JESSICA
JOINT EUROPEAN SUPPORT FOR SUSTAINABLE INVESTMENT IN CITY AREAS
JESSICA EVALUATION STUDY – West Poland
January 2009
This document has been produced with the financial assistance of the European Union. The views expressed herein can in no way be taken to reflect the official opinion of the European Union.
European Investment Bank JESSICA EVALUATION STUDY - WEST POLAND
Final Report
January 2009
This report takes into account the particular instructions and requirements of our client. It is not intended for and should not be relied upon by any third party and no responsibility is undertaken to any third party. Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce ul. Królewska 16, 00-103 Warszawa
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Table of contents Page
Glossary ...... 3 Introduction ...... 4 Summary of the principal conclusions of the Report ...... 6 1 Objective 1: Establishing rationale for JESSICA...... 10 1.1 Task 1.1 Regeneration Project Market ...... 10 1.1.1 Market potential for urban area regeneration ...... 10 1.1.2 Specificity of Regions and effects of JESSICA implementation expected by the Regions...... 11 1.1.3 Assessment of capabilities of public administration and state agencies to financially support JESSICA...... 18 1.1.4 Selected projects carried out in the Regions...... 19 1.1.5 Conclusions for the application of JESSICA in the Regions ...... 22 1.2 Task 1.2 Financial vehicles for urban area regeneration...... 24 1.2.1 Need for regeneration project financing ...... 24 1.2.2 Availability of funds for regeneration activities ...... 25 1.2.3 Key issues ...... 25 1.2.4 Conclusions for JESSICA...... 26 1.3 Task 1.3 Budgetary effects of JESSICA for the Managing Authority...... 27 1.3.1 Cash flow projections arising from the application of traditional grant mechanism... 27 1.3.2 Cash flow projections arising from the implementation of JESSICA...... 29 1.3.3 Financial effect of JESSICA implementation...... 32 1.4 Task 1.4 Non-budgetary effects of JESSICA for the Managing Authority ...... 35 1.4.1 Example of international experience from regeneration projects ...... 35 1.4.2 Non-budgetary effects of JESSICA implementation...... 38 1.4.3 Conclusions on JESSICA implementation effects...... 39 1.5 Task 1.5 SWOT analysis for JESSICA implementation...... 40 1.5.1 SWOT analysis of applying JESSICA from the Managing Authority’s point of view . 40 1.5.2 Conclusions from the SWOT analysis ...... 41 2 Objective 2: Option appraisal of delivery mechanisms ...... 42 2.1 Task 2.1 Strategy for JESSICA implementation in the Regions in Poland...... 42 2.1.1 Key conditions for creation of JESSICA structures ...... 42 2.1.2 Establishment of Holding Fund (HF) ...... 54 2.1.3 Establishment of urban development funds (UDF) ...... 55 2.1.4 Examples of organisation of UDF-type vehicles operation from other countries ...... 61 2.1.5 Possible structures for organising JESSICA funds ...... 81 2.1.6 Conclusions regarding the JESSICA implementation strategy ...... 85 2.2 Task 2.2 Holding Fund operation in the Regions...... 87 2.2.1 Benefits from HF operation in the Regions...... 87 2.2.2 Relationships between the Managing Authority and HF and UDF...... 89 2.2.3 Conclusions for the Regions...... 91 2.3 Task 2.3 Combination of JESSICA and a traditional grant mechanism ...... 93 2.4 Task 2.4 Recommended JESSICA structure in the Regions ...... 95
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2.4.1 Wielkopolskie Voivodship ...... 95 2.4.2 Zachodniopomorskie Voivodship...... 97 3 Objective 3: Market assessment and identification of potential participants ...... 99 3.1 Task 3.1 Potential JESSICA participants...... 99 3.1.1 Potential JESSICA participants ...... 99 3.1.2 Conclusions from the analysis of potential JESSICA participants ...... 113 3.2 Task 3.2 Possibilities of Supporting JESSICA by the Private Sector ...... 115 4 Objective 4: Project development and evaluation of Urban planning environment ...... 118 4.1 Task 4.1 Planning environment in the Regions ...... 118 4.2 Task 4.2 Review of selected cities...... 122 4.3 Task 4.3 Potential projects for JESSICA ...... 125 4.3.1 Projects in the Regions...... 125 4.3.2 Suggested selection criteria for future JESSICA projects ...... 131 4.4 Task 4.4 JESSICA for residential housing projects ...... 135 5 Objective 5: Implementation action plan ...... 138 5.1 Task 5.1 Evaluation of likely operations of potential UDFs ...... 138 5.1.1 Wielkopolskie Voivodship ...... 139 5.1.2 Zachodniopomorskie Voivodship...... 143 5.2 Task 5.2 Recommendations for JESSICA implementation in the Regions ...... 147 5.2.1 Decision of the Board of Voivodship on changing the way the Regional Operational Programme is implemented...... 147 5.2.2 Publication of guidelines for drawing up Integrated Urban Development Strategies (IUDS) and defining and preparing projects ...... 148 5.2.3 Conclusion of the Holding Fund management contract between the Managing Authority and the EIB...... 149 5.2.4 Drawing up draft Regulation on public aid for regeneration and notification of the aid programme ...... 151 5.2.5 Further legal, technical and economic analyses ...... 153 5.2.6 Selection of a UDF operator ...... 153 5.2.7 Commencement of UDF operations ...... 154 5.2.8 Time schedule ...... 155 5.3 Task 5.3 Further technical assistance for the Regions...... 156 5.4 Task 5.4 Documents used in the process of UDF operator selection ...... 158
Appendix 1. Draft call for Expression of Interest
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Glossary
BGK Bank Gospodarstwa Krajowego CEB Council of Europe Development Bank Consultant, Arup Ove Arup & Partners International Ltd. EC European Commission EIB or Bank European Investment Bank ERDF European Regional Development Fund HF Holding Fund IA Implementing Authority Inception Report Report prepared according to the consultancy contract with EIB IRDOP Integrated Regional Development Operational Programme IUDP Integrated Urban Development Plans / Programmes JESSICA Joint European Support for Sustainable Investment in City Areas KFM, NHF Krajowy Fundusz Mieszkaniowy (National Housing Fund) LRP Local Regeneration Plan / Programme MA Managing Authority for a Regional Operational Programme MRR Ministry of Regional Development PPP Public-private partnership Region, Regions Wielkopolskie Voivodship and Zachodniopomorskie Voivodship ROP Regional Operational Programme TBS Towarzystwa Budownictwa Społecznego (Housing Societies) The Study, Project Advisory project named ‘JESSICA Study Poland West’. A project carried out by Arup for the European Investment Bank in connection with the assessment of possibilities to implement JESSICA in Poland for Wielkopolskie and Zachodniopomorskie Voivodship UDF Urban Development Fund UMWW Marshal Office of Wielkopolskie Voivodship (regional government of Wielkopolska) UMWZ Marshal Office of Zachodniopomorskie Voivodship (regional government of Western Pomerania) WKB Wierciński Kwieciński Baehr Sp. k. legal office WROP Wielkopolski Regional Operational Programme ZROP Zachodniopomorski Regional Operational Programme
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Introduction
This Final Report has been prepared as part of the JESSICA Evaluation Study – West Poland, an advisory project carried out by Ove Arup & Partners Ltd. for the European Investment Bank between September 2008 and January 2009. The Final Report is preceded by the Preliminary Report developed during the first weeks of the project. The Final Report includes analyses required under the agreement and takes into account issues discussed in the Preliminary Report and planned therein to be carried out. The Final Report presents the tasks of the Consultant on a step-by-step basis, in line with the required scope of the Study. The required scope as well as analyses and conclusions developed are presented within each task. In justified cases, issues related to each of the Voivodships analysed are discussed in separate subsections. This Report shall not be considered as an investment recommendation for any potential entity interested in participating in the JESSICA initiative. JESSICA stands for Joint European Support for Sustainable Investment in City Areas. This initiative is being developed by the European Commission and the European Investment Bank (EIB), in collaboration with the Council of Europe Development Bank (CEB). Under new procedures, Member States are being given the option of using some of their EU grant funding, their so-called Structural Funds, to make repayable investments in projects forming part of an integrated plan for sustainable urban development. These investments, which may take the form of equity, loans and/or guarantees, are delivered to projects via Urban Development Funds and, if required, Holding Funds. By using financial engineering measures, JESSICA aims to create a leveraging effect in attracting additional financial resources for urban renewal and development projects. The loan financing provided by the EIB and the CEB provides a possibility to complement public resources (Community and national) in the Operational Programmes supported by the Structural Funds to develop an appropriate support for the growing needs of investment in sustainable urban development. Methodology of analysis The following methods of analysis have been used in the development of this Study: a) direct interviews (meetings or phone calls) with institutions potentially engaged in JESSICA, b) surveys on potential projects (project cards) sent out by the Marshal Office of the Wielkopolskie Voivodship (UMWW) to cities preparing urban development projects, c) collection of information on potential projects during meetings with respondents, d) own market studies related to regeneration activities in the Regions under analysis and countrywide, e) analysis of available JESSICA implementation studies from other countries, including: • “Urban Development Funds in Europe. Ideas for implementing the JESSICA Initiative”. Prof. Nadler & FIRU, 2008 • “JESSICA Wales Urban Development Fund (UDF). JESSICA Preliminary Study for Wales. Final Report”. King Sturge Consultancy. September 2008 f) application of Arup team’s expertise in regeneration projects and financial vehicles. The Final Report also includes conclusions from the final version of the legal report entitled “Analiza prawnych uwarunkowań wdrażania inicjatywy JESSICA w Polsce” (Analysis of
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legal conditions of JESSICA initiative implementation in Poland) prepared by Wierciński, Kwieciński, Baehr Sp. k. legal office. During the order execution, meetings with the following institutions were held: a) Wielkopolskie Voivodship • Marshal Office of the Wielkopolskie Voivodship (2 meetings) • City of Poznań • City of Piła • City of Wągrowiec • City of Murowana Goślina b) Zachodniopomorskie Voivodship • Marshal Office of Zachodniopomorskie Voivodship (2 meetings) • City of Szczecin • City of Stargard Szczeciński • City of Koszalin • TBS Prawobrzeże • Szczecińskie Centrum Renowacyjne • Szczecin TBS In addition, meetings with the following entities were held: • Council of Europe Development Bank (CEB) • European Investment Bank (EIB) • Bank Gospodarstwa Krajowego (BGK) • BRE Bank Hipoteczny S.A. • Depfa Bank plc • Dexia Kommunalkredit Bank • Towarzystwo Funduszy Inwestycyjnych Skarbiec (TFI Skarbiec) • Quinlan Private Golub (Poland) Sp. z o.o. • TRI Granit • TUP S.A. • Wierciński Kwieciński Baehr (WKB) legal office We would like to cordially thank all the representatives of the above mentioned institutions for their time, the information provided and their contribution to the discussion on the new JESSICA financial vehicle and preparation of this study. The works also take account of information acquired during conferences dedicated to the JESSICA initiative, which were held on 23 June 2008 in Szczecin and on 11 September 2008 in Poznań.
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Summary of the principal conclusions of the Report
Market potential for urban regeneration projects The analysed Regions are characterised by a considerable demand for urban regeneration projects in both the biggest, as well as small and medium cities of the Regions. Areas which need regeneration include degraded parts of towns and cities, and post-military and post- industrial areas. There is a significant market potential for regeneration projects. The number of projects completed and resources available under IRDOP 2004-2006 were insufficient compared to the needs. Resources available in the current programming period of 2007-2013 will not allow all projects planned by cities to be carried out. However, the availability of the funds is of great importance to cities and their utilisation is of high priority with regard to city measures. The majority of regeneration projects co-financed from EU funds have consisted in the renovation of properties of typically public nature (renovation of streets, building facades, historical buildings) without investment elements which could generate direct profits for cities. The EU intervention was to co-finance projects which do not generate significant income. Therefore, the scope of projects needs to be redefined to change project financing from a grant system to a refundable financing system. Significant investments with the participation of private investors are undertaken in main cities of the Regions, which will contribute to urban area regeneration. Examples of such projects indicate relatively simple mechanisms of cooperation between self-governments and private entities. Cities which hold properties sell them to private investors or form companies together with investors, contributing properties as in-kind contributions to special purpose companies. In the majority of cases, private entrepreneurs (developers) are responsible for project preparation and execution. Therefore, projects may be defined in a way to make recovery of expenditure possible; in addition, private initiatives may be used for regeneration projects. Cities still own properties which may be used as a contribution to project companies which carry out regeneration projects. This creates a significant potential for carrying out projects with the use of JESSICA funding. In a short-time perspective, developers may be expected to slow down their activities in 2009-2010 due to the reduced availability of bank loans in the effect of the crisis on financial markets which started in the US in 2007. However, it is hard to predict to what extent this will limit the capacity of developers to plan and carry out new investments. It is very likely that the availability of long-term finance will be reduced by commercial banks for few years what makes the role of JESSICA funds and institutions like EIB and CEB more important in provision of finance to regeneration projects. JESSICA is a financial vehicle which should fit where no regeneration funds are available and where there is a large market demand for urban regeneration projects. The emergence of a new financing source creates new opportunities and may be expected to enable new projects to emerge which used to be rejected at the preliminary assessment stage in the traditional grant system. Cities are interested in long-term urban area development and stimulation of their growth. All additional institutions supporting regeneration projects financially, organisationally or conceptually may count on a considerable support by municipal authorities. That is to say, the urban development oriented JESSICA fund placed on the market may succeed in its long-term operation. The process of investment preparation and execution is time-consuming and takes from 2 to 5 years. This is why cities which initiate regeneration projects expect Managing Authorities to provide them with information about how to use EU funds in due advance to appropriately
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prepare projects in organisational terms and secure resources in their budgets. From this perspective, the decision on implementing the JESSICA initiative needs to be made in the shortest time practical. Strategy for JESSICA implementation in the Regions Implementation of the JESSICA vehicle in Poland involves three main time perspectives: short-term (1-2 years), leading to the establishment of Urban Development Funds (UDF); medium-term (up to 2015) related to the prospect for using EU funds between 2007-2013; and long-term with an undefined time horizon. Each of the periods involves different priorities and different conditions. The process of the JESSICA vehicle implementation will be gradual and it is not clear now what shape UDFs should have in a long-term perspective. Organisational structures of JESSICA-type funds suggested for the Regions correspond to the medium-term need to implement the policy of the Regions with regard to the management of EU funds available through Regional Operational Programmes 2007-2013. At the same time, these structures are pilot solutions, being new institutions in Poland. In the long-term perspective, the need to support cities in regeneration projects and the possibility of supporting UDF activities by cities will be the main factor determining UDF development. With regard to the pilot nature of the structures proposed, it is not excluded that, following the example of certain European countries, UDFs may evolve towards commercial companies with municipal assets and act as urban developers in addition to co- financing projects. At the present stage, UDFs are only expected to act as institutions substantially supporting the process of project preparation and offering financial support to projects. In the long-term perspective, the establishment of a holding fund may lead to reducing the competitiveness of JESSICA products because of the need to bear additional costs of managing this fund. However, the establishment of a holding fund is justified in the short- term perspective in order to establish UDFs. There are many reasons for entrusting the European Investment Bank with the position of a holding fund manager. The EIB has in- depth knowledge of the JESSICA initiative resulting from its role as an authority implementing the vehicle, it may support the approval of the legal amendments required and of aid programmes in European Union structures; it may also become a holding fund manager without the recourse of public tender. In the event that another fund manager is selected, many of these benefits could not be achieved. Several aspects related to the actual implementation of the JESSICA vehicle still need to be clarified and analysed further. For example, at present there is no explicit legal basis for establishing formal legal relationships between a Managing Authority and an HF. The existing Act on principles for development policy only provides for a grant system for implementation of measures under ROPs. In principle, the scope of HF and UDF activities corresponds to the scope of activities of an intermediary body/implementing authority. Provisions of the Act may not be directly applied to the project implementation system based on JESSICA because refundable financing is not a grant. This creates a potential risk with reference to interpretation of the provisions and requires further detailed clarification leading to explicit legal provisions. It is recommended that one Urban Development Fund should be established in the initial period of JESSICA operation in Poland. Resources available in the framework of ROPs are limited, so very few projects can be financed by UDFs in some Regions. Potential participants of JESSICA Marshal Offices and the EIB acting as a holding fund manager will play a crucial role in building the fundamental structure of UDFs in the next two years. In the following years, it will be the established UDFs and Municipal Offices participating in projects that will play a crucial role in carrying out projects. The range of entities involved in projects with JESSICA participation will depend on the structure and specificity of a given project.
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Banks and professional fund managing institutions are the principal entities which may become involved in the JESSICA initiative as UDF managers. The range of JESSICA’s interest will probably overlap in some areas with activities pursued by other funds in the market. Loan and guarantee funds, currently active on the market, have strictly defined types of projects and potential borrowers (e.g. funds managed by the Bank Gospodarstwa Krajowego). Offering favourable financing conditions and expertise in the industry, these funds are quite attractive to potential borrowers compared to typically commercial sources of financing. It does not appear to be a threat for the use of JESSICA funds, even if the existing funds are able to offer more favourable financing conditions or make financing from other aid funds impossible. In certain cases, JESSICA may remain an additional source of financing and finance projects which, for any reason, may not receive support from other funds. JESSICA should be perceived by potential borrowers as a source of financing granted under preferential conditions in terms of both access to resources, short term in which the resources become available, and advantageous debt repayment conditions (grace periods, cost of financing). Financial institutions prefer to be financially engaged at the level of individual projects. Owing to the nature of UDFs, which is relatively difficult to determine, at the current stage it is reasonable to assume that the vast majority of institutions will prefer to engage in individual projects only. Such an approach additionally means that their interest will significantly depend on the size of a project. Additional capital is unlikely to be raised at a Holding Fund level. None of the financial institutions with which meetings were held has declared that it was willing to invest their resources at this level. Their unwillingness to transfer financial resources to such fund is due to the fact that investment risks cannot be reliably estimated without specific projects indicated. It is difficult to establish UDFs with a strong equity base in the short term. Banks and financing institutions have many conditions which make direct UDF financing difficult. The short-term outlook for the loan market is quite pessimistic, which makes banks adopt more restrictive approaches towards granting of loans. The main potential of UDFs is the possibility to invest private equity and bank loans at a project financing level. Practically, the capital of a UDF may only be increased through contributions from the public sector. These contributions might be significant, but initial evaluation indicates that it will be difficult to increase the pool of available funds by more than 50% of funds allocated under ROPs. The assessment of the total value of investment projects leads to quite a broad range of the estimated scale of future projects, exceeding twofold to tenfold the value of resources at UDFs’ disposal. This indicates that there is more potential for increasing the scale of impact of EU resources under the UDF organisation system than under the traditional grant system. Potential projects EU regulations referring to the JESSICA vehicle mention projects to be carried out under Integrated Urban Development Plans. This means that all projects to be financed from JESSICA-type funds must be provided for in these plans (strategies). On the other hand, no EU or Polish document specifies the definition and requirements for these types of documents. At present, Managing Authorities are obliged to and are responsible for the preparation of guidelines for the preparation of such plans. The Authorities are obliged to define standards for documents required by them in the course of assessment. It should be noted that cities have Local Regeneration Programmes from the previous programming period of 2004-2006, and their updates or new Local Regeneration Programmes will act as IUDPs.
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Currently, all regions in Poland have prepared guidelines for new regeneration programmes. Usually, the guidelines do not take account of the specificity of the JESSICA vehicle. This leads to an insufficient number of planning documents needed to accept projects as compliant with integrated strategies for urban development. The scope of interest of JESSICA will certainly include projects offering socio-economic effects as well as ensuring financial profitability. In the case of high profitability, such projects will also be of interest to private investors whose main criterion is financial return. The most natural scope of interest for JESSICA may be the possibility to become involved in projects justified in socio-economic terms but with little profitability, which however ensure that the resources invested are recouped. Such projects are not eligible for grant financing (they generate profit) but are insufficiently attractive to typically commercial financing. Funds should be able to participate in projects through various products, i.e. loans, guarantees, equity contributions. Decision procedures should allow investment decisions to be issued quickly and need to be transparent. From the beneficiaries’ point of view, the JESSICA vehicle will be less attractive compared to currently applied grants due to the refundable nature of financing. However, JESSICA implementation should lead to developing larger projects of a broader range and better prepared compared to the traditional grant system. In effect, the value of equity invested in regeneration will increase, and the impact of EU funds will be stronger with regard to the actual urban regeneration compared to the traditional grant system. Implementation measures Implementation measures need to be specific for each Region, although some elements will have to be the consistent for all Regions (amendments to legal acts, aid programme approval by the European Commission, holding fund organisation). The existence of shared elements leads to the possibility to carry out critical elements jointly by Regions, e.g. through integrated actions designed to at establish a holding fund. Further technical assistance will be needed to establish JESSICA structures and in preparing projects to be financed by UDFs in the future. Legal analyses as well as transaction and economic consulting are the principle areas for professional support. The selection of UDF managing entities will be the crucial process to be executed by the holding fund. Because many institutions would be interested in managing UDFs, a two- stage selection procedure is justified in order not to involve too many institutions in the development of detailed tender documentation.
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1 Objective 1: Establishing rationale for JESSICA The aim of Objective 1 is to establish the rationale for and the financial feasibility of using JESSICA to accelerate investments supporting Urban Regeneration as envisaged in relevant Regional Operational Programmes.
1.1 Task 1.1 Regeneration Project Market
Task 1.1 The review of the market for urban regeneration projects in the Regions and description of existing public programmes and other financial instruments (including existing investment funds) available to promote Urban Regeneration and to encourage investment in this sector in the Regions. This review should also include the description of the ability and capacity of public authorities and public agencies in the Regions to provide equity, loans, guarantees, and other non-grant financing to urban regeneration projects. The review should also include the analysis of the demand for such products.
1.1.1 Market potential for urban area regeneration The first regeneration activities in Poland started after 1990 as part of single projects consisting in modernisation of old community buildings, renovation of historic buildings, or redevelopment of old factories. Usually, these projects were carried out and financed by Town or City Offices independently, and integrated regeneration plans did not actually exist. Financing of such undertakings under structural funds has become possible only with Poland joining the EU. Local Regeneration Programmes were prepared based on the “National Strategy for Regional Development 2001-2006” guidelines and resulted directly from the “Integrated Regional Development Operational Programme”. At present, 16 Regional Operational Programmes define Priority Axes for each voivodship and provide for resources for regeneration activities, including in urban areas. The activities are aimed to prevent marginalisation of urban areas, where negative social and economic developments increase and where the physical condition of space becomes degraded. The activities should lead to the renewal of most degraded urban areas and reinforcement of socio-economic structures. Individual towns and cities in voivodships have prepared Urban Regeneration Programmes or Local Regeneration Programmes under which they applied for financial resources to carry out their investments. In particular, support will be granted to integrated solutions with a comprehensive approach towards economic, social and environmental issues. The very notion of ‘regeneration’ is superior to such notions as: restoration, redevelopment, modernisation, restructuring, rehabilitation, renovation, etc. Actually, ‘regeneration’ combines all the aforesaid issues, including social and economic development, spatial planning, protection of natural environment and cultural heritage. One of documents on ROPs includes the following definition of regeneration: „A complex, coordinated, multi-annual process of spatial, engineering, social and economic transformation, carried out in a specific area, initiated by a territorial (local, in principle) self- government in order to pull the area out of a critical condition by offering it a new functional quality and creating opportunities for growth based on its specific endogenous conditions". Objectives of regeneration processes refer to the following issues: • Sustainable and coordinated urban development. • Improvement of city image, revival of city centres which ceased to be cultural and commercial city centres. • Improvement of public space image in terms of its functionality, aesthetics and security.
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• Modernisation and reconstruction of buildings, streets and squares of historic, architectural, artistic and urban significance. • Post-industrial and post-military area development. • Increase in tourist and cultural potential through support granted to comprehensive projects of infrastructure modernisation and/or development. • Adjustment of housing to modern standards. • Social development – prevention of social pathologies. • Reinforcement of local identity of inhabitants. In accordance with data from the Institute of Spatial Management and Housing in Warsaw, in 2004-2006, 178 regeneration projects financed from the European Regional Development Fund were undertaken in 113 towns and cities. The total value of regeneration projects carried out in the framework of IRDOP was PLN 659m, and the rate of financial support ranged from 12% to 75% (source: the study „Ocena programów i projektów rewitalizacyjnych realizowanych w ramach Działania 3.3. Wnioski na przyszłość” dr W. Siemiński, dr T. Topczewska). In the majority of cases, the projects included typical public investments financed to a significant extent by territorial self-government entities and concerned properties managed by cities (squares, municipal building facades). The largest cities currently carrying out regeneration projects in their areas include Poznań, Gdańsk, Łódź, Kraków, Wrocław, Żyrardów, Bielsko-Biała, Elbląg, Głogów, Radom, and Szczecin. One of the most spectacular achievements in the area of post-industrial building regeneration in Poland is Stary Browar (Old Brewery) in Poznań and Manufaktura in Łódź. The projects were carried based on private investors and are commercial investments. Selected projects are described in more detail in Section 1.1.4. EU funds for regeneration activities in the programming period of 2007-2013 were allocated through regional programmes (Regional Operational Programmes). The problem of fund availability for the Regions analysed is discussed in Section 1.1.2. A significant market factor which impacts the development of regeneration projects is the availability of financing from sources other than EU funds. In the case of commercial projects carried out with participation of private partners, the availability of debt financing (bank credits, loans) is indispensable for projects to be feasible. The crisis on financial markets which started in the US in 2007 does also affect Poland. At present, commercial banks have tightened credit terms and conditions or have temporarily withheld credit decisions. This situation should be temporary in nature and should not impact regeneration investments in a long-term perspective, but it can make developers stop preparing larger and more complex investment projects in a short-term (one- or two-year) perspective. In addition to EU funds, own resources of self-government entities and private investors, the source of financing which may give support to regeneration programmes are a few funds established on the grounds of public funds; however, these have strictly defined objectives, e.g. thermal modernisation projects.
1.1.2 Specificity of Regions and effects of JESSICA implementation expected by the Regions
1.1.2.1 Wielkopolskie Voivodship Regional conditions In the Wielkopolskie Regional Operational Programme, regeneration activities are integrated in Priority 4 Regeneration of problem areas (. The Priority is divided into two measures: 4.1 Regeneration of urban areas, and 4.2 Regeneration/Renewal of degraded post-industrial and post-military areas. Regional authorities have decided to use the entire budget of the measure (EUR 40m) intended for urban area regeneration based on the JESSICA
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mechanism. In addition, the initial capital may be increased by the contribution of the Marshal Office and the Ministry of Finance (talks are held in this regard). Compared to other Regions, the initiative implementation process is very advanced in the Wielkopolskie Voivodship. In October 2008, the „Memorandum of Understanding” agreement on working together on implementation of the vehicle was signed with the European Investment Bank. From that moment, talks on managing the holding fund by the European Investment Bank have started. At the same time, works related to preparing guidelines for Local Regeneration Programmes are carried out. An information campaign on the new vehicle in the form of conferences and collection of project cards is also carried out. The Local Working Group has been established, dedicated to giving support to the Marshal Office in implementing the vehicle. The objective of regional authorities is to establish a long-term vehicle for urban development policy. Last but not least, the vehicle must be permanent and allow projects, previously without prospects of execution, to be financed. The JESSICA Fund is expected to be an additional vehicle which will fill the gap between typically commercial undertakings and grants, and whose offer is positively distinguished from the existing special purpose funds. B. Situation in selected cities of the Wielkopolskie Voivodship City of Poznań Poznań was established in the 8th century and is one of the oldest and biggest (ca. 560,000 inhabitants) cities in Poland; it is the capital of the Wielkopolskie Voivodship. Poznań lies on the Warta River; it is an important road and rail hub in Poland and has an international airport. The city’s economy is dominated by services, and in particular: trade, banking, education and health care. Poznań is an important food, automotive, pharmaceutical, and chemical industry centre1. The meeting in Poznań was attended by representatives of the City Development Department, European Programmes and Funds Unit and Regeneration Unit. In the previous financial perspective, the city of Poznań prepared Regeneration Plans which correspond to the integrated approach and the need to concentrate resources on selected assisted areas. The city has prepared a second edition of the regeneration programme, which concentrates on two assisted areas: Śródka – Ostrów Tumski – Chwaliszewo and Jeżyce – Łazarz. From the talks it appears that the new vehicle is insufficiently familiar yet. Representatives of the city indicated the fact that detailed information or guidelines were not available, as in the case of grant programmes. The JESSICA vehicle is commonly associated with EU funds, which is a positive remark; on the other hand, potential applicants will expect guidelines for implementing the new vehicle. In the present situation, it is also natural that they compare the new vehicle to the existing grant mechanism. Representatives of the City expressed their dissatisfaction with the fact that the Marshal Office, by transferring a complete pool of resources to the JESSICA fund, has by and large eliminated the fundamental, if not the sole, source of urban infrastructure financing. Nonetheless, a project concept was presented, which comes fully under the JESSICA initiative – Stara Gazownia (Old Gas Works). More information on the project is presented in Section 4.3.1. City of Piła Piła is a 70,000-inhabitant city located near the Gwda river, between Pomorze Zachodnie and Wielkopolska Regions. More than half of its area is occupied by forests and parks filling the areas between modern residential districts. Piła is the 4th biggest city in the
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Wielkopolskie Voivodship. The city constitutes an important intersection of road and rail routes running north to south and west to east. Leading economic sectors include: electronic, electric and printing industries2. Many post-military areas used by the Russian army until 1990s area located in the Piła city area. At present, the areas are developed for housing, education and service purposes. On 30 September 2008, the Piła City Council adopted Resolution updating the "Development Strategy for the City of Piła 2005-2015”. The document, together with the particularising programmes “Local programme of post-military areas revitalization for the city of Pila” and “Housing Strategy for the City/Municipality of Pila 2007-2013”, indicate objectives, scopes and nature of regeneration activities undertaken in the Piła municipality area. The city has significant land at its disposal in post-military areas. It is ready to carry out important undertakings on its own or through municipal companies with tangible property. A modernisation project for sports shooting centre buildings of Centrum Strzelnictwa Sportowego “Tarcza” is under preparation now (concept stage). More information on the project is presented in Section 4.3.1. The city does not expect private economic operators to actively support regeneration processes. At present the biggest private industrial plant in the city is the Philips plant. The city is going to privatise the municipal thermal energy producing plant. Housing industry is another important area where the city is active. The city carries out projects through the housing association Towarzystwo Budownictwa Społecznego (TBS), where it makes payments to cover new investment costs. The TBS benefits from the National Housing Fund (KFM) financing. According to the city representatives, the opportunity of financing housing projects under competitive conditions compared to the KFM would be a JESSICA’s great asset. Piła is a city with a relatively low debt ratio. One-time inflows from privatisation of companies, which could be contributed to the urban development fund, may also be obtained. In the future, with experiences gained from operation of the first urban development funds, the city may commit itself to establishing its own fund to support urban development projects. City of Murowana Goślina The municipality of Murowana Goślina is one of the biggest gminas in the voivodship in terms of area, i.e. over 17,000ha, and is inhabited by 15,200 people. Leading sectors include agriculture, forestry, tourism and leisure. The town of Murowana Goślina is located ca. 10km north of Poznań, near the Trojanka river bank, and is inhabited by more than 10,000 people. On 26 June 2006, the Town Council of Murowana Goślina adopted the Local Regeneration Programme. The document indicates areas for regeneration, with a particular emphasis on the historical city centre area and the adjoining areas. The priority of activities undertaken was to restore the city centre as the contemporary city system centre enlarged by dynamically developing housing estates in the north and in the south. Influenced by the preparation for the JESSICA initiative implementation, the Murowana Goślina LRP was deepened by the Principles of Integrated Urban Development Programme (Założenia Zintegrowanego Programu Rozwoju Miasta). The municipality established a separate Regeneration Office3. The city puts its great hopes in the JESSICA vehicle on obtaining finances for regeneration projects. The city has prepared plans for several regeneration projects which provide for participation of private partners in the projects (railway station vicinity regeneration,
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marketplace regeneration). More information on the projects is presented in Section 4.3.1. Moreover, Murowana Goślina has prepared typically public investment projects, such as renewal of the castle vicinity and of the municipal park. The city is also considering the option of establishing a local entrepreneurship incubator. Projects planned by the City provide for financing a significant part of expenditure from the city budget. The city is ready to become a direct beneficiary of JESSICA products and secure debt payment from its own income. This is because projects to be carried out are to increase revenue derived from taxes. City of Wągrowiec Wągrowiec is located in the north-western part of the voivodship, 50km north of Poznań, in the Wielkopolskie Lake District, where Wełna and Nielba rivers cross. The city is inhabited by 25,000 people. On 28 April 2005, the Municipal Council in Wągrowiec adopted the Local Regeneration Programme. Under the task, the annex to Resolution on “Wągrowiec Urban Area Local Regeneration Programme 2005-2013” (Lokalny Program Rewitalizacji Obszarów Miejskich Wągrowca na lata 2005-2013) provides for a series of projects to be carried out, including: regeneration of the Market Square in Wągrowiec, regeneration of post-rail areas at Średnia street, regeneration of former municipal market areas and regeneration of areas near Durowskie Lake in the administrative border of the town. The majority of regeneration projects prepared by the city of Wągrowiec have been developed with regard to the programming period of 2004-2006. The projects are typically public investments in nature and private partners were not expected to participate in them, neither did the projects include elements able to generate financial return on investment. If the JESSICA vehicle is implemented, the scope and nature of the projects may be revised in a way to generate income. The most realistic scenario would consist in raising a loan from the JESSICA fund directly by the City of Wągrowiec for projects which will allow the municipality’s revenue derived from taxes to increase as a result of economic development of urban areas. The city expects that the organisation of JESSICA funds’ operation will allow it to efficiently obtain financing (simple procedures) and achieve advantageous financing conditions. The city has a low debt ratio and uses debt financing (municipal bonds).
1.1.2.2 Zachodniopomorskie Voivodship A. Regional conditions The Zachodniopomorskie Regional Operational Programme provides for resources for regeneration in two measures: Priority Axis 5 “Tourism, culture, regeneration”, Measure 5.5 “Regeneration of degraded areas”, and in Priority Axis 6 “Development of metropolitan functions”, Measure 6.6 “Regeneration of degraded metropolitan areas”. The definition of the two priority axes determines the location of projects which may benefit from a specific measure. A total of EUR 35m has been allocated for both measures, of which EUR 22m is for Measure 5.5 and EUR 13m for Measure 6.6. The Marshal Office has prepared a two-stage selection of regeneration projects. The regional authorities want regeneration results to be really noticeable to inhabitants; therefore, they will only finance integrated projects to ensure resource concentration. Integrated projects mean a set of cohesive, interrelated single projects carried out in one area in the same time horizon by all entities involved. Project can be submitted by the Local Government Entities, their associations, Partnerships set up on the basis of the Act on public-private partnership and the Municipal Office. After the project has been selected for financing each property owner shall file a separate application. Integrated projects must result from the Local Regeneration Plan. With such an approach, chances of real area regeneration are greater than in case of financing single projects.
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The planned financial assembly of the integrated project provides for both a grant and a loan from the JESSICA vehicle. Presently, ca. 2/3 of resources from ROP allocations are planned to be allotted to the new vehicle and the rest is to remain in the grant scheme. The new vehicle is expected to become a long-term financing source for regeneration and, due to its specificity, to finance this part which may generate revenue for repayment of the initial capital. On the other hand, the part of the integrated projects which does not generate revenue (usually, this would be urban infrastructure) may still receive support in the form of a grant. In a longer perspective, by seeing regeneration results, cities may invest their own resources, combining them with return capital, instead of expecting to receive grants. B. Situation in selected cities of the Zachodniopomorskie Voivodship City of Szczecin Szczecin is located in the north-western borderland of Poland, 12km from the German border, 65km from the Baltic Sea coast line. The city is the centre of Szczecin conurbation which clusters nearby towns and communes. The well-developed economy with participation of different industry branches makes Szczecin the principal economic centre in the Region and one of the most powerful centres of maritime affairs in Poland. Szczecin occupies an area of 302 km2 and is inhabited by ca. 415,000 people. On 10 January 2005, the Local Regeneration Programme for urban, post-military and post- industrial areas in Szczecin was adopted by Resolution of the Szczecin City Council (document updated on 27 September 2005). This document supplements the IRDOP for the Zachodniopomorskie Voivodship, the Economic Development Strategy for Szczecin, the Local Spatial Development Plan and other documents, where regeneration problems are raised. With the above strategies and reports, activities in the area of regeneration of the most neglected parts of the city may be taken, and financial resources for regeneration processes can be obtained from EU structural funds and with the JESSICA initiative, in accordance with the IRDOP principles4. Investments with participation of private partners are planned in many parts of the city. The development of a multifunctional complex, Galeria Handlowa Kaskada, is the biggest investment under preparation now (for more info, see Section 1.1.4). Regeneration of city quarters located in the city centre and on the right bank in the Odra river areas, including Dąbie, is an important field where the city invests. Current regeneration plans cover complex modernisation of several city quarters. Buildings in the quarters are managed by TBSs and the Szczecińskie Centrum Rewitalizacji (municipal company). More information on the projects is presented in Section 4.3.1. The city expects to benefit from the JESSICA vehicle to carry out regeneration projects. However, some projects are expected to continue to benefit from EU grants in the traditional system. Nonetheless, the city might allocate additional resources to support the JESSICA initiative. City of Koszalin Koszalin is located in the north-western part of Poland, in the Zachodniopomorskie Voivodship, near the Baltic Sea coast; it occupies an area of 83 km2 and has more than 100,000 inhabitants. Important international rail route – E-28 – linking Berlin and Kaliningrad, and S-11 national road, linking Koszalin and southern Poland, run through the City. Dominant economic sectors include: processing industry, food production, and machine and equipment production, manufacture of plastic products, wood industry, and electrical machinery industry. The Local Urban Area Regeneration Programme for the City of Koszalin 2006-2013 was adopted on 26 October 2006; this strategic document specifies the spatial policy and the
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investment programme within administrative borders of Koszalin aimed to regenerate degraded areas. The Local Regeneration Programme for Koszalin frames the tasks 5 corresponding to problems observed during the last few years of the city’s operation . The city of Koszalin has a number of projects listed in the regeneration programme. Most of them were framed in such a way that a potential support would involve grants. One of the projects which may comply with requirements of the JESSICA vehicle is so called ‘Przystanek Koszalin’ (Koszalin Stop) which consists in the regeneration of railway station surroundings through construction of a new station building connected with a Polish Long- Distance Coach Service (PKS) stop. Representatives of the city indicated during talks another project, which has a potential for generating profit – investments in housing infrastructure located in the area defined as the ‘Bermuda Triangle’ in the LRP . Development of the areas adjoining the Browar Koszalin premises included in the LRP in another project. With regard to its potential for commercial service, tourist (oceanarium) and housing function development, the project might comply with requirements for projects financed from the JESSICA vehicle. Employees at the City Office indicated that insufficient information on the JESSICA initiative and the system of implementation of resources for regeneration planned in the Region was available. JESSICA is a new initiative and the process of new project preparation or changing the existing ones will only start after the Managing Authority has presented its guidelines for preparing Local Regeneration Plans. City of Stargard Szczeciński The city lies on the Ina River, near national roads 10 and 20, at a distance of 46km from the Polish border and 36km from Szczecin. It has over 70,000 inhabitants. The beginnings of permanent human settlements in the area of the current city go back the 6th century, which means that Stargard is one of the oldest cities in Poland. The city is the seat of Stargard poviat and municipality (gmina). It makes up the Szczecin conurbation – Szczecin Metropolitan Area – together with Szczecin, Świnoujście, Police, Goleniów, and Gryfin6. The city has its Regeneration Programme adopted in December 2007, under which the city is divided into five areas. From interviews made with representatives of the city and plan materials it appears that the city does not have any significant problems related to degradation or escalation of crises in any specific areas. The Regeneration Programme is more a coherent modernisation concept of the city – its public space – and improves its appeal by making it a better city to live in. A significant part of activities included in the plan is financed from the city's funds, where the Stargard TBS – which manages all municipal housing resources of the city and premises let on commercial basis – plays an active role. The fact that the private sector is very active in the city and carries out projects which coincide with the Local Regeneration Programme from their own resources is worth stressing. An example here may be the Jasieński Kompleks sports and entertainment complex integrated into old boiler house buildings of the bankrupt Luxpol knit fabric manufacturing plants (music club, boxing club with a state-of-the-art Boxing Halls in Poland). Reconstruction from scratch of the medieval old town in the city centre is another interesting project. The project is now in progress. From interviews with representative of the city it appeared that the new vehicle was considered as an additional and supplementary element of financing from the city’s own funds. At present, the city is not preparing any project which may be financed from the new vehicle. This is mainly due to the fact that detailed information on the regeneration activity
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implementation system with funding from the Regional Operation Programme is not available. The regional cities know that implementation will be based on the JESSICA vehicle. Only after additional information is obtained, should the city revise its plan and start working on potential projects. However, attention should be given today to the "Integrated City Communication Centre" (Zintegrowane Centrum Komunikacyjne Miasta) project which may potentially become a project financed from the new vehicle. The project consists in organising space around the railway station (PKP) and the coach terminal (PKS) and the terminal for the popular minibuses. In the effect of regeneration, the railway station and the coach terminal are to be linked to the urban building development. As part of the project, a base for small service and shopping outlets and a tourist information point are to be created and a water tower is to be adapted to public purposes, including an observation spot. The project is currently being developed by all the parties involved and its scope might be reformulated in such a way that some activities may be financed from JESSICA resources. More information on the project is presented in Section 4.3.1.
1.1.2.3 Summary of regional aspects Regional Operational Programmes define activities in the framework of the urban development priority in different ways. In the majority of cases, ROPs provide for the option of using JESSICA as a way to support projects. Activity results, project selection methods, and amount of resources for carrying out the activities are defined in different ways in the Regions. Provisions of ROPs have been developed for the grant mechanism and need to be revised at least in parts should JESSICA be implemented. The information collected shows that the biggest cities in the Regions are more aware than the others of the need to develop long-term urban development plans and to carry out comprehensive projects which fulfil many social needs at the same time. This awareness is largely due to the fact that the cities, in general, have more needs for regeneration, which is also reflected in the establishment of separate regeneration departments within their Municipal Offices. The cities are also better prepared for the introduction of repayable financing mechanisms for this purpose. With few exceptions, smaller cities concentrate their activities on the necessary renewal of most degraded residential buildings and central squares and streets only within resources they are able to obtain under the grant system. Little awareness is also observed among municipal clerks with regard to what financial vehicle JESSICA is. This is understandable due to the recent establishment of the initiative, but it means that significant steps need to be taken to inform municipal offices and other interested parties on the new vehicle. It is worth noting that in towns meetings on the JESSICA initiative were usually attended by employees of EU fund departments, whereas in cities – also by employees of regeneration departments. This means that JESSICA is recognised as a substitute for grants; therefore, employees of departments responsible for obtaining EU funds are interested in acquiring knowledge in this regard. This generates a conflict of interests, because employees of such departments lose a potential source of financing urban projects from grants. According to the Consultant, those responsible for regeneration and spatial development of a city should be directly interested in the JESSICA fund. The so-called climate for cooperation with private partners is an essential factor which may affect the success of the vehicle. Regional differences can also be observed in this aspect. In urban areas where projects are successfully carried out with participation of private entities interesting projects which may be financed from the JESSICA fund are easily identifiable. On the other hand, where no positive experience or even negative experience exists, there is conviction that the initiative might be unsuccessful.
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1.1.3 Assessment of capabilities of public administration and state agencies to financially support JESSICA Public administration entities support regeneration processes in different ways. Obviously, municipalities which manage their own areas and whose commune-specific tasks include issues of spatial order, property management, environment and nature protection, communal housing, conservation and care for historical buildings, communal green and tree-covered areas, and commune promotion, etc., in accordance with Art. 7 of the Act on Commune Self-government (Dz.U. 1990, No 16, item 95), are most active in this field. The said commune-specific tasks are directly related to the state of infrastructure in a given area and should constitute a sufficient reason for municipalities to undertake regeneration activities. At other self-government levels the situation is not quite the same. Activities of the voivodship self-government are aimed to improve competitiveness in the whole Region, which does not mean that regeneration projects essential from the regional perspective are not supported. Powiats which do not generally have any vehicles to carry out regeneration activities (except for independent cities which essentially act as municipal communes) are of least importance with regard to regeneration activities. On the other hand, there are not enough public agencies on the market, whose basic objective is to finance regeneration. The existing special purpose funds, e.g. Thermo- Modernisation Fund managed by the Bank Gospodarstwa Krajowego, concentrate on improving energy efficiency of buildings. Such funds are of additional and supplementary nature. Having regard to the aforesaid, further analysis will principally concentrate on municipalities (urban gminas) which organize programmes with the fundamental objective of carrying out regeneration in their areas. In order to carry out its activities, public administration may use different instruments, including: • Business activity (purchase and disposal of shares). • Granting of loans and guarantees. • Acquisition and sales of properties, using them as collateral for raising debt finance. • Concluding agreements with other entities. • Drawing long-term loans and credits, and • Granting support to other territorial self-government entities, including financial support. From a legal point of view, public administration has all instruments to cooperate with Urban Development Funds. In addition, a self-government entity e.g. Marshal Office may grant financial support, but they also may receive support e.g. City Council (in theory, in this way they may become the owner of funds in UDFs that is originally owned by Marshal Offices acting as the Implementing Institution). Public sector entities use the instruments in different ways; examples of urban initiatives concerning regeneration are presented below. In-kind and cash capital contributions Kaskada shopping centre in Szczecin. The City of Szczecin made a contribution to the Centrum Handlowe Polska 1 (CHP1) special purpose company in the form of 1,28h of land, situated in the city centre. By means of an in-kind contribution, the city holds 23% of shares in the company and the other 77% is held by Cura Beteiligungsgesellschaft Polen, a company from ECE capital group, as a result of cash contribution. The CHP1 is building the entire multifunctional complex with an estimated value of ca. EUR 160m. Agreements with ECE also govern issues related to redevelopment of the road system around the future
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shopping centre. The works will be carried out by the City; however, the municipality's partner will co-finance them up to PLN 8m. ECE will also draw up necessary design documents at its own expense, and it will obtain a building permit for the City. As part of the agreement, the investor shall be obliged to build a new seat for the Puppet Theatre Pleciuga (PLN 35m expenditure). The opening of the shopping centre is due in 2010. Cities undertake various types of regeneration related activities. They also apply different forms of support. The amount of resources for such programmes is a great limitation in this case. Needs for regeneration are enormous, which is reflected in the fact that in case of each grant programme the amounts applied for exceed the volume of available resources several times. Shortage of expertise in loan funds and tax allowances prevents an accurate analysis of these instruments. It should be noted, though, that the city is not obliged to establish any fund in the case of tax allowances – financial support will be granted to all those who meet conditions specified in the Resolution. Capital contributions to companies, which will by and large include land, are a separate issue. Joint venture experiences of cities and private investors show that a public discussion on the validity of city's activities, the issue of land appraisal, and the possibility of selling company shares need to be taken into account. This means that such activities are possible but they must be performed with significant public opinion support, transparency and political consensus. To sum up, public sector entities have a number of tools and instruments which may be used for regeneration. Usually, this refers to non-repayable grants the demand for which is enormous while internal resources of cities are limited. Due to the scarcity of the resources, new methods emerge to support this process, including the said loans, tax allowances, or bilateral programmes.
1.1.4 Selected projects carried out in the Regions Information on several projects carried out in the Regions was collected to illustrate sample investments which comply with regeneration issues. The information on projects comes from materials collected during visits in the Regions and from publicly available information, including Polish newspapers and weekly magazines, websites of individual project developers and investors, and other websites and Internet releases. Stary Browar Arts and Business Center in Poznań (Wielkopolskie Voivodship) Stary Browar (Old Brewery) was built on the premises of the former Hugger Brewery – over a hundred years old property. In 1890, the Brewery was expanded by a brew house, a malt house and a drying house with its characteristic chimney. The building architecture was typical of the post-industrial round-arched building style of the time, with red face brick facades, semicirularly arched windows and simple decorations also made of brick. In the pre-World War II period the brewery changed its owners several times. At the end of 1944, the Germans made bunkers in the Brewery’s cellars and basement. The Brewery was badly destroyed during the fights for Poznań. In 1998, Fortis Sp. z o.o. acquired the Brewery property from Lech Browary Wielkopolskie. After adjoining land was acquired from the Military Property Agency and private entities, work on the Stary Browar Business and Art Centre started. In the next 4 years many cultural events, including theatre premieres and operas, were held on the Brewery's premises. In 2002, the first stage of Stary Browar shopping, art and business centre construction started. The Atrium – the shopping part of the Brewery – was opened at the end of 2003, whereas its second wing, the Arcade, was open at the beginning of 2007.
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Source: www.starybrowar.pl Stary Browar is visited by over 1 million customers per month. Its total area of 22,500 m2 is occupied by 94 tenants (shops, service points, catering lane). Some 400 parking spaces located in a three-storey ground car park are prepared for customers.
Source: www.starybrowar.pl The redevelopment of Stary Browar was managed by Fortis Sp. z o.o. owned by Grażyna Kulczyk. The entity was established to redevelop and modernise the old brewery into the modern Stary Browar Business and Art Centre. At present, the company is responsible for management and planning of further development of the Stary Browar complex. The successful project completion has been confirmed by many awards granted to Stary Browar. The most recent one was awarded at the beginning of December 2008 in the competition organised by the International Council of Shopping Centres (ICSC) in Phoenix, Arizona. Stary Browar won the statuette and title of the best world shopping centre in the category “Expansion". Okrąglak in Poznań (Wielkopolskie Voivodship) The department store building was erected between 1948 and 1955 in the centre of Poznań. The building is located near the Market Square at Mielżyńskiego 14 and is considered an outstanding architectural work of Polish modernism. The owner of Okrąglak, Centrum Development & Investments, is preparing its complete regeneration and conversion into an office building. The facility has lost its splendour with the change of the economic system and development of modern trade forms and shopping centres resulting from market liberalization. Nonetheless, due to its location and architecture, Okrąglak has become the hallmark of
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Poznań and is one of most recognisable buildings in the city to date. Moreover, due to its value it has been listed in the register of historical buildings.
Source: www.centrumdi.pl The aim of the building regeneration will be to restore its original outlook and to adapt it to the function of a modern office building supplemented with shopping and catering functions. As a Class A building, it will comply with all requirements for a modern, intelligent commercial building. Some 6,000 m2 of modern office space has been planned on eight storeys. The internal, round staircase with three flights of stairs will be maintained and its original outlook will be restored together with other interior decoration elements which will remain in the new arrangement of office space. Footprint: 10,312 m2 Office space: 5,100 m2 Commercial space: 1,100 m2 Design: JEMS Architekci. A private company, DTZ, is responsible for the Okrąglak’s commercialisation. The investment started in the 3rd quarter of 2008 and is planned to be completed in the 1st quarter of 20107. Examples of projects completed in the Regions under Integrated Regional Development Operational Programme 2004-20068 In the majority of cases, projects carried out under IRDOP 2004-2006 included projects financed in 100% from public funds. The following examples are listed to illustrate the nature of investments currently co-financed from EU funds. Zachodniopomorskie Voivodship • Renovation of front facades of tenement houses in the historical zone of Mieszkowice • Regeneration of the Old Town in Białogard – Stage I • Renovation and modernisation of a facility at 22 Wielkopolska street in Szczecin for the needs of disabled persons • Regeneration of a historical building of the Vice-Chancellor’s Office at the Pomeranian Medical University in Szczecin • Renovation of a historical Public Library building in Dębno – Stage III • Regeneration of Połczyn Zdrój – Stage I
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• Redevelopment of a historical traffic route in Darłowo at Powstańców Warszawskich street (Stage II) • Modernisation of Klasztorna, Malarska, and Piekarska streets in Chojno • Redevelopment of streets and adaptation of a building in the regenerated part of Karlino city • Enhancement of social and educational infrastructure as part of the Higher School of Applied Arts (WSSU) building regeneration in Szczecin • Regeneration of the Plac Wolności square in Moryń together with adjoining buildings • Construction of a small scene of the Teatr Współczesny in the Bogusław arcade in Szczecin Wielkopolskie Voivodship • Modernisation and expansion of a historical town hall building in Murowana Goślina for public library operation purposes • Renovation of a historical building complex of the training and education centre for deaf children (Ośrodek Szkolno-Wychowawczy dla Dzieci Niesłyszących) at 4a Bydgoska street in Poznań – Stage I • Regeneration of post-military buildings at Wrzesińska street in Gniezno for educational purposes – a kindergarten
1.1.5 Conclusions for the application of JESSICA in the Regions The material and analyses presented herein lead to the following conclusions about the validity of JESSICA application in the Regions: • The analysed Regions are characterised by a considerable demand for urban regeneration projects, both in the biggest cities and in small and medium towns. Areas which need regeneration are degraded parts of town and city centres, and post-military and post-industrial areas. Therefore, there is a significant market potential for regeneration projects. • The majority of regeneration projects co-financed so far from EU funds have consisted in renovation of properties of typically public nature (renovation of streets, building facades, historical buildings) without investment elements which could generate direct profits for cities. The EU intervention was to co-fund projects which do not generate income. Therefore, the scope of projects needs to be defined in a different way to change project financing from the grant system to the refundable financing system. • The number of projects completed and amount of resources available under IRDOP 2004-2006 were insufficient compared to the needs. Therefore, self-governments need to financially support the urban regeneration process. • EU resources available in the current programming period of 2007-2013 will not allow all projects planned by cities to be carried out. However, the availability of the funds is of great importance to the cities and their use is of high priority in a medium-term perspective of the cities’ operation. The criteria for using EU funds included in ROPs involve, however, many restrictions with regard to the location and target use. As a result, projects carried out with participation of JESSICA must meet all restrictions under ROPs. • Significant investments with participation of private investors are undertaken in main cities of the Regions, which will contribute to urban area regeneration. Examples of such projects indicate relatively simple mechanisms of cooperation between self- governments and private entities. Cities which hold properties sell them to private investors or form companies together with investors, making in-kind contributions to special purpose companies. In the majority of cases, private entrepreneurs Page 22 Ove Arup & Partners International Limited Sp. z o. o. Department in Poland January 2009
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(developers) are responsible for project preparation and execution. Therefore, projects may be defined in a way to make the recovery of expenditure possible; in addition, private initiatives may be used for regeneration projects. • In a short-time perspective, developers may be expected to slow down their activities in 2009-2010 due to a reduced availability of bank loans in the effect of the crisis on financial markets which started in the US in 2007. However, it is hard to predict to what extent this will limit the capacity of developers to plan and carry out new investments. • Cities still own properties which may be used as their contribution to special purpose companies carrying out regeneration projects. This creates a significant potential for carrying out projects with the use of JESSICA funding. • Cities are interested in long-term urban development and city growth stimulation. All additional institutions which support regeneration projects financially, organisationally or conceptually may count on a considerable support by municipal authorities. That is to say, a JESSICA-type urban development oriented fund, when placed on the market in such conditions, may succeed in its long-term operation. • The investment preparation and execution process is time-consuming and takes from 2 to 5 years. This is why cities which initiate regeneration projects expect to be given information about how to use EU funds in due advance to make appropriate organisational preparations and secure resources in their budgets. From this perspective, the decision on implementing the JESSICA initiative needs to be made in the shortest time possible.
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1.2 Task 1.2 Financial vehicles for urban area regeneration
Task 1.2 Identification and evaluation of the problems and gaps between the supply and demand for financial engineering actions and products in the urban regeneration sector that could be supported by JESSICA. Can JESSICA efficiently respond to any market shortcomings in the Regions?
1.2.1 Need for regeneration project financing Market demand for regeneration projects is mentioned in Section 1.1. Public projects certainly have huge demand for financing. Current regeneration investments carried out by cities have been based on spending public resources whose availability is limited by budget size of the cities and their current debt margin. Bigger cities have developed their demand for public investment financing to such an extent that they already have high debt ratios. This limits their financing capabilities and creates demand for extra-budget forms of financing of urban investments. From the city’s point of view, specific fields which need to be financed include social housing construction, renovation of existing residential buildings, renewal of building facades near main city streets, improvement of functionality and tourist value of existing historical buildings, and development of land after liquidated industrial plants, mines and post-military areas. A considerable demand for non-repayable EU resources for financing such investment is currently observed in cities. The idea behind regeneration is socio-economic recovery of city areas through creation of conditions and motives to be used by inhabitants of a specific area. A wide range of investments concentrated on a small area, which often exceed organisational and financial capacities of a city, is required to renew cities. It is essential that private initiatives are activated to develop projects, and through support to such initiatives and their combination with necessary public investments – to carry out fundamental city renewal objectives. Therefore, to finance such investments from public funds only is not the most advantageous solution. Cities are slowly becoming more and more aware of this, which should lead to increasing their involvement in more complex projects with participation of private partners and use of repayable forms of financing. Regeneration projects carried out by private partners will certainly be based on external funding. However, both entrepreneurs and territorial self-government entities have limited credit capacities and any forms of financing with extra-bank or extra-budget support should quickly be used for undertakings. Financing costs and availability conditions are key financing parameters. Therefore, all financing sources with comparable or more advantageous conditions than commercial debt financing should quickly be applied. Where cities have significant debts and entrepreneurs have limited credit capacities, the very fact that an additional source of financing is available is of great advantage which allows projects to be carried out. To date, EU funds have been the most attractive source of project co-financing due to its non-repayable character. However, their use involved significant formal requirements, which made them less attractive to private entrepreneurs. If funds are available both as grants and loans (JESSICA), grant funds will continue to be more attractive than loan funds under similar formal requirements. However, if grant funds are unavailable, quasi-commercial loan funds, such as JESSICA funds, may be the most attractive form of project financing available on the market. Some of housing associations Towarzystwa Budownictwa Społecznego (TBS) are an example of limited activities due to the scarcity of available financing. Apart from contributions from owners (cities), the associations also use contributions from future tenants (max. level limited by legislation) and funds from the National Housing Fund (KFM) managed by the Bank Gospodarstwa Krajowego. In the case of large-scale activities by TBSs, the availability of funding from the KFM is the main limitation for their activity
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development due to strict restrictions with reference to credit concentrations on one TBS. EU funds are of no help here because KFM financing and EU financing are legally exclusive; however, this case illustrates that the demand for urban development project financing outstrips the supply. The issue of housing development project financing from JESSICA is further discussed in Section 4.4. Therefore, demand should not have any significant limitations with regard to financing from the JESSICA fund, unless conditions of availability of such financing are considerably restricted in relation to conditions of availability of grant funds and financial conditions offered by banks and other credit institutions. However, cities may also be required to offer organisational support for project preparations.
1.2.2 Availability of funds for regeneration activities As mentioned earlier, for commercial undertakings, such as e.g. shopping centre construction, own city resources, EU funds, and private capital are now the fundamental source of financing of regeneration activities. In the case of own city resources, funds are organised both in the form of direct contributions to investment projects and through special funds, e.g. established for renewal of housing resources or historical buildings. The analysis of available financing sources was carried out as part of the legal analysis of JESSICA implementation in Poland (a study from the WKB). Only few financial sources are available and they often concentrate on narrowly defined projects, such as thermo- modernisation activities, support to the housing industry, support to small and medium enterprises, water sewage management and environmental protection projects, etc. Moreover, the process of obtaining financing from such a source often involves complicated procedures and takes a long time. At present, Poland does not have any funds supported by public resources and specialised in financing complex regeneration projects. Banks continue to be the source of repayable funds, which may grant credits to both cities and institutions and/or companies which carry out the projects. Banks will remain the basic source of external financing, though availability of such financing depends on specific criteria of granting credits and is closely related to financial markets’ condition.
1.2.3 Key issues Key issues related to the availability of financing for urban regeneration projects include: • Close dependence on municipal budgets and limitations resulting from debt ratios (historical building renewal funds, housing resources renewal funds). • Financial vehicles available on the market do not allow a complex urban area regeneration project to be financed. • KFM resources for social housing financing encounter obstacles in the form of maximum debt ceilings. • Regional development agencies tend not to get involved in financing typically urban investments for formal reasons. • Property developers are cautious about getting involved in joint ventures with municipal self-governments. • Procedures for acquisition of funding from public institutions are complex enough and often involve prolonged application processes. • Financing institutions are not actively engaged in project creation and preparation.
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1.2.4 Conclusions for JESSICA Marshal Offices are conducting talks with potential beneficiaries based on the current urban regeneration programmes. In the majority of Regions, the talks concern the existing available non-repayable aid for projects to be carried out by cities (except for Wielkopolska, where potential beneficiaries have been informed on other methods of distributing the resources from the beginning). The change in the concept of distribution of available funds, i.e. abandoning non-repayable aid for the repayable JESSICA vehicle, may be received with surprise and disappointment by the cities. Moreover, unaware of such vehicles, potential beneficiaries have often not defined projects which might have been financed by JESSICA, i.e. by a repayable capital (loan) granted under advantageous terms and conditions. Breakdown of resources available under ROPs into grants and contributions to HFs/UDFs is possible, but this solution will significantly limit investment opportunities of the emerging fund. An appropriate policy of regional authorities in this regard will have a significant impact on the success of the new vehicle. The emergence of a new financing source creates a new range of opportunities and may be expected to make emerge new projects which used to be rejected at the preliminary assessment stage. As regards financial vehicles offered by JESSICA: • Funds must be able to participate in projects through various products, i.e. loans, guarantees, equity contributions. At the same time, projects not only need financial, but also technical assistance. • Decision procedures should allow investment decisions to be issued very quickly and need to be transparent. Finally, we believe that JESSICA is a financial vehicle which fits well in the circumstances of the lack of regeneration funds and large market demand for urban area regeneration projects.
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1.3 Task 1.3 Budgetary effects of JESSICA for the Managing Authority
Task 1.3 Presentation of budgetary implications for MA in the Regions of using JESSICA – comparative cash-flows showing the difference between employing traditional grant vs. JESSICA mechanisms. Highlighting differences in timing, interest income, tax charges, etc. Projections for cash flows resulting from JESSICA and – as a comparison – with application of a grant mechanism were developed to analyse financial effects of JESSICA implementation (from the Managing Authority’s point of view). The initial value of resources available under ROPs for regeneration financing will be the same for grant financing and the JESSICA vehicle. In the case of the Regions analysed these resources will come from EU funds dedicated to urban area regeneration measures under ROPs. However, it is possible that the JESSICA fund mechanism will be used to benefit from resources derived from other measures. For the analysis of JESSICA budgetary effects, an example amount of available funds similar to the scale of resources available under ROPs was assumed, but without detailed reference to any one of the Regions. Specific aspects of JESSICA implementation in the Regions are discussed in Section 5.1. The projections are made in Polish zlotys. For the currency translation, a uniform EUR exchange rate at EUR 1 = PLN 4.00 was assumed during the entire analysis period.
1.3.1 Cash flow projections arising from the application of traditional grant mechanism For the cash flow projection arising from the grant mechanism application, the following were assumed: • In 2009, project competitions will be announced and agreements with beneficiaries will be signed. • In 2010, first payments will be made. • Expenditure of resources will last 3 years (which is a safe assumption, having regard to the fact that many projects eligible for grant financing are now ready to be carried out in this system). • Project under grant financing would mainly concern public space and would not generate income. • There will be no pre-financing costs because territorial self-government entities will secure their so called own contributions at the beginning of each project and will use these resources in settlements with the Managing Authority in two-month cycles throughout the project. • If a grant method is applied for financing regeneration activities, the grants will be exempted from corporate income tax (under the existing regulations). Cash flow projections resulting from the application of the grant mechanism, developed on the basis of the above assumptions, are presented in the table below.
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Table 1. Cash flows resulting from the application of the grant mechanism [PLN mil]
Item 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Available funds balance at year end 200,00 200,00 133,33 66,67 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 Inflows 66,67 66,67 66,67
Outflows - grant utilization -66,67 -66,67 -66,67
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1.3.2 Cash flow projections arising from the implementation of JESSICA For the projections of cash flows arising from JESSICA implementation, the assumptions presented below were made. Assumptions regarding HFs: • A Holding Fund will be established for each voivodship in mid-2009; the EIB will become the Holding Fund operator (this issue is further discussed in Sections 2.1.2.2 and 2.2). • HF management contract will be signed for the period until mid-2011. The HF will be liquidated after that period. • In the first year, the HF will concentrate on UDF selection and on project preparation support; and in the second year of its operation it will supervise UDF operation. • The HF managing entity will receive an annual remuneration of 2% of the fund’s capital. The remuneration will be the fund's cost. • Till the end of 2010, the HF will maintain its financial resources on bank deposits, thus obtaining interest revenue (4.0% per year). • At the beginning of 2011, the HF will transfer its capital to UDFs. • Interest revenue earned on HF resources (fund’s capital) temporarily deposited in banks will be taxed at 19% (tax at source) – as with taxation of revenue of a legal entity with its registered office and its management based in the territory of Poland. Only if a holding fund is established as an investment fund (under the Act on investment funds), or e.g. as a special purpose fund, will it be exempted from tax. In such case, revenue of entities participating in the investment fund would be subject to taxation to the extent of profits on this investment – as with taxation of net profits on investments in general. Taxation of potential profits on investing in a HF earned by entities transferring resources to the fund was however outside the scope of analysis. • Taxation of a fund operator’s profits on managing the HF (including revenue from management fee reduced by management costs) does not concern the perspective of the Managing Authority. It was therefore not taken into consideration in financial projections. Assumptions regarding UDFs: • UDFs will operate as separate blocks of finance, entrusted by HFs into the management of a selected entity. • UDF operators will be selected in mid-2010 and will prepare themselves to start their operating activities by the end of that year. • UDFs will conduct their operations starting from the begining of 2011. • UDFs will operate as loan granting funds. This assumption is for projection simplification purposes only. In fact, the range of products may comprise loans, guarantees and equity contributions. • During the first three years of operation, all UDF resources (i.e. capital from HFs) will be distributed in the form of loans for regeneration undertakings. • Entities managing resources transferred to UDFs will receive remuneration of 3% of a UDF capital per year. The remuneration will be the funds’ cost. • UDF resources temporarily not allocated to financing regeneration projects will be maintained on bank deposits to generate interest revenue (4% per year). • The average interest rate for the whole portfolio of loans granted by UDFs will be 5% per year. • The average period of loan repayment will be 20 years.
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• Repayments will start after 2 years from granting a loan (2-year grace period). • No UDF commission income is assumed. • Interest revenue earned on UDF resources temporarily deposited in banks will be taxed at 19% (tax at source) – as with taxation of revenue of a legal entity with its registered office and its management based in the territory of Poland. • Interest revenue from loans granted by UDFs for regeneration undertakings will be levied a 19% tax rate. Only if a UDF is established as an investment fund (under the act on investment funds), or e.g. as a target fund, will it be exempted from tax. In such case, revenue of entities participating in the investment fund would be subject to taxation to the extent of profits on this investment – as with taxation of net profits on investments in general. Taxation of potential profits on investing in a UDF earned by entities transferring resources to the fund was however outside the scope of analysis. • Taxation of profits of entities managing resources transferred to UDFs (including revenue from management fee reduced by management costs) does not concern the perspective of the Managing Authority. It was therefore not taken into consideration in financial projections. Cash flow projections resulting from JESSICA implementation, developed on the basis of the above assumptions, are presented in the table below.
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Table 2. Cash flows resulting from the implementation of JESSICA [PLN mil]
HF and UDF Set-up Utilization of EU Funds Long term fund operation Item 2008200920102011201220132014201520162017201820192020 Holding Fund balance at year end 201,24 203,75 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 Inflows 201,24 2,51 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 contribution of initial capital 200,00 operating profit (positive) 1,24 2,51 0,00
Outflows 0,00 0,00 -203,75 transfer of capital to UDF 0,00 0,00 -201,71 other outflows 0,00 0,00 0,00 operating loss (negative) 0,00 0,00 -2,04
Operating activities 1,24 2,51 -2,04 intrest income on deposit (gross) 4,00 8,10 0,00 tax on interest income -0,76 -1,54 0,00 intrest income on deposit (net of tax) 3,24 6,56 0,00 cost of management fee -2,00 -4,05 -2,04
Urban Development Fund balance at year end 203,80 205,11 206,97 209,07 211,17 213,30 215,45 217,61 219,80 222,00 Inflows 209,92 7,44 8,04 8,35 8,40 8,50 8,58 8,66 8,74 8,83 capital transfered from MA/HF 201,71 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 net interest on loans and deposits 8,20 7,44 8,04 8,35 8,40 8,50 8,58 8,66 8,74 8,83
Outflows -6,11 -6,13 -6,18 -6,24 -6,30 -6,37 -6,43 -6,50 -6,56 -6,63 cost of management fee -6,11 -6,13 -6,18 -6,24 -6,30 -6,37 -6,43 -6,50 -6,56 -6,63
Operating income 8,20 7,44 8,04 8,35 8,40 8,50 8,58 8,66 8,74 8,83 interest income on loans (gross) 3,36 5,04 8,41 9,92 9,85 9,99 10,08 10,16 10,23 10,31 tax on interest income -0,64 -0,96 -1,60 -1,88 -1,87 -1,90 -1,92 -1,93 -1,94 -1,96 intrest income on loans (net of tax) 2,72 4,08 6,81 8,03 7,98 8,09 8,17 8,23 8,29 8,35
interest income on deposit (gross) 6,77 4,14 1,52 0,39 0,53 0,49 0,51 0,54 0,56 0,59 tax on interest income -1,29 -0,79 -0,29 -0,07 -0,10 -0,09 -0,10 -0,10 -0,11 -0,11 intrest income on deposit (net of tax) 5,48 3,36 1,23 0,31 0,43 0,40 0,41 0,43 0,46 0,48
Relevant data loans extended in year 67,24 67,24 70,63 0,00 14,05 12,35 12,38 13,11 13,74 14,38 loans repayment 3,36 6,72 10,26 10,26 10,96 11,58 12,19 12,85 loans balance 67,24 134,48 201,75 195,02 198,82 200,92 202,34 203,87 205,42 206,94 unused capital in UDF 136,56 70,63 5,22 14,05 12,35 12,38 13,11 13,74 14,38 15,05
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Conclusions from the analysis of HF cash flows: • HF operation from mid-2009 to the end of 2010 may generate surpluses of interest revenue over operational costs. • HF operation after transferring resources under UDF management will generate operating loss because interest revenue will not cover HF service costs. Conclusions from the analysis of UDF cash flows in the loan model adopted: • UDF capital in nominal terms will increase for the interest rates (interest of loans and bank deposits) and management costs assumed. • In the perspective up to 2015, the amount of resources allocated for project financing will be larger than in the traditional grant system. If UDFs are not involved in regeneration projects in the form of loans but through capital contributions, the stream of payments to a UDF will be significantly different. It will not be possible to allocate all initially available resources because receipts of cash income from completed projects will be shifted in time. This will result in no income stream for covering commissions of the fund manager. That is why resources for periodic fund management remuneration payments must be reserved in financial plans of the fund. In the case of investments through capital contributions, a common solution is to pay some part of remuneration to the manager when profits are earned, which also makes a payment conditional upon investment performance. If a UDF grants a guarantee, funds will need to block some resources in bank deposits at an amount corresponding to the amounts guaranteed (to establish a contingency fund). In this case, liquid means for remuneration of funds’ management will also need to be reserved.
1.3.3 Financial effect of JESSICA implementation In the effect of using JESSICA as a vehicle for carrying out activities under operational programmes, EU resources will be used in a different way, both in terms of payment deadlines and the nature of aid, i.e. aid will be repayable, as opposed to non-repayable aid granted traditionally. This should allow an increasing pool of resources for urban development to be cumulated in a long-term perspective. The short-term benefit from setting the JESSICA programme will be that it will be possible to be granted a complete pool of resources to be used as part of a relevant ROP measure. Until the resource are used in accordance with their destination, they may be held on interest-bearing bank accounts and generate income, which will allow at least part of fund operation and management costs to be covered. Results of analyses carried out based on cash flow projections drawn up for grant financing and for JESSICA are presented in the diagrams below.
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Diagram 1. Comparison of resources available in individual years for financing regeneration projects in grant mechanism and in JESSICA
Comparative capital balance
250
200
150
PLN mil. PLN 100
50
0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 years
Traditional Grant Financing JESSICA HF/UDF Fund
Diagram 2. Comparison of amounts expended in individual years on financing regeneration projects in grant mechanism and in JESSICA
Traditional grant financing vs. JESSICA
300
250
200
150 285 PLN mil. PLN 100 200
50 71 67 67 67 67 67 14 14 12 13 14 12 0 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021e v ti a years l 2008-2020 Subsidy flow JESSICA loans extended cumu
As the above diagrams show, application of JESSICA will have the following budgetary effects, as compared to a traditional grant system: • Owing to the repayable nature of JESSICA financing, resources assigned for regeneration will not be reduced. • In the perspective up to 2015, in nominal terms, the value of resources allocated to project financing will be by ca. 10% higher than in the traditional grant system. This will Page 33 Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce January 2009
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be possible because resources returned to JESSICA funds will be reused as loans are repaid, and because JESSICA resources will increase by interest on project loans and on bank deposits. • Financing of regeneration undertakings will probably start 1 year later, i.e. from 2011, but will last longer due to reinvestment of resources.
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1.4 Task 1.4 Non-budgetary effects of JESSICA for the Managing Authority
Task 1.4 Assessment of non-budgetary implications for MA in the Regions of using JESSICA regarding: volume, quality (including sustainability) and timing of Urban Regeneration investments. In the absence of functioning UDFs, HFs or similar structures, selected case studies should be presented illustrating how JESSICA-like fund-based investments could support Urban Regeneration. Non-budgetary effects of the JESSICA vehicle implementation are analysed from the Managing Authority’s, i.e. the Marshal Office’s, point of view. The analysis of non-budgetary effects of JESSICA implementation does not include an analysis of all effects of regeneration investments and concentrates on the analysis of potential effects for the Managing Authority and for the entire JESSICA funds system arising from the application of the new vehicle as compared to the traditional grant system. This section includes a description and conclusions from one of the biggest regeneration projects carried out in the UK in the last 30 years.
1.4.1 Example of international experience from regeneration projects Example of a comprehensive project of a city part regeneration – London Docklands9 In the mid-1930 the London docks were at their peak. Over 35 millions tons of cargo were handled each year, carried by 55 000 ships. The port employed more than 30 000 people. It was an area based on the growth and prosperity of traditional activities including ship repair, heavy engineering, food processing, warehousing and distribution. However in the post-war period the prosperity of the port began to decline. As a key starting point in the review of the role the docks played in the city’s economy and change in the approach to the whole area was the Rochdale report issued in 1962 by a committee headed by Viscount Rochdale. It stated “As a general proposition we think that the port activity should be moved away from the centre of London and there is, on the face of things, land at these docks which could be valuable for redevelopment”. In the following years Port of London Authority started a pattern of closures. Meanwhile various scenarios for the regeneration of the area were developed. In 1974 the Docklands Joint Committee was established by the Secretary of State for the Environment in order to prepare and coordinate the implementation of the strategic plan for the redevelopment of the Docklands. The committee had to take into account all specific factors among which were: large amount of inhabitants in the area (55 000 people living in the docks), expected high unemployment in regard to the planned closures of the docks, limited financing, need of land acquisition (80% of the land was in public ownership). In 1977 Docklands became a partnership area and was provided with an allocation of £3,25m in 1978-79 and £15m per year for the next three years covering 1979-82. Within these resources the whole infrastructure program (housing, transport, infilling of the many dock basins, buildings redevelopment) was due to start. These relatively small amounts enabled work to commence on various fronts, though there was a constant need of more significant investments. Unfortunately, despite the endeavour of the Docklands Joint Committee, life and working conditions in Docklands had declined dramatically: • The population of London Docklands fell by 20% between 1971 and 1981. • The unemployment rate in London Docklands in 1981 was 17.8%. • In the three years between 1978-1981 10,000 jobs were lost in London Docklands.
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• In 1981 60% of the area was derelict, vacant or under-used. The realities of the project reinforced the determination of the new Secretary of State for the Environment, to obtain powers from the Parliament to establish urban development corporations with specific aim of creating one to take responsibility for the future of London Docks. Following this idea in July 1981 he designated the London Docklands Development Corporation (LDDC). The LDDC was provided with unprecedented powers in order to accomplish its tasks: • 12 members were directly responsible to and appointed by the Secretary of State for the Environment • Sufficient financial resources – initially an amount between £60 – £70 million per annum • Powers as a single development control Planning Authority enabling the Corporation to provide a ‘one stop service’ for investors and developers seeking advice and planning permission • Land acquisition powers • Powers as an Enterprise Zone Authority • Powers for marketing and promoting the Docklands area. However the Docklands inherited by the LDDC was isolated both physically and emotionally from the rest of London. It was not only difficult to get to, as the roads were poor and public transport to the area was virtually non existent, but few people in the rest of London thought that the area was worth visiting anyway. Docklands had overwhelming problems of social deprivation, poor housing and bleak prospects for education and employment in a physical context of dereliction and decay. LDDC presented framework documents which demonstrated the potential of Docklands by opening up development possibilities rather than closing down existing options. Most importantly the strategies provided a framework for regeneration with sufficient flexibility to allow for the changing economic and social demands that would certainly arise during the period of regeneration of such a large area. One of the first actions of the LDDC was to formally invite the Department of the Environment to reappraise the historic buildings of Docklands. This was completed in 1982 and 116 buildings were added to the statutory list of Buildings of Architectural and Historic Interest. What more, LDDC considered the dock and Thames as the most powerful symbol of the area’s heritage and recreational amenity. This was the special asset that distinguished the area from any other part of London. In 1985, once the broad strategy for regeneration had been established local LDDC offices were set up to forge closer links with residents, community groups and businesses as specific development proposals were brought forward for consideration and implementation. In the mid 80s the process of regeneration was running at its full speed. In order to draw investment into Docklands and away from London’s more prosperous areas a special Enterprise Zone was established. With further encouragement of the LDDC this led the developers and house builders to test the emerging market. The success and demand was so big, that the contractors acquired their own sites for further development. What LDDC has perfectly understood and managed during the process of redevelopment of Docklands were the constraints and opportunities that had a fundamental bearing on the design solution; the site configuration, ownership, boundaries, street layout, open spaces, adjoining buildings and the site's orientation. All of these had to be considered together simultaneously because of their mutual impact. Thanks to this consciousness and sustainable approach realization of the Docklands project was possible.
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Since 1981 and as a result of the LDDC's success the population of London Docklands has increased from 39,400 to more than 80,000 and the number of jobs has risen from 27,200 to 72,000. 21,600 new dwellings have been built and 2.3 million sq. meters of new commercial buildings have been completed, allowing the number of businesses to increase from 1,000 to 2,450. The respective unemployment rates lowered from 17.8% in 1981 to 7.2% in December 1997. Public investment of £1.799 billion has generated £6.5 billion of private investment. However the regeneration of Docklands is far from complete. Despite the massive improvement that can be witnessed to date it will take a generation for the full potential of the area to be realized and all of the dereliction and decay eliminated. Conclusions • Land, building or any object regeneration is usually a long-term project. It involves not only sufficient resources to carry out the investment, but also willingness, skills and adequate methods to change the attitude of the local communities in the area of the investment. People are the final beneficiaries of the projects and that is why their approach should always be taken into consideration. • As in the above described example big regenerations projects can’t be done by the strengths of one organization. Usually various public institutions and private companies must work together in order to achieve the assumed results. The idea of public regeneration investments is to trigger the participation of private capital. In the Docklands example Secretary of State for the Environment with the help of Parliament had to establish a special urban development corporation (LDDC) which cooperated with developers, housing companies, local authorities, designers, transport planners, various private investors, ordinary citizens and many more in order to regenerate the area of the former port. • What is interesting is that about half the Corporation's £1.8 billion investment has been spent on transport infrastructure. Beside the core area of regeneration projects the complimentary investments made in order to adjoin the project to the cities infrastructure are of an extremely high importance. Among these the most valuable seem to be properly prepared transport scheme, as without good communication with the rest of the city, the regenerated area might be left alone to it’s own existence. • The successful regeneration of a large urban area such as Docklands not only requires substantial levels of public and private investment, improved education and training and employment prospects, it also requires an improved environmental quality. To the people managing the LDDC the design of the objects in the area, urban planning and keeping the project coherent were the most important factors influencing the future interest of investors and inhabitants of the regenerated port. To keep the quality of the works on one level LDDC appointed a special Urban Design Advisory Group, which consisted of eminent architects and other designers with an interest in the urban environment. The Group met on regular basis throughout the year to consider key projects at critical stages in their development. As a result of the development of the LDDC's design strategies, projects within the UDA have received more than 90 awards for planning and design. Taking the above model into account, such special advisory groups could be appointed to advise the Urban Development Funds in cities, which will use financing within the JESSICA initiative. • From the JESSICA initiative point of view the most important thing in regard to regeneration projects is to combine public investments with private financing. In Docklands LDDC through its £1.8 billion investment of public money has levered in £7.2 billion of employment generating private investment: hotels, restaurants, shops, factories, print works, offices and leisure facilities. Although it was Government policy that the majority of new development within the Urban Development Area would be funded by private investment, the LDDC was charged with the task of creating a
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physical environment which would create the right setting to encourage such investment. This involved the construction of transport and community infrastructure where the LDDC as the commissioning entity could appoint the best architects and designers. To achieve such result LDDC had to collaborate with boroughs, Councils and other statutory providers in order to speak to potential private investors in one, clear voice. Private capital had to be sure that this investment is safe, backed with public plans for the redevelopment and eager to cooperate.
1.4.2 Non-budgetary effects of JESSICA implementation The following non-budgetary effects may be expected for the Managing Authority in case of implementing the JESSICA vehicle in the Regions in Poland: • Delegation of funds’ management and project selection responsibilities to an external entity. Duties of the Managing Authority will be transferred to HFs and UDFs which will become effective implementing bodies with regard to resources they have been entrusted with. • Fewer burdens on the Managing Authority related to verification of design documents and support for project preparation. • More burden on the Managing Authority at the JESSICA implementation preparation stage due to the novelty of the financial vehicle and the need to prepare formal implementation of the initiative. • Independence of project criteria verification by the UDF manager, according to closely defined criteria. In addition, the following effects may be expected with regard to the nature of projects: • JESSICA implementation will lead to preparation of bigger projects in terms of their scope and value compared to the traditional grant system. This will result from the need to take into account commercial income-generating investment elements, which will require increasing project scales. • Some 1 to 1.5 more years are required to clarify formal issues and make potential amendments to regulations, to develop agreements with holding funds, to prepare and carry out election procedures for the UDF manager, and for cities participating in projects to prepare budget decisions before JESSICA can be implemented and the projects prepared. The need for increased preparation efforts will also lead to shortening time for application processes and project execution; however, this time may be used for project preparation. Many projects already prepared in the programming period of 2004-2006 will need to be redefined in terms of JESSICA requirements. • Projects with JESSICA participation need to be of enhanced quality because preparation analyses for projects which generate return are more complex and thorough (market analyses, participation of private partners, involvement of UDF managing authority, bank participation in project financing, etc.). • Projects co-financed by JESSICA will probably need to have a more complicated organisational structure than projects carried out by cities in a traditional grant system. • In a short term, as a result of JESSICA application attention may be concentrated on income-generating projects. Projects which may not be redefined in a way to generate income will need to be financed from city’s own funds. • The form of repayable financing should contribute to stimulating entrepreneurship in creating and carrying out project, and thus increasing the impact scale of EU funds.
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1.4.3 Conclusions on JESSICA implementation effects The identified non-budgetary effects of JESSICA implementation in the Regions show that positive effects of JESSICA implementation prevail. JESSICA may contribute to better quality and more effective project preparation, and increase the impact scale of EU funds. Municipal offices show understanding of the purposes of implementing the new JESSICA financial vehicle and perceive it as an opportunity which may support regeneration projects to a significant extent. However, the Regions need to start distributing funds under ROPs quickly enough to be able to use them in the budgetary perspective of 2007-2013. The process of application selection has not started yet, which is due to the lack of several legal acts and the need for a more complete preparation of the JESSICA mechanism. This factor is certainly not in favour of a more efficient JESSICA implementation. At the same time, it also makes JESSICA be understood in the perspective of accomplishing this objective only. With time, urban funds where resources from projects will be repaid and potential subsequent contributions made may engage in more and bigger projects in terms of their value. This is to say, these funds are of long-term nature, which requires cities to act with awareness as to how to use JESSICA to accomplish broadly understood urban development objectives. The funds established also need to take account of long-term objectives of individual cities.
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1.5 Task 1.5 SWOT analysis for JESSICA implementation
Task 1.5 Analysis of Strengths, Weaknesses, Opportunities and Threats (SWOT) of applying JESSICA in the Regions, including SWOT analysis of JESSICA in achieving objectives as set up in ZROP and WROP.
1.5.1 SWOT analysis of applying JESSICA from the Managing Authority’s point of view Strengths • Quick payments and availability of resources from EU funds, possible accelerated certification of the use of resources • A wide range of financial products (loans, equity contributions, guarantees, mezzanine) • Flexibility of determining parameters of financial products • Expertise of the Managing Authority in developing loan and guarantee funds for other fields (small and medium enterprise sector) and in preparing the JEREMIE Initiative • Limited need to apply public procurement procedures at the project level, if the project is to be carried out by a non-public entity • Built-in feature of recouping the financial resources (financing is repayable) • Possibility of using financial leverage at the project level Weaknesses
. Limited range of applications of funds available under ROPs resulting from ROP requirements and the need to take into account pre-defined criteria for regeneration projects originally planned to be executed under traditional grant financing
. Necessity to apply additional tenders related to the selection of a UDF operator
. Lack of expertise with financial vehicles for urban development
. Lack of experience in managing UDFs and HFs
. Little awareness and understanding of JESSICA initiative among EU fund beneficiaries
. Relatively late JESSICA implementation in relation to 2007-2013 programming period (cities expect non-repayable financing, additional time for UDFs establishment needed) Opportunities
. The potential of several projects defined well enough to use repayable financing
. Projects do not meet financial gap criteria. Many projects may not meet the financial gap criterion because of too high return on investment, which prevents the eligibility for grants and the projects may be of interest to JESSICA
. Popular support for regeneration projects
. Cities aim to enhance living conditions in the face of increasing competition for labour force and tax payers between cities
. Availability of land in cities; significant areas in degraded parts of cities have a great commercial potential
. Difficult situation on the credit market makes developers more interested in alternative sources of financing
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. Considerable needs and interest of cities in obtaining funds for urban development
. Readiness of certain cities to co-finance regeneration projects Threats
. Lack of funds to co-finance projects in budgets of the cities involved in preparing EURO 2012
. Difficult situation on credit market and restrictive requirements of banks acting as creditors may limit the potential for obtaining debt financing for projects
. Passive approach of cities with regard to engaging in cooperation with private partners (negative public perception of cooperation)
. Unavailability of sufficient human and financial resources in self-government entities. Financial and human resources necessary to prepare the JESSICA vehicle implementation and operation, including know-how, are currently not at the disposal of Marshal Offices and cities. Therefore, additional involvement of time and financial resources may be expected in the initial phase.
. High debt ratios of city budgets. This factor may be significant when cities become direct beneficiaries of JESSICA products
. Potential conflicts of interests of partners participating in the initiative. Compared to traditional (i.e. grant) forms of urban development project financing in Poland, JESSICA implementation will be more difficult in terms of organisation and it will require more efforts to reconcile interests of institutions involved, both at the project level and at the level of HF and UDF operation.
1.5.2 Conclusions from the SWOT analysis The majority of weaknesses results from the lack of experience of regional and municipal self-governments in respect of operation of Urban Development Funds. This is natural due to the novelty of the instrument. The majority of weaknesses will lose significance with the passage of time. Market opportunities and demand for urban regeneration are strong enough to act as a factor motivating to overcome the weaknesses. The identified threats concern a medium-term perspective (debt, execution of EURO 2012 related projects), or are inherently related to cooperation between public and private sectors. In the end, in a long-term perspective, building enthusiasm in the cities for the Urban Development Fund concept implementation will be critical for the JESSICA initiative’s success in the Regions.
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2 Objective 2: Option appraisal of delivery mechanisms The aim of Objective 2 is to identify and evaluate various options to implement JESSICA in the Regions, bearing in mind the existing national and regional institutional framework, the constraints imposed by the current structures of ZROP and WROP, local market opportunities and limitations, the need to minimise management and implementation bureaucracy as well as other relevant conditions, which impact the decision.
2.1 Task 2.1 Strategy for JESSICA implementation in the Regions in Poland
Task 2.1 Indications of the most appropriate and advantageous strategy to implement JESSICA in the Regions including: evaluation of an option to establish HFs, indication of the optimum configuration/number of UDFs to be established in the Regions and general determination of scopes of their activity (including rationale for establishing UDFs for small and medium sized cities), etc. Recommendations should take account of urban priorities identified in ZROP and WROP and other conditions identified in the Regions. The proposed structures for the implementation of JESSICA should also take account of any legal constraints.
2.1.1 Key conditions for creation of JESSICA structures
2.1.1.1 General concept of the JESSICA vehicle This section presents a general concept of the JESSICA vehicle, to begin with a complete implementation model for the vehicle. This is a starting point for an analysis of implementation and organisation of the JESSICA vehicle under specific conditions in individual Regions in Poland referred to in this Study. A general concept of the JESSICA vehicle provides for financing urban development related activities using a structure which comprises Holding Funds (HF) and Urban Development Funds (UDF).
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Chart 1. Full theoretical model of JESSICA implementation
Managing Authority
Fund Optional: Holding Fund Operator
UDF I UDF II UDF III
Business Business Business Plan I Plan II Plan III
Project Project Project PPP PPP PPP SPV SPV SPV
Integrated Integrated Integrated Urban Urban Urban Development Development Development Plan Plan Plan
Source: European Investment Bank materials Under Council Regulation (EC) No 1083/2006 (Art. 44), Member States may apply financial engineering instruments, including Urban Development Funds and – optionally – Holding Funds, to implement operational programmes.
2.1.1.1.1 Holding Funds Holding Funds (HF) are defined in Council Regulation (EC) No 1083/2006 (Art. 44) as funds set up to invest in urban development funds. As results from Council Regulation (EC) No 1083/2006 (Art. 44) Member States may and not must organise Holding Funds. However, it would be worthwhile to consider potential benefits from a Holding Fund. These include:
. Transfer of a significant part of administration work from the Managing Authority;
. Consultancy with regard to selection of appropriate Urban Development Funds;
. Significant progress in absorption of structural funds (due to the fact that, under Council Regulation (EC) No 1083/2006 Art. 78(6), a contribution to HFs shall be eligible expenditure);
. Ability to earn higher financial income from investing Fund resources;
. Simplification and acceleration of procedures if an HF is established in the EIB because no tender procedure is required.
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2.1.1.1.2 Urban Development Funds Urban Development Funds (UDF) are defined in Council Regulation (EC) No 1083/2006 Art. 44 as “funds investing in public-private partnerships and other projects included in an integrated plan for sustainable urban development”. The form of such a Fund is not specified. However, it shall be an independent legal entity or a separate block of finance within a financial institution. An Urban Development Fund may serve a city (cities) for many years, including the next programming periods. The concept of Urban Development Funds is that (according to the EIB) the funds should be active partners and consultants for municipal authorities in stimulating individual area development. According to the Council of Europe Development Bank and the European Investment Bank, establishment of Urban Development Funds is aimed to:
. Create stronger incentives for successful urban regeneration implementation by a coalition of private, public sector players and structural funds through a professional fund management;
. Utilise financial and managerial expertise to invest in many different elements of a regeneration process, some non-profitable and some more profitable than others;
. Provide bridge financing: Investments needed upfront are usually high while project benefits (either internal or for society at large) tend to develop only over time;
. Target the specific area where private sector does not invest and public sector grants are not extended.
2.1.1.1.3 Objectives of HFs/UDFs JESSICA is a vehicle which is to allow social and economic objectives of urban area development to be accomplished with efficiency, regard being had to financial objectives. UDFs are the fundamental tool of JESSICA. Their essential objective is to carry out urban development investment projects (regeneration projects, in principle). Mobilised and appropriately organised public and private financial resources are to be the measure to accomplish this objective. Having regard to this, projects to be financed by UDFs should comply with the following general characteristics:
. Because of participation of private equity provided for in the JESSICA concept (needed to maximise the scale of activities and ensure their effectiveness), investment projects must be profitable with respect to the Financial Internal Rate of Return (FIRR).
. Financial profitability of the projects, and thus a high self-financing level, would make many of them not be eligible for grant financing due to the financial gap criterion.
. On the other hand, but for the public sector's participation, the projects would not be attractive enough to be undertaken independently by private entities – due to too low a financial profitability or too high risks.
. Because of participation of public bodies acting as initiators and promoters of investment undertakings, the projects must be socio-economically profitable with respect to the Economic Internal Rate of Return (EIRR). JESSICA will allow projects which could not be carried out under strictly commercial or grant conditions to be completed. This is illustrated by the chart below.
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Chart 2. Areas of investment specialisation of UDFs
positive internal rate of return
Above: Private sector interest projects not beneficial from social and
Potential area positive economic rate of return of UDF interest economic perspective
Below: Public sector grants
financially unprofitable projects Source: European Investment Bank materials Internally diversified investment undertakings (investment programmes), projects included in Integrated Urban Development Plans (IUDP), are suitable for financing with the JESSICA vehicle. An Integrated Urban Development Plan (or Programme) is to be understood as a plan which includes the required set of activities and projects which combined contribute to sustainable urban community development. The plan as a whole has more impact than the impact of its individual components considered separately. The JESSICA vehicle is to ensure that urban development undertakings are managed with efficiency. The efficiency in managing the undertakings is required at two levels: urban development fund and project. At a project level, creation of an independent managing structure which will cooperate with the city is of particular significance. At a fund level, experience in commercial space rental should be acquired though cooperation with external consultants, or through establishment of a special advisory body. The principal objective of a UDF will be to search for relevant projects and to build an investment portfolio managed with help of uniform tools, maintaining economic independence of individual projects. This should lead to generating synergies that will allow many projects to be carried out in a longer time, which would be much more difficult without the fund. With this, expenditure on each project will be optimised and projects will be carried out with fewer measures involved. This will allow budgetary means of cities to be released for other purposes. According to the investment portfolio management theory, a well- diversified urban development fund shall dispose of as many projects of diverse volume, repayment periods and profitability as possible. However, the search for the best projects should be the priority in the first phase to consolidate financial bases of the mechanism. The Managing Authority is responsible for specifying the objectives and the modus operandi of HFs and UDFs. This results from Commission Regulation (EC) No 1828/2006 Art. 43(2) (on business plans) and Art. 43(5) and (6) (on funding agreements).
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Several illustrative generic objectives are presented below (according to the Council of Europe Development Bank and the European Investment Bank):
. To upgrade a city’s competitiveness and attraction for citizens, entrepreneurs, investors, researchers, students, skilled labour (high value-human capital)
. To optimize the utilization of the capital already deployed in the urban regeneration
. To address different types of structural deficits:
. dilapidated older city areas
. large brownfields (post-industrial, post-railway, post-military and similar areas)
. poor intra-urban infrastructure
. To address the issues in the Integrated Urban Development Plans.
2.1.1.1.4 HF/UDF products The funds referred to in the general JESSICA concept, which act as so called financial engineering instruments, may provide refundable financing, as opposed to grant financing. This arises directly from definitions of HFs and UDFs included in Council Regulation (EC) No 1083/2006 Art. 44 as funds investing in e.g. UDFs (in the case of HFs) and in public- private partnerships and other projects included in an integrated plan for sustainable urban development (in the case of UDFs), respectively. With reference to this, Council Regulation (EC) No 1828/2006 Art. 46(2) lists by what means UDFs may invest. UDF products listed therein include:
. equity,
. loans for investment projects,
. guarantees for institutions granting debt financing. As provided by the EIB and the CEB, UDF products may include, in particular: mezzanine financing, bridge financing, subordinated debt financing, loans with interest adjusted to a project revenue schedule, etc. UDFs may also finance urban development projects which receive grant financing under operational programmes. Products of funds to operate in the framework of JESSICA are present in the charts below.
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Chart 3. Full theoretical concept of the possibilities to organize and finance the JESSICA vehicle
European Commission Structural Funds
Grant
Member State Represented by Managing Authority
Equity, loans, guarantees
Establishment of Holding Fund is optional
Holding HF operator Fund EBI CEB e.g. EBI (HF) Loans, guarantees Equity, loans, guarantees
Municipalities Equity, loans, guarantees
Other investors UDF managing entities managing UDF Urban DevelopmentFund Urban DevelopmentFund Urban DevelopmentFund (public and private sector), Urban Development Fund incl. financial institutions
Equity, loans Equity, loans, guarantees
Projects included in Integrated Urban Project Project Project Development Plans Project Project Project Project Project Project
Source: own analysis based on European Investment Bank materials
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Chart 4. UDF products
Urban Development Fund
Loans Equity Guarantees
Extending long- and Acquiring of equity stakes, Extending guarantees to medium-term loans especially of public utilities entities providing financing loan and interest and loan of Repayments equity of Contribution credit analysis credit after Loans dividends Sale of shares,
Banks
Provision of Repayment loans of loans and interest
Projects, PPP, SPVs
Source: materials of the Council of Europe Development Bank and the European Investment Bank In principle, Chart 4 does not take account of entities other than UDFs (except for banks) in financing UDFs and projects. In practice, however, many private sector entities may be more interested in direct project financing than in participating in a UDF structure – e.g. for procedural reasons. The following list shows that equity contribution is the form of financing urban development activities which may provide most benefits.
Table 3. Comparison of different forms of financing of urban development projects by UDFs
Criteria Grants Loans Guarantees Equity Project influence 0 + / 0 0 ++ + / 0 Participation in project + 0 (partial ++ losses / risks (no payback) payback) Participation in project 0 0 0 ++ earnings / gains Leveraging capital ++ + + / 0 ++ resources Periodic earnings for “debt ++ service” (interest / 0 ++ -- (like loan) redemption) + / 0 ++ ++ Revolving funds -- (only fee (periodic) (at exit) income)
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Criteria Grants Loans Guarantees Equity + ++ Capital costs -- + / 0 (project loan) (private equity) Costs of management (and + / 0 ++ 0 0 / - set-up) (part of bank) (SPV) Crowding out effects + / 0 + / 0 + / 0 0 / - Legend: ++ = high positive impact -- = high negative impact 0 = no impact / not of relevance Source: presentation “Implementation of the JESSICA Initiative”, Final Report, Prof. Nadler & FIRU, 2008 Moreover, from talks with development companies it appears that mezzanine financing, supplementary to the three basic products offered, may be an attractive JESSICA product. Mezzanine financing is a form of financing in between debt financing (credits, bonds, etc.) and capital financing (e.g. stock issue, private equity). In formal terms, mezzanine is a loan which gives a lender the right to change to equity stake if a debt is not paid before an agreed date or in full. Mezzanine financing is subordinated to credit financing. This means that a decision on using such financing does not work to the disadvantage of previous financing providers, so the financed entity does not need to obtain their permission to incur such liabilities, thus having more room for action. From the financed entity’s point of view, the main advantages of mezzanine include10:
. Flexibility in formulation of financing conditions and its repayment conditions. No defined standards or strict regulations with this regard. Solutions are adjusted to needs of a financed entity, its capabilities and development strategy;
. Repayment of equity by the end of agreement validity only. This makes it easier for the financed entity to maintain liquidity during the investment.
. Lower costs for the financed entity shareholders compared to a public stock issue or capital acquisition from a private equity fund. Owners hold unthreatened control over a company’s operation;
. Availability of financing despite insufficient, from banks’ point of view, securities and credit capacities needed to be granted a common credit;
. Detailed verification of a business plan for an undertaking prior to starting an investment. Prior to taking a decision on financing, the party financing mezzanine has business projections assessed, often using external consulting companies. This helps investors verify their business assumptions and accurately identify potential threats. Fundamental characteristics of the three types of financing are listed in the table below.
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Table 4. Fundamental characteristics of three main types of financing
Credits Mezzanine Equity funds In economic terms debt capital capital In legal terms debt debt capital Acceptable risk low medium/high high/very high Expected return on 5% - 11% 14% - 21% 25% - 35% equity over the by end of by end of Return on equity course of financing (fixed financing (no deadline financing deadline) fixed deadline) interest is tax interest is tax Tax implications no tax shield expense expense low (strict Adaptability high high standards) Source: BRE Bank S.A. – www.mezzanine.com.pl
2.1.1.1.5 Formal process of complete JESSICA model implementation According to the EIB, the formal process of complete JESSICA model implementation includes the following stages:
. Establishment of Holding Fund (HF) 1) Holding Fund Funding Agreement between Managing Authority and Holding Fund operator; Criteria defined under Regulation EC 1828/2006, Art 44 (1, 2)
. Establishment of Urban Development Fund (UDF) 2) Call for Expression of Interest to select UDF(s); No specifications contained in EU regulations 3) UDF Funding Agreement between Managing Authority or Holding Fund and each UDF Criteria defined under Regulation EC 1828/2006, Art 44 (3), Art 43 (5, 6) 4) UDF Business Plan to be submitted for each UDF Criteria defined under Regulation EC 1828/2006, Art 43 (2) The formal process with reference to individual Regions is discussed in Section 5.2.
2.1.1.2 Legal conditions for HF/UDF operation in Poland In our opinion, in the light of conclusions of the Analysis of Legal Conditions for the Implementation of the JESSICA Initiative in Poland (the “Analyses of Legal Conditions”), no significant legal obstacles are in place to hamper JESSICA implementation as a financial vehicle. No specific legal acts governing JESSICA in detail are in place either. Issues identified in the Analysis of Legal Conditions were taken into account at establishing implementation solutions and organisational structures for JESSICA in Regions in Poland, herein proposed. Detailed solutions, e.g. agreement-related, will require further legal analyses. Issues identified herein, requiring in-depth legal analyses, are presented in Section 5.3. It is assumed that the initial HF/UDF equity will be set up from EU resources planned in the framework of Regional Operational Programme measures. These are resources with a strictly defined purpose by intervention categories, catalogue of beneficiaries, or directly by project selection criteria. The resources will make part of the public finance system equally with other resources under operational programmes until they are used at least once, which involves certain obligations of the Managing Authority and implementing authorities. This Page 50 Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce January 2009
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concerns e.g. ensuring supervision over appropriate expenditure of the resources and complying with relevant reporting requirements. From the potential fund beneficiaries’ point of view, the most important aspect is to explicitly determine formal requirements for carrying out projects under the JESSICA vehicle. In accordance with Council Regulation (EC) No 1083/2006 (Art. 78(6)), until the partial or final closure of the operational programme, a contribution to Urban Development Funds and Holding Funds shall be expenditure eligible for financing from structural funds. The next paragraph of Article 78 describes rules for re-investing resources derived from investments, including interests.
2.1.1.2.1 HF/UDF legal form – General issues The legal form of Urban Development Funds is not determined in legal regulations. However, in accordance with Commission Regulation (EC) No 1828/2006 Art. 43(3), a UDF should be: 1) an independent legal entity governed by agreements between the co-financing partners or shareholders, or 2) a separate block of finance within a financial institution subject to specific implementation rules within the financial institution, in particular, separate accounts to distinguish new resources including structural fund contributions. With reference to the above, under the Analysis of Legal Conditions (Section 8), HFs and UDFs may operate in the Polish reality as separate legal entities, in the form of:
. incorporated partnerships (i.e. limited liability companies and joint stock companies),
. closed-end investment funds (managed by existing investment fund companies),
. cooperatives. The above legal forms will:
. allow entities with different legal status, including public bodies, private investors, banks and other financial institutions, to participate in HFs and UDFs;
. allow private entities potentially engaged in HFs and UDFs to participate in profits from these funds;
. allow HFs and UDF to conclude agreements, contribute equity, grant guarantees and loans;
. allow HFs and UDFs to execute transfers of funds between the Managing Authority and HFs or UDFs, between HFs and UDFs, and between UDFs and entities executing urban development projects. Establishment of HFs and UDFs as separate legal entities in the following forms can also be taken into consideration:
. state and self-government target funds,
. other organisational forms which require separate legal regulations. The Analysis of Legal Conditions shows that both the above options are burdened with significant obstacles and limitations in the light of JESSICA implementation and its later operation. In principle, a legislative initiative would need to be started with regard to both the options. This could lead to establishing currently non-existing in Polish legislation opportunities for HFs and UDFs but it would be time-consuming and potential shortcomings of new solutions would only be revealed during funds’ operation. Moreover, the first of the aforesaid options would involve limitation of a circle of potential HF and UDF participants to public bodies only, and regulatory solutions established specifically for new target funds would be inflexible.
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2.1.1.2.2 Possibilities of participation of territorial self-government entities in UDFs The issue of possibilities of participation of territorial self-government entities in UDFs is discussed in detail in the Analysis of Legal Conditions (mainly in Section 7.4). An overview of the most significant findings of the Analysis in this regard is presented below. With reference to opportunities for participation of territorial self-government entities in UDFs (except for the transfer of resources intended for urban development under ROPs), especially restrictions related to activities of the entities, under the Act on Municipal Management, need to be taken into consideration. The restrictions concern the character of activities pursued in the context of public and public utility tasks, and permitted legal forms of the activities. Territorial self-government entities and municipal companies may establish or enter into capital companies which pursue public tasks without restrictions. Restrictions concern, however, non-public utility activities:
. Poviats may not pursue economic activities outside public utility tasks (including through companies established by them).
. Voivodships may only establish capital companies outside public utility area for the purpose of promotional, educational, and publishing activities aimed at voivodship’s development.
. Activities of municipal companies (and with the majority stake held by self- governments) established by communes/municipalities may be limited to public tasks of parent municipal entities. In the case of companies established by poviats and voivodships, non-public utility activities are restricted for entities establishing the companies. Based on the Analysis of Legal Conditions (Section 7.4) it is assumed that:
. UDF activities of granting loans and guarantees, and investing in individual urban projects will go beyond the scope of tasks of territorial self-government entities;
. in the majority of cases, projects to be carried out under JESSICA will be public tasks (probably not only, however). Therefore, and due to the restrictions with regard to activities of territorial self-government entities under Art. 9 of the Act on Municipal Management, territorial self-government entities may only participate in UDFs through limited liability companies or joint stock companies established with other entities. Of all territorial self-government entities, only municipalities may engage in UDF establishment because only these entities may establish capital companies outside the public utility area in a scope which complies with UDF activities – unless the companies are not significant to municipal development. Due to regulatory restrictions related to non-public utility activities, poviats and voivodships may not engage in UDF establishment. For the same reason, participation of municipal companies and companies with the majority stake held by territorial self-government entities in establishment of UDFs is limited to such self-government companies whose activities are not limited to public tasks. Therefore, those of municipality-owned companies which may pursue activities outside public utility tasks, and poviat- and voivodship-owned companies shall be excluded. With reference to the involvement of territorial self-government entities and municipal companies in UDFs in the form of investment funds, the Analysis of Legal Conditions provides that resources for the purpose of supporting urban area development may be allocated to investment certificates of closed investment funds. As this would not be a common money deposit made with the purpose of withdrawing resources as needs arise, it would probably mean that the same restrictions concern public resources involved in
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investment funds as in the case of establishment of capital companies. This would entail that of public bodies only municipalities and certain self-government companies could engage in UDFs operating as investment funds. Based on the Analysis of Legal Conditions (Section 7.4) it is assumed that the model of a UDF operating as a separate financial unit in the framework of an external financial institution is applicable as a matter of principle but under the existing legal order self- government entities may not make any financial contributions. Under Art. 3 of the Act on Municipal Management, self-government entities may admittedly transfer resources to a UDF based on an agreement with a financial institution managing such a fund. However, under such agreement self-government entities may only entrust specific municipal management related tasks to a financial institution. Moreover, in accordance with the Act on Municipal Management, the financial institution shall be obliged under an agreement to e.g. grant loans or guarantees to specific entities in the area of a given territorial self-government entity. This would be against the JESSICA concept under which it is the financial institution which shall decide to which entities and in which area to grant financing or guarantees. Another important restriction is the fact that transfer of resources to a UDF in the form of a separate account in a Financial Institution will involve the public procurement law because it will be a chargeable contract for management of resources for regeneration projects. In the event that a financial institution (UDF) has been selected by tendering procedure by a holding fund, it will not be practically possible to transfer resources. A UDF operator will enter into a tendering procedure parallel to other financial institution, with no guarantee that it will actually be granted the procurement.
2.1.1.2.3 Conclusions on the legal form of HFs and UDFs Having regard to the shortcomings, restrictions and benefits of the aforesaid options, and taking advantage of the findings of the Analysis of Legal Conditions, it is recommended that HFs and UDFs should adopt the form of closed investment funds (managed by investment fund companies existing in the market and selected for this purpose, or the EIB – these issues are discussed in detail in Sections 2.1.2.2, 2.1.3.4 and 2.2). This legal form selected from among other possible and potentially advantageous forms will ensure, inter alias, cost- effectiveness because owing to using the organisation structures of fund operators selected from among entities already in operation, separate corporate structures will not need to be established for HFs and UDFs to operate.
2.1.1.3 Time horizon for HF/UDF operation For the analysis of JESSICA implementation in Poland, three time horizons are considered: short-term, medium-term, and long-term. Specific groups of JESSICA implementation- related issues are identified in the context of each of the time horizons.
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Short-term horizon: 2009-2011
. Organisation of Urban Development Funds (UDF)
. Key issues: EIB support, voivodship self-government decisions, project preparation Medium-term horizon: 2009-2013 (2015)
. Application of Regional Operational Programme resources
. Key issue: application of EU resources to projects in the framework of current budget period Long-term horizon: from 2009, no specific end
. Long-term operation of UDFs
. Key issues: return of resources, sustainable fund growth; support from cities will be critical, possible further financing from EU funds Resources for regeneration activities under ROPs are limited in terms of both value and time, which is and probably will be crucial for the entire operational programme in the future. Having regard to this, Managing Authorities want to accelerate expenditure of resources through their transfer to market-based entities which operate more efficiently than public bodies in this area. What is also important is that the faster money is transferred, the faster projects are carried out and the resources made eligible. Refundability of resources committed to investment undertakings is the final objective, which means in practice that more urban development projects may be carried out from the same available total financial resources. HF/UDF operation should not be limited to 2015 when the expenditure eligibility period 2007-2013 expires. A complete return on investments, which are long-term investments in nature, is very unlikely to be achieved in that period. Therefore, activities by HFs/UDFs must provide for a long-term horizon for which the programming period of 2007-2013 is just one of periods – crucial due to the capital contribution and execution of the first investment cycle in order to prove the eligibility of expenditure. EU resources are to be returned to the fund after 2015; at that time, decision may be taken on withdrawing or re-using the resources under the same or different conditions. With reference to the assessment of the solution consisting in HF establishment, presented in Section 2.1.2.1, it is recommended that the Managing Authority and a Holding Fund managing entity should be provided with an option of terminating their cooperation after an initial period of 2-3 years when the HF is most needed.
2.1.2 Establishment of Holding Fund (HF)
2.1.2.1 Justification for Holding Fund (HF) establishment Establishment of a HF is optional. The potential benefits of establishing a Holding Fund are worth considering however – a list of those is presented on p. 43. In case of a positive decision on establishing a HF, establishing it within EIB will make JESSICA implementation simpler and quicker as this does not require the tendering procedure. Establishment of a multi-level structure (HFs and UDFs) is justified where at least several UDFs are planned to be ultimately set up. In order to assess the validity of HF establishment in the current situation of Polish regions, certain specific aspects also need to be taken into account, e.g. related to the fact that: a) EU resources for regeneration under ROPs are currently managed at a voivodship level, i.e. higher than the level of single cities.
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b) establishment of one HF at a voivodship level, which would carry out regional tasks and objectives, is relatively easy to implement because it only requires cooperating with one public sector body (voivodship) and with an entity managing the fund. At present, there appears to be no justification for establishing an HF at an entire country or several voivodships level because conditions of ROPs are specific of individual regions to the extent that it would be difficult to ensure coordination of such a fund. However, it is not impossible that the creation of transregional structures may be justified in the future to acquire more resources and to reduce fund management costs. If a positive decision on establishing an HF is taken, the role of Holding Funds in individual regions in Poland should be to actively manage UDFs, and not only to formally administer resources entrusted to them. Assessment of the Holding Fund establishment solution:
. Advantageous in the initial phase of the JESSICA vehicle implementation, where the Managing Authority needs support in the process of UDF establishment.
. Advantageous where the number of UDFs is sufficiently large, and where the value of available resources is sufficiently high (then, the role of a Holding Fund would be to control UDF operation for the Managing Authority).
. Advantageous where UDFs need to be established from scratch, without any analogous local structures under operation (that is to say, as it is in Regions in Poland). This solution allows resources from EU funds to be paid in a shorter time – the payment is already possible when an HF is established, i.e. in a considerable advance compared to UDF establishment.
. Disadvantageous in the long-term horizon with regard to the cost-efficiency (additional management costs generated). However, the HF may be liquidated after several years in the event a UDF is implemented successfully.
2.1.2.2 Selection of a HF operator The Analysis of Legal Conditions has shown that an HF managing entity should be selected under the public procurement law. Tendering procedures may be time-consuming. At the same time, the managing entity needs to have a good understanding of the concept of how the entire JESSICA mechanism works. In the present situation, the quickest implementable solution may be to entrust the European Investment Bank with the HF management, which in addition to in-depth knowledge of the JESSICA concept may be contracted to manage the HF in a non-tendering mode by the Marshal Office (based on conclusions of the Analysis of Legal Conditions). However, the duration for which the EIB may act as the fund manager and the duration for which the EIB's acting as a manager is appropriate should be considered. Further analysis of the issue of the EIB selection as an HF managing entity is included in Section 2.1.3.
2.1.3 Establishment of urban development funds (UDF)
2.1.3.1 Justification for establishing urban development funds (UDF) UDFs are the key tools of JESSICA implementation. Accomplishment of the effects expected of JESSICA depends on their successful organisation. At the current stage, it is difficult to predict to what extent the scale of activities and the structure of the JESSICA fund will be developed in individual Regions in Poland. The UDF establishment should be justified by:
. the value of available resources,
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. the scope of operation,
. a long-term interest of territorial self-government entities in its operation,
. fund establishment and management costs. Value of available resources. With the growth of value of resources intended or available for financing UDF investment activities, the establishment of subsequent funds will be more justified (specialised, e.g. in terms of geography or thematic scope of activities). However, if the value of the resources is limited at a voivodship level, it will also have a negative impact on establishing a diversified palette of funds. Only through establishment of funds with considerable resources will complex and ambitious projects be able to be carried out and the project portfolio to be managed reasonably through its diversification. In the case of funds with considerable resources, benefits of scale, management cost-efficiency, and attractiveness to the managing body may be achieved. As opposed to this, even good remuneration, in percentage terms, for the management of funds with a small pool of available resources may not be sufficient to attract interests of fund management service providers. Ability to identify and prepare many projects. Notification by regional centres that a large number of urban regeneration projects needs to be financed under the JESSICA initiative could be considered as an argument in favour of the establishment of many UDFs (this issue is discussed more broadly in Section 2.1.3.2). High complexity of the projects, necessity to put significant work into their preparation and execution and existence of project groups with clearly different specificity would reinforce the need to establish many UDFs. Whereas establishment of extensive fund structures would not be economically justified for few projects only. Scope of operation. As stated above, the existence of project groups of clearly different specificity (e.g. geographic, thematic or other significant) would reinforce the need to establish many UDFs. This issue is discussed more broadly in Section 2.1.3.3 below. Long-term interest of territorial self-government units in UDF operation. The task of UDFs would be to support regeneration projects, most probably in the area of one or several cities. Undoubtedly, city authorities interested in supporting urban area development will play a crucial role in the establishment of funds and support for their activities. Therefore, the establishment of funds will strongly depend on the needs, willingness and financial capabilities of individual cities/towns. In the case of the biggest city, it may be appropriate to establish a fund dedicated to one city only. In the case of smaller towns, agreements and relationships aimed at establishing a common fund for one or more towns will need to be established to achieve an appropriate scale and efficiency of the fund activities. Fund establishment and management costs. As stated above, the establishment of extensive fund structures would not be economically efficient in the case of few projects. Relatively high operational costs with reference to the value of resources managed by such a structure would not be justified from the point of view of benefits from such a solution. Moreover, fragmentation of funds may lead to a situation where even high remuneration, in percentage terms, for the management may appear to be insufficient to attract interest from professional fund management service providers. To entrust one manager with the management of a group of several UDFs would ease the problem to some extent. It will be important to structure the UDF(s) in terms of scope of operations and fund manager’s remuneration, so that they attract the best expertise to deliver their objectives. Reasons for the decision on establishing UDFs:
. Establishment of a separate UDF allows the fund to be concentrated on a specific city or a group of cities/towns.
. Establishment of a separate UDF makes local entities become interested in regeneration and activates cities in terms of project creation.
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. UDF management cost-efficiency is low where each fund is managed separately.
2.1.3.2 Number of urban development funds (UDF) Deliberations on the target number of UDFs are inevitably linked with the issue of justification for the establishment of a diverse structure of separate UDFs. This issue is discussed in Section 2.1.3.1 above. With reference to the optimum number of funds in a situation where a large number of urban regeneration projects is to be carried out under JESSICA, two completely different approaches are possible: a) establishment of many UDFs would lead to:
. efficiency through fund specialisation, e.g. in geographic or thematic terms (the scope of UDF activities is discussed more broadly in Section 2.1.3.3 below)
. introduction of benchmarking for the purpose of both fund performance monitoring and JESSICA mechanism efficiency improvement through the ‘indicator competition’ between funds (in particular, in the case of many funds with similar investment portfolio characteristics)
. making local entities interested and involved through undertakings significant from their point of view b) establishment of one large fund for a Region would lead to:
. creation of a more diversified project portfolio, and in consequence limitation of risks related to a single project for a specific fund, and ability to cross-subsidise projects of great socio-economic significance with projects of high financial profitability
. benefits of scale and management cost-efficiency
. achievement of essential synergy effects between projects
. easier accomplishment of a critical mass with regard to attracting funding and new projects, and the ability to carry out large, comprehensive projects which generate subsequent projects in the area (not necessarily to be carried out under JESSICA) Each of the above alternative solutions has its specific advantages and disadvantages, e.g. in terms of cost-efficiency. A compromise would consist in creating a moderate number of funds in a Region. In practice, selection of an option in a specific situation of a Region directly results from such conditions as e.g. the value of available resources and the number and value of projects eligible for execution under JESSICA. Reasons for the decision on the number of UDFs:
. Due to the limited value of resources for urban area regeneration under ROPs, the number of UDFs should be limited to minimum;
. The number of UDFs should result more from initiatives of cities and a natural process than an arbitrary decision made at high level;
. One UDF should engage at least in 3-5 projects;
. Possible establishment of thematically specialised UDFs should only be considered in the event that explicit legal recommendations for such solutions are in place.
2.1.3.3 Scope of urban development fund (UDF) operations This section discusses the two following aspects related to the scope of operations of UDFs:
. geographic and thematic specialisation of UDFs
. a UDF business model – a loan and guarantee fund or an investor-developer
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2.1.3.3.1 Geographic and thematic specialisation of UDFs In geographic terms, UDFs may be established at country, regional, and local levels (e.g. for individual cities or groups of cities/towns) – depending on planning conditions, number and specificity of projects eligible for JESSICA and needs of the project initiators. Similarly to solutions planned in the case of HFs, establishment of UDFs for the entire country or for several voivodships does not appear to be justified now due to the specificity of conditions under ROPs. Initially, the JESSICA mechanism will mainly (probably exclusively) grant financing in Regions in Poland from EU funds committed to urban regeneration under Regional Operational Programmes. ROPs provide for a geographic and, to a certain extent, thematic delimitation of the scope of UDF activities to so called assisted areas, formally defined in Local Regeneration Plans. Under the plans, assisted areas are socially problematic urban areas in need of development, and not commercially attractive locations, e.g. city centres. This delimitation will impact UDF operation, unless financial resources other than from ROPs are found in UDFs. Having regard to the regional character of JESSICA funding, a limited value of resources to be disposed by UDFs in the initial phase of their operation, and limited capacities of urban centres to generate projects applicable to JESSICA and compliant with ROP criteria, at the same time, the task of UDFs will be to support regeneration projects probably in the area of one or several cities. Therefore, it would be worth beginning with the establishment of UDFs in big cities only (regional capitals), with prospects for creation of at least several major projects. On the other hand resources for supporting small and medium towns, where projects are of smaller scale, should be separated to limit competition between small towns and big cities. Taking the above discussed conditions into account, the establishment of thematically specialised UDFs (e.g. with regard to housing investments, thermo-modernisation, etc.) should only be considered in the event that clear legal recommendations for such solutions are in place. Potential benefits from such a specialisation (in terms of organisational, socio- economic, financial, or other efficiency of UDFs) will probably be too small to constitute a sufficient justification for implementing it. Opportunities for financing housing projects under JESSICA are a separate issue and are therefore discussed in Section 4.4.
2.1.3.3.2 UDF business model – loan and guarantee fund or investor- developer In accordance with the EIB concept, urban development funds should be active partners and consultants of city authorities in stimulating individual area development. Having regard to such a defined role of UDFs and applicable forms of project financing (financial products), at least two completely different business models of UDF operation can be singled out:
. a loan and guarantee fund; and
. an investor-developer allocating equity to investment projects. Business models applied in the operation of such vehicles as UDFs in Europe are discussed more broadly in Section 2.1.4.6. By contract, organisational structures referring to business models, and in the case of UDFs applicable in Poland, are presented in Section 2.1.5.
2.1.3.4 Selection of a UDF operator Similar to other entities established to finance specific activities, UDFs should operate according to defined rules and apply operational procedures agreed on by members of the
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funds. Expertise in investment activities is certainly required to manage funds granting loans and guarantees and committed to project development and execution. The UDF operator should be selected under the transparent procedure. Due to a large number of UDFs which may be established, it is difficult to assume that the EIB, similar to HFs, could act as an operator for all UDFs. Therefore, specialised institutions (e.g. banks, investment fund companies) will need to be entrusted with fund management. Tendering procedures will be time-consuming but experiences of other commercial institutions in managing such funds will need to be examined parallel to ensuring management cost- efficiency through a tender. Experiences of fund management institutions show that management costs can be reduced where one operator manages several funds. At the current stage of analyses, it is difficult to predict to what extent the market will allow such effects to be achieved in the future. As regards the selection and set-up of an operator for HF and a UDF (or several UDFs), ensuring the balance between the two perspectives, i.e. a future fund(s) managing entity and an entity organising its development activities, will be of great significance to the success of JESSICA. To make it attractive from a prospective operator’s point of view is a prerequisite to making the entity effectively interested and to selecting it. In principle, a candidate entity for a fund(s) operator will pay attention to financial profitability issues, including remuneration method, achievable amount of remuneration, management risk level and specificity related to certain funds, fund management agreement time horizon, and fund operation time horizon. However, from the point of view of the JESSICA vehicle organisers and public entities potentially interested in its implementation (e.g. metropolitan offices), ensuring efficiency of development activities and cost-efficiency of managing such activities, and not only the very establishment of a fund(s) operator, will also be important. Due to this, both perspectives discussed will need to be taken into account in the process of selecting a fund(s) operator and in provisions of a management contract concluded with the entity. It will be critical to work out the precise UDF objectives and performance criteria before going to market. It will also be important to get the remuneration structure right to ensure that JESSICA funding works to fill a financing gap between grant funding and commercial finance but is invested in a professional manner so that the capital is recycled. The nature of UDF tasks and how they are remunerated will determine who wants to take on the role of a fund manager. Regarding the attractiveness of managing JESSICA-type funds in terms of the management fee, it is worth noting that market interest rates are relatively low at present. This situation will probably persist for some time and it may cause problems with financing the HF and UDF costs (determined as a percentage of the fund’s equity). The issue of selecting a fund operator is discussed more extensively hereunder. The discussion will take account of the effects of identifying expectations and capabilities of entities interested in managing UDFs.
2.1.3.5 Considerations of entities potentially participating in JESSICA Entities which professionally manage funds investing in properties have acquired certain expertise in investing money entrusted to them in a precisely defined way. However, such entities tend not to have expertise in managing EU funds (e.g. investment fund companies). At the same time, bodies with expertise in EU fund management have no expertise in regeneration project investments (e.g. regional development agencies).
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In the case of banking institutions, they have their own procedures developed with regard to risk assessment, project selection procedure, monitoring financial products granted, and investment portfolio management. Few banks have expertise in managing public funds entrusted to them. As regards the Bank Gospodarstwa Krajowego, it administers many funds and organises internal fund activity processes on its own within the regulatory framework established, using reliable banking procedures and its own organisational structures. Similarly, foreign banks which cooperate closely with the public sector have developed their fund management organisation methods. As mentioned in Section 2.1.3.4, fund managers will aim to build the economics of operation scale and to used structures and procedures established to manage funds of the largest scale possible. Therefore, UDF resources need not to be too fragmented because fund managers may not show interest in managing a too small a fund, or management costs would be too high compared to the fund's scale to be accepted by the Managing Authority. An important aspect of banks' participation in fund management is that they simultaneously finance undertakings or funds directly in the framework of their fundamental commercial activities. In order to avoid potential conflicts of interests in this area, the role of a fund operator should possibly be separated from its credit function. Participation of entities financing and managing UDFs is further discussed in Section 3.1.1.
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2.1.4 Examples of organisation of UDF-type vehicles operation from other countries
2.1.4.1 United Kingdom Many innovative institutional solutions in respect of the development of urban areas have recently been developed and implemented in the UK. JESSICA UDFs have not yet been established in the UK. Similar mechanisms are however already becoming increasingly commonplace, frequently referred to as Local Asset Backed Vehicles (LABVs)11. Nearly half the Regional Development Agencies (RDAs) in England have now adopted the use of local asset backed vehicles (LABVs) as a means to manage and/or develop their urban areas 12 . Numerous local authorities are currently considering the adoption of this model. Department for Communities and Local Government (DCLG) defined LABVs as funds, combining locally-owned public sector assets and equity from institutional investors, established to finance the delivery of major regeneration outcomes. It is envisaged that these vehicles, with their own boards and management teams, are constituted as limited partnerships. Public and private sector partners generally have equal shares in the equity and voting rights of LABVs. Property development and regeneration projects are delivered according to an agreed business plan established at the outset of the vehicle’s life. Returns made by the vehicle are directed back into the LABV and shared between the partners on the basis of their shares in equity. The model LABV structure is presented on Chart 5. In essence, the public sector invests property assets into the vehicle which are matched in liquid assets (e.g. in cash) by private sector partners. The partnership may then use these assets as collateral to raise debt financing. Assets will revert back to the public sector if the partnership does not progress them according to pre-agreed timescales through the use of specific contractual provisions.
11 Those vehicles are also referred to as: PRP (Property Regeneration Partnerships), RIV (Regeneration Investment Vehicles) and URV (Urban Regeneration Vehicles). 12 As at mid December 2007 this applies to four out of nine Regional Development Agencies in England. The information comes from the publication “Local asset backed vehicles: The potential for exponential growth as the delivery vehicle of choice for physical regeneration”, George Grace and Andrew M.W. Ludiman, Journal of Urban Regeneration and Renewal, Henry Stewart Publications 1752-9638 (2008) Vol. 1, 4, p. 341-353, 2008 Page 61 Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce January 2009
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Chart 5. LABVs in UK as an example of UDF-type mechanism already in operation
Managing Authority Private Sector Partner • JESSICA funds •Cash •Assets (land, buildings)
Urban Development Fund
Equity financing: • JESSICA funds • Assets (land, buildings) •Cash
Project A Project B Project C
PPP / SPV / JV PPP / SPV / JV PPP / SPV / JV
Property Local Partners, e.g.: Assets Municipality
Municipal Utility Company
Senior debt Private Sector Developer Banks, Financial Institutions etc.
Source: „JESSICA Wales Urban Development Fund (UDF). JESSICA Preliminary Study for Wales. Final Report”. King Sturge Consultancy. September 2008 Entities falling within the LABV include both investment funds and those with a clearly property development profile. As stated in the JESSICA Preliminary Study for Wales13, the European Commission is inclined to the opinion that any JESSICA UDFs will be required to focus on investment and not carry out development directly. Many other organisational solutions, alternative to the LABV, are applied in the UK to carry out urban development and regeneration projects. These include: property sale by public bodies, development contracts, public-private partnerships, regeneration companies (City Development Companies, Urban Regeneration Companies). It needs to be acknowledged that LABVs are a new solution and their implementation and successful operation involves specific challenges. However, they have significant advantages compared to other available options – in particular, in terms of organisational functional flexibility, control over socio- economic aspects of urban development and regeneration by the public sector, and ability to ensure a comprehensive approach to development and regeneration. Many UDF and UDF-like vehicles currently operating in England and Wales are based on the LABV concept or refer to it. Examples of UDF or UDF-like vehicle in United Kingdom include:
. British Waterways PPP
. One NorthEast PPP
. East Midlands Development Agency
13 JESSICA Wales Urban Development Fund (UDF). JESSICA Preliminary Study for Wales. Final Report”. King Sturge Consultancy. September 2008 Page 62 Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce January 2009
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. North West Development Agency
. Advantage West Midlands
. Croydon Council
. Priority Sites Limited
. English Cities Fund
. Welsh Industrial Partnership (WIP)
. Dragon 24
. Welsh Investment Strategic Partnership (WISP) In addition to the aforesaid examples, there are also many other public bodies at a local level that are currently in the stage of selecting a fund or analysing strategic options, taking also into consideration such vehicles as UDFs (usually named LABVs).
Table 5. Emergence of LABVs in England Private sector Date Value (*) Public sector entity Current name partner ISIS Waterside 2002 GBP 50m British Waterways AMEC/Morley Regeneration Buildings for 2004 GBP 150m One NorthEast RDA UK Land Business East Midlands RDA 2005 GBP 45m and English Igloo (Morley) Blueprint Partnerships Ashtenne Industrial 2006 GBP 140m Northwest RDA Space Northwest Fund Advantage West 2007 GBP 65m Langtree PxP Midlands RDA London Borough of In final stages of 2008 n/a. --- Croydon procurement (*) – Value of property assets invested by the public sector Source: publication “Local asset backed vehicles: The potential for exponential growth as the delivery vehicle of choice for physical regeneration”, George Grace and Andrew M.W. Ludiman, Journal of Urban Regeneration and Renewal, Henry Stewart Publications 1752-9638 (2008) Vol. 1, 4, p. 341-353, 2008
British Waterways PPP British Waterways (BW) is one of the first public sector bodies to establish UDF type mechanism in the UK in which they entered a joint venture (JV) with a private sector body (a JV between AMEC and Morley) to develop its non-operational property portfolio. The JV vehicle, in which BW has a 50% stake, develops the properties according to a pre-agreed development plan. This ensures that the properties are developed in a way that is congruent to BW’s objectives but in a shorter timescale than otherwise would be possible. BW also benefits from the development expertise of the partner and is able to utilize financing methods not otherwise open to them. Finally, BW is guaranteed to receive at least the book value for the assets and receive a 50% share in all other development profits. The vehicle is structured as a Limited Partnership which provides both BW and the JV partner significant operational and tax benefits and has been operating and successfully delivering on its objectives as ISIS since 2001.
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One NorthEast PPP One NorthEast (ONE) has established a JV to hold and manage its portfolio of investment properties. A partner with property management expertise has been selected to outsource this function and who can generate additional value from the portfolio. However, ONE retains a 50% interest in the vehicle, thus retaining some control over how the properties are managed, and receives 50% of the uplift in value created through the portfolio’s improved management. As the JV is not on ONE’s balance sheet, it is able to utilise third party debt to regenerate the portfolio and develop new properties. ONE is guaranteed to receive at least the book value of the assets in addition to receiving half the rental income from the properties. East Midlands Development Agency (i.e. ‘Blueprint’) The East Midlands Development Agency (emda) and English Partnerships (EP) established Blueprint, a joint venture Public Private Partnership between the two agencies and Igloo Regeneration Limited. The aim of the fund is to hold and manage emda’s investment portfolio and to undertake development activity targeted on the urban priority areas in the Region, to include key strategic regenerative sites in the ownership of both emda and EP. Through the utilisation of private sector expertise and funding, Blueprint enables emda and EP to undertake more regenerative property development activity and to refurbish and redevelop the investment portfolio to maximise returns, sharing in these returns through the structure of the partnership but minimising its position with regard to the risks of undertaking such developments. A bespoke financial model was developed in order to assess the viability of a number of investment and development option scenarios and to determine the most appropriate strategy to be undertaken. The model enabled comparison of both the internal rates of return and net present values of the differing approaches, as well as providing indicative annual receipt forecasts. emda and EP developed the strategy for the establishment of the joint venture vehicle. The process included a detailed business case, securing all internal approvals and subsequently providing assistance in presenting the concept to Government and gaining all necessary statutory approvals. A new fund has now been created, using a Limited Partnership structure, and is operating successfully with emda, EP and Igloo Regeneration having 25%, 25% and 50% stakes respectively. North West Development Agency North West Development Agency (NWDA) established a Public Private Partnership (PPP) to hold and manage its £130m portfolio of investment properties. The Agency’s core objectives of social and economic resurgence for the region were integrated into the PPP’s operation in a way that also enabled the private sector to operate and meet its primary objectives of producing a financial return. In implementing the strategy developed, the NWDA went through the procurement exercise following the European procurement guidelines. The PPP was established in December 2006 with Ashtenne Industrial Fund. Advantage West Midlands AWM wished to progress development opportunities at a faster rate, benefiting from the private sector’s knowledge and expertise, producing sites for local businesses’ needs and creating and safeguarding jobs for the West Midlands Region. Retention of the investment portfolio of properties was no longer regarded as a core objective of the RDA and was used to provide an income stream to assist with the development costs. The aim was to develop
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a strategy that would meet its financial requirements but without the Agency having to dispose of the property assets outright. AWM’s structured a vehicle, which holds the assets together with a Private Sector Partner. In forming this partnership, it was imperative that AWM’s core objectives of social and economic resurgence for the region were integrated into its operation. The process required a detailed assessment of AWM’s property portfolio and developing a detailed financial model to demonstrate to AWM and central Government the financial viability of the strategy proposed. This culminated in writing an Outline Business Case for the fund that was presented to the Board and Treasury/ODPM to obtain formal approval to progress with the project. This culminated in a procurement exercise following the European procurement guidelines and the new Competitive Dialogue process. The vehicle was established in April 2007 with Langtree Group and Bank of Scotland Corporate forming the PSP. Croydon Council Croydon Council has completed an options appraisal, outline business case and procurement exercise including selection of John Laing Developments Ltd as a preferred partner for the regeneration of Croydon town centre. The vehicle is based around relocating 20,000 sqm of the Council’s core office space into a new, purpose built town hall from a building that is at the end of its economic life. The Council’s new premises will be subsidised by the creation of market and affordable housing in the Council’s current premises and further commercial space from three other identified sites. The partners expect to conclude the agreement imminently which will catalyse an anticipated £500m worth of development. Priority Sites Limited 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. 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 (perhaps 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: . 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; . so called "hybrid" units which link industrial and logistics space with office space; . office buildings which, in some cases, fit into larger urban development projects. Although investment is profitable in these market segments, private companies do not do it on a sufficient scale. This is primarily due to the high risk of non-owner occupied 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. The development of employment space is crucial for promoting the economy from the perspective of the national regeneration agency English Partnerships (EP). Therefore, there is still need for the public authorities to be active in this area. PSL is owned 51:49 by the Royal Bank of Scotland (RBS) and English Partnerships (EP). RBS is the second largest banking group in Europe and EP is the national urban regeneration agency in England. EP is a non-departmental public body sponsored by the UK’s Department of Communities and Local Government (DCLG). 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
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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. RBS contributed 51% and EP 49% 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. Of this amount, GBP 2.848 m made up its 49% 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. 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 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% (of total project costs). The decision whether to give a grant is made by EP on a case-by-case basis after evaluating the project.
Chart 6. Priority Sites Ltd.
English Royal Bank Partnerships of Scotland
49% 51% equity equity
Priority Sites Ltd
Project 1 additional Project 2 grants Project 3
Source: presentation “Implementation of the JESSICA Initiative”, Final Report, Prof. Nadler & FIRU, 2008 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, before servicing equity. In 2005 and 2006 PSL distributed dividends to both partners in equal measure. This was an equivalent payout ratio of 76% in 2006, for example. Retained earnings have been gradually stockpiled in the nearly 10 years of PSL's business operations. 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 values higher than anticipated) then a proportion of the grant is returned to EP. Based on the analysis of PSL financial statements it can be said that, without the EP 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 and
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profit reduction is acceptable as the principal reason for the company’s existence is to develop in areas of economic need, create inward investment and ultimately job creation. Other private developers have not developed in 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%) return. The structure of PSL would however not be suitable for JESSICA due to the fact that under EU state aid legislation it is prohibited for the equity investor and outside creditor to be 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. Also 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, it has had net cash inflows from EP. EP however extends PSL the grants only for projects with insufficient cash return (based on the ex-ante project planning). The PSL fund was not subsidised in any way. It raises its equity and debt capital at market conditions. English Cities Fund English Cities Fund was created by the government to identify and break through the barriers to institutional investment and pave the way for higher levels of private investment in the re-shaping of our towns and cities. The Fund is to invest in projects in town and city centres and their fringes in assisted areas in England, where local economies fall below the EU average. ECf aims to show that high-quality, mixed-use area-based regeneration schemes provide viable, attractive and worthwhile opportunities for institutional investors in the medium to long term, alongside lasting community benefits and environmental improvements. The three partners are Muse Developments (AMEC), English Partnerships (national regeneration agency) and Legal & General. An initial £100m has been raised through the investment of £50m in equity from the three partners together with £50m in bank debt. Objectives of ECf include: . Attracting institutional and other private sector investors into fringe of town and city locations in priority regeneration areas selected by Regional Development Agencies . Providing a model for regeneration projects that would encourage confidence in regeneration, by demonstrating the potential commercial viability and attractiveness of urban regeneration projects to private sector investment funds ECf is designed to operate as a commercial developer and investor, in areas where currently the private sector is not present. According to the UK authorities, the need for establishment of ECf has been caused by a failure of the market to provide long-term institutional funding for regeneration. The result is that development projects in regeneration areas suffer from a lack of finance and have to depend on short-term bank finance, which is expensive. ECf would demonstrate how institutional investors may invest in a portfolio of projects and provide evidence of returns achievable from regeneration and the real risks. This should increase the amount of regeneration projects undertaken and reduce the cost to the public sector because of the reduced cost of private sector capital. ECf – Duration The Partnership would terminate on the tenth anniversary of the Agreement constituting ECf. However, the Partnership can be liquidated earlier than that, where all commitments have been drawn down in full and all investments realised or where all the Partners agree Page 67 Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce January 2009
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that the Fund has been (or would be) unable to implement sufficient development and that market conditions suggest no improvement in that situation. At any time before termination, the life of the Partnership may be extended with Limited Partners consent by such period and on such terms as they may agree. ECf – Description of the scheme / fund ECf would be an individual legal entity constituted as a Limited Partnership under English law. The Limited Partners would be the investors. They would be entities of EP, AMEC, and L&G. In Phase 2 they would be joined by Institutional Investor B procured further to tendering. The Limited Partners would agree investment terms with the General Partner, which would be established as a company to run the Fund and oversee the division of returns to the shareholders. ECf would be an investment fund, created through a pilot partnership between the public and private sectors. It would be dedicated to land and property development in fringe areas of towns and cities in urban priority regeneration areas in England. Investments by the Fund would be limited to projects located in Assisted Areas. ECf would make equity investments in a series of urban regeneration property development projects, on the basis of the following criteria:
. To invest in regeneration projects in Regional Development Agency priority areas
. To bring forward development within these regeneration areas
. Where appropriate, to enter into joint ventures with developers operating at a local level within the Fund’s chosen regeneration area
. To invest over a period of more than five years in order to participate in the value enhancement which tends to occur in the later years of regeneration programmes
. To invest mainly in speculative developments, where pre-let must be not more than 50% of the project at commencement
. To invest in projects which produce an estimated return at or in excess of a target return of 12%
. ECf would not invest in projects located outside Assisted Areas. ECf – Internal functions The General Partner would have overall responsibility for the Fund. It would delegate certain functions to the Investment Manager and to the Development Manager, which would receive a market fee for their services. Such fee would include a fixed amount per year plus a percentage linked to their performance. The Development Manager would be responsible for the identification of a project, the procurement process and implementation of the development, the letting of the project until six months after the issue of the certificate of practical completion of the project, and the estate management of the project until the date of practical completion. ECf would draw down the investment of the Partners and bank debt and invest in a number of ways: . As a developer – working with local partners to design projects, buy land, construct properties, market space to end-users, secure first lettings by occupiers. . As a joint venture partner with a landowner or local developer, providing longterm finance to support property development by third parties, who would fully share the risk and reward. . ECf would not provide loans nor gap funding. It would not purchase completed projects.
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ECf would invest in projects on full market terms, seeking to make a return. In developing the projects ECf would act like any market operator. Where the Fund acted as sole developer it would carry out and procure all aspects of the development process. The Fund would procure its development contracts by full open tenders. ECf – Distribution of profits The ECf was set up on the assumption that “early institutional involvement in regeneration projects could result in attractive returns over the longer term: attractive returns in a development context could be considered to be in the range of 15-20% annualised return on partners' equity”. The Fund would invest in projects sufficient to get a 12% return on each project. According to the UK authorities, this is the minimum level of return to require private sector investment in ECf. However, there would be no guaranteed rate of return on projects and EP’s investment would not guarantee a return to the private partners. The distribution to the investors is based on the risk each shares in the Fund. ECf would have a life of ten years; distributions would occur when the investors have each invested all their capital. Welsh Industrial Partnership Welsh Industrial Partnership (WIP) is a UDF-type mechanism already in operation in Wales. WIP is a formal partnership between WAG and the Royal Bank of Scotland, the purpose of which is to undertake the provision, mostly through speculative development, of modern industrial facilities in the Objective 1 areas of Wales. It was identified that this is an area of the market that the private sector was not able to meet the needs of Welsh business because of the obstacle of completed values being lower than the cost of development. Rather than provide grant to individual projects, WIP is an investment-based approach. The capital structure of WIP provides for the “A” Capital of the partnership to be held 51:49 private to public, with a secondary “B” Capital held entirely by the public sector, but this secondary layer of equity enjoys a subordinated rate of return, but this return increases with the financial performance and profitability of projects. WIP has been used as a basis for a further partnership for Welsh Assembly Government (WAG) and the private sector. Dragon 24 Dragon 24 has a structure similar to WIP but has a developer partner instead of an investor partner and the management of the projects in Dragon is provided on a fund management basis by the commercial developer. Dragon 24 will develop small offices, predominantly for owner occupation, in the Objective 1 areas of Wales. Welsh Investment Strategic Partnership Welsh Investment Strategic Partnership (WISP) has a structure somewhat different from WIP, but is still built around an innovative partnership between the public and private sectors. Under WISP, the design, construction and financing risk associated with Grade A offices is borne by the private sector partner with WAG bearing the occupational risk. This partnership approach is unique to Wales but is proving very effective in creating high quality office buildings in areas where the private sector would not normally invest.
2.1.4.2 France The implementation of urban development projects in France is supported in various ways. Especially relevant for the JESSICA initiative is capital set aside by the Caisse des Dépôts (CDC) public bank for urban development projects. 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. As a financial
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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. Within the area of non-profit investment in urban development projects, 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 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. On January 1, 2005, the CDC set up a CDC Projets Urbains fund from which all non-profit investments in urban regeneration and urban development projects were to be financed. The fund’s capital was meant to be invested in five main areas: rental flats (41%), office property (17%), shopping centres (15%), property for tourist usage (9%) and health and social facilities (8%). In mid 2007 the fund was reintegrated into the CDC, nevertheless this restructuring did not affect the essence of project financing in any way. For each project to be financed, an individual real estate company is established as a public-private partnership (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 initially remains 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. The model is presented on Chart 7 below.
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Chart 7. The model of financing urban development and regeneration projects by Caisse des Dépôts
Caisse des Dépôts CDC
100% equity Established: 1 January 2005 Investment Fund Private Dissolved: June 2007 CDC Projets Urbains Investor (reintegration into CDC) equity equity
Property building Real Estate Developer acquisition Company leasing Users • equity • loan Bank loan
Source: Urban Development Funds in Europe. Ideas for implementing the JESSICA Initiative. Preliminary Draft 16.09.2008. Prof. Nadler & FIRU The payments to the fund are generated from current rental income and additional annual cash inflows from the five real estate areas. At the end of a determined project cycle the fund plans to dispose of its investment, leading to additional income from sales. One of projects financed by Caisse des Dépôts within the framework of the above- presented model was the „Foncière Camus” urban development project in Sarcelles. The way the project financing has been organized in that case is illustrated below.
Chart 8. Example of equity investments by the Caisse des Dépôts – the „Foncière Camus” urban development project in Sarcelles
Caisse des Dépôts S.à r.l. GECO CDC Promotion
urban 33% 67% regeneration equity equity (soft) loan
Local guarantee authority Crédit Mutuel S.à r.l. Foncière . Camus La Banque loans Populaire ERDF grant
Source: presentation “Implementation of the JESSICA Initiative”, Final Report, Prof. Nadler & FIRU, 2008 and report Urban Development Funds in Europe. Ideas for implementing the JESSICA Initiative. Preliminary Draft 16.09.2008. Prof. Nadler & FIRU The investments in the Foncière Camus project 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.
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The investment of the CDC in the project in Sarcelles – as both equity investor and as creditor – made it possible to raise additional private capital for the project in the form of bank loans and equity contribution. As far as leveraging of public funds is concerned, more than one half of the project investment was financed by private partners, including both equity and loans. In respect of 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 urban regeneration loan. Insofar, despite the equity structure being 67:33 in favour of the private partners, the majority of the project risks are with the public sector. The risk to the private sector is virtually limited to the equity investment of GECO Promotion.
2.1.4.3 Germany The city of Frankfurt has numerous investments in companies. It is the partner of diverse companies dealing in the development of properties. In this regard there are several, variously organised, institutionalised forms of cooperation with private parties, and these are normally tailored to specific properties and situations. 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.
Chart 9. Example of equity investments by the City of Frankfurt am Main – the Westhafen urban development project
owner bank loan . guarantee City of Investor Investor Investor Frankfurt
participates participates 1/3 equity 1/3 equity 1/3 equity in profits in sells area loan from Grundstücksgesellschaft private partly finances Westhafen (GWG) partners waste disposal •buys land (interest- • develops area free) contract for • sells plots Landesbank project bank loan management Hessen- Thüringen 50% equity 50% equity
Westhafen Projektentwicklungsgesellschaft (WPG) project manager for Grundstücksgesellschaft Westhafen
Source: presentation “Implementation of the JESSICA Initiative”, Final Report, Prof. Nadler & FIRU, 2008 and report Urban Development Funds in Europe. Ideas for implementing the JESSICA Initiative. Preliminary Draft 16.09.2008. Prof. Nadler & FIRU Currently 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).
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The PPP organisation consists of two companies and a complex contractual agreement to develop the property. The private investors each own an equal share of the Grundstücksgesellschaft Westhafen GmbH (GWG). 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 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 space developed by the investors will be transferred to the city of Frankfurt free of cost once the development is complete. The purchase price is divided in two instalments. The first part of the purchase price was the value of the real estate independent of the planned development. The purchase price fell due upon the formal transfer of the real estate ownership. The second instalment will be made to the city of Frankfurt once the real estate development is complete, if it earns a net profit. A debtor warrant in the real estate sales contract ensured that the city participates in the potential sales profits. The net profit (after deducting all necessary investment costs) would be divided 50:50 between the private and public partner. Through this second purchase price payment, the city of Frankfurt indirectly participates in the costs and revenues of the real estate development (including planning, clearing, rezoning, decontamination and development of the area). With this contractual agreement, the city of Frankfurt also bears a part of the sales price risk. To limit the financial risks, possibilities were agreed whereby both the city of Frankfurt and the private investors could dissolve the contract. The city of Frankfurt had a right of withdrawal if the costs for decontamination and vacating the buildings exceeded the first purchase price payment. The private investors could terminate the contract if the costs for decontamination and vacating the buildings exceeded 50% of the first purchase price payment. The latter actually did occur during the development; however, the private investors did not exercise their right of withdrawal. 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% each of the WPG. Essentially, the WPG is only responsible for the incoming and outgoing agency contracts for the Westhafen development project. Incoming contracts, for which the WPG receives an annual fee, are signed with the GWG. At the same time, outgoing agency contracts were signed with the companies invested in the GWG (subsequently all essential tasks resulting from the initial contracts were taken over by a single contractual partner, OFB Projektentwicklung GmbH). The WPG, which could be called a type of “PPP organisation”, is essentially attributed the control and steering tasks for the public project partner. In this regard, its operating responsibilities are strictly limited and connected with only few risks in the area of its operation. 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. 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) and simultaneously contractually secured a share in the project profit. 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. Although the calculated rate of return does not meet the usually expected returns of private investors, through the participation in the project the private partners ensured the option to purchase attractive property. The total capital employed in
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the project was earned back and, according to current projections, will result in profit for partners from both the public and the private sector. No public grant flowed into the Westhafen project. Any attempt to replicate this PPP organisation has to take into account however that smaller cities or less attractive brownfields will have more difficulty finding private investors willing to invest under these conditions.
2.1.4.4 Portugal ParqueExpo 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. 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 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 98. 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 of project development.
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Chart 10. Investments in urban development and regeneration in Portugal – the ParqueExpo 98 SA development company
State of City of Portugal Lisbon
guarantee 99.1% 0.9% equity equity
Private banks loan
ParqueExpo 98 S.A.
ERDF grant
SPV 1 SPV 2 SPV 3
Source: presentation “Implementation of the JESSICA Initiative”, Final Report, Prof. Nadler & FIRU, 2008 The Portuguese state holds 99.1% of ParqueExpo 98 SA and the city of Lisbon holds the remaining 0.9%. It is therefore not a public-private partnership, but a purely publicly owned business. The entity is organized as a public limited company, whereby the company’s assets comprise the maximum extent of their liability. One of the benefits of using the PLC legal form was that the costs of the world fair were not considered public debt. Apart from developing the property for EXPO ’98, ParqueExpo is currently invested in diverse companies to varying degrees (wholly / partly owned). 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 of permits to the constructions needed for the EXPO ’98 event. These powers were transferred back to the relevant municipalities in December 1999. The company is still responsible for the management of the public space, which is supposed to be transferred to the two relevant municipalities in the future. This far reaching empowerment of ParqueExpo was considered necessary to make it possible to organise EXPO ‘98 within only five years (from 1993). All long-term credit facilities extended up to 1999 were guaranteed by the Portuguese state, which also guaranteed a few issues of bonds. Without such a guarantee, no bank would have been willing to extend credit. Furthermore, as a result of the state guarantee the company’s average financing costs for loans and bonds were well below the market interest rate for land and project development. ParqueExpo was not charged for the guarantees, so it effectively enjoyed an interest subsidy. In spite of the above, the company would have gone bankrupt if the state had not invested additional equity. The capital employed, comprised of contributions from the Portuguese state and ERDF grant, has been used up nearly completely while ParqueExpo has already sold almost all of its land and buildings set for disposal. This is due to the fact that ParqueExpo, as a publicly owned business entity, runs many of its operations with revenues barely covering costs, is obliged to finance the maintenance of public infrastructure and
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does not benefit from all positive effects of its investments (many of them being public in nature). No private equity was invested in projects connected with the organization of EXPO ’98. Substantial amounts of debt financing were however provided by private banks. The banks did not carry any default risk because the state issued guarantees to cover this. This one- sided distribution of risk could not be avoided due to the nature of the project: 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.
2.1.4.5 Italy 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 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), 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.
Chart 11. Financing of regeneration projects through a system of investment funds in the region of Umbria
”Umbria” Fund
Sub-Fund Sub-Fund Sub-Fund Sub-Fund ”Monteluce” … … …
Source: Urban Development Funds in Europe. Ideas for implementing the JESSICA Initiative. Preliminary Draft 16.09.2008. Prof. Nadler & FIRU 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 far-reaching influence on the development of the properties. In this model, urban development sub-funds of the umbrella fund would be created for the disposal and redevelopment of various public properties. Each fund would have separate existence and would each pursue a specific strategy for the reinvestment of proceeds. The common element for 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. In the Monteluce example, the redevelopment of two projects (one in Perugia and one in Foligno) were consolidated to reach greater investment volume and thus an improved cost efficiency with regard to the fixed cost of setting up the fund. Page 76 Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce January 2009
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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 who 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 the mandated fund manager in May 2006 and subsequently properties were transferred to the fund. 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.
Chart 12. The Monteluce urban development project in Perugia
Region of Umbria Financial University of Perugia Investors Units Class B sale of units to Participation in financial investors extraordinary Units Units profit Class A Class A
Fund Manager (Sub-)Fund „Monteluce” BNL Fondi Immobiliari
Banks loans
Monteluce Foligno project project
Source: presentation “Implementation of the JESSICA Initiative”, Final Report, Prof. Nadler & FIRU, 2008 and report Urban Development Funds in Europe. Ideas for implementing the JESSICA Initiative. Preliminary Draft 16.09.2008. Prof. Nadler & FIRU Fund management is completely in private hands; the fund is generally also the redeveloper (although the Foligno project was sold to a regional project developer after the master plan had been completed.) The fund itself assigns architects, runs 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 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. 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. The Class A fund units belonging to the region and the university are to be completely sold to private fund investors. This mechanism did not just create an exit for the public fund partners. More importantly, the fund units with codetermination rights (Class B, with a symbolic value of one euro each) ensure that the Page 77 Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce January 2009
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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. Any fund investment in the redevelopment which exceeds the equity will be financed through borrowed capital. The real estate is the only collateral the fund offers. The properties can be mortgaged up to 60%. Proceeds from the sales of redeveloped property, together with resources from loans, will initially be reinvested in the remaining properties until all have been redeveloped. Sales income will then be used to repay debt, though an interim dividend payout to the shareholders is also possible. If the target yield determined by the fund managers is exceeded, the fund manager is to receive 20% of this additional income. The remainder will be paid out equally to the private and public fund shareholders. Given the scarcity of capital in the public coffers, the intent 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. After the placement, the full risk of the redevelopment is therefore borne by the private investors.
2.1.4.6 Different business models of UDF-type vehicles in Europe The analysis of examples of UDF vehicle operation in Europe, developed by Prof. Nadler & FIRU team14, shows that:
. No guarantees for the development or operating phases have been used by UDFs in practice.
. Equity financing is the dominant project promotion.
. Loans are the most important part in the project financing but are always allocated by external banks, not by the UDFs. Based on the analysis of case studies of UDF vehicle operation in Europe quoted, Prof. Nadler & FIRU team has developed a classification of UDF business models, presented in the chart below.
Chart 13. UDF business models
Business classification according to applied financial instruments
Non-equity finance from Equity finance from UDF UDF to project to project
development (loan) Venture Capital Development of guarantees land Model III Model II
Development of Too risky and Too risky and real estate capital-intensive capital-intensive estate assets Soft loans Business classification classification Business Use of existing share capital
according to promoted real real to promoted according (rental guarantees) real estate Model IV Model I
Source: presentation “Implementation of the JESSICA Initiative”, Final Report, Prof. Nadler & FIRU, 2008
14 Presentation “Implementation of the JESSICA Initiative” slideshow , Final Report, Prof. Nadler & FIRU, 2008 Page 78 Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce January 2009
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German experiences in pilot UDF implementation in five federal states (2008-2010) has led to formulating the following conclusions on the said UDF business models15:
. Development approach (Model III) is predominant with regard to the way in which activities are pursued (so far no pilot UDF allocates funds in existing real estate);
. Equity approach (Model III or IV) is predominant (so far only 1 of 5 pilot funds allocates funds by loans; no guarantees so far); Accordingly, the two selected UDF business models are presented below: Model I and Model III.
Chart 14. Model I of pilot UDFs – funding lender
2009 2010 2011 2012 2013 2029 years UDF: management costs costs costs costs costs costs
loan = Subsidized loan conditions (interest rate / redemption) cash outflow
debt service debt service debt service debt service debt service Project:
rent income rent income rent income rent income rent income loan = cash inflow
Source: presentation “Implementation of the JESSICA Initiative”, Final Report, Prof. Nadler & FIRU, 2008 Model I, where a UDF underwrites soft loans to existing real estates, is characterised by the following:
. the fund is a part of public bank/state sponsor institute which distributes and manages loans
. default risk and management costs are with the UDF
. debt services on soft loans constitute UDF revenues; revolving capital use
. refinancing only by public equity (no contributions in kind and no private equity because no commercial return on capital is possible)
. model compatible for existing real estates with periodic rental income. In contrast to Model I above, under Model III (land developer) a UDF allocates equity to urban development projects using public and private funding.
15 Presentation “Implementation of the JESSICA Initiative” slideshow, Final Report, Prof. Nadler & FIRU, 2008 Page 79 Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce January 2009
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Chart 15. Model III of pilot UDFs – land developer
2009 2010 2011 2012 2013 2029 years UDF: management costs costs costs costs costs costs outflow of resources: contributed cash, sites
pro rata of pro rata of pro rata of sale income – sale income – sale income – Project: project 1 project 2 project n inflow of resources: contributed cash, sites Source: presentation “Implementation of the JESSICA Initiative”, Final Report, Prof. Nadler & FIRU, 2008 Model III, where a UDF allocates equity to land developments, is characterised by the following:
. formation requirement: private financial investors and bank as partner for the fund respective for the project, undeveloped (public) land
. UDF as an incorporated special purpose vehicle for land developments (only)
. refinancing by public and private equity (sites as possible contributions in kind)
. land development risks and higher management costs borne by UDF
. additional capital: private (development) loans to UDF or directly to projects
. sale proceeds from developed land (trader approach) ensure UDF revenue
. bylaws with asymmetric distribution of earnings (and losses) in favour of a sufficient return for the private equity (landlords and/or financial investors).
2.1.4.7 Overview of European examples – Summary The above overview shows that an important tendency can be observed in urban area development and regeneration in the last 10 years or so. Its fundamental characteristics include:
. the use of financial vehicles and entities organised on commercial basis,
. involvement of private entities,
. refundable financing. More and more development and regeneration projects are carried out with different financial vehicles and entities organised on commercial basis such as companies or investment funds. Execution of such undertakings directly by administration units (including government and self-government bodies, regional development agencies, etc.) is at least limited, if not abandoned at all. The private sector is more and more often and to a larger extent involved in development and regeneration activities – not only as a contractor of public procurements but principally as a partner which provides financing, know-how, and in consequence participates in management, and in certain cases also makes decisions on carrying out or rejecting specific projects. However, participation of the public sector is still needed and significant. It consists in defining directions, objectives and ways of performing the activities discussed and their organisational framework, in initiating and promoting specific projects, and ensuring financing. Without participation of the public sector private entities would not be interested in
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becoming involved in many regeneration projects, and urban area regeneration would be selective, at best, and not comprehensive. Refundable financing, i.e. through equity contributions and loans, is increasingly applied. In consequence, the classical grant financing is less important. With this, limited financial resources of the public sector are used with more intensity and the scale of regeneration projects increases through mobilisation of private sector resources. The selective overview presented in the subsections above shows that the organisational financial solutions applied in Europe to carry out regeneration and development projects are very diverse. Organisational structures include both regional and local range of activities. In certain cases, participation of private entities in a financial vehicle aimed at regeneration reaches 50% of equity, whereas in other cases (e.g. ParqueExpo 98 S.A. in Portugal) total equity contribution is ensured by the public sector and private entities provide debt financing only and in addition under the condition that they are granted guarantees by public bodies. Moreover, similar to e.g. The English Cities Fund and the funds operating in the Umbria region, Italy, different types of shares or notes may be applied, which grant different rights to equity holders. A financial vehicle may be organised as both commercial company and cash pool handled by a financial institution (e.g. a fund of the Umbria region or as sub-funds in Italy). In terms of a business model, i.e. at the level of financing individual development regeneration projects, both financial vehicles acting as lenders and those acting as investors-developers can be distinguished in Europe. Considerable differentiation results from many conditions, including preferences of entities which organise regeneration and development activities in a given region and e.g. characteristics of land intended for regeneration. It is difficult to assess individual solutions, especially in terms of their applicability in the reality of regions in Poland, both due to their diversity and short time of their operation. Many financial vehicles have been operating for less than 10 years, and some of them are just starting their activities. Many undertakings carried out by the financial vehicles discussed have not been completed yet, and therefore there are no grounds for make the final assessment of their performance. Thus, it is impossible to explicitly state that one solution is more advantageous than the other. As regards the applicability of international solutions at implementing JESSICA in Poland, it should be noted that such vehicles as HFs/UDFs (e.g. analogous to the British LABVs) are currently not operating in Poland, contrary to the above described examples. In the area of both urban area regeneration and other projects carried out in the public area only grant financing is applied. Examples of public-private partnerships are also few and subject to controversy. Due to this, in order to implement JESSICA (currently possibly only based on EU funds) organisational institutional framework necessary for this mechanism to operate will need to be created from scratch. Solutions adopted for the establishment of first UDFs will therefore be preliminary, determined by limitations resulting from the existing situation. It is important that the current arrangements should be flexible and not introduce unnecessary limitations in forming JESSICA in a further time horizon. Having regard to the above, this study proposes individualised solutions for the JESSICA vehicle organisation, adjusted to the needs and capacities of specific regions in Poland (including short-term financial conditions). Through the reference to international experiences and through many meetings attended with entities potentially interested in implementing the JESSICA initiative in Poland, the proposals presented in subsequent sections are characterised by the pragmatism of organisational solutions.
2.1.5 Possible structures for organising JESSICA funds A full scheme for the JESSICA vehicle organisation comprises the establishment of a Holding Fund (HF) and an Urban Development Funds (UDF). Section 2.1.1.2 includes a
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definition of the funds, identification of their specific roles in the JESSICA vehicle implementation, and legal bases applied (EU Regulations). JESSICA is a flexible vehicle, which allows the implemented configuration to be adjusted to specific conditions and needs of a given Region. Alternative organisational modes of the JESSICA vehicle implementation, also possible in the framework of the general concept, are presented in the chart below.
Chart 16. Possible alternative organisation models for JESSICA implementation
(1) (2) (3) Managing Authority Managing Authority Managing Authority
Holding Fund Holding Fund
Established within EIB Formal proceedings in order to with Technical Assistance select HF managing entity (operator) Urban Development Fund Development Urban Fund Development Urban Fund Development Urban Fund Development Urban Fund Development Urban Fund Development Urban Urban Development Fund Development Urban Fund Development Urban Urban Development Fund Development Urban
Formal proceedings in order to select UDF Formal proceedings in order to select UDF Formal proceedings in order to select UDF managing entities managing entities managing entities
EIB Technical Assistance EIB Technical Assistance (optional) (optional)
Note: establishment of a holding fund is optional, yet it could make possible achieving the benefits presented on page 43. Source: European Investment Bank materials Chart 16 presents a general picture of the possible configurations of the entire JESSICA vehicle (optionally, with Holding Fund establishment). Under JESSICA UDFs can operate according to a number of different models – from relatively simple where the UDF acts as a lender, to complex ones where the UDF contributes equity to investment projects.
2.1.5.1 Different UDF business models As stated in Section 2.1.3.3, having regard to the target role and the forms of project financing by UDFs (financial products), two completely different basic business models for UDF operation can be taken into consideration:
. a loan and guarantee fund; and
. an investor-developer allocating equity to investment projects. With reference to the aforesaid, the European Commission is inclined to consider that UDFs operating under JESSICA should concentrate on investment financing and not on carrying out development activities directly. The potential for applying in Poland the model of the UDF acting as an equity investor are more limited than in the case of establishing the UDF as part of a financial institution (with separate pool of resources). This is because the financial institutions which could operate such UDFs specialise in debt or grant financing. The equity investor model in not impossible in the implementation of UDFs in Poland but a loan guarantee fund would be the basic model.
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2.1.5.2 UDF as a loan and guarantee fund An illustrative chart of a UDF operating as a lender is presented below.
Chart 17. An illustrative chart of a UDF operating as a lender
Managing Authority
UDF objectives Urban Development 1 and targets Fund acting as a lender
2 •Credit analysis Urban Development Fund • Financial operations 3 • Factors considered • Business scoring Investment •Criteria Committee • Project scoring • Business analysis • Financial analysis • President • directors of departments Initial score
4 Illustrative project scoring categories: Board of • Eligibility • top priority Directors • Public benefit scoring
PROJECT SELECTION PROJECT (public interest) • strategic • President Final score •eligible • members nominated by • eligible with high return the UDF 5 • member nominated by the Managing Authority • period of loan financing •grace period • interest rate level (0%, inflation, WIBOR, WIBOR+) • fixed or variable interest rate • required level of own contribution, collateral •other Determination of terms and PRICING conditions of financing 6
Decision on extending • Issues of financing from other financing public sources
Source: own elaboration based on the Council of Europe Development Bank and the European Investment Bank materials The following list, developed on the basis of materials from the Council of Europe Development Bank and the European Investment Bank, includes illustrative scoring criteria. Business evaluation: . Financial performance of the business and borrower
. Market performance
. Management performance Project evaluation: . Project revenues and expenses
. Projected financial statements
. Value of assets and collateral
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Public benefit evaluation: . The degree to which the feasibility of the project depends on UDF
. The impact on the urban community and quality of life
. Projected tax revenues
. The optimization of urban infrastructure and attraction capacity.
2.1.5.3 UDF as an equity investor An example of the existing solution, where a financial vehicle such as a UDF allocates equity to projects, is LABVs (Chart 5) operating in United Kingdom. A theoretical structure based on the LABV concept is presented in the diagram below. It also takes account of the possible use of all forms of project financing by UDFs, including loans and guarantees, and excluding equity contributions. In addition, the diagram specifies the issue of project financing organisation. For simplification, the Holding Fund is not included.
Chart 18. Theoretical possibilities of structuring UDF organization and financing based on the structure of LABV and financial products of UDFs
Managing Authority Private Sector Partner • JESSICA funds • Assets • Assets (land, buildings) (land, buildings) •Cash •Cash
Banks, Urban Development Fund Financial Institutions Loans
Equity financing: Guarantees • JESSICA funds Banks, •Assets Financial Institutions (land, buildings) •Cash Debt financing Debt financing
Project A Project B Project C
PPP / SPV / JV PPP / SPV / JV PPP / SPV / JV
Property Local Partners, e.g.: Assets Municipality
Municipal Utility Company Property Senior debt Assets Private Sector Developer Banks, Financial Institutions etc.
Source: own elaboration based on „JESSICA Wales Urban Development Fund (UDF). JESSICA Preliminary Study for Wales. Final Report”. King Sturge Consultancy. September 2008 The theoretical structure presented above provides for organising a UDF as a joint venture with a private partner. However, German experiences show16 that private entities are not
16 JESSICA Berlin Project. Introduction of JESSICA in Berlin. Prospects and possibilities exemplified by the Molkenmarkt and Klosterviertel project. Study for the European Investment Bank (EIB) – Executive Summary. DTZ Page 84 Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce January 2009
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likely to financially participate in UDFs. Having regard to differentiation of a project portfolio and the need to make political decisions, private partners would not be allowed to perform control and participate in decision-making. However, private entities have many opportunities to participate in the financing of individual projects – in the case of projects that ensure investment profitability at a level similar to that of a risk-free rate of return.
2.1.5.4 UDF as a separate unit within an existing financial institution As previously indicated with regard to the form of urban development fund organisation, the funds may be independent legal entities or separate financial units within existing financial institutions (a separate pool of resources). An example of a UDF organised within an existing financial institution is presented in the chart below.
Chart 19. Organisation of a UDF functioning as a separate financial unit within an existing financial institution
Investment Committee Management Board of Directors
Financial Asset / Fund General Accounting and Human Legal Operations Management Administration Reporting Resources Department Department Department Department Department Department
Risk Credit Analysis Management JESSICA Task Force
Source: Council of Europe Development Bank and European Investment Bank materials
2.1.6 Conclusions regarding the JESSICA implementation strategy Suggestions for the decision on establishing a Holding Fund:
. In a short-term perspective –
. to establish a HF, if it is to be managed by the EIB (see: Section 2.2)
. In a medium-term perspective –
. to establish a HF, if the number of UDFs is to increase and expertise in establishing and monitoring UDF activities needs to be used
. to establish a HF, if cities are not committed to establishing UDFs
. not to establish a HF, if cities are to take on responsibility for UDFs and to increase resources for UDF financing
. not to establish a HF to reduce UDF management costs
. In a long-term perspective –
. to establish a HF, if the number of UDFs is sufficient and if cities are not to take on responsibility for UDFs, or if they need significant support at establishing UDFs
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. not to establish a HF, if cities are capable of establishing UDFs on the own and controlling them
. to establish a HF, if it is to be needed to distribute EU funds in the next programming periods Suggestions for the decision on establishing UDFs:
. to establish numerous UDFs –
. a separate UDF for the main regional city will have more opportunities to obtain additional resources from the city budget and more possibilities of generating a sustainable portfolio of projects
. UDFs dedicated to groups of small and medium towns in a Region (less opportunities to obtain additional resources from town budgets)
. to establish a limited number of UDFs to be managed by an existing financial institution with expertise in fund management (selected in a public tender); one manager for many UDFs to improve cost-efficiency Suggestions for the decision on the number of UDFs:
. at the beginning, to carry out pilot projects by one or two UDFs in the Region, ensuring that resources for small and medium towns are separated from those for big cities
. subsequent UDFs should only be created after experience has been acquired from pilot projects and cities encouraged to establish and finance UDFs
. in a long-term perspective (after JESSICA has been implemented successfully), medium-sized towns should be encouraged to establish their own UDFs Final conclusions
. Taking into account the benefits of a solution consisting in establishing a holding fund (listed in Section 2.1.1.2) – an HF is worth establishing.
. It would be worth to begin with UDFs in big cities (regional capitals) with prospects for at least several major projects to be created.
. Resources for supporting small and medium towns where projects are of a smaller scale should be separated to limit competition between small towns and big cities.
. Initially, the number of funds should be as small as possible (HF for small and medium cities and e.g. one UDF for a big city). Recommendations from the JESSICA fund structure in individual Regions are presented in Section 2.4.
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2.2 Task 2.2 Holding Fund operation in the Regions
Task 2.2 If a HF option is found appropriate, appraisal of the perceived advantages of a HF and description of relationship between the MA and a HF. Assessment of the relative advantages of using EIB or other institutions as a HF manager.
2.2.1 Benefits from HF operation in the Regions In the current situation where limited resources are available to constitute initial capital for JESSICA – the establishment of a Holding Fund appears to be justified only where it is to be a separate pool of resources managed by the European Investment Bank. The benefits from the EIB involvement include:
. No need to apply provisions of the Polish Public Procurement Law, so resources may be transferred relatively quickly upon the completion of negotiations on management contracts between Marshal Offices and the EIB;
. Acquisition of a strong partner, in the area of both expertise in financial management, and EU regulations on financial engineering instruments;
. Continuation of works on specification of legal provisions, including EU regulations, and detailed solutions for Poland regarding the new JESSICA vehicle, with participation of the EIB. The EIB may act here as an intermediary or an institution which assists talks between Marshal Offices, central administration (Ministry of Regional Development, and Ministry of Finance), European Commission, and potential project promoters. It should also be noted that the EIB has currently the broadest knowledge on the JESSICA vehicle;
. Quick payments under ROPs and the possibility to keep resources on bank deposit, which in the current market situation will allow income surplus over management costs to be generated until the resources are released;
. Easier implementation of JESSICA due to the availability of operational procedures developed by the EIB, and verified during many year of the bank's operation. This concerns fund management procedures and UDF selection procedures. The EIB also has its own selection procedures for service providers;
. Close cooperation with the European Commission and other institutions involved in the JESSICA creation process;
. Competitive fund management fee as compared to other financial institutions;
. The EIB may be able to add value by helping to define practical actions of UDFs, drawing from their broader experience. If an entity other than the European Investment Bank was to act as a Holding Fund, it would not have any significant benefits for Marshal Offices in the light of further recommendations of the Consultant, i.e. the establishment of a single UDF for a given Region. Furthermore, it would not be practically possible to select an HF operator until all formal legal issues were resolved due to the lack of unambiguous definition of responsibilities and operating rules for such an entity. Resolution of the above-mentioned legal issues would in such case pave the way for Marshal Offices only to the selection of an HF operator, whereas in the event of entrusting the EIB with HF management it would already be possible to select UDF operators. It should also be noted that as a rule, the EIB is devoted to the promotion of the JESSICA initiative (an agreement signed with the European Commission and the Council of Europe Development Bank). In this context, the EIB’s involvement will be particularly valuable because at present many aspects related to JESSICA implementation need to be clarified and further analysed.
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In addition, our recommendations are based on the following premises:
. Additional capital is not likely to be gathered at the Holding Fund level. None of the financial institutions with which meetings were held (including the EIB and CEB) has said that it was willing to invest their resources at this level. The unwillingness of the institutions to transfer their financial resources to such a fund is due to the fact that investment risks cannot be reliably estimated without specific projects being indicated. The only solution would be to establish appropriate securities. A Voivodship Self- Government would have to guarantee a credit or a loan granted for the HF, or by the HF to a UDF, which is highly unlikely.
. The Consultant recommends that one Urban Development Fund be established in the initial period of JESSICA operation. Resources are limited, so very few projects can be financed by UDFs in some Regions. Even if the division of available resources is justified, then taking into account the size of beneficiaries a sufficient solution would be to apply two or three separate accounts within the existing financial institutions. A Holding Fund would transfer resources to be managed by one UDF managing body, so its role would be limited to the mediation in money transfer, and such an HF would have a doubtful added value.
. Cost-efficiency is another argument. Operational costs of an entity whose responsibilities are limited to controlling one UDF would be difficult to justify in financial terms. The HF operation will be supervised by the Managing Authority for the Regional Operational Programme, which will need to aim at cost-efficiency of a solution with regard to which it makes a decision.
. The rationale also results from the scope of activities the Managing Authority needs to take when implementing JESSICA. In the event that a body other than the EIB is to manage an HF, the Voivodship Self-Government will be obliged to develop and conduct a tendering procedure to select an institution to act as the Holding Fund. Then, the Holding Fund will have exactly the same task under the concluded agreement, i.e. to select in a tender a financial institution to act as a UDF. Furthermore, the HF will certainly consult and agree on UDF selection criteria with the Managing Authority. In practice, this means that the Managing Authority would become involved in the selection process at two levels, and not one level. After invitation to tender, staff of the Managing Authority are also to be expected to become involved in the analysis of business plans submitted by entities which want to act as UDFs. It is also worth mentioning that if in the future the structure needs to be expanded to a complete model in the future, for instance if additional resources become available, the existing UDF will have no legal barriers to establish a Holding Fund. To carry out such an action, the Managing Authority as the owner of resources gathered in a UDF will transfer its management right to a new entity, observing terms and conditions of the contract concluded with the UDF. To sum up, in the event that the Managing Authority does not entrust the role of the Holding Fund to the European Investment Bank, the Consultant recommends that in the initial period of JESSICA operation the creation of an HF be abandoned in favour of a UDF established in a tender procedure under the public procurement law. Given the present situation (still non-clarified requirements for JESSICA implementation), we recommend that a Holding Fund be established as a separate bank account in the EIB. Support from the EIB will be of great importance, in particular in the initial period of JESSICA implementation in Poland. A fund administration contract could be valid for two or three years. During that period, the EIB would be responsible for the effective launch of an urban development fund – until financing of first regeneration projects is released. After that period, it is necessary to consider whether further EIB support is needed.
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2.2.2 Relationships between the Managing Authority and HF and UDF The legal framework of relationships between the Managing Authority, the Holding fund and UDFs should refer to the Act on principles of development policy (Journal of Laws of 2006, No 227 item 1658). The Act stipulates the principles of a development policy and defines entities to conduct the policy and their cooperation mode. According to the Act, a development policy is conducted based on operational programmes which are financed from the ERDF. This means that the aforesaid Act also concerns Regional Operational Programmes. Point 4 of Article 5 includes the definition of an Implementing Body. In the light of the provisions, this will be a Holding Fund or UDFs. Unfortunately, the Act may not simply be applied to determine relationships between institutions as it only refers to assistance in the form of grants. On the other hand, the COCOF Notes (COCOF/07/0018/01-EN) indicate that a Holding Fund will have the status of beneficiary. However, the interpretation of the Coordination Committee of the Funds is made from the point of view of expenditure eligibility and not that of relationships between institutions. In addition, in the light of the Act on development policy, a Holding Fund will not have the status of beneficiary because, in accordance with the definition therein, a beneficiary is an entity which carries out projects under a co-financing agreement. It should be noted that due to the fact that the aforesaid Act does not concern any forms of assistance other than a grant, resources may not be transferred for management of an HF or UDFs based on the Act. Having transferred resources from a ROP to the HF or a UDF, the Voivodship Board would render itself liable to a charge of breaking the public finance discipline (unlawful transfer of public funds). Another option for transferring resources is to award a development grant. The trouble with a development grant is that it is awarded under a co-financing agreement – which does not comply with conditions of the JESSICA mechanism either (HF and/or UDFs shall not be awarded grants senso stricte). Furthermore, it is difficult to tell today which of Financing Bodies entering the HF and/or UDF selection procedures would accept a grant as a form of transferring resources. Given the aforesaid, further legal analyses need to be made, which will lead to developing an appropriate interpretation regarding the basis of such relationships. Nonetheless, as a rule and in accordance with its purpose, a UDF will act as an Implementing Body for one or several measures of a Regional Operational Programme. One of the tasks of the HF (the EIB in this case) will be to select a UDF. In our opinion, relationships between the Holding Fund and the Urban Development Fund will copy duties entrusted to the HF by the Managing Authority. The Managing Authority will be bound directly by an agreement with the Holding Fund only. Therefore, from the formal point of view, resources may not be transferred without a transfer of responsibilities for implementation of projects compliant with ROP criteria (type of project, time, accountability, monitoring). At the subsequent level, in order to satisfy the demand of the Managing Authority for appropriate product indices and performance, and its requirements for reporting, monitoring, promotion, control, etc., the Holding Fund shall include in the agreement appropriate clauses for the UDF managing bodies, and these managing bodies, in turn – for individual beneficiaries. In order to identify the responsibilities and relationships, an analysis should be made to find out what kind of entity is the Implementing Authority in the light of the legislation. According to the Act on principles of development policy: Implementing Authority – a public or private body entrusted with tasks related directly to beneficiaries under an operational programme based on an agreement or contract; an Implementing Authority (Intermediary body of secondary level) also acts as an intermediary body within the meaning of Point 6 of Art. 2 of Council Regulation (EC) No 1083/2006 of 11 July 2006 laying down general provisions on the European Regional Development Fund,
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the European Social Fund and the Cohesion Fund and repealing Regulation (EC) No 1260/1999; Point 6 of Art. 2 of Council Regulation (EC) No 1083/2006: 6) ‘intermediate body’: any public or private body or service which acts under the responsibility of a managing or certifying authority, or which carries out duties on behalf of such an authority vis-à-vis beneficiaries implementing operations. Article 27 and Articles 29 to 34 of the above-mentioned Act include a detailed scope of responsibilities and competencies for the Managing Authority, the Intermediary Body, and the Implementing Authority. The Articles which are crucial from the JESSICA point of view are listed hereunder. Detailed scopes of responsibilities in each Region will be indicated in the contracts negotiated between the Managing Authorities and the HFs. According to Art. 27, the basic scope of responsibilities of an Intermediary Body/ Implementing Authority includes:
. to prepare and submit a detailed description of priorities of the operational programme to the managing authority based on guidelines of the minister responsible for regional development, referred to in paragraph 1 of Art. 35(3);
. to prepare and submit proposals for project selection criteria to the Monitoring Committee;
. to select, based on specified criteria, projects to be co-financed under an operational programme;
. to conclude agreements on project co-financing with beneficiaries;
. to control execution of co-financed projects;
. to make payments from operational programme funds for beneficiaries,
. to recover amounts unduly paid to beneficiaries,
. to conduct information and promotion campaigns. The Implementing Body shall operate on the basis of notices on project submission rounds (competitions) (a submission round can be of open kind – without a selection deadline, while the pool of resources lasts). The Implementing Authority should publish the full competition notice on its website, and their outlines – including information on the type of projects and entities, and the amount to be co-financed – in a national or regional newspaper. A press release published by the Implementing Authority should include a reference to the website where the full notice is available. The relevant voivod should informed by the Implementing Authority about dates of competition committee meetings, and s/he may delegate a representative to act as an observer. Competition results shall be published on the website of the Implementing Authority. Under a standard procedure (competition for grants), each applicant shall be entitled to protest against a decision by a project assessment committee. It will probably not be possible in the JESSICA model but this issue requires a relevant legal expertise. In accordance with Article 32, the Managing Authority may conclude an implementation contract or agreement with the Implementing Authority. The agreement shall stipulate:
. tasks of the implementing authority that are co-financed under an operational programme;
. amount of co-financing;
. conditions for granting resources;
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. how supervision of the correct use of resources transferred is performed by the managing authority or the intermediary body. The existing Act precisely stipulates the relationships between the Authorities responsible for operational programme implementation. Moreover, agreements on the implementation of ROP measures currently concluded by some Marshal Offices are much more precise. The agreements provide for the following general scope of duties:
. To carry out a process of selection and assessment of applications for co-financing based on determined criteria,
. To conclude agreements on project co-financing with beneficiaries,
. To control the implementation of projects co-financed under ROP,
. To make payments from ROP to beneficiaries,
. To conduct information, training and promotional activities,
. To monitor the progress of projects and to verify reports and applications for payments,
. To inform about irregularities,
. To recover amounts unduly paid to beneficiaries,
. To perform duties related to granting ROP funds, State aid and de minimis aid to beneficiaries,
. To draw up reports on the implementation of Measures,
. To store and backup documents related to the entrusted tasks, including project implementation. As far as a Holding Fund is concerned, its duties will be:
. To cooperate with the Marshal Office with regard to clarification of all the legal and procedural aspects,
. To prepare competitions and select bodies to act as UDFs,
. To sign agreement with UDFs and perform system audits (analysis of level of the preparedness for that role),
. To supervise UDF activities (verification of reports, monitoring of works, participation in works by UDF bodies),
. To prepare reports to Marshal Offices,
. To store and backup documents related to the entrusted tasks. It should also be noted that an agreement between an HF and a UDF should be constructed in a way that clearly states who the actual owner of resources is (City Office), and that includes an option for the Holding Fund to withdraw and for new relationships to be established directly with the Managing Authority – the Marshal Office.
2.2.3 Conclusions for the Regions In the current situation, the establishment of a Holding Fund within the European Investment Bank is worth considering. This is even more important as further legal analyses and actions for changes in legislation are still needed. All these issues need to be identified and the Holding Fund should be the body to solve them. The selection of the EIB is an advantageous solution in this case. It is worth noting that the earlier the decision on establishing a Holding Fund is made, the sooner payments from the EC can be made, thus generating interest revenue. An alternative approach is to solve all the problematic issues independently using technical
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assistance resources and to select a UDF independently. A UDF may be selected when all the operational conditionings of such an entity are known (elimination of operational risks). In short, with the selection of the EIB its fee may be covered from profits on the deposit. In addition, a joint representation of interests backed up by the EIB potential and expertise will certainly be more efficient than separate actions of individual self-governments. It should also be clearly stated that due to limited resources intended for the JESSICA instrument, maintaining a Holding Fund currently appears economically unjustified in a long term. For this reason, an agreement concluded with the EIB should provide for the option of transferring UDF management from the HF to the Managing Authority. The value of resources transferred for HF management is also significant. As in some Regions the initial capital of JESSICA may be EUR 5m only, establishing an HF for one Region only does not appear to be justified. Not even the EIB, which operates on a not purely commercial basis, will be interested in the management for a fee specified as a maximum of 2% of initial fund capital per year if the value of HF is below a certain level. It appears to be justified to establish two or one Holding Fund only for all the analysed Polish Regions, in particular in the initial period when most activities of a Holding Fund will be legal analyses, organisational activities, etc. The effect of scale could be achieved in this way – to collect enough equity to be able to finance HF activities. An agreement concluded between the Managing Authority and a HF should provide for an option for both Managing Authority and the EIB to withdraw. Proceedings for the future liquidation of a HF also need to be precisely determined. HF withdrawal and liquidation modes will depend on the modes of HF establishment and the transfer of resources to it (in the form of grants, or entrusting resources under its management). An agreement between the Managing Authority and a HF should also provide for an option of the Managing Authority transferring the ownership of funds managed by HF to another entity, e.g. a selected city office.
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2.3 Task 2.3 Combination of JESSICA and a traditional grant mechanism
Task 2.3 Evaluation of the feasibility of combining grants with UDF financing in certain operations and of the ability to adequately manage such financial structures. The issue of combining grant assistance and financing from JESSICA should be considered with regard to two aspects: public aid and organisation of financing. As a rule, in accordance with Article 46 of Commission Regulation (EC) No 1828/2006, urban projects receiving grant assistance from an operational programme may also be supported by urban development funds. A project may be defined as one undertaking – indivisible, and completed with the achievement of a specific product, e.g. development of a sports shooting range. It may happen that a beneficiary receives a grant for a given project and in parallel he wants financing from the JESSICA fund for the so-called own resources. Public aid aspect The public aid aspect, and in particular its maximum ceiling, is an important limitation which needs to be considered in this situation. If grant financing is applied, the aid programme from which grant assistance is to be derived needs to be notified to the European Commission. In accordance with the binding law, the Commission defines the maximum permitted levels of public aid. Usually, the aid ceiling concerns a specific undertaking. In a situation where JESSICA financing would also be public aid (e.g. an interest rate on loans would be lower than a relevant reference rate), the maximum ceiling of public aid for the undertaking in question should be referred to the total value of both grant and benefits from preferential financing. In such a case, the grant should be appropriately reduced so that aggregated benefits from the preferential interest rate do not exceed the maximum ceiling of public aid. Therefore, the two financing methods used for the same project are closely related in the aspect of public aid. In the course of developing the given aid programme, the method of combining public aid from two sources should be defined, or additional conditions for receiving it should be specified. In practice, it is very inconvenient to combine public aid from two sources. This will lead to the need to calculate the amount of public aid from a preferential source for each project as early as the stage of obtaining the funding, and in the next step – to apply for a grant in the amount reduced by the benefit from a preferential interest on loan. Organisational aspect The organisational aspect related to financing projects from grants in parallel to the JESSICA-type fund is equally important. If such decision is not conditional, i.e. not dependant on a condition such as receiving support from other sources, it does not involve any major complications. The organisation of financing is of crucial importance where a decision to carry out a project is taken only if the project receives support from two sources at the same time. The entity giving a grant or financial support cannot then be certain of what decision another institution will take. Also, verification of applications and formulation of recommendations on granting support to many different projects is ineffective with no guarantee that the projects will receive full financing. In view of this, two solutions may be considered: 1) Grant assistance and financing through JESSICA funds are awarded by one body. This solution is formally feasible – it would involve the announcement of one tender for both the function of UDF and the ROP implementing authority. However, such an entity is
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unlikely to be designated. In addition, management costs of such an organisation would be relatively high. 2) Grant assistance is awarded by the Managing Authority based inter alia on UDF recommendations. One can imagine that in the course of verification the relatively cheaper, quicker and easily repeatable part of project verification – i.e. that related to awarding grants – would be performed at first. If the result were positive (conditional grant award), the second stage of procedure would follow, in which a project would be subject to an assessment by a UDF, including market analysis, risk analysis, financial model analysis, etc. If a project meets conditions set by the UDF, it will make appropriate recommendations for the Managing Authority. If not, it will proceed to the analysis of a subsequent project, positively recommended by the grant awarding body – the Marshal Office. Integrated projects The second from the solutions presented above may also be applicable to the so-called integrated projects. The idea of integrated projects consists in a concentrated approach to regeneration of one area, where one coherent regeneration concept, accepted by all partners (property owners), is implemented. Usually, a local self-government unit is the leader of such an agreement, developing projects and consulting them with partners as early as at the LRP preparation stage. Integrated projects typically combine projects which need to be financed from various sources, including own resources and those of private entities, grant assistance, loans from the JESSICA vehicle and commercial financing. The selection of financing sources to be used in a specific case results from financial characteristics of a project – in particular with reference to its capacity to generate profits and the level of financial rate of return. An important aspect to be considered is that the financing for individual projects within integrated projects is granted by different bodies. As a rule, grant financing comes from public institutions which have resources to finance such activities. In the case of grants for urban areas regeneration, these are Marshal Offices. An Urban Development Fund is to be liable for financing projects under JESSICA, while commercial banks and other financial institutions carry out typically commercial financing. Parallel decision-making may be a problem – integrated projects are constructed in such a way that all their individual components need to be carried out in the same time perspective. Refusal to grant financing to one partial project may lead to failing to achieve objectives of an entire integrated project. With reference to the second proposed solution, the role of the Marshal Office should be to pre-select projects, establish a ranking list, and prepare conditional recommendations for awarding grants in case an integrated project receives financing for other sub-projects (including that from the JESSICA vehicle). Conclusions on the combination of JESSICA and the traditional grant mechanism . The JESSICA vehicle and the traditional grant mechanism may operate in parallel . The approach, method and mode of establishing the maximum value of permitted public aid with reference to co-financing projects need to be defined explicitly in an aid programme . The use of both the JESSICA vehicle and the traditional grant system in one undertaking may be complicated in procedural terms (co-conditionality of granting financing).
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2.4 Task 2.4 Recommended JESSICA structure in the Regions
Task 2.4 Recommended structure of envisaged UDFs in the Regions – number, aims, sizes, governance (including description of relationship between the MA and a UDF: split/distribution of powers, responsibilities, tasks, etc.), outlined investment strategy (geographical and/or thematic), potential for co-financing, etc. The previous sections analysed in detail issues related to the establishment of a Holding Fund and division of tasks and responsibilities between the Managing Authority, the HF and UDFs. The findings are universal, do not change from Region to Region, and are therefore not included in this Section. The fundamental objective of this sub-section is to present a general strategy for the JESSICA implementation based on the existing measures of Regional Operational Programmes. The issue of the JESSICA implementation in the Regions is discussed in more detail in Section 5.2.
2.4.1 Wielkopolskie Voivodship In the Wielkopolskie Voivodship, the strategy for supporting regeneration activities based on EU funds is explicitly directed to using the JESSICA vehicle and all resources planned in the Wielkoplskie Operational Programme for urban regeneration will be used within the JESSICA mechanism. The proposed implementation strategy is presented in the chart below.
Chart 20. JESSICA implementation strategy in Wielkopolskie Voivodship
Marshal Office - WROP Possible other Measures of Measure 4.1 Regeneration of urban areas the Regional Operating EUR 40.8M Program
Subsidy Fund HF ?
JESSICA Fund EUR 40.8M
UDF Cities with population above 50 000: Cities with population below Poznań, Kalisz, Konin, Ostrów 50 000 Wielkopolski, Piła, Gniezno, Leszno Profits Repayment Profits Repayment Guarantee Equity Loan Guarantee Equity Loan
Projects, SPV Projects, SPV
Resources for the fund will be derived from the Wielkopolskie ROP from Priority 4 Regeneration of problem areas, Measure 4.1 Urban regeneration. The amount of EU resources for the measure is EUR 40.875m. Additionally, talks are being held with the Ministry of Finance to contribute capital to the fund from the State budget. It is also possible to increase the fund equity with Marshal Office’s contribution from its own resources. The expected volume of equity is EUR 50m. According to representatives of the Office, in a
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longer perspective other activities under the ROP may also be integrated in the JESSICA vehicle. In line with the Marshal Office’s suggestions, the recommended UDF structure provides for the breakdown of resources in two parts (two funds): one for bigger cities with over 50,000 inhabitants and one for other cities/towns. The breakdown of resources in two parts should lead to eliminating uneven competition between bigger cities, where it is easier to carry out profitable projects, and smaller urban centres in the Region. It is important that despite the breakdown a single entity manages the resources following one marketing policy and applying uniform procedures and documents. The establishment of a holding fund might appear unjustified due to its simple structure and the relatively low value of equity. However, the fact that the fundamental task of an HF in the short-term perspective will be to determine and specify frameworks of UDF operations in the legal context and to clarify provisions on expending resources derived from the ERDF also needs to be taken into account. This is a series of problems to be solved which requires a complete involvement of an entity which will assume the HF functions. In the event that there is no holding fund, its task must be performed by the Marshal Office of the Wielkopolskie Voivodship. The validity of establishing an HF is discussed in Section 2.1.2. The next step will be to prepare a tender for a UDF, to select the fund and to prepare it for operation. This stage would be easier if there was a legal basis for Urban Development Fund operations clearly defined in legal regulations. The UDF could be selected by employees of the Marshal Office of the Wielkopolskie Voivodship responsible for ROP implementation, with a limited support from external specialists. The Marshal Office of the Wielkopolskie Voivodship decided to start negotiations with the European Investment Bank regarding the contract for managing the holding fund. For this purpose, in October 2008 an agreement was signed (“Memorandum of Understanding”) and the process of negotiations regarding the establishment and management of a holding fund for the Wielkopolskie Voivodship has started. The negotiation process is expected to end in March 2009. The Marshal Office has created task teams with the aim of preparing recommendations for appropriate management contract provisions and identifying all legal issues which prevent or hinder effective implementation of the JESSICA initiative. The results of the work of the teams will constitute an important document, one to guide and be used in negotiations of the management contract. They will indicate problems, risks, issues to be clarified, tasks for the holding fund and an implementation schedule.
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2.4.2 Zachodniopomorskie Voivodship The Zachodniopomorskie Regional Operational Programme provides for resources for regeneration in two measures: Priority Axis 5 “Tourism, culture, regeneration”, Measure 5.5 “Regeneration of degraded areas”, and in Priority Axis 6 “Development of metropolitan functions”, Measure 6.6 “Regeneration of degraded metropolitan areas”. The definition of the two priority axes determines the location of projects which may benefit from a specific measure. A total of EUR 35m has been allocated for both measures, of which EUR 22m is for Measure 5.5 and EUR 13m for Measure 6.6. The strategy for JESSICA implementation in Zachodniopomorskie Voivodship is based on the assumption that ca. 1/3 of resources for regeneration will continue in the grant scheme, and the rest will constitute a contribution to an Urban Development Fund. The implementation strategy is illustrated graphically in the chart below.
Chart 21. JESSICA implementation strategy in Zachodniopomorskie Voivodship
Marshal Office - ZROP Measure 5.5 – Regeneration of degraded areas EUR 22.3M Measure 6.6 – Regeneration of degraded metropolitan areas EUR 13.1M
Traditional grant financing JESSICA
HF ?
Subsidy Fund Subsidy Fund UDF Measure 5.5 Measure 6.6 (SOM) KFM (JESSICA) Regeneration: Regeneration: or other funds EUR 14.7M EUR 8.6M ca. EUR 20M less UDF contribution less UDF contribution Social Housing: Social Housing: EUR 7.5M 4.5M EUR less UDF contribution less UDF contribution
Integrated projects (leader cities)
Sub- Sub- Sub- Sub- project project project project
Integrated projects
Sub- Sub- Sub- Sub- project project project project
In Zachodniopomorskie Voivodship the system for the implementation of regeneration is more complex than in other Regions. The specificity of the Region consists in the assumption that regeneration will be executed only through integrated projects, i.e. those composed of several sub-projects and aimed at a comprehensive regeneration of a specific area. This approach is to concentrate resources in such a way that they are used for an intensive regeneration of a specific area. An integrated project is a set of subprojects with different characteristics with regard to financial performance. Some concern urban infrastructure, where a grant is to be the support vehicle in most cases, some are to be financed from the own resources of property owners. Finally some of those projects generate returns but in amounts insufficient to obtain financing on commercial terms. The latter remain in the area of interest of JESSICA-type funds. The leader and initiator of such an integrated project is a territorial self-government entity which should assume the burden of building a partnership, defining the scope of the entire project and proposing a financial assembly for the entire undertaking. The strategy for integrated projects will be implemented regardless of whether financing will be provided through the JESSICA mechanism or a grant system. Regeneration would be
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much easier to manage in these circumstances if financing was provided by one entity – a Marshal Office. If decisions on awarding grants and on preferential financing from JESSICA resources were to be made by different entities, a project selection system would be more complex. This issue is described in Section 2.3. Issues relating to the establishment of a holding fund are similar to those in the Wielkopolskie Voivodship. The establishment of an HF for the initial period appears to be appropriate on the condition that it is administered by the EIB. Over a longer period, HF operation may prove too costly and dispensable. The establishment of a holding fund together with the Wielkopolskie Voivodship can be considered in the Zachodniopomorskie Voivodship (these Regions cooperate closely on the JEREMIE initiative). The final decision on selecting an implementation method is to be made at the regional level. It is recommended that one UDF should be established in the Zachodniopomorskie Voivodship, under which two sub-funds will be separated with the aim of financing projects in the Szczecin Metropolitan Area and in other regional towns and cities. At the current stage the determination of a strict division of fund allocations between two measures (Measures 5.5 and 6.6) does not appear advantageous. It would be appropriate for the fund to maintain flexibility with regard to the allocation of available resources. Indicators of measure completion adopted in the Zachodniopomorskie Regional Operational Programme should be the basic indicators of the volume and number of projects in individual priorities, and these should be included in the criteria for project selection and breakdown of resources. With regard to this, the obligations of the Managing Authority to achieve certain values of indicators at the level of the entire operational programme has to be taken into account.
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3 Objective 3: Market assessment and identification of potential participants The aim of Objective 3 is to identify potential market participants in JESSICA from both public and private sectors and to describe their specific requirements as well as their expected roles and contributions to the success of JESSICA in the Regions.
3.1 Task 3.1 Potential JESSICA participants
Task 3.1 Identification of the key participants from both the public and private sectors in the urban regeneration market, as well as existing investment delivery vehicles/structures, which could be used for the purpose of implementing JESSICA in the Regions. The analysis should include a review of potential partners/vehicles in the following sectors: Polish and international banks and other commercial financial institutions (including BGK), international financial institutions (including EIB and CEB), public authorities (including cities and municipalities in the Regions), public agencies and other public institutions (including Narodowy Fundusz Ochrony Srodowiska, municipal housing funds and municipal housing / urban regeneration companies, regional development agencies, etc.), investment funds of various types, property developers, NGOs and other relevant. Recommendations on how to integrate these different actors/stakeholders based on meetings, interviews and other forms of consultations with them will also be required.
3.1.1 Potential JESSICA participants The main idea of the JESSICA instrument is the co-operation of both public and private resources in order to achieve sustainable economic growth and social development of urban areas, where public funds are to create favourable conditions for investing private capital. The potential participants of future JESSICA projects and their implementation in the Regions were assigned to the following nine groups:
. Group 1 – Polish and international banks as well as other commercial financial institutions (including BGK)
. Group 2 – international financial institutions (including EIB and CEB)
. Group 3 – public administration (including municipal and regional governments)
. Group 4 – state agencies and other public institutions (including the National Fund for Environmental Protection, urban housing funds and social housing societies)
. Group 5 – various kinds of investment funds
. Group 6 – professional institutions managing funds that invest in real estate
. Group 7 – real estate developers
. Group 8 – other interested entities
. Group 9 – non-financial institutions supporting the processes of urban regeneration and development.
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3.1.1.1 Group 1 – Polish and international banks as well as other commercial financial institutions The list of banks and credit institutions operating in Poland includes 76 entities (list of central banks – NBP data of September 2008). Most of these banks operate on a national scale. Moreover, there are several dozen cooperative banks in Poland operating on a local or regional scale. Many banks participate in financing real estate investment projects and are involved in financing territorial self-governments which execute investment projects. The largest Polish banks are PKO BP, Pekao SA, Bank Zachodni WBK, ING Bank Śląski. These banks are often the key financial partners of cities in the scope of executing investment projects and they have a large organizational base as well as knowledge about the local specificity of cities and regions. The banks that are particularly focused on public sector investments and public fund management are: Bank Gospodarstwa Krajowego, Depfa Bank or Dexia Kommunalkredit Bank Polska. These banks are involved in financing public sector projects, as well as corporate projects devised to achieve public objectives, thus they are most compatible with the character of the JESSICA initiative. A separate category of banks functioning on the market are mortgage banks, which concentrate on financing real estate investments with mortgage being their primary security. Mortgage banks grant special long-term loans (e.g. to territorial self-government entities) earmarked for the regeneration of old or historic urban areas (industrial districts, residential neighbourhoods, historical buildings). BRE Bank Hipoteczny S.A. serves as an example – it provides finance to territorial self-government entities, private developers and retail clients. Commercial banks of universal character are also engaged in urban development projects either by directly financing entities executing the projects (developers, special purpose vehicles), financing local government entities or public institutions executing the projects. The offer of universal banks is very rich and comprises a number of financial products for financing investment projects (loans, bond issues, bank guarantees, etc.). Larger banks approach each big project on a case-by-case basis (depending on the bank the minimum loan totals PLN 5-10 million), offering structured financing meeting the needs of a specific project. Below we present an overview of selected banks together with information obtained during meetings with respective bank representatives.
a) Bank Gospodarstwa Krajowego (BGK) BGK holds a special place in the market owing to the fact that it is supervised by the Ministry of Finance and that it supports the implementation of the state's economic and financial policy. BGK manages state special purpose funds thus supporting, among others, the development of social housing, infrastructure, innovation, helping local governments to utilize EU funds or supporting environmental projects. These funds efficiently support state social and economic programmes. Below we enumerate those that are most compatible with the JESSICA17 initiative: • Municipal Development Fund – it finances the preparation by municipalities (gminas) and their unions of project documentation for municipal investments that are to be co- financed with EU funds. The documentation financed from the fund’s resources includes feasibility studies of investment projects, cost-benefit analyses and other project documentation, analyses, expert opinions and studies required to prepare the investment for execution.
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• National Housing Fund (NHF). The main goal of NHF is increasing the availability of flats for those individuals whose income prevents them from satisfying their housing needs on market conditions, by granting preferential loans to Social Housing Societies (SHS) and housing cooperatives. NHF is universally used by SHSes and extends financing on very favourable terms and conditions (interest of ca. 3.5% in annual terms). However, the procedures of taking out a loan from NHF is lengthy, the whole period from supplying an application for a loan until receiving it can last even up to 2 years. Granting a loan by NHF for the purpose of executing a project is a form of government support for social housing and it is not possible to receive EU financing and a NHF loan concurrently (according to NHF regulations). • National Credit Guarantee Fund – the aim is to support Polish entrepreneurs and self- governments in accessing bank loans that help develop business activity by financing investments, creating new workplaces or enabling the execution of export contracts. • EU Guarantee Fund (EUGF) – the purpose of the fund is supporting entrepreneurs and local governments in executing projects in Poland co-financed with EU funds. Using the fund managed by BGK enables entities to absorb EU funds. Thanks to the EU Guarantee Fund, entrepreneurs without sufficient security have a chance to gain access to project financing from EU funds. The bank, apart from executing government tasks, also conducts commercial activity on the corporate and retail markets. The main characteristics of BGK relevant for the JESSICA initiative are: • Wide experience in managing public funds in Poland; • Regional branches in the main Polish cities; • Interest in UDF management.
b) Depfa Bank (Depfa) Depfa Bank has been operating in Poland since 2005 and as of 2007 belongs to a German banking group: Hypo Real Estate Group. The bank is seated in Dublin. Depfa Bank is one of the leading banks providing financial services to the public sector worldwide, while its product range meets the needs of all groups of entities in the sector. Depfa supplies ready- to-use solutions in response to specific problems of clients, regardless of whether they concern financing public infrastructure projects, consulting services regarding public service privatization processes, debt restructuring, supporting bond placements or extending credit lines. Thanks to its focus on the public sector and experience in specific financial, political and social requirements, Depfa Bank is a strong financial partner and an independent advisor for its clients18. The main features of Depfa Bank products are: • Long financing tenor; • Repayment structure adjusted to the nature of the investment; • Innovative approach to creation of credit products; • Financing infrastructure investments (minimum credit amount PLN 5m); • Financing projects (including Private-Public Partnership Projects). The main characteristics of Depfa Bank relevant for the JESSICA initiative are: • Experience in cooperating with public entities in Poland and abroad; • Experience in financing public and private partnership projects; • Interest in financing urban projects worth more than PLN 5 million; • Little interest in UDF management.
18 Based on www.depfa.com Page 101 Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce January 2009
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c) Dexia Kommunalkredit Bank Polska S.A. (Dexia) Dexia is a specialist bank offering services to the public sector. Dexia offers long-term financing for public sector projects. The bank’s clients are the State Treasury, self- governments at the voivodship, poviat and commune/municipality level. The bank also provides finance to projects executed by businesses performing public tasks (in areas of infrastructure, public utility services, health protection) as well as those with a high share of self-government capital. Dexia has experts who provide advisory services to territorial self- governments and public utility companies in the scope of organizing long-term financing. The main characteristics of products offered by Dexia Kommunalkredit Bank Polska are: • Long financing tenor (up to 20 years) • Negotiable grace period • Repayment structure adjusted to the character of the investment • Multi-currency financing • Financing investment needs • Financing infrastructure investments (e.g. public utility units, hospitals, roads etc.) • Financing projects (including Private-Public Partnership Projects)19. The main characteristics of Dexia relevant for the JESSICA initiative are: • Experience in cooperating with public entities in Poland and abroad; • Experience in financing public-private partnership projects; • International experience in managing public funds; • Interest in financing urban projects worth more than PLN 5 million; • Interest in UDF management.
d) BRE Bank Hipoteczny S.A. BRE Bank Hipoteczny S.A. is the largest Polish specialist mortgage bank which operates in the field of financing commercial real estate and issuing real estate-backed mortgage bonds. The bank’s offer is directed at business entities and institutional clients investing in real estate. The bank finances commercial real estate for sale or lease, in particular office buildings, trade centres, hotels, modern storage and distribution facilities, single- and multi- family house neighbourhoods. An important client segment comprises housing developers and small and medium-sized enterprises. Another key business area of the bank is financing territorial self-government entities. The offer directed to this market segment includes co-financing of municipal investments such as municipal housing, construction and renovation of roads, sewage-treatment plants and other premises. The bank also offers refinancing of municipal real estate – local government headquarters, commercial premises and office buildings20. The main characteristics of BRE Bank Hipoteczny S.A. relevant to the JESSICA initiative are: • Experience in cooperating with public entities in Poland and abroad; • Experience in financing investments in real estate and raising capital by issuing real estate-backed mortgage bonds; • Lack of experience in managing public funds; • Interest in financing urban projects worth more than PLN 5 million; • Lack of interest in UDF management.
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Summary of Group 1 • Bank institutions operating in Poland can be active participants of the JESSICA initiative, both as entities financing individual projects as well as entities managing entrusted public funds. • Banks are unlikely to be interested in managing holding funds. It is more probable that they will offer UDF management services, though only a few institutions have experience in this respect. • Provision of financing for UDFs by banks is very unlikely if UDFs were to function as separate pools of resources managed by a financial institution. A bank’s participation in a fund would require assessing the risk of the whole UDF investment portfolio and would probably lead to imposing numerous requirements resulting from the bank’s credit policy. In effect this would lead to tightening project assessment criteria. In general, banks are reluctant to disclose information about their credit policies. • In case of establishing a UDF in the form of an incorporated loan and guarantee fund governed by Commercial Code regulations, bank financing could assume the form of a loan, yet it would still entail a portfolio approach in terms of risk assessment and difficulties with assessing credit risk by the bank owing to the lack of information on the risk characteristics of individual future projects. Banks undoubtedly prefer assessing credit risk for individual projects. • All the banks are interested in financing territorial self-government entities as well as in granting loans guaranteed by cities to entities executing projects. This is understandable due to attractiveness of such loans (low credit risk). • Banks prefer granting loans directly to institutions executing projects or special purpose vehicles (preferred credit amount PLN 10-20 million). • The fee for UDF management is difficult to estimate. It can be 3-5% of the value of the fund depending on the scope of the UDF’s responsibility and tasks as well as the fund’s size. • Banks do not specialize in managing equity investment funds. For this purpose they set up separate specialized entities (investment fund societies). Moreover, in time of the banking market downturn banks will retreat from equity type situations into more conservative lending activities. • Owing to the crisis on the financial markets, banks are currently introducing a restrictive credit policy, yet there are chances that this will not have a significant impact on their capacity to engage in regeneration projects in the horizon of the next few years.
3.1.1.2 Group 2 – international financial institutions Among global financial institutions relevant from the viewpoint of the potential participation in the JESSICA initiative, there are three largest European banks whose business profile is consistent with the planned functions of the JESSICA instrument: European Investment Bank, Council of Europe Development Bank, European Bank for Reconstruction and Development. a) European Investment Bank (EIB) The European Investment Bank (EIB) was established in 1958 on the basis of the Treaty of Rome as a European Union bank granting long-term loans. The bank grants loans to the public and private sector for European projects in such fields as: cohesion and convergence of EU regions, support for small and medium-sized enterprises, environment protection programmes, research, development and innovation, transport and energy.
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The EIB is a non-profit institution whose activity is based on political premises. It is the initiator and creator of the JESSICA instrument thanks to which it will be possible to utilize EU funds in a new way, for sustainable investments in city areas. The JESSICA initiative is congruent with one of the key goals for which the EIB assigns its funds to finance projects, i.e. improving the condition of European transport and communications infrastructure as well as environmental protection, upgrading living standards and promoting the development of urban areas. The key characteristics of EIB products are the following: • Long financing tenor and flexible repayment conditions – the EIB grants long-term loans for financing capital investment projects (mainly fixed assets), but does not grant subsidies; • Financing of up to 50% of investment value; • Financing infrastructure investments of public character which contribute to achieving EU goals, are reasonable from the economic, financial and technical point of view, safe for the environment and attract funds from different sources. The main characteristics of the EIB relevant for the JESSICA initiative are: • Experience gained during the development of the JESSICA initiative; • Experience in cooperating with public entities, including regional and central governments in Poland and abroad; • International experience in financing investment programmes; • Interest in HF management; • Possibility of granting financing at the level of an individual project or UDF. b) Council of Europe Development Bank (CEB) The CEB finances self-governments on very favourable conditions, both in terms of the tenor and cost of financing of investment projects of a social nature in the following sectors 21 : social integration (housing for low-income persons and related infrastructure, improving living conditions in urban areas, job creation), environment (water, waste, renewable energy, air, clean transport means), human capital (education, health sectors). The second business area of CEB is extension of credit lines (programmes) for commercial banks which on the basis of these funds finance the activity of defined entities. The key characteristics of CEB products are: • Long financing tenor and flexible repayment conditions; • No minimum credit amount; • Financing of up to 50% of investment value; • Financing infrastructure investments of public character in strictly defined sectors; • No necessity to apply public procurement procedures upon the financing of territorial self-government units; • Frequently no requirement to provide security in case of the direct financing of territorial self-government entities. The main characteristics of the CEB significant for the JESSICA initiative are: • Experience gained during the development of the JESSICA initiative together with the EIB.
21 Aid to refugees, migrants and displaced persons is one of the CEB’s two statutory priorities (Article II of the Articles of Agreement) together with aid to victims of natural or ecological disasters. In addition CEB finances projects for the construction or rehabilitation of infrastructure as well as the conversion of buildings into premises intended for public service use, in particular the organisation and functioning of administrative and judicial public services. Page 104 Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce January 2009
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• Experience in cooperating with public entities, including regional and central self- governments in Poland and abroad. • International experience in financing investment programmes. • Lack of interest in HF management, though theoretically this is not ruled out if appropriate changes in the bank's policy are introduced. • The bank is interested in granting loans to territorial self-government entities or entities executing projects. • Due to the novelty of the initiative, decisions regarding the financial support of HFs/UDFs might require a several-month approval process. Spending funds by the UDF would have to be in line with the CEB’s investment policy in respect of the purpose of funding. Currently the CEB cannot acquire shares in the fund, but it can grant a loan after assessing credit risk. • Possibility of granting financing at the level of a specific project. c) European Bank for Reconstruction and Development (EBRD) The EBRD is an international financial institution created in 1991, consisting of more than 60 countries, including all EU states. The main goals of the bank are the support of activities promoting economic development and the reconstruction of democracies in Central and Eastern European states, the development of a market economy in the region and protection of the natural environment. In order to implement the aforementioned assumptions, EBRD grants loans co-financing projects in the private and state sectors and creates special purpose funds. EBRD loans are granted both to governments for specific projects (especially for developing infrastructure, restructuring economic sectors and ownership changes), as well as private entities. In recent years EBRD’s activity has concentrated on non-EU states. Nonetheless the bank is still active in Poland, engaging in long-term loans for large corporations as well as acquiring shares in private equity or mezzanine funds. The key characteristics of EBRD products are: • Long financing tenor and flexible repayment conditions, • Amounts of loans granted directly – above EUR 5 million. Smaller loans – granted through the intermediary of other financial institutions, • Financing infrastructure investments of public-private character, • No financing for projects connected with development activity in the field of tourism and real estate used for commercial purposes. The main characteristics of EBRD relevant for the JESSICA initiative are: • Experience in cooperating with public entities, including regional and central self- governments in Poland and abroad, • International experience in financing investment programmes, • Possibility of granting financing at the level of a specific project. d) European Investment Fund (EIF) The EIF provides venture capital to small and medium-sized companies. The EIF does not grant direct loans or subsidies to enterprises, nor does it make direct investments in companies. It operates through the intermediary of banks and other financial brokers. In doing so it uses its own funds or those granted by the EIB (the main shareholder of the EIF) or European Commission. The EIF is also an institution that prepares the implementation of the JEREMIE initiative in Poland. The JEREMIE initiative has been initiated by the European Commission
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concurrently with the JESSICA initiative. If a specific project includes elements connected with developing entrepreneurship, there is a possibility of supplementary financing from one of the support programmes for enterprises, provided the criteria of relevant programmes are met.
3.1.1.3 Group 3 – public administration This is the main group interested in the functioning of the instrument and thanks to its involvement it will be possible to implement the initiative and organize it efficiently. Moreover, for territorial self-government entities it can be one of the methods of executing its statutory tasks. These institutions are likely to be directly interested in the cooperation and gaining experience upon implementing the JESSICA initiative, since it provides a chance of accelerating the process of urban development. a) Ministry of Regional Development (MRD) and other ministries The MRD is a central authority responsible for planning and coordinating activities aimed at a coherent development of the country. The ministry’s priority is to coordinate and monitor the system for managing EU funds in order to guarantee an appropriate and timely execution of programmes financed with EU funds and ensure that the funds allocated to Poland are used to the maximum extent. The key areas of support provided for the JESSICA initiative by the MRD and other ministries are preparation and implementation of legal regulations enabling the efficient implementation and functioning of the JESSICA initiative, in cooperation with the regions. This concerns regulations regarding public aid and the notification of aid programmes in the European Commission, as well as procedures for managing and spending EU funds. There is also the possibility of increasing the value of resources contributed to the HF and UDF through the Ministry of Finance granting of up to 25% worth of the EU contribution to the HF/UDF. Such a capital injection is not certain however, and will depend on the decision of the Ministry of Finance. b) Voivodship self-governments Voivodship self-governments (also referred to as regional governments) are managing authorities for Regional Operational Programmes. Regional governments conduct their independent regional policies which aim at increasing the attractiveness of a voivodship and its competitiveness in relation to other regions. The voivodship self-government’s scope of responsibilities includes public tasks at the voivodship-specific level, not reserved by law for the central government administration entities. The voivodship self-government executes public tasks defined by specific acts in its own name and on its own responsibility; it has at its disposal voivodship property and independently manages finance in line with the voivodship budget act. The main characteristics of regional governments relevant for the JESSICA initiative are: • Key role in deciding about the management of funds assigned for urban regeneration purposes. • Experience acquired during studies of the concurrently implemented JEREMIE initiative. • Experience acquired upon implementing the Integrated Regional Development Operational Programme 2004-2006. • Experience in cooperating with cities and international financial institutions. • Possibility of granting organisational support in respect of establishing HF and UDFs. • Budgetary possibilities of additional HF/UDF financing with own funds, should an appropriate method of such financing, in keeping with legal regulations, be established.
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c) Cities Municipal Offices are entities which should be most interested in the JESSICA initiative’s impact. Their statutory tasks include, among others, regeneration of urban areas. JESSICA should be a tool adjusted to cities’ needs with regard to the reconstruction and development of urban areas. Talks conducted with many cities indicate that: • There is a potential for supporting the JESSICA initiative by cities through preparation of projects, making municipal properties available for regeneration projects and, in some cases, the potential to assign financial resources for UDFs or individual projects. • Cities have limited possibilities of contracting debt and granting guarantees for financing UDF activities, owing to high debt ratios of city budgets. • Some cities have experience in executing regeneration projects both in cooperation with private partners as well as by themselves (issue discussed in Chapter 1).
3.1.1.4 Group 4 – state agencies and other public institutions a) Regional development agencies Regional development agencies promote the social and economic development of individual regions, with the particular acknowledgement of SMEs, by implementing domestic and European aid programmes. These agencies have in-depth knowledge about the local market and usually function on the territories of particular voivodships e.g. Zachodniopomorska Agencja Rozwoju Regionalnego S.A. Based on research conducted during the preparation of this study and the Consultant’s knowledge regarding the functioning of regional development agencies, the following can be stated: • The agencies are established by regional governments mainly in order to support entrepreneurial development in the regions (management of aid programmes, organisation of training courses, consulting on the preparation of investment projects, purchase and preparation of land for investment purposes etc.); • Regional development agencies have various activity profiles depending on the region; • Some agencies have wide experience in organising and conducting loan and guarantee funds, though addressed to private enterprises, and not investment projects of a public character; • Regional development agencies might participate in supporting the JESSICA initiative through managing UDFs (this requires changes in the agency statutes) or preparing projects to be co-financed by UDFs (e.g. the purchase and development of land for investment purposes) in line with the purpose of funds available in UDFs. b) National Fund for Environmental Protection and Water Management (NFEPWM) NFEPWM is the largest institution implementing state ecological policy by financing investments in environmental protection and water management in areas important from the viewpoint of convergence with EU standards. The fund co-finances projects including e.g. the construction or modernisation of a municipal sewage-treatment system or reclamation of land degraded by the industry for natural environment or other uses, which means that the NFEPWM or voivodship FEPWMs could be interested in co-financing specific projects under the JESSICA initiative. c) Social Housing Societies (SHS) The main aim of SHSes is the satisfaction of housing needs in cities and sub-regions, by building and renting residential space absorbing moderate construction and usage costs and by preparing new land for housing development, usually with the help of preferential
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credit lines offered by Bank Gospodarstwa Krajowego. This is a form of supporting residential (tenement) housing development by the state and local self-governments, i.e. Municipal Offices. Based on research conducted during the preparation of this study and the Consultant’s knowledge about the functioning of SHSes, the following can be stated: • SHSes function on a strongly regulated market (limited rates of rent, own contribution of future tenants, financing principles). • SHSes have broad experience in preparing and executing social housing projects. • The execution of projects by SHSes is strongly dependent on the availability of preferential financing, at present primarily from the National Housing Fund, and the amount of financial contributions of cities. • SHSes could formally be the borrowers of UDFs, yet using EU funds would rule out the possibility of financing the same projects by the National Housing Fund. • Investments of UDFs in shares of SHSes would entail problems with achieving a return on equity due to the social mission of SHSes and the execution of projects that do not generate substantial income. • There is a possibility of executing joint ventures (through special purpose vehicles) with the participation of SHSes and UDFs, yet only in the boundaries consistent with the area of SHS functioning. d) Urban and regional regeneration funds Some cities establish their own funds with the aim of promoting, preparing and sometimes executing regeneration projects. Funds of this type are also established under the auspices of central government authorities. Examples of such funds are presented below. Szczecińskie Centrum Renowacyjne Sp. z o.o. – the company’s assets are properties located in five central quarters of the city of Szczecin. The revenues from the current use and lease of premises, as well as from sales of real estate are assigned for financing renovation works. In effect, it is possible to conduct investments consisting in renovations of frontal tenement houses, demolitions and outbuilding repurposing, as well as in construction of pedestrian routes and parking places within the quarters. The company is the only entity in Poland which conducts regeneration processes on a commercial basis, without receiving financing from the municipality. Summary of Group 4 • Regional development agencies and public funds are unlikely to be the beneficiaries of the JESSICA instrument, though they can support the promotion and development of regeneration projects. • SHSes and regional development agencies can be the partners of UDFs during development of projects. • Regional agencies and other funds have strictly defined areas of operation which might overlap with the scope of projects financed under JESSICA, though they do not offer a competitive product nor focus on large and complex investments.
3.1.1.5 Group 5 – various kinds of investment funds The potential participants of JESSICA from the investment fund sector were divided into two groups described below: a) Private equity funds The main goal of private equity investments is boosting the value of a portfolio company, which can be achieved primarily by restructuring the company, selling disposable assets and financing robust growth. The investments of such funds in Poland totalled Page 108 Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce January 2009
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EUR 747 million in 2007 (source: www.inwestycje.pl). The largest funds (34 companies) are the members of the Polish Association of Capital Investors. These funds frequently contribute capital into companies, guided first and foremost by the projects these companies carry out. Particular funds define the fields in which they invest in advance, thanks to which one can determine in what type of projects they will participate. In terms of private equity funds the following issues come to the fore: • These funds expect high rates of return at 25% of capital annually. • The financial horizon of an investment for a private equity fund is up to 5-7 years, after which realisation of return on investment is expected in the form of a sale of shares to other investors. • Private equity funds rarely engage in public infrastructure projects owing to too low rates of return and overly long periods of return. • Similarly, investing in real estate or real estate development projects is not common among private equity funds. • When a private equity fund takes part in a project, it usually requires the possibility of influencing management decisions and focuses on a fast, short-term increase of enterprise value in order to resell it. b) Other investment funds The equity market and market for debt financing are relatively well developed and have a large number of funds operating on them. Many of those funds concentrate on financing enterprises with growth potential. Urban regeneration is not the direct subject of their interest, yet it cannot be ruled out that their goals will coincide with UDF objectives. • Krajowy Fundusz Kapitałowy S.A. (KFK) – has been operating since 2007 as a fund of venture capital funds. The fund’s equity is contributed by the Ministry of Economy. Until 2013 KFK is to have at its disposal more than PLN 770 million. KFK makes investments in selected venture capital funds, which in turn contribute capital to enterprises. The KFK programme is an example of a specific public and private partnership, where private investors merge their capital with a public investor, entrusting it, for management purposes, to experts in the field of equity investments. KFK focuses on supporting small undertakings by eliminating the so-called capital gap. • Open Pension Funds which could be interested in participation in financing e.g. at the UDF level within the perimeter of one city or a whole voivodship, provided the UDF’s legal status permits it. The listed institutions could invest in a UDF e.g. by accepting the operating conditions of such a fund. It is thus important to make it possible for such financial institutions to join UDFs at least in the future. Summary of Group 5 • Investment funds seek a possibility of financing individual projects or enterprises that execute such undertakings. At the present stage it is however difficult to determine how vast the interest of such funds would be in financing particular projects. • Currently it is highly unlikely that investment funds engaged in financing UDFs. • The main difficulties with the participation of investment funds may include too low expected rate of return on investments carried out by UDFs and too long investment horizon.
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3.1.1.6 Group 6 – professional institutions managing funds investing in real estate There are many entities managing investment funds on the market (investment fund associations). However, there are only a few entities specialising in the management of funds investing solely in real estate. Such entities are for instance: TFI Skarbiec Real Estate, Arka BZ WBK, AIB, PZU, ING BSK TFI. For example, one of the first funds of this kind is Arka BZ WBK Fundusz Rynku Nieruchomości, a closed-end investment fund. It was established in 2004 for the period of 8.5 years with an initial capital of PLN 350 million. Its expected rate of return is above 10% annually. The fund specialises in investments in office real estate (more than 50%) and other commercial and housing locations in the largest Polish cities and abroad. The fund’s investments are financed in 30% with equity and 70% credit. Below we present the key conclusions regarding the possible participation of this type of institutions in the JESSICA initiative. • Fund management companies do not have their own restrictions with regard to the mission of investing in real estate of a particular kind, yet the fund’s experience in a specific type of investment is of key importance for achieving management efficiency. • The criteria and the process of project selection require a very accurate description upon formulating the fund’s statute. Managing entities can, however, invest their time and knowledge in preparing and supervising the implementation of individual projects, including the establishment of special purpose vehicles and oversight of their activity. • The possibility of managing more than one fund by one entity might reduce management costs thanks to economies of scale. This is connected with project portfolio fragmentation (setting the minimum scale of a single project) and the administrative and reporting requirements of the fund. • The fee of the fund manager could be based solely on a fixed management margin (without the element of the currently popular success fee), in case of strong emphasis on keeping to procedures, project quality and weaker emphasis on maximizing profits. • These entities are not interested in managing holding funds. • They are interested in managing UDFs.
3.1.1.7 Group 7 – real estate developers This sector constitutes a base of potential investors which could be directly interested in preparing, executing and financing particular projects connected with the modernisation and expansion of urban areas. Developers usually know the local real estate market very well and hold appropriate financial resources (own or borrowed). Some developers emphasise their specialisation in regeneration projects. Currently there are several dozen large developers operating in Poland, both with Polish and foreign capital. These are, for instance: ING Real Estate, TRI Granit, CDI, PKO Development. In the current context of the crisis on financial markets, real estate developers are forced to function in the difficult conditions of limited access to financing for their own investments and uncertainty regarding real estate sales (restricted crediting of buyers). In the longer horizon, developers will be the key initiators and participants of regeneration projects, as co- participants or funders of project companies. During the course of preparation of this study we conducted talks with the following three developers, each representing a different kind of such entities: a) TRI Granit Development Corporation. TRI Granit is one of the leading developers in Central and Eastern Europe, operating on the real estate market since 1997. It specialises in creating modern, multi-functional urban premises, which with time
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become “new city centres” vibrant with life and activity. They have experience in executing regeneration projects and public-private partnership projects. TriGranit conducted projects in Budapest, Bratislava, Prague and Katowice. The total value of its completed investment projects exceeds EUR 2 billion. Currently the company is executing or preparing investments in 10 European countries, e.g. in several cities in Poland, Romania, Croatia, Serbia, Bulgaria and Hungary22. b) Quinlan Private Golub (QPG). QPG belongs to the international Quinlan Private capital group with its seat in Ireland and EUR 11 billion worth of assets. QPG is one of the most robustly expanding developers in Central and Eastern Europe. The company executes investments in office buildings, retail trade, multi-functional and residential buildings. QPG is currently engaged in executing a regeneration project of a trade centre in Warsaw dating back to the beginning of the 20th century – Hala Koszyki, where trade and service facilities, parking lots and apartment buildings are to be located. c) TUP S.A. – company with Polish capital, investing equity in enterprises from various industries. Its shares are listed on the Warsaw Stock Exchange. The TUP S.A. group includes TUP Property, a company dealing with investments in real estate, building and managing a portfolio of commercial real estate for lease. At the end of Q3 2008, TUP Property managed assets with a book value of PLN 213 million. The company’s portfolio consists of commercial buildings (Centrum City Point in Tychy and surfaces leased to trade centres, in e.g. Katowice, Kołobrzeg, Zabrze, Nowy Sącz, Będzin, Syców, Łańcut and Ostrzeszów), logistic real estate (e.g. Logistic Centre in Pruszków near Warsaw, planned acquisition and expansion of the Logistic Centre in Tarnowskie Góry) and office real estate (in Gdańsk and Ożarów Mazowiecki). Apart from the expansion of facilities for lease, TUP Property is preparing complex housing development projects in Katowice and Siewierz. TUP’s philosophy is to act in keeping with the principles of sustainable development and social responsibility. Below we present information and conclusions collected during meetings and talks with selected developers, relevant from the viewpoint of JESSICA implementation. • The number of entities engaged in the execution of an undertaking (project company) should be limited to a minimum in order to execute the project efficiently. • The availability of real estate is the key factor with which cities might significantly accelerate the execution of projects. • Developers expect that cities will participate in the costs of expanding the necessary technical infrastructure (e.g. roads, sewage systems) in order to enable the execution of investments without the actual transfer of such costs onto developers. Among the potential JESSICA project participants there are also developers connected with financial institutions, e.g. ING Real Estate and Pirelli Pekao Real Estate. Operations of these companies include consulting, organisation and execution of real estate investments, real estate management, including primarily: • Preparation and selection of investment projects. • Organisation, supervision and conducting of design and construction works, including assuming the role a substitute investor. • Organisation of investment financing. • Legal and financial consulting during investment execution. • Promotion of investments during their course, finding tenants.
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3.1.1.8 Group 8 – other interested entities This group consists of private real estate owners, entrepreneurs and large domestic and international enterprises whose operations are significant for a given region, with possibilities of financing development projects in cities. Large enterprises are involved in urban development and frequently identify with a given city or region through fulfilling its social mission. Private enterprises are interested in developing smaller cities, frequently as a consequence of the need to ensure an attractive place of residence and work for workers of large industrial plants. An example of an enterprise which might be a strong partner in the region in terms of supporting regeneration investments is for instance Kulczyk Investment House. Kulczyk Investment House has been established in 2007, after the reorganisation of Kulczyk Holding. The company is the owner of assets in the brewing and motor industry, as well as infrastructure and real estate. The company participated in the biggest transactions and ownership changes in Poland, it also initiated and executed innovative business projects. In the Wielkopolskie Voivodship the enterprise is conducting the construction of the A2 East- West motorway through its subsidiaries: Autostrada Wielkopolska S.A. and Autostrada Eksploatacja S.A. Not in all cities can one find such large enterprises that would be seriously interested in regenerating urban areas. In case of larger cities, such as e.g. Szczecin, there are many companies whose activity, as viewed individually, does not have a strong relationship with the development of the whole city. In case of smaller towns, the owners of private real estate (e.g. tenement buildings), housing cooperatives and local entrepreneurs are key partners in the field of regeneration projects. For example, these investments consist of the renovation of historical shopping arcades or centres, reconstruction of building facades or thorough renovation of such buildings and developing them into hotels, office space and apartment buildings. Such projects however can exceed the capacity of JESSICA’s participation in the initial phase of its functioning, since the limitations resulting from Regional Operational Programmes might impede JESSICA’s significant participation in such investments.
3.1.1.9 Group 9 – non-financial institutions supporting the processes of urban regeneration and development The development of cities is an important area of interest not only of public administration but also scientific institutions with a social mission. The following can serve as examples of such institutions: a) Regeneration Forum Association – established in 1998 as a venue for integrating societies connected with regeneration, discussing significant issues, exchanging experience and views. The forum facilitates gaining knowledge about regeneration programmes, is the proponent and promoter of measures aimed at developing the methods and systems of financing the regeneration of development, social, cultural and economic projects. It helps to prepare and execute multi-annual, substantively- advanced regeneration programmes, using all programme assumptions and possibilities. b) Institute of Urban Development (Cracow) – established on the basis of the Cracow Branch of the Institute of Spatial and Municipal Planning and the Institute of Housing Management, thanks to which it has rich traditions and achievements in scientific research and its practical application in the field of spatial planning, environment protection and development, municipal and house planning, construction and real estate development. These institutions perform an important role in transferring knowledge and experience regarding the execution of urban regeneration projects in Poland and abroad. In respect of the JESSICA funds’ operations, these institutions might be a good source of information Page 112 Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce January 2009
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about market conditions and a supporting force in promoting legislative changes. It is not very likely that such institutions can participate in managing HFs or UDFs.
3.1.2 Conclusions from the analysis of potential JESSICA participants The analysis of various groups of entities potentially participating in the execution of projects connected with the JESSICA initiative leads to the following conclusions: • Financial institutions prefer to be financially engaged at the level of individual projects. Owing to the nature of UDFs, which is relatively difficult to determine, at the current stage it is reasonable to assume that the vast majority of institutions will prefer to engage in individual projects only. Such an approach additionally means that their interest will significantly depend on the size of a project. • Loan and guarantee funds currently active on the market have strictly defined types of projects and potential borrowers (e.g. funds managed by BGK). These funds, thanks to favourable financing conditions and experience in the industry, are relatively attractive for potential borrowers in relation to the typically commercial sources of financing. • The scope of interest in JESSICA will probably overlap in some areas with the activity of other funds on the market. This does not seem to be a problem, however, even if existing funds are capable of offering more favourable financing conditions. JESSICA might remain an additional financing source and could finance projects which owing to any reasons do not stand a chance of finding financial support from other sources. • Owing to the specialisation of existing funds, the range of possible projects that could by financed by them is narrow, which need not be the case of JESSICA. The only limitation of JESSICA is its congruence with the Integrated Urban Development Strategy. • JESSICA funds might potentially be an alternative option for borrowers, if financing conditions are more attractive than in other funds. JESSICA’s competitiveness will largely depend on the expectations of HF/UDF shareholders in terms of the time perspective and amount of profits on the investment. In case of a high share of public funds in financing HF/UDFs, the financing conditions of JESSICA might be very attractive as compared to the typically commercial sources or other special purpose funds. • The main entities that will be able to engage in the JESSICA initiative as fund managers are banks and institutions professionally managing funds. The participation of regional development agencies or other organisations established by public administration entities for the purpose of UDF management would require changes in the statutes of those organisations. • For the purpose of integrating the activities of individual groups and entities aimed at achieving results envisioned under the JESSICA initiative, the following actions can be indicated: a) organisation of knowledge about the JESSICA initiative concentrated in HFs managed by the EIB. HFs will become the focal point of JESSICA’s organisation within the next 2-3 years. b) organisation of an official forum for the exchange of information and experience between Marshal Offices regarding the progress of preparations to launch UDFs (appointment of an association for the development of urban development funds, establishing a website, organisation of meetings of working groups), which have been thus far organised by the EIB. c) organisation of seminars with the participation of city representatives and potential participants of the JESSICA initiative, such as banks, investment funds, developers.
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3.2 Task 3.2 Possibilities of Supporting JESSICA by the Private Sector
Task 3.2 Description of the ability and/or willingness of the private sector to support urban regeneration in the Regions through JESSICA and the estimated size of capital that could be raised for that purpose. Below we present collected information about the conditions and constraints of institutions from the private sector regarding the financing of projects under the JESSICA initiative. The analysis was conducted for institutions from Group 1, 5, 6, 7 and 8, as per group definitions presented in Section 3.1.1. • Private investors (developers) have organisational and frequently financial capacity to engage in projects. They usually execute investments by their own concept and expect to receive support from cities in respect of access to real estate, efficient issuing of administrative permits, execution of road, water and sewage infrastructure development projects accompanying the investment. Legal limitations frequently make it difficult for private investors to execute a certain type of public investment or its execution by an investor stands no chance for at least partial refinancing by the public sector. The execution of such elements of the projects by private investors or financing such activities by them markedly decreases the profitability of investments and in many cases is the reason for abandoning interesting projects. • Developers prefer freedom of action in respect of organising investments (establishing a project company). Developers do not need to establish companies in cooperation with the city, but they count on cooperating with the city upon investment execution. • Developers expect financial support from UDFs regarding the amount they cannot cover with own sources or a bank loan owing to negative bank decisions (usually a gap of 5-15% of investment value). Financing of projects could have a form of mezzanine financing. An equity share of a UDF in projects is less preferred, though not ruled out. • Banks are not in a position to declare the amount of capital they could assign for financing projects. In case of banks the amount of employed funds will result from the maximum share of bank financing in project costs. One can estimate that in typical investments in real estate and commercial premises this can amount to 50-70% of the investment value. The minimum amount of a loan preferable from the viewpoint of banks is PLN 10-20 million. Banks, however, require that their debt be senior (priority of repayment) in relation to other creditors. • Banks will most willingly finance special purpose vehicles, which simplifies and streamlines the process of assessing credit risk and credit monitoring. There is little chance for the financing of UDFs owing to the difficulty with assessing credit risk (no credit risk specification for future projects). • Individual real estate owners who might take part in regeneration projects (previously mentioned in Section 3.1.1.8) constitute a very fragmented group of partners for regeneration projects, whereas they are most interested in the effects of such projects since such undertakings usually boost the value of their real estate. The capacity of private real estate owners to finance the renovation of entire buildings might be a limitation. In case of granting access to real estate held by investors or sale of land plots for the purposes of executing a project, the readiness to execute projects will each time depend on the individual situation of such persons. It is therefore difficult to assess to what extent, in relation to JESSICA contribution and total project value, individual owners could support such projects. In some cities such projects stimulate ca. 20-30% of additional investments executed apart from the public financing of projects. The initial estimate of the capital that could be raised or invested at the project level is a difficult task, since even during interviews it is difficult to obtain the declarations of potential
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participants as regards the size of their future exposure. A discussion regarding the possibility of obtaining financing at the HF/UDF level and the level of an individual project is presented below. Potential size of HF/UDF capital In case of the capital of a HF/UDF functioning as a separate pool of financial resources within a financial institution, the amount of funds will mainly depend on the size of funds within the ROP and potential contributions of the Ministry of Finance or regional governments. Such contributions could increase the value of funds available within the ROP by additional 25-50%. This is still little in relation to the regeneration needs of cities. The key limitation in building the capital of JESSICA funds will be their “EU” and public character. Increasing capital thanks to the contributions of private entities or loans involves too many complications and impedes increasing the funds’ value by private shareholders. The participation of private institutions in HF/UDFs entails the following consequences: a) Problems concerning public aid, resulting from merging public and private resources for the purposes of achieving a profit. b) Increased complexity of decision-making procedures in case of additional requirements imposed by shareholders or financing entities, with regard to fund objectives, size of projects and procedures of assessing investment risk (particularly significant in case of banks). c) Potential conflicts of interest in case of a bank’s participation in JESSICA as a manager or shareholder of a UDF and at the same time a provider of finance at the project level. d) Increased exposure of a UDF to credit risk issues and the bank’s investment policy if the bank participates in JESSICA as a provider of financing to the UDF. In conclusion, the amount of HF/UDF funds might be increased in practice only through contributions of the public sector. These contributions might be significant, but initial evaluation indicates that it will be difficult to increase the pool of available funds by more than 50% of funds allocated under the ROPs. Potential amount of capital possible to be mobilised in order to execute projects The key parameters that might impact the size of capital employed in regeneration investments to be executed within JESSICA will be: a) percentage share of a UDF in the financing of project costs (the higher the share, the fewer the projects that can be financed) and b) in connection with the above, project profitability (the higher the profitability, the higher the potential interest shown by private investors and credit institutions and the lower the demand for UDF financing). It should be noted that in case of subsidy instruments the amount of subsidies is within the 50-80% range of qualifying project costs (specified in the list of qualifying costs provided for a given measure). The HF/UDF policy will cap the maximum financial involvement in a project, which directly translates into the necessary amount of funds from other sources (public and private funds). Such a research will help make an initial estimate of the pool of available funds for financing regeneration plans in a given Region. In case of projects attractive for private investors, the share of UDF financing will be relatively low, ca. 10% of investment value. Assuming that most of the investment costs (apart from real estate made available by the public sector) will be borne by the developer and commercial financial institutions, it would be possible to execute projects worth ten times more than the value of resources in UDFs.
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Many projects will probably not be financially attractive enough to allow for a UDF share in financing being limited to a figure below 20%. In case of investments with a high share of public financing, both the participation of the public sector (cities) in financing capital expenditure as well as a UDF’s much higher share in financing the commercial part of the project will be necessary. Assuming that the UDF’s share would be limited to financing 50% of capital expenditure, it would be possible to execute projects worth double the value of resources available in UDFs. Thus the impact of JESSICA funds would not be much greater than in the traditional subsidy system. The above considerations lead to the estimation of a rather wide range of the total amount of future projects. In line with them the value of projects might be from 2 to 10 times higher than the resources the UDFs could have at their disposal. This, however, gives information that the impact of EU funds within JESSICA will potentially be much greater than in the traditional grant system.
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4 Objective 4: Project development and evaluation of Urban planning environment The aim of Objective 4 is to identify and evaluate specific potential JESSICA projects being part of the existing Integrated Plans for Sustainable Urban Development and consistent with WROP and ZROP (taking into account various constraints and opportunities, including those associated with the Community legislation) and to map other Urban Regeneration investment programmes that could complement JESSICA in the Regions.
4.1 Task 4.1 Planning environment in the Regions
Task 4.1 General evaluation of the “planning environment” in the Regions and existing procedures for the preparation and adoption of Integrated Plans for Sustainable Urban Development. Investigation of the ability and familiarity of regional and local authorities to develop integrated approaches in the urban sector. The legal and planning environment of JESSICA consists of two principal elements: Integrated Urban Development Plans and Local Spatial Development Plans. Integrated Urban Development Plans In the context of JESSICA, the EU legislation refers to the implementation of projects included in Integrated Urban Development Plans, which means that every project which will be financed from JESSICA funds has to be mentioned in such a plan. On the other hand, none of the relevant EU or Polish documents specifies definitions or requirements regarding those plans. Some indication is given in Article 8 of Regulation (EC) No. 1080/2006 which describes the objectives and potential actions to be defined in such documents. Regulation (EC)1080/2006 Art.8 In addition to the activities listed in Articles 4 and 5 of this Regulation, in the case of action involving sustainable urban development as referred to in Article 37(4)(a) of Regulation (EC) No 1083/2006, 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, post- industrial areas 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 taking account of changing demographic structures. According to this article, the ERDF can support – through funds such as JESSICA – projects implemented in areas with the high concentration of economic, environmental and social problems. However, this article does not state that the plan should be limited to such areas only, on the contrary – it may and should cover larger urban areas. More specific information on Integrated Urban Development Plans is included in the Leipzig Charter on Sustainable European Cities which was adopted at the Informal Ministerial Meeting on Urban Development and Territorial Cohesion of 24 May 2007. The Leipzig Charter is a document containing the framework, and the general principles and strategies for urban development. It also includes a number of recommendations favouring the development of European cities. The first recommendation is formulated as: 'Making greater use of integrated urban development policy approaches.'
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The Charter reads: „For us, integrated urban development policy means simultaneous and fair consideration of the concerns and interests which are relevant to urban development. Integrated urban development policy is a process in which the spatial, sectoral and temporal aspects of key areas of urban policy are co-ordinated. The involvement of economic actors, stakeholders and the general public are essential. Integrated urban development policy is a key prerequisite for implementing the EU Sustainable Development Strategy. Its implementation is a task of European scale, but it is one which must take account of local conditions and needs as well as subsidiary. The reconciliation of interests facilitated by an integrated urban development policy forms a viable basis for a consensus between the state, regions, cities, citizens and economic actors. By pooling knowledge and financial resources, scarce public funds can be more effectively used. Public and private investments will be better co-ordinated. Integrated urban development policy involves actors outside the administration and enables citizens to play an active role in shaping their immediate living environment. At the same time, these measures can provide more planning and investment certainty.” According to the Charter, when elaborating integrated development plans, cities should use planning tools which need to:
Describe the strengths and the weaknesses of cities and neighbourhoods based upon an analysis of the current situation,
Define consistent development objectives for the urban area and develop a vision for the city,
Co-ordinate the different neighbourhood, sectoral and technical plans and policies, and ensure that the planned investments will help to promote a well-balanced development of the urban area,
Co-ordinate and spatially focus the use of funds by public and private sector players, and
Be co-ordinated at local and city-regional level and involve citizens and other partners who can contribute substantially to shaping the future economic, social, cultural and environmental quality of each area. The above-mentioned requirements are difficult to satisfy, particularly in the case of big cities. However, according to Regulation (EC) 1080/2006, such plans can be prepared for areas with the high concentration of various problems (degraded areas). Degraded area Article 8 of Regulation (EC) 1080/2006 states that interventions of EU funds should only take place in areas with a high concentration of problems – so called problem areas. The EU legislation does not specify any criteria to be met by an area to be considered a problem/degraded area. Some incoherence in the definition has been introduced by the Order of Minister of Regional Development on granting assistance for regeneration under Regional Operational Programmes. The included definition of a degraded area, i.e. an area in which regeneration activities are conducted, brings up the criteria mentioned in art. 47 section 1 of Commission Regulation (EC) 1828/2006. That refers to areas in which operations related to residential housing are conducted. This article lists ten criteria described by statistical indicators, such as the level of poverty and exclusion or the long- term unemployment rate. On the other hand, Poland has agreed with the European Commission on other selection criteria for areas ranged by residential housing interventions. Those are included in the document „Guidelines of the Minister of Regional Development on programming of activities related to housing”. Upon consideration of the nature of Polish development conditionings,
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especially in urban areas, and the availability of statistical data illustrating socio-economic changes, as well as the condition of housing infrastructure, the number of criteria has been reduced to the following:
high level of poverty and exclusion,
high rate of long-term unemployment,
high level of crime and delinquency,
low rate of economic activity,
comparably low value of residential housing supply. Our analysis shows that uniform definitions of both an Integrated Urban Development Plan and a degraded area do not exist. However, it is worth noting that an Integrated Plan should meet the following conditions:
be prepared for an urban area,
cover an area with the high concentration of problems (as one eligible for EU assistance),
cover three aspects: social, economic and infrastructural ones,
promote sustainable development. It will be rather difficult to introduce one coherent definition binding in all the Regions before a regulation on public assistance for regeneration projects comprising definitions of the basis notions is prepared and adopted. At present, the responsibility to prepare guidelines is held by the Managing Authorities. They have to define the standards of documents that will be required for assessment. Please note that in the previous programming period documents named Local Regeneration Programmes were used in Poland, and those documents will now act as Integrated Urban Development Plans. The Plans will have to be prepared on the basis of an appropriate methodology, and with the use of appropriate tools. For the moment, the guidelines have been prepared by two of the four Regions interested in the implementation of JESSICA. In Wielkopolskie and Zachodniopomorskie Voivodships, the Marshal Offices are currently working on the preparation of appropriate guidelines. One should note here that in the first two Regions where the guidelines have already been prepared, the funds earmarked for regeneration will be utilised on the basis of a grant mechanism. In the remaining two voivodships, all the resources or a large portion of them will be allocated to the Urban Development Fund. For this reason, the Offices are suspending the issue of final instructions by the time when conditions for the implementation of regeneration projects under the new instrument are known. The new guidelines for the preparation of Local Regeneration Programmes are based on similar principles. The first part of the guidelines should describe the area to be assisted, and justify this choice. The part to follow should include regeneration objectives showing the cohesion of those objectives with other planning documents. The final part usually contains a list of activities (projects) serving the attainment of the adopted objectives. This methodology is very similar to the methodology of preparing Local Regeneration Programmes under IRDOP in the previous programming period. It means that the procedure, the method of determining problem areas and defining objectives, as well as project preparation activities are well familiar to the officials. In order to recognize the Regeneration Programmes as Integrated Urban Development Plans, these programmes have to fulfil the condition of applying the integrated approach which implies both that the programme integrates various sector strategies in the economic,
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social and infrastructural fields, and that all the interested parties are involved in the preparation process. The integrated approach is generally used in Poland in rural development programming. The LEADER+ initiative, under implementation in Poland since 2004, is based on such an approach. Local Action Groups were responsible for preparing Integrated Rural Development Plans, and 187 of these have been made ready for implementation (applied for the financing of their activities). Attention should also be paid to the fact that cities are now bound to prepare a number of various plans and strategies. The most common ones are development plans, environment protection programmes, waste management plans, integrated public transport development plans, multi-annual investment plans, programmes for cooperation with NGOs, and others. Many of these documents, and even individual investment feasibility studies, include results of social consultations, as well as environmental impact assessments. Considering the above, one can be certain that the officials are familiarized with the techniques and tools for preparing strategic plans. Representatives of the Marshal Offices which have prepared their guidelines and assessed the first submitted plans report that the quality of the latter is quite high. In particular in large cities, much significance is attached to regeneration processes, and so the plans are prepared with much diligence. The time needed to prepare a good quality Development Plan is ca. 6 months. It is also important that the above-mentioned plans come to be the basic development plans for the cities. It sometimes happened during the previous programming period that the Local Regeneration Plans were only created for the purpose of co-financing application. At present, the Plan often becomes one of the key municipal operational documents, and projects included in the Plan are entered into Multi-annual Investment Plans, and implemented according to the schedule. Local Spatial Development Plans Another issue within the planning environment are Local Spatial Development Plans. These plans are basic planning documents indicating the type and quality of building developments in the areas they cover. Since 11 July 2003 the act on spatial planning and development of 27 March 2003 is in force (Journal of Laws no. 80, 2003, item 717). The new act invalidated all the previously binding plans, and thus new plans have had to be prepared. Unfortunately, the preparation processes are time-consuming and costly, owing to which for many areas, including urban ones, such plans have not yet been prepared. This status is particularly significant for the investor as it prolongs the investment preparation process due to the largely increased number of permits to be obtained as compared to the situation when the area is included in a valid spatial development plan.
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4.2 Task 4.2 Review of selected cities
Task 4.2 Review of a sample of Integrated Urban Development Plans in the Regions which can be the source of JESSICA Projects. This detailed review of Integrated Urban Development Plans should regard the following cities: Zachodniopomorskie – Szczecin, selected sample of other cities including small and medium sized cities; Wielkopolska – Poznań, Piła, selected sample of other cities including small and medium sized cities. As mentioned in the previous sub-chapter, Local Regeneration Programmes will now play the role of Integrated Urban Development Plans. This assumption results from the fact that it’s the Local Regeneration Programmes which would include the projects to be financed from ROPs funds for regeneration. The introduction of an additional planning document would be pointless. At the same time, the contents of a well-prepared Local Regeneration Programme will meet the statutory requirements for an integrated plan for sustainable urban development outlined in Article 8 of Regulation (EC) No. 1080/2006 concerning conditions for the financing of projects included in such plans. When talking about Local Regeneration Programmes, one should start from providing a definition of regeneration and of a regeneration programme. Both definitions are given in the document entitled “Guidelines of Minister of Regional Development on programming of activities concerning residential housing.” This document reads: Regeneration is a complex, coordinated, multiannual and conducted on a specific area process of spatial, technical, social and economic transformations initiated by a territorial (usually local) self-government in order to lead this area out of crisis through providing it with a new functional quality and creating conditions for its development on the basis of specific endogenous conditionings. And a Regeneration Programme is a multiannual programme of activities in the fields of spatial management, technical infrastructure, society and economy, prepared, adopted and coordinated by the municipality, and targeted at leading the given area out of crisis, and creating conditions for its further development. In the draft “Order of Minister of Regional Development on granting assistance under Regional Operational Programmes”, the definitions of the above-mentioned notions, however differently formulated, boil to the same principles. Moreover, this draft order includes a provision which considerably reduces the degraded areas, i.e. the areas where regeneration activities are conducted. A reference is made to the areas eligible for residential housing assistance which are much more limited and disadvantageous regarding JESSICA mechanism. It follows from both of the definitions quoted above that regeneration programmes will be integrated programmes initiated by local governments, i.e. city councils in this case (public sector), and prepared in partnership with the private sector, non-governmental organizations and other public bodies. It is very important from the JESSICA perspective, and its implementation schedule in particular, that the regeneration programmes have to be adopted by the appropriate bodies, i.e. City Councils. Detailed guidelines concerning regeneration programmes are under preparation by Managing Authorities, i.e. Marshal Offices. In Wielkopolskie and Zachodniopomorskie, the guidelines are now under preparation. Considering the fact that such programmes either have not been yet prepared, or have been prepared without taking the new instrument into account, the number of projects eligible for JESSICA assistance included in these programmes is limited. The only programmes/strategies to have been analysed are those that meet the criteria for Integrated Urban Development Plans in the opinion of the consultant. In other cases, the process of
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preparation of programmes, and in consequence also of projects, will need to be repeated. On the other hand the Cities, even without having updated the strategies, are knowledgeable about potential projects which could be assisted by the new instrument. A list of such projects with short descriptions is presented in Section 4.3. Wielkopolskie Voivodship At present there are no binding guidelines on the preparation of Local Regeneration Programmes for urban areas in Wielkopolskie. The Managing Authority is at the stage of public consultation with regard to the preparation of guidelines for Measure 4.3 “Regeneration of degraded post-industrial and post-military areas”. Under this measure, regeneration projects will only be financed by way of grants. According to a provision of the detailed specification of the Wielkopolskie ROP, integrated projects to be implemented must be included into Local Development/ Regeneration Programmes or equivalent planning documents allowing for the identification of integrated projects. The draft guidelines, now under consultation, also concern regeneration issues and one can expect that a large portion of the adopted provisions will relate to Measure 4.1. These guidelines are of a different nature than in other Regions. The first part of the document comprises a large description of what regeneration is, its definition, legal background and types of eligible projects. The second part describes potential possibilities for conducting a plan preparation process as well as the contents of such a plan. The authors indicate the highly arbitrary character of this process. On the other hand, one should reflect on whether indicating more precise instructions for programme preparation (which was done in the other Regions) would not facilitate the assessment process. Summing up, there are no Local Regeneration Programmes in Wielkopolska, which meet the criteria specified by the Managing Authority and this is due to the lack of such criteria. Representatives of the Marshal Office report that all the Local Regeneration Programmes prepared correctly in relation to IRDOP applications will – having undergone slight modifications – constitute the basis for Wielkopolski ROP applications. The list of projects to be implemented under the programmes will surely have to be updated with regard to the current sources of financing, and in particular to the lack of the grant instrument which will be replaced by repayable financing. It shows from our talks with City/Town Councils officials that by the time the Marshal Office provides them with clear signals as to the implementation of the new instrument (e.g. implementation schedule, preliminary financial conditions, types of eligible projects or instructions for preparation/updating of Local Regeneration Programmes), they will not take any steps forward. Once such a clear signal is given on what kinds of projects will be financed and what is the beneficiary list, the Councils will immediately start working on the elaboration/updating of LRPs, and the preparation of projects which could be financed from JESSICA funds. Poznań has a Local Regeneration Programme adopted by the Poznań City Council in October 2006. It is the second edition of this programme which covers a broader regeneration area as compared to the previous version. The programme has so far been prepared for two areas: Śródka – Ostrów Tumski – Chwaliszewo and Jeżyce – Łazarz. The methodology of the programme preparation is in principle compliant with the criteria for an Integrated Urban Development Strategy, which are: integrated approach, comprehensive nature of activities in a specific area, broad public consultation etc. However, the City Council prepared the programme when it expected the grant assistance instrument to be involved. It means that many project documents name EU grants as the potential financing source. Therefore, the next version of this programme (as it is a regularly updated evolving document) needs to be complemented with the new financing source and new projects, following which it will probably be possible to apply for JESSICA funds on the basis of the programme.
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From among projects planned for implementation, individual projects can be identified to have return generating potential which is the key eligibility factor for JESSICA assistance. Examples here are the project of sports facilities modernization in Sports Youth Centre at Gdańska street in Poznań, where some buildings are planned to be converted into a hotel, or the public toilets modernization project. These projects will have to be reformulated with regard to the applicants (the current beneficiary is the Poznan City Council) and their financial capabilities. The “Local Regeneration Programme for post-military areas in the Town of Piła” was adopted by the Town Council in August 2004. Since that time, it was updated twice with regard to the list of projects planned for implementation. The scope of the programme covered the grounds of the former military airport. If the Town wished to take advantage of JESSICA financing, it would have to update the document by elements such as the specification of the assistance area, and the inclusion of economic or social-type projects in the task lists. Town officials report that there are projects which the council would like to have financed with the new instrument. It will therefore be necessary to prepare a new regeneration plan on the basis of MA guidelines. Zachodniopomorskie Voivodship In Zachodniopomorskie, guidelines for the preparation of Local Regeneration Programmes are under preparation, which means that the towns in the Region do not have, and often are not even preparing new programmes. Due to the specific system of ROP implementation covering only integrated projects, it will be difficult to adjust the existing Regeneration Programmes to the needs of the new financing perspective. In addition, the character of integrated projects with various sources of financing (grants, commercial resources, JESSICA fund) will imply that appropriate projects could only be prepared for some parts of the degraded areas. The towns expect more information to be provided by the Marshal Office as regards the types of projects eligible for financing. By the time such information is provided, they are suspending the preparation of new projects. It should be said here that a number of towns are unhappy about the fact that the limited resources are to a large extent to be used as the repayable instrument. Most of the towns had been preparing projects eligible for grant financing. Summing up, in spite of the lack of binding Local Regeneration Programmes, the towns have identified projects that could be potentially financed from JESSICA funds. Short descriptions of these projects are contained in the next chapter.
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4.3 Task 4.3 Potential projects for JESSICA
Task 4.3 Identification and overview of selected JESSICA Projects in the above mentioned Integrated Urban Development Plans (“Pilot JESSICA Projects”). This overview of Pilot JESSICA Projects should include: background and rationale, including public interest aspects, financial analysis of anticipated commercial performance (description of potential revenue generating capacity), timing of implementation, readiness for JESSICA type funding and other key information relevant for JESSICA. Indication of general criteria to be used by a UDF in selecting JESSICA Projects will also be required. As shown in the previous chapter, in spite of the comparatively small number of valid Local Regeneration Programmes in cities, there are many projects which could be financed with the use of the new instrument. To a large extent, these are projects included in regeneration programmes prepared for the purpose of IRDOP financing. These projects were constructed taking into account three basic financing sources: grants, public funds and private sources (often from commercial bank loans). The new instrument offers more opportunities in this regard. Due to the lack of such an instrument in the past, projects potentially eligible for JESSICA assistance have not been listed anywhere. Now, that the opportunity for preferential funding has appeared, one should expect the emergence of new projects which require or seek such kind of capital. The sources of financing available to date (grants or purely private investments) were considerably limiting the urban regeneration capacities. JESSICA is a mechanism located between those instruments, and so the projects in need of this type of funding have to be reached by appropriate promotion activities, and their development has to be stimulated. Flexibility in the adjustment of this financial engineering product to projects needs should be the advantage of JESSICA as compared to other financial instruments.
4.3.1 Projects in the Regions Chapter 4.1 above illustrates that as of the end of 2008, cities typically did not have Integrated Urban Development Plans, and used Local Regeneration Plans prepared as the bases for IRDOP applications. Being unaware of the available opportunities and of any decisions regarding JESSICA, cities have not identified projects which could with high probability take advantage of JESSICA funding. For this reason, potential JESSICA projects could only be preliminarily identified at the time of preparing this study. The amount of information about potential projects is so limited (early conception stage) that it would be difficult to perform reliable analyses of compliance with the criteria which could later be used by UDFs. At this stage, the key element of project assessment with regard to JESSICA eligibility was the return generating potential of the project. This is an indispensible element thanks to which the assumed JESSICA financial instruments could be used. Selected projects, potentially attractive for JESSICA (judging from the general characteristics of the projects and the amount of available information) are presented below.
4.3.1.1 Wielkopolskie Voivodship Old Gas Works in Poznań Project background and rationale The project „Regeneration of Old Gas-Works structures in Poznań” concerns the conversion of a building of the so-called Old Gas-Works to a New Culture Centre. The Gas-Works operated since 1856, and it supplied 96% of the city residents with coal-derived gas by the year 1939. In 1970 Poznań was connected to a gas pipeline, which brought the gas
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production to an end. Since that time the function of the former gas-works structures has been reduced to gas distribution. Currently, the gas-works premises are owned by three companies:
Aquanet S.A. – 68,94% of Municipality share,
Wielkopolska Spółka Gazownictwa Sp. z o.o. (Wielkopolskie Gas Company),
Transmission gas pipeline operator Gaz-System S.A. Project scope The principle project objective is to create a special space for culture, within which the Culture Centre will operate exhibition, theatre and concert activities. The refurbished building would house galleries, a theatre auditorium, a concert hall and a cinema/conference room, as well as coffee shops, a bookshop, a multimedia library, office and technical background. These would be administered by one institution, headed by a team of curators and managers. The second component of the project would consist in the creation of spaces for offices, commerce, services and apartments in order to make the project financially feasible. Initially, an idea was conceived to unite the gas-works grounds with the neighbouring area of the old southern Warta river bed. However, in the current project phase this is but a preliminary concept as the Warta cut-off area, particularly in its southern part, is totally degraded with large terrains covered by unordered vegetation. The approximate investment cost is estimated at ca. EUR 40 million23. Financial aspects of project implementation (income, return) The Municipality is now working on the project conception. One of the phases of the conception under preparation consists in elaborating financial and programme connections of the Culture Centre with the remaining part of the Old Gas-Works in the business, legal and substantial aspects, so that the operation of the whole complex could bring synergy and financial profit. Project advancement and implementation schedule The project is presently in the conceptual phase. The conception of using the area of the Old Gas-Works for cultural purposes will comprise structural, substantial and financial aspects. Potential for application of JESSICA assistance From the JESSICA point of view, the currently available information on the project includes two significant elements. Firstly, it concerns regeneration activities to be conducted in direct vicinity to an assistance area specified in the Local Regeneration Plan of Poznań. Another important aspect is that the city authorities are defining the project in a way that it ensures generating resources sufficient for return – both for the repayment of the invested capital (rents from offices and commerce, sales of apartments), and covering the Culture Centre construction costs. It is now difficult to ascertain that the project is feasible, i.e. whether it could be implemented in the shape initially planned, however it surely has the potential for generating return. Other information (project promoters and partners, etc.) The project was initiated by the Poznań City Council that is preparing conceptions for development of that area. Together with the owners of the premises, the city authorities are considering establishing of a special purpose company which would later be responsible for the project implementation.
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Implementation dates have not yet been established due to the broad scope and complexity of the project. Centre for Sports Shooting (in Piła) Project background and rationale The post-war history of Piła is linked to the presence of the army which was stationed in the city suburbs since 1944, and used the military airport constructed by the German authorities in 1913. In the post-war period, the airforce and ground troops significantly contributed to the city reconstruction after war damages, and the removal of unexploded bombs and misfires. The liquidation of Piła garrison military units in the years 1998–2002 as part of the restructuring and modernisation of the Polish Army resulted in historical, economic, social and investment degradation of the city, and generated abrupt growth of unemployment following dismissal of several hundred professional servicemen and civilian army staff, as well as staff of companies whose operations were targeted at supplying goods and services to the army. In effect, the city was left with large post-military areas to be regenerated, including the former military airport. These areas are now under regeneration through adjustment of post- military buildings to various functions, including residential and educational ones. The main project objective is the regeneration of the post-military area, and thus an enhancement of the city's attractiveness as a sports centre, stimulating sports activity of the residents of Piła and its region as a social development factor. Project scope The project covers regeneration works (construction and conversion) in the shooting-range complex named „CSS Tarcza” (Target Sports Shooting Centre) at Al. Powstańców Wielkopolskich street 182 in Pila. There are 80 shooting positions divided between 8 kinds of shooting-ranges. Financial aspects of project implementation (income, return) The project income would be generated from charges for using the shooting-range. According to the Piła city authorities, the north-western Poland is lacking in professional sports shooting-ranges (there are specific location requirements for such operations). For this reason, apart from civilian users, services could also be rendered to the army, the police, security agencies and others. The project cost has been estimated at PLN 8 million. Project advancement and implementation schedule The Piła Municipality is currently working on the conception and business analyses. The investment area is owned by the Municipality of Piła and administered by City Sports and Recreation Centre. The implementation is planned for the years 2010-2011. Potential for application of JESSICA assistance The project will be implemented as one of the projects included in the „Local Regeneration Programme for Post-Military Areas in Piła”. The Local Spatial Development Plan is under preparation. Other information (project promoters and partners, etc.) Piła Municipality is the beneficiary of the project and the body responsible for its implementation. Another involved body is City Sports and Recreation Centre which administers the premises now and will continue to do so after the project is completed.
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Regeneration of Railway Station (Murowana Goślina) Project background and rationale Murowana Goślina is a town in which according to its mission statement it is worthwhile to live, work and rest. Its strategic objective is to develop the residential functions of the town. This is to be achieved by activities such as those related to the development of the transport potential for connections with the Poznań conurbation. One of the key routes connecting Murowana Goślina with Poznań is the Poznań-Wągrowiec railway line which is to be modernised by 2011 thus shortening the travel to Poznań to 30 minutes. To this end, the town will reproduce and develop its degraded transport system, and enliven the centre through the creation of a transfer base (railway, buses, cars, bicycles, and pedestrians). The implementation of this project would also positively affect the social and environmental domains. In the long run, beneficial financial and non-financial results are expected to be achieved by the municipality thanks to the creation of an attractive and prospective image of it in the external environment. In the short term, the positive impact of the project will show in a reduction in the emissions of combustion gases (faster translocation plus public transport), noise and vibrations. In addition, the project will obviously have a positive aesthetic effect as the spatial orderliness of the station and its surroundings will increase. Project scope The project entitled „Railway station – a modern public transport junction” covers the modernisation of 2.400 m2 of squares and 800 meters of streets. The station buildings of 450 m2 will be regenerated too. Also, the project involves the adjustment of the railway station area to the function of a transfer node (named The Station) for rail, bus, motor, cycling and pedestrian transportation. Financial aspects of project implementation (income, return) To be determined. Project advancement and implementation schedule 97% of the area is owned by the Polish Railways – PKP, and the remaining 3% – by the municipality of Murowana Goślina. The planned implementation period is 2009-2012, and the estimated cost reaches ca. PLN 5.2 million.24 Potential for application of JESSICA assistance Project is included in the Local Regeneration Programme. Other information (project promoters and partners, etc.) The project was initiated by the municipality of Murowana Goślina. Partners will be as follows: Polish Railways – PKP PLK, transport operators (PKS, KSK, Warbus sp. z o.o.), housing co-operative „Koziegłowy”, as well as other private investors and owners of properties and companies located at Kolejowa, Dworcowa and Polna streets. The institution responsible for the project implementation is the Town and Municipal Council of Murowana Goślina. Other regeneration projects planned in the Region In October 2008, cities and towns in the Region received from the Wielkopolskie Voivodship Marshal Office a project card for potential JESSICA projects. As a result of that enquiry, 58 cards were submitted to the Office, in the opinion of which 11 of them actually have potential for JESSICA financing. These projects are listed below:
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Regeneration of the Market Square and the Old Town central promenades (Planty) of the town of Rawicz,
Railway station – a modern public transport junction (Murowana Goślina),
Market Square as the attractive city centre (Murowana Goślina),
„Godebski Barracks” in Kalisz as a space for integration and support – modernisation and conversion of the building,
Construction of a sports centre in Pleszewo,
Regeneration of Old Gas-Works structures in Poznań (New Culture Centre),
Construction of a sports and concert hall on post-military grounds at Kolejowa street in Ostrów Wielkopolski,
Regeneration of 20 Października square (Mosina),
Repair and modernisation of Oborniki Cultural Centre (Oborniki),
Regeneration of post-military grounds in the city of Piła – Sports Shooting Centre in Piła at Powstańców Wielkopolskich street,
Construction of a town market in Zagórów. It should be noted that the scope of information contained in the project cards is very general, however the Marshal Office staff had been familiar with a number of these projects, and the selection was made on that basis.
4.3.1.2 Zachodniopomorskie Voivodship Quarter 21 (Szczecin) Project background and rationale Szczecin as a city has enormous regeneration needs. Three municipal companies have been charged with the regeneration of the city residential supply: Szczecin Regeneration Centre (Szczecińskie Centrum Rewitalizacyjne), „Prawobrzeże” Social Housing Society (Towarzystwo Budownictwa Społecznego Prawobrzeże) and the TBS Szczecin. These companies' operations cover entire city quarters. Regeneration of Quarter 21 is one of such projects, and it will be implemented in three phases. The first phase involving the reconstruction of ten tenement houses at Jagiellońska and Ks. Bogusława X streets is in principle ready for implementation (works are expected to start in the first quarter of 2009). The houses will be modernised, with ground floors intended for service shops, the first floors for offices, and the remaining floors – for apartments. The two following phases relate to the regeneration of the inside of the quarter, and buildings at Śląska and Obrońców Stalingradu streets. Project scope The project will involve the regeneration of spaces within the quarter, meant to be used for cultural and entertainment events. An underground car park could also be constructed there, divided into two parts – for local residents and for the general public. The third phase covers the modernisation of other tenement houses at the opposite side of the quarter (Śląska and Obrońców Stalingradu streets). Phases 1 and 2 can potentially be interesting for the JESSICA fund.
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Financial aspects of project implementation (income, return) The plan of project takings comprises return generated from charges for the location of events within the quarter and for parking fees. As for the regeneration of the other tenement houses, a return can be obtained through the sales of residential apartments. Project advancement and implementation schedule The project is in the conception phase. An official decision of the Szczecin Municipality is now expected concerning a change of the location of Elementary School and a sports field inside the quarter. Potential for application of JESSICA assistance The Quarter 21 area will be covered by the Local Regeneration Programme, currently under preparation. In addition, it is easy to identify such elements of that project, which could generate return. Other information (project promoters and partners, etc.) The project was initiated by Szczecin Regeneration Centre – a municipal company which owns all of the buildings to be regenerated in the first phase. Station Koszalin – development of the Railway Station area in Koszalin Project background and rationale The name Station Koszalin refers to Zone 4 of the Local Regeneration Programme for Koszalin. Zone 4 covers regeneration operations in the train station area limited by Zwycięstwa and Jana z Kolna streets. This is an area with high investment potential, and convenient location in proximity of the city centre. At present, the station surroundings are rather neglected and inefficiently used. The favourable location combined with good infrastructure will allow this area to play – after having undergone some preparatory activities – many important roles, and to attract potential investors. The Station Koszalin is intended to become the showcase of the new city centre. Project scope The project provides for the construction of a new train station building connected to the bus station. The Local Regeneration Programme includes actions aimed at ordering and organising the space around the train station, the walkway leading towards the city centre and as well as the buildings of the train and bus stations. The following are needed to enhance the quality of this area:
modernisation of the railway station building,
digging an underground passage connecting with the areas located behind the railway sidings,
development of the space in front of the station,
completion of the blind walls of buildings at the Dworcowa street walkway. Financial aspects of project implementation (income, return) Potential return on the investment would come from lease or sale of the grounds around the station. Project advancement and implementation schedule Work is under way on completing the conception of project implementation, now discussed between the project partners. The total expenditure planned for the 2007-2013 programming period amounts to PLN 28 869 000. Page 130 Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce January 2009
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The project duration was established at 3 years.25 Potential for application of JESSICA assistance The project is included in the Local Regeneration Programme. In addition, it is easy to identify such elements of that project, which could generate return. Other information (project promoters and partners, etc.) The participating and financing institutions: Koszalin Municipality, Polish Railways (PKP), and entities contracted by the Polish Railways.
4.3.1.3 Conclusions from project identification Projects prepared by the cities are at very early preparation stages. Project documentation for only a few projects is completed or under preparation. For some of the projects compliance with the local spatial development plan has been assured but they still have not been included in integrated urban development plans. The examples of projects given above were identified as a result of study work completed in December 2008. Many projects are undergoing dynamic transformations, and therefore the degree of their attractiveness for JESSICA financing can fundamentally change. Having got familiar with the JESSICA principles, the cities and future project stakeholders may be able to create new very attractive projects within a comparatively short time. It would therefore be worth to leave open the possibility of creating long-lists of projects by the time that UDFs start operating (ca. 2 years), and to verify these lists after this time. During this period the Marshal Offices, co-operating with the EIB as the HF operator, may support the formation process of projects which are considered of primary importance for the city and for the preparation of which most time and money can be involved. It should be mentioned that in the case of complex projects, the period of project preparation, i.e. from defining its structure and contracting its participants (e.g. the establishment of project partnership) by the actual start of project implementation, lasts ca. 2 years. Preparation of projects should therefore start as early as possible so that their implementation could be completed before 2015.
4.3.2 Suggested selection criteria for future JESSICA projects The selection criteria applied to the investment projects to be implemented under JESSICA can be conventionally divided into three large groups:
Group A – criteria contained in ROP;
Group B – criteria of compliance with sustainable development principles;
Group C – financial criteria. These groups of criteria are successively described below. Group A – ROP criteria Initially, JESSICA financing in the Polish Regions will come primarily (or exclusively) from the EU funds intended for urban regeneration under Regional Operational Programmes. At present, resources available under regional programmes can be allocated to the financing of projects which meet the criteria specified in the detailed specifications of these operational programmes. Therefore, ROPs will be the source of the selection criteria for projects in the initial period of JESSICA operation in Poland. Regional Operational Programmes specify the types of projects eligible for assistance under individual priority and measure axes. This involves aspects such as:
Type of activities to be assisted,
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Area in which the project will be implemented (e.g. urban area covered by a local regeneration plan),
Type of entity responsible for project implementation. After projects are initially qualified for implementation under a particular measure of the operational programme on the basis of the above-mentioned criteria, a competition-type selection process is then performed (without making an indicative list) and projects are assessed on the basis of criteria defined separately for each measure. The lists of criteria are included in the operational programmes and in their detailed specifications. This assessment can involve criteria such as the following:
formal,
technical (specific for each type of project),
financial,
socio-economic,
strategic etc. In some voivodships, the schemes of assessment and selection of regeneration projects consist of two phases. In Zachodniopomorskie in turn, integrated projects are assessed first, i.e. groups of coherent, mutually related individual projects included in Local Regeneration Plans and implemented on a single area by all the involved entities in the same timeframe (projects submitted by City/Town Councils). After a given integrated project is selected for financing, every property owner submits a separate application. A significant conditioning of JESSICA operation, in particular in the initial period, is the fact that projects to be financed from the funds of operational programmes will have to contribute to the achievement of result and product indicators specified in ROP and in their detailed specifications. By the time that sources of funding other than ROP are available for HF/UDF, the selection criteria contained in the detailed specifications of individual operational programmes will only have to be used. The situation will become more complex when HF/UDF will have other investors preferring other project selection criteria. In addition, one should note that the binding project selection criteria contained in ROPs have been prepared for a grant instrument, and as such they do not relate to the specific nature of JESSICA. This means that at least a partial change of project selection criteria will be necessary, as well as result and product indicators for the urban regeneration measure. Changes in project selection criteria included in the Detailed Specification are introduced at the level of the Operational Programme Monitoring Committee. A change in result and product indicators, if those were included in the body of the operational programme (not in the detailed specification), is possible after approval of the European Commission in the course of individual negotiations, or after the process of the first programme assessment is completed (half of the programming period duration). Group B – sustainable development criteria It should be noted that in the very name of the JESSICA instrument the notion of sustainable development appears. This notion is interpreted in different ways by various people and institutions. In the case of JESSICA it will be necessary to include the key principles of sustainable development when defining project selection criteria in a way which will not block the possibility of parallel implementation of diverse development projects. The concept of sustainable development is based on the appreciation of mutual relations between economic, social and natural resources, as well as environmental systems. All these systems function in mutual relation and together they determine the quality of life, socio-economic conditions and efficiency.
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Therefore, a project sustainability assessment should take into account the need of environmental protection, social equality, economic efficiency, and efficient use of natural resources. Assessment criteria should thus concern refer to the following aspects of the project:
social,
economic,
environmental,
natural resources. To perform assessment and selection of projects with regard to their sustainability, one of the assessment tools available on the market, such as SPeAR™, can be used. SPeAR™ (Sustainable Project Appraisal Routine) is a tool which has proven to be efficient in large urban investments, facilitating the inclusion of sustainability aspects at the key stages of the decision-making process. With the use of SPeAR™, project sustainability can be measured and illustrated at any stage. The assessment makes is possible to optimize the principal sustainability factors: environmental, social, economic and natural resources. The simple, logical and transparent methodology is fully adaptable to all types of projects at all implementation stages:
master planning, planning, investment preparation,
conceptual design,
technical design,
construction,
handing-over,
operation and maintenance,
demolition/ dismantling. SPeAR™ can be used as an effective comparator of options to help lead the strategic decisions as to the project development and implementation. The assessment can also be used to demonstrate to both internal (executive management, workforce, etc.) and external (planning authority, insurers, public, etc.) stakeholders the overall performance of the development in terms of sustainability Group C – Financial criteria Financial criteria are to some extent included within the previous criteria groups, in particular as regards financial sustainability of projects. As the involvement of sources other than ROP in JESSICA financing is increasing, criteria referring to individual forms of project financing (loans, guarantees, equity contributions and possibly mezzanine financing) will be growing in significance in the project assessment and selection process. These criteria include:
internal rate of return (from the whole project, and from the involved capital),
net present value (from the whole project, and from the involved capital),
return period for the investment,
cashflow profile,
availability and form of a collateral,
financial indicators typically used in credit, analysis. Detailed financial criteria can be subject to arrangements with UDF operators (at the stage of selection of applying operators, or negotiations with the selected operator).
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The financial criteria of project assessment will also be influenced by conditions of the assistance programme concerning the conformity of projects financing with the public assistance principles. Specific aspects which should be reflected in the future project selection criteria in individual Regions are discussed below.
4.3.2.1 Conclusions on project selection criteria Due to the key role of ROPs in the financing of JESSICA in the first phase of its operation in Poland, the main criterion to be considered in the assessment and selection of projects is the compliance with priority axes of the operational programmes for individual Polish regions. The scope of criteria to be applied to the selection of projects for implementation with the use of JESSICA should be specified in detail in the funding agreement between the Managing Authority and the holding fund or the UDF. At present, most of the urban regeneration projects which have been identified and prepared for financing from EU funds in the 2007-2013 budget perspective are ready for implementation only within the grant system. Projects potentially eligible for JESSICA have not yet been identified – inter alia due to the lack of decisions taken in relation to this instrument. A reformulation of projects planned for implementation with the grant assistance would – in the cases where it is possible – require more precise definition of the way JESSICA operates. It is significant here that the conditionings included in the current ROPs (regarding the indicators to be achieved, project selection criteria and types of beneficiaries) have been created for the grant financing system, and can in some cases cause difficulties in the implementation of JESSICA. It is possible to change these conditionings but it will be time consuming. In favourable circumstances, the introduction of necessary changes can delay the implementation of JESSICA by a few months. In the light of the above, one should note that a narrow and restrictive detailing of criteria at the present early stage of JESSICA implementation in Poland could result in holding back the preparation of projects for implementation with JESSICA assistance. In order not to introduce unnecessary limitations to UDF future operations, the project selection criteria formulated now should be as liberal as possible in the context of ROP conditionings.
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4.4 Task 4.4 JESSICA for residential housing projects
Task 4.4 A specific review of opportunities and limitations in providing support from EU funds through utilization of JESSICA instruments to housing projects in Poland is required given the importance of this sector for the country as well as taking into account particular sensitivities imposed by the EU legislation. The need of one's own dwelling place belongs to the basic human needs that directly affect the life quality. The development of residential housing is now particularly significant for Poland, which follows from many years' delays in the construction of accommodations offered both in the free market, and as communal and social apartments. The 2002 general census shows that over 1.5 million of Polish households do not have their own accommodations. It should also be noted that more than 23% of the apartments in use were constructed before 1944. The commercial sector of the residential housing market is very dynamic, and its demand increases year by year, both in the qualitative and quantitative aspect. On the contrary, the market of apartments intended for persons with low incomes is the one which requires support, and can benefit from the new mechanism. Generating conditions conducive to meeting residential needs of a self-governed community is a task for the communal administration. It should provide communal, social and reserve apartments, as well as satisfy residential needs of families – in particular of those with low income. In order to accomplish this task, municipal residential resources are created. A residential resource consists of the following categories of apartments:
26 Social apartments. The Polish law defines this notion as “an apartment habitable with regard to its fitting and technical condition, in which room area per one member of the occupier's household cannot be smaller than 5 m2, and 10 m2” in the case of one- man household. A social apartment can be of lowered standard, and it can be applied for by persons who are not able to purchase or rent an apartment in the free market. Detailed criteria concerning persons entitled to the use of social apartments are established by the Municipal Council. In addition, the right to occupy a social apartment can be acquired through a court judgement (eviction sentence), following which the municipality is bound to provide the evicted person with a social apartment. The rent for the social apartment cannot exceed the half of the lowest rent for communal apartments in the given municipality.
Communal apartments. Apartments owned by the municipality or its administrative unit. These apartments serve to satisfy residential needs of municipality residents. Detailed conditions and principles of granting the right to rent communal apartments are established by the Municipal Council, and income is usually the main criterion. The level of rent is established by the Municipal Council and specified in the multi-annual programme for municipal residential resource management. The Council establishes the basic rate which can be decreased or increased depending on the building parameters. Other Polish institutions very active in this field are Social Housing Companies (Towarzystwa Budownictwa Społecznego – TBS). These Companies were called to life by virtue of Act of 26 October 1995 on some forms of assistance for residential housing (Journal of Laws 1995 no. 133 item 654). These entities operate on the basis of loans from the National Housing Fund which is administered by the Bank Gospodarstwa Krajowego. The bank's involvement amounts up to 70% of investment costs. The remaining 30% is the so-called participation, i.e. the participation of physical persons in the apartment construction costs. These loans have preferential interest rates – the statutory principle is that it cannot exceed the rediscount rate of the National Polish Bank. The current interest rate on the loans from the National Housing Fund is 3.5% per annum plus 1% commission for considering the application.
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The rent in TBS apartments is also regulated by the law. The rate for 1 m2 cannot exceed 4% of an apartment’s recovery value27 per annum. In the light of the above, the capacity for the repayment of loans raised for residential housing should be examined. The table below presents rates of rent for the three categories of apartments in selected cities.
Table 6. Examples of rates of rent in selected Polish cities [PLN]
2 2
2 2 City in TBS of 1 m for 1 m in social apartments apartments in communal Rent for 1 m for 1 Rent m for 1 Rent Maximum rent Maximum rent Recovery value value Recovery
Warszawa 4 905 16,35 6 3 Poznań 5 160 17,20 5,1 1 Murowana Goślina 3 400 11,33 6,21 2,48 Piła 3 400 11,33 3,08 0,83 Szczecin 3 346 11,15 5,96 0,76 Stargard Szczeciński 3 241 10,80 2,47 1,23 Kraków 3 647 12,16 1,08-1,47 1,00-5,76 Wrocław 4 340 14,47 4,10 1,03 Source: Consultant's own analysis Representatives of TBS organisations report that a loan raised for the construction of apartments in the National Housing Fund with 3.5% interest rate can be repaid with the rate of rent established at the statutory 4% of the recovery value. The fact that most of the rents in municipal apartments are lower than the TBS rate defines the conditions for granting the JESSICA fund loans for these purposes. In order to keep debt financing of municipal residential housing repayable, the interest rates on loans would have to be lower than for TBS, and often equal to 0%. Similar repayment conditions relate to renovation of apartments. In this case, it should be taken into account that one building (one housing community) can comprise apartments belonging to the municipal residential resources, TBS as well as private owners. It happens that the latter are persons with very low incomes, and often oppose to raising rates of rent or renovation fund contributions. In housing communities the decisions on new investments have to be taken unanimously, which seriously hinders reaching consensus and the planning of renovation works. On the other hand, one should consider Regulation (EC) No. 1080/2006 of the European Parliament and of the Council of 5 July 2006 on the European Regional Development Fund, and the Guidelines of the Minister of Regional Development on the programming of activities concerning residential housing. It follows from the above-mentioned acts that the funds available under the Regional Operational Programmes can support residential housing on the following conditions:
If the assistance relates to renovations of existing buildings or adjustment of buildings for the use of persons with special needs (new buildings cannot be constructed).
Assistance will cover renovations and modernising of (exclusively) common areas of existing multi-apartment buildings (roof, facade, windows and doors, staircases,
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internal/external corridors, entrances and elements of the external structure, lifts, technical fittings and thermal insulations).
The investments have to be included in the Local Revitalisation Programme.
The area of investment support in which housing projects will be implemented is hedged about by stricter conditions than those applied to the area covered by the entire revitalisation programme. The criteria for defining this former area, adopted for the Polish ground in accordance with article 47, section 1 of Regulation (EC) No 1080/2006, are constituted by the following socio-economic indicators:
high level of poverty and exclusion,
high rate of long-term unemployment,
high level of crime and delinquency,
low rate of economic activity,
comparably low value of residential housing resource. The reference values at the regional levels are given by the relevant guidelines. To sum up the conditioning of the residential housing in Poland, and the conditions for obtaining assistance for investment activities in this sector, one can ascertain that it will probably be very difficult for potential applicants to obtain the assistance. On the other hand, this sector is accustomed to cooperation with financial institutions on the implementation of most of its projects using repayable financing, which means that entities operating within the sector would find it relatively easy to adjust to the conditions of the new JESSICA instrument. The Consultant identified several projects in this area, which could potentially be financed with the assistance of JESSICA (more about it in Section 4.3).
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5 Objective 5: Implementation action plan The aim of Objective 5 is to propose a practical medium-term action plan for JESSICA in the Regions for years 2008-2010, which will take into account results of the actions described in Objectives 1 to 4 above, including description of pilot JESSICA Funds and pilot JESSICA Projects.
5.1 Task 5.1 Evaluation of likely operations of potential UDFs
Task 5.1 Evaluation of likely operations of potential UDFs, with relevant case studies (based on analysis of Pilot JESSICA Projects and including indication of financial instruments that could be used by the UDFs) and/or simulations to test the efficacy of the recommended JESSICA implementation strategy. This evaluation should also include estimation of management costs and tax implications. Operations of potential UDFs can be evaluated in the following aspects: . Evaluation of fund operations possible to carry out at the current stage, taking into account management costs and tax consequences. . Evaluation of the number and development status of potential projects, and the scale and method of UDF contribution to these projects. Aspects mentioned above have been analyzed for each of the Regions within the framework of the following conditions: . The analysis of fund operations is referred to the scale of operations within the resources granted by ROP and the identified number and scope of projects, . It is too early to perform an analysis of financial instruments suitable for individual projects due to limited information about the potential projects. In this case simplified assumptions should be made.
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5.1.1 Wielkopolskie Voivodship
5.1.1.1 Assumptions for UDF operation It is assumed that a UDF will be created in Wielkopolskie Voivodship in accordance with the recommended JESSICA structure described in Section 2.4. It is also assumed that a holding fund will operate in accordance with the assumptions presented in Section 1.3.2. Additional assumptions concerning the UDF have been specified in the table below.
Table 7. Assumptions for the UDF operation in Wielkopolskie Voivodship Parameter Value ROP funds: EUR 40.8 m UDF capital (PLN 160m) Two sections: 1) big cities; Division of fund’s resources 2) medium and small cities Commencement of operations I quarter 2011 Average value of funds assigned to one PLN 5-10m project Number of projects 20-40 up to 3% annually charged as a fixed fee, Overall UDF management costs with incentives and penalties Products loans, guarantees, equity contributions
According to the chart presented in Section 2.4.3, there will be a certain amount of resources assigned within the fund to finance projects in the biggest cities in the Region and in all other cities. The division of the available amount will depend on the decision of the Marshal Office. Determination of the division proportions will influence the number of projects which could receive JESSICA support. In case of allocating most of the funds to projects in smaller cities, it will be possible to finance a larger number of small-scale projects in numerous cities of the Region. In such circumstances the effects of regeneration will be geographically dispersed. Otherwise, when the majority of the fund’s resources is allocated to bigger cities, a smaller number of projects will be executed, but of a larger scale (above PLN 10m worth of support). In case of equal division of the fund into two parts (ca. PLN 80m each) one could expect that ca. 10 projects in big cities (average of PLN 8m per project) and ca. 20-30 projects in medium and small cities (average of PLN 3m per project) will be co- financed. The above mentioned estimates may change in case the fund’s initial capital is increased by the Marshal Office through the contribution of UMWW own resources. At this moment it is difficult to estimate the scale of such a potential increase of the fund’s resources. The scale of the fund (PLN 160m at the beginning) indicates that the value of fund management costs would not exceed PLN 4.8m annually (up to 3% fund value). The amount is sufficient to assure effective fund management and there is a possibility to reduce the cost if several bidders take part in a competition procedure. The remaining assumptions concerning UDF operation are: • UDF will operate as a separate pool of financial resources managed by an institution chosen by HF. • The range of products may include loans, guarantees and equity contributions.
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• In the first three years of operation all UDF resources will have been allocated to regeneration projects. • UDF resources temporarily not allocated to financing regeneration projects will be maintained on bank deposits to generate interest revenue (4% per year). • The average interest rate for the whole portfolio of loans granted by the UDF will be 5% per year. The expected rates of return should be determined by the project risk level. In case of low risk projects, 5% per annum might not be an attractive level for the borrowers. Interest rate level should also be determined with the account of the allowed level of public aid. • Loan tenor will be between 5 and 30 years. • UDF revenue from commissions on the granting of loans may be subject to limitations in order to make UDF attractive as a financing source. Levying commissions is however justified as it will help to recover at least a part of the current operating costs of the fund. • Interest revenue earned on UDF resources temporarily deposited in banks will be taxed at 19% (tax at source) – as with taxation of revenue of a legal entity with its registered office and its management based in the territory of Poland. • Interest revenue from loans granted by UDFs for regeneration undertakings will be levied a 19% tax rate. Only if a UDF is established as an investment fund (under the act on investment funds), or e.g. as a target fund, will it be exempted from tax. In such case, revenue of entities participating in the investment fund would be subject to taxation to the extent of profits on this investment – as with taxation of net profits on investments in general. Taxation of potential profits on investing in a UDF earned by entities transferring resources to the fund was however outside the scope of analysis. • Capital revenue from the sales of shares in companies will be realized 5-15 years after the establishment of the companies (contributing equity to them). The expected rate of return on equity investments should be lower than average yields of investment funds (above 20%) and they should amount to some 10-20% annually, for instance. • Revenue from granting guarantees will be based on a determined quarterly or semi- annual commission on the amount of the guarantee granted. In case of granting guarantees at the beginning of the fund’s operations (no investment track record available), it will be necessary to create a deposit for the purposes of securing the possible payout of guarantee claims up to the full amount of the guarantees granted, which is tantamount to unavailability of that amount for the financing of other projects. • Profits of entities managing the resources transferred to the UDFs (including revenue from management fee reduced by management costs) will be taxed at the general CIT tax rate.
5.1.1.2 Possible UDF activities It is assumed that the fund will be a financial institution which will not only address enquiries of potential borrowers but will also take active part in discussions with project promoters on the correct preparation of projects. The operational strategy of the fund, its business plan and all the operational procedures will be developed by the UDF and agreed with the Managing Authority and the HF before the UDF operational phase starts. The main areas of the fund operations are: . Selection of projects on the basis of project information available in the Marshal Office. Project fiches were completed by the towns/cities in November 2008, and collected by the Marshal Office. The amount of obtained information is limited but it
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indicates the nature of the projects. Many of them are interesting but they are still at the concept stage, in which financial efficiency of a project is difficult to verify. Further collection of information is possible. It would be worthwhile to conduct another survey after the towns/cities have been provided with guidelines for the preparation of IUDP and of projects for JESSICA (e.g. including information about the scope of available products of the fund); . Consulting assistance for future borrowers at the project preparation stage (assistance in the preparation and structuring of projects). If there is a high demand for project co-financing by equity contributions, it will be important to have personnel experienced in equity investments (employed or contracted) capable of being actively involved in the phase of creation of special purpose vehicles. By the time the UDF is established, this task should be carried out by the holding fund or the Managing Authority; . Providing financial assistance (loans, guarantees, equity contributions) on preferential conditions but with convenient forms of security (bills of exchange, mortgage); . Current monitoring of UDF involvement in individual projects; . Sale of equity stakes in entities executing projects to another investor, as a form of exit from equity investments; . Restructuring of involvement in line with the needs and collection of outstanding receivables. Due to the limited amount of information available on the future projects, it is difficult to specify the share of loans, guarantees and equity contributions. One has to bear in mind that investments through equity contributions can generate higher return but they do not ensure current receipts to the fund, needed to cover its operating costs. An advantage of equity contributions from the project perspective is that no financial costs are expended on a day-to-day basis, however for the fund it means incurring costs of investment preparation and monitoring without any current receipts. If the fund is only used to provide equity contributions, it will be necessary to secure some of the resources for the purpose of covering future UDF operating costs. This will diminish the amount of fund resources available for projects co-financing. Therefore, equity contributions should not be the only form of investment. The fund should also grant loans and guarantees which will secure regular receipts to the fund. One can expect that for small projects implemented in towns, the basic product will be loans granted to self-government entities or other public sector bodies. In practice, such loans would then be taken by towns or municipal companies with repayment guarantees given by the towns. Interest on such loans can be low due to the low risk of the borrower’s insolvency. For large projects, the basic products will be loans and equity contributions. It is difficult to estimate the extent to which the financial instrument will depend on the complexity of project structure. Projects with a short implementation period and comparatively simple are likely to use loans, while larger-scale projects with complex ownership structures will probably require equity contributions.
Table 8. Illustrative tasks of a UDF acting as a lender Before Operations Preparation of the business plan (involving operational budget, the ownership, co-financers, targeted market of urban projects the provision on professionalism, competence, and independence of the management, intended use of Structural Funds, the exit policy, the winding up provisions)
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Definition of investment strategy Definition of the credit analysis criteria Human resources policies Recruitment of related staff Negotiating and signing of the funding agreement with the Managing Authority or Holding Fund Market assessment During Operations Credit analysis (business evaluation, project evaluation, public benefit evaluation) Financial operations (Liquidity management, returns and receipt management) Risk management and monitoring (project risk management, monitoring and control of the operations, debt management) Accounting and reporting (bookkeeping, asset valuation, income monitoring, preparation of accounting statements) Definition of loan parameters Administrative (preparation of board meetings, meeting minutes, payments and foreign exchange, archive)
Source: materials of the Council of Europe Development Bank and the European Investment Bank
5.1.1.3 Case study – Sports shooting range in Piła The available information on the project of expanding the sports facility in Piła is presented in Section 4. The information gathered suggests the need for the following UDF activity: . It will be beneficial to support the future borrower at the stage of project development; . The most likely UDF product is a loan.
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5.1.2 Zachodniopomorskie Voivodship
5.1.2.1 Assumptions for UDF operation It is assumed that a UDF will be created in Zachodniopomorskie Voivodship in accordance with the recommended JESSICA structure described in Section 2.4. It is also assumed that a holding fund will operate in accordance with the assumptions presented in Section 1.3.2. Additional assumptions concerning the UDF have been specified in the table below.
Table 9. Assumptions for the UDF operation in Zachodniopomorskie Voivodship Parameter Value ROP funds: EUR 20m UDF capital (PLN 80m) One fund equipped with resources coming Division of fund’s resources from two Measures within ZROP (5.5 and 6.6) Commencement of operations I quarter 2011 Average value of funds assigned to one ca. PLN 5m project Number of projects 10-20 up to 3% annually charged as a fixed fee, Overall UDF management costs with incentives and penalties Products loans, guarantees, equity contributions
According to the chart presented in Section 2.4.4, regeneration funding comes from two measures of the Zachodniopomorski Regional Operational Programme: Priority Axis 5 “Tourism, culture and regeneration”, Measure 5.5 “Regeneration of degraded areas”, and Priority Axis 6 “Development of metropolitan functions”, Measure 6.6 “Regeneration of degraded metropolitan areas”. As the distinction between priority axes influences the location of projects which can benefit from a given measure, it will be necessary to determine the limits of the fund’s involvement in the Szczecin Metropolitan Area and other cites/towns. The scale of the fund (PLN 80 million at the outset) indicates that the value of fund management costs would not exceed PLN 2.4 million per year (up to 3% of the fund value). This amount may not be sufficient to ensure an effective fund management, especially in the cases when the complexity of project structures (integrated projects) may increase the number of tasks to be completed at the stage of consultations and project preparation. One cannot expect that as a result of a tender this amount might be considerably reduced below the 3% of the fund value. It is potentially possible to conduct a tender jointly with Wielkopolskie Voivodship authorities in order to select a UDF operator. In such case, the scale of the joint funds should allow for a reduction of management costs. The remaining assumptions concerning UDF operation are: • UDF will operate as a separate pool of financial resources managed by an institution chosen by HF. • The range of products may include loans, guarantees and equity contributions.
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• In the first three years of operation all UDF resources will have been allocated to regeneration projects. • UDF resources temporarily not allocated to financing regeneration projects will be maintained on bank deposits to generate interest revenue (4% per year). • The average interest rate for the whole portfolio of loans granted by the UDF will be 5% per year. The expected rates of return should be determined by the project risk level. In case of low risk projects, 5% per annum might not be an attractive level for the borrowers. Interest rate level should also be determined with the account of the allowed level of public aid. • Loan tenor will be between 5 and 30 years. • UDF revenue from commissions on the granting of loans may be subject to limitations in order to make UDF attractive as a financing source. Levying commissions is however justified as it will help to recover at least a part of the current operating costs of the fund. • Interest revenue earned on UDF resources temporarily deposited in banks will be taxed at 19% (tax at source) – as with taxation of revenue of a legal entity with its registered office and its management based in the territory of Poland. • Interest revenue from loans granted by UDFs for regeneration undertakings will be levied a 19% tax rate. Only if a UDF is established as an investment fund (under the act on investment funds), or e.g. as a target fund, will it be exempted from tax. In such case, revenue of entities participating in the investment fund would be subject to taxation to the extent of profits on this investment – as with taxation of net profits on investments in general. Taxation of potential profits on investing in a UDF earned by entities transferring resources to the fund was however outside the scope of analysis. • Capital revenue from the sales of shares in companies will be realized 5-15 years after the establishment of the companies (contributing equity to them). The expected rate of return on equity investments should be lower than average yields of investment funds (above 20%) and they should amount to some 10-20% annually, for instance. • Revenue from granting guarantees will be based on a determined quarterly or semi- annual commission on the amount of the guarantee granted. In case of granting guarantees at the beginning of the fund’s operations (no investment track record available), it will be necessary to create a deposit for the purposes of securing the possible payout of guarantee claims up to the full amount of the guarantees granted, which is tantamount to unavailability of that amount for the financing of other projects. • Profits of entities managing the resources transferred to the UDFs (including revenue from management fee reduced by management costs) will be taxed at the general CIT tax rate.
5.1.2.2 Possible UDF activities It is assumed that the fund will be a financial institution which will not only address enquiries of potential borrowers but will also take active part in discussions with project promoters on the correct preparation of projects. The operational strategy of the fund, its business plan and all the operational procedures will be developed by the UDF and agreed with the Managing Authority and the HF before the UDF operational phase starts. The main areas of UDF activities are: . Consulting assistance for future borrowers at the project preparation stage (assistance in the preparation and structuring of projects). The amount of currently available information is limited as most of the projects still require defining in detail.
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Some of the projects have been defined at the occasion of preparing Local Regeneration Plans for IRDOP 2004-2006 and should now be redefined in order to meet the condition of revenue generation by the project. The newly created integrated projects require thorough analysis with regard to their division into sub- projects so that some of the sub-projects could benefit from UDF financing. If there is a high demand for project co-financing by equity contributions, it will be important to have personnel experienced in equity investments (employed or contracted) capable of being actively involved in the phase of creation of special purpose vehicles. By the time the UDF is established, this task should be carried out by the holding fund or the Managing Authority. . Providing financial assistance (loans, guarantees, equity contributions) on preferential conditions but with convenient forms of security (bills of exchange, mortgage); . Current monitoring of UDF involvement in individual projects; . Sale of equity stakes in entities executing projects to another investor, as a form of exit from equity investments; . Restructuring of involvement in line with the needs and collection of outstanding receivables. Due to the limited amount of information available on the future projects, it is difficult to specify the share of loans, guarantees and equity contributions. One has to bear in mind that investments through equity contributions can generate higher return but they do not ensure current receipts to the fund, needed to cover its operating costs. An advantage of equity contributions from the project perspective is that no financial costs are expended on a day-to-day basis, however for the fund it means incurring costs of investment preparation and monitoring without any current receipts. If the fund is only used to provide equity contributions, it will be necessary to secure some of the resources for the purpose of covering future UDF operating costs. This will diminish the amount of fund resources available for projects co-financing. Therefore, equity contributions should not be the only form of investment. The fund should also grant loans and guarantees which will secure regular receipts to the fund. One can expect that for small projects implemented in towns, the basic product will be loans granted to self-government entities or other public sector bodies. In practice, such loans would then be taken by towns or municipal companies with repayment guarantees given by the towns. Interest on such loans can be low due to the low risk of the borrower’s insolvency. For large projects, the basic products will be loans and equity contributions. It is difficult to estimate the extent to which the financial instrument will depend on the complexity of project structure. Projects with a short implementation period and comparatively simple are likely to use loans, while larger-scale projects with complex ownership structures will probably require equity contributions.
Table 10. Illustrative tasks of a UDF acting as a lender Before Operations Preparation of the business plan (involving operational budget, the ownership, co-financers, targeted market of urban projects the provision on professionalism, competence, and independence of the management, intended use of Structural Funds, the exit policy, the winding up provisions)
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Definition of investment strategy Definition of the credit analysis criteria Human resources policies Recruitment of related staff Negotiating and signing of the funding agreement with the Managing Authority or Holding Fund Market assessment During Operations Credit analysis (business evaluation, project evaluation, public benefit evaluation) Financial operations (Liquidity management, returns and receipt management) Risk management and monitoring (project risk management, monitoring and control of the operations, debt management) Accounting and reporting (bookkeeping, asset valuation, income monitoring, preparation of accounting statements) Definition of loan parameters Administrative (preparation of board meetings, meeting minutes, payments and foreign exchange, archive)
Source: materials of the Council of Europe Development Bank and the European Investment Bank
5.1.2.3 Case study – Quarter 21 in Szczecin The available information on the project of modernization and development of Quarter 21 in Szczecin is presented in Section 4. The information gathered suggests the need for the following UDF activity: . The most likely UDF product is a loan.
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5.2 Task 5.2 Recommendations for JESSICA implementation in the Regions
Task 5.2 Recommendations on how JESSICA should be taken forward in the Regions. This should include practical tools, which should be developed, actions and draft documents, which should be launched to support the application and management of JESSICA and to embed JESSICA in the existing administrative procedures and regulations. A time scope for the implementation of the new structure will also be required. In order to present a medium-term strategy for the JESSICA mechanism implementation, a set of actions required to be carried out to establish urban development funds and start their operational activities has been presented. Because the strategies for implementation are similar for Wielkopolska and Western Pomerania Regions, the set of actions presented below is common for both voivodships. In the first place the description of crucial actions is presented; those actions were then included in a schedule presenting time needed for their completion, their sequence, and interrelations between individual actions. The fundamental process elements described in this Section include: 1. Decision of the Board of Voivodship on changing the way the Regional Operational Programme is implemented 2. Publication of guidelines for drawing up Integrated Urban Development Strategies (IUDS) and defining and preparing projects 3. Conclusion of the Holding Fund management contract between the Managing Authority and the EIB 4. Drawing up draft Regulation on public aid for regeneration and notification of the aid programme 5. Further legal, technical, and business analyses 6. Selection of an Urban Development Fund operator 7. Commencement of UDF operations
5.2.1 Decision of the Board of Voivodship on changing the way the Regional Operational Programme is implemented The first step starting the process is a formal decision on implementing regeneration activities based on the JESSICA mechanism. In the Wielkopolskie Voivodship, this decision may be the conclusion of the „Memorandum of Understanding” between the Wielkoplskie Voivodship Self-Government and the European Investment Bank. Such a decision may also be in the form of a Resolution of the Board of Voivodship. At a later time, the ROP Specification will also need to be amended. Taking such a decision and making it public will be a clear signal to potential beneficiaries as to what rules will be applied at implementing ROPs. It is important to prepare formal arrangements in due advance and to present an implementation schedule for the new vehicle. Participants and their involvement
Voivodship Self-Government
European Investment Bank (if a decision on establishing a holding fund in the EIB is made)
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Tools
Resolution of the Board of Voivodship or other equivalent document
5.2.2 Publication of guidelines for drawing up Integrated Urban Development Strategies (IUDS) and defining and preparing projects This stage should begin with a formal approval of guidelines for preparing IUDSs by cities and making them available. Making quick decisions is crucial because the process of preparing the very strategy takes at least 6 months. As part of work on the strategy, a multidimensional analysis of city areas needs to be drawn up and critical areas need to be identified. The next stage will be to select critical areas for which a strategy will be prepared. Once areas to be subject to regeneration in the first period are selected, work on identification of projects aimed at leading areas out of a critical condition will start. With participation of social and business partners, the process will be subordinated to the adopted objectives of conferring new or restoring old functions to an area. Activities regarding public space and technical equipment will be territorial self-government units' domain and some projects have already been identified and prepared in this field. In addition, as a rule their execution system will not really change: the projects will be financed from cities' own resources. It will not be the same for economic and social projects which, in principle, will be carried out by other entities than Municipal Offices. All projects will be defined in the process of debates with representatives of inhabitants, social organisations operating in assisted areas, and business entities. In the end, the inhabitants and companies will be direct aid beneficiaries so their role is crucial. As a new vehicle, JESSICA will become another potential source of project financing, in addition to public and private resources, bank financing, and EU grants. From talks with cities it is clear that projects which could apply for financing from JESSICA have already been identified. On the other hand, many projects were abandoned in the past because they could not obtain commercial financing. In practice it means that the process of defining projects should be repeated, taking account of the precisely defined assisted areas and current budget situation in cities as well as the new list of financing sources. The process will also be significantly affected by the fact that the JESSICA mechanism and principles of preparing IUDSs force, to some extent, projects to be developed and carried out under various forms of public-private partnerships. It should be noted here that these will be joint projects of cities and private entities such as car parks, swimming pools, etc., but also own projects of developers or other entities which will carry out tasks specified in regeneration programmes and coherent with objectives and assumptions specified therein. Taking additional account of the concept of integrated projects in the strategy being common to both Wielkopolskie ROP and Zachodniopomorskie ROP will lead to complicating and extending the process of preparing projects. It should also be born in mind that regeneration programmes must be approved by City Councils, which will also lead to extending the process of preparing projects. A correct Regeneration Programme is an operational programme with an indicative list of projects to be carried out together with their schedule and financing sources. Due to the fact that the programme will be an integrated programme combining different actions, sectors and entities, there will be several dozen institutions involved in projects. Projects will be in different stages of preparation, which will also impact the schedule for the programme completion. All the above described conditions lead to the conclusion that it will be a long process, requiring a considerable involvement from many institutions. The integrated approach is a well-known approach but it still requires substantial support and significant determination
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from entities involved in it. Support to the process is therefore needed from Marshal Offices and the holding fund (if it has been selected). Having regard to this, the process should start as soon as possible. Participants and their involvement
Marshal Office regarding preparation of guidelines and promotion of the new vehicle
Cities regarding preparation of strategies and new projects, involvement of social and business partners in the process, joint creation of new projects
Holding fund regarding structuring of new projects, cooperation with project promoters Tools
Guidelines for preparing LRPs/IUDSs
Local Regeneration Programmes / Integrated Urban Development Strategies
Design cards and design documentation (feasibility study, formal legal documents)
5.2.3 Conclusion of the Holding Fund management contract between the Managing Authority and the EIB Another action which needs to start once the decision on implementing JESSICA is made is the process of negotiations and preparation of a funding agreement with the holding fund. In accordance with the Consultant’s recommendation presented in Section 2.2, negotiations are to be conducted with the European Investment Bank in relation to its specific role in the process of implementing the JESSICA mechanism and the possibility to select it without tendering procedure. Preparation of relevant documents will precede the conclusion of a contract for managing the holding fund. In accordance with Article 44 of Regulation (EC) 1828/2006, a funding agreement should include at least: 1. the terms and conditions for contributions from the operational programme to the holding fund; 2. a call for expression of interest addressed to urban development funds; 3. the appraisal, selection and accreditation of urban development funds by the holding fund 4. the setting up and monitoring of the investment policy or the targeted urban development plans and projects; the investment policy includes at least information on financial engineering products; 5. reporting by the holding fund to Member States or managing authorities; 6. monitoring the implementation of investments in accordance with applicable rules; 7. audit requirements; 8. the exit policy of the holding fund out of the urban development funds; 9. the winding-up provisions of the holding fund, including the reutilisation of resources returned to the financial engineering instrument from investments made or left over after all guarantees have been honoured which are attributable to the contribution from the operational programme. The process of negotiations and preparation of the agreement will last several months, which is appreciably related to the lack of relevant and explicit legal regulations. In principle, this concerns the issues mentioned in Point 1 above, i.e. formal legal conditions for transferring resources from local operational programmes to a holding fund.
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The existing legal regulations on implementation of aid do not actually provide for any support vehicle other than a grant. This means, in practice, that many issues is solved on the basis of interpreting legal provisions. At the same time, neither the Ministry of Regional Development nor the Ministry of Finance issue explicit and common interpretations. The assessment of legal solutions will be additionally verified by Voivodship Treasurers and Regional Chamber of Auditors, and by the Supreme Chamber of Control and other controlling institutions. This does not facilitate decision-making. Furthermore, different interpretations of legal provisions on transfer of resources are applied in different regions. This and other issues are currently the biggest barrier to implementation and will be subject to further legal analyses. Points 2 to 4 listed above will mainly constitute a contribution of the European Investment Bank to the process. Regarding Point 3, at present it is not possible to indicate urban development funds because such fund do not exist in Poland. Furthermore, in accordance with legal provisions such funds shall be selected in a tender open by a holding fund. At this stage it appears that it would be sufficient to present institutions which would express their interest in acting as operators of such a fund. Points 5 to 7 will be a compilation of internal procedures of the EIB and requirements of the Managing Authority concerning monitoring, reporting and control of EU resources. Points 8 and 9 will be subject to further legal analyses, in particular with regard to the exit strategy of the holding fund out of the JESSICA mechanism. There are two options to consider: to resign completely from such institutions, or to change the fund operator. This means, in practice, that the agreement between the Managing Authority and the Holding Fund should be prepared in such a way that UDFs may be supervised in the future regardless of the fact whether a HF exists and what institution is holding this position. To sum up, further legal analyses must precede the conclusion of an agreement between the Managing Authority and the holding fund. This means that analyses will need to be drawn up which will affect detailed legal structures and, in consequence, operating costs of the holding fund in the future, in addition to negotiating commercial conditions, i.e. level of remuneration and service standards. Once the management contract is concluded, the holding fund will be obliged to prepare a Business Plan which, according to Article 43 of Regulation (EC) 1828/2006, shall specify at least the following:
the targeted market of urban projects and the criteria, terms and conditions for financing them;
the operational budget of the financial engineering instrument;
the ownership of the financial engineering instrument;
the co-financing partners or shareholders;
the by-laws of the financial engineering instrument;
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 of the financial engineering instrument concerning exit from investments in enterprises or urban projects;
the winding-up provisions of the financial engineering instruments, including the reutilisation of resources returned to the financial engineering instrument from investments or left over after all guarantees have been honoured, attributable to the contribution from the operational programme.
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The scope of the document presented above mostly coincides with contractual provisions. It is its specification – an operational plan which will be subject to periodic analysis and monitoring by the Managing Authority. Participants and their involvement
Marshal Office
European Investment Bank
Ministry of Regional Development
Ministry of Finance
Legal offices
Consulting companies Tools
Feasibility analysis
Business studies
Executive Regulations
5.2.4 Drawing up draft Regulation on public aid for regeneration and notification of the aid programme Granting financial support under the JESSICA initiative will constitute public aid. Regulation of the Council of Ministers of 11 August 2004 on the detailed method of calculating the value of public aid granted in various forms specifies the methodology of calculating the permitted value of public aid. In accordance with the Regulation, public aid is:
for loans – the difference between the discount value of interest from an analogous loan or credit granted on market conditions (according to reference rate28) and the discount value of interest paid from a loan granted under the JESSICA mechanism,
for guarantees – the product of the amount of liability guaranteed and the difference between the reference rate and the rate granted with a State guarantee. Except for de minimis aid, public aid is granted only under aid programmes or in the mode of individual aid. In the case of JESSICA, an aid programme in the form of a normative act (Regulation) will need to be drawn up, which will specify legal basis for granting specific support to entrepreneurs parallel to defining terms and conditions for granting the support, including but not limited to:
the group of beneficiaries;
the form of support (loan, guarantee, warranty, equity contribution);
the destination (e.g. regeneration, training, environmental protection, increase in employment, restructuring);
granting bodies;
the maximum support volume;
programme duration. Before an aid programme comes into force, it must be approved by the European Commission. To do this, it must be first notified to the Commission. Decision on notifying a programme is taken by the Council of Ministers, after examining the opinion of the President of the Office of Competition and Consumer Protection (UOKiK) on the programme
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compliance with the common market principles. Once the Council of Ministers has approved the notification, the President of the UOKiK submits the required notification in the European Commission. The draft Regulation of the Minister of Regional Development on granting aid for regeneration under Regional Operational Programmes has partly undergone this procedure and was notified on 19 September 2008. In accordance with the aforesaid path, it was submitted to the European Commission for approval. The problem is that the aforesaid Regulation only refers to grants and may therefore not be the basis for granting aid under the JESSICA mechanism. A new aid programme will need to be drawn up, which will provide for such support as loans, warranties, guarantees, and equity contributions. It is crucial that such a Regulation is prepared, as otherwise it will only be possible to launch the JESSICA vehicle on market conditions, e.g. in the case of loans – above the minimum reference rates. In practice, each support request will need to undergo an analysis of reference rate which will take account of the financial stand of a beneficiary and his level of securities29. It will only be possible to acknowledge whether proposed financial conditions are public aid or not once the reference rate for a given undertaking is determined. If they are, aid may not be granted because no aid programme will be established. Preparing and approving an aid programme is a long and complicated process. It is worth noting that the first version of the draft Regulation on grant support for regeneration processes was submitted for departmental arrangements in August 2007 (no information on how long it took to prepare the text of the Regulation); the version accepted by the Council of Ministers (after departmental arrangements) was published one year later and submitted to the European Commission for approval in September 2008. The analysis of approval time for other aid programmes shows that the European Commission approves aid programmes no earlier than after 100 days, whereas the average programme approval time is 280 days30. Preparing a draft Regulation on public aid taking account of financial engineering instruments will certainly be a difficult task. Therefore, all parties interested need to be mobilised to the maximum to drawn up the aid programme and have it approved efficiently. All entities which may accelerate the process will need to be involved. Participants and their involvement
Marshal Offices
Government Legislation Centre
Ministry of Finance
Ministry of Regional Development
Office of Competition and Consumer Protection
European Commission
Holding Fund
European Investment Bank
Council of Europe Development Bank Tools
Draft Regulation
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5.2.5 Further legal, technical and economic analyses A series of legal, organisational and business issues have to be settled in order to establish urban development funds. JESSICA initiative is a new approach to urban regeneration on a European scale and existing legal regulations do not refer to such approach. This implies that Marshal Offices do not have a legal vehicle to transfer funds to HF and have to interpret (clarify) regulations rather than use a specific regulations for this purpose. Legal analyses have to be conducted to lead to a situation in which all interested parties have one and unified interpretation of legal regulations. In addition, each Region has its own economic specifics and its specific regional development policy. This means that in each Region the implementation of the initiative will be done in a different way, which then means that potential HFs and UDFs will exist in different business conditions. Further analyses of regeneration projects and institutions potentially managing UDFs will be necessary regarding each regional market. A large part of these tasks has been included in Section 5.3 and should be supported by further technical assistance for Regions interested in implementation of JESSICA initiative. These actions will be taken during the entire implementation period till the establishment of urban development funds. Participants and their involvement
Marshal Offices
Government Legislation Centre
Ministry of Finance
Ministry of Regional Development
Office of competition and consumer protection
European Commission
Holding Fund
European Investment Bank
Bank of the Council of Europe
Municipal Offices
Potential project promoters
Legal firms
Business advisers Tools
Interpretation of legal regulations
Guidelines
Feasibility studies
Expert opinions
5.2.6 Selection of a UDF operator This task will belong to the holding fund. In line with the Consultant’s recommendation, the process will include two stages. In the first instance, calls for Expressions of Interest will be sent to financial institutions potentially capable of performing the UDF role. After clarification of all legal issues, the HF will be in a position to prepare the final version of competition documentation, in which duties of an urban development fund will be determined in detail. Documentation prepared in this way will be sent by HF to entities which would declare their preliminary readiness to perform the role of a fund operator. Page 153 Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce January 2009
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In the outcome of the competitive procedure applied by EIB (HF), an operator of an urban development fund will be selected. In the next step HF will conclude an agreement with it. In line with Commission Regulation (EC) No 1828/2006 Art 43(6), the agreement will include at least:
investment strategy and planning;
monitoring of implementation in accordance with applicable rules;
exit policy for operational programme contribution out of the financial engineering instruments;
the winding-up provisions of the financial engineering instrument, including the reutilisation of resources returned to the financial engineering instrument from investments or left over after all guarantees have been honoured that are attributable to the contribution from the operational programme. Participants and their involvement
Holding Fund – EBI
Marshal Office
Financial institutions Tools
Competition documentation
Draft funding agreement
Bids from potential UDFs
5.2.7 Commencement of UDF operations Following its selection, in the initial period UDF will focus on marketing activities and preparation of operations (preparation of necessary documents, establishment of a regional office etc.). After the mobilisation period, enrolment of applications and their evaluation will begin. The possibilities and options regarding UDF operation are discussed in Section 5.1. Participants and their involvement
Urban Development Fund (UDF)
Marshal Office
Holding Fund
Municipal Offices
Individual project promoters
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5.2.8 Time schedule For the purposes of presenting the sequence of actions and relations between them, the following schedule in the form of a Gantt chart has been prepared.
Chart 22. JESSICA implementation schedule
Acceptance by MA of JESSICA implementation plan agreed with EIB Preparation of LRP/IUDP and projects Preparation of an investment strategy Conclusion of a HF funding agreement between MA and EIB HF operating activities Drawing up draft Regulation on public aid Notification of public aid scheme for JESSICA projects Further legal, technical and business analyses MA / HF guidelines on LRP / IUDP and project development Sending an Expression of Interest to potential UDF operators Preparation of documentation for the tendering procedure to select an UDF operator Tendering procedure to select an UDF operator Concluding the agreement with the UDF operator UDF marketing activities; defining and structuring projects Commencement of UDF operating activities
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5.3 Task 5.3 Further technical assistance for the Regions
Task 5.3 Identification of the need for further technical assistance for the Regions in implementing JESSICA in the various areas (including establishing of HFs/UDFs) and identification of essential components of the envisaged technical assistance. This should also include suggestions for subsequent studies, if required. Further technical assistance for the Regions will be determined by the choice of a specific JESSICA model, which could vary from the one proposed in this report, and ability of the Marshal offices to independently prepare and implement the JESSICA initiative. The scope of the needs may be different in the case of every Region. Regions may learn from each other’s experience in order to improve the JESSICA implementation process. From the Consultant’s point of view, two areas of necessary technical assistance are currently identified, regardless of the Region:
Legal analyses and expert opinions, including recommendations of changes in legal regulations,
Technical assistance during the organization of fund set-up process and project preparation, including elements of legal assistance; and above all, transaction and financial advisory. The first stage of the process will be the establishing of holding funds. Setting up such a fund will probably not be well-grounded for every Region, however it is important to ensure access to experience of the Regions which have created holding funds. During HF set-up stage the key element will be to prepare their operations in formal and legal terms, together with ensuring efficient functioning of UDFs in the future. Key problems which would need to be solved in the nearest time are: 1. Agreeing an interpretation of regulations regarding the use of European Union funds in order to clarify the possibilities and rules of transferring the funds from the MA to the HF, and in particular: a) Principles of certifying payments to EC b) Legal basis of transferring resources to HF/UDF c) Legal basis of relations between MA and HF/UDF d) Ownership and financial resources utilization strategy after 2015 2. Legal analysis of options of changing the entity managing the HF/UDF and procedures of possible liquidation of these entities. 3. Preparation and notification of the assistance program for JESSICA. The next stage, during which further technical assistance might be needed, is establishment and operation of UDFs. Technical assistance at this stage may include:
Preparation of tender documents and assistance during the evaluation of submitted applications.
Assistance during determination and verification of selection criteria for projects eligible for financing from the UDF.
Independent audits of UDF operation The subsequent stage of the assistance is the preparation of projects for UDF financing. At this stage technical assistance may have a much wider scope and include:
Assistance regarding the generation and preparation of individual projects
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Assistance in project evaluation as regards tasks performed by external advisors (legal, technical, environmental, financial and economic issues)
Assistance in project execution and implementation and investment monitoring processes.
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5.4 Task 5.4 Documents used in the process of UDF operator selection
Task 5.4 Preparation of draft documents for calls for “Expression(s) of interest to manage/participate in UDFs” and appraisal of the criteria to be used in the selection process. At the current stage it is assumed that requirements for the fund operator at the stage of Expression of Interest will be defined in one document and differentiation of the scope of requirements subject to the type of entity will not be necessary. It should be of no significance what type of institution will perform the duties of the operator. According to analysis we assume that the most important institutions will be the banks. Despite that fact the EoI should be addressed to any interested institutions. Differentiation of the scope of requirements in respect of the type of fund i.e. HF or UDF may be left for consideration later on. It is suggested to organize the procedure of operator selection in two stages. The aim of the Expression of Interest stage is to perform a preliminary selection of a limited group of entities which will be invited to participate in the further selection process and will prepare detailed bids for fund management. During the EoI stage it would not be useful to demand of the future fund operators to prepare very detailed bids requiring extensive work and financial input. At this stage potential participants should only be conscious of key features of future fund operation. It is only at the next stage that potential operators will be obliged to present priced bids, description of specific instruments applied during fund management, types of projects and reporting and monitoring system. Only institutions which according to MA/HF assessment have potential adequate to perform the role of UDF operator in a specific Region will be qualified for this stage. A preliminary scope of the call for Expression of Interest addressed to potential participants, HFs and UDFs, including a suggestion of application evaluation criteria, is presented below. A call for Expression of Interest should include: Part I. Information regarding UDF operation concept for potential candidates including:
The background of the call
Expected scope and form of fund operation
Specification of important conditions and constraints for the scope of fund operation Part II. Requirements for the candidates, including those regarding the organizational potential:
Description of business profile with an indication of the potential to set up fund operation in the Region
Specification of experience regarding fund management with presentation of human resources potential
Corporate documents Part III. Requirements concerning the general concept of fund operations including work organization system and applied instruments In part III a potential operator should briefly present his concept of the functioning of a JESSICA-type fund. Such description should include among others: organizational structure, risk management system, expected remuneration system etc.
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Evaluation of “Calls for Expression of Interest” may include the following elements:
Experience in fund management (25%)
Ability to perform active operations in the Region (25%)
Proposed work organization system of the fund (25%)
Understanding of the JESSICA initiative (25%) Institutions that would be granted at least 50% points in each of the categories should be invited to participate in the next stage.
5.4.1.1 Draft Call for Expression of Interest See Appendix 1 to the Report.
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Document Verification
Project name JESSICA Evaluation Study – West Poland Project No.
207573
Document title Final Report
Prepared by Checked by Approved by Name Ireneusz Kołodziej Paweł Malinowski Elżbieta Cichońska Piotr Mierzejewski Charles Abel Smith Andrzej Maciejewski Paweł Malinowski Igor Czmyr
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Appendix 1 Draft Call for Expression of Interest for the role of operator of Urban Development Fund established under JESSICA initiative
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Call for Expression of Interest for the role of operator of Urban Development Fund established under JESSICA initiative
1. Basic information Country: Region: Announcement number: Publication date: EOI submission deadline: Language of document:
2. Contact information Full name of Client: Address for correspondence / Address for submission of EoI: Telephone/ fax: WWW: E-mail: Contact person:
3. Introduction [name of voivodship] Voivodship has decided to establish an Urban Development Fund (the Fund) in the framework of the JESSICA initiative (Joint European Support for Sustainable Investment in City Areas) for the purpose of enhancing the effectiveness of absorption of EU funds available under the [name of voivodship] Regional Operational Programme for 2007- 2013, measure [name of measure according to ROP] In 2009, the [name of voivodship] Voivodship and [name of holding fund operator] concluded an agreement for the managing the Holding Fund (HF) established by the Voivodship with the assistance of EU funds available under the ROP for 2007-2013. This Call was prepared with regard to [name of holding fund operator] acting as operator of the Holding Fund.
4. Information on JESSICA initiative JESSICA stands for Joint European Support for Sustainable Investment in City Areas. This initiative is being developed by the European Commission and the European Investment Bank (EIB), in collaboration with the Council of Europe Development Bank (CEB). Under new procedures, Member States are being given the option of using some of their EU grant funding, their so-called Structural Funds, to make repayable investments in projects forming part of an integrated plan for sustainable urban development. These investments, which may take the form of equity, loans and/or guarantees, are delivered to projects via Urban Development Funds and, if required, Holding Funds. By using financial engineering measures, JESSICA aims to create a leveraging effect in attracting additional financial resources for urban renewal and development projects. Through JESSICA mechanisms, the European Regional Development Fund will provide resources which will be managed in a commercial way with the view to generating return on this investment, which will permit retrieving and reusing the EU funds.
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5. General concept of Urban Development Fund operation
5.1 Form of operation of Urban Development Fund [name of voivodship] Voivodship and the Holding Fund operator are intending to establish the Urban Development Fund (UDF) in the form of a separate block of finance within a financial institution subject to specific implementation rules within the financial institution. The key border conditions for the operation of the Urban Development Fund are set by: . Principles of the [name of voivodship] Regional Operational Programme, . Scope of agreement between the [name of voivodship] Voivodship and [name of holding fund operator] for the establishment and operation of the Holding Fund, . EU and Polish regulations on the operation of this type of funds. The anticipated duration of performing the role of the Urban Development Fund operator is [...] years. 5.2 Scope of tasks of Urban Development Fund operator The main areas of UDF activities are: . Consulting assistance for future borrowers at the project preparation stage (assistance in the preparation and structuring of projects). The amount of currently available information is limited as most of the projects still require defining in detail. If there is a high demand for project co-financing by equity contributions, it will be important to have personnel experienced in equity investments (employed or contracted) capable of being actively involved in the phase of creation of special purpose vehicles. . Providing financial assistance (loans, guarantees, equity contributions) on attractive conditions aimed at achieving JESSICA goals; . Current monitoring of UDF involvement in individual projects; . Defining optimal exit strategy from equity investments; . Other activities related to UDF management, such as restructuring and collection of outstanding receivables. During the first […] months (Preparatory Phase), the UDF will focus on marketing activity, and preparation of operations (preparation of necessary documents, establishment of a regional office etc.). With the completion of the Preparatory Phase, the Operational Phase will start, involving the enrolment of applications and their evaluation. It is assumed that the Preparatory Phase should be completed before January 1, 2011. 5.3 Management fee of Urban Development Fund operator It is assumed that the fee of the Urban Development Fund operator will be based on commission, also including incentive and penalty elements to enhance its performance. Any proposals of candidates will be subject to negotiations before the final agreement is concluded.
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6. Operator selection procedure In the outcome of the competitive procedure, an operator of an Urban Development Fund will be selected. In the next step the Holding Fund operator will conclude an agreement with it. In line with Commission Regulation (EC) No 1828/2006 Art 43(6), the agreement will include at least: . investment strategy and planning; . monitoring of implementation in accordance with applicable rules; . exit policy for operational programme contribution out of the financial engineering instruments; . the winding-up provisions of the financial engineering instrument, including the reutilisation of resources returned to the financial engineering instrument from investments or left over after all guarantees have been honoured that are attributable to the contribution from the operational programme. The objective of the Call for Expressions of Interest phase is to preliminarily select a small group of entities which will be invited to enter the following phase of the process, and will prepare detailed bids for performing the role of Urban Development Fund operator. Evaluation of Expressions of Interest will include the following elements: . Experience in fund management . Ability to perform active operations in the Region . Proposed work organization system of the Urban Development Fund . Understanding of the JESSICA initiative principles. 7. Requirements for candidates The entities interested in operating the Urban Development Fund should provide the following information and documents in their Expressions of Interest: A) Description of business profile with an indication of the potential to set up fund operation in the Region, including at least: i. Key principles of the business operation policy ii. Organisation structure iii. Information on the offices operating in the Region and in other parts of Poland B) Specification of experience regarding fund management with presentation of human resources potential in the Region C) General description of the UDF organisation, including inter alia: i. Proposed work organisation system of the Fund, ii. Tools which may be used, iii. UDF organisation structure defining key interfaces between its main elements, iv. Possible risk management systems to be used, v. Expected remuneration system. D) Corporate documents . Financial reports for the last three financial years . Statute of the entity . Management profiles . Profiles of experts managing the fund assets. Appendix 1 Page 4 Ove Arup & Partners International Limited Sp. z o. o. Oddział w Polsce January 2009