Financial engineering instruments for sustainable urban development – introducing an impact analysis for innovative urban policies

Abstract

The Joint European Support for Sustainable Investment in City Areas (JESSICA) is part of a general paradigm shift in EU-policy, since its most innovative element is to introduce an alternative to traditional grant funding by providing financial engineering instruments – namely loans, guarantees and equity capital – on a revolving base. This means that instead of financing sustainable urban development projects with grants that are – once paid out – lost for good, revolving financial engineering instruments for successful projects may generate a capital backflow enabling Managing Authorities to reinvest in new urban development projects. In order to channel funds effectively to sustainable urban projects, the institutional framework of the JESSICA-initiative intends to set up urban development funds as financial intermediary. The three main objectives of the JESSICA-initiative are (i) to promote urban deve­lop­ment projects as economic stimulus, (ii) to provide cost-effective, long-term financing to support urban trans­formation in a sustainable fund model and (iii) to mobilize private capital for public-private partnerships. Concerning the latter, the JESSICA-initiative shall attract private investors and banks to finance sustainable urban development by providing catalytic first-loss capital via UDFs that lowers the risk and enhances the return of private investors, therefore making more projects feasible and overcoming existing market failures. So far, an empirical evaluation is missing on how successful JESSICA has been so far in achieving its ambitious objectives. In this paper, we first develop a conceptual base to analyze urban development funds and give second an introduction into the realized outcomes of the policy change measurable in monetary terms in all 28 EU member states. Our findings reveal the prob­lems in urban development financing for private financial institutions as well as public authorities. With the help of an ongoing impact analysis managing authorities might overcome these problems in the current programming period.