JESSICA Addressing State aid issues in Andalucia (ES) and the United Kingdom Frank Lee Head of Holding Funds and Advisory – Northern Europe JESSICA & Investment Funds European Investment Bank Brussels, 30 November 2010

UDF financial products in need of State aid solutions UDFs as strategic vehicles for delivering projects, which Address urban sustainability on the basis of integrated plans Strengthen economic growth Are financially and economically viable (repayability) develop natural and cultural heritage The market fails to deliver alone Resources of Operational Programmes Can be invested on sub-commercial terms Can leverage commercial financing for public policy objectives Risk mitigation Lower price of financing Envisaged also by Art. 43(5) of the Implementing Regulation 2

UDF financial products in need of State aid solutions Main UDF financial products Loans – Senior or subordinated (mezzanine) with preferential coupon or other terms – Market rates or preferential coupon with a floor of zero % Equity – Pari passu or non-pari passu Preferential or priority returns, first loss piece Combination of the above 3

… a solution is therefore needed, and quickly… 4

Addressing market failure – Target areas of: low skills base high worklessness poor infrastructure insufficient economic diversity – Specifically: land assembly brownfield land enabling infrastructure demand uncertainty long lead times low or negative land values and valuation impairments – Leads to lack of access to appropriate levels of financing 5

Key factors we should be able to rely on Since investments need to be made in line with ERDF OPs and Integrated Plans for Sustainable Urban Development, they are already focused on an area of common interest. Economic and social output/impacts balanced with minimum financial return expectations UDF manager is selected through a Call for Expression of interest, of which fees are a component of the award criteria UDFs also required to demonstrate an appropriate level of independent decision making and sound risk management principals in making investment decisions. 6

Proportionality: fair rate of return concept The returns earned by private investors involved in the UDF/project (through equity, mezzanine or debt) must not exceed the fair rate of return for that given investor The FRR has to be established on a case-by-case basis for each private investor into the project/UDF, taking into account, inter alia: – Nature and risk profile of project – Project financing structure – Market conditions (what could a similar investment earn in a comparable project not requiring JESSICA intervention) 7

Determining FRR How to ascertain the FRR for each investor in each project/UDF? Generally expected to be the responsibility of the UDF In some cases, the terms of private partners financial participation in a project may have been already procured (concessions) Competitive process of selecting co-financiers at UDF and/or project level – UDF/project selection process where co-financing is among the award criteria – Negotiations where at least 2 potential co-financiers have participated In other cases, the FRRs could be calculated by Independent Expert – Alternatively, FRRs could be calculated by UDF and verified/ratified by Independent Expert 8

The use of Independent Experts Who could serve as an Independent Expert? Company/person independent of project promoter, UDF or project investors, possessing demonstrable expertise: – Industry and market knowledge relevant to given project/fund – Financial expertise relevant to the project and type of investment – Registration with and license by regulated professional associations – Compliance with professional rules Examples – Professional Service Firms (e.g. accounting firms) – Property Firms, such as chartered surveyors or real estate development consultants – Financial institutions/investment banks carrying out advisory work – Specialist consultancies involved in public private investment funds and project finance 9

Key outstanding issues Defining exact responsibilities of UDFs – Could not be specified in detail in Operational Agreements signed so far (e.g. Poland) as the details have not been defined/agreed with EC yet – Reliance to be placed on UDF managers based on selection process and contracts in place (investment strategy/focus; remuneration structure; project selection criteria, etc) Should the Independent Expert only give an opinion on the FRRs for private co-financiers or should it also confirm… Presence of market failure? Incentive effect of aid? Proposed terms of UDF financing of the given project? Timing of EC approval – Where UDF investments would include State aid, disbursements are not possible before the relevant aid scheme is approved by EC 10

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