City development fund in the context of the JESSICA · PDF file3.1.2.2 Funding eligibility within the meaning of ERDF rules and ... Figure 20 – Cash flows Mümmelmannsberg SHC project

F

JESSICA

JOINT EUROPEAN SUPPORT FOR SUSTAINABLE INVESTMENT IN CITY AREAS

Hamburg

EVALUATION STUDY Final Report

December 2009

Client:

European Investment Bank 100, boulevard Adenauer L-2950 Luxembourg Luxemburg

Contractor:

Forschungs- und Informations-Gesellschaft für Fach- und Rechtsfragen der Raum- und Umweltplanung mbH Dipl.-Ing. Andreas Jacob Dipl.-Ing. Christian Plöhn Bahnhofstraße 22 67655 Kaiserslautern Germany

DECEMBER 2009

This document has been produced with the financial assistance of the European Union. The views expressed herein can in no way be taken to reflect the official opinion of the European

Union.

December 2009 JESSICA Evaluation Study for Hamburg – Final Report

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TABLE OF CONTENTS

TABLE OF DIAGRAMS ....................................................................................5

SUMMARY ....................................................................................................7

1 INTRODUCTION .................................................................................12

1.1 Framework conditions for JESSICA evaluation in Hamburg ...................... 13 1.2 Motivation ........................................................................................................ 13 1.3 JESSICA in Hamburg – multi-stakeholder development process .............. 14 1.4 Scope of the JESSICA Evaluation Study ...................................................... 17

2 URBAN DEVELOPMENT IN HAMBURG: GENERAL CONDITIONS AND MARKET ...........................................................................................18

2.1 The lead concept “Metropolis Hamburg – a growing city” ......................... 18

2.1.1 Objectives and requirements ................................................................. 19

2.1.2 Target messages and key projects........................................................ 21 2.2 The “Leap across the Elbe“ model project................................................... 21 2.3 Additional urban development projects........................................................ 24 2.4 Framework Programme for Integrated Urban Development (RISE) ........... 26 2.5 The City of Hamburg Operational Programme (ERDF 2007–2013) ............. 28

2.5.1 Background............................................................................................ 28

2.5.2 The Hamburg Development Strategy .................................................... 29

2.5.3 Priority axes ........................................................................................... 30 2.6 Integrated urban development planning in Hamburg.................................. 32 2.7 Summary market review and description of the possible role of

JESSICA in Hamburg ...................................................................................... 34

3 CONCRETE OPPORTUNITIES FOR JESSICA INSTRUMENTS: PROJECT LEVEL ...............................................................................36

3.1 Presentation of potential model projects...................................................... 37

3.1.1 Energy bunker ....................................................................................... 38 3.1.1.1 Project description ................................................................. 38 3.1.1.2 Eligibility for funding according to ERDF rules and the

Operational Programme ........................................................ 38 3.1.1.3 Description of the project participants ................................... 39 3.1.1.4 Description of the project development process.................... 39

3.1.2 Weltquartier heat distribution grid .......................................................... 39 3.1.2.1 Project description ................................................................. 39

JESSICA Evaluation Study for Hamburg – Final Report December 2009

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3.1.2.2 Funding eligibility within the meaning of ERDF rules and the Operational Programme...................................................39

3.1.2.3 Description of the project participants ....................................40 3.1.2.4 Description of the project development process ....................40

3.1.3 World Trade Square ...............................................................................41 3.1.3.1 Project description..................................................................41 3.1.3.2 Funding eligibility within the meaning of ERDF rules and

the operational Programme....................................................41 3.1.3.3 Description of the project participants ....................................41 3.1.3.4 Description of the project development process ....................42

3.1.4 Centre for local economy, education and further training.......................42 3.1.4.1 Project description..................................................................42 3.1.4.2 Funding eligibility within the meaning of ERDF rules and

the Operational Programme...................................................43 3.1.4.3 Description of the project participants ....................................43 3.1.4.4 Description of the project development process ....................43

3.1.5 “Gateway to the world” education centre................................................44 3.1.5.1 Project description..................................................................44 3.1.5.2 Funding eligibility within the meaning of ERDF rules and


3.1.6 Mümmelmannsberg Service and Health Centre (SHC)..........................45 3.1.6.1 Project description..................................................................45 3.1.6.2 Funding eligibility within the meaning of ERDF rules and


3.1.7 Neugraben-Fischbek education and community centre .........................47 3.1.7.1 Project description..................................................................48 3.1.7.2 Funding eligibility within the meaning of ERDF rules and


3.2 Assessment of the potential model projects presented and reasons for the expansion of the scope of the urban development fund .................49

4 STRUCTURE OF HAMBURG'S URBAN DEVELOPMENT FUND ................. 51

4.1 Financial consideration of the model projects selected ..............................51

4.1.1 Weltquartier heat distribution grid...........................................................51

4.1.2 Mümmelmannsberg Service and Health Centre.....................................51

4.1.3 Neugraben-Fischbek education and community centre .........................54

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4.2 Derivation of a financial model for the Hamburg urban development fund..................................................................................................................... 55

4.2.1 Capital requirement analysis at fund level ............................................... 56

4.2.2 Premises of the fund statement ............................................................... 58

4.2.3 Assessment of fund financing in view of implementation of public objectives at project level......................................................................... 60 4.2.3.1 Weltquartier heat distribution network ..................................... 60 4.2.3.2 Mümmelmannsberg service and health centre........................ 61 4.2.3.3 Neugraben-Fischbek education and community centre .......... 62

4.3 Assessment of the operations at fund level ................................................... 62

5 IDENTIFICATION OF LEGAL ISSUES REGARDING IMPLENTING A HAMBURG URBAN DEVELOPMENT FUND 67

6 SUMMARY REPORTING 69

6.1 Findings from the Hamburg model projects................................................... 69 6.2 SWOT analysis .................................................................................................. 70 6.3 Consideration of advantages for the various participants............................ 72 6.4 Future potential for JESSICA financing instruments in Hamburg................ 74 6.5 Questions identified regarding the implementation process for the

Hamburg urban development fund.................................................................. 75

7 SUMMARY AND OUTLOOK 76


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TABLE OF DIAGRAMS Figure 1 – Parties involved in the Hamburg model project (Source: FHH)..........15

Figure 2 – Course of the development process (Source: FHH)...........................16

Figure 3 – Population development and forecast for Hamburg (Source: FHH) ...18

Figure 4 - Political model of Metropolis Hamburg – a growing city (Source: FHH) ..............................................................................20

Figure 5 – New centre of Wilhelmsburg, actual (left) and planned (right) (Source: FHH) ..............................................................................24

Figure 6 – Work and leisure at Spree Harbour, actual (left) and planned (right) (Source: FHH) ..............................................................................24

Figure 7 – Financing plan according to priority axes and funding sources (in euros) (Source: FHH) ..............................................................32

Figure 8 – Wilhelmsburg energy bunker (Source: FHH)......................................38

Figure 9 – Wilhelmsburg world trade square (Source: FHH)...............................41

Figure 10 - “Gateway to the world” education centre (Source: FHH) ..................44

Figure 11 - Mümmelmannsberg Service and Health Centre (SHC) (Source: SEHW) ...........................................................................45

Figure 12 – Location of the future Neugraben-Fischbek Education and Community Centre Source: GWG industry) ................................47

Figure 13 – Investment costs in the Mümmelmannsberg SHC business plan ....52

Figure 14 – Cash flow development in the Mümmelmannsberg SHC business plan................................................................................53

Figure 15 – Investment costs and net rents without heating, lighting and other service costs required in the Neugraben Education and Health Centre ...............................................................................55

Figure 16 – Accumulated development of the fund expenditure in the first 4 years ...................................................................................56

Figure 17 – Derivation of fund structure ..............................................................57

Figure 18 - Finance plan for the Hamburg urban development fund (starting situation: 100% loan financing and 75% non-interest bearing refinancing of the fund activity)........................................59

Figure 19 – Accumulated change in the fund cash flow throughout the total operations.....................................................................................60

Figure 20 – Cash flows Mümmelmannsberg SHC project after consideration of the debt service ........................................................................62

Figure 21 – Accumulated change in the fund cash flow throughout all the operations (Alternative scenario 1: Reduction in fund management fees to 2.5875% of the ERDF investments) ...........63

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Figure 22 - Accumulated change in the fund cash flow throughout all the operations (Alternative scenario 2: Raising the fund loan rate from 2.75% to 3.07%) ...................................................................64

Figure 23 – Accumulated change in the fund cash flow throughout all the operations (Alternative scenario 3: Immediate reinvestment of available residual capital in new loans at 2.75%) .........................65

Figure 24 – General functioning of the Hamburg urban development fund .........66

Figure 25 – Strengths, weaknesses, opportunities and threats of an urban development fund .........................................................................72

Figure 26 – Financing opportunities for projects including an urban development fund .........................................................................73


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SUMMARY

With the JESSICA Initiative (Joint European Support for Sustainable Investment in City Areas), the European Commission has created a new opportunity to support urban development projects by using structural fund resources in a revolving way. Structural funds can be contributed to a Urban Development Fund (UDF), set up to invest these resources in urban development projects by way of loans, guarantees or equity contribution. Project investments will be paid to the UDF back again, so that they can be used several times, thus becoming more efficient and also exercising comparatively greater leverage on private capital than grant schemes.. However this requires a different type of structuring than hitherto of the projects as they must generate income sufficient revenue. This is why a combination of grants and UDF financing instruments is conceivable and even expressly desirable. The new support instruments serve to supplement subsidy support and not to replace it.

The European Investment Bank (EIB), together with the European Commission (GD Regio), supports the development and transposition of the JESSICA Initiative in the EU Member States. It makes finance and know-how available to implement urban development funds (by commissioning feasibility studies, for instance) and can be mandated as a Holding Fund Manager in line with the Structural Funds regulations. In addition, it can also contribute towards co-financing projects or ERDF resources invested in the fund.

In 2008 the Free and Hanseatic City of Hamburg joined the Federal ExWoSt research project (experimental housing and urban development) on urban development funds in Germany, initiated by the Federal Ministry of Transport, Building and Urban Development and by the Federal Office for Building and Regional Planning. At the same time, the ERDF managing Authority of Hamburg also formally requested a JESSICA Evaluation Study. This feasibility study was commissioned by the EIB to support the project using European Commission funds.

The conduct of this feasibility study was overseen by a Steering Committee involving the ERDF Managing Authority, the Ministry of Urban Development and Environment, the EIB, the Hamburg Wohnungsbaukreditanstalt (promotional bank of Hamburg) as possible fund manager, SAGA-GWG as a large city housing construction group with a multi-sector project portfolio, the Lawaetz Stiftung (Foundation) as an advisor for project-related subsidies and the Institut für Nachhaltiges Projektmanagement (Institute for Sustained Project Management).

The City of Hamburg's original motivation was to set up an urban development fund closely linked to the civil activities in the district of Wilhelmsburg. A total of 8.4 million ERDF funds will flow into the area during the funding period 2007-2013 in the context of the “Leap across the Elbe” model project. In addition, an International Building Exhibition and an International Garden Show will take place there in 2013. However, while this feasibility study was being processed, it was established that (currently) not sufficient projects conforming to JESSICA could be found in Wilhelmsburg, so that the UDF’s geographical scope was expanded to cover the whole city area of Hamburg.

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The framework conditions for implementing an urban development fund were elaborated in this feasibility study using “model” or “starter” projects which were selected by the Steering Committee. The projects were analysed against the objectives of the “Leap across the Elbe” concept as well as the following parameters:

Investment measures with reference to the job market and employment policy

Creation of the infrastructure needed to develop local economies

Increase in attractiveness of the centres of local district centres

The selected model projects were evaluated in the context of Hamburg’s urban development policy as well as OP objectives, followed by a financial analysis of concrete business cases provided by respective project promoters. Furthermore, a general analysis of the framework conditions of Hamburg’s market for urban development projects was undertaken, possible legal challenges were identified, JESSICA’s added value was assessed and further potential for Hamburg was identified as a result.

The Hamburg market for urban development projects is strongly shaped by the city authorities' activities. Currently the European lighthouse project HafenCity dominates the market and attracts large parts of capital investments available for urban development. The urban development focus is currently being steered in a new direction through model projects developed in the context of Hamburg’s “Leap across the Elbe”, i.e. the development of inner city wasteland and the upgrading of public spaces, of social infrastructure and of educational institutions, especially in deprived city areas and quarters. The framework programme ‘Integrated Urban Development’ adopted in the summer of 2009 forms the basis for above mentioned interventions and follows the following key objectives:

Improvement of living conditions by social and material stabilisation of the area,

Improvement of the development prospects for people in the fields of education, employment, economy and integration and

Strengthening the citizens' opportunities for involvement and activity of their own

Urban project implementation in Hamburg builds on specific integrated development concepts formulated for particular city areas, thereby meeting a key pre-condition for the use of ERDF - the existence of an integrated urban development plan in which the project in question is included.

The second pre-condition is a project’s correspondence to the City of Hamburg's Operational Programme for the ERDF (2007-2013)”. The Operational Programme provides for two relevant priority axes in addition to the priority axis for technical aid (1.27 million euros):

Priority axis 1 – innovation and knowledge-based economy (25.6 million euros). Support for networking research and economy, for the creative and innovative potential of SMEs and for ecological conversion of energy production


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Priority axis 2 – integrated and sustainable urban development (8.4 million euros). Resources to secure and strengthen the competitiveness of city and district structures.

All projects to be promoted by the envisaged urban development fund must be assignable to the priority axes from which ERDF resources are to be contributed to the UDF.

Three “starter (or model) projects” were selected and analysed for the feasibility study, thereby serving as a basis for elaborating a fund model. The selected projects represent different project typologies that characterise Hamburg’s urban development market and their exemplary evaluation verifies both the sustainability objectives and the financial feasibility of Hamburg's urban development fund.

District heating grid “Weltquartier”: A district containing 700 flats in the Wilhelmsburg district is to be supplied with district heating through the Weltquartier heat distribution grid. Investment costs amount to 1.1 million euros. Income is to be obtained through leasehold. However, a central development risk is the uncertainty still existing regarding the heat generating facility (energy bunker), for which there is still no mature solution. In addition, the costs of energy supply must not rise due to modernisation.

Service and health centre Mümmelmannsberg: A service and health centre is to be set-up in an old supply centre in Mümmelmannsberg. The renovation of housing units, the focus on assisted housing along with the setting up of services in the areas of local supply, health care, advice, and leisure are provided for within the framework of the mix-use development. Total investment costs are estimated at 17.1 million euros, of which however the housing proportion of 12.91 million is not eligible under ERDF rules. However, because of the meagre data situation, the total cost approach was used for the exemplary calculation of possible financing instruments that could be provided by the UDF. Regular income to re-pay UDF investments is generated through rental income (excluding housing).

Educational and community centre Neugraben-Fischbek: An educational and community centre is to be developed in the Neugraben-Fischbek district where an all-day school is to be newly built and will be supplemented by various facilities in the areas of culture, sport, leisure, care and advice. In this project also the ERDF subsidy is only given for some of the supplementary uses. Because of the lack of sufficient data, here too the investment costs of all supplementary uses were estimated for the exemplary financial calculation of financing to be received from the Hamburg urban development fund. In this project also, refinancing takes place using rental income.

A series of assumptions were made for the exemplary calculation of a preliminary financial model of a Hamburg urban development fund:

All projects are fully financed by a loan from the urban development fund.

The urban development fund will commence its activity at the start of 2010 and has a total capital of 10 million euros, of which 50% comes from ERDF and 25% from the Land's budget and accordingly does not yield interest (or have to do so). The other 25% will be added to the fund as a loan with an interest rate of 3.5% p.a.

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The fund can take up interim financing at 5.0% p.a. to cover short-term peak demand.

Free residual funds can be invested again at an interest rate of 2% p.a.

The costs for the fund management are estimated at 3% of the investment of ERDF funds and co-financing in the fund.

The term of the fund's business activity examined is assumed to be 20 years.

If the urban development fund awards its loans to the three projects selected at an annual interest rate of 2.75%, then once the 20 years have expired and once the loan has been paid back which the fund itself has taken up, then 93% (6.96 million euros) of the remaining capital used will have flowed back under the preconditions referred to above. In addition, a 100% flow back of the funds can be achieved, by reducing the management fee to 2.5875%, for example, or by an increase in the loan interest rate to 3.07 or an increase in the reinvestment interest rate to 2.75% (by investments in new projects, for instance). This way the added value of the urban development fund becomes clear also compared with providing project financing in the form of a “lost” grant. The capital invested in the fund can be reused after 20 years. In addition, more than 14 million euros will flow at the peak into the projects examined, and public interests will be brought to bear at project level.

Legal uncertainties regarding the implementation of the Hamburg urban development fund relate above all to the areas of calculation and settlement of the management costs, the consequences of the investment of ERDF funds from several priority axes in the urban development fund and the structural separation of financing streams for eligible and non-eligible costs. These questions and others will be worked out in a separate expert opinion commissioned by the EIB to clarify legal issues on implementing urban development funds in Germany. The expert opinion should be concluded during the first quarter of 2010..

It follows from the results of the exemplary fund calculation that the setting up of an urban development fund for Hamburg is worthwhile. Even a scenario with incomplete capital preservation in the fund seems better compared with classic grant schemes, since a significant share of ERDF resources can be reused. In addition, there are numerous optimisation parameters the stimulation of which would allow for full cost recovery and full recycling of ERDF funds.. Furthermore, the framework conditions also bear potential for optimisation with regard to the projects. Partial UDF financing of project costs (e.g. through financing of selected sub-projects), or the additional use of subsidies from other support programmes can, for instance, improve the fund model's performance.

It has become clear that the use of JESSICA instruments for sustainable urban development in Hamburg is sensible. A broad spectrum of additional financing opportunities for project developments opens up for public authorities; new types of projects can be stimulated and implemented using this innovative and revolving instrument. In addition, land and buildings can be contributed to the fund and enhance the fund’s impact. From the perspective of a project promoter, conditions for acquisition of loan capital from the market significantly improves as the financing instruments of the UDF help to de-risk projects and thus actively support the implementation of projects. The example of the heat distribution grid Weltquartier shows that the measures foreseen under the lead project “Leap over the Elbe” hold restructuring potential that would increase the revenue generation potential of projects and therefore allow for a shift from grant support to revolving financing, increasing the efficiency


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of ERDF funds while meeting OP objectives as Hamburg’s urban development goals. The project in Mümmelmannsberg makes clear that even districts characterised by downgrading processes and depreviation can offer project opportunities that would allow for a return on capital, thereby,also having a positive spill-over effect on smaller projects currently promoted through special support programmes (for instance “social city”). The project in Neugraben-Fischbek is exemplary for key investments in public uses with complementary mix-use components which have a wider urban development policy effect and, due to their revenue generating character, enable a pro-rata repayment of public funds channelled through the UDF.

Based on the results of this study, it is recommended to the Free and Hanseatic City of Hamburg that it set up an urban development fund with activities throughout the city area. Low-interest loans facilitate the acquisition of third-party capital for project developers and can reduce future rents, which lessens the likelihood of loss of rent during the utilisation phase of a real estate development and therefore de-risk projects for project promoters. Equity capital injections represent the critical factor in financing a project. Although they were not realised in any of the model projects examined, in addition to the positive effect on the acquisition of borrowed capital, they enable a far-reaching influence by the equity provider (und thus by the public authorities represented in the fund’s governance structure) on the development of the project to the very end. Guarantees also facilitate the acquisition of debt capital and generate fees without capital having to be paid out of the fund.

Following a positive political decision on setting up an urban development fund in Hamburg and further clarification of legal questions, the fund can be established after concluding a funding agreement between the ERDF Managing Authority and the designated fund manager. After a first recycling of ERDF resources in the UDF, these funds can be used to finance a wider spectrum of urban development projects and are no longer subject to the provisions of the ERDF regulations and the Operational Programme. New ground will be broken in the area of urban development policy with the setting up of the urban development fund for Hamburg. Successful management of this “pioneering work” over the next few years can effectuate a significant reinforcement of positive effects with regard to the city’s development objectives.

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1 INTRODUCTION

With the JESSICA Initiative (Joint European Support for Sustainable Investment in City Areas), the EU Commission has created new opportunities for supporting urban development projects using the resources of the structural funds in a revolving way. While projects were so far only promoted by providing grants, ERDF resources can now also be used by way of loans, guarantees and equity investments (programme period 2007-2013). ERDF resources are contributed to an urban development fund from which individual urban development projects can be supported by the above instruments. Urban development funds are to be set up as an independent legal entity for which agreements between the co-financing partners or shareholders are entered, or as a separate financing block within a financial institution.

Thus the initiative permits the use of new financing instruments with various advantages. Since the funds are not paid out as a “lost” grant, they can be used several times (“capital recycling”). Where projects are successful, public authorities participate in the enhancement in value. By investing capital in the urban development fund, profit from project returns and interest can be obtained which is then made available again for the promotion of other urban development projects. Moreover, the provision of public funds by the urban development fund enables greater leverage of private capital in project financing and the integration of extensive know-how of private project developers, investors and banks to carry out complex urban development projects, which would otherwise overburden individual stakeholders.

However, urban development funds and their financing instruments are only suitable for supporting particular urban development projects. Since financing is made available as a loan, a guarantee or equity capital, the projects must generate sufficient returns. While the fund’s project investment pipeline (or even concrete project expenditure) do not need to be mapped out upon establishment of the fund, a UDF business plan must be drawn up for the fund from which promotional objectives and anticipated capital return forecasts are evident to the parties involved.

The initiative tries to link new forms of financing for implementing urban development projects with the objectives of integrated urban development policy. In addition to economic and financial issues regarding the efficiency of individual financing instruments offered by the UDF, stakeholder co-operation, changes in political processes and governance structures as well as their contribution towards integrated urban development objectives, are to be seen as important factors.

The European Investment Bank (EIB) together with the European Commission (GD Regio) supports the development and implementation of the JESSICA Initiative in the EU Member States. In addition to financial support and advice when developing the JESSICA programme by way of Evaluation Studies, it also enables a rapid connection between the European Commission and Managing Authorities. It can take on the role of a multiplier of best practices owing to its experience of financing projects throughout Europe. In addition, EU regulations also permit the EIB to be appointed as a holding fund manager. Finally, in the context of its mandate, the EIB also provides additional financing opportunities, which can create further leverage in JESSICA models both at the fund and at project level.


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1.1 Framework conditions for JESSICA evaluation in Hamburg While the philosophy and the orientation of the JESSICA Initiative are discussed intensively in professional circles, a degree of uncertainty continues to be detectable in practice. This is not least due to the fact that numerous questions still exist in the practical implementation of the initiative. The application of the instruments leads to a fundamentally different form of financial support for projects and impacts also on structural and organisational features of these projects. As experiences with ERDF-based urban development funds do not exist to date, the parties involved find it difficult to understand pre-requisites, interdependencies, workflows and procedures in their entirety.

The conditions and the opportunities for the deployment of urban development funds are being tested without bias in Germany, both by the EIB Evaluation Studies and in the context of the Federal ExWoSt research project on UDFs in Germany. Thus the basis for possible implementation is being created in a co-operative way.

Experience of model projects and European best practice serveas a basis for developments in Germany. The question of the extent to which and with which interfaces fund structures can efficiently complement the current financing mechanisms in urban development is being investigated in particular. Among others, the following questions need to be investigated: Which organisational structure suits the various stakeholders and how can they best be involved in a JESSICA scheme? How can regional promotional banks (Hamburg-based WK Bank in this case) and KfW best contribute to the implementation process and how can urban development funds be integrated into existing practice? Not least the Federal ExWoSt research project is intended to contribute towards creating sustained acceptance of these new forms of urban financing.

In early 2008 the Free and Hanseatic City of Hamburg applied to the Federal Ministry for Transport, Building and Urban Development (BMVBS) and the Federal Office for Building and Regional Planning (BBR) with its project “Hamburg urban development fund” as a model project for the ExWoSt research project “Urban Development Funds in Germany”. The project was accepted and will receive research assistance from the Federal level until 2011 to fund the UDF development process.

To further support the “Hamburg urban development fund”, the EIB commissioned this feasibility study at the start of the project using European Commission funds. In the process the EIB study actively supports Hamburg's key participants (JESSICA Working Group) in the joint working out of a JESSICA model fund. It summarises the results of individual assessments as well as the feasibility/advantage of UDF structures. The JESSICA Feasibility Study is intended to be published at European level in order to continue to drive the thematic discussion forward in the EU Member States.

1.2 Motivation The city of Hamburg's original motivation for setting up an urban development fund was closely linked to the city activities in the Wilhelmsburg district.

Currently, the Free and Hanseatic City of Hamburg is pursuing the integrated development of the Elbe islands and thus of the Wilhelmsburg district using the “Metropolis Hamburg – a growing city” concept and the “Leap across the Elbe” model project associated with it. The

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ERDF Operational Programme will provide 6.3 million euros ERDF development capital in the funding period 2007-2013. Another 2.1 million euros of ERDF funds to develop the local economy is added to this. Support to activate the potential of areas at the harbour's edge, to increase the value of central locations and to provide an impetus to the existing economic activities in the district is to be achieved by setting up an urban development fund for Wilhelmsburg. These development attempts are accompanied by the fact that the International Building Exhibition and the International Garden Exhibition will take place in Hamburg in 2013 and thus the results of the long-term oriented development strategy will be brought up internationally for discussion.

Currently the Wilhelmsburg district is a social and economic problem area. Still there are great development opportunities for living, industry and commerce, leisure, education and culture, provided considerable investments are made involving private investors and public authorities. At the same time, social balancing measures and ecological objectives must be taken into consideration. From the public side, the use of various funding instruments is planned from various programmes (ERDF, ESF, social city, Hamburg – a city worth living in/active city district development, programme for housing and economic development). The JESSICA Initiative was seen as an effective approach of achieving an efficient use of public funds in combination with private investments. A long-term increase in value is expected in the course of the development measures in Wilhelmsburg, which should make planning/development profit possible in accordance with the JESSICA Initiative and a revolving UDF. However, while undertaking this feasibility study, it was established that (currently) a sufficient number of projects in conformity with JESSICA cannot be found in Wilhelmsburg, so that the Working Group decided to expand the fund’s territorial scope to cover the whole city area of Hamburg. Furthermore, an early decision was taken to focus on the development of a single UDF as opposed to a Holding Fund structure.

1.3 JESSICA in Hamburg – multi-stakeholder development process

Numerous participants are involved in the development process in the Hamburg urban development fund. In addition to the city administration participants (yellow) mentioned in Figure 1, the following play a role: the EIB, the Hamburgische Wohnungsbaukreditanstalt (promotional bank of Hamburg) as a possible fund administrator, the SAGA-GWG as a large public housing enterprise which also develops industrial properties through its subsidiary firms, and the Institute for Sustainable Project Management (INP) appointed since January 2009 by the City of Hamburg to moderate the process. Originally financing of the fund for Wilhelmsburg was to be carried out using the sources (blue) referred to in Figure 1. However, because of the new fund approach, adaptations had to be made during the study period.

Figure 2 clarifies the course of the development process to implement an urban development fund.This EIB feasibility study belongs to phase one. The study was conducted in close coordination with the working group and at the end is intended to assess potential for and possible advantages of implementing a JESSICA urban development fund in order to further the political decision taking process and to pave the way for possible implementation. In order to prepare for the actual implementation (phase III), an implementation study will probably be undertaken by the Hamburgische Wohnungsbaukreditanstalt in co-operation


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with the working group (Phase II). The Working Group drives the development process forward and is responsible for the exchange of information in Hamburg. It also organises the flow of information and the amount of work arising from the EIB feasibility study and the ExWoSt research project. In the implementation phase, the fund manager is envisaged to be supported by an advisory council made up of all those involved in the fund.

Figure 1 – Possible parties involved in the Hamburg UDF (Source: FHH)

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The interplay of the JESSICA Evaluation Study & ExWoSt research project “Urban development funds in Germany” UDF Hamburg

Figure 2 – Course of the development process (Source: FHH)

Following an ambitious start of the development process in the summer of 2008, phase one is now concluded with the drawing up of this evaluation study. Collecting relevant data for potential projects to be financed by the UDF proved to be a lengthy process, since in too many projects not enough data was available for assessment and not in an appropriate degree of detail. The search for projects was expanded to cover all of Hamburg in the context of the following working group meetings and three model projects were identified at the end of the selection process. Selection of the model projects was undertaken using theoretically pre-designed projects (not yet ready for implementation), which were looked at in place of other similarly structured project typologies identified in Hamburg’s urban regeneration market. Missing data was replaced by assumptions on the part of the experts. A political decision about setting up an urban development fund in Hamburg is intended to be brought about in early 2010, using the results of this evaluation study (phase I) and the envisaged implementation study (phase II).

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1.4 Scope of the JESSICA Evaluation Study The framework conditions for implementing an urban development fund were to be worked out in this evaluation study using selected model projects. The projects were initially selected using the following categories that can be derived from the objectives of Hamburg’s lead project the “Leap across the Elbe”:

Investment-related measure with reference to labour market and employment policy

Creation of the infrastructure needed to develop local economies

Increase in attractiveness of local district centres

The city of Hamburg followed the public-private finance approach to design the urban development fund. In this context, further clarification was required about how the combination of more and less profitable projects can lead to an altogether balanced diversification of risks and what terms and conditions the UDF’s financing instruments will have to offer. Furthermore, the critical mass of the urban development fund had to be named, the possible types of fund investments defined and the leverage estimated with regard to third parties.

Accordingly, the study comprised the following working steps:

1. Analysis of the framework conditions and of the market for urban development projects in Hamburg: Evaluation of planning guidelines and of the operational programme

2. Identification of opportunities for JESSICA to intervene at project level: Identification of potential model projects and drawing up of a sample project portfolio

3. Conception and analysis of UDF: structuring, drafting of a business plan and evaluation of the leverage

4. Legal analysis: identification of possible legal challenges

5. Summary reporting: SWOT analysis and consideration of added value along with identification of further potential for Hamburg

A total of seven recorded working group meetings were held in the course of this feasibility study.

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2 URBAN DEVELOPMENT IN HAMBURG: GENERAL CONDITIONS AND MARKET

This chapter closely looks at the planning framework for urban development in Hamburg and the pre-conditions for the use of JESSICA instruments as far as the market for urban development projects is concerned. In 2001, Hamburg began the formulation process for a workable plan for the future and in early 2007 gave itself a new vision for future development as a result of this. Planning and political strategies for the next few years were formulated under the lead concept “Metropolis Hamburg – a growing city”. Meanwhile, the new model “Hamburg - growing with foresight” was passed by the Senate. This model in many ways tallies fundamentally with the “Growing City” theme, but has yet to be put into concrete terms. This is why the “Growing City” concept will be looked at in this study. The model project “Leap across the Elbe” is part of this concept which is intended to push urban development southwards in the context of the International Building Exhibition (IBA) planned for 2013, in order to create a link between the centres of Hamburg and Harburg. The Operational Programme of the Land of Hamburg for the funding period 2007-2013 lays down the areas of use of ERDF resources made available by the EU and explicitly provides for support for “Leap across the Elbe”.

2.1 The lead concept “Metropolis Hamburg – a growing city”

Figure 3 – Population development and forecast for Hamburg (Source: FHH)

The model's title refers to the current demographic (cf.

Figure 3) and economic developments. Hamburg is ahead of all the federal states in terms of population growth and creation of new jobs. Hamburg's image as a green metropolis by the sea and as the gateway to the world is regarded as the basis for the sustainable qualitative

Population extrapolation

Advance estimate mean variant

Population

Calculations by Statistikamt Nord based on the 10th coordinated population projection for the Bund and

the Länder – August 2004

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growth striven for. Hamburg seeks to assert itself in the global competition between cities with the broadly structured model which directs itself towards equally quantitative and qualitative growth (“smart growth”) in population, places of work, quality of living, competence in knowledge and attractiveness of the city. Looked at physically, it is still based on Fritz Schumacher's “fan plan” with an expansion of the housing scheme axes or the utilisation of landscape axes being waived in favour of internal development on conversion areas belonging to the railways, post office, German Federal Armed Forces, industry and commerce, hospitals, care institutions, and churches. However, the old harbour areas, close to the housing estates in the centre of the city, are at the heart of the future physical development, which because of the considerable changes in the harbour economy now constitutes great potential for the newly oriented urban development. Accordingly for the first time with the “Leap across the Elbe”, a physical target plan was drawn up within a model, supplementing the “fan plan” with an additional development centre in the heart of the metropolitan region.

2.1.1 Objectives and requirements

In addition to the growth objectives in the fields of population and economy/employment already mentioned, the objectives of the lead concept are supplemented by an expansion of the metropolitan function, increase in the international attractiveness and the safeguarding of quality of living and future sustainability. Five model projects for Hamburg's future development were developed using the seven focuses for action with appropriate operative measures shown in Figure 4:

− Metropolis of knowledge: Making Hamburg a more attractive educational and scientific location and making it known internationally by intensifying co-operation in the areas of economy, marketing and tourism.

− Welcome to Hamburg: Making the Hanseatic city more attractive for a skilled work force from home and abroad, including a general improvement in the framework conditions for family life in the city.

− Hamburg, a cultural metropolis: Use of the city's cultural profile as a visible brand in external image, reinforcement as important cultural metropolis (architecture, urban development, culture, sport)

− Hamburg, a sporting city: Effective national and international staging of the city as a sporting city in preparation for a renewed showcasing to be an Olympic city

− Leap across the Elbe: Focus on citywide development to utilise the potential between the growth centres of the HafenCity and the Harburg river port, improvement in locations close to the sea and the centre, and of the quality of living in the heart of the city.

In the next few years, the focus of physical development is on Wilhelmsburg as the model project the “Leap across the Elbe“ is seen as a model for sustained, forward-looking, internal development and is intended to spread an impetus for development across the whole inner city area divided by the Elbe. In addition, the conversion of large areas (mostly used up to now by the harbour, the railways, hospitals and the military) opens up development opportunities and thus a return or gain of urban links and new city areas.

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Figure 4 - Political model of Metropolis Hamburg – a growing city (Source: FHH)

Due to the growing population, a housing requirement of between 5,000 and 6,000 new homes per year will arise over the next few years, with only between 3,000 and 4,500 homes currently being built per annum. The commercial demand for land is estimated at between 35 and 45 hectares annually, which can however be met by the existing potential land. When mobilising this land potential, well-targeted and balanced distribution of related opportunities and responsibilities will be important to improve the quality of living across the whole city.

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2.1.2 Target messages and key projects

The five target messages “more city in the city”, “build on quality - Hamburg a family friendly place to live”, “use skills - boost the economic area”, “experience the city of Hamburg” and “the metropolis is the city and the region” explain the central concept and are laid out across the sectoral planning themes such as housing, work, care, leisure etc. With a different focus in each case, they take account of sectoral overlaps and name a series of key projects which are intended to be the future focus for implementing the development objectives (cf. Appendix 1 - Good examples and key projects in the “Metropolis Hamburg - a growing city“ model). The central focus for action is the “Leap across the Elbe”. In addition to the IBA and IGS activities, the programmes “city renewal”, ”soziale Stadt” and “city renovation west” will be started in Wilhelmsburg. This is intended to blaze a trail for internal development, to reduce the burden on areas in the direct vicinity of the harbour and to restructure the islands of the Elbe by integrating the districts located on the river into the city structure. The IBA and IGS function as a pool of ideas for new projects and equally stand for a new procedural culture and for citizens' commitment to create a new momentum in the following areas:

− Quality development of inner city districts

− Integration of work places into urban development

− Forms of housing suitable for families and mixed ages

− Water and green spaces, architecture and building aesthetics

− Intelligent infrastructure

Housing and workplaces are to be integrated on former harbour land on the castle island in the Harburg river harbour. In Wilhelmsburg itself, a new central public park is to create a link between the various districts and new landscape-based forms of housing are to be developed in the east of the district. In addition, numerous projects for cleaning up dangerous waste and eco-friendly energy production are being prompted. A new district will come into being in the future in the “Kleiner Grasbrook” harbour area which will continue the developments in the neighbouring “HafenCity” and can serve as a nucleus for development for new sports facilities in the context of a possible bid for the Olympic Games.

2.2 The “Leap across the Elbe“ model project The central model project within Hamburg’s lead concept “Metropolis Hamburg - a growing city” shifts the direction of future urban development from the periphery back into the city centre. The whole river area of the Elbe along with the islands of the Elbe moves into the focus of urban planning and is intended to have a knock-on effect throughout the city. In the north it will be delimited physically by the “HafenCity” and in the south by the Harburg river harbour with the castle island (“Channel Harburg” project) and will create a link in the course of restructuring the islands of the Elbe. This way the districts located between the harbour, industry, infrastructure routes and the river are to be integrated into the municipal structure which has evolved naturally. The activities for qualitative growth will be directed towards making the overall strategy of the “Leap across the Elbe” something which can be experienced with the International Building Exhibition and the International Garden Show. A forward-looking picture of life in a modern city is being designed and carried out in exemplary

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fashion. There is an overview of the Wilhelmsburg district in Appendix 2 - Wilhelmsburg overview plan.

The model project is intended to increase the value of the Wilhelmsburg district, up to now greatly encumbered with problems, and to place special emphasis on the opportunities for cultural enrichment through new forms of co-existence. As well, there are some beacon projects on the one hand, which illustrate subjects of the future, occupy a prominent place and act as a beacon for the public. On the other hand, smaller projects effective in detail are being carried out which together cover future topics and trigger a quality impetus for the daily negotiation of urban development.

The islands in the Elbe are characterised by the juxtaposition of harbour, city, village and cultural landscape. Ambivalent impressions can perfectly well arise in this mixture of changing cityscapes, differing small landscapes, diverse forms of watercourses and heterogeneous combinations of use. These contrasts create the special physical, cultural and social potential for developing a versatile and living city. The harbour is of international significance and - especially following the eastward expansion of the EU - benefits from increasing turnover figures. Large open spaces with a variety of landscapes form the basis of an independent garden culture and anchor points for many leisure activities. The piecemeal estate structure of building units mostly divided into small sections shows a high proportion of social housing with a simultaneously low proportion of ownership.

The following areas of action are formulated in the model project to which numerous differing projects are allocated on the premise of organising globalisation productively, of using the resources of knowledge and culture to create added value and of creating quality districts:

− At home in the world: Productive utilisation of the great cultural diversity and presentation of places promoting an identity

o Construction of an international school

o The migrant town at the Müggenburger customs port as a centre of culture, supplemented by a floating youth hostel (tourist attraction)

o Establishment of an international study and research college

o Construction of an international indoor market

o Design of international gardens

o Organisation of scholastic and extracurricular opportunities for children

o Organising international musical events

− Housing experiment: New kinds of housing districts with different architecture

o Living beside the water (Aßmann Canal)

o Landscape related housing (Kirchdorf Ost)

o Non-standard housing (allotment buildings)

o Family in the city

o International city and integration

o New forms of ownership in Kirchdorf-Mitte


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− Working differently: Bringing housing and work together acceptably for the city

o Pearl chain logistics (Reiherstieg)

o Waterside City Olympics - mixed utilisation consisting of services, housing, cultural and trading facilities and harbour (Kleiner Grasbrook)

o Educational facility to shorten the innovation cycles on the Schlossinsel in Harburg Harbour (direct connection to Harburg Channel and with the Harburg Chamber of Trade Centre of Competence), combined with culture, gastronomy and housing

− The green metropolis: Increasing importance of the city's space potential for favourable location and quality of living

o New lake in the centre of Wilhelmsburg (cf. Figure 5)

o Waterway links between Hamburg, Harburg and the islands of the Elbe

o Green bridges linking the cultural landscapes from Wilhelmsburg-Ost as far as Reiherstieg

o Continuous waterfront promenades

o Landmark former Georgswerder dump

o Kreetsand dyke realignment area natural landscape

o Reiherstieg-Knie event area

o Spree Harbour swimming boat

− Waterside city: Development of sites full of character in waterside locations

o Favourable location and development potential at Kleiner Grasbrook, Harburg river port and at Reiherstieg

o Interlinking with inner city locations using the Vering Canal, the Aßmann Canal and the Jaffe-David-Canal

− Intelligent infrastructure: Noise reduction and separation effect, compensation for lack of design

o Renovation of Rethebrücke

o Harbour railway bridge

o Harbour link roads

o Innovative solutions for city/harbour co-operation

− Citizens for Hamburg: Identification and active citizen participation processes

o Advisory council for district development

o Future conference

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Figure 5 – New centre of Wilhelmsburg, actual (left) and planned (right) (Source: FHH)

Figure 6 – Work and leisure at Spree Harbour, actual (left) and planned (right) (Source: FHH)

When formulating the IBA projects (cf. Appendix 3 - Overview of IBA projects), it was not the quantity but the quality and model character that came to the forefront. Together they present the picture of the building exhibition and clarify the themes of the future and the quality requirements. Eye-catching beacon projects in strategic locations are intended to set the contours of future development in advance and create the strength necessary for the structural change. HafenCity is cited as an external beacon project already being implemented which it is intended to incorporate directly with the Elbe island via the new bridge. In Wilhelmsburg itself impetus effects are expected, particularly from scientific facilities, the emigrant city, the other developments around the Spree Harbour (business start-up centre, cf. Figure 6), the pearl chain logistics and the city garden housing. The developments in the Harburg river port (Schlossinsel) are intended to positively influence restructuring the Elbe islands from the south.

2.3 Additional urban development projects Over and above that, the Free and Hanseatic City of Hamburg has initiated a series of additional urban development projects, which will be supported by way of staffing and funding.

− The family gains

The Ministry of Urban Development and Environment, together with the Hamburg Housing Construction Loan Institution, is making 70,000 euros available for projects, which improve life for families in their home environment by stimulating neighbourly co-operation or promoting interaction and joint activities. Using a bidding process, the funds will be distributed to initiatives and projects, which for example, provide supervised playgrounds, implement special leisure facilities that cross the generation


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divide or housing projects organised to suit families, the disabled or children or also promote the imaginative design of outdoor areas.

− Private initiatives for district development (Business Improvement Districts)

The Free and Hanseatic City of Hamburg has been supporting innovation areas since 2005, by means of which clearly delimited business regions are enhanced in status into organisations in their own right at the instigation of those involved in a fixed period (five years maximum). Several innovation areas have already been set up: Neuer Wall (centre), Wandsbeker Markt (Wandsbek), Alte Holstenstraße (Bergedorf), Bergedorf inner city (Bergedorf), Hohe Bleichen (centre), Rissen (Altona), Ochsenzoll (north) and St. Pauli (centre). Innovation areas have also been possible in industrial areas since 2007.

Following this, from 2007 onwards, private urban development initiatives were also made possible in regions predominantly with housing development (innovation districts) implementing enhancement measures for public infrastructure and public space which exceed the normal standard. The first pilot project was launched in the large Steilshoop estate.

− HafenCity

Following the example of the London Docklands, a new district is being developed on 157 hectares of harbour areas lying waste in the heart of Hamburg directly on the Elbe and alongside the harbour, which can be characterised by a metropolitan mix of uses involving culture, leisure, retail, gastronomy, inner city housing, services, parks, squares and promenades. It serves to expand the city in terms of quality and is the largest urban development project in Hamburg.

A total of roughly 2.0 million gross floor area is being newly developed. 5,500 flats for 12,000 people are going be built and more than 40,000 jobs are going to be created. The high-quality modern architecture is characterised by many references to expanses of land and water. The ecological sustainability is to be ensured through a mixture of district heating and decentralised heat generation plants. The sites intended for housing use are being put out to tender and being awarded through competition procedures as a result of which a great variety design and architecture is guaranteed. Businesses, which plan to use at least half of it for themselves can apply for space in office buildings (no tender). A commission for site allocation must agree on all types of site allocation. Only then is the sales agreement negotiated based on the specific site conditions and the guidelines of the construction design. As a result, the city is given the opportunity of intervening directly in the development phase of private projects, while the buyers only need to effect financing purchase of the site at the end of the development process and thus optimise their design during development and to be able to find the first users.

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2.4 Framework Programme for Integrated Urban Development (RISE)

Building on the Hamburg’s conceptual approach, activities in active urban development and the project “Hamburg – a city worth living in” are brought together and further developed involving the individual expert policies in integrated urban development in a framework programme, which brings creativity, sustainability and readiness to assume responsibility to the forefront. In this way, Hamburg is to be promoted as a just city worth living in. People are to be supported in their housing and living environment and the districts boosted. Education and employment, along with the promotion of families and integration become the focus of interest. The programme drawn up in July 2009 by the Senate is a reaction to the situation in the districts afflicted by problems, which are marked by increasing disintegration and marginalization. Increasing poverty, long-term unemployment and growing social and cultural insecurity are determined as the causes of this.

Existing renovation and development procedures are already tackling these aspects, thus the “Leap across the Elbe“ model project. In the summer of 2007, a total of 35 areas are in a process of urban development or social revitalisation, amongst them Wilhelmsburg and Mümmelmannsberg. These various programmes promoting city building and renovation are intended to be consolidated with RISE into an overall strategy to boost their effect. Social, economic, structural and cultural problems must be approached in the process simultaneously by dealing in an integrated manner with visible efforts, with the expert policies being integrated embracing departments, their resources being brought together and a co-operative structure of local politics being shaped afresh. The RISE sets the following methodical and institutional priorities:

− Greater focus on social problem situations along with a strengthening of area-based management,

− Area-based co-ordination of the relevant expert policies for bringing together opportunities for development and funding, along with the use of investment and non-investment resources,

− Setting up of new procedural and organisational structures that cover several authorities,

− Use of up-to-date control instruments.

At programme level the central objectives of integrated urban development

− Improvement of living conditions by social and material stabilisation of the region,

− Improvement of the development perspectives for people in the fields of education, employment, economy and integration and

− Boosting the citizens' opportunities for collaboration and their own activity

are developed by twelve thematic areas of action

− Employment, skills and training,

− Local economy,

− Education,


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− Promotion of the family

− Housing, local housing market and housing industry,

− Living environment and public space,

− Integration of people from a migrant background,

− Culture in the district,

− Promotion of health,

− Environment and traffic,

− Safety, prevention of crime and violence,

− Sport and leisure.

Regional objectives are worded in the form of Integrated Development Plans (IDP) and refer to the particular areas of action to be supported in a specific territory. The IDPs are of strategic importance in implementing the programme. They recognise the local potential and promote communication between local participants. They are the binding basis for resource commitment by the authorities, offices and district offices in the context of the integrated district development programme and as a result also decisive for application for, approval of and monitoring of funds. Its central quality feature is the coherence between projects, partial objectives, objectives, areas of action, guide targets and diagnosis of problems. The IDP's elements and contents are listed in Appendix 7 - Elements and Contents of the Integrated Development Plans. The projects themselves must also be made sufficiently concrete, i.e. the eligibility for funding clarified, the mode of action described during implementation and a timetable indicated. The IDP must be updated regularly according to events and extrapolated. The same quality requirements as in the IDP list and the results of the self-evaluation after four years form the basis for the extrapolation. The preparation or extrapolation of an IDP is estimated at roughly 12 months. The Senate Commission decides on the IDP for Integrated Urban Development at the end of the procedure.

Standardised criteria for the choice of region, the IDP and performance of the project are defined so as to achieve a new quality standard in district development. However, in addition to classical problem areas, special plans can also be supported, which while they lie outside the problem areas, an exemplary status can be derived from their conception and function enabling transferability to disadvantaged districts. However, these special plans must, amongst other things, contribute to boosting local neighbourhoods and to improving the local infrastructure and exhibit innovative elements of integration of hitherto separate areas of responsibility.

An area management is set up for each IDP area which functions as a system for action organised socially and spatially and represents a network of local administration, local developers and local organisations.

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2.5 The City of Hamburg Operational Programme (ERDF 2007–2013)

2.5.1 Background

To date the Free and Hanseatic City of Hamburg has only benefited slightly from ERDF funds due to its considerable economic strength. From 2000 to 2006 ERDF funds amounting to 6.4 million euros flowed into the objective 2 area in the district of St. Pauli which were chiefly invested in infrastructure measures and less in business activities, because not enough project applications had been received from the business area and the development funds threatened to lapse. Once the geographical demarcation of the development background was removed in 2007, Hamburg received a considerable amount of ERDF funds, which can be spent throughout the city area to cope with the change in structure. The individual company funding to date remained, however it had to be directed to specific sectors (innovation and knowledge-based economy).

The whole of the Hamburg metropolitan region is characterised by the change from the industrial to the service society whose opportunities lie above all in the logistics, aviation, life sciences, media, tourism and trade sectors. An economic policy directed towards clusters can contribute to efficient and sustained utilisation of these opportunities, since the importance of industry in Hamburg continues to decrease. However, Hamburg is distinguished by overall very high productivity. At the same time, however, investment continues to be restrained, which chiefly affects SMEs and business start-ups requiring considerable funding (high-tech). A good competitive position in the field of renewable energy provides the opportunity for the ecological reorganisation of the economy with a simultaneous increase in employment in environmental technology and renewable energy.

When evaluating the human resources, it is striking that in Hamburg an above average number of young people do not have a school leaving qualification (11.2% of all school leavers). Although unemployment has fallen slightly in the past few years, however, above all poorly qualified individuals, young people and inhabitants with a migrant background are particularly affected. At the same time there is a shortage of qualified employees in the highly skilled field. To date the gap noted cannot be filled in the innovation system by the existing transfer arrangements for universities and businesses. Great significance is attributed to the creative economy with reference to this, which is intended to function as a pioneer of important paths for innovation.

The operational programme is also directed towards promoting renewable energy in Hamburg as a focus area in the course of which primary network structures are to be developed and existing strengths in the field of wind and solar power are to be further expanded.

The Hamburg city structure is characterised by numerous regional and district centres rich in tradition with a strong care function and their own image and which supplement the city functions. Some centres east of the inner city and south of the Elbe are suffering from development obstacles due to urban development and economic deficiencies, particular social challenges (unemployment, low education level, high incidence of foreigners etc.) and lack of utilisation of existing potential. The programmes “active district development” and “a city worth living in” are intended to counteract negative development tendencies and instead


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to implement targeted development impetus and value enhancement strategies to boost economic strength. Wilhelmsburg also belongs to these districts afflicted with problems, whose most important economic potential is a trade structure with a strong ethnic mix due to the high proportion of foreigners in the population. In addition to realising this potential through district-related development, positive effects are promised for Wilhelmsburg also from the urban enhancement of central locations and the realisation of area potential on the edge of the harbour edge.

Integrated urban development, economic and social measures are carried out as a contribution to the managed change in structure of the Free and Hanseatic City of Hamburg through the IBE and the IGS. Another important aspect regarding this is the sustainable development of a large number of conversion areas for housing and commercial spaces. Investment in the cultural economy (above all in district cultural centres) is intended to work as a catalyst for cultural district development to promote integration and to give a push to positive processes for change with regard to crime, tendencies towards segregation and social problems.

2.5.2 The Hamburg Development Strategy

The strategy's content and objectives are based on the directions of the Federal Republic of Germany's National Strategic Framework Plan, of the Lisbon Strategy and the Gothenburg Strategy (cf. Appendix 4 - The tasks and objectives of Germany's National Reform Programme and the National Strategic Framework Plan). The Hamburg Development Strategy formulates the “Expansion of Hamburg's Function as an innovation-oriented Metropolis and Boosting International Attractiveness for Investors and Labour“ and comprises the following objectives:

− Promoting Hamburg as a location for application-oriented research and development through improving exploitation of knowledge and knowledge transfer (SZ1)

In order to utilise innovation potential and implement growth in the technological field in the best possible way, individual infrastructure projects with an R&D reference are supported in Public Private Partnerships (PPP). In particular these include initiatives in state-of-the-art areas of technology in life sciences, in nano technology, logistics and telematics and renewable energy.

− Increase in the competitiveness of the Hamburg economy through boosting the R&D potential of SMEs and the setting up of innovative businesses (SZ2)

Investments in SMEs are closely linked to the innovation process and the marketing of innovations in order to thus strengthen the R&D potential of the SMEs. Further business set-ups in the high technology area are supported by ERDF funds, the use of revolving investment funds is also planned in addition.

− The reinforcing of existing and developing cluster structures and networks as the driving forces behind dynamic economic development and to increase the competitiveness of businesses (SZ3)

The Hamburg cluster and competence centres, the aeronautics industry, ICT and media sector, logistics sector, maritime economy, the life sciences (health care, medical technology, pharmaceuticals/biotechnology), nano technology and renewable

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energy are specifically promoted and are intended to trigger spill-over effects across sectors and spaces.

− Integrated development of individual districts and quarters to increase Hamburg's quality of living and future capabilities (SZ4)

The two-part structure of the city of Hamburg is to be joined by an urban planning development spreading across the Elbe in the model project the “Leap across the Elbe”. Measures promoting integration at urban planning level will be developed in the context its self-conception as a metropolis open to the world. At the same time, the economic development potential of ethnic infrastructures is being used to overcome the competitive disadvantages of local economies, tendencies towards ethnic segregation and the lack of cultural and social infrastructure. Promoting the cultural economy serves, in addition to socially integrated components, the generation of added value so that positive processes for change in districts are supported. The IBE and the IGS will contribute greatly towards improving location factors. Inner city waste lands will be revitalised which were often created when relinquishing land belonging to former state enterprises.

− Environment (QZ1) and equality of opportunity (QZ2)

Both horizontal objectives are taken into account in all the strategic targets.

Since no development area backdrop is planned within Hamburg for the funding period 2007–2013, the funds can be used throughout the area. However, it can be assumed that the subsidy content will greatly influence the spatial distribution of funds within Hamburg. It is above all the problem districts of St. Georg, Altona-Altstadt, Billstedt, Barmbek, Dehnhaide, Eidelstedt and Wilhelmsburg, which will benefit from ERDF funds. The three priorities referred to in article 5 (1) to (3) of the ERDF Regulation are of varying importance in Hamburg, on which the corresponding distribution of development funds across priorities also depends. Because of its significant contribution to the appropriation of the development funds the “promotion of innovation“ is clearly given priority. The funds are concentrated on a few subjects within the two priorities “environment and risk avoidance“ to extend existing strengths. Thus the second priority is equally taken into account due to the increased orientation of the “promotion of innovation” towards the environmental area. Only a small part of the funds is provided for the third priority “access to traffic and communication services”, since Hamburg's provision relating to this is already high quality. Another part of the funds is intended to flow into measures for sustained urban development to combat the strong concentration of economic, ecological and social problems in individual districts. A more precise delimitation of measures according to the three priorities is not possible, since they are too complex. However, aspects of sustainability, the environment and risk avoidance are to the fore.

2.5.3 Priority axes

The operational programme of the Free and Hanseatic City of Hamburg for funds from ERDF for the funding period 2007–2013 provides for the following priority axes:


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− Innovation and knowledge-based economy (priority axis 1)

All the structures affecting the entirety of the innovation system are going to be improved. With the networking of enterprises with the participants of the public research sector, PPP models are to be built and further developed with the corresponding co-operation of public and private sponsors so as, above all, to qualitatively consolidate R&D activities and competitive advantages. Innovation laboratories will be promoted as well. It is intended that the development funds will be approved increasingly on a competitive basis.

In order to increase the competitiveness of SMEs the creative and innovative potential of these enterprises is to be better utilised (founding new businesses, enterprise follow-ups, spin-offs). Investment funds will be used as development instruments for this or investment subsidies effected in the ”de minimis” area.

Innovative model projects and accompanying measures for increased use of renewable energy are to be promoted to drive forward ecological reorganisation in energy generation.

Priority axis 1 will receive the biggest proportion of ERDF funds for the funding period 2007–2013 at 25.6 million euros.

− Integrated and sustained urban development (priority axis 2)

The priority axis has as its objective to guarantee and expand sustainable and competitive city and district structures by promoting the integrated development of the individual districts and quarters to improve Hamburg's quality of living and sustainability. 8.4 million euros are available for this from 2007–2013. A quarter of the scheduled ERDF funds directly affect the horizontal objective of the environment as in priority axis 1. Justice is done to the horizontal objective of equality of opportunity by concentrating the strategy on the districts and quarters with the most economic and social problems and by promoting functional and urban planning qualities.

The local economy is the focal point of the development interest. SMEs are to be promoted in the context of the "de minimis” regulation. Local networks for co-operation are intended to improve education and employment opportunities for the local population, to allow creative economy networks to come into being. Urban planning, transport and cultural projects are to be combined and will contribute to a balanced economic structure in areas for revitalisation. District cultural centres are to be developed because of their positive social effects but also from a tourism-related economic standpoint.

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− Technical assistance and programme and project related studies/expert reports (priority axis 3)

A total of 1.27 million euros is available for priority axis 3, so as to support assessments, studies, conferences, competitions, publicity measures and exchanges of experience in networks, amongst other things.

Of the total 35.269 million euros ERDF funds intended for Hamburg for the funding period 2007–2013 the main portion (85.2%) is to be spent as lost subsidies, repayable funds (loans, interest rate relief, bond) are not provided for. Only a smaller portion of the funds is allocated via risk capital/equity interest (11.2%) and other forms of funding (3.6%).

While Hamburg has to do without a commitment in the JEREMIE Initiative because of the comparatively small amount of ERDF funds, the door for JESSICA is open. While the JESSICA Initiative instruments are not explicitly mentioned so far in the operational programme, the corresponding use of the funds available will be examined while the programme is being carried out. Figure 7 provides an overview of the distribution of the ERDF funds between the individual priority axes and of the origin of the corresponding joint funding.

Figure 7 – Financing plan according to priority axes and funding sources (in euros) (Source: FHH)

2.6 Integrated urban development planning in Hamburg An integrated urban development policy is considered to be a key instrument in sustainable urban development, which is why, among other things, its significance was emphasised in the Leipzig Charter. As per Structural Funds regulations, JESSICA financing instruments and investments are to be closely linked to integrated urban development plans. While there are no binding instructions at European level for integrated urban development plans in terms of their specific content and parameters, still a standard understanding regarding the overall features exists. Various sectoral development strategies and expert plans have to be spatially, chronologically and objectively co-ordinated and networked in integrated urban

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development plans by defining targets and by naming suitable instruments to achieve these targets. From a content point of view, appropriate statements should come out of the plans regarding the areas of economic, social and ecological sustainability as well as regarding urban planning matters. This understanding is formed in the Member States using respective planning systems and traditions. In almost all cases, the overall urban and district planning documentation available to date meets the requirements of the JESSICA Initiative.

The Free and Hanseatic City of Hamburg's model is based on the current on-site demographic and economic developments. It formulates four main general objectives and seven main focuses, which are each covered by operative measures. Five models across space and subject emerge in the overview, which will determine the city's development over the next decades. It becomes evident that sustained urban development is propagated in Hamburg at the highest planning policy level, which forms the reference framework for the various urban development policy fields of action and expert planning.

The models identified, amongst them the “Leap across the Elbe”, form the expert policy framework for numerous individual measures in every field of urban development. Other smaller, however no less significant urban development projects, such as the HafenCity, for instance, also follow an integrative approach by taking aspects of economic, social and ecological sustainability as a basis for the solution of the urban planning problem.

German building supervision planning is applied in a cross section direction in accordance with § 1 BauGB (Building Code). It ensures that the most recent building laws are beneficial to sustainable development by weighing up the various specialist requirements.

In addition to the relevant informal and formal planning instruments named above, federal and Land funding programmes supplement the urban development policy activities. For example, social and architectural aspects are combined in the “social city” programme in the context of developing urban construction.

It becomes evident in the overview of the formal and informal planning instruments and of the development programmes that their co-operation as an integrated urban development plan with inter-disciplinary objectives and strategies is to be judged in accordance with the requirements of the JESSICA Initiative. Due to the comprehensive reworking of the urban development model in Hamburg some years ago there was an opportunity to identify numerous urban development measures through the arrangement of model projects which have been tackled since then and are yet to be tackled. The promotion of subsidies by the EU, the Bund and the State of Hamburg is strongly directed towards these measures without being able to serve all the starting points equally.

With the framework programme for integrated urban development, the Free and Hanseatic City of Hamburg is now creating a new instrument to combine all of above mentioned approaches. The integrated development programmes correspond precisely to the EU requirements for an integrated urban development plan and will be drafted gradually as of 2010.

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2.7 Summary market review and description of the possible role of JESSICA in Hamburg

The market for urban development projects in the Free and Hanseatic City of Hamburg is strongly influenced by the activities of the city authorities. A large portion of the capital available for urban development projects is committed to the European beacon project of Hamburg HafenCity. The attractive market position of this project is also attracting a large volume of private capital. The HafenCity will be developed from the northwest to the southeast. 1,400 people were already living there at the end of 2008 and 2,000 were already working in the area. To date the worldwide economic crisis also does not appear to be having a direct effect on investment and construction in the HafenCity.

The Free and Hanseatic City of Hamburg has again directed the focus of urban development in a particular direction by drawing up its new model and the model projects developed from this. The islands of the Elbe will be the main focus of the urban development projects due to the “Leap across the Elbe” model project. The International Building Exhibition and the International Garden Show emphasise this setting of priorities and set development dynamics in advance with their time horizon up to 2013. By contrast with HafenCity, the islands of the Elbe cannot show any direct attractive market situation. In addition, many of the measures planned yield returns on capital which are too small or none at all (design of public space, social infrastructure, educational institutions), so that they are of little interest to private project developers.

A wealth of good experiences has exists already in other districts with the development of the Business Improvement Districts where it was possible to attract private investors for urban development and upgrading projects. In a further move, even Housing Improvement Districts are being experimented with at this stage (e.g. Steilshoop model project), i.e. the participation of private investors is even being stimulated in less high-yielding housing areas.

Hamburg’s focus on the development of inner city waste areas (as opposed to green field development), on the enhancement of the islands of the Elbe and on activities stimulating the participation of private investors in the field of urban development supports the use of JESSICA instruments as a promotional financing instrument for sustainable urban development. On the one hand, it might prove challenging to find a sufficient number of private investors for the Wilhelmsburg area because of the poorer market situation and the fact that returns on capital in urban development projects are chiefly being made in the HafenCity. On the other hand, it is the very examples of the HafenCity and the Business Improvement Districts (BIDs), which show that private investors can still be integrated successfully into Hamburg’s urban development agenda - and also that they want to be integrated. Now with the help of UDF financing instruments, urban development projects that are less attractive to private investors but definitely generating a certain minimum return on capital can be made more lucrative to attract more private investors (perhaps also for reasons of continuing local image profiling). In any case it cannot be of interest from the viewpoint of local government to develop the IBA projects itself and/or by allocating large amounts of “lost” grant funding, since the full potential of these projects would not be realised and overall (financial and operational) sustainability aspects would be neglected.

With the help of the JESSICA Initiative, there is an opportunity to design and expand Hamburg’s promotional activities and public financing initiatives more efficiently. The


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Hamburg urban development fund interventions can selectively give a push to urban development projects which are profitable in principle (profitability below normal market levels) and thus save subsidy capital, which can then be used elsewhere. Simultaneously problems and bottlenecks in project development can be tackled using urban development fund instruments – bottlenecks which subsidies and grant schemes have so far shown themselves as unsuitable to solve (providing a project promoter with a guarantee on rental income, for instance).

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3 CONCRETE OPPORTUNITIES FOR JESSICA INSTRUMENTS: PROJECT LEVEL

Because of the provisions of the corresponding European Regulations and of the specific characteristics of the JESSICA instruments, only certain types of projects are suitable for UDF financing. In close consultation with the Working Group, concrete model projects were selected, each representing a specific project typology reflecting Hamburg’s urban regeneration market. The different project typologies can be categorised as property development and property utilisation projects.

The following project typologies can be identified in the field of property development:

− Land and area development:

Guarantees can secure third-party financing for new developments of office and trading areas, for example, industrial parks and/or technology centres and low cost loans can bring about a reduction in the proportion of third-party financing. In the case of recycling waste areas, which are barely profitable, a supply of equity capital can promote the setting up of “development companies with a social agenda”.

− Project development (structural engineering) - new building:

Similar to JESSICA’s applicability when it comes to the development of land, the instrument is also well-placed to support the construction of individual buildings. While equity capital can be provided to set up a project development company and low cost loans can bring about a reduction in the proportion of external financing, guarantees on the one hand as already said can secure third-party financing, but on the other hand also safeguard against a possible revenue shortfall once the development has been completed.

The following project types can be identified in the field of property utilisation (existing stock):

− Interim acquisition models

The support of an interim acquisition company using equity capital can be supported for the necessary purchase and subsequent selling of sites and buildings. The regeneration of sites and buildings can be carried out with the help of low cost loans and guarantees.

− Energy upgrading of housing stock

Low cost loans and guarantees are also suitable to support measures for energy upgrading in the private/commercial and also public sector.

− Conservation and appreciation of natural and cultural heritage

Similar to the promotion of new project developments in this field, investments in existing concert halls and art galleries, leisure centres and similar can also be supported by low cost loans to reduce the proportion of external funding and guarantees to secure third-party funding along with safeguarding against a revenue shortfall once the development has been completed.


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− Ecological enhancement and improvement of infrastructure networks

On the other hand, cheaper loans and guarantees suit the promotion of energy efficiency, renewable energy production, supply and waste systems (gas, water, electricity, waste) as well as of local public transport

− Integration of additional uses and services into existing public housing stock

As already described under the last two points, the integration of “supplementary uses/services“ in public buildings, for example, can be promoted using low cost loans and guarantees.

3.1 Presentation of potential model projects Below projects were identified and discussed by the working group in view of their suitability for JESSICA financing instruments. Project were selected because they met the requirements of the ERDF funding rules,1 project revenue was to be expected and the project sponsors had a particular interest public support through JESSICA instruments. An overview of the criteria relevant for the selection of projects is located in Appendix 5 - Criteria for the selection of projects for urban development funds. Starting from the original approach, most projects are located in Wilhelmsburg. However, mostly these could not be pursued due to insufficient information (above all relating to mature business plans), limited project maturity and/or differing time scales. In the context of the necessary expansion of the UDF's intervention area, some projects outside Wilhelmsburg were also assessed. At the end of the day, a total of three projects were accepted into the feasibility study portfolio.

The three projects selected are intended to serve as a basis for elaborating a fund model with a real reference. In some cases, assumptions had to be made by the experts to cover missing project information. At the end of the project identification process, the working group agreed the following portfolio of model projects:

− Heat distribution network for the Weltquartier in Wilhelmsburg

− Mümmelmannsberg (Billstedt) service and health centre

− Neugraben-Fischbek education and community centre

1 The ERDF eligibility of the potential funding projects could only be verified on the basis of data provided to

the consultants. A final, in depth statement of reasons for the eligibility of these projects cannot be provided at this point in time. The project approaches set out below must also be examined in detail as to their compatibility with the EFRE funding rules in the event of a positive decision in the context of actual acceptance into the Hamburg urban development fund.

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3.1.1 Energy bunker

Figure 8 – Wilhelmsburg energy bunker (Source: FHH)

3.1.1.1 Project description

A former flak bunker in the centre of Wilhelmsburg, which provided shelter for up to 30,000 people during the Second World War, is to be remodelled into an energy bunker, which will use solar panels (3,500 m²) and an integrated wood chip cogeneration unit to generate and supply electricity and heat to the neighbouring Weltquartier. A 20,000 m³ water storage tank inside the bunker will serve as a distribution reservoir for the excess heat for subsequent use in the winter months. The bunker facility will be converted, the Wilhelsmburg district will be supplied with green energy, jobs will be created and further positive spill-over effects are expected .

3.1.1.2 Eligibility for funding according to ERDF rules and the Operational Programme

The project falls under Article 5 No. 2c of the Regulation (EC) No 1080/2006 of the European Parliament and of the Council of 5 July 2006 on the European Regional Development Fund “stimulating energy efficiency and renewable energy production and the development of efficient energy management systems”, since almost CO2-neutral energy and heat are produced, as well as under Art 2 No. 3 1. of the “Guidance note on eligibility of energy efficiency and renewable energies interventions under the ERDF and the Cohesion Fund (2007-2013) in the building sector including housing.”(COCOF 08/0034/02EN of 28.10.2008). The project can be assigned to priority axis 2 within the meaning of the current operational programme for Hamburg (“Integrated urban development”). In addition, the project is directly linked to the Free and Hanseatic City of Hamburg's model and its model project the “Leap across the Elbe” and thus in principle satisfies the requirements for inclusion in an integrated urban development plan. However, attention must be paid in the further designing of the


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project to ensure that an urban development or energy supply plan is drawn up which provides for supply for the whole population within the area.

3.1.1.3 Description of the project participants

The energy bunker is a key project in the IBA. Investors were being sought by tender at the time of the JESSICA Evaluation Study.

3.1.1.4 Description of the project development process

A piece of real estate fallen into disuse is being revitalised by the project. It can be assumed that large investments for the renovation of the basic structure and for the re-equipment with power station components will have to be effected and funded at the beginning of the development. More precise information should be contained in the investor's proposal. Up to now it was assumed that the energy bunker would come into operation in 2013 (the year of the IBA).

The energy bunker is suitable per se as a model project because of its conceptual and thematic focus. However, until now a profitability study and an agreed schedule for project development were lacking. With reference to profitability, it is quite likely that the energy bunker can also be implemented without promotional UDF financing. Therefore, and due to a lack of profound project data (a business plan is only drawn up when an investor has been found for the project), the energy bunker could not (yet) be recommended as a realistic starter project at the time this study was conducted.

3.1.2 Weltquartier heat distribution grid


To supplement the conversion of the flak bunker to a renewable energy production facility, the whole “Weltquartier” estate is to be connected to a district heat grid. Thus the energy standard of the existing properties is raised considerably above the energy efficiency requirements currently demanded. The objective is to cut down on the cost of energy consumption.

3.1.2.2 Funding eligibility within the meaning of ERDF rules and the Operational Programme

The project can be funded within the meaning of the ERDF rules and the operational programme for the same reasons as the energy bunker. In addition, the project can be directly derived from the Free and Hanseatic City of Hamburg's model and its model project the “Leap across the Elbe” and thus in principle satisfies the requirements of integrated urban development. However, attention must be paid in the further designing of the project to ensure that an urban development or energy supply plan is drawn up which provides a supply for the whole population within the area.

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The heat distribution grid is operated by SAGA-GWG and the grid is leased to the operators of the energy bunker. Should an operator for the energy bunker not be found in time, the Free and Hanseatic City of Hamburg or the IBA could conclude the agreements and then transfer them to the operator of the energy bunker at a later stage.


The project is an infrastructure development and was still in the planning process at the point in time of the feasibility study. Project implementation is intended from late 2009 to 2011. A more precise schedule was not yet available, since the development of the project is also connected with the developments of the energy bunker and the Weltquartier in its entirety.

Overall costs of 1.1 million euros were anticipated for the heat distribution grid. A leasehold rent bringing income would have to be adapted to the term of the lease, the maintenance costs and the financial scope of the energy bunker operator. A profitability calculation has not yet been drawn up for the project. However it was assumed that in addition to reduced interest loans from the urban development fund, non-repayable subsidies would also be required.

Some project development risks could already be determined. The primary risk of the project is the energy bunker not being implemented and/or (linked to this) a price for energy which is too high for the Wilhelmsburg market. To counteract this risk, the Free and Hanseatic City of Hamburg and the IBA must actively support the development of the energy bunker. The profitability calculation for the heat distribution grid also depends on the profitability calculation for the energy bunker. The FHH and SAGA-GWG considerations of developing a separate bio-cogeneration unit (in the event the energy bunker project might fail) have a risk lessening effect. However, no more concrete plans had yet been developed with reference to these considerations.

The investment costs required were provisionally estimated and can only be calculated precisely once the invitation for tenders is issued. Furthermore, the legal and ownership issues for the heat distribution grid must be defined and solved contractually.

In accordance with the risks referred to above, the initial schedule proposed was also not certain, since it must be co-ordinated with other planned developments in the district. Additional costs may arise as a result of the temporary use of other energy providers.

Compared with other possible model projects of the Hamburg urban development fund, the heat distribution grid was in the best position with regards to the data available at the point in time of the study. The investment costs could be estimated, the heat output price target reduced the financial scope. The use of JESSICA instruments to reduce the financing burden in the development phase and to shorten the payback time appeared sensible. The only essential uncertain factor here was the lack of clarity mentioned above concerning the implementation of the energy bunker. Because of the much better data situation compared to the other projects, above all the existence of a serious cost estimate and of a defined framework for income, the project was accepted into the Hamburg urban development fund portfolio as a model project.


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3.1.3 World Trade Square

Figure 9 – Wilhelmsburg world trade square (Source: FHH)


The world trade square, a part of the Weltquartier, houses small trade businesses and garages. In the framework of the “Leap across the Elbe”, the area is to be restructured and cheap and flexible trade areas for local (ethnic) businesses and for the creative economy are to be made available. About 15 trade units are planned with an area requirement of 60–230 m² gross floor area. Disputes between the adjoining housing use and the existing trade use will be quashed by the project. Additional advice services are to support business start-ups. An urban planning/structural engineering competition is underway and financed by the IBA. The results of the competition are expected for early 2010.

3.1.3.2 Funding eligibility within the meaning of ERDF rules and the operational Programme

The project falls under Art. 8 p. 2 of Regulation (EC) No 1080/2006 of the European Parliament and of the Council of 5 [sic.] July 2006 on the European Regional Development Fund “[...] the promotion of entrepreneurship, local employment and community development, [...]”. The operational programme explicitly provides for the promotion of local economies in priority axis 2. In addition, the project can be directly derived from the Free and Hanseatic City of Hamburg's model and its model project the “Leap across the Elbe” and thus, in principle, satisfies the requirements of integrated urban development.


The world trade square is part of the IBA Weltquartier project in the context of which the whole district will be generally overhauled in co-operation between the IBA, BSU and SAGA-GWG. In addition to the renovation of 823 flats, energy supply infrastructure will be renewed (cf. 3.1.2), the neighbourhood will be redesigned and the Weimarer Platz will be rebuilt as a central district square. Other relevant participants of the world trade square project should be identified once the competition procedure has been concluded.

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No statement could yet be made about the planned development due to the small degree of detail of the information obtained about this project up to now. An interim acquisition solution is conceivable where the sites are acquired, cleared up, restructured and prepared for new uses. However, it is always possible that project development will be taken forward by a private investor. Just like all the other IBA projects, the world trade square is expected to be implemented by 2013.

Against the background of above findings, the world trade square could also benefit from funding by the urban development fund. However, the most important bases for a decision - development planning and profitability analyses - were missing at the time of the evaluation study. The world trade square project was not taken into consideration as a model project for the Hamburg urban development fund because the project details were not sufficiently defined yet.

3.1.4 Centre for local economy, education and further training


A centre for local economy, education and training is to be implemented in the building complex ‘Am Veringhof 7’, intended to comprise a production and skills area fashion/textiles/design, a horticultural working area, a community dance and sports centre and exhibition and events premises, including a cafeteria. This way unusual project combinations and crossover projects are to be supported, networks initiated and a greater degree of autonomy set in motion.

The centre is intended to give an impetus to the social enhancement of the Reiherstieg district, since roughly one quarter of the residents there are in receipt of social benefits (SGB II) and one third of households are considered to be in debt. Due to the integrated approach, the centre provides an appropriate contribution towards commercial production, professional orientation services and professional training, informal capacity building, movement and sport. Through the project, local employment market policy and district development are to be innovatively combined.

The following projects are to be implemented in the centre for local economy, education and further training:

− Textiles/fashion/design: Studios with tailoring and design courses for Wilhelmsburg students and adults, showrooms for exhibitions, training, further training and professional orientation measures and a shop meeting place; occupational projects for the long term unemployed and for the disabled

− Further training: Further training and job offers for disabled people in the field of horticulture; training facilities in the logistics field for young people with special needs; a youth welfare service to reintegrate young people into ordinary schools

− Community Dance and Sports Centre: Dance projects for people without a school leaving certificate, dancing classes for Wilhelmsburg students, senior citizens and the disabled; open sports hall with offers combined with homework help and private coaching


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− Centre for business development and creation: Services for existing businesses and business start-ups (advice, further training, networking)

− Function room with cafeteria

The building is located in a commercial area and currently only used by a logistics training project. There is no development plan for the associated sites on the Vering Canal. More intensive utilisation of the site (including pulling down the existing building) would be possible, but would lead to considerable additional site preparation costs because of the serious pollution of the soil with heavy metals.


The project comes under Article 8 p. 2 of Regulation (EG) No 1080/2006 of the European Parliament and of the Council of 5 [sic.] July 2006 on the European Regional Development Fund “[...] promotion of entrepreneurship, local employment and community development, and the provision of services to the population taking account of changing demographic structures”. The operational programme provides for the promotion of investment measures with commercial references in priority axis 2, just as of projects, which create the infrastructure needed to develop the local economy. The commercial purchase or the resulting promotion of local economic development must be appropriately elaborated in the specific project application to the Managing Authority. In addition, the project can be directly derived from the Free and Hanseatic City of Hamburg's model and its model project the “Leap across the Elbe” and thus, in principle, satisfies the requirements of integrated urban development.


The Free and Hanseatic City of Hamburg and SpriAG are the owners of the building and the associated sites. In addition to SpriAG and the IBE those interested in utilisation are also to be gained as investors and to join together as a co-operative. Additional funding can be obtained through the BSU (“integrated social district development” programme) and/or the Ministry of Economic Affairs and Employment (ESF funds).


No concrete statements could yet be made about the planned development because of the small degree of detailed information on this project gained up to now. The project comprises the renovation of an existing building and the development of additional supplementary buildings. JESSICA funds should be used in all the development phases, chiefly as loans or as (small scale) participation in the equity capital. The project could not be accepted into the Hamburg urban development fund portfolio because no thought had yet been given by the actors involved with regard to possible future income.

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3.1.5 “Gateway to the world” education centre

Figure 10 - “Gateway to the world” education centre (Source: FHH)


The “Gateway to the world” education centre consists of five central modules. Space is provided in the School & Business Centre for groups of unemployed citizens to work on professional and business related tasks whereby genuine project-based tasks provide the students with real-life learning experience and the district’s development momentum is strengthened through the provision of services for unemployed citizens. In the Environment & Science Centre, students are encouraged to debate with scientific thought and action. The multifunction centre with adult education services, family services, youth welfare services and advice on education also provides a multipurpose room and a parent’s café. The new Elbe Island school houses elementary and grammar school classes and co-operates closely with day nurseries. Teaching is directed towards the main focus of English, art/music and religion. The Wilhelmsburg speech therapy school is also covered by this project and is intended to support new forms of work with parents, along with expert advice, therapeutic care and multilingual support.


The project comes under Article 8 p.2 of Regulation (EC) No 1080/2006 of the European Parliament and of the Council of 5 [sic.] July 2006 on the European Regional Development Fund “[...] and the provision of services to the population taking account of changing demographic structures”. The operational programme provides for the promotion of investment measures with commercial references in priority axis 2, just as of projects, which create the infrastructure needed to develop the local economy. The commercial purchase or the resulting promotion of the development of the local economy must be appropriately elaborated in the specific project application to the Managing Authority. In addition, the project can be directly derived from the Free and Hanseatic City of Hamburg's model and its model project the “Leap across the Elbe” and thus in principle satisfies the requirements of integrated urban development.


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The education centre is also an IBA project. There was no information yet about other participants at the point in time of the feasibility study.


A description of the project development process was not possible due to the lack of detailed information. However, it could be assumed that this project is a project development (new construction) with long-term returns. No further information was provided by the IBA about this project.

The Centre for Local Economy, Education and Further Training and the “Gateway to the World” Education Centre are structured in a similar way. Because of the principal focus of the projects on social effects (level of education, job market opportunities) sufficiently high yields are not to be expected (there was no profitability calculation yet available) to make the use of JESSICA instruments possible. Support for sub-projects with anticipated returns (multifunctional hall, textile studio) is however conceivable, but could not be justified due to lack of data.

3.1.6 Mümmelmannsberg Service and Health Centre (SHC)

EKZ - Mümmelmannsberg

Figure 11 - Mümmelmannsberg Service and Health Centre (SHC) (Source: SEHW)


The Mümmelmannsberg shopping centre consists of three multi-storey buildings, a commercial wing, between 3 and 4 four-storey ribbon developments containing chiefly housing units, flats for the disabled, a nursing home for the elderly and a medical centre. Various commercial uses are located on the ground floor, which are characterised by high

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fluctuation and increasing vacancies. The buildings constructed in the 1970s are very greatly in need of renovation and surround an unattractively designed square. In conjunction with a large proportion of “problematic tenants”, this creates a location with great social tensions and stigmatisation. This has a has a negative impact on the medical centre, the care facilities and the adjacent school. The whole district of Mümmelmannsberg accordingly also has a negative reputation in and around Hamburg and has therefore been included in the “social city programme”.

In the context of redevelopment, the ramshackle structure is to be renovated or totally demolished in some areas (commercial wing). Besides focussing on sheltered accommodation, services in the fields of local care, health, advice and assistance along with leisure are to be acquired for the former commercial spaces which fit well with the dominating housing use into the design of a service and health centre. In addition, the square is to be changed into an appropriate boulevard and an artist's studio created. The overall investment is estimated at 17.1 million euros, of which 12.91 million euros will be allotted to housing use, 3.14 million euros to outside areas and 1.08 million euros to the new commercial uses.


In its technical concept, the project pursues various measures which show a varied eligibility for funding according to ERDF Regulation rules. Therefore, thought must be given to the structuring of sub-projects and possible separate accounting:

− Making housing utilisation more attractive: In principle, promotion of investment in the housing function is not possible in the old EU Member States. However, the EU has introduced an amendment to the Regulation, which makes investments in energy renovation and the appreciation of housing stock eligible for funding and which was adopted in spring 2009 (Regulation (EC) 397/2009 of 6 May 2009). This type of support is however limited to a maximum 4% of the ERDF OP resources. The existing Operational Programme would have to be amended so as to be able to exploit this “new” opportunity for funding, as up to now it does not include an appropriate objective under which above measures could fall. But in the view of the EU Commission, good reasons are required for modifications to the OP. These do not seem to exist in Hamburg.

− Possible funding eligibility appears somewhat more complex for the special function “sheltered housing”. In accordance with Article 8 and in conjunction with Article 37 Paragraph 4a in the “sustainable urban development” paragraphs, the project could be eligible under the objective “Regional competitiveness and employment”. However, relevant references in the City of Hamburg’s OP are missing under the objective “Regional competitiveness and employment” (ERDF) and therefore here too eligibility for funding can be excluded. A general clarification of the question as to whether “sheltered housing” is to be seen as “housing development” or “the provision of social infrastructure” is recommended.

− The present commercial use and the optional “artist's studio” are eligible for funding with regard to the ERDF rules and the allocation in the operational programme (“support for local economies” / ”support for district and district cultural centres”).


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The project location belongs to a district, which is included in the “Social City” programme. Approaches to integrated urban development are supported within this programme, which is why the project requirements with regard to incorporation in an integrated urban development plan in conjunction also with the instruments of the general development plan are to be regarded as satisfied.


The property is jointly owned by the Hamburg Building Company SAGA GWG and another private owner (medical centre). A large part of the building belonged to a company, which faced insolvency in 2007 and was put up for compulsory auction in spring 2009. The lot went to one of the creditors. The Free and Hanseatic City of Hamburg is very interested in developing this real estate and plans to set up a company for social urban development (CSC) relating to this jointly with SAGA GWG. The Hamburg Housing Construction Loan Institution may be prepared to act as a possible funder of a project development supported by the local authority.


In the run-up to the compulsory auction in spring 2009, the Free and Hanseatic City of Hamburg, the Hamburg Housing Construction Loan Institution and SAGA GWG drew up an implementation model and a business case about the SHC and gave some thought to the CSC. Now that the lot for the real estate has gone to a creditor, development of the SHC will, if possible, be undertaken jointly with the creditor.

3.1.7 Neugraben-Fischbek education and community centre

Figure 12 – Location of the future Neugraben-Fischbek Education and Community Centre Source: GWG industry)

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It is intended to implement an Education and Community Centre (ECC) with this project by building an all-day school, a volleyball hall, along with various facilities of benefit to the public (culture, sport, day nursery) of 18,000 m² gross floor area. Only the following uses are to be taken into consideration for funding from the Hamburg urban development fund:

− Centre management

− Gastronomy

− Süderelbe forum

− Advice and education

− Cultural building

− Playhouse

− Day nursery

The site is located within the area of a development plan and is owned by the Free and Hanseatic City of Hamburg.


The uses for gastronomy, Süderelbe forum, cultural building and playhouse are eligible for funding as commercial uses with regard to ERDF rules and the allocation in the operational programme (“support of local economies”/“support of district and district cultural centres”). For the advice facility and the day nursery functions, in principle, in accordance with Article 8 and in conjunction with Article 37 Paragraph 4a in the “sustainable urban development” paragraphs, the project could be eligible under the objective “Regional competitiveness and employment”. However, the project is not included in the City of Hamburg's operational programme under the objective “Regional competitiveness and employment” so that eligibility for funding can be excluded. The project's location could also represent a difficulty for a subsidy. The Neugraben-Fischbek district does not belong to the districts afflicted with problems named in the Operational Programme, which are chiefly to be in receipt of ERDF funds.

As far as the project’s inclusion in an integrated urban development plan is concerned, there are no conflicts with the general development plan instructions and a development scheme for the site already exists. While the project cannot be liked to any other high-level strategy, it is not in conflict with it either, so that it can be seen as part of an integrated urban development plan. If necessary, this should be examined more closely during the actual funding application for the project to the UDF.


Project implementation and construction activities are to be undertaken by the GWG which is also to take over the management of the cente for the following twenty years.


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A competition for the realisation of structural engineering work under the project was completed in spring 2009. Construction works will start in early 2010 and commissioning will commence from the end of 2011 onwards. The potential users had only been partially identified at the time of this study, so that the moment when profit is generated could not yet be forecasted for the purpose of developing a detailed business case. Moreover, the uncertainties regarding anticipated rental income remain a risk.

The project was included as a model project for the Wilhelmsburg urban development fund, since it was the only project able to show all the data relevant for corresponding assessment.

3.2 Assessment of the potential model projects presented and reasons for the expansion of the scope of the urban development fund

An overall assessment of the potential model projects implies that only the Weltquartier heat distribution grid is worth considering as a possible model project for an urban development fund in Wilhelmsburg. It appeared difficult to ascertain further information and data about the other Wilhelmsburg projects, since the project sponsors in the course of the process had not shown any evident interest in more intensive co-operation.

On the initiative of the Hamburg Housing Construction Loan Institution, a project outside the Wilhelmsburg district, the Mümmelmannsberg service and health centre, was brought into the discussion as a potential model project and supported by sufficient information and data. The Ministry of Urban Development and Environment, in close co-operation with SAGA GWG supplied the relevant data for a further project, the Neugraben-Fischbek education and community centre. According to a unanimous statement by the members of the steering group for this study, both these projects represented a series of similarly constructed projects (complementary uses for district supply centres and school complexes), which represent a specific project typology for urban development in Hamburg. Therefore, as already outlined in previous chapters, the scope of the urban development fund was expanded to cover the whole city area (beyond Wilhelmsburg).

In principle two additional points had some influence on the considerations regarding the development of the Hamburg urban development fund.

The initial restriction of the territorial scope of the urban development fund to the Wilhelmsburg district led to considerable problems with the conception of the fund and also for the future funding of new projects. As the search for suitable model projects conducted in the context of this study has already shown, only a few potential model projects could be identified. On the one hand this was because the relevant participants showed no clear interest in using JESSICA instruments in their projects and on the other hand because many projects could not be admitted during the course of the fund development. (Developments were planned much later than the start of the fund). New projects will be sought which the urban development fund could subsidise after the start of the fund and after the initial repayment of subsidies. Because of the concentration of urban development policy on the Wilhelmsburg district and the development horizon of 2013 set by the IBA, it can however be assumed that there will hardly be any new projects. When the first capital has been repaid

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into the fund after between four and five years, the other IBA projects will already be in their final stages or have already been completed. It is not foreseeable that new urban development projects would be found after the IBA exhibition as the majority the necessary developments in Wilhelmsburg will already have been implemented by the IBA.

On the other hand, many of the Wilhelmsburg projects were and are directed towards social policy effects which make the repayment of the subsidies to the urban development fund more difficult, because they generate either no or only minimal profit (but by contrast show considerable indirect profits). Not only did these projects require subsidies for project development, but the majority of projects also needed financial support in the utilisation phase, which is why they are not suitable for funding by an urban development fund.

Therefore in principle, expansion of the urban development fund's field of action to include the whole city area was considered. Thus not only was it possible to search more intensively for model projects, but it was also possible to considerably guarantee the sustainability of the fund’s activity in the long-term (second and third “round” of the search for projects).


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4 STRUCTURE OF HAMBURG'S URBAN DEVELOPMENT FUND

Reference will be made to three exemplary model projects selected by the working group to develop the structure of the Hamburg urban development fund. These projects serve as proxies for many similar projects, which will become the focus of Hamburg’s urban development in years to come.

4.1 Financial consideration of the model projects selected

4.1.1 Weltquartier heat distribution grid

The heat distribution grid is intended to serve roughly 700 flats in the Weltquartier for which 1,900 m transmission lines with approximately 27 transfer stations are required. The overall cost for this project (gross construction costs, fees, additional costs, the unforeseen) amounted to 1.1 million euros according to initial estimates. Further, it was assumed that 4,300 MWh heat annually would be bought by the flats in the Weltquartier. The effective life of the heat distribution grid was estimated at 40 years according to VDI (Association of German Engineers’) Guideline 2067.

Where running costs are concerned, 1% of the building costs were estimated for repairs (in accordance with VDI Guideline 2067) and 5% of the overall investment costs for annual debt servicing. This resulted in a possible supply price of thermal energy of €15.12 per MWh which constituted a proportion of 18.7% of the total price of heat supply (€81.03 per MWh, as at 27.03.2009).

The Free and Hanseatic City of Hamburg's overriding premise was and is not to make electricity supply to the households in the Weltquartier more expensive despite the modernisation (costs). As a consequence, this meant that such an increase in price of the electricity supply should not occur as a result of the utilisation of fund capital, which could no longer be offset by the future, cheaper electricity generation in the energy bunker.

4.1.2 Mümmelmannsberg Service and Health Centre

264 flats covering a total living area of 13,836 m² are to be renovated in the Mümmelmannsberg SHC. The corresponding investment costs for this were estimated at 12.91 million euros (gross). In addition 25 commercial properties with a reduced area of 4,056 m² are to be modernised which was estimated at 1.08 million euros. Together with the costs for the redesign of the public space needed (3.14 million euros), the project thus had a capital requirement totalling 17.1 million euros. The duration of the project development until the sale of the developed real estate amounted to 15 years. Renovation of the flats was estimated for the first three years and modernisation of the commercial units for the first two years of the project development according to the business plan. The redesign of the public space was to be carried out afterwards. The costs for acquisition of the real estate and the costs of moving, vacancy and social care in the construction phase were not taken into account in the calculation.

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Figure 13 – Investment costs in the Mümmelmannsberg SHC business plan

Assumptions about subsidies for the redesign of the public space (80% subsidy from the Free and Hanseatic City of Hamburg development programme - 2.5 million euros) and by using the module B mod-programme (3.6 million euros) were also included when assessing the project development. The assumptions about the loss of rent were estimated at 3% (housing) and 4% (commercial) of the net rent exclusive of heating, lighting and other service costs. The maintenance costs were calculated at €4 per m² commercial space (from year 6 onwards €6 per m² annually) and at €4 per m² living area annually in the first three years, €6 per m² annually thereafter until year 11 and subsequently €11 per m² annually which came to a total of 2.2 million euros maintenance costs on the planning horizon. Administration costs were calculated as a lump sum at 100,000 euros annually plus 4% of the expected rent. The overall cost estimate is shown in Figure 13.

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Figure 14 – Cash flow development in the Mümmelmannsberg SHC business plan

On the income side, commercial rents of €5.90 per m² were assumed in the project development calculation (from year six €7 per m²). Flat rents varied within the range of €4.75 per m² monthly in the first year, €6.69 per m² monthly in year 12 of the development (rent price-fixing by applying the development programme module B) and finally €7.50 per m² monthly in year 15 (moderate rent increase). Thus a total of 5.4 million euros of commercial rents would be generated and 15.8 million in flat rents. The proceeds from selling the property in year 15 amounts to eleven times the net income, thus to 13.2 million euros (with an expected return of 9% for the investor). The change in cash flow is illustrated in Figure 14.

In the approach assessed, the project was 100% externally funded. 20% of these funds had to be guaranteed by the Free and Hanseatic City of Hamburg. The corresponding costs were put in at 0.75% of the sum to be secured. The interim and final funding interest rate was estimated at 5.50%.

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It was not possible to make a clear “separation” in the project calculation between a part eligible for JESSICA funding (commercial utilisation) and a part not eligible for funding (housing use, green space) based on the data to hand, which is why the whole project development was looked at as an example of the intervention of an urban development fund.

4.1.3 Neugraben-Fischbek education and community centre

The winning design, drawn up by D&K drost consult in the competition for the realisation of structural engineering work, provides for the following uses, complementing the school centre and the sports hall:

− Child welfare clinic: 49 m² GFA

− Day nursery: 1.329 m² GFA

− Centre and facility management: 86 m² GFA

− Gastronomy 441 m² GFA

− Playhouse: 385 m² GFA

− Süderelbe forum: 1.049 m² GFA

− Advice and education: 86 m² GFA

− Cultural building: 738 m² GFA

The investment costs and the possible construction cost subsidies were assessed by D&K based on above distribution of floor space. In conjunction with project financing under current market conditions and the utilisation costs of the building, net rent without heating, lighting and other service costs required could then be deduced from this (cf. Figure 15).

The public interest in the present project lies in reducing the net rent for complementary functions. The complementary uses required (child care, advice centre, culture/events, gastronomy) can be achieved more easily this way, using private partners if necessary, for which low rents can then also be agreed.


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Figure 15 – Investment costs and net rents without heating, lighting and other service costs required in the Neugraben Education and Health Centre

4.2 Derivation of a financial model for the Hamburg urban development fund

The project portfolio was the starting point for the further analysis with its payment streams and profitability, as derived in the previous chapter. In a first step, it was possible to deduce the urban development fund's maximum capital requirement from above data. The planned project financing which the fund was to provide for the individual business plans was to be

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considered accordingly. Finally, in the last step, the refinancing costs for the fund along with overall operational costs for the fund were taken into account in the fund architecture.

4.2.1 Capital requirement analysis at fund level

Analysis of the three model projects showed that the necessary fund volume can be increased step by step. While the Neugraben project shows a financing volume of 3.72 million and the Weltquartier heat distribution grid project 1.1 million euros directly at the start of the fund, in the Mümmelmannsberg project the capital stock is built up gradually over four years corresponding to the construction progress in accordance with the business plan. Therefore, below UDF disbursements emerged for the first four years:

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Figure 16 – Accumulated development of the fund expenditure in the first 4 years

Here, however, attention must be paid to three effects: Firstly, up to now, the financing of full project costs (100%) is assumed. Here a smaller capital requirement could arise if only parts of the project or sub-projects were financed by the UDF. Secondly, a chronological deferment of individual projects is possible, so that not all the projects commence simultaneously. Thirdly, up to now the capital and administration costs of the fund have not been recorded. These will increase the capital requirement.

On the one hand, the additional expenses to be sponsored by the fund, such as the management costs provided for, must still be taken into consideration. On the other hand, the fund’s refinancing conditions will determine the extent to which additional financing costs are to be covered at fund level. Thus the final capital requirement can only be determined as an interplay of all three parameters, in line with the following approach:

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Figure 17 – Derivation of fund structure

In line with this approach, the project must be assessed on the basis of computed investment criteria including the financing side. By contrast to the traditional approach in the context of project financing, capital values will not be applied in below calculation, but rather final asset values based on complete budget plans. In the recursive form of the final asset value, only they permit the realistic integration of the imperfect capital market with a split assets and liabilities interest rate. This way, the customary standardised prevailing interest rates for capital assets can be avoided for the funding of deficits and the reinvestment of surpluses.

tttt

tt

tt

tttttt

TKSSHhZESsZA

wherentfürZAAZEEVV

AEV

−+=⋅=⋅=

=−−++=−=

−

−

−

−

1

1

1

1

000

,...,1

In order to establish the asset values V t (t = 0.1, 1, …n,), the fund income (Et) is annually and progressively balanced in a budget with continuous expenditure (At) for management, tax and project promotion costs along with the interest income (ZEt) and the interest expenditure (ZAt). In each year, a check must be made as to whether the fund has an excess income and thus the opportunity for reinvesting free (fund) capital (H) for investment or credit interest (h), from which corresponding interest results in subsequent years. However, if there is an expenditure shortfall, then there is a need to raise capital (Kt), due to which corresponding interest expenditure and repayments (Tt) will be needed to refinance the business activity.

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4.2.2 Premises of the fund statement

In the following, the essential assumptions will now be clarified for the fund calculation. These assumptions have been set out and discussed in the context of the working group meetings.

Thus, a start of fund activity in January 2010 was assumed. Given the long-term project periods, a term of fund operations of 20 years (until the end of 2029) was assumed. Initially, the maximum management fee2 legally allowed (3% of ERDF investments in the fund) was taken as a basis for fund management. Because of the planned public sponsorship of the fund, tax payments were ignored.

Furthermore, it turned out during the discussions with the WK Bank (potential UDF manager) that UDF loan financing is favoured as a financing instrument. In this connection, the objective of the fund activity is to give the individual projects as favourable repayment conditions as possible for the total borrowings taken up. In addition to the loan interest, the term and the form of repayment are important influencing factors. Annuity loans with a repayment term of up to 20 years were considered meaningful against this background. Grace periods only became “indirectly” necessary in the Mümmelmannsberg project, since no repayment is possible in the first four years, rather the outstanding debt position actually increases due to additional raising of capital. As low a value as possible was striven for in view of the loan interest to further reduce the project burden and to achieve the particular public objectives. The loan interest must be seen as dependent on the chosen refinancing structure of the fund and must also be laid down with regard to the promotional impact on the pilot projects.

For the initial phase of UDF operations, the fund volume was defined by the working group at 10 million euros, for which mixed refinancing from various sources of capital was assumed.

75% non interest-bearing contribution to the fund: Since in the past (see the Brandenburg urban development fund), up to 75% of ERDF capital was paid into a fund, a corresponding amount of investment was also presumed in the Hamburg urban development fund. This public capital must meanwhile not only come from the ERDF funds available, by contrast with other urban development funds, but could also be made available from other Land Government sources within the meaning of “national co-financing”. (For Hamburg the maximum possible ERDF proportion is only at 50% in any case). Therefore, what is decisive from a financial view is not the source of the provision of capital but rather the non-interest bearing nature of the investment in the fund (i.e. either ERDF and/or other non-interest bearing public resources). It is only this interest-free investment, which opens up the opportunity for interest rate relief in lending, which will be discussed.

25% interest-bearing contribution to the fund: The remaining 25% of the fund's starting capital will be invested in the fund as interest-bearing capital at a current refinancing rate of 3.50%. On this occasion, the best rating class was taken as the basis for the fund. Corresponding refinancing could, for example, also be granted by the EIB, although the low fund volume could however pose a problem. Foundations could also make capital available within the meaning of a “social investment” to the urban development fund under the appropriate conditions. Over and above this, a preferential repayment of this investment is


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guaranteed by the fund operation. Interest-bearing funds can also flow into the Fund from public capital but also from private capital, if so desired by the fund management or the fund initiators. In principle, both refinancing models are thus possible in the context of the operations (with and without private capital at fund level). Regardless of this, private capital can be and is used at project level. This path is not only problem-free for the fund activity but also helpful in principle, since then no full financing of the investment volume is required any more.

Should a short-term peak funding requirement above the 10 million euros starting investment be required in the context of the fund activity, interim financing of the peak requirement occurs at a higher market interest rate of 5.0%. Should there be free residual capital at fund level, this is reinvested at 2.0%. These assumptions showed a conservative starting point, which could be varied in view of a further “optimisation potential” for the fund. This is, for instance, evident by the fund management naturally being able to reinvest the free capital in new projects also, which have currently not been settled. In this case, higher interest revenue is obtained from the reinvestment even at the low interest rate up to now. Further explanations about the continued optimisation are outlined at the end of this chapter.

If the iterations and adaptations to the fund structure are carried out in accordance with the above approach, then the following payment streams for the next 20 years can be deduced at fund level (cf. Figure 18), based on the project payment streams, the fund's financing conditions (at an interest rate of 2.75%), the costs and the refinancing of the operations (cf. Figure 18).

Figure 18 - Finance plan for the Hamburg urban development fund (starting situation: 100% loan financing and 75% non-interest bearing refinancing of the fund activity)

2 Higher management fees are also possible only as the result of a public tender procedure for the selection

of fund management services.

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Figure 19 – Accumulated change in the fund cash flow throughout the total operations

It is evident that the fund’s projected cash flow indicates typical investment character. Expenditure predominates in the first four years. From year five onwards up to the possible end of the fund’s activities (and of all projects), there are only reimbursements in the form of surplus revenue. These surplus revenues will be fairly small because of the terms of the fund's financing products (low interest rate, long term). At the same time, the highest excess expenditure occurs in year four. At its peak, the UDF’s capital requirement will be over 14 million euros which is a result of the high investment requirement in the Mümmelmannsberg project. In principle, it must be noted that the proposed fund model is not a set target but the result of an iterative process and working group discussions. This allows for a step-by-step convergence of the fund architecture with the (promotional) financing requirements of the selected model projects, shown very clearly when analysing the effects the fund financing has on these projects.

4.2.3 Assessment of fund financing in view of implementation of public objectives at project level

4.2.3.1 Weltquartier heat distribution network

100% of the planned investment costs of 1.1 million euros would be financed by the Hamburg urban development fund. Here, a long term loan with a 20 year repayment period at 2.75% interest was granted as a financing instrument which results in a 70,239 euros annual debt service.

Including the planned utilisation costs, an annual expenditure of 82,239 euros is to be expected for the project (heat distribution grid). At a planned heat output of 4,300 MWh, this expenditure corresponds to €19.13 per MWh which is approx. 26.5% above the necessary electricity supply price of €15.12 per MWh (at full subsidy support).

If the heat generation costs (the amount of which could not yet be determined by working group participants at the time the study was conducted) are set at the maximum delivery price to the consumer (currently €81.03), at this spread, a cost saving can be achieved (€81.03 €-19.13 €=61.90), provided the energy production costs of the Energiebunker remain below €61.90 per MWh. In this case, the project objective of enabling cost-efficient energy production for the Weltquartier would be fully implemented by the selected UDF financing instrument. Moreover, the full share of public contributions to the funds (e.g. ERDF), originally planned to be given out as grants, are paid back into the fund.

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Depending on the final heat generation costs (Energiebunker), if necessary, an even shorter loan repayment term could be agreed, from which a more rapid payback would result for the fund.

4.2.3.2 Mümmelmannsberg service and health centre

No separation of the cash flow for the various utilisation areas planned could be carried out by the working group for the Mümmelmannsberg SHC, which is why complete financing of the project was assumed. On this basis, it was possible to examine whether the necessary capital repayments can be realised at all by the project’s cash flow income and whether thus acceptability is also given from the perspective of the potential fund management. Should it be possible in future to clearly separate the uses and only to realise partial financing, for example, for the commercial part through the urban development fund, then this would greatly simplify feasibility at fund level. The present capital requirement, which is still at 17.1 million euros, ties up a large part of UDF resources. Even if stock rents reduce the net borrowing in the meantime, still at over 10 million euros these are already above the fund's starting volume. In this respect short-term peak refinancing at market interest rates is required in future from a UDF perspective.

Since the SHC business plan is directed towards 15 years, the loan financing term was also fixed at 15 years. Here, one must take account of the fact that a grace period is required in the first four years. Borrowing will grow during these years since the investment costs are not (yet) covered by the regular cash flow. Thus, the actual repayment period is 11 years.

Nevertheless, the resulting debt service of 1,157,545 euros can be borne by the project which leads to the full repayment of the UDF loan for the whole project. The project cash flows are clearly above the corresponding debt services in the overall 15 year project term. The minimum in year 13 is still at +64,000 euros (cf. Figure 20).

No debt service is provided in the first four years of the project term because of the grace period. Because of the high sales revenue in accordance with the business plan (14.4 million euros), in the final year of the actual repayment term (year 11) the debt service is more than guaranteed in any case. Therefore, these years were not listed from the outset referred to in the figure above.

Thus even under the (difficult) premise of the UDF financing the full project costs, the public interest in the project would be implemented, namely guaranteeing the enhancement of a disadvantaged district by this “lead investment” in the existing depriviated stock. Partial financing of the project would simplify implementation of the fund and reduce its capital commitment as well as its financing risk at individual project level.

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0

100.000

200.000

300.000

400.000

1 2 3 4 5 6 7 8 9

500.000

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10

Figure 20 – Cash flows Mümmelmannsberg SHC project after consideration of the debt service

4.2.3.3 Neugraben-Fischbek education and community centre

A concentration of fund financing takes place in the Neugraben-Fischbek education and community centre for complementary uses (child care, advice office, culture/events, gastronomy). After taking additional construction subsidies into consideration, a remaining capital requirement of 3.72 million euros results for the project.

Insofar as again full financing of the investment cost is assumed (annuity loan at 2.75% interest and a 20 year repayment term), an annual debt service of 244,349 euros can be deduced.

Compared with the annual debt service of 300,411 euros at market rate (as currently assumed by the project developers), an annual cost saving of 56,062 euros could be achieved..This corresponds to € 12.60 per m2 annually for 4.447 m2 net floor space or 1.05 euros monthly of the net rent (excluding service costs). In relation to the current average net rent (excluding service costs) of 6.82 euros, a reduction in net rent (excluding service costs) of 15.4% could be achieved through UDF financing. As a result, public policy objectives could be met at project level through the provision of (promotional) UDF financing.

4.3 Assessment of the operations at fund level The business plan for the Hamburg urban development fund, based on the first three starter projects selected by the Steering Committee, revealed the limits but also the additional optimisation opportunities of this innovative financing instrument for urban planning.

The finance planning cited above shows that the “national” co-financing would be repaid in full including interest after 20 years had passed. Thus private capital could also be presented with a reliable result in the event of uptake of return on capital of 3.5%. The interim peak financing required at a higher short-term refinancing interest rate is fully repaid at the end of the fund's term and the fund management costs are covered. However, when comparing the residual capital (6.74 million euros), it is evident that the interest-free fund capital or the “(ERDF) investment” of 7.50 million euros could only be recycled at almost 93% (6.96 million euros). It can be concluded from this result that possibilities for capital growth at fund level

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appear very limited under the given conditions. Furthermore, a dropping below the 75% share of interest-free capital in the fund (i.e. public or ERDF funds) should be prevented. as additional interest-bearing capital would be required, thereby leading to an increasing interest rate for the projects or to lower capital preservation at fund level. Both effects should be prevented from the consultants’ perspective.

Despite the observations above, the added value of UDF financing instruments is high compared with supporting the project by way of granting “lost” subsidies from ERDF capital or other public programmes. This is because after the end of the fund's term, the projects will have been implemented and 6.96 million euros is still available out of the 7.50 million euros initially provided. These recycled funds could be used for the financing of new urban development projects in Hamburg (through the UDF or, in case of UDF closure, through grants). In addition, in accordance with the present business plan and the above analysis, in the peak more than 14 million euros were provided by the UDF for the financing of starter projects and all public policy objectives were implemented at project level.

Furthermore, it must be emphasised that there are still opportunities for additional optimisation in implementing the UDF Hamburg. The financing of projects could be synchronised better with regard to their start and finalisation (instead of financing them chronologically). Also, the projected fund management costs of approx. 3.0 million euros already bear potential for optimisation. For example, a management fee reduction from 3.0% to 2.5875% would result in a 100% capital preservation (reimbursement 7.50 million euros) at UDF level. However, the setting of management costs will to a large degree be subject to a political decision in Hamburg and cannot be set in advance in the framework of this study.

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Figure 21 – Accumulated change in the fund cash flow throughout all the operations (Alternative scenario 1:

Reduction in fund management fees to 2.5875% of the ERDF investments)

Also, increasing interest rates and/or reducing the repayment terms improves the preservation of fund capital. Raising the interest rate for loans from the UDF to 3.07% also guarantees 100% capital preservation at fund level:

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Figure 22 - Accumulated change in the fund cash flow throughout all the operations (Alternative scenario 2:

Raising the fund loan rate from 2.75% to 3.07%)

Raising the loan interest rate however, as shown above, is at the expense of implementing public interests at the level of the individual projects; because UDF financing becomes more expensive from a project’s perspective and the promotional impact might be weakened. The same applies to a possible limitation of UDF financing from full project costs to a share of overall project investment requirements3 only, since in this case also, the remaining finance must again come from commercial sources and thus increased financing costs would restrict implementation of the project and its public objectives. The granting of guarantees by the fund too with lending in parallel by commercial bank partners would raise financing costs at project level, since the guarantee fees and the usual lending rates will not fall below the project financing interest rate of 2.75%, as assumed in this financial model.

Further optimisation can be achieved if the fund manager ensures an immediate re-investment of recycled funds as this would allow for the realisation of higher “interest” (as compared with the 2% interest on residual fund capital) and the implementation of additional public project objectives. In addition, the financing of more “short-term projects” and of smaller projects (instead of individual major projects, such as in the case of the SHC) is more advantageous because of the shorter loan repayment cycles but also because of the smaller “cluster risk” at fund level. However, such projects remain to be identified in Hamburg. If the fund management were able to allocate all the capital flowing back into the fund directly in new lending at 2.75%, a small surplus (reimbursements 7.52 million euros) could be achieved at fund level (cf. Figure 23).

3 For example, this would be possible for the Mümmelmannsberg SHC, if a total separation takes place

between the investment costs and the cash flow in the housing area and the commercial area. However, such a project structure does not (yet) exist at this time.

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Figure 23 – Accumulated change in the fund cash flow throughout all the operations (Alternative scenario 3:

Immediate reinvestment of available residual capital in new loans at 2.75%)

Finally, it must also be taken into account that for this financial model no private capital contributions have been considered at fund or project level, even though private sector leverage is a central building block in the JESSICA Initiative as it will help to multiply (the impact of) the scarce public resources. When defining the basic principles and policies of an urban development fund in Hamburg, consultations with private sector actors (including foundations) should be started as rapidly as possible in order to establish their interest in contributing resources at fund or project level. The 25% start-up financing with interest-bearing capital (amounting to 2.5 million euros) could serve as an initial starting point for private sector participation, provided the returns calculated above appeal to long-term and/or sustainable fund investors. Since multi-party participation in the fund is closely linked to issues concerning the right of say, it could also be sensible initially only to begin with public fund capital and only to integrate private capital at fund level in a second stage.

In addition, the use of other financing instruments (such as equity and guarantees) was explicitly kept open by the working group. Since the fund model drawn up for Hamburg is based exclusively on allocating loans, the change in fund cash flow will alter drastically with the inclusion of projects supported by equity injections or guarantees. The functioning of the whole fund instruments is shown as an example in Figure 24.

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Functioning of urban development fund

Hamburg urban development plan Acceptance of other projects into the fund

Figure 24 – General functioning of the Hamburg urban development fund

It is clear from above figure that the amount of interest-generating capital remaining in the fund varies, and that the time and the amount of the capital reflux into the fund depend on the UDF financing instruments. For the loan, the capital used is only paid back gradually into the fund through constant loan amortisation. Where there is equity participation, repayment of the capital used depends on profits and losses realised at project level and/or even only on sale of the UDF’s equity share, for example at the end of the project (reimbursement via exit proceeds). In the case of a guarantee, the capital amount guaranteed remains in the fund and can be invested bearing interest. Simultaneously, fees are recovered for granting guarantees. One and the same guarantee amount can even be lent several times in a large balanced project portfolio. In the end, from the perspective of a UDF project portfolio, the interaction between the instruments used and the actual reimbursement from project investments form the basis for supporting additional/new projects.

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5 IDENTIFICATION OF LEGAL ISSUES REGARDING IMPLENTING A HAMBURG URBAN DEVELOPMENT FUND

In the course of this study's development process, a variety of legal issues were identified regarding the actual implementation of the JESSICA Initiative in Hamburg. The questions are in part of a general nature, in part however derived specifically from the situation in Hamburg. All the questions arising were channelled into a national legal study on JESSICA which is currently conducted by a law firm. This law firm is collecting legal questions regarding JESSICA implementation from all the federal states and will produce a final report with answers to these questions by the end of 2009, in direct co-ordination with the European Commission. Initial answers can be found below in italics. The following questions were identified:

UDF interventions in the context of the Operational Programme:

o Can the urban development fund also promote projects which cannot be allocated to the Operational Programme's priority axes but are eligible for subsidy in accordance with Articles 5 and 8 of the ERDF Regulation (in an extreme case, can this apply to projects which are even excluded from the Operational Programme) ?

The following three points must be taken into consideration to assess the funding eligibility of projects: The principles of Article 4 (Convergence Regions) and 5 (Regional Competitiveness and Employment) of ERDF Regulation No 1080/2006 are decisive. What is established in the Operational Programme is equally important, i.e. the provisions laid down there about the ineligibility to fund projects also apply. In addition, projects can only be funded if they are embedded in an integrated urban development plan.

This means that the funding eligibility of projects in accordance with the conditions of Article 8 of the ERDF Regulation No 1080/2006 is only given if the provisions of the Operational Programme are adhered to (for example by a priority axis urban development).

o Can strategies for sustainable urban development other than those listed in Article 8 (2) of the ERDF Regulation be promoted by an urban development fund?

o How are facilities for sheltered (and serviced) housing classified by the European Commission - do the housing-related or the commercial aspects predominate?

o In principle can capital from several priority axes be invested in an urban development fund (proportional investment of capital in accordance with the varying objectives)?

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Fund management:

o Can the role of the fund manager be assigned to Hamburg Housing Construction Institution (promotional bank) fall under public procurement law? What formal standards must be adhered to regarding the selection of a fund manager?

o What formal standards must be adhered to for fund management?

o What documentation and reporting requirements have to be adhered to?

o Are there rules prohibiting the calculation of the management fee through reimbursements from capital granted to a project (for example in a loan granted at 2% an additional 3% is calculated for management costs, so that the actual interest rate is 5%)?

State aid:

o What formal standards must be taken into consideration, what procedures are required?

Separation of eligible and non-eligible cost (ERDF):

o How can a structural separation be made between eligible and non-eligible project expenditure? What formal standards must be taken into account?


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6 SUMMARY REPORTING

6.1 Findings from the Hamburg model projects It is clear from the results of the financial modelling for the three “starter projects” that it is worth setting up a Hamburg urban development fund. The calculations show that, under very conservative assumptions, the exemplary starter projects do not permit any complete maintenance of capital at fund level (however, full repayment of interim peak funding and of interest-bearing co-financing has been achieved). Nevertheless, compared to the provision of “lost” grants to these projects, every euro flowing back into the fund can be considered a success. Representatives of the European Commission also confirmed this once again in the context of the JESSICA Network meeting held in Brussels on 17.06.2009. Moreover, 100% capital preservation in the fund can be achieved by a few and minor modifications, as shown in this study.

In addition, the framework conditions and premises agreed for the (theoretic) financial model hugely reduce the profitability of the urban development fund, compared to actual fund operations implementation using concrete projects. For example, it was assumed that the UDF Hamburg would provide loan financing for 100% of the project cost, which in practice will in all probability turn out different.

When setting up the heat distribution grid, it is very likely that subsidies from federal or Land subsidy programmes can be brought in, so that the external capital requirement and the associated project costs are reduced. This way, project profitability increases on the one hand (the fund could apply higher pricing for its funding), on the other hand the capital requirement from the fund goes down, which is why the necessary interim funding of the urban development fund also goes down and thus costs for the urban development fund estimated up to now cease to apply.

If for the Mümmelmannsberg service and health centre only the proportion of actual uses eligible for funding are taken into account, then the capital requirement from the urban development fund reduces hugely. As a result, no further interim funding would be needed at fund level. Capital to subsidise additional projects would be available. Depending on the availability of alternative financing and re-financing sources for project costs not eligible under the ERDF (chiefly the development of new housing), profitability in this project also increases.

In the case of the Neugraben-Fischbek education and community centre, intervention by the Hamburg urban development fund enables substitution of commercially available loans and thus provides future uses with a clearly lower net rent (excluding heating, lighting and other service costs). However, instead of reducing the net rent, subsidies to the project can be replaced by Hamburg urban development fund loans, so as to reduce the amount of “lost” capital and recycle funds.

The three model projects make it very clear that the public interest in urban development projects can be implemented using revolving instruments. A heat supply network could be installed in Wilhelmsburg, which would only require slightly higher utilisation fees, but would

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return all the capital invested (compared to the total loss of a subsidy). Sustained mitigation of deprivation and social grievances could be achieved in Mümmelmannsberg by using UDF financing instruments. In the case of the education and community centre in Neugraben-Fischbek, minimum rents for complementary uses could be reduced and thus catalyse, or even guarantee, attraction and long-term commitments of the users.

6.2 SWOT analysis The central objective of the JESSICA Initiative is to enable a more efficient and revolving use of public funds or subsidies when implementing urban development projects. Return flows from from promoted projects occur by investing ERDF funds as loans, guarantees and participations in equity capital. This way, funds are available again for additional promotional activities. This aspect is particularly important against the background of the expansion of the European Union and ongoing discussions on the future of Structural Funds beyond the year 2013. .Regardless of the amount of ERDF funds the State of Hamburg will receive in the coming Structural Funds period, projects can be continuously promoted using capital recovered from the current Structural Funds period 2007-2013.

An additional advantage is that after a first investment cycle, the use of the capital which has flowed back to the UDF is no longer subject to ERDF eligibility criteria and that it must “only” be invested within the meaning of sustainable urban development (Art. 78 (7) of Regulation (EC) No 1083/2006). After the renewed return and UDF exit, ERDF resources contributed to the fund are in fact freely available to the Land.

From an administrative point of view, it is an advantage that ERDF funds are considered disbursed as soon as they are contributed to an urban development fund, and thus are no longer subject to the n+2 Regulation. of having to be transferred back to the European Commission if they are not spent in time. However, accordingly, the federal States will have to ensure that the corresponding ERDF co-financing is contributed to the urban development fund at the same time reimbursements are claimed from the European Commission (advance payment).

In this respect, the provision of national co-financing could prove difficult, since it is not yet clarified whether funds from particular federal or Land programmes (“Städtebauförderung”), which so far were used to co-finance ERDF grants for urban development, can first be contributed to a revolving fund and then invested in projects. Here the process of rethinking, away from grant schemes to innovative and revolving instruments, must continue to be supported at both regional and national level.

Even if the administrative burdens and requirements in the starting phase of an urban development fund (e.g. preparing the funding agreement, etc.) are more complex than traditional grant support, processing ERDF funds through an urban development fund is by far more efficient (for instance also as regards reporting to the European Commission).

Regionally available financing could be mobilised from public and private sources using the urban development fund's development activities, and tied into urban development policy activities. A leverage effect can be achieved this way, which exceeds the amount of available subsidies. At the same time, public authorities are given a far reaching right to a say in all phases of project development. In addition, jointly run public-private urban development projects raise private sector consciousness of sustainable urban development. Public


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authorities can play their part in such joint projects, using urban development fund instruments.

Strengths

New flexible financing instruments for urban development (loans, guarantees, equity capital) which can also be combined with grants

Multiple use of public (grant) resources increases the leverage of capital used (multiplier effect)

Increasingly subsidised public-private co-operation also raises the leverage on private capital and know-how which is introduced in support of sustainable urban development (public right to have a say in private developments + spill-over effects)

Holistic approach which also emphasises the private partners' social responsibility

Promotion of (sub-)projects not eligible for ERDF funding until now; in areas where grant schemes were not available up to now

Small investments help large projects to be implemented (enabling third party financing, e.g. through a guarantee from the UDF)

Risk reduction through long-term investments and diversification in a broadly invested portfolio

Recycled UDF capital is no longer subject to ERDF eligibility criteria, capital revolving twice is not subject to any more provisions for use after exit

No n+2 problem for ERDF fund investments (provided funds are invested by 2015)

Revolving financing approach promotes project discipline and project sustainability during preparation and implementation phases

Weaknesses

JESSICA was launched very late in the Structural Funds period; ERDF funds/OP resources are already pre-assigned to specific priority axes and projects through the Operational Programme.

Restricted use of ERDF funds (Structural Funds regulations; ERDF eligibility criteria), especially as far as housing construction is concerned (which often forms part of mix-use projects)

Urban development funds may exclusively invest in urban development projects (no alternative business activities possible)

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Opportunities

Transfer of the main focus of EU Structural Funds into the ten new Member States (convergence objectives) leads to ever decreasing resources for the old Member States in the long-run - the revolving urban development fund allows for long-term usability of funds already received

Long-term support approach which extends beyond the current Structural Funds period and, in principle, is not dependent on additional ERDF funds (financially sustainable and independent)

More efficient use of ERDF funds

Concentration of ERDF funds from various priority axes in the urban development fund (for Hamburg, however, probably not possible according to statements by the ERDF Managing Authority)

In times of economic crisis, JESSICA financing can positively affect the recipient's general credit worthiness

Opportunity to stimulate real estate/project development market

Project-link to integrated urban development plans safeguards public policy objectives and sustainable urban development

Threats

Financial and economic crisis makes gearing more difficult

Limits to municipal borrowing

Administrative structures and procedures are not yet in tune with anticipated UDF requirements and operations

Only a few projects within the current OP project pipeline (eligible for ERDF funding) show revenue-generation potential and therefore often do not enable repayments

Little experience with new financing instruments in urban development

Risks of capital loss restricted to the interest-bearing fund capital; the loss of non-interest bearing fund capital (from public sources) would be similar to subsidy support

Figure 25 – Strengths, weaknesses, opportunities and threats of an urban development fund

Moreover, the provision of UDF equity contributions or guarantees facilitate the acquisition of external capital for a project (gearing), for a private investor in particular, which can help numerous projects to actually be carried out.

An overview of the strengths, weaknesses, opportunities and threats of an urban development fund is shown in Figure 25 above.

6.3 Consideration of advantages for the various participants For the various participants in or beneficiaries of an urban development fund, additional advantages emerge in addition to the strengths, weaknesses, opportunities and threats listed above.

Projects: Since the JESSICA scheme follows an integrated approach in support of sustainable development, numerous differing types of project are worth considering for UDF


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private

subsidy

public

private

private subsidy

public

private fund

private subsidy

fund

financing. Through a more integrated perspective on promotional activities (and the potential use of ERDF resources from various priority axes), the relevant ministerial departments or authorities in Hamburg could benefit from ERDF interventions in a way which would previously not have been possible in this manner. Moreover, the spectrum of possible project developments is broadened as shown in Figure 26, although the use of UDF financing instruments can vary between loans, guarantees and equity. In addition, land and buildings can be contributed to the scheme and benefit directly from promoted development activities.

Figure 26 – Financing opportunities for projects including an urban development fund

The project promoter receiving financing from the urban development fund also benefits from further advantages, going beyond the provision of additional capital for the project or the creation of improved conditions for the acquisition of external capital (i.e. lowering the barriers to market entry). A favourable financing decision from the urban development fund signals a positive administrative and political attitude towards the project, which is beneficial to the acceptance and the success of the project development. It can also be assumed that this way, optimisation of the project approval process will occur in the course of time. As a result, additional development opportunities for private investors (new types of project) may open up.

Neighbourhoods: With UDF-financed projects implemented and market obstacles successfully overcome, UDF interventions are likely to create a “quality stamp” and boost the image of a district. These projects also exercise a positive effect on the neighbourhood as “lead investments” in urban development and can catalyse further positive processes with regard to economically and socially sustainable urban development.

Finance: Setting up an urban development fund and the advisory services associated with it bears potential for the finance industry as well as for the projects to benefit from relevant services. The need to draw up a business plan on the one hand, along with the financial appraisal and assessment of the projects' business plans on the other hand, are classical financial management services. Through the co-operation between financial fund management and the urban development policy advisory committee, public authorities will gain private sector know-how. The consideration of project and fund profitability is also likely to impact on national and regional authorities, likely to trigger small changes or adaptations of current promotional programmes for the benefit of (partly) profitable projects.

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6.4 Future potential for JESSICA financing instruments in Hamburg

It has become clear in this study that the use of JESSICA instruments in support of sustainable urban development in Hamburg is sensible. A series of concrete measures are to be implemented during the next decade against the background of the “Hamburg - growth with foresight” strategy and the associated model projects. At the same time, it is not just the current economic situation, which shows clearly that capital, whether public subsidies or private investment capital, is getting ever scarcer. Therefore it seems all the more sensible to use public funds for urban development more efficiently and to attract private investments in this field. The urban development fund instruments represent an ideal addition to the current subsidy support for carrying out Hamburg's urban development projects.

The example of Wilhelmsburg has shown that, although the majority of the measures for the “Leap across the Elbe” as they are currently structured require purely subsidy support (traffic infrastructure, green areas/nature conservation, enhancement of surroundings/furnishing, social facilities, ...), however, individual projects such as the heat distribution grid are indeed capable of paying back the promotional funds (or subsidies) needed over a longer period. This way the “Leap across the Elbe” on the one hand is further driven forward and on the other hand subsidies spent at the same time are recovered again for further use. Against the background of the International Building Exhibition and the International Garden Show in 2013, it can be assumed that existing projects hold a corresponding potential for restructuring (revenue-generating vs. grant-based) and that projects will be put into concrete terms in the near future for which funding by the Hamburg urban development fund would be sensible.

Even though Hamburg’s urban development strategy is directed towards growth, there are also areas in the Free and Hanseatic City of Hamburg affected by downgrading processes and showing pockets of social problems and deprivation. Even if special development programmes such as “Soziale Stadt” implement numerous small, sensible measures in these areas, with its instruments the UDF enables the development of lead or impulse projects involving private investors. The Mümmelmannsberg SHC project addresses the existing defects and with the help of capital from the UDF it creates a local economic growth pole while subsidies are simultaneously repaid. This project stands for a field of future urban development fund business activity. In future, similar projects in districts similarly affected will show great for financing from the urban development fund. Since the opportunity also exists on the part of the BSU of investing more land resources in the Hamburg urban development fund than are required for co-financing in line with the ERDF OP, considerable expansion is to be expected of the UDF intervention areas beyond ERDF eligibility criteria. Thus both parts of projects eligible for funding or not eligible within a complex mix-use project can be financed from the various capital sources contributing to the UDF. If considerably more in-kind contributions (land and buildings) are invested in the fund than resources form the ERDF Operational Programme, so that a corresponding (partial) project can be financed “exclusively” from non-OP resources, then also project costs not eligible under the ERDF (e.g. new housing development) can be financed in the start-up phase.

The Neugraben-Fischbek EHC stands for a third type of project, which in future will be in the focus of the urban development fund sponsorship. Investments in major public sector projects will be accompanied by complementary private sector uses to increase the


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reciprocal attractiveness of the project. Moreover, the promotion of such complementary uses will help to activate mixed uses in district centres and to revive the surrounding areas. Instead of a full grant support for such a project, grants will only be made available for non revenue-generating uses. Self-sponsoring private uses will receive start-up financing from the UDF which must be paid back again over time.

Furthermore, the provision of equity and guarantees (which were not considered in the financial model of this study) would open a wide range of interventions for the Hamburg urban development fund and its promotional objectives.

6.5 Questions identified regarding the implementation process for the Hamburg urban development fund

The present feasibility study confirms the profitability for Hamburg of an urban development fund and recommends a direct implementation. However, some preparatory steps must be undertaken in the run-up to the actual implementation of such a fund and the present data evaluation must be further put into concrete terms, especially as far as financial matters are concerned. These points must be considered in a concrete implementation study, possibly under the overall supervision of Hamburg’s promotional bank (as originally planned at the start of the working process). The decision about the next steps is subject to further working group discussions.

In the follow-up to this study, the final financing approach for the actual UDF implementation must be determined (e.g. financing instruments offered, UDF volume and partners, etc.) and the (financial) prerequisites for implementation clarified. Against this background (i) the formulation of a promotional guideline for UDF support, (ii) the setting up of a corresponding project advisory committee (for the assessment of a project’s relevance to the urban development policy and the drawing up of a model portfolio), (iii) the formulation of structures and procedures concerning fund management (including financial analysis and acceptance of the projects, consideration of public procurement standards and state aid questions, depending on the structure selected) and (iv) the preparation of associated advice and PR services, the UDF business plan and further administrative agreements are seen as relevant next steps, along with the step-by-step investment of mobilised capital in the fund.

Furthermore, the working group kept some other additional basic points open until now which must be clarified in the run-up to an actual implementation of the Hamburg urban development fund. In general, thought should be given to possible strategies to secure the projects financed by the fund to prevent capital losses. In addition, projects being promoted through equity contributions or guarantees must be examined more intensively, since the projects looked at in this feasibility study were all supported through the provision of soft loans (the fund's operations will alter significantly in case equity and guarantees are also considered). However, what applies to all projects and the UDF interventions as a whole is that compliance with public procurement law and state aid regulations will have to be ensured. In addition, the composition of the project advisory committee is still under discussion. Currently a centralised contextualisation (city administration) is favoured which could be supplemented by decentralised interlocutors in the districts. Synergies with the Senate Commission for Integrated District Development already named in RISE could be harnessed.

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7 SUMMARY AND OUTLOOK

Based on the results of this study, the Free and Hanseatic City of Hamburg is recommended to set up an urban development fund with activities throughout the city area. The UDF should provide the whole spectrum of JESSICA financing instruments as well, i.e. not just soft loans examined for the model projects in this study (as requested by the Steering Committee)..

The urban development fund’s soft loans facilitate the third-party financing of urban development projects and contribute accordingly to cost reduction for the project. This way, also in line with the real estate development cycle, soft loans can enable rent reductions for subsequent users, thereby reducing the likelihood of loss of rent in the utilisation phase.

In most cases, the lack of equity capital constitutes the bottleneck in project financing, so that an equity capital contribution by UDF on the one hand makes the required third-party project financing cheaper and on the other hand simplifies its acquisition. In addition, a more far-reaching influence by public authorities on the objectives and development of a supported project is made possible through a UDF equity contribution (right to say). For the fund’s financial model, this means that the capital spent is only brought back to the fund as an exit profit at the end of the project development.

Guarantees are also effective promotional instruments to give project promoters the opportunity of taking up third-party capital. The guarantee capital can be invested in addition to the guarantee fees to be collected from the project and thus generate further revenue for the urban development fund through interest.

The assessed projects in Wilhelmsburg and Mümmelmannsberg show that profit-yielding project developments are also possible in the city’s “problem districts” and that at the same time these projects make an important contribution towards overcoming the economic and social problems on the spot. The three model projects examined in this study represent actually existing project typologies, which the Hamburg urban development fund should support in the course of its implementation.

Following a positive political decision regarding the implementation of the Hamburg urban development fund and the clarification of state aid related matters, a fund such as this could already be implemented in 2010, based on the conclusion of a funding agreement between the Managing Authority and the designated fund manager. After putting their business plan in concrete terms, the projects examined could be financed from this urban development fund (provided they are selected for UDF financing in the context of a procedure which is compliant with public procurement rules). Other projects of a similar nature would first have to be examined similarly as set out in this study. However, in principle projects with shorter implementation terms and repayment cycles should be financed for the reasons already elaborated in this study.

With repeated recycling of UDF financing from the projects supported, and the practical functioning and profitability of the UDF thus being proofed, private investors should also be attracted at UDF level. Additional capital can be leveraged for urban development purposes by involving private investors at project level. Here, the existing legal questions need to be clarified in the run-up. Inclusion of private capital at fund level can further increase the fund’s leeway for intervention (without having to invest additional public resources in the fund), but


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at the same time require higher fund profitability. However, this is facilitated by the fact that after the first “investment cycle” of the fund, UDF resources can be invested more flexibly as they are no longer subject to ERDF eligibility criteria. Accordingly, for example, intervention opportunities open up for the urban development fund in the housing market, thereby allowing for further diversification of risk at fund level and increasing the chances of finding more lucrative projects according to ensure the revolving JESSICA concept. At fund level, participants also from foundations or development banks such as the KfW or EIB could be considered as possible medium to long term oriented co-financing partners.

The Free and Hanseatic City of Hamburg will be entering new territory when it comes to funding sustainable urban development with the Hamburg urban development fund. Successful “pioneering work” in this field over the coming years can create a variety of synergies and is likely to further strengthen the positive effects of the city’s overall development efforts.

Documents

City development fund in the context of the JESSICA · PDF file3.1.2.2 Funding eligibility within the meaning of ERDF rules and ... Figure 20 – Cash flows Mümmelmannsberg SHC project