How do Revolving Funds change the Investement and Decision-Making Game?

Photography: Budapest by János Balázs on Flickr

Aldo Vargas

By Aldo Vargas, on September 23rd, 2014

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The aim of the JESSICA (Joint European Support for Sustainable Investment in City Areas)  initiative by the European Commission and the European Investment Bank is to support “sustainable investment in cities” via financial engineering mechanism. Through the implementation of the initiative, Urban Development Funds are emerging as potentially powerful tools to pursue sustainable urban transformation.  URBACT CSI Europe project will build upon the achievements to date to improve the effectiveness of current delivery and future potential.  The CSI Europe transnational network recently met in Poznan – here is what Melvin Könings , consultant from Lysias, could witness in the engagement of the different partners cities with revolving funds and a few of his advices on making the move from subsidies investments to revolving funds.

“The whole idea is that EU Structural Fund Money is usually granted through subsidies. Subsidies strategy  – for the government – is basically to give away money, usually aimed at investments. So as a government you give the money: the investment is done, you shake hands, you cut the ribbon with golden scissors, you smile, you drink a glass of champagne and your project is over, as you got rid of your money.

A New Relationship

Now with these new financial instruments the government says: „We want our money back after some period of time”. We will grant you a loan or we will do a capital injection and we become shareholder, or maybe we give a guarantee. But somehow we will have our money back. Maybe not all of it, because we take high risks and we also allow very low interests, but at least some part is coming back.

This new approach leads to a totally new relationship between the government and private parties. Instead of just shaking hands, paying the subsidy and being done with each other, parties are attached to each other for a couple of years, because companies or organisations have to pay their loan back including interest. So there is a totally different relationship and  duration.

In the subsidy strategy the local government with the Managing Authority basically says ‘we grant money and it is our responsibility” If you go to new Revolving Instruments, the government must create a distance. You will have to give a big bag of EU Money to a Fund Manager and this Fund Manager will take care of the investments and the return on capital. This will be out of the hands of the Managing Authority or even the local authorities. So it is also a fundamental change of ‘letting things go’. And that’s really complicated for lots of politicians, because they are used to be in a role of ‘Santa Claus’ and to walk around in their region and say „You get a bit of money, you get a bit of money” and then the political game is often over.

It’s About Governance

The new revolving instruments make an end to this divide and conquer approach. Today’s topic is about governance and actually this is one of the key aspects. Governments will have to ask themselves: „Who has the last word, who has a veto right?”. Now in our group , it is only the city  The Hague that has really said „The veto right and the whole decision making is in the hand of the (external) Fund Manager. He will decide upon projects, no more and no less”. For now, all the other cities say:„well – the Fund Manager does the proposal, but at the end of the day, the politicians will make the decision”. This approach is not in the nature of revolving investments. Because politicians are no bankers, nor should the be bankers. This is still one of the key aspects that local authorities will have to address: ‘Are we really going to work towards a revolving instrument and do we want to do that in the right way? Or are we trying to implement aspects of revolving instruments, but in fact we stick to the old way, because we still want to be Santa Claus”. This is one of the major challenges.

Who are the Fund Managers?

And these Fund Managers,  who should they be? Here you have to be very careful: never appoint civil servants in this seat! A Fund Manager should be basically a banker. Someone who is aiming at financial result and society result and also that will be awarded over that. But this is also complicated, because most Fund Managers are only selected for their capacity to bring financial results. Governments hire traditional investment bankers, but is that smart? The new revolving instruments are not only aimed at financial result, but also on social return. Maybe in one project the financial result is a loss of 50%, so the revenue is only half of what the authorities had invested. But this result is still much better than the financial result of a subsidy (always 0%). And if this project also results in a significant carbon reduction or technological breakthrough, the instrument is in fact a great success. But the banker will say „I’ve lost half of my money, so I do not continue with this project”. So you need to find a new balance between financial and social results. And it is quite hard to get the right people there. For instance people of the EIB (European Investment Bank) say „Yes, we would like to be Fund Managers, because we are the best Fund Managers in town”. But when we ask the EIB whether they will invest in loss making projects, their answer is „We will never go and do that”!
I think all people involved should think twice at concept level. You need to get into a helicopter and rise above the playground. And then really consider: „OK, this is our concept, I understand our strategy and I accept everyone’s role in the game”. Hardly anybody is doing that tight now. Practitioners don’t understand the concept, lawyers are confused, consultants are puzzled and politicians take a wait-and-see approach. Nobody looks at the big picture.

Now that’s the real good thing about URBACT. Every now and then officials go to another city, away from their everyday burden and get inspired by others. They come back home with good new ideas. Or sometimes they come home with the right questions!  A good example of this was a visit by our colleague Modesta from Seville. She and her boss went to Manchester and got inspired to implement this new instrument. This interactive approach resulted in a new kick start in Spain, great!”

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