European and External Affairs Committee
EUR(3) 04-07 (p2): 27 November 2007
Title: JEREMIE and JESSICA financial instruments
Purpose
This paper provides some further detail on the JEREMIE and JESSICA financial instruments as promised by the First Minister in his report to the Committee last month. Discussion is invited on the potential for the use of the JEREMIE and JESSICA financial instruments in the context of the new European Structural Fund programmes.
Summary
This paper provides an outline of a new facility under the 2007-2013 Structural Fund Regulations, which facilitates the use of ERDF funding financial engineering instruments. The JEREMIE and JESSICA schemes are the ones which have relevance for Wales and this paper highlights the progress made to date on assessing the viability of their use. Members are asked to note that work is still continuing in these areas.
Background
JEREMIE and JESSICA are financial engineering instruments, the use of which is established by the European Commission in the Structural Funds Regulations 2007-2013. The Commission envisages that the use of these instruments could potentially bring about closer alignment of European Structural Funds (primarily ERDF) with, European Investment Bank resources, as well as domestic resources, in order to maximise their impact. The ERDF Operational Programmes for the Convergence and Regional Competitiveness and Employment programmes set the Welsh Assembly Government’s commitment to explore the benefits of these instruments for Wales.
JEREMIE
JEREMIE stands for Joint European Resources for Micro to Medium Enterprises.
JEREMIE is designed to help regions address directly the funding gap experienced by SMEs in securing finance in the market. The JEREMIE model comprises a holding fund into which the EIB, ERDF and domestic private and public resources can be placed to provide SMEs with a range of financial products through appointed financial intermediaries. The mix of products and size of the overall fund is dependent on the evidence of market failure. As with the venture capital instruments in the old round of Structural Funds, the fund would 'revolve’ to provide legacy funding for SMEs.
The UK’s Department for Business, Enterprise and Regulatory Reform commissioned, on behalf of the all UK ERDF managing authorities, a scoping study from the EIF to establish the size of the gap in different parts of the UK. The report draws in information from national data sources and the outcomes of other recent studies, including specific Wales-level studies. As a result of the gap analysis on SME access to finance supply and demand in Wales the EIF has concluded that there is a funding gap of £155 million in Wales, which could be addressed through a JEREMIE initiative. The minimum funding needed to create a viable JEREMIE holding fund is around £65 million (€100 million). The range of financial engineering instruments includes loans, equity, co-investment and technology transfer facilities. Such a portfolio mix is designed to address the full spectrum of market failure in Wales. It should also ensure critical mass and offer enough diversity for the fund to be self sustaining in the longer term.
The holding fund will be managed through Finance Wales, the Assembly Government’s subsidiary company that has a proven track record of successfully investing commercial public/private funds. A business plan is currently being developed by Finance Wales in discussions with WEFO and DE&T. This plan is progressing on the basis that around half of the funding will be provided to the fund through the EIB (as a commercial loan to Finance Wales) with the remaining half sourced from ERDF and other public sources.
It would be for WEFO, as the Managing Authority for the Structural Fund programmes in Wales, to determine the specific elements of any ERDF to be provided for a JEREMIE fund in Wales. The considerations that would apply include: value of ERDF resources; the potential for meeting the programmes’ objectives (Convergence and/or Competitiveness) and targets; the extent of the perceived market failure; the balance to be struck between loan/equity based instruments as opposed to grants as a means of supporting the development of the SME base in Wales; and the opportunity costs, taking account of other potential demands on the funds.
Next steps
JEREMIE seems to offer an efficient way to combine ERDF with loan capital and other sources of finance. Establishing a fund early on in the life of the Programmes would mean that the funds are available to be used at the outset as any ERDF transfer could be made in a single tranche or a number of staged payments, thus providing maximum opportunity for re-investment as loans mature and equity holdings and divestments provide returns.
Officials in the UK Government and other Devolved Administrations see some advantage in pursuing JEREMIE but are not yet in a position to decide whether or not to commit to the instrument. For Wales, given the significant value of Structural Funds at our disposal (particularly in West Wales and the Valleys) and the fact that in Finance Wales we have a ready-made vehicle to hold the fund and we are far better placed to take early advantage of this instrument. Arrangements are in hand to procure professional fund management services from the open market.
The EIF’s report has been considered by officials in DE&T responsible for the management of public sector support and finance and within whose portfolio responsibility for Finance Wales rests. It is deemed consistent with the wider policy objective of moving towards an investment rather than grant based regime. The report also provides a good basis upon which to develop a proposal for JEREMIE to operate in Wales and officials in DE&T have commissioned Finance Wales to prepare a formal ERDF bid to WEFO. However, details of the size, geographical spread, make up and balance of interventions needs to be considered in more detail. It is anticipated that match-funding would come in the form of a loan from the EIB.
JESSICA
JESSICA stands for Joint European Support for Sustainable Investment in City Areas.
JESSICA is based on the model of an urban development fund, examples of which exist across the UK. It is a mechanism to promote sustainable investments and growth in urban areas. It establishes a development investment fund which makes re-payable investments in a portfolio of regeneration projects forming part of an integrated regeneration plan that would deliver holistic regeneration in a spatial area. The Structural Fund Regulations anticipate that ERDF could be channelled into these funds alongside other public and private sector funds. JESSICA is usually considered in an urban context because of the overall scale of assets involved. The mechanism does not necessarily involve any additional money from the EIB, although the ability to raise debt finance, from the EIB or national financial institutions, is a key aspect of any JESSICA scheme.
JESSICA funds are expected to be structured as public/private partnerships, with the public sector having no more than 50% of the equity in the legal entity. In accordance with accounting standards and practice the public sector will have neither majority control nor ownership, with the consequence that it will not be regarded as the borrower of any loans received by the partnership. These investment funds are similar to mechanisms that have been used in Wales and other parts of the UK over the last few years and are emerging as a good practice model for urban development.
The partners put equity into the scheme, in return for a proportionate share of the fund. The public investment is usually made in the form of land holdings, and the private contribution normally comes as cash. The ERDF and the private sector cash contributions, together with EIB or private sector debt, are used to invest in development projects on the land now owned by the fund. Projects within the fund can include any activity that would qualify for ERDF support (e.g. sites and premises, site remediation, urban infrastructure, etc). The investments of the fund can also include expenditure that is not eligible for ERDF support, such as housing, retail and leisure, which are strong potential value generators, as long as the ERDF element of the funding, and any related match funding, is not used for such purposes.
The investments will, across the fund as whole, need to generate a commercial return in order for it to be attractive to the private sector participants and also to provide an opportunity for the re-cycling and re-investment within the fund of the ERDF. Whilst it will therefore be possible to include some projects that are not commercially viable there must be sufficient economic potential to both cross-fund such projects and to generate value to provide an investment return to the partners. It is a key benefit of the JESSICA approach that the future recycling of monies into the fund or other regeneration projects would create a significant ERDF legacy.
In Wales it is envisaged that these Funds could be established by a partnership of the Assembly Government and one or more local authorities, which would then tender for a private sector partner on the basis of public investment (land assets and ERDF) being matched on a pound for pound basis by private cash. The initial cost of establishing such incorporated delivery vehicles can be relatively high and therefore in order to be attractive to both private investors and debt providers each JESSICA fund will need to achieve a critical mass level. It is difficult to be precise about the size threshold but the minimum feasible size is likely to be at least £10 million. Examples of the existing Welsh models are WIP (Welsh Industrial Partnership) and Dragon 24LLP.
Next Steps
Consideration of the JESSICA scheme is at an earlier stage than for the JEREMIE scheme. The first step is to establish where JESSICA could add value to Welsh Assembly Government’s established priorities for urban regeneration.
A Steering Group of public and private sector stakeholders has been established and will contribute views on the opportunities for using the JESSICA mechanism.
The next steps in assessing the viability of JESSICA are to:
a) initiate a scoping study on the JESSICA initiative in partnership with the EIB which will commission and pay for the study; and
b) to establish which, if any, opportunities would best benefit from using the JESSICA mechanism
Summary
There appears to be a clear case for implementing JEREMIE in Wales and, with their experience of managing similar funds, Finance Wales has been commissioned to develop a bid for ERDF funding which will be assessed against the WEFO’s project selection criteria. A procurement exercise will be undertaken to appoint fund managers from the open market.
Consideration of JESSICA is still at an early stage and more will be known when the scoping study is completed in early 2008. This study will be supported by the Stakeholder Steering Group and will provide DE&T and WEFO with a clearer idea of the viability of JESSICA initiatives in Wales.
Financial Implications
There are no direct financial implications at this stage. The ERDF funding will come from the Wales allocations and this will be applied for through the standard WEFO application process.
JEREMIE will primarily be funded through the ERDF and the EIB (counting as Private Sector debt). Finance Wales will be submitting applications to WEFO and the EIB. Dependant on the proposal being worked-up by Finance Wales there could be a small funding gap (due to maximum ERDF intervention rates). This could be addressed through private sector finance or met through the DE&T budget. These requirements will be known in more detail once the proposals are fully developed.
A scoping study has been commissioned on JESSICA and this will identify precise funding needs. JESSICA will consist of public investment (usually land holdings), ERDF, private sector cash contributions and EIB (or private sector) debt. Potential land holdings are being identified alongside the scoping study.
Action for Subject Committee
To note the content of this paper and the next steps to be taken for each instrument.
Rt Hon Rhodri Morgan, AM
First Minister
