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Use of an Urban Development Fund to stimulate private investment in jobs and

growth - case of Manchester (UK)

Gerry Muscat, Senior Urban Specialist

Workshop – Urban Developers Network 2014

Marseille, 22-24 October 2014

EUROPEAN INVESTMENT BANK

Presentation Outline • What is an Urban Development Fund? • How to use a UDF to target employment

generation? • Manchester – An investment strategy focused

on employment creation • Examples of some specific employment-

generating investments • What are the market failures? • Conclusions relevant for MENA

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What is an Urban Development Fund? • An assembler of funding from diverse investors

(public and private) • Vehicle for targeting investments with specific

urban objectives • Spatial / geographical focus • Vehicle for loan or equity investments • Financier for private or public projects • Provider of soft financing tailored to address

market failures (if public funds available) • May be structured as a “revolving fund”

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Strictly private and confidential - Not to be disclosed without prior consent of the EIB

How do UDFs compare to other approaches to stimulate employment through urban regeneration? • Traditional “direct development” approach: public sector

acquires land, clears it, equips with infrastructure, then sells/leases to the private sector for commercial development

• “Gap funding” approach: Provide investment grants to cover the difference between total development cost and costs which the market will bear (but, no public sector return)

• “Urban Development Fund approach”: provide equity and loans on sub-commercial basis to leverage developers, with repayment to the public sector and revolving of funds • Sub-commercial public investments made where market cannot

deliver urban regeneration by itself • Public support kept to the minimum necessary • Leverages additional projects

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EIB Financing Instruments – where do urban development funds fit?

Instrument Examples of potential urban financing

Investment Loans Direct loan for a specific investment project or programme, usually > EUR 25m

•Loan to a City or urban development enterprise to finance an urban development project •Loan to a private partner to implement an urban investment programme under contract •Loan to a private urban developer to co-finance a commercial real estate development project

Framework Loans Loan for a programme of investments meeting defined criteria but not finally prepared at time of signing

•Framework loan to a city or region to finance a programme of small or medium urban investments •Framework loan to a specialised municipal bank or public sector urban development agency to finance a programme of urban investments

Funds Investment in a fund

•Investment into an urban development fund, brownfield fund, fund specialised in urban investment

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Greater Manchester’s Economy

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Manchester Strategic Framework

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Top Priority: Employment and Economic Growth A minimum of 200 ha of employment land will be developed between 2010 and 2027 for • offices 140 ha • research and development, light

industry and general industry 25 ha • distribution and warehousing 35 ha

Priorities for ensuring continued economic growth include: • Improving access to jobs for all via public transport, walking and cycling; • Demonstrating that employment-generating development has fully considered opportunities to provide

jobs for local people, through construction or use; • Improving the portfolio of employment premises, by providing a range of employment sites and

premises for small, medium and large businesses; • Improving digital infrastructure delivery to businesses and residents; • Creating business destinations by enhancing the primary business use with ancillary commercial

facilities; • Ensuring the continued social, economic and environmental regeneration of the City; • Ensuring connectivity to international markets for the import and export of goods to ensure

competitiveness in international markets.

Greater Manchester Investment Strategy

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Example of a priority area for urban regeneration: East Manchester

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Note: 1. Almost the whole area is in 10% most deprived 2. Man City Etihad Stadium is in Eastlands…

Strictly private and confidential - Not to be disclosed without prior consent of the EIB

Stimulating employment – what are the market failures?

• Positive externalities of urban regeneration hard to capture (eg. environmental, resource efficiency, indirect /induced employment)

• Brownfield land has high costs / risks for site preparation – greenfield sites more attractive but negative externalities

• Since the financial crisis the market will not construct offices without a high % of pre-let

• SMEs need space but are unable / unwilling to pre-let • Banks perceive urban regeneration as high risk • Perceived risks elevated in deprived urban areas • New employers / employees / residents require improved services

– urban transport, public space, culture and leisure facilities which market will not deliver alone

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Strictly private and confidential - Not to be disclosed without prior consent of the EIB

Primarily an urban regeneration focused Fund Both UDFs target the remediation of brownfield sites, creation and/or refurbishment of new/redundant floor space and job creation UDFs can only invest in strategic sites or areas of regeneration need as defined by Local Enterprise Partnerships Market conditions are limiting the pipeline, a number of schemes still need grant and there are competing public sector schemes (Growing Places Fund) NWUIF state aid approval secured in July 2010 – which enables sub commercial debt and equity to be provided where certain conditions and requirements are met NWUIF established with in kind match and is now operating on a hybrid co-finance/co-investment model

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Northwest Urban Investment Fund - Strategy

Strictly private and confidential - Not to be disclosed without prior consent of the EIB

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URBAN DEVELOPMENT FUND

The UDF approach using EU funding (JESSICA model)

EUROPEAN COMMISSION Structural Funds

MEMBER STATE Via a designated Managing Authority

Holding Fund

Projects forming part of an Integrated Plan for Sustainable Urban Development

Grant (not repayable as long as EC Regulations adhered to)

optional

OTHER INVESTORS (Public & Private)

CITIES

IFIs/Public Agencies/ Banks

Investment (equity, loan or guarantee)

Contribution (repayable or non-repayable)

Strictly private and confidential - Not to be disclosed without prior consent of the EIB

£32.5m

Northwest Urban Investment Fund

£100m Managed by EIB

Additional co-investment at project level

Chrysalis UDF

(Merseyside)

Aiming to deliver outputs of job creation, new and refurbished floor space and redevelopment of brownfield land

Evergreen UDF

(Rest of NW)

£36m

£50m

Cash and in kind In kind

substituted out at project level

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Northwest Urban Investment Fund

Strictly private and confidential - Not to be disclosed without prior consent of the EIB

£50m

Soapworks

City Labs

Exhibition Centre

Strictly private and confidential - Not to be disclosed without prior consent of the EIB

Evergreen signed project – City Labs

Grade 2 Listed Building Bio-medical Research Facility Prelet – 55% - Clinical Trials Challenges – Senior Debt Evergreen – Match Senior Debt “Club” Financing

14 Strictly private and confidential - Not to be disclosed without prior consent of the EIB

Strictly private and confidential - Not to be disclosed without prior consent of the EIB 15

Background

• Former Colgate Palmolive factory in Manchester was unused and deteriorating

• Signed to be refurbished and turned into green office space for a variety of sectors & other facilities

Best practice because…

• Big step in city transformation from industry to business hub

• Promotes healthy lifestyle: cultural, family and sports facilities in the complex

• Local employment boosts the economy in the area

Strictly private and confidential - Not to be disclosed without prior consent of the EIB

Evergreen signed project – Soapworks

Strictly private and confidential - Not to be disclosed without prior consent of the EIB

Harnessing linkages: Agent for Change and essential urban infrastructure

Etihad Stadium • Catalyst of “sport city” • Stimulus to medical, sports,

culture, science industries • Financial and in-kind

contributions from the stadium owners

+ nearby Beswick Community Hub • Regeneration linked to Etihad

sports city • New school, community

swimming pool, community-focused retail

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Strictly private and confidential - Not to be disclosed without prior consent of the EIB

Key features of the UK UDF approach

• Investment decisions delegated to independent professional UDF fund managers

• Enables leveraging of public funding at both the project level and the fund level

• Creating a UDF forces emphasis on sound governance, which can build public commitment and transparency (citizens/mayors feel its “their” UDF)

• Portfolio effect to mitigate risk • Revolving nature leads to sustainable approach • Flexible in tailoring sub-commercial funding to

project-specific market failures 17

Strictly private and confidential - Not to be disclosed without prior consent of the EIB

Conclusions relevant for the MENA region • Challenge for employment creation targeting SMEs is equally

relevant in MENA as in Europe • Planning-led approach + Urban Development Strategy is key

everywhere • Preference for (less sustainable) greenfield development equally

strong in MENA • Fewer brownfield sites but they do exist in MENA (eg. disused

airfields) • MENA can also harness agents for change • MENA does not have EU structural funds, but government funding,

long-term IFI funding, waqf/kabbous funding (?), can provide some softer co-financing.

• Lack of grant funding in MENA places even greater emphasis on efficient financing approach

• Urban development funds just one of may financing vehicles

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http://www.eib.org

…and to conclude – a short video clip