CritCom | Homepage

EU Cohesion Policy’s Financial Instruments for Urban Development: Fit for Purpose?

0 Comments 🕔13.Jan 2015

This article is part of our EU Cohesion Policy 2014-2020 feature.

Brownfield site for one of JESSICA projects in Poznań, Poland. Credit: M. Dabrowski

Brownfield site for one of the JESSICA projects in Poznań, Poland. Credit: M. Dabrowski

by Marcin Dąbrowski

Introduction

In the context of a severe economic crisis and austerity, new ideas were put forward to reform cohesion policy to enhance its often-contested effectiveness and returns on investment. One of them were financial engineering instruments, such as the Joint European Support for Sustainable Investment in City Areas (JESSICA) introduced during the 2007–2013 period, expected to offer a means to ‘do more with less’ in this difficult budgetary context. In the case of such instruments, European Union (EU) funds are not offered as grants co-financing investment projects, but rather are used to provide repayable assistance to projects, a form of support. Such a revolving funding approach is in stark contrast to the grant-based assistance typically offered as part of EU cohesion policy and is supposed to increase the sustainability and effectiveness of interventions. But do they?

The study reported in this paper investigated the operation of JESSICA in two of the regions that were early adopters of this new tool – Wielkopolskie in Poland and Andalusia in Spain. Its aim was to verify whether JESSICA is actually fit for its purpose of supporting sustainable urban development and examine its effects on the actors involved in its implementation. The research drew on the conceptual insights from the policy instruments literature, which typically asks questions about whether these tools deliver their promises and allow for achieving the objectives that were assigned to them. One of its strands also strives to reveal how policy instrumentation affects the behavior of the actors  concerned, considering that introducing a new policy instrument may create scope for learning and produce new (often less apparent) dynamics of change in path-dependent policies.

 

How JESSICA works and why it raised hopes?

In a nutshell, JESSICA is an innovative delivery mechanism for the European Regional Development Fund (ERDF), developed by the European Commission in cooperation with the European Investment Bank (EIB) and supported by the Council of Europe Development Bank, which allows for allocating assistance for sustainable urban development projects on a revolving basis. This means that, unlike in the case of the traditional grants, the capital provided can be reinvested in new projects, thus enabling the ‘recycling of funds’.

The instrument was implemented through the so-called Urban Development Funds (UDF), using ERDF money and run by, at the national or regional level, the Structural Funds Managing Authorities (MAs) in collaboration with financial intermediaries, such as the EIB or domestic financial institutions (see Figure 1). Financial assistance for projects is offered in the form of loans, guarantees, or equity used to support profit-generating urban investment projects, typically implemented in cooperation between the public (e.g., municipality) and private actors.

 

JESSICA Implementation System

Figure 1. JESSICA implementation system. Source: adapted from Kreuz and Nadler 2011: 12.

 

JESSICA was expected to offer several benefits. Revolving assistance is supposed to be a more sustainable alternative or complement to grants, creating stronger incentives for successful implementation by beneficiaries. JESSICA allows for leveraging additional finance, as public and private finance is brought in to further support the investment on top of the EU structural funds monies. And, last but not least, the collaboration between the sub-national authorities, financial institutions and private investors was expected to allow for pooling expertise and building new kinds of partnerships. How did JESSICA fare in reality though?

 

Is JESSICA fit for its purpose?

In order to verify this, one can apply the set of criteria for evaluating tools of government proposed by Salamon (2002): effectiveness, efficiency, equity, manageability, legitimacy, and political feasibility.

While it is too early to examine the impacts of the projects implemented under JESSICA in Wielkopolskie and Andalusia, which were launched in 2010 and 2011, respectively, the low take-up of funding makes JESSICA’s effectiveness in promoting urban development in the recipient regions rather questionable. The low number of JESSICA projects, particularly in Andalusia, stemmed mainly from insufficient knowledge on the JESSICA framework among the potential beneficiaries, uncertainty about the interpretation of the complex rules guiding its implementation, and low administrative capacity among the municipalities. Despite a strong interest in the initiative, most of the initial bids for funding were rejected, as only a few of the applicants were capable of preparing projects that would meet the requirements for long-term sustainability of investment and its economic viability. Moreover, there can only be a limited number of sustainable urban development projects that could generate profit and thus qualify for JESSICA funding. The instrument also puts a strong emphasis on promoting public-private cooperation; however, both regions studied had little traditions of public-private partnerships, which involved reluctance of municipalities to engage in such cooperation.

Turning to the second of Salamon’s criteria, efficiency, JESSICA fares better. The tool can be considered efficient because it does bridge a financing gap by offering long-term loans at a competitive interest rate, making them suitable for projects that have a long period of maturation and run the risk of relatively limited profitability. Again, this is particularly true for Andalusia, where local governments face a credit crunch. JESSICA offers a great advantage in this context, as it has its own liquidity from the Structural Funds transfers and therefore can continue lending money for investment even in crisis, unlike the commercial banks. JESSICA is also efficient from the policymaker’s perspective, as its costs are lower as compared with grant-based programs. Money invested in projects is to be paid back eventually and then reused to support further investment. However, that does not mean that JESSICA allows for ‘doing more with less’, as was expected from financial engineering instruments. Given the said access barriers, low take-up, and the limited applicability to address urban challenges, ‘doing less but for less’ may be a more accurate expression to characterize JESSICA.

As concerns equity, credit is by nature not equitable, but if one considers equity as fairness in access, JESSICA, again, cannot be assessed positively. While during 2007–2013 all EU regions were eligible for JESSICA and could set up UDFs, only a few regions decided to embark on this complex program and only a few municipalities within those regions had enough capacity to take advantage of the revolving funding offered by the UDFs.

Concerning manageability, JESSICA is also extremely complex and difficult to manage. It involves the use of highly technical tools imported from the financial sector into urban development policy and it is managed through a complex network of public authorities at different levels and from different sectors. Ensuring an efficient information flow between those diverse actors and setting up governance structures has proven to be a major challenge, as evidenced by the information gaps and legal uncertainty problems reported by interviewees in both Wielkopolskie and Andalusia.

This resulted in protracted negotiations between the Member States and the European Commission on the adaptation of the domestic legal frameworks to accommodate decision-making in JESSICA’s cross-sectoral, cross-level, and somewhat experimental institutional set-up, which proved to be complex and riddled with tensions.

Finally, considering legitimacy and political feasibility as criteria for assessment of a policy instrument, it should be stressed that credit programs tend to be attractive for policymakers, as they offer an appearance of a business-like activity. Also, the revolving nature of the public support offered is something that is easy to ‘sell’ to the voters, as it creates an impression that public money is not wasted. This is particularly relevant in times of austerity and crisis, like the current times. Thus their political feasibility tends to be high and they can allow for enhancing the legitimacy of the government in the eyes of the public, by creating an impression that it is spending public money in a careful and wise manner.

Turning to JESSICA, one can hardly consider it as an initiative that will allow for winning political support, as public awareness of this tool is very limited, due to its technical character and rather sporadic use to date. However, at least on a rhetoric level, it can be seen as a tool enhancing legitimacy of the EU in the eyes of the general public. From a political feasibility point of view, it can be seen as a winning strategy to promote such an instrument in the current economic climate, as evidenced by the mainstreaming of financial instruments across all of the fields of application of EU Cohesion Policy during 2014–2020. But will anyone notice? It is unlikely particularly in areas that benefit from substantial allocations of Structural Funds, such as most of the regions of the newer EU Member States, where public attention is focused on highly visible infrastructural projects for which most of the allocated EU funding tends to be used. A further downside as regards political feasibility of financial instruments is the widespread reluctance toward this instrument among the sub-national authorities in the countries that are the main beneficiaries of the EU Structural Funds, which have a clear preference for grants that remain ‘cheap money’ for investment. Finally, national governments have an (electoral) interest in spending all of the allocated EU funds, while JESSICA, as argued above, is difficult to manage and implies a risk of a funds absorption problem.

 

Conclusions

JESSICA does offer some advantages in terms of efficiency and legitimacy. However, it is probably not an adequate and certainly is not a sufficient tool for supporting sustainable urban development, which requires much more integrated and comprehensive actions. In addition, JESSICA presents serious problems in terms of effectiveness and manageability. It may also reflect the current Zeitgeist of austerity and ‘doing more with less’, but in reality its application remains limited. The findings indicate that JESSICA is a flawed and overly complex instrument that, instead of doing ‘more with less’, only allows for achieving ‘less with less’.

That being said, the picture is not entirely negative. The instrument does exert a certain positive influence, at least on the limited number of the sub-national authorities involved in its implementation. JESSICA indeed promoted cross-sectoral interactions and facilitated learning in the regions where it was applied. It also created a new set of incentives for the beneficiaries of EU funding, requiring them to focus more on the economic viability of investment, triggering a change in their approach to EU cohesion policy and public investment more generally. It can thus be a potentially transformative instrument that ushers a shift away from the reliance on EU subsidies, where assistance is taken for granted and, consequently, often used carelessly and without proper reflection on the strategic role of the projects and their long-term sustainability.

Nonetheless, considering the problems and low take-up of funding observed in the case of JESSICA in the two case studies, these benefits will not become more widespread unless the financial instruments are used more widely. This, in turn, invites pessimism, as it would require much more effort to provide technical assistance, build administrative capacity, and diffuse knowledge and good practices among the prospective managing authorities at the sub-national level and to the potential beneficiaries. Without this, the mainstreaming of financial instruments, as planned for the 2014–2020 period, is very likely to fail.

 

Acknowledgement: This paper summarizes the main arguments presented in a full-length research paper submitted for publication in Regional Studies, Regional Science. This research was supported by the Regional Studies Association’s Early Career Grant Scheme.

Marcin Dąbrowski is a research fellow at the Department of Urbanism, Delft University of Technology. His academic interests span across regional, urban and policy studies and include such topics as multi-level governance, European Union’s and national regional policies, decentralization and regionalization, cross-national policy transfer and climate change policies in cities.  Currently, his main research project – funded by the Urban Studies Foundation – investigates the patterns of governance in urban regions in China’s Pearl River Delta and the Dutch Rhine-Meuse Delta through the prism of climate change adaptation policies.

 

This article is part of our EU Cohesion Policy 2014-2020 feature.

 


 References

Kreuz, Claudia, and Michael Nadler. 2011. “Udf Typologies and Governance Structures in the Context of Jessica Implementation.” Brussels: DG REGIO.

Lascoumes, Pierre, and Patrick Le Gales. 2007. “Introduction: Understanding Public Policy through its Instruments – from the Nature of Instruments to the Sociology of Public Policy Instrumentation.” Governance 20(1): 1–21.

Salamon, Lester M., ed. 2002. The Tools of Government: A Guide to the New Governance. Oxford: Oxford University Press.

Stanton, Thomas. 2002. “Loans and Loan Guarantees.” In Tools of Government: A Guide to the New Governance, ed. Lester Salamon. Oxford: Oxford University Press.

 

No Comments

No Comments Yet!

No one has left a comment for this post yet!

Write a Comment

Your email address will not be published. Required fields are marked *