1

The Role of the JESSICA Holding Fund in Bulgaria

Implementation of the JESSICA Initiative in Bulgaria

JESSICA and Investment Funds

European Investment Bank

Stara Zagora, 7 April 2011

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What is JESSICA?

Initiative of the European Commission (DG REGIO) launched beginning of 2006,supported by EIB & CEB, to establish a common approach for financing urbandevelopment and strengthening the urban dimension in cohesion policy throughthe “transformation of grants” in repayable/recyclable assistance

Applying “financial engineering” techniques to EU Structural Funds

More efficient and effective utilisation of Structural Funds through tailor made“non-grant financial instruments” and mobilising additional financial resources

Financial and managerial expert support of international financial institutions(EIB, CEB)

JESSICA: Joint European Support for Sustainable Investment in City Areas

MISSION: To assist European cities in defining long-term, sustainable

and viable patterns of development through investment activity

financed with the utilization of “revolving” financial instruments.

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JESSICA implementation model

HF Manager

European Commission

ERDF – DG Regio

Managing Authority

EU

Level

Na

tio

nal /o

r

regio

nal

Level

Holding Fund (« HF »)

Urban Development

Funds

Na

tio

nal/re

gio

nal

/Local Level

Re

gio

nal /L

oca

l

Level

ProjectsSustainable Urban Development Plan

€ € € €

€€€€

€

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Urban Development Fund (UDF) as an urban impact fund:

a specific policy tool within the wider financial engineering concept in the programming period 2007-2013

to promote, by employing Structural Funds in close cooperation with DG-REGIO, the development of a system of financial engineering instruments (so-called Urban Development Funds) for urban development

policy-driven, geographically-focused and planning-led investmentvehicle supporting the sustainable transformation processes of city areas

impact investing to be seen as a new asset class requiring specific investment skills, organisational structures, metrics and benchmarks.

The terms “impact funds” or “impact investors” refer to investors and investment vehicles that have an interest, in addition to achieving remuneration to their

investment, in achieving measurable “impacts” (in our definition “sustainable ERR target”) on policy-defined, non-financial objectives, constituting a key dimension

in the investment vehicle performance assessment.

UDFs as "impact funds" for urban transformation

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Urban regeneration funds (mainly area-based)

“Place making” locations / incubators / creative class attractors

Brownfield locations, mostly in inner city areas

Deprived city districts, urban sprawl voids

City infrastructure transformation funds (for city systems)

Addressing infra / urban imbalances from changes in city hierarchy

Focusing on the provision of capital in less competitive areas

Focusing on transformation of strategic urban infrastructure

IT broadband, waste to energy, water, electric public transport, etc.

Energy-focused funds (regional or city-based)

EE / RE and energy / emission audit /certification systems

Climate action strategies (EU 20/20/20 targets in urban areas)

Regional upgrade of green technology and transmission systems

Which types of UDFs?

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Key implementation stages:

0Pre-negotiation Stage/ HF

Agreement to be signed in 2010

1

HF Agreement signed/ Investment

strategy/ Investment board

2Call(s) for Expression of Interest

in preparation

3Call(s) for Expression of Interest

launched

4Call(s) for Expression of Interest

closed

5 UDF(s) selected

6Operational agreements in place

(HF/ UDF)

Stage Achieved

Implementation of the stage imminent

Signature expected in coming months

Legend

State of play of existing JESSICA mandates

Managing AuthorityVolume (EUR

m)HF FA 0 1 2 3 4 5 6

HF - Wielkopolska (PL) 67 II/09

HF - Andalucía (ES) 86 II/09

HF - Lithuania (LT) 227 II/09

HF - Portugal (PT) 130 III/09

HF - WestPomerania (PL) 33 III/09

HF - London (UK) 110 IV/09

HF - NorthWest England (UK) 110 IV/09

HF - Sicily (IT) 148 IV/09

HF - Moravia Silesia (CZ) 20 I/10

HF - Campania (IT) 100 I/10

HF - Scotland (UK) 55 II/10

HF - Greece (GR) 258 III/10

HF - Silesia (PL) 60 III/10

HF - Pomerania (PL) 57 III/10

HF - Bulgaria (BG) 33 III/10

Total signed 2010 1,494

HF - Energy Efficiency (ES) 142 II/11

HF - Galicia (ES) 15 II/11

HF - Sardenia (IT) 60 II/11

HF - Masovia (PL) 40 II/11

HF - Abruzzo (IT) 25 III/11

HF - Czech National Fund (CZ) 40 III/11

HF - Hungary (HU) 50 III/11

HF - Slovakia (SK) 20 III/11

HF - North East (CZ) 20 IV/11

Total expected 2011 412

Total 2010 + 2011 1,906

EIB Holding Fund mandate Implementation progress

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62 Evaluation Studies (national, regional, sectoral)

18 Memoranda of Understanding on cooperation in JESSICA implementation

By the end of 2010, EUR 1.65 billion of Structural Funds has already been legally

committed to 19 JESSICA HF / UDF vehicles in 11 Member States (and nearly

50 NUTs-2 regions):

15 Holding Fund agreements signed by EIB (EUR 1.49bn)

1 Holding Fund set up with a national financial institution (Estonia)

3 Urban Development Funds established without Holding Fund (Brandenburg/DE,

East Midlands/UK and Wales/UK)

7 fund structures out of 19 have an energy component, committed to invest

amounts of up to EUR 784m in energy efficiency and renewable energy

infrastructure

UDF selection and disbursements to final recipients take place in all JESSICA

countries

State of play of existing JESSICA mandates

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1. EU & globalization => “single market for cities” (1200 – 2000 functional urban areas compete for scarce resources: Human capital, Economic activity, Budgetary transfers, etc.)

2. MS and regions face difficult challenges in ensuring the transformation of the urban systems due to both market and institutional factors

3. New modes of interaction with the private sector to achieve public goals

4. National budget discipline ( pressure on sovereign and municipal debt levels; limits on transfers from national to local level; lower expenditure capacity of cities for investment without taking on additional debt

5. De-leveraging of banking activity (financial markets offer less co-financing for investment activity)

6. Highly volatile real estate economic cycle (from overinvestment & over-aluation to under-investment and under valuation )

7. Impact on viability of private investments (PPPs) in urban infrastructure and urban development

8. Reduced collateral value of land and buildings in non-core areas

9. Institutional investors reshuffling their sovereign and sub-sovereign portfolios

10. End of baby-boomers’ era => from asset accumulation to management of existing property and infrastructure

Global challenges in urban transformation

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Livebirths in Germany and

Central-Eastern Europe, 1970-2007

200000

300000

400000

500000

600000

700000

800000

900000

1000000

1100000

19701973

19761979

19821985

19881991

19941997

20002003

2006

DE

PL + Baltics

CZ + SK + HU

RO + BG

1980

2005

-21%

-47%

-45%

1989

-36%

The Central EU demographic scenario

Births & Deaths in Bulgaria

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Births

Deaths

Population in Bulgaria

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

According to Eurostat, Bulgaria is expected to illustrate the sharpest decline among EU Member States between 2008-2060:

2008-2035: -14.5% 2008-2060: -28.2%

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Development of Sofia area, Bulgaria

Holistic Approach Urban wealth (Natural, Fixed, Human, Economic)

Jobs & economic activity

Financials / Fiscal

Sustainability

Capital & enterprise transfers

Human capital ageing / migration

Asset value creation processes

… focus on the functional urban area (Urban Labour Market Areas, ULMAs) and the role of European Metropolitan areas over the next 20 years

Integrated urban investment strategy for highly dense functional areas

Functional urban areas and metropolitan areas

Population density in Bulgaria

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11

Retirement Dependency Ratio(65%+ / 15-64)

Ageing impacts on city infrastructure functionality and public finance

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Geography matters:

Transform your city areas into growth poles

Focus on latent capital

Keep your cities “slow”/ “low cost” (maintenance, obsolescence)

Think new ways to finance inner city areas, housing stock refurbishment

Attraction from external sources is crucial (investment, capital…)

For all this, combine various sources of leverage

– Regions: SF

– Cities: land & buildings

– Banks: financial resources

– Private: additional resources

1970

2030 (?)

2010

2030 (?)

2010

Inflation

Public debt

Banking leverage

City Operating cash flows, Technological progress,

Foreign Direct Investment Efficiency/Reprocessing

Pension rights

Increasing value of land rent and

buildings

Urban sprawl

What drove growth in 1970-2010?

What will happen to these (largely financial) drivers in 2010-2030?

Raising “financial resources” for cities

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A macroeconomic conclusion for urban policy:

• For 30 years, (urban) expansion took place naturally, because of market forces and demographic (baby boom) factors• Cities initially built on revenue generation, later expanded via debt/consumption

• In the next 30 years (ageing process), the process of urban transformation must be guided in a completely different way as compared to the past• What will additional debt be used for? Not for debt-addict structures

• The core element is to have efficient, productive, attractive and livablecities characterized by low maintenance/management costs and low “break-even point” on fixed assets• Competitive cities in a shrinking/restructuring environment

• Can be achieved by rationalization, reprocessing, restructuring and optimization at the urban level with a focus on sustainability

Global challenges: Conclusions

Cities need clear objectives, strategic planning, a roadmap,

governance, technical data and systems to tackle market distortions/

long-term risks - managed through strategic impact investors.

Implementation of the JESSICA Initiative in Bulgaria

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Current status of JESSICA in Bulgaria

Completed pre-implementation phase

Funding Agreement between the EIB and the Government of the

Republic of Bulgaria signed on 29 July 2010

JESSICA Holding Fund for Bulgaria organised as a separate block of

finance within EIB established

UDFs selection procedure launched (call for the EoI)

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The role of the EIB at the current stage in Bulgaria

Operating the JESSICA Holding Fund for Bulgaria on the basis

of Regulations specifically providing for EIB involvement and in

line with the Funding Agreement:

Launching and managing of one or more calls for EoI to identify

and select one or more UDFs for submission for approval to the

Investment Board

Negotiating of the Operational Agreements with UDFs

Monitoring and controlling of the UDFs operations in accordance

with the terms and conditions of the applicable Operational

Agreement

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Flow of funds within JESSICA in Bulgaria

Directorate General “Programming of Regional

Development” in the Ministry of Regional Development

and Public Works

JESSICA HF for Bulgaria (managed by the EIB)

Urban Development Funds (UDFs) selected through the Call for EoI

Contribution from OP

(2010)

Urban projects conform to the criteria of the Investment Strategy and are

compliant with eligibility and state aid rules

Investment into UDF

(2011)

Loans, equity or guarantees

for projects

(2011-2015)

Resources repaid from

projects to UDF

(2015 )

EUR ca. 31.3 m

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Call for EoI – Structural Elements (1/2)

2 Lots

Amount to be invested - EUR ca. 31.3 m - divided into two lots:

Lot 1: EUR ca.12.5 m earmarked for investments in Urban Projects in Sofia

Lot 2: EUR 18.8 m earmarked for investments in Urban Projects in the sixmajor cities of Bulgaria (Plovdiv, Stara Zagora, Burgas, Varna, Ruse andPleven)

Structure of the Call for EoI

Annex 1 – General Information about the Applicant

Annex 2 – Declarations to be made by the Applicant

Entry in trade register, representative, representations on not being subject to insolvencyproceedings, conflict of interest as well as on compliance with public law obligations (tax, socialsecurity)

Statement of relevant experience (execution of different types of Urban Projects and different rolesheld by the applicant in the project)

Supporting documents

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Call for EoI – Structural Elements (2/2)

Annex 3 – Terms of Reference

Background of JESSICA and its operational characteristics

Amount allocated to the Call for EoI

Selection procedure and criteria (exclusion and selection criteria)

Business Plan template

Characteristics of potential Urban Projects

Financial model

Conditions for the financial products

Management fee

Award criteria (Appendix A)

Selected Terms of the Operational Agreement (Appendix B)

Instructions on Financial Forecasts and Operational Budget of the UDFs, incl. financial statements

template (Appendix C)

Instruction on Economic Analysis of Urban Projects (Appendix D)

Definitions and Abbreviations (Appendix E)

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EoIs Evaluation Principles

Exclusion criteria

Being in bankruptcy or analogous situation

Proof of professional misconduct

Non-fulfilment of social security and tax payment obligations

Criminal conviction

Proof of misrepresentation

Selection criteria

Proper submission of the relevant documentation and supporting material,

according to the specifications of the Call for EoI

Possession of adequate experience

Completion of declarations (Annex 2) to the satisfaction of EIB

Minimum co-financing

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Detailed Business Plan

1. Investment Policy

2. Financial forecasts and operational budget of the UDF

3. Portfolio of potential Urban Projects

4. Methodology for the identification and evaluation of Urban Projects

5. The policy of the UDF concerning exit from Urban Projects

6. Legal and ownership structure of the UDF

7. The by-laws of the UDF

8. Governance structure and key experts

9. Annual management fee

10. Interest rate on Available Funds

11. Co-financing – leverage

12. Winding-up provisions of the UDF

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CriterionMaximum

scoring

Investment Policy 0-15

Financial forecasts and operational budget of the UDF 0-10

Projects portfolio 0-10

Methodology for the identification and evaluation of urban projects 0-10

Governance structure 0-20

Key experts 0-5

Annual management fee 0-10

Interest rate 0-5

Co-financing leverage 0-15

Total Score 0-100

Offers Evaluation Principles – Award Criteria

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Call for EoI indicative timetable

Call for expressions of interest

April 2011

EIBUDF

candidates

Evaluation of the offers:

-exclusion criteria

-selection criteria

-award criteria

May / June 2011

Signature of the

Operational

Agreement

July 2011

Offers

(incl. business plan)

May 2011

Presentation of the successful

bidders to the IB

UDF selection – June 2011

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Next steps

For cities

Discuss the main aspects of the project with Managing Authority (interactive process…)

Prepare / elaborate the project (in cooperation with private investors) in order to ensure recyclability

Ensure that these projects constitute a part of an Integrated Plan for Sustainable UrbanDevelopment. According to the Funding Agreement, each JESSICA project shall be in compliancewith the relevant Urban Master plans/detailed spatial plans and the Municipal Development Plans,which are considered as Integrated Urban Development Plans according to Article 43, 1(b) ofRegulation 1828/2006

Initiate immediately project preparation procedures

For candidate UDFs

Familiarize themselves with the Operational Programme

Create a project portfolio which will constitute a basic part of the business plan which will besubmitted in the context of the tendering procedure

Discuss with municipalities/cities their Integrated Plans for Sustainable Urban Development and thepotential to incorporate revenue generating projects

For project promoters

Familiarize themselves with the requirements of the OP

Prepare properly the revenue generating projects

- Feasibility study / project business plan

Discuss with municipalities/cities the potential to incorporate their project into Integrated Plans forSustainable Urban Development

Initiate immediately project preparation procedures

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Thank you for your attention

JESSICA and Investment Funds

European Investment Bank100 Bvd Konrad Adenauer, L-2950 Luxembourg

www.eib.org/jessica

Gianni Carbonaro, Economic Advisor, g.carbonaro@eib.org

Elias Papageorgiou, Holding Fund Officer, papage@eib.org