so that the commitment was assessed to be too risky.
50
fund of the CDC extended the guarantee. This created additional, nonrecurring costs of
€ 85,000 for concluding the urban regeneration loan.
3.2.2.4 Empirical analysis of the real estate company
The income statement forecast of the SARL Foncière Camus real estate company over the
next 15 years 29 (viewed from 2006) makes it clear that a (steadily rising) profit for the year is
not anticipated before 2013. Nevertheless, the true operating profit, as the difference of
property rental income less operating expenses, is already positive starting in 2008. The
high, negative financing costs each year stem from the annual interest for the three loans.
in T Euro
- Operating expenses
= Operating Profit
- Financing costs
+ other income
= Profit for the year
- Accumulated loss
- Taxes
= Profit after Taxes
Dividends
2007
552
931
-379
-402
5252
-729
729
0
-729
0
2008
1.008
941
67
-267
52
-148
877
0
-148
0
2009
1.029
869
160
-242
52
-29
906
0
-29
0
2010
1.050
876
174
-227
52
-1
907
0
-1
0
2011
1.072
884
187
-209
52
30
877
0
30
0
2012
1.093
928
165
-192
52
25
852
0
25
0
2013
1.116
937
179
-174
52
57
795
0
57
0
2014
1.139
946
192
-156
52
89
707
0
89
0
2015
1.162
956
206
-135
52
123
584
0
123
0
2016
1.186
965
220
-114
52
158
425
0
158
0
2017
1.210
685
525
-92
52
485
0
20
465
0
2018
1.235
696
539
-70
52
521
0
174
347
38
2019
1.260
707
553
-48
52
557
0
186
371
330
2020
1.263
717
546
-38
52
559
0
186
373
353
2021
1.289
729
560
-29
5.351
5.882
0
1.960
3.922
5.168
Figure 20 – Planning income statement for the SARL Foncière Camus real estate company (in thousand €)
The planned pre-tax return on assets of the project comes to 6.9 per cent; as the planned return on equity from the project, a value of 14.6 per cent is used for both investors 30 . Examining the starting parameters of these two yields reveals that the assumed property rental income on the one hand and the assumed sales price of the office centre in 2021 on the other
are particularly sensitive.
Looking at the rental situation (as of March 2008), it can be affirmed that the rental forecasts
will be maintained. At present, the office centre is 95 per cent leased at an average rent per
m2 of € 161 p.a. This is in line with the planned rate. All rental contracts are for at least three
years. The tenants represent nearly all industries; 60 per cent come directly from Sarcelles.
Because of the local clientele and the strong diversification, it can be assumed that the rental
situation will meet forecasts. Whether the planned sales price of € 8.371 m (after tax 31 ) will
be realised in 2021, however, appears doubtful to say at least. In order to justify such a sale
price for a building which will then be approximately 15 years old, the value of the location of
the office centre will have had to appreciate so much that the increased value of the land
more than compensates for the loss of value in the building (corresponding to the depreciation). As Sarcelles is located in a zone where public monies will be invested in urban development in the future, it can be assumed that the area will appreciate in value; however, it is
doubtful that this will justify a sales price worth 3.5 times the remaining book value
(€ 2.885 m, see Figure 19).
29
30
31
The CDC has a maximum investment horizon of 15 years for its holdings. For this special real estate company, both sides contractually agreed not to exit the company within the first five years after construction is
complete.
The return on assets is the sum of the internal interest rate for the project payments plus the total investment
cost of € 8.839 m (see chapter 3.2.2.3). The project payments are calculated by subtracting the (non-cash)
amortisation to the real operating profit. By the same token, the return on equity is calculated based only on
the equity investment (see Figure 19) and the dividends.
The sales price of the office centre is recorded as a nonrecurring gain in 2021 (see Figure 20). This is the
sum of the nonrecurring gain from the sale of € 8.371 m plus other nonrecurring income of € 52,000 (= grant
spread out over 25 years) minus the nonrecurring expenses of € 3.072 m (= amount of grant yet to be amortised).
51
As legally stipulated, the Plan Local d’Urbanisme (PLU) of the city of Sarcelles includes
statements regarding long-term urban development and detailed regulations on the use of
the land. The statements of the PLU on urban development also address the economic development of the large housing estate. The mixture of various uses along the primary axis of
the Lochères estate should be maintained and strengthened. The planned construction of a
new tram through the area, together with a redesign of the public spaces, should improve
access to the area and promote its economic development.
The large housing estate is one of the focal points of French urban regeneration policy and
has been declared a Zone Urbaine Sensible (ZUS), a Zone de Redynamisation Urbaine
(ZRU) and a Zone Franche Urbaine (ZFU). As such, this area benefits from public subsidies
and is tax-exempt. The declaration as a ZFU in particular means that companies with at least
50 employees who settle in this area enjoy tax advantages and pay lower social contributions
if residents of this neighbourhood fill one third of their positions.
Within the framework of diverse urban regeneration programmes, several plans have been
made to regenerate the large housing estate. In its Grand Projet de Ville agreement of September 2001 for the cities of Garges and Sarcelles, the cities, regions, representatives of the
federal government and the CDC laid down comprehensive goals for the development of
various urban problem areas. This included the development of various urban, economic and
social goals and measures.
In 2003 the Agence Nationale pour la Rénovation Urbaine (ANRU) was established to coordinate various political initiatives for urban generation and individual aid programmes. Together with the département, the regions and cities, the CDC and the housing associations,
complex urban regeneration projects and the necessary aid were contractually agreed.
These specified the targets of the Grand Projet de Ville and made the funds available to realise the projects. From 2004 to 2013, the ANRU is providing a total of more than € 12 bn from
diverse sources for urban regeneration projects.
For the first part of the Lochères large housing estate, comprehensive urban regeneration
measures were contractually agreed for the 2007–2014 period. The focus of these plans lies
on increasing the value of buildings in the area. Accordingly, 540 flats will be torn down and
468 flats for families and seniors within the area and another 72 flats outside the area will be
newly built. Furthermore, 1,046 flats will be renovated and the public and private free space
for 1,146 flats will be defined and improved. Support will be offered for the families, which
have to move because of these steps. The ANRU is making a total of approximately € 98.8
m available for this project. Comparable urban regeneration measures designed for similar
purposes are being prepared in other parts of the large housing estate.
Parallel to these urban regeneration steps, a new tramline will be built in the next few years
to better connect the housing estate with the surrounding areas and the train lines. The Foncière Camus project is approximately 100 m away from the planned tramline.
52
The Foncière Camus project will offer office space for companies in the large housing estate.
At present there is little space available in the estate for companies and service providers.
Attracting new companies and ensuring the vitality of the existing ones will strengthen the
economic activity in the estate. This should also help to lower unemployment in this
neighbourhood. At the same time, the project improves the image of the neighbourhood and
thereby makes it possible to decrease the prejudices and fears of other investors and residents regarding the large housing estate. The public interest in the project is therefore manifold. In addition to strengthening the economy of the neighbourhood, it has a positive impact
on the image of the area.
The investments of the CDC in urban development projects are generally focused on problematic areas of urban development. There is thus a public interest in aiding these investments. At the same time, the construction of rental flats, for example, makes a desired offering available that is not provided by the market. The CDC is thereby active in areas which
private investors do not operate in because of the high risk or comparably lower returns.
The Foncière Camus project fits into numerous urban regeneration concepts for the
neighbourhood. In the various agreements and plans for urban regeneration, it is mentioned
many times that the neighbourhood should be strengthened economically by attracting commercial use. Various urban regeneration areas have also been identified with this in mind.
The declaration as a ZFU in particular is based on the intended alliance between economic
and social aims. The exemption from taxes is designed to attract companies to the area. This
exemption is restricted, however, to companies with a certain number of positions available
to residents of the neighbourhood.
The designation as the Grand Projet de Ville in particular ties together diverse goals. In contrast, the specifications agreed to later within the framework of the agreement with ANRU
and the other partners are mainly focused on improving the area through construction. There
is no comprehensive plan which ties together all of the various measures. Nevertheless,
there are lateral relationships and references between all of the concepts and plans. The parties involved are aware of the diverse concepts, which are perceived as a unified strategy for
improving the neighbourhood.
The CDC's investment in the urban development project was originally linked to the areas legally identified for urban regeneration (ZUS, ZRU, ZFU). This ensured that there was a close
connection between these investments and the goals of urban regeneration. In the past few
years, this connection has been eliminated in order to be able to act more flexibly and in the
areas directly adjoining the urban regeneration area. Even without this formal connection,
however, the urban regeneration areas remain in the focus of the urban development projects financed by the CDC. Agreement with regional and communal policies also occurs informally. Even though agreement from communal leaders is not a prerequisite for the projects, the CDC only invests in projects which are supported locally.
53
tions/efficiency
of
funds
and
profitability
of
business
opera-
According to the business plan of the real estate company, the project in Sarcelles under
analysis shows a project return of 6.9 per cent before tax and a return on equity for both
partners of 14.6 per cent. The profitability forecast here and the revolving allocation of investment funds, however, has to be viewed in the context of various issues.
To reach these figures, it is crucial to sell the property at the sales price indicated in 2021.
Assuming a sales price at the remaining book value of € 2.885 m yields a return on assets of
5.0 per cent compared to the previous 6.9 per cent. The return on equity even falls to 7.5 per
cent and thus only one half of the previously calculated 14.6 per cent. Furthermore, it should
be considered here that a net profit from the real estate company is not foreseen until 2018 –
such a long time horizon means plenty of uncertainty in the forecast dividend flow. In this regard, it is doubtful whether the forecast returns will actually be achievable. It should also be
kept in mind that, while low, there is still a risk of a change in the PRU interest rate. Moreover, take into account that the equity investment of both partners totalling € 836,628 does
not even equal 9.5 per cent of the investment sum, so that a high leverage effect rather than
high payouts from the project is responsible for the amount of return on equity. Finally, it is
crucially important for the valuation of the project that it would not have been implementable
without the EFRE grant of € 1.3 m. If JESSICA funds had been invested in lieu of the grant,
these funds could not have been won back from the project under the current forecast.
It is not currently possible to estimate the profitability of the commitment for the CDC, as the
independent CDC Projets Urbain fund was dissolved. By applying the model calculation of
the fund, however, it becomes noticeable that the fund payouts (Figure 15) do not include
any personnel or administrative expenses. If we add the CDC’s targeted € 1.3 m for personnel expenses and € 0.6 m in other operating expenses, this yields negative fund capital of
more than € 28 m in 2020. Consequently, when adding the administrative costs, there would
be no expected complete capital inflow from the fund after 15 years. 32
Overall, then, it can be confirmed that the investments in this segment and in the project under review would not be cost-effective from a profit-oriented perspective. It would therefore
have been impossible for a private partner to implement the project alone. If the expected
impacts come about, then the public commitment will have proven to be justified.
3.2.3.4 Capital employment and diversification of risk in the public-private partnership
The investment of the CDC in the project under analysis in Sarcelles – as both equity investor and as creditor – should be viewed as a signal. Only through the commitment of the CDC
could be raised private capital in the form of bank loans of € 4.05 (= 3.25 m + 0.80 m) for the
project. In this regard, the leveraging of public funds can be viewed positively, as, together
with the invested equity of the private partners totalling € 0.575 m, more than one half of the
project investment sum of € 8.839 m was financed by private equity.
32
The reintegration of the fund into the “normal” banking business in 2007 did not change this statement, because the fund pay-ins and pay-outs (including administrative costs) remain.
54
In the distribution of project risks, it should be borne in mind that the CDC is not only involved
in the project as an equity investor and outside creditor, but also as a guarantor of the PRU
urban regeneration loan. Insofar, the majority of the project risks are with the public sector: In
the event the real estate company went bankrupt, the income from the foreclosure of the
property would first be used to service the senior, secured loans from the two private banks.
Since the sale income from a compulsory auction would not realistically be enough to satisfy
all creditors, the unpaid amounts on the principal of the PRU would partly be payable by the
guarantor (50 per cent CDC special fund and 50 per cent municipal body). The equity investors, who only receive the residual income, would lose their entire investment in this event.
The risk to the private sector is virtually limited to the equity investment of GECO Promotion.
It is in this way that the investment of the CDC enables projects for urban development and
regeneration, which would not be financed by other banks. Assessors, who advised against
the investment, rated the planned office project as highly risky in advance. Of particular importance here is the long-term perspective of the CDC, which goes beyond the investment
horizon of many private investors.
3.2.3.5 Impact of the project
The Foncière Camus project has only recently been completed and let out. The investors interpret the nearly complete occupancy and the achieved rental income as a reaffirmation of
the project. Altogether, approximately 200 jobs in 40 companies have been brought to the
site. The extent to which the residents of the neighbourhood have found work here has not
been documented. It should also be noted that the residents directly adjacent to the area are
comparably affluent. The good rental situation is presumably also tied to the close connection between the investors and the Jewish community, whose members have also not abandoned the neighbourhood as business people and who have now found an adequate offering
for their companies in the office complex. According to the estimates of the interview partner,
the project has also improved the image of the neighbourhood considerably. To what extent
this will be reflected in additional investment in the surroundings cannot yet be assessed. As
the project was only recently completed, there are not yet any visible impacts on the development of the neighbourhood.
The impact of the involvement of the CDC in urban development projects cannot altogether
be described. The different starting conditions and types of projects are difficult to compare.
An evaluation of the impacts can therefore only be done at the level of the individual projects.
55
3.3 Germany
3.3.1 The equity investments of the city of Frankfurt in urban development
3.3.1.1 Public-private partnerships in urban property development
The city of Frankfurt has numerous investments in companies. It is the partner of diverse
companies concerned with the development of properties. In this regard, there are several,
variously organised, institutionalised cooperation with private parties, and these are normally
tailored to specific properties and problematic situations (such as the case below in which a
special purpose company – the Konversionsentwicklungsgesellschaft – redevelops former
military land).
City
Cityof
of Frankfurt
Frankfurt
Public:
+
Private:
Beratungsgesellschaft Stadterneuerung und
Modernisierung
=
PPP
KonversionsentwicklungsCompany: gesellschaft
+
Euroga B.V.
Concret GmbH
=
Rebstock
Projektgesellschaft
+
+
Grundstücksgesellschaft
Westhafen
(GWG)
Gateway
Gardens
=
=
Westhafen
Projektentwicklungsgesellschaft
(WPG)
Gateway
Gardens
Projektentwicklungsgesellschaft
Figure 21 – Selected PPP of the city of Frankfurt as public partner
For the area around the western harbour known as the Westhafen, in cooperation with private participants institutionalised under the Grundstücksgesellschaft Westhafen (GWG), the
city developed an organisational model whereby the city and private participants would jointly
finance the property development. Together they established the Westhafen Projektentwicklungsgesellschaft (WPG) as a public-private partnership. This organisational model was also
the basis for a subsequent project, the development of Gateway Gardens – a new
neighbourhood at the Frankfurt Airport.
3.3.1.2 The organisation of the public-private partnership to develop the Westhafen
The area of the former western harbour belonged to the city of Frankfurt. Considering the
significant investment volume necessary to repurpose the land, an opportunity was sought to
develop it in cooperation with private participants. In 1991 the city consequently conducted
an investor competition to find both an urban planning concept and a suitable organisational
model for the cooperation. The winning investor group further developed the model in conjunction with the city. In 1993 the investor group broke apart due to the internal reorientation
of the investors. A new consortium of six investors filled the shoes of the former investor
56
group and continued to develop the project. When three investors faced financial difficulties
in 1999, the other three investors took over their shares. Today the investor consortium consists of the Max Baum Immobilien GmbH, the OFB Projektentwicklung GmbH (a wholly
owned subsidiary of the Landesbank Hessen-Thüringen) and the Bau- und Bodenverwertungs- und -verwaltungsgesellschaft mbH (a wholly owned subsidiary of the AAREAL Bank).
The PPP organisation consists of two companies and a complex contractual agreement to
develop the property. The private investors own an equal share of the Grundstücksgesellschaft Westhafen GmbH (GWG) each. In 1994, this company acquired the land of the former
western harbour from the city of Frankfurt. The task of the real estate company is to clear the
land, remove the waste, prepare the plans, create the public space, and develop and sell the
real estate. The owners of the real estate company have options to buy and can acquire the
real estate at the fair market value determined by an assessor. The space for social infrastructural facilities will be sold to the city at a reduced price. The streets and public spaces
developed by the investors will be transferred to the city of Frankfurt free of cost once the
development is complete.
Westhafen GmbH (GWG)
- 1/3 Max Baum Immob. GmbH
- 1/3 OFB Projektentwicklung
GmbH
- 1/3 Bau- und Bodenverwertungsund –verwaltungsges. mbH
agency
contract
sale of site
1. rate:
23,008 Mio. €
City of Frankfurt
2. rate:
50% of net income of GWG
50 %
50 %
Westhafen Projektentwicklungs-GmbH
(WPG)
Figure 22 – Organigram of the Westhafen
The purchase price is handled in two instalments. The first part of the purchase price of
€ 23.008 m 33 is the value of the real estate independent of the planned development, covering a gross area of 126,476 m2 and a net area (after deducting land for infrastructure) of
approx. 50 per cent (63,700 m2). The purchase price (on average € 182 per m2 of gross development area or € 361 per m2 of net development area) will be due when the real estate is
transferred to the company in writing. It corresponds roughly to the publicly registered land
value of the neighbourhoods directly adjoining the Westhafen in 1994 (the value for the
manufacturing and consumer markets, shipping was DM 450/m² +/- DM 150/m² = max. DM
33
The valuation of the real estate is based on an assessment by the city’s Office of Municipal Assessment in
September 1992. In this assessment, a reference price was calculated based on the publicly registered land
value of the prior year of DM 45.83 m, which was almost exactly equal to the agreed purchase price of DM
45 m or € 23.008 m.
57
600/m2 – thus the upper limit was approximately € 300 34 , while the peak of € 1,000/m2 was
reached in 2000). At the same time, a debtor warrant in the real estate sales contract ensured that the city participates in the potential sales profits (once the area has been planned,
cleared, rezoned, decontaminated and developed). Afterwards, a second instalment will be
made to the city of Frankfurt once the real estate development is complete, if it earns a net
profit. This net profit (after deducting all necessary investment costs) will be divided 50:50
between the private and public partner. Through this second purchase price payment, the
city of Frankfurt thus indirectly participates in the costs and revenues of the real estate development. With this contractual agreement, the city of Frankfurt bears part of the sales price
risk (of the developed and decontaminated properties). This leans in the direction of a capital
investment.
To limit the financial risks, possibilities were agreed to whereby both the city of Frankfurt and
the private investors could dissolve the contract. The private investors can terminate the contract if the costs for decontamination and vacating the buildings exceed 50 per cent of the
first purchase price payment. This event did occur during the development; however, the private investors did not exercise their right of withdrawal. The city of Frankfurt had a right of
withdrawal if the costs for decontamination and vacating the buildings exceeded the first purchase price payment. These arrangements are typical examples of required exit rules within
the scope of the JESSICA initiative, and were also used in the present case. Whether, in this
regard, the project partners had agreed to an exit rule or risk rule in the event of loss, i.e. if
the sales revenues for the real estate remain under the development costs, could not be
definitely clarified. Assuming that the city of Frankfurt had also participated in the losses,
there would have been a distribution of the project risk between public and private partners.
Finally, it was also contractually agreed that the GWG would engage the Westhafen Projektentwicklungs-GmbH (WPG) through an agency contract to develop the project. The city of
Frankfurt and the GWG both own 50 per cent each of the WPG. Therefore, six seats for representatives of the city balance the six seats on the supervisory board of the WPG for the
private investors. In addition to the head of the planning office as chair of the supervisory
board and the city treasurer, or head of the city treasury, there is one city councillor for each
of the three large parties then represented in the city council and one local councillor elected
by the residents of the neighbourhood. The managing director of the WPG is appointed by
the private investors and the authorised officer of the city of Frankfurt.
Essentially, the WPG is only responsible for the incoming and outgoing agency contracts for
the Westhafen development project. Incoming contracts are signed with the GWG, for which
the WPG receives an annual fee. At the same time, outgoing agency contracts were signed –
at the beginning with all six of the companies which had invested in the GWG and which
were consolidated into three divisions (Planning and Technology; Rental and Sales; Commercial Management, Financing and Legal), and later only with the OFB Projektentwicklung
GmbH. This contractual partner in turn took over or takes over all essential tasks in the initial
contract for an agency fee. In 2007, the fees for incoming and outgoing contracts were equal,
so that the money was transferred “through” the WPG. The annual report of the WPG thus
stated that ”the Westhafen Projektentwicklungs-GmbH is a controlling and handling company
34
Cf. Gutachterausschuss für Grundstückswerte und sonstige Wertermittlungen für den Bereich der Stadt
Frankfurt am Main: Grundstücksmarkt Frankfurt am Main 1993/1994, p. 17 – Key figures of land value calculation as of 31 December 1994 for submarkets in the neighbourhood.
58
especially for the development of the Westhafen site. Its actual purpose is to provide an organisational and legal framework for the cooperation of the project participants (publicprivate partnership). In this regard, its operating responsibilities are strictly limited and tied to
few risks in this area.” The small amount of equity of the WPG amounting to € 153,000 in
2006 corresponds to the strictly limited operations. The control and tasks for the public project partner are essentially attributed to the WPG, which one could call a type of “PPP organisation”. Even though the city of Frankfurt completely disposed of the real estate to the
private GWG, this innovative governance structure ensures that the city of Frankfurt retains
far reaching influence in the real estate development in favour of public interest and thus in
favour of integrated urban development.
3.3.2 The Westhafen urban development project in Frankfurt am Main
3.3.2.1 Location
The city of Frankfurt, with approximately 660,000 inhabitants, is found in the Bundesland of
Hessen in the centre of Germany. The Gutleut neighbourhood is approximately 800 m south
of the central train station at the western end of the downtown of Frankfurt and is demarcated
by the facilities of the central station, industrial companies, a power plant, and the former
western harbour. Today the neighbourhood is the home of approximately 5,400 inhabitants.
It began as a residential neighbourhood for workers and is influenced by its proximity to industrial plants and railway equipment of the central station. Because of its isolation between
various commercial uses, there are only a few links to other neighbourhoods. There is hardly
any free space available in the neighbourhood and there are only a few facilities for social infrastructure. Characteristics of the neighbourhood are a high proportion of immigrants, a lowincome level and an above-average number of unemployed people and of people being on
supplementary benefit.
South of the neighbourhood lies the city’s western port facilities, the so-called Westhafen,
completed in 1886. In the second half of the 20th century, the use of the port was in continual
decline. Only coal for the adjacent district heating station, as well as sand and gravel for construction sites within the city, was still delivered via the port. The area was increasingly used
for normal commercial operations. In 1989, there were 96 businesses with 860 jobs in the
area. Since the 1970s, the use of the port was repeatedly put in question and a repurposing
of the harbour discussed.
3.3.2.2 Project
The port covers approximately 17 ha, including water area; the land area alone without the
port basin covers 12.6476 ha. In the initial phase of development, it was intended to create
an equal amount of space for residential, office and commercial usage. The residential space
was to be divided into 1/3 each of freely financed, rental units and subsidised housing. Furthermore, a school and other facilities for social infrastructure were to be built in the area.
59
Figure 23 – Westhafen planning concept (Source: WPG)
In the course of development, the distribution of usage has shifted. Today, approximately
121,700 m² of gross floor space is being built for office use. This greater share of commercial
space is also attributable to the noise exposure of the surrounding usages. Approximately
90,800 m² of gross floor area will be built as housing and social and private infrastructural facilities. The type of residence has changed in the course of project development. The city
decided against financing subsidised housing in the area. The great majority of the units will
thus be freely financed, high quality residential space. 85 residential units will be built with
fixed rents for the following twelve years. A supermarket and several retail and gastronomy
businesses augment the provision of the neighbourhood. The originally planned school was
not built, as there was insufficient need for one. There is space for two kindergartens in the
area. The Protestant church built a community centre in the area. Altogether, residential
space was created in the area for approximately 1,650 inhabitants and commercial space for
approximately 3,500 jobs.
Figure 24 – Residences in the Westhafen
The port basin was maintained and is used today as a harbour for sailboats and motorboats.
The high maintenance port walls and the port basis itself were sold with the land to the private investors and remain in the property of the home and flat owners adjacent to the port
basis. These owners are also responsible for financing the maintenance activities.
60
Today most parts of the area are brought to market and already developed. The project developer plans to sell the remaining lots in 2008. The project development company will be
dissolved after the completion of the development and GWG will pay the second rate of the
purchase price back to the city of Frankfurt on the basis of the outcome of the project development.
3.3.2.3 Financing
The concrete development of the Westhafen refers to the period from November 1994 to
2008. The total costs for the project from the perspective of the Grundstücksgesellschaft
Westhafen (GWG) come to € 113,378 m:
Overhead costs
Site:
- Purchase of site
- Additional costs of site
- preproduction costs
- Revision tenancy agreements
Costs for demolition and other clearance
Total costs of decontamination
- Reimbursement by city of Frankfurt
= Remaining costs of decontamination
Costs for preparation of land
Costs for alternate retention space
Costs for bridges, rearrangement of dock
Additional construction costs
Marketing costs
Total financing costs
- Interest on decontamination costs (100 % city of Frankfurt)
= Remaining financing costs
Value added tax
Total costs
705.000
23.008.000
1.029.000
1.023.000
11.842.000
4.546.000
8.103.000
3.162.000
8.446.000
-591.000
4.941.000
30.614.000
990.000
7.105.000
11.063.000
2.839.000
0
7.855.000
5.818.000
113.378.000
Figure 25 – Total costs of the Westhafen project in € (from GWG’s perspective)
Nearly € 37 m is directly attributable to the land. In addition to the purchase price payment of
€ 23,008 m by the GWG to the city of Frankfurt, this also reflects the costs of € 11.842 m in
particular to completely vacate the Westhafen. Before the area could be further developed, it
was necessary to decontaminate it, which cost a total of € 8.103 m, 39 per cent (or € 3.162
m) of which was borne by the city of Frankfurt alone. It is also necessary to distinguish between geogenic (natural) and anthropogenic (manmade) waste. The purchase contract stipulated that the city of Frankfurt, as the prior owner, was to pay 60 per cent of the costs of removing the latter waste 35 . Only the remaining 40 per cent are considered construction costs
in the project’s books and then split 50:50 as the purchase contract stipulates. All in all, the
city paid for 80 per cent of this decontamination. In contrast, the public and private partners
agreed to split the costs for disposing of the geogenic waste 50:50. These costs were not
immediately discharged by the city, but rather pre-financed by the private owners; in return,
the GWG is to be reimbursed an estimated € 591,000 in interest on decontamination costs.
The € 30.6 m in costs for preparing the land represent the largest cost item. According to the
35
The city of Frankfurt was partly able to hold the creators of the waste – the former renters of the harbour
area – responsible for the costs, thereby lowering the decontamination costs of the city and the private partners from € 9.27 m to € 8.103 m.
61
interview partner, for every task to be carried out worth more than € 2,500 for the development of the Westhafen, three (five for greater sums) different tenders were solicited. 36
The total costs for the Westhafen project are – with the exception of the share of the decontamination costs still to be reimbursed by the city – (pre)financed by the private partners. Insofar, an analysis of the Westhafen Projektentwicklungs GmbH would not be very meaningful
at this point, because the company only serves as a steering and control organisation for carrying out the project. It does not have any assets and hardly any staff 37 . The entire financing
of the project can thus only be seen on the balance sheets of the GWG:
in €
Non-current assets
- Financial assets
- Shares in affiliated companies
- Financial investment
Current assets
- Stocks
- Unimproved sites + similar land rights
- Own buildings under construction
- Trade and other payables
- Trade creditors
- Other assets
- Cash and cash equivalents
Total assets
Equity
- Share capital
- Accumulated profits/ deficit
- Profit of the year
Total equity
Accruals
Liabilities
- Bank dept
2006
65.713
1
2005
65.713
1
2004
65.713
1
2003
65.713
1
2002
65.713
1
2001
65.713
1
2000
188.158
76.694
20.011.022 23.887.915 29.804.345 40.051.970 36.249.718 43.426.325 40.850.256
305.160 6.408.545 8.767.203 1.135.537 5.370.225
295.715
841.689
108.185
740.658 1.254.592
895.285 1.191.609
395.923
256.032
976.583
715.134
830.866 3.786.904 2.645.270
507.891 1.670.396
21.466.664 31.817.966 40.722.721 45.935.411 45.522.537 44.691.568 43.883.225
52.152
132.735
59.758
244.645
13.519.720
7.702.299
4.221.132
21.466.664
52.152
1.654.858
-1.522.123
184.886
14.876.077
16.757.002
14.614.000
31.817.966
52.152
1.466.777
188.081
1.707.010
12.972.805
26.042.907
19.184.000
40.722.721
52.152
52.152
52.152
52.152
1.576.496 1.126.294
380.411
-317.356
-109.719 1.575.202
745.883
697.767
1.518.929 2.753.648 1.178.446
432.563
13.280.072 18.908.286 16.878.062 12.324.857
31.136.410 23.860.603 26.635.060 31.125.806
15.678.727 5.828.727 8.896.479 8.896.479
45.935.411 45.522.537 44.691.568 43.883.225
Figure 26 – Balance sheets of the private Grundstücksgesellschaft Westhafen (GWG) (in €)
The equity is comprised of the subscribed share capital paid in by the three partners and the
profit or loss for each year. The strong fluctuations of the latter item are due to the fact that
the only purpose of the GWG is the allocation and subsequent sale of the land prepared for
development. In the years in which high development costs were borne (basically as preliminary costs), but which were only offset by little or even no sales revenues, there was a high
net loss, which was then balanced out in the following years by greater sales. Because of the
fluctuations brought about by this prescribed accounting method, it makes little sense to
compare it to a multi-year project analysis.
On the other side of the balance sheet, it can be seen that the share of outside capital in the
GWG was approximately 97 per cent in 2006. The main source of financing was bank loans.
These were secured through guarantees by the partners and taken out from the Landesbank
Hessen-Thüringen, which at the same time is the parent company of the OFB Projektentwicklung GmbH, one of the private partners. Furthermore, there are commitments to partners. The partner Westhafen-Gelände Frankfurt/M. GbR, which bundles the interests of the
three private partners, extended an interest-free loan of € 77,000 and interest-bearing capital
now totalling € 780,000. These partner loans, which can be considered as debt mezzanine,
even showed far higher amounts in 1999/2000: € 1.5 m. They have meanwhile, however,
mostly been paid back to the partners.
36
37
The tender procedures did not follow the VOB (contracting rules for the award of public works contracts),
however, because the contracting body is a 100 per cent private entity.
The only demonstrable business transactions for the WPG are the sales revenues for the construction service fees of the GWG on the one hand, and the costs for the agency contracts on the other.
62
The principal use of capital on the asset side of the balance sheet can be seen in the item
“unimproved sites and similar land rights”, which is listed among the already developed but
not yet disposed land. The “shares in affiliated companies”, listed among the assets, originate from the fact that the GWG purchased a company with hereditary leasehold already located on the site. The € 1 investment is symbolic for the investment of the GWG in the joint
project development company WPG.
3.3.2.4 Empirical project analysis
In order to calculate the project earnings, the revenues from the sale of the Westhafen property ready for construction have to be compared to the total costs. The expected revenues
(including minor property rental income of € 25,000) come to € 121.974 m:
in € (1994 - 2008)
Revenue from sale of properties
+ Property rental income
= Total revenue
- Total costs
= Project profit to be distributed
Share for each partner
121.949.000
25.000
121.974.000
113.378.000
8.596.000
4.298.000
Figure 27 – Calculation of shares of project profit (in €)
The difference is net project profit of € 8.596 m, of which each project partner is due 50 per
cent. At present, this amount comes to € 4.298 m and can rise a little, as long as the current
interest provisions are not needed and can thus be recognised and added to earnings.
The PPP model for the Frankfurt Westhafen is not only innovative in the way the city of
Frankfurt sold an inner city brownfield to a private investor, but also in the way it invested in
the property development (under the parallel usage of exit rules and governance regulations,
see Chapter 3.3.1.2) and simultaneously contractually secured a share in the project profit.
Insofar, an analysis of the success of the project has to distinguish between the perspective
of the public partner and that of the private one.
For the city of Frankfurt there is surplus cash of € 23.553 m from the sale of the Westhafen
area, which is the sum of the two purchase price payments of € 23.008 m + € 4.298 m less
the decontamination costs of € 3.162 m and the decontamination financing costs of
€ 0.591 m. It would be a mistake to call this profit, however, as the city has only traded assets – land for cash. Nevertheless, the city managed to transfer a part of the costs for removing the anthropogenic waste, which it bears alone as the former owner pursuant to the “polluter pays principle” to the private partners. Its own decontamination costs were furthermore
completely offset by the second purchase price payment.
From the perspective of the private partners, a share of the profits equal to € 4.298 m does
not meet the usually expected returns of private investors. This can already be directly deduced from the total project return. Although for both partners together this comes to
(€ 8.596 m revenues/€ 113.378 m total costs =) 7.58 per cent, this does not relate to one
year – as other non-project-specific return benchmarks, but rather to the entire duration of
63
the project 38 . If one limits the project duration to the years 2000 to 2008, in which nearly all
of the project costs were due, one is left with an annual project yield of only 0.84 per cent 39 .
This perspective, which relates purely to the land development, however, does not take the
primary motive of the private investors into account: to ensure the option to buy preferred
land in the Westhafen area. This is a matter of the last remaining free space located in the
city centre, which is why it was of primary importance to the investors that they get an opportunity to buy this land. In the contract between the city of Frankfurt and the three private investors, it was agreed accordingly that property in the Westhafen could only be sold to third
parties if none of the three private partners exercised their options to buy.
The private end investors and end developers, to whom the decontaminated and prepared
properties were sold by the GWG, are facing a differentiated price and rent level in the Westhafen: whereas top prices of up to € 3,200/m2 can be earned for newly built freehold flats located directly on the water and the requested rental rates of € 13/m2 are above the average
for Frankfurt 40 , this is not only true for newly built office space. In the Westhafen, this is
leased on average for € 16.63/m2 41 , which is at the lower end of the average for well-situated
office property in Frankfurt 42 . The development in the publicly registered ground value for
land prepared for building is also interesting. This came to top prices of € 590 to € 4,500/m2
in the Westhafen in 2002 and then continuously fell (2004: € 470 to € 4,000/m2; 2006: € 420
to € 3,300/m2) – as it did nearly everywhere in the city. 43
Planning
Repurposing the Westhafen has occupied Frankfurt urban policy since the 1970s. There are
thus declarations on this area to be found in various plans.
In the Consilium Stadtraum Main, an urban development policy discussion took place from
1990 to 1992 regarding the use of city land along the river. In this informal advisory council,
outside professors, administrative heads and private individuals discussed repurposing the
land along the river to increase the quality of life in the city. Several spaces in the city were
identified in this context and new construction development was encouraged. The Consilium
38
39
40
41
42
43
The calculation of annual return figures, such as ROE, is omitted because of its lack of informative value. As
seen in Figure 26, net profits and losses for the year fluctuated between € 1.57 m and € -1.5 m due to the alternating investments and revenues of the GWG on the one hand and, on the other, the equity of the GWG
was so low that the partially very high ROE derived from it gives a false image of the company. Furthermore,
it is not possible to calculate the amount of equity that would have been necessary if the private partners had
had to fulfil their guarantees.
If one uses the geometrical mean rather than the arithmetic mean, this yields an annual return of 0.815 per
cent.
Cf. the Westhafen data in Immobilienzeitung dated 5 April 2007, p. 21, and the rent index of the city of
Frankfurt 2006 for comparative data.
Cf. Immobilienzeitung dated 5 January 2006, p. 25.
The average rents for office property in the best locations in Frankfurt came to between € 24 and € 31/m2 in
2006, for space in good locations € 13.5 to € 23/m2 (cf. DEGI Research Marktreport 2006, p. 65).
The upper value relates to the price immediately adjacent to the Westhafen Tower, whose floor space ratio
of 4.0 is also the highest and thus shows the greatest amount of development; the lower value relates to a
floor space ratio of 1.0.
64
Stadtraum Main thereby created a conceptual framework for individual areas and the planning for the whole city and set important incentives for public discussion.
The urban planning concept for repurposing the area was created over a longer process. The
plans drafted in an investor competition in 1990 intended that far more be constructed in the
area and that most of the pier be built over. The city had a planning office revise these plans
to develop a building concept which was less dense, for one, and which encouraged public
spaces along the riverbank for another. In the discussions with investors, a draft was finally
drawn up which worked in the essential elements of urban planning.
The Flächennutzungsplan (FNP) of the Umlandverband Frankfurt is the official plan setting
the framework for land usage in the Greater Frankfurt area. According to the revisions to the
FNP, as decided on 5 May 1999, the former harbour space became a mixed zone on which
both commercial and residential buildings could be planned.
The Zoning Map is the official plan for defining public and private space, the type of construction which can be done, the density of construction, and additional specifications. The Zoning
Map for the former Westhafen went into effect on 10 August 1999 and forms the legal foundation for individual planning permits.
The real estate company and the project development company have furthermore drawn up
additional specifications for the design of buildings in individual parts of the area, and these
specifications must be committed to in the purchase contracts. The land was only sold on the
basis of a concrete building project, the completion of which was set in the purchase contract
to occur within a certain deadline.
Urban renewal
The structural and social problems in the Gutleut neighbourhood were already the cause for
urban renewal measures before the development of the Westhafen. The neighbourhood was
identified as a redevelopment area from 1985 to 1999. During this period, more than € 20 m
of public grants were invested in the area. This money supported the redevelopment of private residential buildings and redesign of the public space. At the same time, a former military barracks was repurposed. The city’s building society ABG Holding constructed social
housing on former commercial land directly adjacent to the Westhafen. While these urban
renewal steps improved the living conditions in the neighbourhood, they did not solve its fundamental problems.
The repurposing of land in the Westhafen was in the public interest from the city’s point of
view. The repurposing meant that the space close to the city centre could be given higher
quality usage and thus the city centre strengthened. Repurposing the space along the river
also introduced new qualities to the city. The neighbourhood itself benefits by opening it to
the river and from new infrastructural facilities. At the same time, moving the commercial operations reduces exposure to noise. From the perspective of both the neighbourhood and
the whole city, there is therefore a public interest in repurposing the space. As the land belonged to the city, there were no legal ownership issues standing in the way of the project.
65
The decontamination and high preliminary costs for real estate development, however,
prompted the city to decide to carry out the development together with private parties.
Aside from the benefit of private know-how regarding the development of land for construction, the PPP organisation primarily served to link together public and private interest in the
development. In addition to its authority to set the conditions in the official plans, the city also
had other possibilities to influence via its investment in the project development company. It
was thus material to the city that decisions are made in consensus between the public and
private partners. Through the financial investment of the city in the property development (indirectly through the purchase contract), the city was also interested in seeing the project carried out quickly and profitably. From the city’s perspective, the project development was successful in taking the public interest into account. Land was not sold solely on the basis of the
highest bid; rather qualitative aspects of the planned construction were considered. Via the
supervisory board of the project development company, not only the administration and urban policy makers were involved in the development, but a representative of residents in the
neighbourhood as well.
The various plans make it clear that not only economic but also ecological and social issues
played a role in the project. The high quality use of the space strengthens the economic development, while the decontamination and reduction of noise is ecologically significant. On
site, the social aspects were controversial. Certain individuals feared that the high share of
freely financed, very expensive residential development would push the poorer populace out
of the neighbourhood. The city sees the new uses as an opportunity to enhance the
neighbourhood and create a mixed social structure. Because of the ongoing, high exposure
to noise surrounding the neighbourhood, the city sees no risk that the rents will raise extremely. A moderate rise in the value of the neighbourhood would be welcome. The city’s
building society also has a larger number of flats directly adjacent to the Westhafen.
There is no integrated urban development plan uniting all of these aspects. The participants
in the development are, however, aware of the various correlations on different scales and
view them in a single context.
The aims of urban renewal were defined by the city during the preparation of the project. The
organisational model of cooperation made it possible to carry out the project and meet the related aims. The sovereign planning process ensured additional small-scale goals. Furthermore, it becomes clear that the investment of the city in the development company also
helped to ensure certain targets and qualities. Other goals, such as the originally planned
mixture of residential forms were abandoned by the city itself or could not be implemented.
3.3.3.3 Revolving allocation of resources and profitability/efficiency of business operations
The PPP organisation of the city of Frankfurt with three private investors to prepare the land
in the Westhafen for construction not only involved the revolving allocation of resources but
was also profitable. The total capital employed in the project was earned back and, according
to current plans, resulted in project profit of € 4.298 m each for the public and the private
partner. No public grant went into the Westhafen project. The original ground sales price of
66
the city of Frankfurt to the GWG (1st instalment: € 23.008 m), which averaged € 182/m2 (related to the gross area of 126,476 m2) or € 361/m2 (related to the net area of 63,700 m2) lay
within and at the upper end of the prevailing publicly registered ground value in 1994, which
did not rise significantly until the years thereafter. However, the project calculation (see
Figure 25) shows that considerable clean-up and decontamination costs were necessary to
sell the land on the real estate market. In addition, the pure size of the property and project
has to be taken into account, as it would have utterly overtaxed the capital resources of the
city or a single private developer.
Both partners in the PPP benefited from the cooperation. For the city of Frankfurt, as calculated in Chapter 3.3.2.4, there was total surplus cash of € 23.553 m (= € 186/m2) from the
sale of the Westhafen property. This surplus cannot be seen as profit, however, as the land
was already assessed at a value of € 23.008 m in 1994. Nonetheless, the city did manage to
exert strong influence on the development of the Westhafen on the one hand, and pass on
the decontamination costs or offset them through its share of the profit in the form of the second purchase price payment: Instead of the total decontamination costs of € 8.103 m, the
city effectively earned a surplus of (-8,103 – 0.591 (financing costs) + 4.941 (GWG’s share) +
4.298 second purchase price payment =) € 0.545 m.
From the perspective of the private partners, the PPP met its goals. The entire invested capital was regained plus a (limited) profit (€ 4.298 m or € 33.98/m2 gross area or € 67.47/m2 net
area) and the private partners ensured their option to buy the best properties in the Westhafen, so that appropriate margins could be earned on the buildings on these properties
(spin-off effects).
Crucial for the success of this model, however, is the location of the property sold by the city.
The Westhafen is an extremely central and, because of its proximity to the water, preferred
location in one of the largest German cities. This was the deciding factor for winning over private investors to this kind of PPP model. Insofar, any attempt to replicate this PPP organisation has to take into account that smaller cities or less attractive brownfields will have more
difficulty finding private investors which would be willing to invest under these conditions.
3.3.3.4 Capital employment and distribution of risk in the public-private partnership
In regard to the capital employment and the distribution of risk, the Westhafen model proved
to be innovative, as the direct capital employment of the public partner, the city of Frankfurt,
in the total cost of developing the land for construction (total costs € 113.378 m) was limited
to its share of the decontamination costs of € 3.162 m. At first glance, the risk to the city of
Frankfurt was thus limited to the lacking compensation of the decontamination costs paid if
there was no second purchase price payment. Given the innovative exit rules and governance structures created in the PPP organisation under review, this can be assessed as efficient brownfield financing. The role of the city in the event of a loss is still unclear, however. If
the city of Frankfurt had participated in the possible losses from the Westhafen, the risk
would be seen as much higher.
Regarding the private partners in the PPP model, the GWG, a different analysis is necessary
because it can be seen that the employment of private capital only comes to € 52,015 (see
the balance sheets of the GWG). In comparison to the project cost volume and the balance
sheet totals, which are each outstanding, the project was nearly 100 per cent leveraged. By
gradually developing the property, the actual loans (see Figure 26, between € 31.1 and
67
€ 7.7 m) could be brought down to much lower sums than the total investment costs
(€ 113 m). The partners in the GWG received an advance distribution of profits of € 1.125 m.
In the end, the PPP organisation was limited to the preparation of the land for construction
from the beginning, which excludes the much riskier building development projects, which
were taken on by private developers and end investors. With an average sales price of
€ 1,915/m2 net development area, sales revenues were earned which correspond to the
mean of the current publicly registered ground value of the Frankfurt Westhafen in the real
estate market (2006: € 420–3,300/m2). Presumably this is also the result of the advantages
of the Westhafen’s location. In distributing the risk the only problem seems to be the fact that
all bank loans extended to the GWG (meanwhile up to € 19.1 m, see Figure 26) came from
one public Landesbank, the Landesbank Hessen-Thüringen. This is even more the case because the loans were guaranteed by the partners in the GWG, which is tantamount to joint liability, and one of the partners is a subsidiary of the Landesbank Hessen-Thüringen itself. It
is questionable how the guarantees in the event of a (fictional) loss would have been used.
The high quality development of the space shows that the project succeeded in enhancing
the space and bringing new purpose to the neighbourhood. The repurposing of the urban
space along the river also set an important signal for urban development and drew new attention to the urban potential and life quality of the city. The construction of very expensive
residential space also made it possible to bring wealthy citizens living in the outskirts back
into the city.
The long-term effects on the Gutleut neighbourhood cannot yet be estimated. The city only
expects a moderate rise in value, which should not push out larger population groups. The
extent to which additional investment and enhancement of the neighbourhood occurs remains to be seen. It is also unclear to what extent the former and new residents will live together closely. The Protestant church in particular is making efforts to bring the population
groups together by organising common events.
68
3.4 Portugal
3.4.1 The ParqueExpo 98 SA development company
Parque Expo 98, S.A. is an urban and regional sustainable development company with specific expertise in urban and environmental regeneration. The company was created in 1993
in order to organize and carry out the Lisbon’s World Exhibition of 1998 (EXPO ’98) and to
manage and carry out a large urban redevelopment project, in and around the grounds
where EXPO ’98 would take place, leading to the construction of a new city district, later to
be named Parque das Nações.
3.4.1.1 Aims
Between 1993 and 1998 the company decontaminated and developed the land of the Parque
das Nações and constructed the necessary pavilions and buildings for EXPO ‘98 (land and
project development). Outside of the property where EXPO ’98 actually took place the company led infrastructural measures such as building linking roads and constructing a rail station for the city of Lisbon in preparation for EXPO ’98. During the actual exposition, ParqueExpo was responsible for running the world’s fair. After 1998 the company developed the
same property into a neighbourhood, repurposing EXPO ’98 buildings (e.g. office and retail
space) or dismantling them and selling off the adjacent, free land. In this regard, three joint
ventures were entered into with private partners to develop three office buildings (land and
project development). Private end investors mostly constructed residential properties on the
remaining land, which had been developed, decontaminated and sold by ParqueExpo.
In addition to carrying out all of these activities, ParqueExpo took on further responsibilities
for public authorities after 1998. ParqueExpo supports the Portuguese government and Portuguese cities in carrying out urban renewal programmes and projects. Furthermore, ParqueExpo has operations in Eastern Europe and especially in the Portuguese speaking countries of Africa and South America. The company acts solely as a service provider for these
projects and never takes on financial risk for project development.
With an exclusively state owned capital of 66.051.000,00 €, ParqueExpo 98, S.A. is an instrument for environmental and land use planning public policies. The Portuguese state
holds 99.1 per cent of ParqueExpo 98 SA and the city of Lisbon holds the remaining 0.9 per
cent. It is therefore not a public-private partnership, but a purely publicly owned business.
The abbreviation SA stands for sociedade anónima and represents a public limited company
or PLC, whereby the company’s assets comprise the full extent of their liability.
ParqueExpo was created as a sociedade anónima mainly for legal and operational reasons.
A professional project management team was able to carry out the project more quickly and
independently of day-to-day politics. At the same time this set-up fit Portugal’s aim to comply
with the Maastricht criteria regarding new public debt within the scope of the EU Stability and
69
Growth Pact; by using a PLC the costs of the world’s fair were not considered public debt. 44
ParqueExpo holds shares in diverse companies. The two holding societies which used to develop the Lisbon Aquarium and the event hall in preparation for EXPO ’98 – Oceanário de
Lisboa S.A. and Atlântico Pavilhão Multiusos de Lisboa S.A. – are wholly owned by ParqueExpo. Beyond developing the property for EXPO ’98, ParqueExpo still holds shares in diverse companies to varying degrees today.
To prepare EXPO ‘98 and develop the new city district, ParqueExpo was given full capacity
to expropriate and special powers. Beside project management, financing and contracting,
marketing and commercialisation the company was also responsible for urban planning and
issuing building permits for the constructions needed for the EXPO ’98 event. These powers
were transferred back to the two municipalities in December 1998. The company is still responsible for the management of the public space, which is supposed to be transferred to the
two municipalities in the future.
This far reaching transferral of rights to a PLC was considered necessary to make it possible
to organise EXPO ‘98 with only five years’ of preparation (from 1993).
3.4.2 The Parque das Nações urban development project in Lisbon
3.4.2.1 Location
Lisbon, the capital of Portugal with approximately 546,000 inhabitants, is the centre of an urban agglomeration with more than 2.6 m inhabitants and lies at the delta where the river Tagus (Tejo) flows into the Atlantic. Through the centuries, the city expanded primarily westwards, on the slopes facing south, approaching the mouth of the river and profiting from the
cooler sea breezes. The eastern part, with its colder and more humid microclimate, was first
reserved for agriculture and later for industry. From 1950, some large community housing
projects started being located eastwards, on the edge of the then existing town, which did not
decisively change the social status of this part of the city.
On the north-eastern edge of Lisbon, approximately 6 km from the city centre, there was a
large industrial space on the river embankment being used by an oil refinery, port operators,
a military warehouse and a warehouse for other goods. In the northern part of the industrial
property there was also a former landfill. When the port was relocated, much of the property
lost its commercial function. The land was also contaminated by a great deal of pollution. The
Trancão River, which flowed through the property, was one of the most polluted waterways in
the country. The area around the property can be mostly characterised by subsidised housing and commercial buildings. Approximately two thirds of the property is located in the borders of Lisbon and one third within the city of Loures.
When Portugal applied to host the world’s fair, three alternative sites were examined for use
as locales. In addition to an area on the city’s western side and one outside the city limits, the
former industrial area in the city’s northeast also came under consideration. Choosing this
44
According to the convergence criteria set out in Maastricht, the public debt quota may not exceed 60 per
cent of gross domestic product. Portugal managed to cut the deficit by more than one half between 1993
and 1997. The 1996 debt quota of 59.9 per cent and 1997 quota of 62 per cent were slightly below and
above the benchmark (see EU Commission (1997) at http://www.der-euro.de/euro2/tei_ntei.html as well as
Eurostat (2008): Government Finance Statistics, Data 1997–2007, p. 28).
70
area was a conscious decision to inject new energy into developing the eastern half of Lisbon. From the outset a decision was made to combine the EXPO ’98 (occupying only 60 ha)
with an urban re-qualification project over 430 ha. Old industrial plants, oil tanks, old military
warehouses, an obsolete slaughterhouse and even an open-air illegal waste dump were replaced by a new city district. 5 km of riverfront along the river Tagus were made accessible to
the public.
Figure 28 – Industrial use of Parque das Nações before 1993 (Source: ParqueExpo)
3.4.2.2 Project
Building comprehensive infrastructural facilities for the city of Lisbon, running EXPO ’98 and
the subsequent use of the location as its own neighbourhood are all part of one interconnected project. This ensured that, even when planning the world’s fair, it was kept in mind
how the individual areas could be used once the event was over.
The redevelopment project evolved in three phases. In the first phase from 1993 to 1995
existing uses were relocated and the acquisition or expropriation of the land took place. The
majority of the land belonged to public authorities and was transferred to ParqueExpo. Individual plots of land were disappropriated. In the run-up to EXPO ’98 the remaining users
were relocated, the soil was decontaminated and the master plan for the area was prepared.
The second phase started in 1995 and ended in December 1998. During this phase
EXPO ’98 took place between May and September 1998. The second phase included the
construction of the buildings and open spaces used for the EXPO ’98. Among them are the
Atlântico event hall, the Lisbon Aquarium and various exposition halls and buildings. The
outer part of the area was used for parking during the EXPO.
In addition to developing the interior of the property, comprehensive infrastructural measures
were undertaken to link the area with the city. As part of the World Expo, the Oriente train
station was built to be the new central station and handle the majority of long-distance travel.
The rail station and thus the area were connected to the city’s underground network through
a new subway. Diverse linking roads connect the area to other parts of the city. The Vasco
da Gama Bridge across the river Tejo crosses the area and was completed for EXPO ‘98.
Only two weeks after EXPO ’98 was over in October 1998, the area was reopened to the
public. Most of the temporary structures were dismantled, while the buildings constructed by
ParqueExpo were repurposed.
71
Figure 29 – Parque das Nações plan after 1998 (Source: ParqueExpo)
The third phase started in 1999 and will end when the whole development is completed. The
realisation is at least three years ahead of schedule, meaning that the expected deadline will
be reached soon. This phase involves the marketing and commercialisation of the buildings
and plots, extensive building work and the revision of the planning framework. The Lisbon
Aquarium is open to the public; concerts, conferences and large events take place in the
event hall. The former reception hall has been converted into a shopping centre. Several
event halls were sold to the operators of the Lisbon Fairgrounds and are now their new
home. The remaining land was sold to investors for building on. The potential buyers had to
commit to developing the land within two years.
More than 50 per cent of the 3.5 million m2 of land is public parkland and waterfront. Only
27.5 per cent of the total land is used for real estate business. Of this amount, nearly one half
is for residential use (building development by private end investors), one quarter for office
space (building development in joint venture with private investors) and 8.0 per cent for retail
(repurposing of former EXPO ’98 reception hall). The built-up area offers 2.5 million m2 of
space; ground floor coverage is 0.7 times total area. The area is expected to house 25,000
residents. Companies on the site employ approximately 22,500 people.
Territory distribution
Private (residential, retail, offices)
Urban infrastructures
Public (green spaces and river front)
Aquatic (dock and marina)
Total
in m²
in %
Construction area
Housing
Offices
Retail
Others
Total
in m²
1.239.465
636.479
198.670
419.127
2.493.741
962.550
573.750
1.864.400
102.000
3.502.700
27,5%
16,4%
53,2%
2,9%
100,0%
in %
49,7%
25,5%
8,0%
16,8%
100,0%
Figure 30 – Use of Parque das Nações space
While the centre of the area is mainly for office use, retail and hotels, a variety of buildings
were constructed in the remaining territory. These did not include subsidized housing in order
to enhance the value of the area relative to the surrounding neighbourhoods. Sporting and
recreational facilities are planned for the northern part of the area. Except for these purposes, the area is mostly already developed. Because of the variety of offerings and the attractive public spaces, the area has become a popular place for Lisbon residents to spend
the day.
72
Figure 31 – Office and residential use in Parque das Nações
Maintenance of the 1.86 million m² of public space and parkland has so far been completely
financed by ParqueExpo. The cities of Lisbon and Loures have not yet been willing to take
over these spaces and their maintenance. Various models are therefore being discussed regarding how to ensure that the maintenance of this public space can be organized and financed in the long term. Once the remaining building sites have been sold, the project development of ParqueExpo in the area will be complete.
3.4.2.3 Financing
The total investment for the Parque das Nações project, excluding the EXPO ‘98 costs, came
to € 1,732.8 m:
in m €
539,3
622,4
50,4
155,1
107,6
88,4
62,7
61,6
45,3
1.732,8
Land acquisition and general infrastructures
Real estate assets (buildings and equipment)
Atlantic Pavillion
Oriente Station
International Exhibition and Fairs Center
Accessibilities
Plot infrastructuring (after 1998)
Costs assumed by public entities
Other
Total investment
Figure 32 – Total investment Parque das Nações (Source: ParqueExpo)
It cost € 539.3 m to acquire the land and prepare the general infrastructure for further conversion. The majority of the area belonged to the cities of Lisbon and Loures, though some
land had to be repurchased, including that of the oil refineries, whose licence agreements
had not yet expired. The greatest investment, € 622.4 m, was dedicated to building and
equipping the real estate assets. The buildings have either been sold off to end investors or
remain in the hands of ParqueExpo today. Three additional investments are listed separately
because of their high sums: ParqueExpo still has considerable investment in the Atlantic Pavilion, the Oriente rail station and the present fairgrounds of Lisbon. The remaining items refer to infrastructural development. The company invested € 88.4 m in linking the area to the
surrounding neighbourhoods and making it possible to reach the city centre quickly, and an
additional € 62.7 m in internal site development after the EXPO ’98 had ended. A further
€ 61.6 m was invested in the infrastructure there, though this was carried out on behalf of the
city. After ParqueExpo fronted the costs, most were later repaid by the city.
73
The total investment sum of € 1,732.8 m was finished in three ways: € 501.3 m from the equity of the Portuguese state, an EFRE grant for € 198.3 m, and the remaining € 1,033.3 m
as debt through a global loan in which nearly every commercial and investment bank represented in Portugal took part. All long-term credit facilities extended up to 1999 were guaranteed by the Portuguese state, which also guaranteed a few bonds. This guarantee was not
given for new loans extended from 1999 onwards, though it remained in force for already
existing credit facilities and already issued bonds. Without such a guarantee, no bank would
have been willing to extend credit. Furthermore, the company’s average financing costs for
loans and bonds can be determined from the financial reports; in the period under review
they ranged between 0.03 per cent and 2.24 per cent p.a. and thus well below the market
rate of interest for land and project development. This is a result of the state guarantee, as
100 per cent of the default risk of the debt was hedged by the state. ParqueExpo was not
charged anything for the state of Portugal to give these guarantees. In this regard, it can be
said that ParqueExpo enjoyed an interest subsidy through these free-of-charge guarantees,
though the amount cannot be quantified.
In the year of the World EXPO (1998) the state invested an additional € 274.34 m in equity to
compensate for the fact that the performance of ParqueExpo required deficit spending. This
raised the total equity investment of the state of Portugal to (501.30 + 274.34 =) € 775.64 m
and the investment costs to (1,732.80 + 274.34 =) € 2,007.14 m.
3.4.2.4 Empirical analysis of the project
Analysing the financial performance of ParqueExpo by period since its establishment in
1993, it can be seen that the company did not begin posting consistent operating income until 2000. This is due to the fact that the primary aim of ParqueExpo was to sell land ready for
building and, in some cases since the EXPO ‘98, existing buildings to end investors 45 . For
this reason, the costs of developing the area were greater in the early years than the sales
proceeds. The financial result – the largest item – includes the financing costs and is negative in the double-digit-million range; the extraordinary result is mainly determined by writedowns in past years. Due to the rising land values in the development area, the company
was able to earn additional income from disposals, especially in 2003, 2005 and 2006. Overall, the result for the year (pre-tax) was in the black for the first time in 2000:
in Mio. €in
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
Operating income
56,55
59,15
55,32
40,63 166,05 210,69 240,11 126,84 525,88
17,48
14,93
19,59
6,79
- Operating costs
54,14
47,13
51,00
44,02 124,72 159,38 192,09 159,66 787,00
18,40
14,34
1,54
11,76
6,96
2,40
12,02
4,32
-3,39
48,02 -32,82 -261,12
-0,93
0,58
-1,95
-4,97
-2,72
-16,60 -16,69 -13,22 -19,10 -35,26 -44,71 -51,01 -51,79 -38,18
-0,18
= Operating result
+ Financial result
41,33
51,32
+ Extraordinary result
15,38
-0,01
12,87
18,34
-3,46
-0,94
= Result for the year
1,19
-4,68
3,97
-4,15
2,60
5,66
4,24
-0,33
-1,71
-0,31
-2,21
5,89
0,25
0,31
0,26
-0,21
0,00
1,63 -57,95 -293,41
-1,01
-0,82
-2,00
-7,38
-2,90
4,62
26,67
- Corporate income tax
0,02
0,03
0,03
0,07
0,08
0,10
0,11
0,00
0,00
0,00
0,00
0,00
0,00
= Net result for the year
1,16
-4,71
3,94
-4,22
2,52
5,57
1,52 -57,95 -293,41
0,00
-1,01
-0,82
-2,01
-7,38
-2,90
Figure 33 – ParqueExpo 98 SA 1993–2006 Income Statements (in million €)
Looking at the development of ParqueExpo’s balance sheet since the company was founded
in 1993 shows that the assets are dominated by receivables (for buildings and infrastructure)
and tangible assets, both in the triple-digit millions. The latter consist of unsold land and
45
Offering services began as a sideline for ParqueExpo, but progressed to become the company’s main purpose as more and more of the space was sold off.
74
buildings on the one hand and buildings to remain in the company’s hands on the other, such
as the Atlântico event hall and the Aquarium:
in Mio. €
Fixed Assets, thereof
- Tangible assets
Current assets, thereof
- Receivables
Total assets
Shareholder Equity
- Share capital
- Share capital adjustments
- Reserves
- Results carried forward
- Net result for the year
Liabilities, thereof
- Creditors medium an long term
- Creditors short term (intrestb i )
2006
193,28
172,26
227,72
148,35
421,00
7,56
66,05
0,00
46,01
-105,67
1,16
413,44
98,41
2005
213,30
192,32
336,27
286,77
549,56
6,40
66,05
-2,80
48,81
-100,95
-4,71
543,17
217,72
2004
228,04
204,58
393,67
339,39
621,70
42,04
66,05
-6,45
49,83
-71,33
3,94
579,66
227,72
2003
279,65
93,09
397,15
339,15
676,80
38,96
66,05
-6,45
48,61
-65,02
-4,22
637,83
368,67
2002
297,08
87,11
465,05
401,74
762,12
38,53
66,05
-6,45
48,61
-72,19
2,52
723,59
371,45
2001
2000
1999
1998
1997
313,37 322,79 483,58 606,64 1.012,78
102,39 104,55 267,84 481,56 999,37
632,19 750,74 871,12 837,16 411,80
515,21 541,61 577,71 492,77 268,67
945,56 1.073,53 1.354,70 1.443,80 1.424,58
44,39
41,04
50,30
-96,77
29,57
402,75 401,78 401,78 127,44
42,65
-6,47
-5,50
0,00
0,00
0,00
48,33
49,22
48,72
82,27
0,00
-405,79 -405,98 -342,26
-13,08
-12,07
5,57
1,52
-57,95 -293,41
-1,01
901,18 1.032,49 1.304,40 1.540,57 1.395,01
0,00 424,48 448,92 399,04 744,34
228,99 230,01 264,01 151,52 156,41 680,03 397,12 653,31 931,52 198,53
421,00 549,56 621,70 676,80 762,12 945,56 1.073,53 1.354,70 1.443,80 1.424,58
1996
636,10
623,38
248,06
175,56
884,16
30,58
42,65
0,00
0,00
-11,25
-0,82
853,58
458,95
1995
413,69
400,38
104,65
72,28
518,34
31,40
42,65
0,00
0,00
-10,29
-0,96
486,94
337,07
1994
269,50
263,29
21,77
8,72
291,27
28,62
38,91
0,00
0,00
-2,90
-7,38
262,65
118,86
1993
7,77
6,16
42,80
38,08
50,56
36,00
38,91
0,00
0,00
0,00
-2,90
14,56
0,20
167,39
83,72 116,84
884,16 518,34 291,27
11,57
50,56
Figure 34 – ParqueExpo 98 SA 1993–2006 Balance Sheets (in million €)
An analysis of the equity and liabilities side of the balance sheet reveals how the company’s
equity was gradually eaten up. While the equity ratio came to a nonrecurring 71 per cent in
1993, the year the company was founded, it stayed in the single-digit range throughout the
following years (1994: 9.83 per cent) and was a meagre 1.8 per cent in 2006. The year of the
EXPO ’98 draws particular attention; the net result for the year plummeted to a record loss of
€ -293.41 m after tax. This was not so much a result of the operational performance of the
Parque das Nações, but rather mostly due to ParqueExpo running the world’s fair (together
with the relevant operating proceeds and costs).
This not only completely digested the company’s shareholders’ equity that year; the year end
balance sheet showed negative equity of € -96.77 m. This means the company would have
gone bankrupt if the state had not invested additional equity of € 274.34 m. The share capital
rose temporarily to € 401.78 m. In 2001, however, the loss carryforward had grown to
€ 405.79 m, so that part of the share capital was used in 2002 to lessen the carryforward. Total shareholders equity continued to fall gradually until it came to only € 7.56 m in 2006. On
the other hand, at the same time there are also long- and short-term credit facilities totalling
(98.41 m + 228.99 m =) € 327.40 m. In spite of € 148.35 m in receivables and real estate assets worth € 172.26 m in 2006, ParqueExpo will not be able to completely back the debt. The
remaining real estate assets are special properties like the Atlântico event hall and the
Aquarium; nearly all land and buildings set for disposal have already been sold off to end investors.
The many-sided interactions between ParqueExpo and the cities and the state cause the
company’s financial statements to show a distorted picture of the company’s assets, finances
and earnings. For example, the operators of facilities like the event hall and aquarium do not
pay going rates; rather their leases barely cover costs, so these cannot be assumed to be
valued at market prices. A far stronger distortion is visible in the area’s infrastructure. It is still
in the possession of ParqueExpo, meaning the company has to pay € 7 m p.a. in maintenance costs for this infrastructure, though it is actually a task of the cities. Conversely, ParqueExpo benefits from the public sponsorship in the form of the mentioned state guarantees
for long-term credit facilities and for bonds issued before 1999. The financing costs are also
below market rate.
75
Urban planning in Lisbon takes place on several formal planning levels. The Lisbon Master
Plan regulates planned land usage and forecasts density in the area at a relatively general
level. This plan was revised in the scope of this project development.
A competition in 1994 formed the foundation for planning development, specifying a total of
six urban plans for the individual parts of the area. For one, these plans were used to develop the so called Urbanization Plan (Plano de Urbanização) for the entire area of the
EXPO ‘98, which further specified the assertions of the Master Plan and already contained
more exact information on the public and private spaces, as well as the infrastructure in the
area.
For another, a Detail Plan (Plano de Pormenor) was subsequently developed for each of six
subareas, which contains detailed information on the use of the individual plots of land and
the design of the public space. The Master Plan, Urbanization Plan and the six Detail Plans
comprise the three-level planning system in Lisbon.
Both the Urbanization Plan and the Detail Plans were prepared by ParqueExpo and are legally binding. In order to organise the EXPO ’98, ParqueExpo was legally transferred planning authority for the Parque das Nações area from 1993 until 1998. During this period, ParqueExpo was also responsible for issuing building permits for the area. This special legal
status ended in 1998. Even today, however, ParqueExpo is informally involved in assessing
building applications and supports the community in issuing building permits.
The city of Lisbon is also carrying out various urban renewal measures in the area surrounding the former EXPO ’98 site. The waterfront to the south of the Parque das Nações is currently being enhanced in order to strengthen its connection to the historical city centre. Away
from the waterfront, a large public area is being prepared for repurposing and enhancement.
The development of a new neighbourhood on the former industrial area in the city’s northeast
is in the public interest for several reasons. Through this development, the brownfield sites
are given a new purpose. At the same time, the environment is improved, as the contamination in the area was cleaned up. For the development of the city as a whole, it is particularly
important that urban development on Lisbon’s east side be promoted. At the same time, the
waterfront is improved and made accessible to the public, which enhances the entire city.
Furthermore, new facilities were created in the area, which service the entire city. Through
the long-distance rail station, the fairgrounds and the event hall, important infrastructural facilities were either renovated or newly created. Building the underground and various streets
not only made the area accessible but also improved the entire transportation system in the
east side of the city. Repurposing the land and the numerous infrastructural measures were
made possible by linking the project to the EXPO ’98. This nationally significant event made
it possible to carry out projects which otherwise would presumably not have been done.
The public interest in ParqueExpo has changed over the course of time due to the change in
its responsibilities. ParqueExpo was originally founded to organise and run the EXPO ’98. A
76
PLC was chosen in order to be able to carry out the world’s fair and the related construction
measures quickly and efficiently. The public interest here was principally in the organisation
and running of EXPO ’98, which was under enormous time pressure as an event of national
significance. After the world’s fair, ParqueExpo was responsible for repurposing and selling
off the land. The public interest in this development is primarily in the successful commercial
marketing of the land, whose proceeds should be used to pay back the investment. As the
business operations have been expanded in the last few years, the public interest in ParqueExpo has also changed. The support of public agencies in the implementation of urban
renewal programmes and measures enables the public sector to carry out individual initiatives competently and purposefully.
The second primary reason for founding a PLC, however, was to comply with the Maastricht
convergence criteria. For one, by shifting public expenditure to a private company, Portugal
was able to lower public debt to 59.9 per cent of GDP. In euro terms, Portugal’s public debt
in 1996 was € 54.259 bn. Simply adding the total project costs (see Figure 32) of € 1,732.8 m
to the quota, brings the amount to 3.19 per cent or 1.9 per cent of GDP, which means €
90.508 bn in 1996 46 . This would actually have endangered Portugal’s chance of complying
with the convergence criterion to keep public debt no higher than 60 per cent of GDP.
The development of the Parque das Nações neighbourhood was prepared using diverse
plans. The diverse informal and formal plans were primarily concerned with construction in
the area. An integrated urban development plan coupling construction concerns with economic, social and ecological measures does not exist. Nevertheless, the repurposing of the
land is an intentional step to strengthen the eastern part of the city and is therefore also tied
to social objectives. Decontaminating the land also has an impact on the environment. While
the integration of various concerns is not regulated by any plan, the participants nonetheless
have it in mind.
The other operations of ParqueExpo differ considerably from the Parque das Nações project.
The company mainly acts here as a service provider.
tions/efficiency
of
funds
and
profitability
of
business
opera-
From the financial reports of ParqueExpo it can be seen that the capital applied, comprised
of (501.3 m + 274.34 m =) € 775.64 m from the Portuguese state and a € 198.3 m EFRE
grant, was nearly completely used up. At the same time, outstanding credit facilities at the
end of 2006 still amounted to (98.41 m + 228.99 m =) € 327.40 m and nearly all land in the
development area has been sold off. Therefore, despite the state’s default guarantee, which
considerably reduced the interest costs for the company, it did not achieve a revolving use of
capital. The costs of this state interest subsidy were not charged to ParqueExpo and thus
cannot be quantified.
This statement needs to be put into perspective given the background of the area under development. Of the 3.5 million m2 of space, only 27.5 per cent is foreseen for real estate pur-
46
See Eurostat (2008): Government Finance Statistics, Data 1997–2007, p. 28.
77
poses in the form of offices, residences or retail. Parkland (including one large park which is
to include a golf course) and the promenade make up 53 per cent of the space, another
16 per cent is for public infrastructure and the rest goes to the docks and the marina. Inversely, only 27.5 per cent of the space thus earns income. While the remaining 72.5 per
cent had to be decontaminated in parts, developed and repurposed, it does not earn any
monetary proceeds, but rather serves the public good. This developed public land, which is
not only a strong quantitative but also a strong qualitative aspect of the overall development
project, remains in the hands of ParqueExpo. If it could be “sold” to the cities at cost, then all
outstanding credit could presumably be repaid. Then the total development measures, including the EXPO ‘98, which brought in a loss in the high triple-digit millions, could be financed through earnings from the sale of land to private developers and investors. In this regards, it becomes evident that the sale of the land with restricted real estate usage could
clearly earn a profit in the triple-digit millions.
This is also visible looking at the development of property prices. While the market rate per
m2 of land for construction was € 200 in 1994, € 1,100/m2 was earned in the peak year 2001
and the rate landed at € 800/m2 in 2007. This represents four to five times higher value.
Under Portuguese law, the state also profits from valorisation outside the Parque das Nações area. As the development of the area also enhanced the value of real estate in the surrounding neighbourhoods, property sellers there have to hand over 50 per cent of the appreciation to the state.
3.4.3.4 Capital employment and distribution of risk
ParqueExpo is a wholly publicly owned company; consequently, there is no public-private
partnership involved. No private equity was invested in the project, though a total of
€ 1,033.3 m in outside capital from private banks was brought in throughout the duration of
the project. Despite the enormous amount of long-term credit facilities they made available
up to 1999, the banks did not carry any default risk, because the state issued guarantees to
cover this. Insofar, private venture capital was not invested in the project, nor did private financial institutions have to bear the risks of default.
Nevertheless, the nature of the project meant that this one-sided distribution of risk could not
be avoided. Because of the size of the area to be developed and the very high investment
sums, no private investor was in the position to develop the area. The market failed here on
the private side. Thus, it was inevitable that the state would have to bear the risk, because it
was only through public investment in developing the area that the way was clear for private
end investors. Furthermore, it would not have been possible to carry out the EXPO ’98 under
any other means.
The company itself reduced its own business risk by focussing from the beginning on developing the land and leaving the project and building development to private investors. The
€ 3 bn estimated by the company went into the Parque das Nações via private project development led to a public leveraging factor of 1.7, in spite of the high investment necessary to
develop and decontaminate the public land, and even omitting the impact of the EXPO ’98.
78
3.4.3.5 Impact of the project
The impact of the EXPO ‘98 and the urban development project can only partly be separated. In the last few years, multiple studies have been conducted to determine the impact of
the EXPO ’98 itself. The world EXPO brought in a total of approximately € 4,435 m in tax income. Approximately 1/3 of the increase in the Portuguese gross national product (GNP) in
1998 stems from the EXPO ‘98. In 1998 the number of tourists grew by 10 per cent.
The Parque das Nações development is one of the largest urban development projects ever
carried out in Portugal and the largest in Lisbon in the last 30 years. The scale of the project,
the site and the fixed time schedule imposed by the world’s fair required a powerful approach
and a competent organization, besides a dedicated commitment from the Government. The
organizational framework created in 1993 allowed for a combination of public mission responsibility with managerial flexibility, innovation and quality standards. It also allowed for the
development of partnerships.
The development of the Parque das Nações neighbourhood is mostly complete today. Only
individual plots of land for construction and recreational spaces remain to be sold. ParqueExpo estimates that approximately € 5 bn in public and private funds have been invested in
developing the neighbourhood. Through the repurposing, an attractive neighbourhood has
been created that also attracts numerous tourists because of its recreational offering. The
project has also influenced the professional discussion about urban regeneration both in Portugal and abroad. The impact on the surrounding neighbourhoods has been relatively minor,
however. So far, only individual investments in the surroundings have been made. The city is
now aiming to enhance the waterfront between the Parque das Nações and the city centre
and hopes to thereby transfer the positive development to the adjacent neighbourhoods.
The impact of ParqueExpo as a company cannot be described abstractly. The company was
responsible for organising and running the EXPO ‘98 and subsequently developing the
neighbourhood.
79
3.5 Italy
3.5.1 The Monteluce urban development fund, Perugia
3.5.1.1 Aims of the public-private partnership
In March 2004, the Region of Umbria commissioned Nomura International plc., an investment bank, to develop a concept for the sale and utilisation of public hospitals that are no
longer in use. As global coordinator, Nomura proposed issuing a closed-end property fund
for the real estate to be redeveloped in the region of Umbria. In mid 2005 BNL Fondi Immobiliari was chosen through a tender process as fund manager.
BNL Fondi Immobiliari, a subsidiary of BNP Paribas (one of the leading commercial banks in
France), developed the concept of an umbrella fund (fondo umbria) 47 , under which diverse
urban development sub-funds for the region of Umbria should be issued. The first urban development sub-fund, Monteluce in Perugia, was established in 2006.
Figure 35 – Umbria holding fund with sub-funds (Source: BNL)
The Monteluce urban development sub-fund was established to carry out the redevelopment
of public hospitals in Umbria which are not in use. The Region of Umbria intends to use the
proceeds from the sale of the properties to invest in health care facilities. In addition to getting the best price for the disposal of assets, the public authorities would also have farreaching influence on the development of the properties.
In this model, urban development sub-funds of the holding fund would be created for the disposal and redevelopment of various public properties. The Monteluce fund is the first of a series of funds which are to be installed in the region in the future. Each fund would have separate existence and would each pursue a specific strategy for the reinvestment of proceeds.
The common element between all funds is that the public authorities always make a contribution in the form of disused properties or public spaces, without investing any cash at all.
The business model of the Monteluce fund focuses on the redevelopment of public property;
there are to be no greenfield projects. The fund is to act as a trader, disposing of the fund
property after the redevelopment is complete; it is not foreseen that the fund property be held
after the planned duration of the fund. Insofar, the repurposed property is to be sold by the
fund to potential end investors at the termination of the fund.
47
The fondo umbria holding fund is a theoretical structure at the moment as there is only one existing urban
development fund.
80
One big problem in issuing additional funds is the necessary size of such funds. The contributed public properties are often relatively small and it is difficult to coordinate the development of the projects. In the Monteluce example, the redevelopment of two projects (one in
Perugia and one in Foligno) was consolidated to reach greater investment volume and thus a
higher fixed cost degression in regard to setting up the fund.
The fund was established as a closed-end property fund. The strength of this financing instrument is that mostly only a few investors invest large sums in individual properties. After
raising the necessary investment sums, the fund is closed; it is not possible to ask for repayment of fund shares before the fund property has been redeveloped. Shares of the Monteluce fund can however be resold to other investors before the end of the project (expected
in June 2012). The money normally comes from financial investors, who may have nothing to
do with the redevelopment. The public authorities that own the properties and buildings to be
redeveloped contribute them to the fund and, by selling their entire equity investment, obtain
cash from the investors in the amount of the set value of the fund property.
The Monteluce fund was established by BNL Fondi Immobiliari as mandated fund manager
and approved in May 2006 by the Bank of Italy; the properties were transferred to the fund in
February 2007. The closed fund makes up a separate asset, so that the fund shares only
represent shares in the property; there are no guarantees or rights of recourse to the assets
of the management company.
Figure 36 – Management structure of Monteluce fund (Source: BNL)
Fund management is completely in private hands; the fund is generally also the redeveloper 48 . The fund itself assigns architect’s and building contracts and carries the full amount
of redevelopment costs and risks. BNL Fondi Immobiliari is therefore accorded a strategic
role; the project management operations were transferred to a project manager. Architects
48
This is only true for the much larger area in Perugia. While this project is being completely redeveloped by
the fund, the smaller area in Foligno will be transferred to regional project developer.
81
and construction firms for the redevelopment of the fund properties were retained through
tender procedures.
The public authorities have a co-determination and veto rights via the advisory committee
comprised of seven people, including one permanent seat each for a representative of the
Region of Umbria and the University of Perugia (the seller of a minority share in the site).
The private investors choose the other five members. At present, this still includes a representative of the City of Perugia. The two permanent representatives of the region and the
university have veto rights.
Units Issued
- to the region
- to the university
Total units
Unit price (in €)
Value issued (in €)
Class A
172.932
36.068
209.000
250
52.250.000
Class B
828
172
1.000
1
1.000
(Data at the contribution value)
Figure 37 – Shares of Monteluce fund
The fund units are divided into those with shareholder rights (Class A) and those with codetermination rights (Class B). The shareholder rights were determined as a ratio of the
value of the invested property. A total of 209 fund units at a price of € 250,000 were issued,
equalling a value of € 52.25 million for the real estate portfolio, as confirmed by independent
assessors. The Class A fund units belonging to the region and the university are to be completely sold to private fund investors; 60 per cent were sold in August 2008. This mechanism
did not just create an exit for the public fund partners. More importantly, the fund units with
co-determination rights (Class B, with a symbolic value of one euro each) ensure that the
public authorities retain their influence on the redevelopment. They remain in the hands of
the region and the university, which was a very efficient solution for governance.
There are several reasons for using a closed-end property fund as the vehicle for the public
private partnership. For one, such a fund allows an efficient mix of purely private, professional fund management, without losing the public influence on the redevelopment through
the co-determination rights. Aside from the use of private expertise, the purely private management of the fund makes it possible to implement the project more quickly. The private financial investors also benefit from this, as they do not need to have any specific real estate
expertise. The trader model of the fund means that the commitment of the fund investors is
limited in duration and yields are maximised by aiming to sell the property to end investors
for the highest sales price.
In contrast to simply disposing of the property without a fund, this option grants the region of
Umbria an advantage. In addition to the co-determination rights, a terminal earn-out was
agreed upon with the private investors; the region gets a portion of any proceeds exceeding
the target result. The advantage of a closed-end property fund over other legal forms (such
as a special purpose vehicle) lies in the governance/management rules, which ensure more
guarantees, and in the fiscal treatment that is more efficient in the long-term perspective.
3.5.1.3 Source and use of funds
The equity of the Monteluce fund (€ 52.25 million) equals, at the contribution date, the independently assessed value of the property in the form of disused hospitals and related institutions contributed by the Region of Umbria and the University of Perugia. Of this amount,
82
€ 43.75 million was attributed to the Monteluce property in Perugia, the remaining € 8.4 million to the property in Foligno. The assets are reassessed every six months by an independent assessor (REAG) using the discounted cash flow method. This future-oriented valuation
method discounts the future expected cash flows from the redevelopment at a risk adjusted
interest rate corresponding to the date of valuation and thereby reflects the current market
value of the property. The properties were transferred to the fund at the beginning of 2007;
all units are to be sold to three financial investors by September 2008.
Figure 38 – Timeline of Monteluce fund (Source: BNL)
It took three years from initial conception until fund units were sold to private investors, because feasibility studies had to be conducted and because legal requirements such as building permits and official requirements had to be met with in order to lower the investment risk
for private investors and motivate them to invest. Any fund investment in the redevelopment
which exceeds the equity, which is (presently) € 52.25 million, will be financed through outside capital. The real estate is the only collateral the fund offers. The properties can be mortgaged up to 60 per cent.
Construction is planned to begin in 2009, initially funded using both fund equity and outside
capital. As the buildings will be redeveloped sequentially, the value of the real estate assets
placed in the fund will presumably rise above € 52.25 million, so that more outside capital
can then be raised accordingly. Furthermore, sales proceeds are expected to start being received in 2009. These sales proceeds, together with outside capital, will initially be reinvested in the remaining properties until all have been redeveloped. Sales income will initially
be used to repay debt, though an interim dividend payout to the shareholders is also possible.
The primary value driver for the private investors, however, is not the annual dividend payout
but rather the proceeds from repayment of their shares after the fund is terminated (no later
than in 2012), i.e. four years after the acquisition of the shares in September 2008. The fund
managers anticipate a target return for the private fund investors of 10 per cent p.a. If this
yield threshold is exceeded, the fund manager is to receive 20 per cent of this additional in-
83
come; the remainder is paid out equally to the private and public fund shareholders; the public authorities may participate in profits.
Figure 39 – Cash flows of Monteluce fund (Source: BNL)
The fund model is mainly designed to finance the project through cash flow, while allowing a
moderate degree of debt. The crucial advantage of this model for the public authorities is that
they are not required to invest any equity or outside capital in the form of cash, yet they still
have influence on the project and might participate in profits. The data necessary for empirical fund analysis is not publicly available.
3.5.2 The Monteluce urban development project in Perugia
3.5.2.1 Location
The city of Perugia with approximately 150,000 inhabitants forms the administrative centre of
the region of Umbria. The medieval historical centre and the adjacent neighbourhoods lie on
a hill, while the modern city has spread out in the valley. The Monteluce neighbourhood is
adjacent to the historical city centre. As in many cities in Italy, the former monastery was expropriated after 1861 and subsequently used as a hospital.
The gradually expanding building complex is no longer sufficient for a modern medical facility. The infrastructure is outdated and has no room for modern technology. The region of
Umbria, as the body responsible for hospitals, thus had a new hospital complex constructed
on the edge of the city. Now that the hospital has moved, there are 6 ha of inner city space
available for development. The area lies on a ridge adjacent to the historical centre and close
to the country. The campus of the University of Perugia is also nearby. The region of Umbria
owns 82.8 per cent of the space, the university 17.2 per cent.
84
City Centre
Perugia
Monteluce
Figure 40 – Perugia and Monteluce (Source: BNL)
3.5.2.2 Project
Within the scope of the urban development project, the old hospital property will be given a
new purpose. All buildings, except for the few protected as monuments, will be demolished
and new buildings will be constructed. With a few exceptions, the fund will speculatively construct and market the properties. The architecture will have to be at a high quality and the
buildings will have to exceed the legal regulations, e.g. in the area of energy consumption.
Solely in the case of buildings with special requirements, e.g. a private hospital, the undeveloped land will be sold to end investors. The fund will provide the city with land free of charge
for the purpose of building a school. The public spaces will be transferred to the city after development is complete.
Figure 41 – Monteluce project (Source: BNL)
Within the area, it is planned to construct 27,950 m² (floor area) for residential use, plus
16,000 m² of ground floor area for a hotel and student housing. Furthermore, 5,750 m² for office space, 6,500 m² for retail and 8,450 m² for a private hospital and social services are
planned (see Figure 42).
85
Figure 42 – Zoning map of Monteluce project (Source: BNL)
3.5.2.3 Financing
According to BNL Fondi Immobiliari the total investment costs for the project amount to € 180
million, of which € 30 million are attributed to the property in Foligno, the rest in Perugia. The
purely construction costs amount to € 100 million (€ 16 million for Foligno). It is planned to
gradually use outside capital of up to 60 per cent of the mortgage value of the real estate,
which will increase as the redevelopment progresses. The bank creditors will be AAREAL,
Banca Nazionale del Lavoro, Banca Intesa Infrastrutture e Sviluppo and Cassa di Risparmio
di Spoleto. The interest rate was set at 120 basis points above the Euribor; as more outside
capital is employed, interest-hedging instruments will be used. The remaining capital needs
will be financed not only by the equity determined by the value of the real estate (currently
€ 52.25 million), but also by the cash flow from the sale of properties as they are completed.
No grants will be made to the project; the loans are extended under market conditions, and
there are no general or bank guarantees. The project revenues are currently estimated to be
€ 210 million.
The development of the Monteluce area is being promoted through various plans and
agreements. The official Piano Regolatore Generale (PRG) is the plan regulating land usage
in the entire city. In preparation of this repurposing, this plan was revised in 2002. The plan
determined that most of the buildings would be demolished and could be replaced by a new
neighbourhood with mixed zone. At the same time, a framework was given for the size of
each zoning type.
In 2005 the city, the region and the province agreed to a strategy for the development of the
area. The public was integrated into planning process and informed about the development
from an early stage. A design competition was held to decide upon the construction concept,
which was subsequently further refined.
This concept forms the basis for the Piano Attuativo, the official plan containing detailed
specifications for the development of the area, which is nearly complete. The participation of
86
the public was realised in April 2008 and the plan will presumably go into force in the following months. Afterwards, the building permits for the actual construction can be issued.
The Monteluce project serves the public interest in repurposing the disused hospital complex. Due to its proximity to the city centre and its exposed location, there is particular public
interest in turning it into a high quality neighbourhood. Through the redevelopment, this formerly closed-off neighbourhood would be better linked with the surrounding neighbourhoods.
A representative of the city was appointed by the region to sit on the Governance Committee
of the fund. In this way, the city is able to extend its influence beyond the official planning directly to the redevelopment itself. The extent to which the city will still be represented on the
committee once the region has sold its fund units cannot yet be determined.
The redevelopment of the neighbourhood in the urban development fund especially serves
the interest of the region. Using the sales proceeds, the region is able to invest in the healthcare system and finance new facilities. This model enables the region to participate in the
profits from the redevelopment and, at the same time, transfer the development risks to private investors at an early stage. The region is still represented in the Governance Committee
after selling all its fund units and can thus influence the redevelopment.
The diverse formal and informal plans for the Monteluce project primarily refer to the construction in the area. The ecological component exists in the fund’s intention to construct
buildings to high ecological and energy-consumption standards. At the fund level, there is a
link to social concerns, as the proceeds paid to the region are to be used to improve the public healthcare system. The interaction between these various goals takes place through the
redevelopment – there is, however, no plan that connects and summarises the various concerns.
3.5.3.3 Revolving allocation of resources and profitability/efficiency of business operations
Due to the lack of financial information and the fact that the project is only in the planning
phase, little can be said about the revolving allocation of resources and the profitability of
business operations. Given the target return of 10 per cent p.a. for the private investors,
however, it can be assumed that the closed-end Monteluce property fund is a competitive financial product. No subsidies of any kind were made to the investment. This presupposes,
however, that the value of the property of € 52.25 million equals its market price and thus
there are no hidden subsidies to the fund in the form of a reduced purchase price.
The chosen organisational model is deemed highly efficient. Splitting the fund units creates a
division between ownership and co-determination rights. The public authorities may sell their
investment in the fund and thereby bring about the intended cash flow; at the same time,
however, they retain the possibility of controlling the direction of the redevelopment through
their co-determination rights. The public authorities are simultaneously disencumbered of all
87
administrative responsibilities and profit from the private expertise in redevelopment and professional fund management. The latter in turn adds to making the fund an interesting investment for private investors. The economic advantage of this fund solution for the public compared to the direct sale of the property to a private investor lies in both the co-determination
rights and influence as well as the ability to participate in profits should the fund perform better than average.
3.5.3.4 Capital employment and distribution of risk in the public-private partnership
Given the scarcity of capital in the public coffers, one primary goal of the region of Umbria is
not to have to invest any cash at all into the project. As soon as the fund units have been
placed with the private investors, the risk to the region is limited to not receiving any additional profit should the fund performance be average or below average. A specific Italian
regulation requires them to have disposed of 60 per cent of their ownership within 18 months
since the contribution date in any case. According to the regulation, the sub-fund unit placement occurred in August 2008, when the region of Umbria sold 60 per cent of the units to private investors.
After the placement, the full risk of the redevelopment is therefore borne by the private investors. Whether the targeted ROCE of 10 per cent p.a. is earned or not will primarily be determined by the sales price of the finished real estate. Since the construction phase has not begun yet, one can only speculate about the development of the sale price. The location of the
project should be viewed positively. The area in Perugia is fairly central and conveniently
situated for traffic, while at the same time being attractively elevated on a hill. The area
around it is completely developed, so there are good chances of selling the properties.
The maximum fund gearing of 60 per cent outside capital is very low. As the properties will
only be mortgaged to 60 per cent, the debt is very likely covered in the event of bankruptcy
by the sales proceeds. Due to the lack of state guarantees and pledges, there are no further
public risk takers involved in the fund at all.
The effects of the project on the urban development overall and on the surrounding
neighbourhoods will not be visible until the redevelopment is concluded. It is already very
clear, however, that private owners in the surrounding area are considering investments in
connection with the Monteluce project.
88
4
JESSICA FUNDS FOR FINANCING INVESTMENTS IN HOUSING IN THE NEW EU
MEMBER STATES
4.1 Introduction
Due to the investment backlog in housing in the New Member States (NMS), the European
Regional Development Fund (ERDF) was opened to a limited extent for funding the renovation of residential buildings. Eligibility mainly extends to the common property of blocks of
flats, as well as to energy efficiency measures. Furthermore, the buildings must be located in
problematic urban neighbourhoods 49 . The JESSICA approach can thus also be applied to financing investments in housing in the NMS. The use of JESSICA is well suited to the housing sector for the following reasons:
-
Regular revenues can be assumed, which ensures the JESSICA housing fund resources are recycled.
-
Given the increasing income levels and relatively low credit volumes per household,
the risks are limited to a range of € 6,000–7,000; in addition, it is possible to secure
the funding collaterally through a mortgage or – where that is not possible – through
guarantees offered by the fund. Furthermore, appropriate equity investments from the
residents can limit the risk.
-
The mobilisation of private capital, e.g. as complementary loan financing, should be
relatively easy to accomplish.
-
Through the increase in energy efficiency, investments in housing can contribute to
both integrated urban development and environmental protection.
-
Due to the energy cost savings, the latter also contributes to the repayment of loans.
Comprehensive investment in the housing sector would energise the local and regional job
market to a considerable degree because of the intensity of the work involved.
4.2 Possible financial engineering instruments
An investment of housing funds in financing renovation measures is only justified if the financing offered by private banks is too expensive or too restrictive to ensure an investment
level deemed sufficient from the point of view of housing and urban development policy,
making state intervention necessary. It can be assumed that many households in the NMS
have difficulty taking out loans, especially those with relatively long terms and thus low
charges. The reason is that long-term loans carry relatively high risk and are thus only offered to borrowers with good credit ratings. In addition, many residents are not able to pay
market rates because their income is too low.
49
Article 7, paragraph 2 of the Regulation (EC) 1080/2006 and Article 47 of the Commission Regulation (EC)
1828/2006.
4. JESSICA funds for financing investments in housing
89
Against this background, housing funds have the following instruments for financing investments:
-
(Interest reduced) loans with terms of approximately 20 years, which can, however,
be repaid earlier without a prepayment penalty to accelerate the reallocation of the
resources.
-
Guarantees for private bank loans in order to increase the readiness of banks to grant
longer-term loans, or to grant loans at all.
-
Investment-related consulting services for property owners and housing associations.
These instruments can be combined with grants, e.g. to provide the necessary equity. Here
the resources can be supplemented with housing subsidies by the public authorities to increase equity. Furthermore, it would be important to increase the loan offering to provide a
workable set of mortgages.
4.3 Types of funding
In order to generate more investment, it is not sufficient to offer loans with long terms; rather,
it will be necessary to ensure funding to lower the burden. Several possibilities are imaginable. One possibility is to offer less expensive loans, which every household could access,
regardless of its income. This could be a general incentive to initiate investment. It is already
necessary to offer such an incentive for energy efficient investments, which do not pay off
under current energy prices. Here the energy cost savings are not sufficient to offset the extra interest and principal for financing the investment costs.
Such a general reduction in interest rates can be supplemented with additional interest reductions for low-income households. In this event, the fund or another state agency would
have to examine the income, and repeat this procedure from time to time because of possible increases in income. As an alternative, the state could grant a housing allowance dependent on income. Due to the rising income in accession states, the burden of this housing
allowance on the public budget and of the reduced interest rates on the fund would decline
over time.
4.4 Involving the private sector
Private capital can either be mobilised at the fund level or the level of individual measures. It
should be easier to attract private capital to housing funds than to other areas of urban development because the investments of the fund are restricted to less risky and easy to manage areas. To reduce risk further, the parties could agree to the asymmetrical distribution of
profit in favour of the private investors, which is explicitly allowed in the JESSICA rules. Here
it must be kept in mind that private capital requires market interest rates, so that the funding
possibilities of the fund decrease as the share of private equity and debt capital increases.
The simpler alternative for cooperating with the private sector should be to involve private
banks and building societies in the financing of concrete renovation measures. Here, for example, the fund can guarantee the private loans. One can also imagine combinations of fund
and bank financing: e.g. banks could grant senior loans supplemented by junior fund loans.
In this way, the fund would not compete with the banks; quite the contrary, its favourable of4. JESSICA funds for financing investments in housing
90
fer would increase market volumes and help create a private financing sector for investment
in housing. In any case EU state aid rules have to be observed.
4.5 Financing examples
The following examples should demonstrate the impact of long-term fund financing – when
applicable in combination with lowered interest rates – could have on the monthly financial
burden on budgets. The more households are able to finance investments over the fund, the
greater the impact of JESSICA housing funds on urban development and the development of
local employment.
The example calculations are taken from the INTERREG III B Project “Baltic Energy Efficiency Network” (BEEN), funded by the European Union. The project was concluded at the
end of 2007. According to the project, a comprehensive package of measures for renovating
pre-fabricated housing in NMS of the Baltic Sea region 50 costs € 6,400 on average. The
package especially includes thermal insulation for the building shell, new windows and optimised heating systems. The acceptable, additional monthly costs for the average household
were calculated at € 25.
In examples 2 and 3, private short-term loans (example 1) are replaced with (lower interest)
long-term fund loans. As mentioned above, it is also possible and sensible to combine private loans and fund loans as well as guarantees. The financing volumes of € 6,400 could
also be reduced through equity investments by the households. The financing has to be tailored so that the burden on the average household does not exceed € 25 per month.
Example 1: No fund, only private loans, no equity
-
Investment costs: € 6,400 per flat
-
Interest rate: 6 per cent
-
Loan term: 10 years
Monthly charge
€ 73
Energy savings
€ 14
Total monthly costs
€ 59
Acceptable (on average):
€ 25
Unfunded deficit:
€ 34
Example 2: Fund offers long-term loans at short-term rates (6 per cent as above).
-
-
91
-
Loan term: 20 years
Monthly charge
€ 47
Energy savings
€ 14
Total monthly costs
€ 33
€ 25
Unfunded deficit:
€ 8
(-36%)
Example 3: Fund offers long-term loans at reduced interest rate.
-
-
-
Loan term: 20 years
Monthly charge
€ 39
Energy savings
€ 14
Total monthly costs
€ 25
€ 25
Unfunded deficit:
€ 0
(-47%)
The private sector presently mainly offers short-term loans in the countries studied. In reality,
the information available shows that, when such loans are offered, then it is only to borrowers with especially good credit ratings, but not to the bulk of households. The examples
show, however, that a combination of longer-term loans and a moderate interest rate reduction could significantly improve the financial viability of investment to build housing.
4.6 Turnover rate of fund
An important question related to the fund is how quickly the resources can be recycled, that
is, when the lent resources are returned. This return determines the possible annual transaction volumes of the fund. The fund should not basically “dry out” in the first year after granting
the deposits because of the long loan term and thus few repayments and hardly be able to
grant more loans, as this would jeopardise the rehabilitation process. In order to clarify these
relationships, a simple example will be presented which disregards the management costs
and defaults, which constrain the transaction volumes of the fund:
-
50
Loan term 20 years, interest rate 4 per cent
Poland, Estonia, Latvia, Lithuania.
92
-
Fund volume € 50 m, 100 per cent lent out in first year (in reality, reserves have to be
set aside)
-
Annual payments to the fund in the form of interest and principal: 7.3 per cent of loan
volume of € 50 m (equals € 3.65 m, thereof € 2 m interest and € 1.65 m principal in
first year).
This means, after lending out the € 50 m, the fund only receives 7.3 per cent or € 3.65 m annually, which it can then re-lend, so that a drastic reduction in transaction volumes is to be
expected. On the other hand, the fund volume grows annually by the interest rate of 4 per
cent, that is € 2 m (0.04 x € 50 m).
One possibility of stabilising the funding activity and even increasing it over a longer period of
time is to expand the fund gradually. For example, a certain amount is fed into the fund from
year to year – presumably over several Structural Fund programming periods 51 . The transaction volumes of the fund would thereby grow steadily until they levelled off at the desired
amount.
In this regard, one great advantage of JESSICA should be indicated, whereby resources
moved to the fund are considered spent. The housing funds can thereby contribute to the
ERDF resources actually being accessed, which is not always the case in the NMS.
4.7 Considering management costs and defaults
Nevertheless, in reality, administrative costs and defaults have to be considered. Administrative costs mainly depend on the average scope of the granted loans: the greater the credit
volumes, the less the administrative costs for the fund, because large loans do not carry
higher costs than small, individual loans. Experience shows that the administrative costs of
the fund are likely to lie between 0.3 per cent (best practice for large loans) and 1.5 per cent
(average for individual loans, and therefore not best practice). As the fund primarily grants
loans to homeowner’s associations in prefabricated blocks, with a volume of only approximately € 6,000 per household, the costs would likely come out closer to 1.5 per cent than to
0.3 per cent in practice.
The costs for defaults are also higher the smaller the individual loan is, and should be around
1–1.5 per cent. If one applies the higher value of 1.5 per cent for both costs, the funds would
no longer grow 4 per cent, but only 1 per cent. As the inflation rate in most countries is higher
than this, the fund may show slight nominal growth but in truth loses value. Early repayments
could increase this value, which the fund should allow free of charge. However, these are difficult to quantify.
4.8 Interim remarks
The successful financing of investment in housing through funds presumes that the homeowners meet the corresponding demand for loans. Residents have to be willing to accept the
additional charges – the € 25 in the examples above – and vote to carry out the renovation
measures in their homeowner’s meetings. This will only be the case, however, if the housing
51
Keeping in mind the upper limit set in Article 7 paragraph 2 of the ERDF Regulation regarding funding housing.
93
administrators have established concepts for the renovation of the existing building and the
residents are able to pay. The essential components of such concepts are:
-
Building analysis which identifies the necessary maintenance and modernisation
measures,
-
Reliable assessment of the costs,
-
Financing concepts with contributions from the residents as well,
-
Subsidies, including the fund offer, especially for low-income households through
special, low interest rates and/or a housing allowance.
It would also make sense to have
-
Savings concepts for homeowner’s associations to accumulate the necessary equity.
4.9 Housing Funds in the new EU Member States
In the following chapter, housing fund approaches in the Czech Republic and in Slovenia are
presented.
4.9.1 State Housing Development Fund (Czech Republic) 52
4.9.1.1 Organisation
The State Housing Development Fund (SHDF) of the Czech Republic is an autonomous entity under the competency of the Ministry for Regional Development stipulated by the Act
211/2000Coll on the State Housing Development Fund. The government of the Czech Republic initiated the fund. The law establishing the State Housing Development Fund was approved by the parliament.
The available fund amounts (in million CZK) are shown in Figure 43
2003
4.1783
2004
3.7608
2005
3.7915
2006
3.9494
2007
5.3800
2008
3.2300
Figure 43 – Housing Development Fund of the Czech Republic: Available Funds from 2003 to 2008
The financial resources are provided as follows:
52
-
State budget;
-
Revenue from obligations;
Article contributed by the Czech Republic.
94
-
Earnings from obligations and mortgage bonds purchased in accordance with this
law;
-
Instalment of credits including attribution;
-
Interests on deposits, penalty payments, insurance benefit and other payments acquired in connection with using the fund sources;
-
Income from public collections (subscription) organized by SHDF, donations and heritage in favour of the fund;
-
EU Structural Funds;
-
Contracted loans and credits;
-
Instalments of state loans provided to municipality funds on modernization, repair and
extensions of the dwelling stock;
-
Other revenues if constituted by specific law.
4.9.1.2 Aims of the Fund
The aim of the SHDF is to create, accumulate and enlarge the financial resources intended
to support investments in the housing stock and to use it in accordance with law. The SHDF
does not substitute the stakeholder, and it does not make its own investments. Its goal is to
stimulate stakeholders in their activities and stabilize the investment environment.
The SHDF supports private and public (municipal) investment in the construction of the new
dwelling stock on the one hand and repair and modernisation of existing flats on the other
hand. It is intended in the future to support the construction of technical infrastructure for the
subsequent construction of apartment blocks and houses in the municipalities, too. The fund
also promotes investments in the existing housing stock, investments in new housing construction and the acquisition of apartments by the occupiers. It promotes the energy-efficient
modernisation of the housing stock as well (housing stock built by prefab technology – Programme PANEL). Along with public and private housing, the fund promotes housing constructed by housing cooperatives. The support is not concentrated on certain types of housing.
4.9.1.3 Type of support
The Fund supports housing investments by means of saving incentives, soft loans, interest
subsidies and guarantees.
Concerning the extent to which the different instruments are used it can only be said that the
parliament approves the budget of the SHDF for each particular year and allocates the
amount of money to each type of support.
The usual conditions (i.e. duration, interest rates, ratio support/investment) are given by the
Government Resolutions (Decrees).
-
Duration: 10 and 20 years, depending on the type of credit and the amount of borrowed money;
-
Interest rates: 2 per cent and 3 per cent;
95
-
Programme PANEL = credit subsidy 4 per cent until 2007, 2 per cent since 2008.
The resources returned to the fund are not sufficient to nominally preserve the capital of the
fund. On the other hand, the fund could leverage private investment.
4.9.1.4 Urban development
There is no spatial constraint on the SHDF activity. According to the Act, financial resources
could be used on the whole territory of the Czech Republic.
The projects supported are linked to the aims of urban planning and development as housing
subsidies or interest subsidies will only be granted to the municipalities which have approved
a territorial (municipal) plan.
4.9.2 National Housing Fund in Slovenia 53
According to the Slovenian Constitution, the state has to create conditions for individuals to
obtain proper housing. For this purpose the National Housing Programme (Official Gazette of
the Republic of Slovenia, No. 43/00) as the current Housing Strategy and the Housing Act
(Official Gazette, No. 69/03) define the framework, competences and tasks of the state and
other involved bodies in the housing sphere, which are:
53
-
to improve access to all types of housing, using a range of different methods depending on the financial capabilities and needs of the population, mobility and other circumstances;
-
to facilitate and promote different methods of obtaining housing and different types of
housing ownership;
-
to provide adequate assistance in the use of housing to those who are unable to resolve their housing problems without support;
-
to improve conditions for trade in building land for flats and residential houses, and for
the management thereof;
-
to increase the scope of construction of flats and residential houses, including the
renovation of existing ones;
-
to encourage higher-quality housing and residential environments, and to provide
proper housing standards with respect to the size of housing units;
-
to balance housing supply and demand to ensure an adequate number of housing
units for purchase or rent in those places where there is demand for housing;
-
to encourage the establishment of new households by improving housing stock as a
whole in order to better deal with demographic development;
-
to contribute to the protection of the family, elderly persons, persons with disabilities
and other vulnerable groups;
-
to stimulate the housing market and its beneficial developmental effects.
Article contributed by Slovenia.
96
4.9.2.1 Overall funding mechanism
The funding mechanism to support housing investments is implemented at three levels:
-
State level:
The implementing organ is the Housing Fund of the Republic of Slovenia, which is a
public financial and real estate fund founded for financing and implementing the National Housing Programme, mainly stimulating the construction, renovation and maintenance of housing.
The National Housing Fund was founded by the state and is working on projects and
programmes proposed by the director of the fund and adopted by the supervisory
board of the fund, led by the president, who is also the minister responsible for housing. The state is financing some types of subsidies and grants for housing (subsidies
for young families to their own housing problems, grants for the Saving Scheme)
through the National Housing Fund.
-
Municipality level:
For the implementation of housing policy, the role of the municipalities is to adopt and
implement the municipal housing programme:
-
providing capital for the construction, acquisition and leasing of non-profit and
residential buildings devoted to the temporary solution of the housing needs of
socially disadvantaged people,
-
encouraging various forms of providing self-owned and rental housing,
-
providing capital for subsidising rents and for extraordinary help in the use of
housing,
-
ensuring conditions for developing various forms of construction and renovation through relevant land policies and minimum standards,
-
adopting guidelines for the project design, construction and renovation of
housing, deriving from local particularities, including the external appearance
of residential buildings,
-
determining permitted activities that may be performed in part of a dwelling.
Municipalities are financing their own housing programmes. The state annually cofinances basic measures to cover housing demand when the respective annual municipal budget is far in the red.
The Housing Act enables municipalities to found a public housing fund in order to ensure the public interest in housing. The fund shall in particular take care of:
-
managing housing and building land,
-
the construction, purchase, renovation and maintenance of non-profit housing,
-
providing loans with favourable interest rates for construction,
-
the purchase or renovation of housing and residential houses,
-
implementing municipal housing programmes.
97
After meeting the necessary requirements, such a public housing organisation registers and operates as a non-profit housing organisation. At the moment there are at
least thirteen registered municipal public housing funds in Slovenia (due to the new
legislation on transformation of public funds – Public Funds Act (OJ RS No 77/08) –
the number of funds can only be estimated).
-
Non-profit housing organisations (as representatives of the private sector)
Non-profit housing organisations (cooperating mainly with the municipalities) are defined in the current Housing Act as legal entities founded for
-
obtaining, managing and leasing non-profit housing,
-
obtaining and managing its own dwellings under special conditions relating
above all to the method of doing business and directing profit,
-
determining the use of obtained land and managing it;
-
award procedures respecting the terms of competition law in all phases of
housing acquisition
-
deciding rents.
The ministry responsible for housing matters maintains the register of non-profit
housing organisations, which now has approximately 58 entries, but it is estimated that only fifteen of them are going concerns.
4.9.2.2 The National Housing Fund
Housing aid for the individuals and for the public bodies (municipalities and non-profit housing organisations) is under the jurisdiction of the state. The support for investment in housing and the maintenance of housing stock ("building help") is provided by the National
Housing Fund, which, through subsidies, co-financing or crediting, provides primarily:
-
Subsidies for young families to solve their own housing problems (buying, renovation,
reconstruction, adaptation of dwellings or houses),
-
The Saving Scheme and yearly grants to the Saving Scheme,
-
The construction of subsidised dwellings for specific groups of people (young families, elderly people, disabled people),
-
Co-financing projects for construction of energy-saving multi-unit buildings,
-
Co-financing projects focused on acquiring protected dwellings for elderly people,
-
Co-financing housing renewal projects.
4.9.2.3 Organisation
The Housing Fund is part of a public system, but is an autonomous entity. It is wholly owned
by the State. The total equity of the Housing Fund is about € 350 m. The fund portfolio was
composed of the allocation of capital from the privatisation of public dwellings (capital and
properties) and of the reallocation of state capital to increase available assets and of interests from current credits and investments. The sources of financing are:
-
the state budget;
98
-
the surplus of revenues over expenses,
-
revenues generated from activities related to special purpose assets,
-
revenues generated from decision-making processes in individual affairs that do not
represent state budget revenue,
-
other revenues.
The Housing Fund of the Republic of Slovenia (hereinafter: the Fund), was established by
the Housing Act (OJ RS 18/91-I, 19/91-I-corrigendum, 9/94-Constitutional Court Decision,
21/94, 22/94-Constitutional Court Decision, 23/96, 24/96-Constitutional Court Decision,
44/96-Constitutional Court Decision, 1/00-Constitutional Court Decision and 29/03Constitutional Court Decision) to finance the National Housing Programme.
On the basis of the amendment to the Housing Act (OJ RS No. 69/03, 18/04-ZVKSES and
47/2006-ZEN), the Fund is a public financial and real estate fund, and is authorised to:
-
give long-term loans with a favourable interest rate to natural and legal persons for
the acquisition of non-profit rental housing,
-
give long-term loans with a favourable interest rate to natural persons for the acquisition of freehold flats and residential houses through the purchase or construction or
for the maintenance and renovation of apartments and residential houses,
-
invest in housebuilding and in building sites,
-
offer help to pay off loans,
-
conduct real estate services in alignment with the public interest,
-
assure financial incentives for long-term building society savings, especially in the
form of premiums for the savings deposits of natural persons,
-
promote different ways of assuring proprietary and rental housing: with annuity buyouts and renting of apartments, with timeshare sales of apartments (leasing), with cofunding with the help of public or private investors, and the like,
-
perform other legal tasks and tasks for the implementation of the National Housing
Programme.
The Fund's conditions of operation are determined by the Act on the Establishment of the
Housing Fund of the Republic of Slovenia as a Public Fund (OJ RS No. 96/00, 8/04, 80/04
and 17/06 − hereinafter: the Establishment Act), which came into force on 28September
2000 and expanded the Fund's areas of activity in such a way that the Fund, the central state
institution for the financing of housing supply, which finances the National Housing Programme, now mostly performs the following activities:
-
giving long-term loans with a favourable interest rate to natural and legal persons for
the acquisition of non-profit rental, social housing, freehold flats and residential
houses through purchase, construction or renovation,
-
investing in the building of apartments and in building sites,
-
conducting real estate services,
-
assuring premiums within the framework of the National Housing Savings Scheme in
accordance with the National Housing Savings Scheme Act,
99
-
performing other legal tasks and tasks for the implementation of the National Housing
Programme.
In addition to the tasks listed in the Establishment Act, the Fund also performs other tasks,
proceeding from:
-
the National Housing Savings Scheme and Housing Grant for Young First-Time
Homebuyer Families Act (OJ RS No. 96/07–ZNSVS-UPB2), which requires the Fund
to carry out all procedures when executing the annual public call for the awarding of
grants and
-
Article 13 of the Spatial Planning Act (OJ RS 110/02, 8/03-corrigendum, 58/03-ZZK-1
and 33/07-ZPNačrt), which binds the Fund to implement an active land policy,
-
Post-earthquake Reconstruction of Structures and Development Promotion in Posočje Act (OJ RS 26/05-UPB1), on the basis of which the fund grants long-term loans
to natural persons, and
-
Art. 173 of the Housing Act (OJ RS 69/03, 18/04-ZVKSES and 47/06-ZEN), on the
basis of which the Fund grants long-term loans to tenants of denationalised apartments.
4.9.2.4 Aims of the Fund
The Fund promotes investment in new housing construction, but partly in existing housing
stock that it owns (has tenders of that kind also for the private subjects) and supports the energy-efficient renewal of housing stock and building of non-profit dwellings, too. It promotes
public and/or private housing and/or housing constructed by housing cooperatives (non profit
organisations) in line with local communities and housing legislation. Recently it also began
to develop its own standards of quality and controls in construction area.
A possibility to use the Fund as a promoter of JESSICA has not been thoroughly investigated
yet. Some of the issues to be dealt with are:
-
a very small proportion of non-profit (social) housing in the new housing construction,
-
over 90 per cent of private ownership in the existing housing stock,
-
organisation of the urban development fund in relation to the existing Housing Fund,
whose primary task is to implement national housing policy,
-
possible role of existing non-profit housing organisations in relation to JESSICA, etc.
4.9.2.5 Type of support
The Fund supports housing investment by using soft loans, co-financing, allocation of equity
and knowledge support 54 . Almost the full amount of the Fund’s resources allocated to the
non-public sector is returned to the Fund. Some projects of the public sector, which are also
co-financed by the Fund, cannot return the full amount of capital that has been invested. The
return of capital to the Fund is sufficient to nominally preserve the capital of the Fund. The
Fund cannot leverage private investments for itself, as the legislation currently forbids that
54
For further information see the
rs.si/index.php?location=1_4_3_0_0.
websites
http://www.ssrs.si
and
http://www.stanovanjskisklad-
100
kind of cooperation, but it can take part in private investments which are favourable to the
public interest, under the conditions of a public-private partnership.
4.9.2.6 Urban development
The Fund is financing projects all over the Republic of Slovenia. While financing or investing
in the projects of building non-profit rental apartments, the Fund cooperates with local municipalities, from villages with less than 3,000 inhabitants to cities as large as the capital city
Ljubljana.
The Fund also invests in and implements projects to construct buildings and apartments for
the socially disadvantaged: young families with children under 6 years old, invalids, etc. and
sells the apartments to very favourable conditions – sales prices are 10 to even 50 per cent
lower than comparable market prices.
All of the projects, which are being developed with the aid of the Fund, are firmly linked to urban and sectoral planning. The Fund usually acts as an initiator of development as a supplement to existing spatial planning acts. In that way the Fund indirectly incorporates the development of social and traffic infrastructure as well as urban, municipal and neighbourhood
infrastructure. Because of the high activity in urban planning and in the development of areas
at the municipal level, most projects of that kind have been developed in the last few years.
The Fund promotes a mix of different types of housing in its programmes and projects, because most of the settlements or buildings with non-rental and social apartments in small and
medium-sized towns in Slovenia (with financing and investment by the Fund) are already a
mix of different kind of dwellings including commercial apartments. In bigger cities like Ljubljana, Maribor, Koper or Celje, this situation is the goal of new projects due to the fact that
non-profit apartments and living units are usually in separate settlements in urban and suburban degradation (redevelopment) areas.
101
5
URBAN DEVELOPMENT FUNDS – AN INSTRUMENT FOR IMPLEMENTING
INTEGRATED URBAN DEVELOPMENT POLICY?
The analysis of the case studies using the criteria developed according to the JESSICA philosophy clarifies the common elements and differences between the individual projects and
forms of financing. The individual tasks and the reasons for public involvement vary depending on the starting situation and the national understanding of public responsibilities. Both
formal and informal planning and strategies were employed in all projects, though the content
and internal linkages were vastly different. The organisational form and the financial instruments used to support urban development projects also varied significantly.
The different forms of financing and the thereby supported urban development projects were
not part of the JESSICA initiative. This explains why they do not precisely follow the legal requirements of the initiative. Nevertheless, all case studies contain essential elements of the
JESSICA philosophy. In terms of implementing the JESSICA initiative, there are thus two interesting, principal questions:
First is the question of what form and what content of integrated urban development plans is
required within the context of the JESSICA initiative.
Second is the question of what organisational and financial form the project can be supported by urban development funds. This must take into account the distribution of risk and
the form of public-private cooperation.
5.1 Integrated urban development plans
An integrated urban development policy represents an important instrument for achieving
sustainable urban development. The significance of this instrument has been highlighted in
numerous European resolutions – most recently in the Leipzig Charter. The legal principles
for implementing the JESSICA initiative link the use of urban development funds with the
conception of integrated urban development plans.
5.1.1 Integrated urban development plans under the JESSICA initiative
Urban development projects to be supported from structural funds under the JESSICA initiative have to be part of an integrated urban development plan. European law, however, does
not define exactly what an integrated urban development plan is. Nonetheless, the discussions at the European level have resulted in a mostly uniform understanding of integrated urban development planning. It was in this pursuit that the preparation of the Leipzig Charter
included a comparative study of integrated urban development planning in the individual
Member States, which examined the central elements of integrated urban development
plans. The findings show that an integrated urban development plan links the various fields
of action and sector planning and coordinates them in regard to space, timing and content. It
defines goals and determines the appropriate instruments for reaching them. Finally, the
5. Urban development funds – implementing integrated urban development policy?
102
relevant parties, including those outside politics and administration, should fully be involved
at each stage. 55
This understanding of integrated urban development planning needs to be shaped in each of
the Member States on the base of their national planning traditions. The national planning
systems in the individual Member States and the resulting forms of planning differ in terms of
both content and process. The existing European guidelines have managed to unify only a
few aspects of the planning systems. The assessment of the parties involved is that the current plans for urban areas and entire cities in most Member States meet the requirements of
the JESSICA initiative in many cases 56 . Any implementation of the JESSICA initiative therefore has to examine the extent to which the current plans meet the requirements of the structural funds regulations or whether additional documentation is necessary. This can only be
evaluated by the management authorities on the basis of their national planning system.
5.1.2 Indications from the case studies
A variety of plans were implemented in the different case studies. Diverse formal planning
procedures formed the official basis for implementing the projects. In many cases, informal
planning procedures were also devised to prepare the development. In addition to the official
aspects, they also differed in terms of the area addressed. In all examples, there are a general urban plan, which usually serves as a strategic framework for the individual projects, and
plans for smaller parts of the urban area, which fit within this framework and specify the intentions of the individual projects. While most of these plans focus on preparing the planning
and building permission, there is another group of plans concentrating on the urban regeneration of specific neighbourhoods. These plans coordinate urban regeneration measures in
existing communities and steer the employment of public aid. These urban regeneration
plans overlap the former, more usage-oriented plans, and are in some cases designed as
contractual agreements.
The majority of the plans are concerned with the structural use of the land. In some cases,
however, the content of the plans goes beyond this issue. For example, they nearly always
contain statements regarding environmental concerns. Particularly the reuse of brownfield
land demands that numerous ecological questions be considered. The integration of ecological concerns in devising formal plans was already made mandatory by the European Strategic Environmental Assessment directive 57 , which requires a comprehensive environmental
assessment for a multitude of official plans for land usage.
Social aspects, in contrast, are only found in the plans to a limited extent. Nevertheless, most
of the plans examined are viewed in connection with social concerns. In Germany and Portugal, high quality residential space was consciously developed in formerly more problematic
55
56
57
Cf. Federal Ministry of Transport, Building and Urban Affairs: Necessity of integrated urban development for
the success of a sustainable city. Background study for the “Leipzig Charter for the sustainable European
city“ by the German European Council Presidency, Berlin 2007, p. 15.
Cf. See European Investment Bank: JESSICA. A new way of using EU funding to promote sustainable investments and growth in urban areas, 10/2007 and Kolivas, Georges: “JESSICA: Developing New European
Instruments for Sustainable Urban Development”. In: BBR: Stadtentwicklungsfonds. Informationen zur
Raumentwicklung, Volume 9, 2007, Bonn, p. 568.
Cf. Directive 2001/42/EG of the European Parliament and Council dated 27 June 2001 regarding the Strategic Environmental Assessment of certain plans and programmes (2001/42/EG).
103
neighbourhoods in order to enhance the areas. In the French example, a specific instrument
was used to link the economic and social concerns in the urban regeneration areas. Identification as an urban regeneration area is tied to tax relief for companies, which employ residents from the neighbourhood.
5.1.3 Conclusions for implementing the JESSICA initiative
None of the case studies included an explicit integrated urban development plan. Rather,
there were a number of different plans with varying timelines and content. Within the individual plans, diverse concerns were traded off against each other. The plans augment and
build on each other. At the same time, there are numerous links to other plans and political
strategies. These linkages are not always bound in writing, though the local responsible parties are normally aware of them.
The combination of various plans with different content meets the requirements of urban project development. The overlapping timelines of plans with different focuses and spatial references make it possible to gradually understand and define the project. The official status of
numerous plans means that they normally take a certain form and have certain, legally defined content.
The form and concrete content of integrated urban development plans has to be shaped at
the national level. It should therefore be possible to fall back on existing plans and programmes and link these to each other. In this regard, an urban development plan could consist of an explanation of how the various plans and strategies fit into the urban development
project and in what manner the various plans were coordinated. The crucial element is that
the prescribed content integrates the various concerns and interlinks the various sector
plans. This limits the costs for implementing the JESSICA initiative and avoids any intervention in the national planning systems.
5.1.3.1 Advices for devising integrated urban development plans
The case studies and discussions within the European working groups provide several advices for devising integrated urban development plans and linking them with urban development projects. Without obligation particular attention should be paid to the following aspects:
Contribution to integrated urban development
The use of resources from the structural funds is justified by the particular public interest in
the implementation of the project. The integrated urban development plan therefore has to
explain and clarify the public interest in the project, and in what manner it will contribute to integrated urban development.
Coherence with different plans and strategies
In all Member States, there are numerous sector plans and strategies, which have been
standardised to different extents. One essential goal of integrated urban development policy
is to coordinate these various sector plans and strategies. This should also ensure that the
individual projects have a place within the urban and regional development.
104
Participation of residents and stakeholders
Involving all stakeholders increases the acceptance of measures and enhances social cohesion. At the same time, the residents identify more with their city and the measures. Especially within the JESSICA initiative, which is meant to promote cooperation between public
and private parties, it is important to closely involve the private stakeholders. On the other
hand it should be considered that each planning system for development official land usage
plans include civic participation. Additional, formal involvement in the same urban development project could therefore confuse residents and should thus be avoided. Here one should
strive to make an intelligent link to already existing forms of civic participation.
5.1.3.2 Hints at the content of integrated urban development plans
In addition to these advices on method, hints without obligation at the content of integrated
urban development planning can also be formulated. These also fall back on the discussed
definitions of integrated urban development planning. Aside from the contribution of projects
and partnerships to economic, social and ecological sustainability, there are also some objectives arising directly from the context of urban planning.
Economic sustainability
In regards to economic sustainability, it is important to consider the impact on the job market
and the local economy. By way of example, several goals relevant to urban development policy can be named. One important objective is to attract innovative companies and business
operations, which strengthen the competitiveness of the business location. On the other
hand, research facilities can promote the growth of the local economy and attract new companies. This helps to improve the local job market and the rate of employment. At the same
time, updating the infrastructure can strengthen and promote current and new business operations. Integrated urban development planning should agree with economic policy strategies and keep an eye on the impact of the individual measures.
Social sustainability
One focus of integrated urban development policy is on disadvantaged neighbourhoods with
social issues. Improving the social infrastructure and integrating new populations is especially important in these neighbourhoods. This particularly means improving the educational
facilities. At the same time, special offers and facilities for children, young people and seniors, as well, can be made within the scope of integrated urban development policy. Additional tasks include making residential space and other social facilities available to poorer
sections of the population. Integrated urban development policy should therefore make an issue of linking urban development projects to social programmes and strategies.
Ecological sustainability
Urban development projects can contribute to economic sustainability by promoting sustainable forms of transportation, which reduce emissions and lower energy consumption. Public
transportation in particular offers the opportunity to support energy efficiency. Lessening and
recycling waste can also reduce resource consumption. Renewable energies can be given
as much support as energy saving methods. In the urban planning context, especially public
green and unused spaces play an important role. Another central issue for urban develop-
105
ment projects is whether and to what extent currently public space can be reclaimed for construction and whether brownfield land can be reused.
Specific urban planning concerns
Furthermore, there are several concerns to urban planning which play a primary role in urban
development projects. The architectural quality of new buildings and public spaces contributes strongly to sustainable urban development. High quality urban development projects
can improve the social interaction of residents and ensure the long-term value of buildings
and public spaces. Hence, efforts should be made in urban regeneration, and particularly in
the design of public spaces, to ensure a high quality of form and function. Protecting and
maintaining historically protected buildings and locations is another important contribution to
upholding cultural values. By renovating and, if necessary, changing the function of historic
buildings, their architectural heritage can be safeguarded.
5.2 Financial business activities
At the time this study was conducted, no UDFs had been issued in the European Member
States under the JESSICA initiative. The evaluation of the case studies in Chapters 3 and 4
showed, however, that at least some Member States have financing and/or fund solutions,
which already include many of the elements promoted by JESSICA.
Together with JESSICA’s legal framework, a comparative cross-section analysis of these
case studies allows for the deduction of potential business activities of UDFs, whereby two
fundamental systematisation criteria are introduced and applied: the systematisation of possible business activities on the basis of the increased property values and on the basis of the
financing instruments employed. These criteria can be used to create a four-field matrix of
the potential business activities for UDFs set up as follows:
Overview business models:
Business classification according to financial instruments
Non-equity funds
(unincorporated
business)
Business
classification
according to
developed
real estate
assets
Equity funds
(incorporated
business)
development
phases in the
LLC-model
operating
phases in the
LLC-model
Figure 44 – 4-field matrix of potential business segments for UDFs
The rest of this chapter will provide a quick look at these two criteria in terms of the importance of UDFs for corporate planning and, afterwards, the four fields will be filled in with con5. Urban development funds – implementing integrated urban development policy?
106
crete business models. One by one these business models will be compared using the experience from the European case studies, so that, finally, a risk/reward profile for each approach will be specified and a proposal for concrete UDFs in model projects will be submitted.
5.2.1 Systematisation of UDF activities
5.2.1.1 Classification of business activities according to properties developed
The starting point for the systematic development of fund activities is their differentiation by
the type of urban investment projects being funded. To be able to measure the value creation
potential of UDFs, however, it is necessary to find out which real estate values can be funded
by a UDF as part of urban development projects.
Figure 45 – Stages in the real estate lifecycle
In this regard, the lifecycle approach has become established in the real estate industry: In
general, the “cycle” refers to a circuit of regularly occurring events. Initially, there is no cycle
as such in relation to a building, but rather a lifespan with a defined beginning and end. Nevertheless, if one wants to take up the circuit idea, the land also has to be considered in the
analysis. In this case, it is justified to speak of cycles, whereby the new buildings are repeatedly being constructed and demolished or refurbished on the same plot of land. This typically follows the stages shown in Figure 45.
The main point is the difference between the stages of real estate development and utilisation:
-
Stage(s) of real estate development: In this stage, project ideas, land, capital and users are basically brought together with the aim of implementing sustainably profitable investment projects at the microeconomic level and creating socially and environmentally friendly properties at the macroeconomic level. While it is the aim of the
(building) land development to prepare the land for construction, in the narrower
sense, the property development, which is typically the focus, is where the building is
newly constructed. In contrast, redevelopment is the attempt to renew the lifecycle of
the property by thoroughly renovating, modernising or even completely repurposing
an existing building.
-
Stage(s) of real estate utilisation: The trigger for redevelopment is often a period of
vacancy during the stage of real estate utilisation, which is promptly recognised by
the property (or real estate portfolio) owner when the Facility Management (FM) is
107
consistent. Under FM all cost-relevant processes having to do with a building are observed, analysed and optimised for the sake of efficiency. At the same time, commercial FM is an essential component of property management, whereby the owner optimises the risk/reward ratio of its property portfolio. This could include disposing of
the property in the form of a sale or demolition, which could then initiate a new development stage in the lifecycle of the property.
For the use of UDFs in urban real estate business, it is essential to differentiate between the
two stages of “development” and “utilisation”, because this has an impact on the requirements, i.e. the costs and risks borne by the parties involved and their ability to influence the
results of the urban development projects (for each city or neighbourhood). Correlations can
be seen in Figure 46.
The fundamental working hypothesis can be based on the premise that, the earlier the public
authorities get involved in the lifecycle (of a property) through UDFs, the more influence they
have on the development of that property and the appendant urban neighbourhood. The earliest opportunity to get involved would be in the development of one of their own public properties (e.g. a brownfield). One alternative would be the purchase of property in the possession of private owners.
Costs of
re-developments
Operating costs
Costs
Construction
costs
Costs of Planning
Start of
building work
Costs of
planning
Initiating project
Completion
Costs of site
(incl. costs of
land development)
Project Interference
Feasibilty Studies
project management
Sale
operating phase
Figure 46 – The correlations between the costs and the ability to influence (urban development) projects in the
real estate lifecycle
Nevertheless, the problems of the entry point can already be seen here, because it is also
true that, the earlier in the lifecycle the public authorities get involved, the greater their costs
and risks are. This is especially the case if the property has to be acquired from private owners first. The necessary funds are often lacking to even initiate the project and finance the
108
stages without project revenues, which often last months or even years (see Figure 47 on the
ideal types of development project cash flows).
Figure 47 – Income and expenses of (urban development) projects in real estate lifecycle
The consequence is that the public authorities must often remain in the project that much
longer. This means that, the earlier they get involved and the more costs and risks they take
on, the later they are able to exit the development. The latest possibility to exit is when the
developed property is taken over as public property. This is not an exit, but rather an asset
holding. For the UDF, this means it will receive low but periodic rental income (or lowered
rental costs) in lieu of sales revenues. These revenues are the basis for the revolving approach, which is a central element of the JESSICA philosophy.
The justification for getting involved at the latest possible point (at least by the beginning of
the utilisation stage of the building) can be seen in the fact that the greatest increases in land
value happen at the beginning of the utilisation stage of the buildings. This occurs because,
during the development stage, the property values rise according to the preparation for building and decontamination costs as well as possible planning advantages (new land zoning)
(see illustration below); this is not the case after a completed development.
Land value
developed land,
ready for building
costs of
land development
land capable of
being redesigned
as building land
benefit of planning
undeveloped
land
an
Pl
B-
an
Pl
F-
building permit
site Development Contribution
Figure 48 – Land value increases in real estate development stages
After the land development and before the project development, the land value (and thus
possible sales revenues for a UDF) is the residual value of the developer’s calculation. Here
109
the necessary building costs and developer’s margins are deducted from the rental and utilisation costs of future users of the building, which are discounted by the expected returns of
future real estate portfolio owners over the forecast utilisation period of the developed area
(= capitalised earnings and discounted cash flows). The remaining, sustainable property purchase prices then make up the land value. The higher the rents or the lower the utilisation
costs in the developed buildings, the higher the payable land value for the (end) investors.
The lower the developer’s margins and the expected returns for end investors, the higher the
possible land value increases. In all areas, from the simple development of building land to
the utilisation of buildings and holding the properties, a UDF could be a potential stakeholder
in the implementation of sustainable urban and property development.
Therefore, the value of the developed and/or utilised properties to be funded by a UDF could
be considered the first, essential criterion for systematisation. The duration of the UDF’s investment in the lifecycle of the properties (to be developed), i.e. the UDF’s point of entry and
exit within the urban development project, not only limits the allocation of resources for the
UDF’s business operations, but also has far reaching consequences for the type of financial
project funding and its refinancing, which is proposed as the second criterion for the systematisation of UDFs.
5.2.1.2 Classification of business activities according to financing and funding instruments employed
The legal framework of the JESSICA initiative (see Chapter 2) sets the following parameters
for Member States to set up UDFs, or more precisely, the associated financing instruments,
when funding is to be used from the European Structural Funds:
-
Legal personality of the UDF,
-
Liabilities of the UDF,
-
Assets of the UDF.
The UDF can thus be set up with or without its own legal personality, i.e. it can be run as an
independent project or investment company. As an alternative, however, the Commission
also provides for the UDF to be set up as a component of a public or private bank, though in
this case the books must be kept independently.
In the UDF, public equity in the form of cash or real capital may be deposited. The cash may
come from the Structural Funds and/or from national co-financing sources. Furthermore,
public properties may be deposited. Due to the central requirement of a PPP, this public
capital should be supplemented with private capital at the level of the UDF and/or the individual projects whenever possible. Aside from the equity financing mentioned above, loans
from private commercial banks at the level of the UDF and/or project could be an important
source of refinancing for UDFs. In addition to the classic debt, these institutions could also
furnish the UDF with mezzanine capital 58 . Mezzanine capital can be similar to equity (so
called “equity mezzanine”) in the form of participation rights, secured profit participation cer-
58
Mezzanine capital is a collective term for types of financing whose legal and commercial form represents a
hybrid between equity and debt capital. In the classic variety, a company is furnished with equity that is
shown on the balance sheet, without the investor being granted voting rights or influence, or residual claims
such as those granted true shareholders.
110
tificates or silent partner’s holdings. Also possible are convertible bonds and bonds with warrants. Mezzanine capital in the form of subordinate, participating loans or shareholder notes,
can be seen as debt and is normally booked as liabilities (so called “debt mezzanine”).
Financial arrangement parameters:
- Entity of the UDF:
- incorporated company or part of a financial institution (with sepa- - special purpose company or investment company (derate segment information)
pending on the number of private investors)
- Capital resources (liabilities of UDF):
- public equity:
- private equity:
- EFRE-funds from OP (if applicable more public funds)
- shares private investors
- public land/ properties as contribution in kind
- land/ properties as contribution in kind by private
landlords
- additional: loans by private banks at project level
- Capital use (assets of UDF):
- equity stake and risk capital for projects (disclosure at equity)
- credit lending to projects
- guarantees to credit landers (for project financing)
Figure 49 – Financial arrangement parameters of the JESSICA initiative
At the centre of the UDF’s financial arrangement is the use of mobilised (public and private)
funding through the UDF, i.e. the project funding granted to urban development projects,
which could be a part or all of the project financing.
Private capital resources:
- equity from financial
investors,
- loans from private banks,
- sites from landlords.
Public capital resources:
- equity from managing
authorities (EFRE funds),
- national co-financing funds,
- loans from sponsor banks,
- municipal sites.
UDF capital use:
equity, loans, guarantees
Project
Project
…
Legal entity
Figure 50 – Project funding in the JESSICA initiative
In detail, the legal framework of the JESSICA initiative allows for the following alternatives:
equity investments, guarantees and/or loans.
5.2.1.2.1 Project financing via provision of venture capital
One of the most important financing components for all development projects which can be
granted by a UDF is the allocation of venture capital in the form of equity investments. The
process for these allocations of venture capital, which have played a major role in financing
SMEs for a long while, usually functions as follows:
-
A project developer applies for finance from a UDF. The UDF will acquire equity
shares in the (in some cases newly founded) project company. Typically, these
shares will be new shares issued by the company with the proceeds going to the
company to meet some of its financing needs. If the UDF is the sole equity investor in
111
the project (100 per cent financing), the UDF can post the project directly on its balance sheet, thereby avoiding the need to establish another project company (1/2).
private loans by third party
Project 1
sale of
shares
(1)
land/project development
effects value of shares (3)
equity
(2)
UDF capital resources
(public and private capital)
trade sale
secondary
Exit clause purchase
going public
fund sells its
shares (4)
MBO
Figure 51 – Project financing via venture capital funds
-
-
During the period of investment (3), the UDF will monitor the investment, sometimes
providing management advice to the project developer. Two basic forms of investment are possible here:
-
Open/direct investment in the stock of the investors’/project company: In this case
there is normally not a fixed interest rate for the capital invested nor period interest payments, but rather a single repayment after 6–10 years upon exit, i.e. when
the stock is sold at a higher value than its cost. The selling value is often contractually fixed as an exit premium on the basis of the project’s expected profitability
(normally: IRR – internal rate of return).
-
Silent/subordinate investment: Basically, equity is allocated in the sense of debt
mezzanine capital for a sum between € 50,000 and € 1,500,000 for up to 10
years. Amortisation by instalments is possible from the sixth year; the capital repayment is deferred until this time. In return for investing, a higher interest rate is
usually agreed, which is based on a benchmark rate (e.g. EURIBOR) plus approximately 400 basis points. This is supplemented by a performance-related remuneration (approximately 2.25 per cent). In this case, investors have a right to
termination with twelve months’ notice.
Once the project has been successfully developed, the UDF will seek to sell its stake
in the project development (4). For successful projects, exit routes may be through
the private sale of the investment to a trade investor (“trade sale”), to another equity
investment company (“secondary purchase”), an IPO (“going public”) or a management buyout (MBO). Under the right circumstances, such exit routes can provide high
returns, reflecting the high risk involved. In a significant number of cases, the project
developer may undergo a financial restructuring caused by poor performance and the
whole of the equity capital will be lost.
The advantage of granting venture capital through a UDF is that equity is the critical factor in
all development projects. If there is sufficient equity to cover liability in the event of loss, then
additional sources of capital regularly open up for the project developer (e.g. loans). For this
maximum investment risk, however, the private sector expects the highest investment returns, whereby the double-digit (12–15 per cent) returns on capital employed (ROCE) are not
normally earned via regular interest payments but rather upon exit, i.e. upon the sale (of
shares) of the project.
112
It is exactly at this point that a UDF could make a critical financing contribution as a “longterm public investor”, by accepting a much lower, single-digit return in favour of realising
other public interests (e.g. creating jobs, utilising brownfields). This would considerably
lessen or even negate the intrinsic disadvantage of this financing instrument, the high interest rate.
The equity financing of development projects by a UDF must, however, follow the guidelines
on State Aid and Risk Capital 59 published by the Commission in October 2001. This can be
achieved by adhering to the so-called “safe harbour” regulations. In this regard, the provision
of risk capital conforms to the EU aid law when:
-
The individual financing tranches are below € 1 m,
-
Professional fund management ensures the decisions to invest are profit-driven,
-
The public tender procedure of the programme ensures the distortion of competition
between investors and investment funds is limited,
-
No companies in financial difficulties are funded,
-
The investment only occurs on the basis of submitted business plans
-
A single company or project does not accumulate state aid measures (maximum 40–
43 per cent of capital needs of company/project).
5.2.1.2.2 Project financing via provision of investment loans
Loans are the most important external sources of financing for development projects, which
can also be granted by a UDF. Consideration needs to be given to the term of the loan and
its intended purpose, the required interest rates and likely losses from default. The process
for granting loans from a UDF to fund urban development projects could function as follows:
-
The loan fund will be set up for a fixed period, financed with a combination of EU and
national funding, supplemented by private financing. Private funding may be obtained
from bank loans or from other sources. The fund or scheme may be co-financed by
Structural Funds and guaranteed by institutions like the EIB (1).
Project 1
Project 1
debt
service
(3)
loan after
credit analysis
(1)
Bank as lender
interest compensation (2)
loan after
credit analysis
(1)
debt
service
(2)
Figure 52 – Project financing via loan funds
59
State Aid and Risk Capital, Official Journal of the European Communities 2001/C 235/03 and annex F.
113
-
A critical issue is assessing the creditworthiness of the borrower. A loan fund will
seek to avoid displacing the commercial provision of loans. If a company or development project can obtain funding from a commercial source, it should do so. Accordingly, projects with the lowest credit risks (including those offering comprehensive security) are likely to be excluded. The objective of the loan fund is thus to find the most
appropriate borrowers from the remaining group. The project companies apply for a
loan to the fund or a bank running or participating in an interest subsidy scheme and
an assessment will be made of the applicant’s credit profile, business plan and objectives.
-
The interest charged for the loan will typically be at a rate equivalent to the cost of
funds plus 4–6 per cent. The usual interest payments by the borrower (2) are calculated based on this rate (principal and interest expenses). There are two possible
methods for granting the funding to the borrower:
-
-
In Member States, where only banks are allowed to issue loans, the loan is initially issued by the (private or public) banking partner. To give the borrower lower
than commercial conditions, a so-called interest “rebate” is paid directly by the
fund to the lending bank. The fund receives then the debt service of the borrower
lower, which is collected by the banking partner (see left-hand side of illustration
above). The fund is set up as a part of a financial institution with separate bookkeeping (similar to segment reporting).
-
In Member States with no contrary regulations, the loan is issued directly from the
fund at a somewhat lower interest rate made possible by the investment of public
capital in the fund (see right-hand side of illustration above).
During the period of investment, the fund will monitor the investment, sometimes providing management advice to the project company. The borrower will either repay the
loan at the agreed time or default if the borrower financially fails.
In comparison to a venture capital fund, the investment risk for a loan fund – presupposing
sufficient private venture capital at the project level – is considerably reduced. The current
management costs are also much lower, especially when the fund is part of a financial institution. Such a loan fund could then require of the development project that the borrower pay
less than the typical 7–8 per cent interest rate (e.g. equal to the inflation rate) to ensure public interests. In certain cases it could even agree to zero interest, which still corresponds to
nominal capital maintenance given periodic capital repayment.
One problem here, however, could be the crowding out of private lenders which would normally grant loans given sufficient venture capital and project feasibility. Still, they would only
lend at much higher rates due to their own, higher refinancing costs, which would result in
the loan fund crowding out their offer.
In order to counteract this intrinsic danger, loan funds would have to be gauged according to
the restrictive EU aid rules. Interest subsidies funded by the EU and/or national grants paid
to the borrower are always viewed as an interest rebate, which reduces the effective interest
rate payable by the borrower typically by between 1 and 3 per cent. When interest rates or
the subsidised granting of loans is co-financed by the Structural Funds, it is generally tied to
strict conditions, whereby the funded company or development project must meet certain
targets, for example in respect of job creation or the level of new investment. A rebate of a
114
third of interest rate costs is not uncommon in such circumstances. A reduction of 1–3 per
cent of interest rate costs, however, would only offer very limited encouragement. In any
case, it must be kept in mind that such loan funds can normally only be relevant for the real
estate utilisation stage, as the company is not able to offer any ongoing, periodic interest
payments during the development stage. Here a loan fund would only be able to extend
loans with deferred payments (interest and principal), though this in turn would result in much
higher risk for the business activities of the fund.
5.2.1.2.3 Project financing via provision of (loan/default) guarantees
Finally, the legal framework of the JESSICA initiative also allows for a UDF to support projects by providing guarantees.
A guarantee is a legally binding commitment given by a third party to pay the remaining loan
value including unpaid interest in the event of default by the main borrower. Guarantee funds
issue guarantees to project companies in order to facilitate access to external finance (mainly
private sector loans) in return for a processing fee to cover both the risk and administrative
and processing costs. Guarantees are then an appropriate financial instrument in cases
where project companies are unable to provide the lender – typically a bank or leasing company – with the necessary collateral to gain access to debt finance on reasonable terms. The
process appears as follows:
-
The project company applies to a financial institution for a loan (1). If requested by
the financial institution, the project company can seek a guarantee from a guarantee
fund on a proportion of the loan (2). Following a comprehensive analysis of the viability of the business plan and a risk assessment based on a range of criteria, the guarantee fund provides a guarantee to the bank, enabling the project company to access
loan finance.
-
The borrower pays an (insurance) premium to the guarantee fund – in addition to the
typical interest payments. The guaranteed proportion of the loan amount varies between 40 per cent and 80 per cent. The fees the borrower pays for the guarantee depend on a series of factors: the guarantee period, the risk factor analysis, and the
proportion of the loan to be guaranteed. In most cases, it is 1–2 per cent p.a. of the
outstanding guarantee amount (= i.e. of the loan amount). This is the sole cash inflow
to the fund, as the remaining (or the actual) project financing is carried out by the private lender (3/4).
-
In case of loan default by the borrower – and based on terms clearly defined in the
contract – the guarantee fund will reimburse the lender immediately upon notification
of repayment default. The company or the project company’s collateral is then sold
and any losses incurred are borne by the guarantee fund. In the case of guarantees
backed by a counter-guarantee, the guarantee fund can recoup a proportion of its
losses through its counter-guarantor and reduce its default risk.
115
Private equity
by third party
Project 1
debt
service
(3)
loan after
credit analysis
(1)
Bank as lender
guarantee on
40-60 % of loan amount (2)
periodic
guarantee fee (4)
Figure 53 – Project financing via guarantee funds
In comparison to the two alternative types of fund already named, a guarantee fund further
reduces the investment risk because it only bears the default risk of 40 to 80 per cent of the
loan principal. This also poses one disadvantage of this type of fund, since it is still necessary to find complete private sector equity and debt financing. A guarantee only represents a
supplementary hedge for the lender. For project companies with a short record of success or
a lack of security, however, they can mean a significant improvement in the conditions for
loan financing.
Consequently, the actual lenders take on the full loan management, which means the fund
hardly pays anything for management costs. By lowering the risk for the banks, however, the
degree of accuracy of the credit check and the loan monitoring is also lowered in part. Dependent on the forecast likelihood of default, the capital in a guarantee fund can be used
multiple times, so that, as long as there are no or only few defaults of payment, it is possible
to achieve the revolving method. Its leverage is strong (on average it comes to ten times the
guaranteed capital), and the proportion of insolvency is low.
Finally, it is also possible to subsidise development projects with a strong public interest by
reducing the premiums e.g. to 0.5 or even 0.0 per cent of the guaranteed amount. As long as
the project is successful, it ensures that the guarantee fund’s capital is also maintained at a
nominal amount with a zero premium. When setting the amount of the guarantee premiums,
however, the EU state aid rules must also be observed. In reference to the guarantees, the
Commission published detailed guidelines on the use of Articles 87 and 88 of the EU Treaty
to State aid in the form of guarantees in March 2000 60 . The fulfilment of the conditions
shown in Figure 54 ensures that the loan guarantee scheme does not constitute state aid.
60
See Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of
guarantees, OJ C 71, 11.03.2000, p. 14.
116
EU Notice on state aid for guarantee programmes
- It is not possible to extend guarantee to borrowers in financial difficulty.
- The aid recipient (i.e. borrower) should in principle be able to obtain a loan on market conditions from the financial markets
without any intervention by state.
- The guarantee must be linked to a specific financial transaction, be for a fixed maximum amount, not cover more than 80 per
cent of teh outstanding loan or other financial obligation (except for bonds and similar instruments) and not be open-ended.
- The terms of the scheme are based on a realistic assessement of the risk so that the premiums paid by the beneficiary enterprises make it, in all probability, self-financing.
- The scheme provides for the terms on which future guarantees are granted and the overall financing of the scheme is to be reviewed at least once a year.
- The premiums have to cover both the nromal risks associated with grasnting the guarantee and the administrative costs of the
scheme, including, where the state provides the initial capital for the start-up of the scheme, a normal return on the capital.
Figure 54 – EU Notice on state aid for guarantee programmes
5.2.2 Differentiating the four business models for UDFs
Consolidating the two criteria for systematisation yields four basic, possible fund models,
which can be established with increasing start-up costs.
Among the four fund types to be presented, the potential risk to the UDF’s operations increases, as does the possibility for the public fund participants to exert influence on the urban development projects being funded:
Overview business models:
Business
classification
according to
developed
real estate
assets
Non-equity funds
(unincorporated
business)
Equity funds
(incorporated
business)
development
phases in the
LLC-model
UDF as
„Development Loan
Guarantor“
UDF as „Financier
of Land
Developers“
operating
phases in the
LLC-model
UDF as „Funding
Lender“
LongUDF as „„Longterm Property
Investors“
(development and
operating phase)
Figure 55 – Four business models for urban development funds
117
5.2.2.1 UDFs without venture capital employment as a part of a financial or funding
institution
The two fund models in the first column are set up to implement a UDF together with a private or public bank as quickly as possible. Therefore, no separate company is established for
either model; rather the “fund” is set up as part of a financial institution with separate bookkeeping (similar to segment reporting).
5.2.2.1.1 Model I: UDF as funding lender
For the real estate utilisation stage, the simplest solution appears to be the UDF shown in the
following as Model I, whereby it functions solely as a “funding lender”. Its primary purpose is
to support sustainable urban development projects by granting loans at preferential, i.e. less
expensive interest rates. As part of a partner bank, the UDF acts as lender without its own
legal personality; the partner bank handles distribution of the loan (e.g. via its branches).
The periodic repayment of loans actually enables the fund to revolve its lending operations.
Although the loans do appear in the yearend financial statements (more precisely on the balance sheets) of the partner bank, all credit risks (especially the default risk) and the necessary management costs are borne by the UDF. As the loans are granted at rates below the
market level (to achieve the funding purposes), however, it is appropriate to primarily use
public capital to refinance the UDF’s business operations. Private equity only appears to be
applicable here when the public lender waives any return on its capital employed and, at the
same time, accepts most of the credit risks. Capital in kind does not play any role for this
type of UDF.
With regards to the systematised urban development projects of the previous Chapter 5.2.1,
the funding of preferential projects in the utilisation stage by the UDF comes into question, as
in this case the regular rental income could service the periodic interest payments. For development projects, the UDF has to go without regular capital repayment in favour of deferring interest and the principal (until the end of the development project). This results in
strongly rising default risk and high payloads for the projects due to the high, accrued interest
(in the projects’ own high debt financing share).
The advantages of this fund approach are doubtlessly the very low, nonrecurring implementation costs and the limited ongoing management costs. If a private commercial bank is
gained as a partner, not only does the approach also become revolving, but a public-private
partnership is always ensured as well. Due to the very limited fund income compared to the
high loan sums to be disbursed, its use should remain limited to low risk projects in the utilisation stage with predominantly public fund refinancing. A potential area of application for
Model I would be, for example, the promotion of the energy-efficiency upgrading of housing.
The rapid, inexpensive implementation (and simultaneous limitation to small loan sums)
would especially be feasible via the corresponding housing funds in the new Member States.
The granting of inexpensive loans to demolish vacant commercial city properties or to promote Business Improvement Districts (BID) could also represent important funding projects
for a Model I UDF. Finally, the UDF could also support the long-term financing e.g. of historic
buildings by lending junior loans, which supplement the commercial senior real estate loans.
For all areas of application – assuming strong public interest – state aid legal problems
should not be relevant.
118
5.2.2.1.2 Model II: UDFs as development loan guarantor
In order to also help projects in the stage of land and property development with a simple,
quick business model, the following, also simple fund type (Model II) is appropriate for a
UDF:
This model can and should also abstain from establishing its own fund company. Rather, to
lessen the start-up costs, not only is the UDF part of an existing (public or private) bank, but
the entire loan management is also handled by the banking partner. The UDF “only” supports
sustainable urban development projects by issuing supplementary default guarantees, which
should be in a range of approximately 40–60 per cent of the loan sum granted to each project.
The UDF therefore acts as a guarantor for development or project loans. These should be
granted and managed at commercial rates through a private partner, i.e. a commercial bank,
which also carries the entire loan in its own balance sheet. To the extent to which supervisory regulations do not contradict it, the UDF restricts itself to granting the guarantee (none
of its own, direct financing operations) and, at the same time, monitors the project and loan.
Here the information of the partner bank could presumably even be used.
A result of this construction is not only to hold its own fund management costs to a minimum,
but also to limit the risk to its own funding operations. On the one hand, the UDF “only” bears
the default risk (no other risks, such as to interest rates or liquidity); on the other, the default
risk is limited to a portion of the loan amount (40–60 per cent). Based on an equity ratio of
approximately 20 per cent of the investment costs in the urban development project, the UDF
“only” bears the default risk of approximately 40 per cent of the total investment costs. The
risk is thus limited, even though the UDF concentrates its operations on risky development
projects.
The “reflux of capital” for the UDF comes, on the one hand, from the guarantee fee, which
the project developer has to pay regularly (normally approximately 1 per cent). On the other
hand it comes from the lack of loan defaults. The effect is that the capital can be used multiple times and remains at a nominal amount almost automatically. Depending on the default
risks which the fund in fact takes on (and the probability of default in each case), the existing
fund capital can already be used multiple times as long as the private commercial banking
partner is willing to grant the corresponding loans. 61
For each of the urban development projects, granting the guarantee firstly means the general
authorisation for large development loans. Furthermore, it results indirectly in preferential interest rates, as the private lender bears fewer risks. This leads to lower risk and capital costs,
which can be passed on to each project developer.
An assessment of the business model shows similar arguments to those for the first model:
In addition to lower start-up and management costs, the risks to fund operations are also limited despite the involvement in the development stage of real estate projects. Similar to the
first business model, it is also the case here that the granting of guarantees only brings in
very limited ongoing inflows to the UDF. In the best case, these should cover the UDF’s own
61
For example, with an average default probability of 10 per cent, the fund capital would still be used ten times
for development projects. Depending on the extent of the guarantee (measured by the investment sum) and
the amount of the default probability, this “leverage effect” can increase further.
119
low management costs, so that, as long as no projects default, the fund capital should remain at a nominal amount, which can then constantly be reused for new projects. Charging
market rates on the fund capital, as must be expected for private equity, cannot happen here
due to the existing management and risk costs. Insofar, the refinancing here should also be
limited to public cash. Capital in kind is not suitable for the proposed business activities of the
UDF.
For this business activity, each urban development project must be completely privately financed in the end. Thus, there does not only need to be sufficient equity but also large outside capital. The guarantee fund can only offer support here, but it is not a replacement for
other private lenders.
In both proposed UDF models, it has to be borne in mind that the “trade off” for the simplicity
of the fund type is the general disadvantage that the public authorities’ influence (in regard to
the public interests) is necessarily limited as a lender in the utilisation stage and as a guarantor in the development stage. The private partners in each of the funded urban development
projects will have more capability to implement their own project goals.
5.2.2.2 UDFs as investment companies offering risk capital
In order to have more influence on the urban development project for the benefit of the public
interests, it is necessary for public funders to take over more entrepreneurial risk, i.e. they
have to provide projects with liable equity in the way of equity financing. This option is expressly stipulated in the framework of the JESSICA initiative. Through their funding activity
here, the public funders could take on the role of either a financier of land developers or longterm financial investors. The two approaches differ in terms of the perception of the role of
the (public) funders and in the question of how income can be earned on the fund capital to
implement the revolving approach.
For the two fund approaches to be presented, it is necessary to establish a separate legal
and commercially independent organisation or legal entity. Thus, an independent company
should be established with the private partners, though the form will vary depending on the
concrete business activities.
5.2.2.2.1 Model III: UDFs as a financier of land developers
In the case of Model III now to be presented, the UDF acts as a financial institution, which invests in land developments. It can be established as a separate company with diverse partners. It is possible for the UDF to finance the development, preparation for building and, if
necessary, decontamination of land exclusively with public capital. In order to implement a
PPP in this model as well, however, private partners (financial investors and/or lenders) as
well as private property owners could be involved according to their capital invested on fund
of project level. Fundamentally, this model is therefore suitable for the use of private and
public cash and capital in kind investment for fund refinancing in any form.
The primary aim of the business activity in Model III should be to finance the development of
the land and less so of the building or project. On the one hand, this will considerably limit
the business risk and the necessary fund capital employment. On the other, in the subsequent project development and property holding, private partners can be involved in the implementation of the entire urban development project in any case. On the level of the land
120
development companies, in which the fund could invest, the still undeveloped and unsold
land makes up the assets. Besides the fund investment the land developers will normally
also need comprehensive, supplementary (private) project loans to implement the development project.
The revolving approach is implemented via a trading method, i.e. the proceeds from the sale
of developed land to private project developers, investment companies or owner-users
should cover all development, management and loan costs. In this case, the fund capital
would at least be maintained at a nominal amount. The project companies should not hold
the land due to the resulting lack of income.
The higher start-up and management costs for the business activities of this type of UDF are
not only legitimated by the far-reaching possibilities to integrate private and public capital. In
fact, this construction makes sure that the public funders can exert a great deal of influence,
as they get involved at the earliest possible point in the lifecycle of the properties (see Figure
45). Finally, the present business model also allows diverse possibilities for setting up the
distribution of profit and loss risks from the funding activities. For example, asymmetrical distribution, especially of fund profits, is also possible in this model, whereby private property
owners, financial investors and/or lenders can also earn market rates on their fund capital
employed. In contrast, the public funders could waive their return on capital in favour of their
public interests in the urban development project (= nominal capital maintenance). In this
way, the capital base of the UDF can be dramatically increased through a high share of equity and debt from the private sector, which should be especially meaningful for capitalintensive development projects. Typical areas of application here are all area development
projects, which do not ensure commercial return on equity in line with the market. Nevertheless, the use of the developed land must result in limited income from rents and/or sale proceeds. In the area of Brownfield refurbishment, which is a typical area of application of Model
III funds, one speaks of so called “B-areas” following the classification by the CABERNET
network. Other typical projects would be, for example, the development of cultural, educational, recreational, or public health properties in their own urban context.
5.2.2.2.2 Model IV: UDFs as long-term property investors
One last and efficient alternative for this funding activity could be Model IV, whereby the UDF
takes on the role of a long-term financial investor. Here the UDF leaves the entire land and
building development to potential private partners (e.g. private development company and/or
property owner). These could either develop their own property or public property as well,
which the UDF could provide as an investment in kind.
The UDF itself would be established as an investment company in the form of a limited partnership with a limited liability company as general partner. The fund has its own legal personality comparable to a closed-end investment company. Its business purpose is solely to
invest the fund capital in real estate to be developed in the framework of sustainable urban
development projects. Both majority and minority interests are possible through the UDF,
which will be booked proportionately as assets on its balance sheet. Therefore, the UDF also
participates in equity financing in this case, though not until the utilisation stage of each
property. This type of fund approach is thus revolving, whereby the return on equity is received in the form of regular rent and leasing income (minus the non-allocable operating
costs). This should remain the focus, even though there might also be occasional proceeds
121
from the sale of individual properties. The UDF itself should not grant any additional loans to
individual project companies pursuant to state aid laws. These can and should be granted by
private commercial banks at market rates. A potential area of application for this type of UDF
are real estate projects similar to those for Model III, though here the influence on the project
development to the benefit of public interests does not come from the upstream land development, but rather from the prospective, long-term property holding. Furthermore, the UDF
could invest in the broadening of the uses of existing public real estate (e.g. schools) or in interim acquisitions of existing real estates.
Similar to Model III, it is also possible to set up an asymmetrical distribution of profit and loss
which grants the private fund investors a higher and thus for them sufficient return on equity.
Similar to the “sustainability funds”, which have been known in the private sector for a long
while, here the public fund partners could in turn waive a part of their return in favour of realising public interests. In this model it would also be possible to integrate additional, private
equity from private sustainability funds under similar conditions. This would significantly increase the equity base. The public funders could also, according to Figure 45, considerably
increase their influence on the projects in this model if they limit themselves to investing in
urban projects newly developed by the private sector. The reason is that, in this case, private
developers can also better consider potential public interests in the project development, as
they can anticipate higher sales proceeds (with no change in rental income) from the beginning due to the lower return on investment for the UDF.
In both cases, a partnership agreement for the development or investment company appears
to be necessary. This has to ensure a different return on equity (profit distribution) and, if applicable, different liability conditions (so called “first loss”) in the event of loss. Considerable
private cash and real capital can be gained in this way. In both cases, therefore, the implementation costs, especially for the public authorities, are much higher than for the two models without legal personality according to Chapter 5.2.2.1.
Model III is especially appropriate when a city already intends to develop a specific
neighbourhood and/or individual Brownfield (or even owns it) and already has its own development concept; in this case, this model is faster to implement, as it is “only” necessary to
gain private capital (financial investors or property owners) through the attractive set-up of
the UDF and project company contract. In contrast, Model IV appears easier to implement in
larger cities, which have a sufficient market for commercial project development with the corresponding developers and investors; the development risk in the funding activities can be
shifted entirely to the private sector in this case.
5.2.2.3 Experience with the business models in the analysed case studies
The presentation of the case studies in Chapter 3 shows that the predominant use of projects
with financing elements of the JESSICA initiative are found in business models of type III,
whereby the UDF acts as land developer (together with the corresponding trading approach).
In one case (France), the business model of a long-term property investor (Model IV) and a
funding lender (housing funds in the new Member States, NMS) could be identified. So far,
the business approach of a guarantor has not been implemented (neither in the development
nor the utilisation stage) (see Figure 56).
122
Business
classification
according to
developed
real estate
assets
Non-equity funds
(unincorporated
business)
Equity funds
(incorporated
business)
development
phases in the
LLC-model
UDF as
„Development Loan
Guarantor“:
not yet available
UDF as
„Financier of Land
Developers“:
PSL, Westhafen;
ParqueExpo;
Fondo Monteluce
operating
phases in the
LLC-model
UDF as
„Funding Lender“:
NMS housing funds
UDF as „„Long
Long
term Property
Investors“:
(development and
operating phase):
CDC/Fonc. Camus
Figure 56 – Classification of cases to four business model types for UDFs
The classification of business fields according to properties developed (see Figure 45) shows
in detail that there is a clear focus on the development stage in the analysed case studies.
Only the housing funds in the NMS concentrate on the utilisation stage of buildings. However, there are differences in the scope of the development activities taken on by each of the
“funds”.
Although the cases in Germany and Portugal were restricted to the (building) land development typical for Model III, Priority Sites in the UK only developed the building, i.e. the project.
The land development here was completely handled in advance by the municipality, which
had first acquired the brownfield. In the French case study, the CDC also “only” developed
the project, as the private partners first handled the land purchase and development independently. In contrast to the British case, the CDC also holds the real estate in its own portfolio together with the private partners, which means this approach can rather be categorised
as Model IV. A similar approach could have been imagined for the Italian case; since it is intended to sell the public real estate portfolio to private financial investors immediately after
the redevelopment is complete, however, this case fits better to Model III. In contrast, the
(planned) housing funds in the NMS only fund the utilisation stage of the real estate (in the
form of energy-efficient upgrades) with loans at preferential rates, whereby these cases can
be categorised as Model I.
For the individual investors involved, this results in the following cost and risk schedule (in
continuation of Figure 45), whereas the individual “funds” were involved in the lifecycle process in the sense of a PPP:
123
Case study
Costs of site (acquisi- Costs of land devel- Costs of construction
Operating costs
tion)
opment
No (public)
No (public)
Yes (PPP)
Fonc . Camus
No (private)
No (private)
Yes (PPP)
Yes (PPP)
Westhafen
No (private)
Yes (PPP)
No (private)
No (private)
ParqueExpo
Yes (PPP)
Yes (PPP)
No (private)
No (private)
Monteluce
No (public)
No (public)
Yes (PPP)
No (private)
NMS Housing Funds
No (private)
No (private)
No (private)
Yes (PPP)
PSL-Evolution
No (private)
Figure 57 – Acceptance of costs and risks in the cases studied
Figure 57 shows that the PPPs in all cases studied predominantly limit themselves to accepting the costs and risks (UK, Germany, Italy and NMS) of a single stage in the lifecycle. In
Portugal ParqueExpo subsequently purchased the property; however, this only led to very
limited investment costs. Only in the French case the costs and risks of the project development as well as those of the utilisation stage were borne by the PPP. According to the second criterion for systematisation, the case studies employed the following financing parameters pursuant to the JESSICA initiative (see Figure 58).
Case studies
Incorporated Company?
PSLEvolution
Fonc. Camus
Yes, development and
investment company
Yes, development and
investment company
Yes, development
company (Special Purpose Vehicle)
Yes, development
company (Special Purpose Vehicle)
Yes, development (and
investment) company
No
Westhafen
Parque-Expo
Monteluce
NMS
Housing
Funds
Fund capital resources
Public Capital
Private Capital
Equity (in kind),
loans, grants
Equity, loans,
grants
Equity
Equity, loans
Fund capital use (promotions)
Venture
Loans (interGuarantees
Capital
est comp.)
(Equity)
Yes
No (external) No
Equity, (loans)
Yes
No (external)
No (external)
(Equity), loans
Yes
No (external)
No (external)
Equity, guarantees, grants
Loans
Yes
No (external)
No (external)
Contribution in
kind (sites)
(Equity), grants
Equity, loans
Yes
No (external)
No
(Equity), loans
No
Yes
No
Figure 58 – JESSICA financing parameters in the cases studied
It is immediately clear that equity financing together with the establishment of an independent
development company represents the dominant funding or financing form among the European cases studied. This most closely corresponds to Model III.
This is even clearer if the financing instruments used in the individual cases are divided according to the percentage of the full amount of the investment. They are compared to a typical private sector property development project supported by the public authorities through a
non-revolving grant (in Germany in the form of an urban development grant). This is usually
set up as follows:
Figure 59 – Possible JESSICA financing component at the project level
124
In contrast, the cases studied in Chapter 3 sometimes show very different structures:
Figure 60 – JESSICA financing structures in the cases studied
It stands out that, although equity was provided by the “investment company” in the form of a
PPP in each of the cases analysed in Chapter 3, this financing component only made up a
small share of the total investment volumes. Only in Portugal and Italy equity was used to a
greater extent, i.e. 29.0–38.6 per cent, whereas this capital came predominantly from the
public side in both cases. Overall, the very low share of private equity in all models stands
out, especially when considering that the sale of 40 per cent of the public shareholding in Italy to private financial investors has not yet been completed. Insofar, the share of public equity here is still 100 per cent at present.
Therefore, it can be noted at first that, while all models are PPPs, the business risk is predominantly, in some cases entirely, borne by the public funders. This is even more the case,
because in Portugal, France and normally in the UK as well, state grants are still being
awarded to implement projects. However, there is an interesting form of awarding grants: In
the UK grants are only awarded if a feasibility study of the project does not show a predetermined minimum return. If the project performs better than anticipated, the regulations provide
125
for the grants to be repaid. The link between the awarding of grants to the ex-ante feasibility
together with the ex-post “clawback” rule appears to be extremely purposeful in view of the
symmetric profit distribution of the public funders. An alternative approach here is to extend
the development stage into the utilisation stage, as was done in France. Grants were also
combined with public equity here. By extending the capital investment to the utilisation stage,
however, the public equity could be limited. Public subsidised loans were granted for this
purpose to a great extent. Their use as a financing component is only possible in the utilisation stage due to the necessary periodic interest payments.
The public funders also bore the entire development risk in Portugal, as it not only had to
award grants and public equity but also a great deal of state guarantees for the private loans,
whose repayment did not happen periodically but only through the proceeds of the sale of
property. Like in Germany, the public authorities chose not to handle most of the capitalintensive project development and property holding but rather to leave this area of the lifecycle to the private sector. While this limited the inflows to the “fund”, it also limited the capital
risk to the public authorities.
In both the German and Italian cases, a financing component was used which has been
known and extensively used in private sector real estate development: cash flow financing.
Accordingly, the property and/or buildings are developed step-by-step, which distributes the
necessary investment expenses over several years. The income from sales can then gradually be used for further investment financing, which limits the need for outside financing (equity and debt) in comparison to the total investment volume. In both cases, approximately
50 per cent less outside financing (compared to total investment costs) has to be sought,
which results in significantly lower financing costs for the project. At the same time, the private sector bears much more of the costs and risks throughout the lifecycle of the property
through the early sale of the land and/or buildings by the development company. As, due to
the high value of the site in Germany, this could be implemented with very low public equity
from the beginning, in Italy – although only public equity was used at the start of the project –
it is planned to replace it by private equity as quickly as possible. Nevertheless, the interesting legal structure of a UDF ensures public influence even after exit and reflux of capital.
This is realised through the additional issuance to the public funders of Category B shares,
which ensure co-determination in the redevelopment of public property.
In addition to these exit rules, the rules on repaying grants and the use of guarantees to replace equity, the use of mezzanine capital in the form of private partner loans – which was
unfortunately only implemented to a limited extent in the German case, also as a replacement for equity – makes up an interesting alternative financing component for potential UDFs
in Europe. It should be used and applied in the scope of pilot funds.
5.2.3 Evaluation of the rewards and risks of financing instruments in the diverse business models for UDFs
While financial innovations have hardly found any application so far, venture capital, loans,
guarantees and grants are found in practically every example. Their fundamental mode of
operation within the projects can be seen as follows:
126
Criteria
Grants
Loans
Guarantees
Equity (VC)
Project influence
0
+/0
0
++
Participation
losses/ risks
on
project 0
+ (no payback)
+/0 (partial payback)
++
Participation on
earnings/ gains
project 0
0
0
++
+
+/0
++
Periodic
earnings
for 0
"dept service" (interest/
redemption)
++
++ (like loan)
--
Revolving funds
--
++ (periodic)
+/0 (only fee income)
++ (at exit)
Capital costs
--
+ (project loan)
+/0
++ (private equity)
Management (and forma- 0
tion) costs
+/0 (part of bank)
0/-
++ (spv)
Crowding out effects
+/0
+/0
0/-
Leveraging
sources
capital
re- ++
+/0
++ = high positive impact; - - = high negative impact; 0 = no impact/ not of relevance
Figure 61 – Assessment of JESSICA financing components in UDFs
Investment grants are traditionally awarded by the public sector to private developers, investors and property owners. The advantage of this is the simplicity of awarding the funding,
which also has a certain leverage effect. This is the case because the investment grant functions like public equity (without co-determination) for the private developer, which can result
in better possibilities of obtaining outside financing. From the perspective of the public authorities, however, the grants are marked by the lack of revolving cash flow, as the funding is
allocated without capital costs or the requirement to pay it back. Consequently, the project
cannot be influenced directly and the public authorities do not participate in the profit and
loss of each development project.
The financial innovations introduced within the scope of the JESSICA initiative tackle exactly
these disadvantages. As already clarified in detail in the previous chapters, loans, guarantees and venture capital all feature the revolving allocation of resources. In contrast to loans
and the associated guarantees, in the case of venture capital it is normally a result of the
nonrecurring sales proceeds upon exiting the project. In this way the much higher costs of
capital can even be covered. Only the allocation of venture capital allows for the public authorities to have far reaching influence on the project, to cause a maximum leverage effect
on the capital resources in the project and to not just participate in the project risks but in the
project profits as well. This is not normally the case when loans and/or guarantees are
granted; though here the management and start-up costs and the necessary costs of capital
can be limited to the project level. Only by awarding venture capital, however, the risk of
crowding out effects can be limited. These effects can arise from the awarding of both grants
and subsidised guarantees and/or loans in comparison to a private loan at market conditions.
Insofar, the supervisory review process required by state aid law should appear to be more
difficult for UDF’s allocating loans rather than venture capital, since equity is normally critical
for development projects. A lack of this component regularly leads to market failure, i.e. the
corresponding project is not carried out.
127
5.2.4 Recommendations for setting up pilot funds
In consequence of the theoretical and empirical evaluation in Chapters 5.2.2 and 5.2.3, the
allocation of venture capital within the scope of UDFs in the pilot phase is clearly recommended. Model III of the (long-term) financier of land development, as shown in detail in
Chapter 5.2.2.2, is the preferred model. The preference for this business model to fund integrated urban development projects within the framework of PPPs can be summarised as follows:
-
The greatest possible influence on the project to the benefit of public interests can be
exerted in each development area only through the employment of public equity (in
the form of venture capital).
-
By establishing project companies with its own legal personality, the UDF can not
only participate in the risks but also the profits and thus a reflux of capital can be realised. The private sector’s freedom of contract in this case allows the greatest possible flexibility in the partnership agreement in terms of possibly asymmetrical profit distribution between the contract partners, possible risk buffers or first loss rules, the distribution of management expenses and naturally the funded land uses and business
purposes within the integrated urban development project. Especially in this area important indications for both the establishment process and the daily business of UDFs
could initially be developed using pilot projects.
-
The central, financial advantage of providing public venture capital through UDFs is
the utilisation of the maximum financial leverage effect, because in the end it is only
through the inexpensive allocation of equity that project developers can obtain additional private equity and especially debt for their own investment purposes.
-
At the same time, a maximum in non-monetary private capital can be integrated into
the urban development project by bringing in the concrete implementation of private
know-how from the areas of project development, the construction industry, financial
management, as well as sales and marketing through the private fund partner.
-
For private funders and partners, the fund construction introduced in Chapter 5.2.2.2
also presents a very advantageous incentive, as the risks to the UDF’s business activities can also be minimised for this group by the purposeful drafting of the partnership agreement. This is because the much more capital intense and risky project development is avoided, the public pre-financing is already given due to the start-up investment in the fund, the possible rules in the partnership agreement mentioned
above (e.g. a first loss rule) signal the considerable reliability of the public fund partner, and finally, a mutual, cooperative interest in the development of the chosen urban development area exists. This is because an enhancement of the corresponding
area also triggers significant increases for the private partner, e.g. in the land value
and rents with a simultaneous decrease in vacancies.
From the perspective of the public funders these opportunities of a Model III UDF as a PPP
can, however, only be realised if they accept the following conditions for implementing the
business model:
-
There has to be a fundamental change in thinking on the side of the public authorities, as has so far only taken place in the area of the microfinancing funds of the
JEREMIE initiative. Public participants have to be ready to act like entrepreneurs,
128
with an eye toward investment and bearing risk. This includes the acceptance of diverse rules in the partnership agreement at both the fund and project level to gain
comprehensive private management and financial know-how. Their know-how is absolutely necessary for the management, refinancing as well as the implementation of
the projects within the scope of the UDFs. Neither the private nor the public participants should dominate public-private partnerships in terms of the goals for the business activities and for the individual projects.
-
For the concrete implementation of the business activities of a land developer, the
public participants should already have designated potential areas to be developed
and improved on the basis of existing, integrated plans. Even though there does not
have to be a concrete ownership of the corresponding area and/or building, there
should be ideas on how to incorporate each of the owners as well as a business plan
for the entire UDF. On the level of the project (companies) plans should include site
and market analyses as well as jointly developed utilisation concepts based on the
forecast cash-flows, similar to a feasibility study in the private sector, in order to quantify the cost, progress and risk in the life cycle of the property to be developed.
-
Only in larger cities which have a sufficient market for commercial project development including corresponding developers and investors and potential users of the
space the development risk can entirely be shifted to the private sector via the alternative fund Model IV, in which the role of a long-term (minority) financial investor with
the same requirements for feasibility and project financing analyses is taken on. This
could consequently lead to greater efficiency in the employment of fund capital, as it
reduces the risk assumption and the possibility of crowding out private financiers.
129
ANNEX 1 – LIST OF WORKING GROUP MEMBERS
Member States
Belgium
Bulgaria (ED)
Czech Republic (ED)
France (ED)
Germany (ED)
Greece
Hungary
Italy (ED)
Luxembourg
Netherlands
Poland
Portugal (ED)
Slovakia (ED)
Slovenia (ED)
Spain
Institutions
European Commission (COM)
Council of Europe Bank (CEB)
European Investment Bank (EIB)
European Parliament (EP)
Organisation for Economic Co-operation and Development (OECD)
ED: Editorial Group Member
Annex 1 – List of working group members
130
ANNEX 2 – CONCLUSIONS AND RECOMMENDATIONS OF THE WORKING GROUP ON
THE IMPLEMENTATION OF THE JESSICA INITIATIVE
Conclusions and Recommendations
of the Working Group on the implementation of the
JESSICA Initiative
(Marseille, 25 November 2008)
In order to implement the Lisbon Strategy well-performing cities will be needed to achieve
socially balanced and environmentally sustainable economic growth. In view of increasing
competition, globalisation and climate change, European cities are facing enormous challenges which require considerable investments. Urban development policy is thus playing an
increasingly important role within the context of EU structural policy.
Although there is a great need for investment, there is at the same time a shortage of capital.
In order to create a larger supply of finance, the private sector and international financing institutions will need to be involved more comprehensively and public funds must be used
more efficiently. The European Commission and the European Investment Bank have therefore launched the JESSICA Initiative (Joint European Support for Sustainable Investment in
City Areas) in cooperation with the Council of Europe Development Bank. Since 2007,
JESSICA has been offering Member States the possibility to introduce resources from EU
structural funds into urban development funds. These funds are to offer revolving, i.e. repayable and possibly interest bearing financial instruments such as equity, loans or guarantees
in order to finance urban development projects. Fund financing can be combined with grants.
Grants will continue to play a crucial role in promoting urban development, as Jessica instruments can only be used to finance projects, or clusters of projects, that are, on the whole,
capable of producing revenues. Furthermore JESSICA can only be implemented on the base
of integrated urban development plans.
At the Informal Ministerial Meeting on Urban Development and Territorial Cohesion in Leipzig
in May 2007, the Ministers welcomed the EU’s JESSICA initiative as a promising instrument
for funding urban development investments. They were of the opinion that a Working Group
should identify and answer the various questions regarding the implementation of the
JESSICA initiative 62 and requested Germany to take the initiative in establishing this working
group.
With the participation of the Member States, the European Investment Bank, the Council of
Europe Development Bank, the European Parliament and the European Commission, the
Working Group has drafted the following conclusions and recommendations:
62
See list of questions in the Conclusions and Recommendations of the Expert Working Group on Loan Financing by the European Investment Bank (EIB) to Promote the Development of Sustainable Cities and
Communities, Annex 1 to the conclusions adopted at the Informal Ministerial Meeting on Urban Development and Territorial Cohesion in Leipzig on 24/25 May 2007.
Annex 2 – Conclusions and reccomendations of the working group
131
I. Conclusions
A. Applications of JESSICA financial instruments
Urban development funds, whether employing Structural Funds and/or other resources, can
make an essential contribution towards achieving the objectives of an integrated urban development as envisioned by the Leipzig Charter. Potential applications include investments in
socially oriented urban growth as well as in ecological urban development and an increase in
the supply of cultural services and events. If Structural Funds are employed the eligibility of
the investments must be verified according to the Structural Funds regulations. Characteristic
examples could be:
-
the regeneration of brownfield sites and the construction of buildings on them (with
subsequent sale or lease);
-
measures to upgrade deprived neighbourhoods or city centres threatened by desertion by creating office and commercial space, business parks and technology centres
for small and medium-sized enterprises, retailers, hotels etc.;
-
sustainable energy supply systems using renewable energies, water supply and
wastewater treatment, public transport;
-
promoting the knowledge economy through schools, universities and institutions for
professional training;
-
investments in the health care system and the social infrastructure, e.g. hospitals, rehabilitation centres, kindergartens;
-
cultural investments in concert halls, art galleries, theatres;
-
leisure facilities such as sports centres, swimming pools and cinemas;
-
modernisation of the existing housing stock (including measures to improve its energy
efficiency) in the new EU Member States.
Projects in the areas of application listed above usually generate revenues which can be
used to reimburse and even pay interests for loans or equity. Profits are not a precondition
for the application of JESSICA. If the revenues fall short of covering the project costs, gaps
can be compensated by combining JESSICA with grants. Neither is economic prosperity of a
city or region a prerequisite for the use of JESSICA financial instruments. On the contrary,
they can also be used to revitalize deprived neighbourhoods.
Urban development funds serve to compensate for market failure. They facilitate investments
which make sense from an urban policy perspective and for which, due to high risks, high financing costs or low revenues, no private funding would have been obtained without public
sector involvement. These key projects often trigger private investments and thus help to
stabilise the economic and social situation in deprived neighbourhoods.
The measures funded through the JESSICA initiative should be located in a way that
strengthens inner cities in line with the vision of the European City.
132
B. Benefits of the use of JESSICA financial instruments
In the view of the Working Group, the use of revolving financial instruments – as opposed to
mere funding through grants – involves the following benefits:
-
JESSICA adds equity, loans, guarantees and others to the range of financial and
funding instruments and through manifold combinations, including grants, makes
flexible and efficient case-by-case solutions possible. It is also possible to provide financial promotion by JESSICA e.g. through soft loans.
-
By means of public sector participation in sharing project risks as well as a reduction
of financing costs by public low-interest loans, additional private capital can be attracted to urban development projects in connection with PPPs. Furthermore, by
sharing investment finance with private investors public authorities are better capable
to spatially steer private investment activities to serve sustainable urban development.
-
Through private sector contribution, additional expertise is brought to the implementation of projects and, at the same time, the private sector is held more accountable for
achieving urban development objectives. Integrated urban development plans which
are a prerequisite for JESSICA funding make sure that social and ecological aspects
are taken into account.
-
The obligation to pay back loans and equity capital increases the pressure to achieve
efficiency in the implementation of projects.
-
Public equity is particularly suitable for risk-sharing because – unlike grants – the
capital will flow back into the public budget if a successful project outcome is
achieved.
-
JESSICA offers the possibility to create a long-term capital stock for urban development measures. Due to the revolving character of the financial instruments, the invested resources, or at least a part of them, will flow back into the funds and can be
reinvested to promote urban development projects.
-
The use of urban development funds allows for the realisation of interest benefits as
the ERDF funds are disbursed to the urban development funds immediately when the
fund has started operating. Capital which has not yet been invested into actual projects by the fund can be invested for interest earnings.
According to sections A and B JESSICA may play a significant role for the increase in efficiency of public funding.
C. Design of urban development funds
The approach of the JESSICA initiative is to offer revolving financial instruments through
funds. The advantage of funds is that they diversify risks and are thus able to maintain the
fund capital on a long-term basis (sustainable funds). How a fund should be organized in order to obtain optimum efficiency from an economic perspective depends mainly on the characteristics and the level of risk of the urban development investments it finances. Funds differ
particularly in terms of their size and diversification, public and private funding sources as
well as in the financial instruments offered.
133
The Working Group believes that the following points should be emphasized:
-
The size of the fund depends on the risks of the investments to be funded: the higher
the risks which projects entail, the higher should be the financial volume of the fund
such that fund capital can be invested in as many different projects as possible.
-
On one hand, private capital involvement in the fund makes more financial resources
available, however, on the other hand, it restricts the funding spectrum of the fund as
market-rate interest will have to be paid on private capital. As an alternative, it is possible to involve private capital only at project level.
-
The financial instruments depend on the requirements of the individual project. Typical urban development measures, for example, mainly require venture capital in their
initial phase which is characterised by low returns and high risks, whereas increasing
use of loans can be made when the project starts yielding returns.
-
Loan and guarantee funds offering mainly long-term loans at favourable interest rates
are particularly suitable for financing investments in the existing housing stock in the
new Member States. By providing special financial products, hereby complementing
the services offered by private banks and building societies, urban development
funds can contribute to a broader use of private loans for housing investments.
-
Funds can be national, regional and urban funds, as well as funds tailored to individual sectors (site redevelopment, housing in the new Member States etc.) which offer
financial instruments adapted to specific projects. Funds can be mere financing institutions or, at the same time, act as development companies. In the latter case, it is
possible to draw on both financial as well as urban development expertise. Urban development funds can further provide technical and economic advice (e.g. on the optimum composition of financing packages for specific investment types).
In order to ensure that the urban development funds will use the resources from the structural funds in line with the urban policy objectives of the managing authority, the managing
authority can set requirements for integrated urban development plans and lay down appropriate provisions in the funding agreements concluded with the fund. The managing authority
can further be represented in the supervisory bodies of the fund.
The case studies which were examined prove that in some Member States, revolving financial instruments will already meet with favourable starting conditions for a broad application
such that a practical implementation as aimed at by JESSICA seems possible.
D. Legal framework
An important practical obstacle to the establishment of urban development funds were some
unresolved legal issues in connection with the Structural Funds Regulations. For this reason,
the Working Group has collected the most important questions of the Member States, developed its own positions on these questions and submitted the list of questions to the
COCOF 63 The questions referred to issues such as public procurement legislation, the design of integrated urban development plans, the reutilisation of capital returned to the funds
and exit policies for funds. The Commission’s answers were published in the guidance note
63
COCOF: Committee for the Coordination of the Funds.
134
COCOF/08/0002/02. Further clarifications were made in an answer of the Commission from
12 September 2008 to questions submitted by the JESSICA Expert Working Group.
II.
Recommendations
On the basis of the conclusions, the Working Group makes the following recommendations:
1. Member States should complement grants by urban development funds employing
Structural Funds and/or other resources in order to enjoy the benefits of the financial
engineering instruments as set out in section B of the conclusions above. The case
studies included in the report of the Working Group may serve as an illustration of the
application of JESSICA instruments.
2. Member States or managing authorities should consider to use JESSICA instruments
when implementing their operational programmes, a specific reference to JESSICA in
the operational programme not being a prerequisite;
3. Any future revision of the operational programmes for the period 2007–2013 could
also be considered an opportunity for dedicating more resources of the Structural
Funds to urban development, using the JESSICA initiative;
4. Member States wanting to gain initial experiences themselves should establish pilot
urban development funds. In doing so, attention should be paid that the financial volume of the pilot funds must be in economically reasonable relation to the risks of its
investment strategy.
5. Member States should consider the establishment of a holding fund which pools the
structural funds contribution to urban development funds and could provide expertise
for drawing up memoranda of association, statutes, business plans and funding
agreements as well as other forms of technical assistance related to the fund operations.
6. The new EU Member States should consider establishing JESSICA housing funds.
Depending on the individual national context, they could offer financial instruments
not available on the market, e.g. (low-interest) loans with a long duration (about 20
years), guarantees and junior loans on favourable terms. The funds could further offer
financing advice for owners of dwellings.
7. Members States should examine if – alongside the results of the Working Group – existing know-how of the European Investment Bank, the Council of Europe Development Bank and other competent authorities can be used to establish urban development funds. Evaluation studies carried out by the European Investment Bank and cofinanced by the European Commission are offered free of charge to interested Member States or managing authorities to help them in the implementation of JESSICA.
Local planners, urban development companies and private investors should be involved in the discussion process in order to develop reasonable criteria to select projects, in combination with appropriate financial instruments.
8. Member States or their agents should advance the establishment of integrated urban
development plans which, based on financial and economic assessment procedures,
e.g. cost-benefit analyses, and with public participation, discuss and weigh the key
135
development objectives. They should be the basis for determining which projects are
suitable for JESSICA funding.
9. Member States should create national frameworks which favour an increased significance of JESSICA funding. A key contribution to achieving this objective could be
supporting PPP models and creating a financing and funding culture which does not
only involve grants, but also financing through JESSICA financial instruments, as well
as through the European Investment Bank (e.g. by use of the Structured Finance Facility), the Council of Europe Development Bank and other banks.
10. By means of targeted publicity campaigns, Member States may contribute to increasing the visibility of the JESSICA financial instruments so that this financing option is
included in the considerations of all actors involved in urban development measures.
11. In order to ensure high quality urban financing on a permanent basis, Member States
should exchange their experiences with urban development funds to further the transfer of know-how and the clarification of any future legal and operational questions.
136
ANNEX 3 – STATEMENT OF THE MINISTERS IN CHARGE OF URBAN DEVELOPMENT ON
JESSICA (MINISTERIAL POLICY PAPER)
25. November 2008
JESSICA,
FINANCIAL ENGINEERING TOOL FOR
INTEGRATED URBAN DEVELOPMENT
The Ministers
-
noted that extensive investment will be required for the implementation of projects for
sustainable urban development in order for cities to be able to answer the challenge
of climate change and of growing competition due to globalisation.
-
considered that to overcome the financing constraints resulting from these challenges, urban development policy must be willing to adopt new approaches;
-
therefore considered it necessary to encourage greater private sector involvement in
the funding of urban development and to exhaust all potential efficiencies with regard
to the use of public funds;
-
considered that the EU’s financial engineering tool of the cohesion policy, JESSICA,
could make an important contribution to these objectives.
-
underlined the broad range of possible applications for JESSICA.
The Ministers stated that the EU’s financial engineering tool of the cohesion policy,
JESSICA, thus contributes towards achieving the objectives of integrated urban development, as envisioned in the Leipzig Charter.
The Ministers suggested that the Member States take into consideration the conclusions and
recommendations of the JESSICA expert working group (enclosed at Annex 1). At the same
time, they underlined that grants would continue to play an important role in the future as
JESSICA can only be used to finance projects, or clusters of projects, that are, on the whole,
capable of producing revenues. They underlined the fact that JESSICA can only be implemented on the basis of integrated urban development plans.
-
- It widens the range of instruments to provide financial assistance to urban development investments, thus facilitating the development of case-by-case funding strategies, which may include both grants and JESSICA instruments. The resulting gains in
efficiency could help to launch more urban development investments with the public
funds available.
-
The obligation to pay back loans and equity capital strongly increases the motivation
to achieve efficiency in the implementation of urban development projects.
-
Due to the revolving character of the JESSICA funds, the resources dedicated to urban development can be used in this field on a long-term basis.
-
Through PPP financing, the public sector could better steer private capital and expertise to foster sustainable urban development, as envisioned by the Leipzig Charter.
Annex 3 – Ministerial policy paper
-
137
The integrated urban development plans, which are a prerequisite for JESSICA funding, provide a good opportunity to pool environmental, economic, and social goals
thereby promoting the sustainable development of cities at the appropriate territorial
scale.
The Ministers thanked the Commission for its second guidance note 64 on financial engineering presented at the coordination committee for the funds and its replies to the questions
submitted by the JESSICA Expert Working Group.
The Ministers suggested that
64
-
Member States should be encouraged to create national frameworks that will facilitate
the use of JESSICA instruments;
-
managing authorities should consider using JESSICA instruments when implementing their Operational Programmes; a specific reference to JESSICA in the Operational
Programme not being a prerequisite;
-
any future revision of the Operational Programmes for the period 2007–2013 could
also be considered as an opportunity for dedicating the Structural Funds to urban development, using the financial engineering tool JESSICA;
-
urban development funds, whether employing Structural Funds or other resources,
may be established in order to benefit from the advantages of the JESSICA framework. As a first step, pilot funds could be mobilized to assess the practical benefits of
JESSICA;
-
the financial engineering tools may be tailored to the characteristics and the level of
risk linked to investment in integrated sustainable urban development;
-
targeted publicity campaigns should be launched to increase urban development
stakeholders’ awareness of JESSICA;
-
based on practical experience in the use of the JESSICA framework in matters of urban development in the present structural funds period, all the possibilities of facilitating the use of JESSICA should be examined with respect to what will happen after
2013;
-
Member States, the EU and the financing institutions involved should implement a follow-up process to the expert working group to promote, in particular, the transfer of
know-how and the clarification of any future legal and operational questions.
COCOF/08/0002/00.
Annex 3 – Ministerial policy paper
138
ANNEX 4 – FINAL STATEMENT BY THE MINISTERS IN CHARGE OF URBAN
DEVELOPMENT
EU urban development ministers met in Marseille on 25 November 2008 at the invitation of
the French Presidency of the Council of the European Union to discuss the following topic:
"The sustainable and inclusive city".
The European Commissioner for Regional Policy, representatives of the European Parliament, representatives of the Committee of the Regions and the Economic and Social Council
as well as representatives from the EIB attended the meeting.
The Presidency also welcomed representatives from candidate countries for accession to the
European Union, neighbouring countries and several non-governmental organisations.
The meeting formed part of a set of three linked informal meetings, covering housing and territorial cohesion as well, allowing all these essential components of any integrated urban development policy to be addressed together.
This meeting took place in a context of global financial economic and social crises which
could have a considerable impact on the lives of our fellows-citizens and on whole sectors of
our economies. We have to use these pressures as an incentive to keep a firm steer in favour of sustainable and cohesive urban development, the only way to maintain new growth
without creating any territorial and social disparities.
The need for an urban approach of public policies
-A- In historical and cultural terms, cities are a fundamental and decisive part of European
identity. They determine the polycentric structure of European territory and cover up to 70
per cent of the European population. The cities are a social reality and a reflection of social
and political choices. As an interactive point of connection between the social, economic, political and environmental domains, and between players in the institutional, private and voluntary sectors, cities are a major positive force in and for Europe. As key players in global
competitiveness, they are the main drivers of economic development and innovation. They
are large centres of employment, business-to-business services and higher educational and
research institutions, providing the services and social and cultural networks needed to ensure that residents enjoy a good quality of life and to foster social cohesion. Their diversity in
terms of their size, form and methods of governance is an asset that we should capitalise on.
Because cities mobilize the diverse potentials and promote sustainable economic growth,
they are at the core of the Lisbon Strategy and the EU Sustainable Development Strategy.
-B- European cities face some major challenges: social cohesion challenge, environmental
challenge, particularly the impact of climate change, and challenge of competitiveness in the
context of globalisation; the new global energy situation; the financial and economic crises.
Cities will have to deal with the tensions and risks of fragmentation of their territories, while
simultaneously searching for excellence, integrating new sections of the population and
showing solidarity with the most vulnerable people.
Annex 4 – Final statement by the ministers in charge of urban development
139
Sustainable and cohesive integrated urban development
-C- The complexity of this new context calls for deep changes by the adoption of a multisectoral approach. By linking governance, the environment, the economy and social inclusion,
and by combining global and local approaches, blending the very short term with the long
term, sustainable development emerges as an opportunity to look at urban problems in a different light and to develop new ways of tackling them. Those in charge of urban policies
need to adopt an integrated approach to develop sustainable and inclusive towns and cities.
-D- These challenges represent opportunities to innovate and create new, better quality jobs
that are accessible to all, particularly the most vulnerable members of society. Social inclusion policies require simultaneously addressing the issues of economic development, access
to employment, education, and training and to decent, affordable housing and high quality
transport. Such an integrated approach helps prevent the social inequalities that might represent a hindrance to innovation, economic prosperity and our ability to live together. Sustainable cities are necessarily cohesive, that is to say welcoming, functional and a source of social progress for all.
-E- These issues bring collective and individual behaviour patterns into play. This is why
members of civil society and urban residents themselves have a key part to play in designing, developing and managing sustainable and cohesive cities. The complexity of these issues requires local authorities to work with competent urban development professionals in
both the public and private sectors, with the support of the financial institutions.
-F- The sustainable city forms part of an open economy. The trading and other relationships
of the sustainable city contribute to an overall momentum, and rely in large part on local production and on optimising the commercial, logistical and transport functions.
-G- Urban and rural areas are interdependent. As a logical progression of the EU sustainable
development Strategy, the Territorial Agenda and the Leipzig Charter call for a new approach
to the relationship between urban and rural environments and to partnerships between urban
and rural territories at the scale of functional areas, in order to secure balanced development
of all areas based on respect for their diversity. This approach is necessary to ensure fair access to services. Additionally, urban-rural cooperation is necessary in addressing issues related to the development of business clusters, of energy economy, of renewable energysources, and of the preservation of natural resources, including more particularly water and
the landscape. Transborder cities are very important for a sustainable, cohesive and integrated urban development in Europe, They have a crucial role in the European cities networks .
-H- This integrated approach needs to take into account the range of scales on which cities
function from neighbourhoods to the largest urban areas. It must also be based on multi-level
governance to enable coordination between the various local, regional, national and European levels which have an impact on urban development.
-I- At the European level, numerous initiatives have been launched in favour of urban development which include the integration of the urban dimension in the ERDF Operational Pro-
140
grammes, exchange of experiences through the URBACT programme, the Thematic Strategy on the Urban Environment, capitalising knowledge through the Urban Audit 65 .
-J- Ministers paid tribute to the work carried out in 2008, under the Slovenian presidency of
the EU. Under the French presidency, they went on with their considerations in order to:
1) give effect to the commitments of the Leipzig Charter
2) take into account climate change
3) facilitate the use of the cohesion policy for integrated urban development projects.
-1- Implementing the Leipzig Charter in favour of integrated sustainable urban development
The Ministers:
65
66
-
recognising the role played by the cities to foster territorial cohesion as asserted for
the first time in the European Commission’s Green Paper on territorial cohesion,
-
welcoming the resolution of the European Parliament on monitoring the Territorial
Agenda and the Leipzig Charter 66 , especially the importance of an action programme
for the implementation of the targets of the Leipzig Charter,
-
recalling the conclusions of the Council on the contribution of architecture to the different components of sustainable development, technical, cultural, and also environmental, economical and social,
-
taking note of the final report of the working group on Action1.1 of the first Action
Programme for the implementation of the Territorial Agenda presented by Slovenia,
which invites to a better coordination between urban and territorial policies and constitutes a pre-requisite for the integrated sustainable urban development,
-
aware of their responsibility for ensuring appropriate spatial policies that support more
balanced development of cities and regions while respecting their specificities,
-
having regard to the major role of local authorities who are accountable for a large
part of sustainable urban development policies, in accordance with the subsidiarity
principle; paying tribute to the initiatives of exchange of knowledge on the application
of the Leipzig Charta by the local authorities, as in the Cities Forum which will take
place in Montpellier on 2 & 3 December,
-
confirming their support for the concept of "Baukultur" as set out in the Leipzig Charter,
-
underlining the importance and the relevance of the different approaches and examples presented by the study on "The levers of public action for the development of
sustainable cities",
European statistical databasewhich in cludes 330 indicators and 321 cities of the European Union
(www.urbanaudit.org).
“Towards a European action plan for spatial development and territorial cohesion “ (PA_TA(2008)0069).
-
141
recognising the importance of urban statistics and comparative indicators at the European level and of the coordination of the information in order to be able draw a comparative picture between cities and to benchmark them; and acknowledging thework
of the European Commission’s Urban audit in this regard,
1.1 confirm the commitments they made on adopting the Leipzig Charter, particularly their
commitment to support deprived city neighbourhoods where the future of the cities is at
stake, for a large part; and recommend a regular follow-up of the application of the Leipzig
Charter through the meetings of ministers in charge of urban development;
1.2 propose to continue exchanges of views on the implementation of the Leipzig Charta and
Territorial Agenda in a prospect of territorial cohesion;
1.3 reassert their commitment to reinforce the urban dimension of the EU Sustainable Development Strategy (Göteborg Strategy), and of the Lisbon strategy for growth and employment;
1.4 propose to work for the improvement of knowledge of the city and to reinforce through
training the know-how and the skills, of individuals in partnership with key professional institutes and organisations;
1.5 propose to consider the key role of architecture and urban quality in the process of integrated and sustainable urban development, giving particular attention to heritage, creative
and innovative architectural solutions and thus achieve better quality of living environment;
1.6 propose, working with local and regional authorities, to implement integrated urban development policies in order to ensure greater coherence between urban functions (housing,
social and economic activities, education and training, culture and leisure), to develop the
levers of public action for the development of sustainable cities; those policies must be in accordance with the circumstances in each country /territory and pay a particular attention to
coordination between urban and rural policies and to cross-border dynamics;
1.7 are in favour of a greater consistency between urban functions and of the concurrent implementation of policies of local economic development, education of young people, urban
planning and development, and access to high quality transport, including public transport,
for the benefit of residents of deprived neighbourhoods;
1.8 affirm their commitment to carry on with and reinforce the work of the Urban Audit coordinated by the Statistical Office of the European Communities (Eurostat), with the national
statistical offices and cities of the European Union involved in this; 1.9 note the conclusions
and recommendations of the Jessica (Joint European Support for Sustainable Investment in
City Areas – a tool of financial engineering in favour of sustainable urban development –
working group appended to the present document. The countries involved in this process
emphasise that the Jessica tool could be an important lever for completing ambitious urban
development projects;
1.10 decide to build a reference framework for the sustainable city, in a spirit of solidarity, for
the application of the Leipzig Charter, based on the appendix attached to this statement; for
this purpose invite all actors in urban policy, including the representatives of the cities, the
European institutions, the Non Governmental Associations and mainly the cities networks,
the scientific and technical organisations and professional associations, to take part in a collective and open process.
142
-2- Taking account of climate change in line with urban development
The Ministers:
-
in line with the European strategy for sustainable development and urban environment; and with international agreements on sustainable development
-
welcoming the adoption of the European Commission's Green Paper on adapting to
climate change in Europe;
-
conscious that a significant proportion (69 per cent) of European greenhouse gas
emissions are produced in cities and that combating climate change requires an integrated approach to public policy, more particularly by optimising energy efficiency in
transport, buildings and public spaces and by reducing the carbon footprint in urban
development operations, in line with local, regional, national and European levels;
-
considering that climate change is not only an environmental challenge for governments and cities but also an economic opportunity to strengthen their competitiveness at a global level and create new jobs; that innovation in tackling and mitigating
the effects of climate change and adapting to its consequences is a factor in increasing the attractiveness of particular areas; and is also a factor in conserving resources,
more particularly water resources;
-
considering, given the risk of aggravating fuel poverty associated with the effects of
climate change and the energy crises and underlining that the need and participation
of all social and economic stakeholders have to be taken into account in policies to
support sustainable development and fight against climate change ;
-
conscious of the need to take urgent action to support sustainable urban mobility for
all, emphasising the need to provide deprived sections of the population with urban
transport that meets their needs and supporting initiatives to open up deprived
neighbourhoods by improving access to transport services;
2.1 suggest to the European Commission that it should take into account the role of cities
and regions in its ongoing work on climate change mitigation and adaptation ; and underline
the importance of investments in this field as one of the solutions to the financial and economic crises;
2.2 invite the relevant authorities to set up integrated urban sustainable energy-climate mobility policies taking into account the environmental, economic and social dimensions together;
2.3 propose that European research programmes should examine the consequences of climate change on the most deprived sections of the population, and underline the importance
of partnership between enterprises and universities;
2.4 propose to promote exchange of best practices and networking at national, cross-border
and cross-national levels, and knowledge capitalisation; underline the importance of such
networks, and more particularly the European Urban Knowledge Network (EUKN) and the
specialized European networks of local authorities 67 as well as of the dialogue with cities in
third party countries; with a view to asking the European Commission to support the efforts to
67
Energie-citeshas a data base of 500 good practices (www.energie-cites.eu).
143
capitalise on the results and data gathered as part of the Urban Audit, the activity of the
ESPON observatory, the Urbact programme, the data and analysis of the European Environmental Agency and European research programmes;
2.5 encourage local authorities and other bodies, where appropriate, to carry out an initial
assessment of the measures currently under way and draw up territorial climate strategies in
conjunction with the national planning documents, the local Agenda 21 programmes, and the
local urban planning documents;
2.6 undertake to strengthen cooperation between countries to develop greenhouse gas reduction strategies in urban areas, in line with the objectives set by the European Union;
2.7 undertake to promote the role of urban planning in adapting climate change and mitigating its impacts and in this view to promote the compact city and act to ensure that sustainable urban development contributes to this and to limiting urban sprawl; support the exchange of ideas on the tools to be used in this regard with particular attention to addressing
this issue upstream in the planning system;
2.8 undertake to promote appropriate policies to improve the energy efficiency of existing
and new buildings in both the public and private sectors and the use of renewable energy.
-3- Promoting the use of cohesion policy in support of urban integrated development
The Ministers,
-
taking into account the important role of the Cohesion policy in favour of sustainable
integrated urban development, and, in particular, through fostering the urban dimension of the Operational Programmes,
-
acknowledging the publication by the Commission at the time of the meeting of Ministers of the working document by the Directorate-General for Regional Policy entitled
“Fostering the urban dimension – Analysis of the Operational Programmes cofinanced by the European Regional Development Fund (2007–2013)”
3.1 welcome the fact that that the urban dimension of the Operational Programmes is being
taken more into account, leading notably to a significant increase in the proportion of ERDF
funds over the 2007–2013 period;
3.2 propose to promote integrated urban operations in the framework of the implementation
of the Operational Programmes ; in this respect invite managing authorities to ensure support
to integrated urban projects and of the involvement of the cities and local stakeholders concerned;
3.3 invite the Commission to update its analysis of the ways and means of taking the urban
dimension more into account through cohesion policy when it publishes its strategic report on
economic and social cohesion in 2010 on the basis of the reports expected from the Member
States in 2009, in accordance with Article 30 of Council regulation 1083/2006 of 11 July
2006.
144
ANNEX 5 – FIRST COCOF-NOTE
Note of the Commission services on Financial Engineering in the 2007–2013 programming
period
DOC COCOF/07/0018/01-EN FINAL
16 July 2007 Final version
Note of the Commission services
on
Financial Engineering
in the
2007–2013 programming period
This note has been prepared by the Directorates-General for Regional Policy and for Employment, Social Affairs and Equal Opportunities.
A draft of this note was discussed on 25 April 2007 in the Committee for the Coordination of
the Funds (COCOF).
The note sets out the reading that the two Directorates-General will give to the relevant articles of the Regulations on this issue in their dealings with Member States.
1. Definitions: "Operation" and "beneficiary" in the case of financial engineering under Article 44 of Regulation 1083/2006.
1a) Operation
In respect of financial engineering instruments under Article 44 of Regulation 1083/2006,
such as venture capital funds, guarantee funds, loan funds and urban development funds,
the 'operation' is constituted by both the contribution from an operational programme to the
financial engineering instrument, and the subsequent investment by that financial engineering instrument in, or provision of loans or guarantees to, enterprises, or urban projects, within
the scope of the operational programme. The operational programme can of course be regional or national.
As is clear from the first subparagraph of Article 44 of Regulation 1083/2006, the operation
necessarily includes the contribution from an operational programme to a financial engineering instrument. That provision states that the Structural Funds may finance expenditure "in
respect of an operation comprising contributions to support financial engineering instruments
for enterprises, … such as venture capital funds, guarantee funds and loan funds, and for urban development funds".
It follows from Article 2 (3) of Regulation 1083/2006 that the operation also necessarily comprises investment in, or provision of loans and guarantees to, enterprises or urban projects.
This provision defines 'operation' as "a project or group of projects … allowing achievement
Annex 5 – First COCOF Note
145
of the goals of the priority axis to which it relates". It is the provision of assistance, by way of
equity investment, loans and guarantees, to enterprises or urban projects that will allow
achievement of the priority axis' goals and this investment or provision of loans and guarantees must therefore be considered as part of the operation.
For the avoidance of doubt, since an operation comprises contributions from a given operational programme to a financial engineering instrument for use within the scope of that operational programme, it is possible to have contributions from more than one operational programme to the same financial engineering instrument.
In such cases, the holding fund and the financial engineering instrument must keep separate
accounts or maintain an adequate accounting code for the contribution from each operational
programme, for reporting and audit purposes, in order to ensure compliance with Article
60 (d) of Regulation 1083/2006 and Article 15 of Regulation 1828/2006.
1b) Beneficiary
Article 2 (4) of Regulation 1083/2006 defines beneficiary as an operator, body or firm,
whether public or private, responsible for initiating or initiating and implementing operations.
The beneficiary is the financial engineering instrument itself. It is the financial engineering instrument itself which implements the operation through the provision of assistance to enterprises or urban projects, by way of equity investment, loans and guarantees.
This is confirmed by Article 78 (6) of Regulation 1083/2006, according to which the eligible
expenditure accepted at closure is that effectively paid by a financial engineering instrument
in implementing the operation.
Where holding funds are used, they initiate operations comprising contributions to support financial engineering instruments. In such cases, holding funds are beneficiaries since they
are responsible for initiating operations (cf. Article 2 (4) of Regulation 1083/2006). For the
purposes of Article 78 (6) of Regulation 1083/2006, the eligible expenditure to which the cofinancing rate will apply at closure will be the amount paid out by the holding fund and which
has in turn been invested, provided or committed as a guarantee, or paid in eligible management costs, under sub-paragraphs (a), (b), (c) and (d) of Article 78 (6) of Regulation
1083/2006.
2. Implementing financial engineering: selection of holding funds, selection of
financial engineering instruments, selection of operations, management costs,
major projects
2a) Selection of holding funds
Article 44 of Regulation 1083/2006 lays down two forms for implementing financial engineering operations organised through holding funds.
The first of these, set out in Article 44 (a), is through the award of a public contract in accordance with applicable public procurement law.
146
The second possibility, laid down in Article 44 (b), involves the award of a grant. Article
44 (b) of Regulation 1083/2006 provides that financial engineering operations organised
through holding funds may be implemented "in other cases, where the agreement is not a
public service contract within the meaning of public procurement law, [through] the award of
a grant, defined for this purpose as a direct financial contribution by way of donation".
This second possibility is defined by distinguishing it from the first. Thus, it applies where the
agreement [between the national authority and the holding fund] is not "a public service contract within the meaning of public procurement law" and where it can be qualified as a grant.
Where the agreement between the national authority and the holding fund is not "a public
service contract" and it can be qualified as a grant, Article 44 provides for a grant to be given
directly to the EIB or the EIF or, if pursuant to a national law compatible with the Treaty, a financial institution. A grant, for the purposes of Article 44, is defined as a "direct financial contribution by way of donation".
The term "donation" as used here therefore concerns the case of grant contributions
from operational programmes to European or national financial institutions serving
public policy objective. It is different from the purchase of services under public procurement provisions.
In addition, the grant from operational programmes to holding funds implies no loss of responsibility by the relevant authorities for those resources under the Structural Funds regulations. Such grants to holding funds, have no impact on the definition of the functions and exercise of responsibilities of the managing, certifying and audit authorities concerning investment in financial engineering instruments of contributions from operational programmes to
holding funds, and the subsequent investment of such contributions in enterprises, primarily
SMEs, or in urban projects. In this context attention is drawn to the specific control and audit
requirements set out by the Structural Funds regulations, with a view to ensuring the legality
and regularity of expenditure, and sound use of public funds.
Regarding national law compatible with the Treaty allowing the direct award of a grant for the
purposes of Article 44 (b) (ii) to a national (or regional as the case may be) financial institution, it is expected that the law will:
a) designate the financial institution in question;
b) present the public policy objectives justifying the direct award of a grant to it; and
c) justify the existence within this financial institution of the expertise necessary for the successful accomplishment of the holding fund tasks.
In its Declaration on Article 44 of Regulation 1083/2006, the Commission encourages Member States and managing authorities to select a holding fund "by awarding a grant" to the EIB
or the EIF. The Commission’s Declaration reflects the special status of the EIB and the EIF
as Community bodies which emanate from the EC Treaty.
147
2b) Selection of financial engineering instruments – Selection of operations
and role of managing authorities and monitoring committees
A transparent procedure for the selection of financial engineering instruments 68 and for taking decisions on contributions from operational programmes to them, should be applied by
the managing authority or the holding fund, as the case may be. This selection procedure
should be based on specific and appropriate selection criteria relating to the objectives of the
operational programme, criteria which should be approved by the monitoring committee.
The managing authority or the holding fund, as the case may be, should examine whether
their contributions from operational programmes to specific financial engineering instruments
would correspond to public procurement of services governed by the EC or national public
procurement law. In this event, managing authorities or holding funds should act in accordance with applicable Community and national rules. Article 44 of Regulation 1083/2006
should not be read as meaning that where holding funds are not used to organise financial
engineering instruments, there is no obligation to comply with applicable public procurement
law.
Where operations comprising financial engineering instruments are financed by the Structural Funds, the business plan of candidate financial engineering instruments must be submitted and evaluated in accordance with Articles 43 (2) and 44 of Regulation 1828/2006, either by the managing authority or by the holding fund.
The managing authority or the holding fund should select financial engineering instruments
and sign funding agreements with them (cf. Articles 43 (5), 43 (6) and 44 of Regulation
1828/2006). Where possible, more than one financial engineering instrument should be
selected, with a view to producing the best possible leverage effects for scarce public resources contributed by the operational programme, and in order to involve any available energy, resources and expertise of good quality from the private sector, and to achieve the investment and development objectives of the operational programme.
In the case of financial engineering organised through holding funds, a funding agreement
between the managing authority and the holding fund should, pursuant to Article 44 (2) (c) of
Regulation 1828/2006, make provision for the appraisal, selection and accreditation of financial engineering instruments by the holding fund. Where such funding agreements include
specific provisions for the criteria applicable to the selection of operations, these criteria
should be considered and approved by the monitoring committee (cf. Article 65 (a) of Regulation 1083/2006).
2c) Management costs eligible for the Structural Funds
Management costs eligible for the Structural Funds may not exceed, on a yearly average,
the ceilings set out by Article 43 (4) of Regulation 1828/2006, unless a competitive procedure
reveals that higher ceilings might be necessary. The rates referred to in this Article to calculate the ceilings of management costs are applicable to contributions from operational programmes to holding funds or to financial engineering instruments.
68
The term "financial intermediaries" is also used in Article 44 (2) of Regulation 1828/2006 to characterise
those bodies, which may subsequently be selected as financial engineering instruments.
148
The eligible amounts of management costs are calculated having regard to contributions
from the operational programme to the holding fund or financial engineering instruments, as
the case may be. The term 'contributions from the operational programme' should be understood as referring to the EC and national public funds, as well to private funds if the priority
axis concerned is expressed in total cost, that are set out as originating from the operational
programme in the funding agreement provided for by Articles 43 (5), 44 (1), and 44 (3) of
Regulation 1828/2006.
The funding agreement may envisage front-loaded payment of management costs which exceeds the limits set out by Article 43 (4) of Regulation 1828/2006 for one or more years, such
as for example the first years of the programming period. This payment structure might be
justified by the fact that holding funds or fund managers may incur significant costs before investments, loans or guarantees in enterprises effectively take place.
However, the eligible management costs for the Structural Funds, at the partial or final
closure of operational programmes, should not exceed, averaged on a yearly basis over
that part of the programming period for which the holding fund or financial engineering instrument effectively manages an operation, the limits set out in Article 43 (4) of Regulation
1828/2006.
The rates for management costs in Article 43 (4) of Regulation 1828/2006 are maximum
rates, unless an open competitive procedure reveals that higher rates are necessary. The
Commission expects the managing authority or holding fund to negotiate management costs
in accordance with the principles of sound financial management.
It is recommended that the funding agreements link the remuneration to the amounts which
will finally be actually invested in, or loaned out or committed as guarantees to, enterprises.
Actual expenditure is a condition of the eligibility at closure of the expenditure other than
management costs, under Article 78 (6) of Regulation 1083/2006. Linking eligible management costs to the volume of finance contributed from operational programmes and finally
disbursed to or committed for guarantees to enterprises, would create an incentive for holding funds and financial engineering instruments to be active in promoting development and
expansion of enterprises and in particular SMEs.
2d) Contributions from operational programmes to holding funds or financial
engineering instruments as possible major projects
Contributions from operational programmes to venture capital, loan or guarantee funds for
enterprises, primarily SMEs, constitute operations or projects in the sense of Article 2 (3) of
Regulation 1083/2006. Such contributions must be subsequently invested in, loaned out or
committed for guarantees. Such investments, loans or guarantees do not constitute an "indivisible task of a precise economic or technical nature" within the meaning of Article 39 of
Regulation 1083/2006, and hence they cannot be considered to be a major project.
Where a single equity investment or single guarantee commitment, co-financed by an operational programme pursuant to Article 44 of Regulation 1083/2006, made in respect of a single
enterprise is in excess of 50 million euros, it could constitute a major project, and a procedure under Articles 40 and 41 of Regulation 1083/2006 should be launched.
149
Contributions from operational programmes to urban development funds could be invested in
urban projects constituting an "indivisible task of a precise economic or technical nature".
Such investments in urban projects could be considered, where appropriate, to be major projects within the meaning of Article 39 when their total cost exceeds 25 million euros in the
case of environment and 50 million euros in other fields.
3. State aid and financial engineering
3.1 Contributions from operational programmes to holding funds
The Commission has already made clear, in point 3.2 of the Community Guidelines on State
Aid to promote Risk Capital investments in Small and Medium sized Enterprises 69 , that it
considers that "[i]n general, […]an investment fund or an investment vehicle is an intermediary vehicle for the transfer of aid to investors and/or enterprises in which investment is made,
rather than being a beneficiary of aid itself. However, […] measures involving direct transfers
in favour of an investment vehicle or an existing fund with numerous and diverse investors
with the character of an independent enterprise may constitute aid unless the investment is
made on terms which would be acceptable to a normal economic operator in a market economy and therefore provide no advantage to the beneficiary".
Where Member States or managing authorities implement an operation comprising contributions to support financial engineering instruments through holding funds, in the forms provided for in Article 44 (b) of Regulation 1083/2006, provided the conditions enunciated above
are respected, the holding fund would be simply initiating investments and would be an intermediary vehicle and so would not be a beneficiary of aid, as is set out in the abovementioned point 3.2 of the Community Guidelines on Risk Capital.
Point 3.2 of the Community Guidelines on Risk Capital also sets out the Commission's view
that, "aid to the fund's managers or the management company will be considered to be present if their remuneration does not fully reflect the current market remuneration in comparable situations."
The ceilings for the management costs of the holding fund, capped at a yearly average of 2
per cent in accordance with Article 43 (4) of Regulation 1828/2006, reflect current market
remuneration. Provided these ceilings continue to reflect market remuneration, payment of
management costs to holding funds should not constitute State aid to them.
3.2 Investments in financial engineering instruments and SMEs
When contributions from operational programmes to financial engineering instruments are
invested, loaned or committed for guarantees in enterprises, primarily SMEs, or urban projects, state aid may be present. State aid rules must then be respected by Member States
and managing authorities, assisted by the holding fund where appropriate.
69
OJ C 194, 18.8.2006, p. 2.
150
4. Retention of supporting documents for expenditure under financial engineering instruments
The retention of supporting documents for expenditure by the Structural Funds is required in
order to prove that the funding conditions at the various levels, including that of the small or
medium-sized enterprise (SME), have been observed. To determine what supporting documents have to be kept and by whom, it is necessary to look at the funding conditions and
how their observance is documented.
The conditions imposed on an SME receiving funds (venture capital or loans) or guarantee
cover, generally include:
a) the start-up or expansion of business activity, where such activity is capable of
contributing to regional development in accordance with the purposes of the
Structural Funds set out in Articles 158 and 160 of the EC Treaty;
b) the transfer of shareholdings (venture capital) or the making of repayments
and the payment of interest or guarantee premia;
c) acceptance of monitoring and reporting obligations over the period of the investment, loan or guarantee; and
d) compliance with Community and national legislation, including State aid rules
and environmental and equal opportunities legislation.
In the majority of cases, it is not a condition that the SME must incur expenditure on particular goods and services, which might be required, for example, for specific investment projects. Instead the capital, loan or guarantee is often given to the SME for the development or
expansion of its general business activity, including necessary working capital.
The supporting documents attesting to observance of these funding conditions may include:
a) application forms with supporting documents, including business plans and
previous annual accounts, checklists and reports of the venture capital fund or
loan intermediary assessing the application, and entry in a commercial register;
b) the signed investment, loan or guarantee agreement (guarantee agreements
are often between the loan intermediary and the guarantee fund, and the enterprise is therefore not always involved);
c) reports by the enterprise, reports on visits and board meetings, annual accounts, and reports by the loan intermediary to the guarantee fund supporting
claims; and
d) environmental approvals, equal opportunities reports, and declarations made
in connection with receipt of de minimis aid.
Evidence of expenditure in the form of receipted invoices and proof of payment for goods
and services by the enterprise is only required as part of the audit trail to justify financial assistance from the Structural Funds where the equity, loan or guarantee offered to an SME is
conditional on certain expenditure on particular goods and services. However, in all cases,
there must be proof of the transfer of the capital or loan by the venture capital fund or loan intermediary to the enterprise.
151
It is the responsibility of the managing authority to ensure that supporting documents are
kept for three years after the partial or final closure of the operational programme (Article 90
of Regulation 1083/2006). It can be decided that they should be kept by the venture capital
fund, loan intermediary or guarantee fund (or the loan intermediary whose loans are underwritten) or by the SME. However, the normal expectation is that the venture capital fund,
guarantee fund or loan intermediary would keep all the documents required, and only where
the equity, loan or guarantee offered to an SME is conditional on certain expenditure on particular goods and services would it be necessary to audit documents in the SME itself. In that
latter case the SME would be obliged to keep documents for the entire period required by EC
law, instead of only for the period required under national law.
152
ANNEX 6 – SECOND COCOF-NOTE
EUROPEAN COMMISSION
COCOF 08/0002/03-EN
DIRECTORATE-GENERAL
REGIONAL POLICY
Final version of 22 December 2008
GUIDANCE NOTE ON FINANCIAL
ENGINEERING
DISCLAIMER:
"This is a Working Document prepared by the Commission services. On the basis of the applicable Community Law, it provides technical guidance to the attention of public authorities,
practitioners, beneficiaries or potential beneficiaries, and other bodies involved in the monitoring, control or implementation of the Cohesion policy on how to interpret and apply the
Community rules in this area. The aim of the working document is to provide Commission's
services explanations and interpretations of the said rules in order to facilitate the implementation of operational programmes and to encourage good practice(s). However this guidance
Annex 6 – Second COCOF Note
153
is without prejudice to the interpretation of the Court of Justice and the Court of First Instance
or evolving Commission decision making practice."
This note has been prepared by the Directorates-General for Regional Policy and for Employment, Social Affairs and Equal Opportunities, in consultation with other Commission services.
The note sets out the reading that the Commission services will give to the issues set out in
the note in their dealings with Member States. It should be read together with COCOF note
COCOF/07/0018/01 of 16 July 2007. Section A of the note provides guidance on contributions to holding funds, other financial engineering instruments and enterprises, PPPs or other
urban projects. Section B provides guidance on other issues related to the implementation of
financial engineering that have been raised by Member States.
A. Contributions to holding funds, other financial engineering instruments and
enterprises, public private partnerships (PPPs) and projects
1) Level 1: Selection of a holding fund under Article 44 of Regulation (EC)
No 1083/2006
1.1. Selection of the EIB/EIF as a holding fund
The mandate which the EIB or EIF may be given by Member States or managing authorities
to act as a holder of holding funds under Article 44(b)(i) is not subject to public procurement
rules. The reasons for this are set out below.
The relationship between the EIB and its members, i.e. the Member States, is governed by
primary law in an exclusive, self-contained and institutional manner. Thus, as a result in the
present context, market related public procurement rules do not apply within this privileged
relationship. If and when Member States and/or their designated authorities wish to call on
the EIB's financing facilities, they may do so without having to observe the procedures set
out in Directive 2004/18/EC. Conversely, if and when the EIB wishes to offer its financial facilities to the Member States and/or their designated authorities, it may do so without having
to follow procedures launched under Directive 2004/18/EC before being allowed to conclude
financing agreements.
Article 159, first subparagraph, EC Treaty empowers the Community to support the
achievement of the objectives set out in Article 158 by actions which it takes, inter alia,
through the European Investment Bank. The EIB may thus be mandated by the Community
to assume special financial tasks in support of economic and social cohesion.
By designating the EIB as a potential holder of holding funds in Article 44(b) of Regulation
(EC) No 1083/2006, the legislator has mandated the EIB to assist interested Member States
and/or their designated authorities in the implementation of specific financial engineering instruments designed to support economic and social cohesion throughout the 2007–2013 programming period. The detailed rules concerning these financial engineering instruments and
the additional provisions applicable to holding funds are set out in Articles 43 to 46 of Commission Regulation (EC) No 1828/2006.
154
Among the latter rules, Article 44(1) of Regulation (EC) No 1828/2006 requires the interested
Member State or managing authority to conclude a funding agreement with the holding fund,
which shall, inter alia, set out the "terms and conditions for contributions from the operational
programme to the holding fund". It is up to the parties to the funding agreement how the holding fund will be organised and what level of control or supervision the managing authority will
retain over the activities of the holding fund. As public procurement rules do not apply to the
mandate given to the EIB or EIF in the funding agreement, it will not be necessary to establish whether the funding agreement is a public procurement contract within the meaning of
Article 1 of Directive 2004/18/EC and Article 1 of the Directive 2004/17/EC.
The foregoing also applies, mutatis mutandis, to holding funds held by the European Investment Fund (EIF). Indeed, The EIF has its legal basis under primary Community law in Article
30 of the Statute of the European Investment Bank. It was established by the Board of Governors of the EIB through the approval of its Statutes on 14 June 1994, as amended on 19
June 2000 70 . Its tasks are set out in Article 2 of these Statutes and comprise its contribution
"to the pursuit of Community objectives". As another "existing Financial Instrument" it is being
referred to in Article 159, first subparagraph, EC Treaty, alongside the EIB. Likewise, it is
mentioned alongside the EIB in Article 44(b) of Regulation (EC) No 1083/2006.
1.2. Selection of a financial institution other than the EIB or EIF as a holding fund
A financial institution other than the EIB or EIF may be chosen as a holding fund either by
way of public procurement or by way of a grant, without a call for proposal if this is pursuant
to a national law compatible with the Treaty.
A number of factors distinguish a grant from a public procurement. A public procurement
contract is defined in Article 1 of Directive 2004/18/EC and Article 1 of the Directive
2004/17/EC.
In general, a public contract will have the following features:
-
a product or service is procured, by a contracting authority (or entity) for needs falling
within its remit in return for consideration (i.e., price or other consideration);
-
the terms of the service or product are set out in detail by the contracting authority in
the tender documents;
-
the successful tenderer will be contractually bound to comply with the terms of the
award;
-
the contracting authority or entities will normally bear 100% of the contract consideration;
-
the contract is bilateral: it imposes reciprocal obligations on the contracting authority
and the product or service provider, with the latter providing the contracting authority
or a third party or parties designated by it with the product or service it has ordered.
The contracting authority monitors provision of the product or service it has ordered;
-
the result of a procurement procedure is a contract.
In general, a grant will have the following features:
70
OJ C 225of 10 August 2001, p.2.
155
-
a contribution is made either to an action or project carried out by a grantee which
falls primarily within the scope of the grantee's activities or direct to the grantee because its activities contribute to policy aims of the grantor, such action or project of
the grantee normally being in the interest of the grantor;
-
the application for financing originates with the grantee, who submits a proposal for
support for activities it is carrying out or plans to carry out; its proposal sets out the
specifications for the action to be performed, which may be within a pre-set legal or
other framework laid down in advance by the grantor;
-
ownership will normally remain with the grantee, although it is possible in some cases
for the financial contribution to revert to the grantor at the end of an action;
-
the grant does not necessarily finance the total cost of the action;
-
the financial contribution of the grantor should not be in consideration of any product
or service provided by the grantee to the grantor;
-
conditions can be attached to the grant awarded, but there is no direct and specific
link between individual obligations on either side (grantor and grantee), although the
grantor has the right to monitor technical implementation of the action and the use
made of the funds granted;
-
the grant must not have the purpose or effect of producing a profit for the grantee;
-
the outcome of a grant award procedure is a grant agreement or a grant decision.
National authorities will have to ascertain, on a case-by-case basis, whether the structure
they are planning to implement is a grant or a public procurement and it is their responsibility
to comply with any and all applicable laws.
2) Level 2: Contributions to financial engineering instruments other than holding funds
Managing authorities and holding funds must assess whether their contribution to a financial
engineering instrument such as venture capital, loan, guarantee or urban development fund
is a public procurement of services governed by EC or national public procurement law and
comply with any such applicable law. The conditions for contributions to financial engineering
instrument other than holdings funds are set out in Article 43 of Regulation 1828/2006, and
they are further explained in point 2(b) of COCOF note COCOF/07/0018/01 of 16 July 2007.
They must also comply with any applicable State aid rules concerning such contributions
(see point 3 of the COCOF note COCOF/07/0018/01 of 16 July 2007). Article 43(7) of Regulation (EC) No 1828/2006 requires managing authorities to "take precautions to minimise distortion of competition in the venture capital or lending markets", and sets out how returns
from equity investments and loans may be used (see point 3 below).
Where a non-repayable contribution is given to a financial engineering instrument, the managing authority should ensure that interest generated and resources returned to the financial
engineering instrument will be re-used by the instrument for the benefit of urban development
projects or of enterprises.
156
3) Level 3: Recycling of Contributions to Enterprises, PPPs and Projects
Pursuant to Article 43(1) of Regulation (EC) No 1828/2006, the provisions on financial engineering of that Regulation apply to "financial engineering instruments in the form of actions
which make repayable investments or provide guarantees for repayable investments" in enterprises, public private partnerships or other urban projects included in integrated plans for
sustainable urban development.
To qualify as financial engineering under that Regulation and under Regulation (EC) No
1083/2006, it is therefore necessary that the contribution to the enterprises, public private
partnerships or other urban projects is not in the form of a non-repayable contribution, but as
a repayable investment or a guarantee for a repayable investment. The intention of the legislator is clear, that resources returned should be re-used for the benefit of urban development
projects or of enterprises.
Indeed, Article 78(7) of Regulation (EC) No 1083/2006 expressly provides that "resources returned to the operation from investments undertaken by funds as defined in Article 44 or left
over after all guarantees have been honoured shall be reused by the competent authorities
of the Member State concerned for the benefit of urban development projects or of small and
medium sized enterprises". For loan and venture capital funds, the resources returned include interest and loan repayments and capital gains.
Any private contribution to an operation or a financial engineering instrument should be returned to the private entity that contributed it, and not to the competent public authority of the
Member State. Indeed, Article 43(7) of Regulation (EC) No 1828/2006 provides that "returns
from equity investments and loans, less a pro rata share of the management costs and performance incentives, may be allocated preferentially to investors operating under the market
economy investor principle … and they shall then be allocated proportionally among all cofinanced partners or shareholders."
It is recommended that returned resources be re-used in the region(s) covered by the operational programme and that re-use should be through financial engineering instruments, with a
view to ensuring further leverage and recycling of public money.
The funding agreement between the managing authority and the financial engineering instrument must, further to Article 43(6) of Regulation (EC) No 1828/2006, include an exit policy for the contribution from the operational programme out of the venture capital, loan, guarantee or urban development fund. Similarly, further to Article 44(2) of the same regulation, an
exit policy for the holding fund out of the venture capital, loan, guarantee or urban development fund must be included in the funding agreement between the managing authority and
the holding fund.
B. Other implementation issues related to financial engineering
1) Possibility to combine interest subsidies and financial engineering instruments
157
Contributions from operational programmes may co-finance repayable investments such as
loans which are combined with interest subsidies in a single financing package. In such
cases, interest subsidies may be considered to be a part of the financial engineering instrument and of the repayable investment, in the sense of Article 44 and 78(6) of Regulation
(EC) No 1083/2006 and Article 43(1) of Regulation (EC) No 1828/2006.
National authorities must comply with applicable state aid rules.
2) Integrated urban development plans
The Structural Funds regulations for the period 2007–2013 do not include a definition of, or
specific requirements for, an “integrated plan for sustainable urban development”. Consequently, these should be defined by Member States and managing authorities, taking account of Article 8 of Regulation (EC) No 1080/2006 and the specific urban, administrative
and legal context of each region.
Section 2.1 of the Community Strategic Guidelines on Cohesion 2007–13 71 is helpful in this
respect. It specifies that "the preparation of a medium- to long-term development plan for
sustainable urban development is generally a precondition for success as it ensures the coherence of investments and of their environmental quality. This will also help to secure the
commitment and participation of the private sector in urban renewal. In general, a multidisciplinary or integrated approach is needed. For area-based actions, for example, to promote
social inclusion, this requires that actions seeking to improve the quality of life (including the
environment and housing) or the level of services to citizens are combined with actions to
promote the development of new activities and job creation in order to secure the long-term
future of the areas concerned. The new JESSICA initiative is designed to promote and facilitate the development of financial engineering products to support projects included in integrated urban development plans. In general, integrated support services and programmes
should have a focus on those groups which are most in need, such as immigrants, young
people and women. All citizens should be encouraged to participate in both the planning and
delivery of services."
3) Audit trail for contributions from operational programmes to urban development funds investing in projects which include components that are not eligible for the Structural Funds
It is possible that public private partnerships or other urban projects in which urban development funds invest include components that would not be eligible for Structural Funds assistance.
To ensure a clear audit trail allowing expenditure eligible under the Structural Funds to be
distinguished from ineligible expenditure, urban development funds must maintain a separate
accounting system or use a separate accounting code for co-financed expenditure down to
the final level of the project. There should be clear identification of the capital contributed
71
Council Decision of 6 October 2006 on Community strategric guidelines on cohesion (2006/702/EC), OJ
L291 of 21.10.2006.
158
from each operational programme to the urban development fund and the expenditure which
is eligible under the Structural Funds, to permit verification that any expenditure declared to
the Commission is eligible under the Structural Funds regulations for 2007–2013 and under
applicable national eligibility rules. An adequate audit trail is necessary for reporting and audit purposes, in accordance with Article 60 (c), (d) and (f) and Article 90 of Regulation (EC)
No 1083/2006 and Article 15 of Regulation (EC) No 1828/2006.
4) Interaction between rules on revenue-generating projects and financial engineering under Article 44 of Regulation (EC) No 1083/2006
4.1. Financial engineering instruments and investments by urban development funds
in PPPs
Recital 26 of Regulation (EC) No 1828/2006 acknowledges that contributions to financial engineering instruments from an operational programme or other public sources as well as the
investments made by them in individual enterprises are subject to rules on State aid. Where
a contribution or investment is subject to State aid rules, it will not be subject to paragraphs 1
to 5 of Article 55 of Regulation 1083/2006, by virtue of Article 55(6) of the same
Regulation 72 .
The following four paragraphs refer to contributions and investments where State aid is not
present.
The financial profitability of the project is vital for the purposes of Article 55 in determining
whether any Community contribution should be provided and, if so, the level of the contribution to be provided. As recalled in COCOF note on revenue generating projects, "financial
profitability", within the meaning of Article 55, is the ability of a project to generate additional
resources (i.e., profits), independently of how the project is financed. If a project is economically viable or profitable without a contribution from the Funds, application of Article 55 will
mean that no contribution from the Funds should be made to it.
By contrast, the very aim of financial engineering operations is to provide financial support
through financial engineering instruments to enterprises and public-private partnerships
(PPP) and urban development projects, and for such financial support to be repaid, with interest or with a gain, so that resources returned can be re-used for the benefit of enterprises,
PPPs or projects. There are even specific rules on how resources returned from financial engineering operations should be re-used (see Article 78(7) of Regulation (EC) No 1083/2006
and 43(7) of Regulation (EC) No 1828/2006).
Thus, instead of applying the rationale in paragraphs 1 to 5 of Article 55 to financial engineering operations, which would have entailed a reduction in the financing given by the amount of
any resulting interest or gain, the legislator has set out a specific regime for such operations
which instead involves resources returned being re-used to finance other enterprises, PPPs
or projects. Indeed, there is a presumption that the target investments to which finance is
provided (enterprises, PPPs or projects) will be economically viable overall, and Article 43(2)
159
of Regulation 1828/2006 requires an assessment of the economic viability of the investment
activities of the financial engineering instrument 73 . The profitability of financial engineering
support is thus relevant to the decision to make the contribution to an enterprise, PPP or project but is not a determining factor when establishing the level of that contribution from the
Funds, as is the case for projects subject to paragraphs 1 to 5 of Article 55.
Applying paragraphs 1 to 5 of Article 55 to financial engineering operations, whereby finance
in the form of equity, loans or guarantees is provided to an enterprise, PPP or project, would
thus undermine their very purpose by reducing the financial support available to potentially
economically viable enterprises, PPPs and projects.
For these reasons, paragraphs 1 to 5 of Article 55 of Regulation (EC) No 1083/2006 do not
apply to financial engineering within the meaning of Article 44 of Regulation 1083/2006 and
Section 8 of Regulation (EC) No 1828/2006.
72
73
Article 55 (6) excludes from the application of paragraphs 1 to 5 of Article 55 projects which are subject to
State aid rules.
Article 45 of the same Regulation goes further in providing that investments shall only be made in activities
"the managers of the financial engineering instruments judge potentially economically viable." It further provides that investments shall not be made in firms in difficulty.
160
ANNEX
COMMISSION SERVICES REPLIES TO THE QUESTIONS SUBMITTED BY THE
JESSICA EXPERT WORKING GROUP OF MEMBER STATES
Question 1: Combination of ERDF and ESF in the case of financial engineering
–Article 34(2) Reg. (EC) 1083/2006
Integrated urban development actions are likely to need interventions which could be financed under both ERDF and ESF, for example actions covering remediation of land; development of business premises; training support for entrepreneurs etc. We presume therefore
that both ERDF and ESF can support JESSICA type financial instruments and the 10 per
cent modulation facility of Article 34 (2) could also be used at the level of a JESSICA fund.
Reply
Urban development funds may receive contributions from operational programmes cofinanced either by the ERDF or by the ESF. In this respect, it should be recalled that contributions from operational programmes to financial engineering instruments are subject to the
provisions on the scope of intervention of each Fund, laid down by Regulation (EC) No
1080/2006 for the ERDF and Regulation (EC) No 1081/2006 for the ESF.
The possibility offered by Article 34 (2) of Regulation 1083/2006 for both the ERDF and the
ESF to finance actions falling within the scope of assistance of the other Fund, in a complementary manner and subject to a limit of 10 per cent of Community funding for each priority
axis of an operational programme, can be used in respect of urban development funds. In
this regard, it should be recalled that the third paragraph of Article 8 of Regulation (EC) No
1080/2006 permits the 10 per cent to be increased to 15 per cent of the programme or priority axis concerned in the context of ERDF funding of measures under the Regional competitiveness and employment objective in respect of sustainable urban development.
Where an urban development fund receives support from more than one operational programme, keeping separate accounting for contributions from each operational programme to
financial engineering instruments-urban development funds is necessary, as indicated in the
last paragraph of point 1a) of COCOF note 07/0018.
Question 2: Article 44 Reg. (EC) 1083/2006 and compliance with EU and national public procurement legislation
Question 2.1: Operations financed by the Funds shall comply with the provisions of the
Treaty and of acts adopted under it, Article 9 (5) Regulation (EC) 1083/2006 esp. with procurement law and State aid provisions. When operations are organised through holding
funds the Managing Authority shall – under certain conditions – implement them through the
award of a grant to a financial institution without a call for proposal (Article 44 (2) (b) (ii)).
As there is no provision in the regulation for the case that operations are not organised
through holding funds the question turns up if in this case the Managing Authority could also
award a grant to a financial institution for implementing and running an Urban Development
Fund?
161
Reply
The managing authority is responsible for assessing whether the contribution it intends to
give to a financial institution is a public procurement of services governed by EC or national
public procurement law and comply with any such applicable law. Where public procurement
law is not applicable, and if there is no holding fund, a managing authority can award a grant
to a financial institution for implementing and running an urban development fund. In this
case, the managing authority must ensure that all applicable laws are complied with, including State aid rules and national legislation on grants.
Question 2.2: As without the existence of an urban development fund a Managing Authority could always award ERDF loans to urban development projects, e.g. by mandating its
public bank without a tendering procedure, we presume that is also possible in the framework of an UDF. In this case, the agreement would also – comparable to the conditions mentioned in Article 44 for holding funds – not be a public service contract and the Managing Authority would give a donation to the public bank.
Reply
Article 43 (3) of Regulation (EC) No 1828/2006 provides that "financial engineering instruments, including holding funds, shall be set up as independent legal entities governed by
agreements between the co-financing partners or shareholders or as a separate block of finance within a financial institution". This provision means that a separate block of finance
within a financial institution such as a bank, can be a financial engineering instrument (it is
recalled in this respect that urban development funds are also financial engineering instruments, as is made clear by Article 43 (1) (b) of Regulation (EC) No 1828/2006).
A contribution from an operational programme to a financial engineering instrument, which
may take the form of a loan, with a view to the subsequent financing of repayable investments in enterprises or urban projects, may be considered as an "operation" within the
meaning of Article 2 (3) of Regulation (EC) No 1083/2006, provided that the provisions of Articles 44 and 78 (6) and 78 (7) of Regulation (EC) No 1083/2006, and Articles 43–46 of
Regulation (EC) No 1828/2006, are respected (see also COCOF note I on financial engineering 2007/0018, point 1a).
Concerning the question of the award of a grant by the managing authority to a financial engineering instrument, including banks, please see the reply to the previous question 2.1.
Question 2.3: Is a tendering procedure required for the selection of private partners in publicly created UDF's, without the existence of a Holding Fund?
Reply
The selection of private partners in financial engineering instruments, including urban development funds, created on the initiative of public entities may correspond to the procurement
of public services. Member States and managing authorities must assess this, and comply
with applicable legislation. Article 44 of Regulation 1083/2006 should not be read as
meaning that where holding funds are not used to organise financial engineering instruments, there is no obligation to comply with applicable public procurement law.
162
Question 2.4: Are there further pertinent Community regulations to be observed?
Reply
Applicable Community and national law must be respected. The law applicable will depend
on the operations being envisaged.
Question 3: Integrated Urban Development Plan under Article 44 of Reg. (EC)
1083/2006
Article 44 states that projects supported by the new financial instruments shall be included in
an integrated plan for sustainable urban development. Are there any requirements on EU
level concerning the content and the degree of detail of integrated urban development plans?
Could one recur to the term of integrated urban development plans used in the URBAN
framework? We expect that, if an UDF is established for a specific Urban Development Plan,
its activity could also be limited to a specific area of a city within the Plan.
Reply
The second note to COCOF on Financial Engineering, point B. 2) Integrated urban development plans, states that:
"The Structural Funds regulations for the period 2007–2013 do not include a definition of, or
specific requirements for, an “integrated plan for sustainable urban development”. Consequently, these should be defined by Member States and managing authorities, taking account of Article 8 of Regulation (EC) No 1080/2006 and the specific urban, administrative
and legal context of each region.
Section 2.1 of the Community Strategic Guidelines on Cohesion 2007–2013 is helpful in this
respect. It specifies that "the preparation of a medium- to long-term development plan for
sustainable urban development is generally a precondition for success as it ensures the coherence of investments and of their environmental quality. This will also help to secure the
commitment and participation of the private sector in urban renewal. In general, a multidisciplinary or integrated approach is needed. For area-based actions, for example, to promote social inclusion, this requires that actions seeking to improve the quality of life (including the environment and housing) or the level of services to citizens are combined with actions to promote the development of new activities and job creation in order to secure the
long-term future of the areas concerned. The new JESSICA initiative is designed to promote
and facilitate the development of financial engineering products to support projects included
in integrated urban development plans. In general, integrated support services and programmes should have a focus on those groups which are most in need, such as immigrants,
young people and women. All citizens should be encouraged to participate in both the planning and delivery of services."
If an urban development fund is established for a specific Urban Development Plan, its activity can be limited to a specific area of a city within the Plan.
Question 4: Article 53 (4) of Regulation (EC) 1083/2006, Co-financing rates for
the assistance from the Structural Funds
When creating an UDF the full amount of capital shall in principle first be financed by the MS
or private investors and then be included in a statement of expenditure in order to get the
163
structural funds money. Anyhow, Article 53 (4) accepts under certain conditions a 100 per
cent ERDF financing. We assume that this provision would also apply in case of JESSICA
type financial instruments.
Reply
Article 53 (4) of Regulation (EC) No 1083/2006 is applicable to financial engineering under
Article 44 of Regulation (EC) No 1083/2006.
Question 5: Financial engineering and Article 55 of Regulation (EC) 1083/2006
about Revenue-generating Projects
Article 55 stipulates that in case of revenue-generating projects the eligible expenditure shall
not exceed the current value of the investment cost less the current value of the net revenue
from the investment (e.g. a toll bridge). In case of JESSICA type financial instruments an obligation to deduct revenues from the investment would impede the financial sustainability of
the fund and be contradictory to the idea of JESSICA. We assume therefore that – as COM
recently confirmed to the German Land Brandenburg – Article 55 does not apply to financing
of urban development funds.
Reply
Point B.4) Interaction between rules on revenue-generating projects and financial engineering under Article 44 of Regulation (EC) No 1083/2006 of the second note to COCOF on Financial Engineering states that:
"4.1
in PPPs
Financial engineering instruments and investments by urban development funds
Recital 26 of Regulation (EC) No 1828/2006 acknowledges that contributions to financial engineering instruments from an operational programme or other public sources as well as the
investments made by them in individual enterprises are subject to rules on State aid. Where
a contribution or investment is subject to State aid rules, it will not be subject to paragraphs 1
to 5 of Article 55 of Regulation 1083/2006, by virtue of Article 55 (6) of the same
Regulation 74 .
The following four paragraphs refer to contributions and investments where State aid is not
present.
The financial profitability of the project is vital for the purposes of Article 55 in determining
whether any Community contribution should be provided and, if so, the level of the contribution to be provided. As recalled in COCOF note on revenue generating projects, "financial
profitability", within the meaning of Article 55, is the ability of a project to generate additional
resources (i.e., profits), independently of how the project is financed. If a project is economically viable or profitable without a contribution from the Funds, application of Article 55 will
mean that no contribution from the Funds should be made to it.
By contrast, the very aim of financial engineering operations is to provide financial support
through financial engineering instruments to enterprises and public-private partnerships
(PPP) and urban development projects, and for such financial support to be repaid, with in74
Article 55 (6) excludes from the application of paragraphs 1 to 5 of Article 55 projects, which are subject to
State aid rules.
164
terest or with a gain, so that resources returned can be re-used for the benefit of enterprises,
PPPs or projects. There are even specific rules on how resources returned from financial engineering operations should be re-used (see Article 78 (7) of Regulation (EC) No 1083/2006
and 43 (7) of Regulation (EC) No 1828/2006).
Thus, instead of applying the rationale in paragraphs 1 to 5 of Article 55 to financial engineering operations, which would have entailed a reduction in the financing given by the amount
of any resulting interest or gain, the legislator has set out a specific regime for such operations which instead involves resources returned being re-used to finance other enterprises,
PPPs or projects. Indeed, there is a presumption that the target investments to which finance
is provided (enterprises, PPPs or projects) will be economically viable overall, and Article
43 (2) of Regulation 1828/2006 requires an assessment of the economic viability of the investment activities of the financial engineering instrument 75 . The profitability of financial engineering support is thus relevant to the decision to make the contribution to an enterprise,
PPP or project but is not a determining factor when establishing the level of that contribution
from the Funds, as is the case for projects subject to paragraphs 1 to 5 of Article 55.
Applying paragraphs 1 to 5 of Article 55 to financial engineering operations, whereby finance
in the form of equity, loans or guarantees is provided to an enterprise, PPP or project, would
thus undermine their very purpose by reducing the financial support available to potentially
economically viable enterprises, PPPs and projects.
For these reasons, paragraphs 1 to 5 of Article 55 of Regulation (EC) No 1083/2006 do not
apply to financial engineering within the meaning of Article 44 of Regulation 1083/2006 and
Section 8 of Regulation (EC) No 1828/2006."
Question 6: Re-use of resources returned to operations under Article 78 (7) of
Regulation (EC) 1083/2006
Question 6.1 Interest generated by payments from OPs to funds as defined in Art 44, shall
be used to finance urban development projects. Resources returned to the operation shall be
reused by the competent authorities of the Member States concerned for the benefit of urban
development projects.
Since it is stated that interest can be used to “finance urban development projects” we take
this to also include any form of expenditure necessary to prepare projects for financing, such
as feasibility studies, obtaining planning consents, and other such technical assistance expenditures related to the structuring of the project or the financing thereof, and which are defined at national level as eligible expenditure in accordance with Article 56 (4) of the same
Regulation. Does the COM agree with this interpretation?
Reply
The first subparagraph of Article 78 (7) of Regulation (EC) No 1083/2006 lays down that interest generated by payments from operational programmes to urban development funds
shall be used to finance urban development projects. The Commission services agree that
75
Article 45 of the same Regulation goes further in providing that investments shall only be made in activities
"the managers of the financial engineering instruments judge potentially economically viable." It further provides that investments shall not be made in firms in difficulty.
165
Article 56 (4) of Regulation (EC) No 1083/2006, providing that the rules on the eligibility of
expenditure shall be laid down at national level, is applicable in this case too.
We also recall the COCOF note II on financial engineering, point A (3) fifth paragraph of
which recommends that:
"It is recommended that returned resources be re-used in the region(s) covered by the operational programme and that re-use should be through financial engineering instruments, with a
view to ensuring further leverage and recycling of public money."
Question 6.2: We assume that the “competent authorities” need not be the Managing Authorities.
Reply
The "competent authorities of the Member States" referred to in the second paragraph of Article 78 (7) of Regulation (EC) No 1083/2006 need not be managing authorities and can be
other national authorities.
Question 6.3: Resources returned to the fund must be re-used for the benefit of urban development projects. Anyhow, as COM confirmed to the German Land Brandenburg, we assume that these resources need not to be reinvested in the geographical area of the OP and
need not to conform with ERDF Regulations again.
Reply
Paragraphs 3 and 5 of point A.3) Level 3: Recycling of Contributions to Enterprises,
PPPs and Projects of the second note to COCOF on Financial Engineering state that:
"...Article 78 (7) of Regulation (EC) No 1083/2006 expressly provides that "resources returned to the operation from investments undertaken by funds as defined in Article 44 or left
over after all guarantees have been honoured shall be reused by the competent authorities
of the Member State concerned for the benefit of urban development projects or of small and
medium sized enterprises".
[...]
It is recommended that returned resources be re-used in the region(s) covered by the operational programme and that re-use should be through financial engineering instruments, with a
view to ensuring further leverage and recycling of public money."
Question 6.4: Where co-financing is being provided from national private sector or other
“external” sources, it would be inappropriate to assume that the amount repaid would be required to be “reused” by the competent authorities. We presume that the reuse provisions
outlined above would only apply to the amounts contributed by the Managing Authority to the
urban development fund and not to a private co-financing.
Reply
Point A.3) Level 3: Recycling of Contributions to Enterprises, PPPs and Projects of the
second note to COCOF on Financial Engineering, in particular its paragraph 4, states that:
166
"Any private contribution to an operation or a financial engineering instrument should be returned to the private entity that contributed it, and not to the competent public authority of the
Member State. Indeed, Article 43 (7) of Regulation (EC) No 1828/2006 provides that
"[r]eturns from equity investments and loans, less a pro rata share of the management costs
and performance incentives, may be allocated preferentially to investors operating under the
market economy investor principle … and they shall then be allocated proportionally among
all co-financed partners or shareholders."
Question 6.5: At what point can a contribution from the Structural Funds, which has been
invested by the fund in a project, be returned from the fund to the competent authority to be
re-used for urban development projects? (After the end of the Structural funds Period in
2013? After a closure of the Fund, irrespective of whether this takes place before or after the
end of 2013? At the time and to the extent that a given amount flows back from a project to
the fund?)
Reply
Point A.3) Level 3: Recycling of Contributions to Enterprises, PPPs and Projects of the
second note to COCOF on Financial Engineering, in particular its paragraph 6, states that:
"The funding agreement between the managing authority and the financial engineering instrument must, further to Article 43 (6) of Regulation (EC) No 1828/2006, include an exit policy
for the contribution from the operational programme out of the venture capital, loan, guarantee or urban development fund. Similarly, further to Article 44 (2) of the same Regulation, an
exit policy for the holding fund out of the venture capital, loan, guarantee or urban development fund must be included in the funding agreement between the managing authority and
the holding fund."
It is for the parties to the funding agreements to determine the exact time when returns to
funds can be returned to the competent authority to be re-used for urban development projects. It would be reasonably expected that this would happen at the closure of the fund. In
this way it could be ensured that during the entire period of the life of the fund finance is
made available to PPPs and other urban development projects (or to enterprises, in the case
of venture capital, loan or guarantee funds).
Question 7: Article 7, 1b of Regulation 1080/2006 – Purchase of Land
According to Article 7, 1b of the Regulation 1080/2006 the purchase of land for an amount
exceeding 10 per cent of the total eligible expenditure for the operation concerned shall not
be eligible for a ERDF contribution. Does this regulation also apply if urban development
funds give loans to enterprises purchasing land or invest in those enterprises?
Reply
Article 7 (1) (b) of Regulation (EC) No 1080/2006 is applicable to the investments by means
of equity, loans or guarantees made by urban development funds, where the latter use resources contributed by operational programmes to invest in PPPs or other urban projects. In
this respect, the definition of an operation in financial engineering is relevant, and reference
should be made to point 1a) of COCOF note 07/0018/01 of 16 July 2007.
167
Question 8: Article 8 of Regulation 1080/2006 and Commercial Projects
The ERDF may, where appropriate, support the development of participative, integrated and
sustainable strategies to tackle the high concentration of economic, environmental and social
problems affecting urban areas. These strategies shall promote sustainable urban development through activities such as: strengthening economic growth, the rehabilitation of the
physical environment, brownfield redevelopment etc. We assume that consequently also
commercial projects like shopping malls, offices, hotels etc. would be eligible.
Reply
Investments by urban development funds by means of equity, loans or guarantees in commercial projects, such as shops, offices, entertainment, cultural and sport facilities, may be
eligible for contributions from operational programmes co-financed by the ERDF, provided
that such commercial projects: a) are part of an integrated urban strategy as described in Article 8 of Regulation (EC) No 1080/2006, b) they comply with the Structural Funds legislation,
and c) they comply with national eligibility rules within the meaning of Article 56 (4) of Regulation (EC) No 1083/2006.
Question 9: Article 43 (4b) of the Regulation 1828/2006 – Management Costs
Is it possible to agree a fixed rate for management costs (e.g. 3 per cent of final investment)
without the need for the management to prove the real management costs?
Reply
There is no express provision in the Structural Funds Regulations on the use of a fixed percentage for management costs of financial engineering instruments and holding funds. Reference should be made by the contracting parties to applicable national eligibility rules in
this respect.
If the holding fund or financial institution is chosen through a public procurement procedure, it
is up to the parties to fix the rate and regard does not need to be had to precise and detailed
management costs.
Where, however, the contribution from operational programmes is given as a grant (other
than to the EIB or EIF), the presence of a profit may indicate that it is a public procurement
and not a grant (see point 1.2 of COCOF II Note on financial engineering).
For example, Commission services have considered the following categories of costs of financial engineering instruments or holding funds as eligible management costs compatible
with the principles of sound and efficient management, in the past:
-
Staff costs, including travel and subsistence expenses, the cost of offices, equipment,
IT systems, consumables and supplies, directly linked to the management and investment of contributions from operational programmes to financial engineering instruments and holding funds; such costs being incurred in carrying out activities such
as selection and tendering procedures, controls, monitoring and reporting, consultancy, information and publicity.
-
Overheads of the financial institution acting as a financial engineering instrument or
holding fund in the management and investment of the contribution from the operational programme(s).
168
In any case, appropriate evidence should be kept by holding funds or financial engineering
instruments, allowing them to demonstrate that management costs paid by operational programmes of the Structural Funds, effectively correspond to sound and efficient management
principles.
In any event, the question of what constitutes eligible management costs is dealt with in the
first instance by national rules pursuant to Article 56 (4) of Regulation (EC) No 1083/2006.
Question 10: Article 43 (6c) and Article 44 (2) (h) and (i) of the Regulation
1828/2006 – Exit Rules and Winding Up provisions
The funding agreement between the Managing Authority and the UDF shall also include an
exit policy for the contribution from the operational programme out of the financial engineering instrument. We understand that this would be the correct way to withdraw ERDF funds
from the UDF if e.g. for certain reasons the investments to be financed by the fund can no
longer be implemented. We assume that these funds would be used as if they had not been
placed in the UDF and must be returned to the corresponding M.A.. (Financial assets which
have not been spent at all must be returned to Structural Funds; if they have been spent they
must be reinvested for urban development).
Reply
The requirement set out by Article 43 (6) of Regulation (EC) No 1828/2006 regarding the inclusion of an exit policy in the funding agreement signed between a managing authority or
the holding fund and a selected financial engineering instrument, concerns the definition of
the precise conditions for returning to the managing authority, or to another designated competent public authority, resources attributable to the public expenditure from an operational
programme contributed and invested in financial engineering instruments, including any return earned by it, after one or more full cycles of investment in enterprises or urban projects
have been made and completed by the financial engineering instrument.
The precise conditions for withdrawing resources attributable to public expenditure contributed from operational programmes to financial engineering instruments in cases of conflict
between the managing authority and the financial engineering instrument or the holding fund,
or in case of incapacity of the financial engineering instrument to carry out investments, etc,
should also be included in the funding agreement.
Where the managing authority proceeds with a contribution from an operational programme
to a holding fund or financial engineering instrument, but does not declare this expenditure to
the Commission and hence does not receive a corresponding interim payment from the
Structural Funds, the Commission services consider that it would not be irregular for the
managing authority to withdraw resources from the holding fund or financial engineering instrument.
However, where the contribution from an operational programme to a holding fund or financial engineering instrument has been declared to the Commission and has been the subject
of an interim payment from the Structural Funds, the Commission services would seriously
discourage the contribution from the operational programme being withdrawn from the holding fund or financial engineering instrument save in exceptional and justified cases.
169
This view is taken because there could be serious risks of irregularities in such circumstances. Once the contribution has been paid from an operational programme to a holding
fund or financial engineering instrument, and it has been included in a statement of expenditure submitted to the Commission, it will be considered as “expenditure” within the meaning
of Article 78 of Regulation (EC) No 1083/2006, and will be reimbursed by the Commission.
Where in such cases the contribution from an operational programme is later withdrawn from
a holding fund or a financial engineering instrument, the Member State will have received an
interim payment by the Commission for expenditure which in fine has not been spent in enterprises or urban projects. This may constitute an irregularity, unless the statement of expenditure is subsequently modified to withdraw the ‘expenditure’ in question.
There is also a question of whether any such withdrawal would comply with the principle of
sound financial management. In particular, there is a risk that such a practice would result in
an improper circumvention of the provisions of Article 93 of Regulation (EC) No 1083/2006
(n+2/n+3 decommitment rule).
For these reasons, the Commission services recommend that Member States or managing
authorities instead proceed prudently, committing money from operational programmes to
holding funds and financial engineering instruments in phases, with payment of contributions
being dependent on effective investment in enterprises or urban projects.
Question 11: Winding up provisions in the case of holding funds
With respect to Holding Funds, winding up provisions might allow for Holding Funds to be
wound up once all contributions from the OP to the Holding Fund have been used to finance
Urban Development Funds. In such a case, the Holding Fund would be wound up by transferring their interests in the Urban Development Funds back to the relevant Managing Authority. This would be consistent with the notion that Holding Funds are only optional in the
implementation of JESSICA and that Managing Authorities are allowed, themselves, to directly finance Urban Development Funds. Does the COM agree with this interpretation?
Reply
There is nothing in the Regulations to prevent a managing authority organising itself in this
way, provided the terms of Regulation (EC) No 1828/2006 are respected.
Question 12: Article 46 (1) COM Regulation (EC) No 1828/2006 – Limitation to
one single Project
Article 46.1 states that “Where Structural Funds finance urban development funds, those
funds shall invest in public private partnerships or other projects included in an integrated
plan for sustainable urban development.” There does not appear to be anything in the Regulations to say that an urban development fund can only use Structural Fund contributions to
initially invest in a single project, or single project company, with the possibility of other projects being added to use the recycled money? Could you also confirm whether, as a result,
either the Special Purpose Vehicle created for a project, or another entity that will invest in
the Special Purpose Vehicle project company would qualify as an “urban development fund”
within the meaning of the Regulations?
170
Reply
Article 44 of Regulation (EC) No 1083/2006 describes urban development funds as "funds
investing in public private partnerships and other projects included in an integrated plan for
sustainable urban development". Within the meaning of this provision, urban developments
funds would in general be expected to invest in a number of PPPs or other urban projects. It
cannot be excluded that an urban development fund invests initially exclusively in one project, and that it invests only at a later stage in other projects.
A Special Purpose Vehicle set out to invest exclusively in a single project may be considered
to be an "urban development fund set out to invest in public private partnerships and other
urban projects", provided it falls within the definition of an urban development fund in Article
44 of Regulation (EC) No 1083/2006, i.e., that it invests in PPPs or other projects included in
an integrated plan for sustainable urban development, and that it does so in accordance with
Regulation (EC) No 1828/2006.
Question 13: Mixed use projects
Scenarios can be envisaged where JESSICA funds will invest in mixed use projects, which
would include housing development. Would this be ruled out because housing is not an eligible activity for funding under the structural funds outside the EU10? If so, this would seem to
limit the opportunities for investment into truly integrated projects. We therefore assume that
the combination would be possible if the eligible parts are clearly separated from the noneligible part (e.g. separate financial assets, accounts, controls etc.).
Reply
It is possible that public private partnerships or other urban projects in which urban development funds invest include components that would not be eligible for Structural Funds assistance.
To ensure a clear audit trail allowing expenditure eligible under the Structural Funds to be
distinguished from ineligible expenditure, urban development funds must maintain a separate
accounting system or use a separate accounting code for co-financed expenditure down to
the final level of the project. There should be clear identification of the capital contributed
from each operational programme to the urban development fund and the expenditure which
is eligible under the Structural Funds, to permit verification that any expenditure declared to
the Commission is eligible under the Structural Funds legislation and under applicable national eligibility rules. An adequate audit trail is necessary for reporting and audit purposes, in
accordance with Article 60 (c), (d) and (f) and Article 90 of Regulation (EC) No 1083/2006
and Article 15 of Regulation (EC) No 1828/2006.
Question 14: In kind contributions paid by beneficiaries under Article 56(2) and
financial engineering instruments under Article 44 of Regulation 1083/2006
How is Article 56 (2) of Regulation 1083/2006 applicable to financial engineering and
financial engineering instruments?
Reply
Article 56 (2) of Regulation (EC) No 1083/2006 provides that under certain conditions, as
listed in its points (a), (b) and (c) of that Article, in-kind contributions may be treated as expenditure paid by beneficiaries in implementing operations.
171
The note to COCOF no 2007/00018 on financial engineering clarifies in its point (1b) the
definition of "beneficiary" in the case of financial engineering, specifying that the beneficiary
is the financial engineering instrument itself, or the holding fund, as the case may be. In the
case of financial engineering in the urban context, the financial engineering instrument would
be an urban development fund. Consequently, in-kind contributions that might be treated as
expenditure paid by beneficiaries in the case of financial engineering, should be contributed
by the financial engineering instruments – urban development funds themselves, but not by
operational programmes. In the case of financial engineering, Member States may include in
their statements of expenditure submitted to the Commission, expenditure effectively paid
from operational programmes to financial engineering instruments or holding funds, either
contributing to or establishing them (Article 78 (6) of Regulation (EC) No 1083/2006).
In conclusion, operational programmes, which could in no case be considered to be beneficiaries, must pay effectively and in cash the expenditure they contribute to financial engineering instruments, existing or to be established, within the sense of Article 78 (6) of Regulation
(EC) No 1083/2006.
Article 56 (2) (b) of Regulation (EC) No 1083/2006 provides that in case of in-kind contributions by beneficiaries, the justification of expenditure should be supported by accounting
documents having a probative value equivalent to invoices. Article 56 (2) (c) requires that in
any case the contribution from the Structural Funds must not exceed the total eligible expenditure excluding the value of such in kind contributions by beneficiaries in implementing operations.
Question 15: the meaning of equity investment under Article 46 (2) of Regulation (EC) No 1828/2006
Article 46 (2) of Regulation (EC) No 1828/2006 states that “urban development funds shall
invest [in public private partnerships or other projects] by means of equity, loans or guarantees.” It is our understanding that UDFs can be either financial investors or developers undertaking projects themselves. As a result, we interpret the term “equity investment” to mean
any form of investment in projects which confers the full risks and rewards of ownership on
the investor. An equity investment may therefore be in the form of either a financial investment in shares (or other similar financial instrument), or in the form of undertaking actual project expenditure, such as that incurred by project developers. In the case of the latter, the
management cost ceiling of 3 per cent p.a., as prescribed by Article 43 (4), should not include costs directly incurred in respect of implementing individual projects, such as the costs
of obtaining planning consent, technical feasibility studies, project management expenses,
etc. Please could you confirm that this is also the understanding of the Commission?
Reply
The notion of "equity" in Article 46 (2) of Regulation (EC) No 1828/2006, providing that “urban development funds shall invest by means of equity, loans or guarantees”, cannot be
considered to extend beyond "shareholding". Management costs within the meaning of Article 43 (4) of Regulation (EC) No 1828/2006, cannot include costs relating to the direct implementation of individual urban projects, such as the costs of obtaining planning consent,
technical feasibility studies, project management expenses, etc.

BBSR-Online-Publikation, Nr. 03/2009 Urban

Transcription

Similar documents

isb-newsletter - Wirtschaftswissenschaftliche Fakultät der Universität

Jahresbericht 2014/2015 - Geographisches Institut der Universität