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Independent Experts in the context of the JESSICA initiative in Greece
Independent Experts in the context of the JESSICA initiative in Greece

CATEGORY: Programme Management

LOCATION: Greece

START/END: 2013 - 2016

CLIENT: EIB

ORIGIN OF FUNDING: EIB

PARTNERS: McBains Cooper (GR)

LDK’s BUDGET SHARE: 50%

STAFF PROVIDED: 4

Independent Experts in the context of the JESSICA initiative in Greece

Type of Services

LDK is engaged by the Urban Development Funds to perform the Services described below, according to the requirements of each State Aid Notification:

Assessing the Fair Rate of Return (FRR): The Service Provider is required to assess the FRR, namely to enable the UDF to determine, with market evidence, the viability of the project based on the respective costs and values and what constitutes a FRR given the project characteristics. The Service Provider’s report will be based on a standardised methodology.

Review of Industry Benchmarks: The starting point for the process of ascertaining the Fair Rate for Return (FRR) will be a review of comparative data as to the returns currently expected on similar projects or urban development projects in the market place. The Service Provider will pool various sources of information and collate the most relevant data for each particular project or fund. In certain cases such data might not be publicly or readily available. Therefore, the Service Provider will be allowed to draw upon its own past and relevant experience of involvement in other projects or financings. The FRR report should specify which benchmarks have been referred to and how these benchmarks have been taken into account.

Review of Project Risk: This part of the assessment will have similarities with the credit committee/credit risk assessment processes in place in banks as part of loan approval. The project review will include, inter alia:

  • Construction cost risk (including also inflation and exceptional factors);
  • Planning risk;
  • Demand risk (including impact of geographic location);
  • Valuation (including potential void and rent free periods);
  • Economic environment and funding climate;
  • Complexity of project;
  • Competence of project sponsor and ability to deliver the project to time and budget;
  • Financial analysis (including sensitivity analysis on the project financial model);
  • Project sponsor’s cost of finance;
  • Security and terms of other funding streams;
  • Appropriateness of contingencies;
  • Extent to which assets are pledged as debt security.

Having assessed relevant industry benchmarks and specific risks, the FRR should then be assessed, starting with the minimum level of FRR and adding on the appropriate margin to reflect project risk. The minimum rate may be taken as the base from which a margin reflecting equity risk is added to produce the equity FRR. The Service Provider may in the absence of any direct market benchmarks, use its own expert knowledge and judgment to assess such risk premium.

In cases where the UDF manager intends to invest own different from those for the resources provided by JHFG (essentially acting as a co-investor), such assessment will also be carried out by a Service Provider in order to avoid possible funds at terms conflicts of interest. The same also applies when a UDF manager provides in-kind contribution as co-investor to a certain project, where the value of the contribution has to be assessed by a Service Provider.

Assessing Equity Investment: For the JESSICA scheme in Greece there must be private co-investment of at least 30% of total eligible project costs. As part of such private co-investment there must be investment at risk (i.e. equity) in an amount which is considered to be significant, in compliance with State aid rules. The private co-investment to be procured by way of equity shall be equal to at least 10% of the total eligible project costs. Any such private equity co-investment will be made on the same terms and conditions as the investment of JESSICA funds by way of equity. In respect of private sector co-investment, the Service Provider may be required to provide an opinion on the significance of the proposed private equity co-investment in the context of the overall eligible project costs, the nature of the project and the reliability of the project cash flows.

Establishing Market Failures: The Service Provider may have to analyse whether the project is affected by a market failure and perform record-keeping services of market failures and/or socio-economic factors that affect a project’s viability. The Service Provider would be required to confirm, inter alia, whether the project is unable to support the interest coupon required by the market, with the costs of servicing the debt making the project unviable; whether the project is unable to provide the equity return requested; and/or other reasons why the project lacks commercial viability.

Other Services: In addition to the investment tools outlined above, the State aid notification includes further areas of flexibility for UDF fund managers that may require an opinion to be sought from the selected Service Provider, such as Grants (review the justification for grant and ensure that it is being used in limited cases and as a last resort) and Exits (an exit policy will be defined in advance before structuring an investment deal and may include a. repayment of loan investments, and b. selling equity or loan investments to other investors or developers).

From 16/10/2013-15/04/2014, LDK was awarded the following contract:
“Restoration of the listed Ahtarika Municipal building to house the Vikelea Public Library of Heraklion, Crete” (7/2013)

Description

JESSICA (Joint European Support for Sustainable Investment in City Areas) is an initiative of the European Commission, supported by the European Investment Bank (EIB) and the Council of Europe Development Bank. The initiative is designed to help Member States in using financial engineering mechanisms to support investments in sustainable urban development in the context of EU Cohesion Policy for the programming period 2007-2013. The initiative utilises ERDF and national funds to invest in projects on a repayable basis by way of debt and/or equity. It therefore represents a more financially sustainable mechanism for investing public resources to achieve economic development objectives.

The Hellenic Republic and the EIB as manager have set up the JESSICA Holding Fund for Greece (“JHFG”) that will support investments via Urban Development Funds (“UDFs”) into sustainable urban development projects (“urban projects”) with the purpose of facilitating sustainable and integrated urban development in defined areas. UDFs focus on delivering investments into eligible urban projects in the Regions under their responsibility. All investments made by UDF managers using JESSICA funds, must constitute eligible expenditure in line with the ERDF regulations and need to be consistent with both the objectives set out in each ERDF Operational Programme, the Holding Fund’s Investment Strategy and each UDF Investment Policy agreed with the EIB in its capacity as the JHFG manager, on behalf of the Ministry of Development, Competitiveness, Infrastructure, Transport and Networks, which acts as the Managing Authority.

Within this framework the EIB has established a short-list of Independent Experts (“Service Providers”) that can be drawn upon directly by the UDFs through a services contract to be concluded between the UDF and the Service Provider selected by the UDF for each specific assignment, to provide the UDFs, in compliance with the State aid notification, with a set of services as described in the next column.

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