The fund

Introduction

The European Commission (“EC”) and the European Investment Bank (“EIB”) have developed an initiative for supporting urban development. Through JESSICA financial engineering instrument, Bulgaria is provided with the opportunity to allocate part of its EU Structural Funds for investments in projects forming part of relevant integrated plans for sustainable urban development and regeneration (“Integrated Plans”).
The Regional Urban Development Fund AD (the “Fund”) has signed an Operational agreement with the EIB. The Fund scope of activity is investment in urban development projects (“Projects”) in the six largest Bulgarian cities outside Sofia, namely Plovdiv, Varna, Bourgas, Stara Zagora, Rousse and Pleven (the “Cities”).

Investment Policy Objectives

The overall objective of the Fund is to foster sustainable and balanced development of the Cities for better quality of life and increased welfare of their citizens.
In accordance to the overall objective, specific objectives are:

  • Support regional authorities in the identification of sustainable solutions for satisfaction of urban and social needs;
  • Innovate in developing revenue-generating public, public-private and purely private Projects;
  • Act as an independent financial vehicle for assisting the integrated urban development;
  • Act in a socially responsible manner;
  • Innovate in the integration of Cities with nature;
  • Reduce Cities’ ecological footprint.

Targeted Market and Sector Coverage

The Cities are diverse in terms of level and dynamics of economic and human capital. We have identified the following common priority areas of intervention and sectors with social necessities and economic potential, such as:

  • Building and management of modern educational, cultural, entertainment, leisure, health and sports facilities;
  • Public and private transport infrastructure (vehicles and networks), traffic management systems, parking facilities and other mobility enhancement services;
  • Utilities and urban infrastructure, whereas investments in waste, water and/or energy should be part of an integrated urban project;
  • Rehabilitation of dilapidated areas;
  • Investment and quality maintenance of public spaces;
  • Improved management and urban integration of natural resources (parks, forests, rivers and wildlife).
  • Support to and development of industrial zones, business and trade entertainment centers.
  • Energy efficiency and increased use of renewable energy, as part of integrated urban projects.

Geographical Coverage

The overall activity, as well as the geographical coverage of the Fund shall be strictly within the urbanized territory of Plovdiv, Varna, Bourgas, Stara Zagora, Rousse and Pleven.
All efforts will be made to ensure that each city receives a fair share of overall funding, but investment decisions will be based primarily on the quality and economic merit of the Projects irrespective of their location.

Strategic Development Documents

Eligible Projects have to be in compliance with:

Urban Master Plans and detailed spatial plans (as per Territorial Planning and the Regional Development Laws)
Municipal Development Plans (as per Local Authorities Law) and other relevant plans, strategies and programmes at local and regional level.
Integrated Plans (as per Operational Program “Regional Development” 2007-2013 (“OPRD”) – city authorities in cooperation with the Ministry of Regional Development and Public Works started development of these Integrated Plans in 2011

Urban Projects Eligibility Criteria

All projects will be judged in accordance with the following criteria:

  • Relevance to the objectives and eligible activities of the OPRD, Priority Axis 1 and the JESSICA Holding Fund Bulgaria (“JHFB”) Investment Strategy;
  • Link and compliance with planned investments from other Operational Programs (environment, transport, competition);
  • Location within the Cities’ urbanized territory;
  • Consistence with municipal priorities and compliance with the Strategic Development Documents, as presented above;
  • Revenue generating potential;
  • Relevance to the Investment Policy objectives of the Fund;
  • Significance in terms of social and economic impact;
  • Public support and relevance to the spirit of the city;
  • Overall sustainability;
  • Economic viability;
  • Motivation and competence of Project sponsor and manager.

The Projects can be sponsored by private investors, municipalities, and public-private partnerships.

Financial Products, Type and Size of Operations:

Only Projects with an ample revenue generation capacity will be deemed eligible.
The Fund will lend overall BGN 36.9 million, complemented by up to BGN 73.8 million co-financed by Societe Generale Expressbank (“SGEB”).
Lending from both lenders shall be Project–related and available by way of project finance, working capital and bridge finance facilities. The amount of any individual loan, granted by the Fund, shall be limited to BGN 18 million. On a selective basis the Fund shall also consider investments in equity, taking into account that the total amount of funds extended under Equity Investment Agreements shall not exceed at any time 3% of the funds disbursed to Final Recipients under Project Funding Agreements, unless the EIB has in advance consented otherwise in writing.
The most applicable project finance loans will finance between 70% and 80% of total Project costs, including, but not limited to capital, legal, development, engineering, civil works, construction contingency, insurance, financing and initial working capital costs. Disbursements shall be made on the basis of cost proving documentation and in most cases upon presentation of progress reports from an independent technical/construction advisor. Repayment instalments on principal shall start after the commercial operation date of the Project, i.e. after expiration of a grace period covering construction period, normally within 1-3 years. Tenors and repayment schedules shall be aligned with the economics of the respective Project, with overall loan life expected to be up to 23 years.

Applicable pricing on the overall financing under JESSICA shall be determined as a combination of the following parts:

  • JHFB via the Fund – Fixed rate determined by the Fund, subject to relevant and applicable restrictions
  • SGEB, as co-financing partner – Market rate of EURIBOR / SOFIBOR + interest rate hedging cost + risk premium + fees

The Project selection process shall start with call for proposals launched by the Fund and published at its Internet site, as well as at the Internet site of the Managing Authority of OPRD.
The information published thereon shall be provided to the municipalities of the Cities and the local authorities shall be asked in writing to publish the information at the Internet site of the six municipalities.
The call for proposals shall provide all potential project promoters with the necessary information about the scope of the measures that can be financed, the eligibility area, the budget limitations, the criteria for selection of eligible urban development projects, etc.
An explicit condition for the Fund to consider an urban development project for financing shall be a written notice by the relevant municipality in support of such urban project, which shall be considered as evidence that the municipality has undertaken the necessary steps to publicly announce the project in order to give opportunity for public discussions.

Indicative phases of the project selection and financing approval process

First phase:

Based on the opened Call for proposals the Fund shall establish contacts with prospective project developers. The Fund has to be provided with concise information describing the Project and including, among others:

  • Short information memorandum with description and visualization of the proposed improvements;
  • Expected sources of financing and its utilization;
  • Basic financial model;
  • Presentation of the promoters / sponsors.
  • Pictures of the Project’s location.

The approach of the Fund in selecting projects shall be on a “first come, first served” basis.

In case of positive initial eligibility assessment the Fund will meet the promoters / sponsors and publish summary information on the project on its Internet site. Otherwise, the Fund shall give a prompt feedback to the promoters/ sponsors.

Second phase:

The Fund shall receive, among others:

  • More details on the Project;
  • Functional financial model with justification of all major assumptions;
  • General information for the sponsors / promoters;
  • Mobility map of the urban area;
  • Timeframe of the Project;
  • Full details of existing / proposed municipal involvement and support;
  • To the extent applicable, a letter from the respective municipality for the project compliance with Integrated Plan.
  • Expected improvement of urban physical environment – i. e. architectural design;
  • Reports from external advisors, if applicable.

The Fund will take all necessary steps to formally check the project compliance with the applicable legal framework in terms of necessary permits, licences, etc., requirements according to public procurement and concessions acts, as well as with the Integrated Plan, if available.
In case of positive result from the related analysis, the Fund shall submit an Indicative Term Sheet for Financing.

Third Phase:

Promoters / sponsors shall develop and present to the Fund a comprehensive business plan including but not limited to:

  • Legal form of the Project;
  • Investment budget;
  • Market research (demand, supply , prices, competition);
  • Forecasted revenues, expenses, balance sheet and cash flow;
  • Detailed description of all associated risks;
  • Organizational structure;
  • Relevant feasibility studies, including but not limited to:
  1. Environmental impact;
  2. Proposed urban mobility solutions;
  3. Building engineering survey;
  4. Terms of reference for external and/or internal architecture;
  5. Proposed public opinion survey questionnaire.

To the extent applicable and possible, the Fund shall assist the prospective project promoters / sponsors with templates of, among others, information memorandum, tables with details of eligible project costs, sources and uses of contemplated financing, financial model, scope of works for external technical, legal, social and environmental reports, etc. These templates shall originate from the applicable commercial lending practice of SGEB adjusted to the specific features of the operational and appraisal model of the Fund.

Fourth Phase:

Project appraisal and investment decisions:

The Fund shall assess the project using criteria and processes that are in line with international investment management and lending practices and own policies of the Fund, considering as well applicable external rules (e.g. State Aid), to the extent those are relevant and applicable. All efforts to ensure optimal investment exits from the supported projects upon expiration of the related terms or based on the reasonable judgement of the Fund shall be made.
The Fund assumes risk on the Projects and its investments shall be repaid with the performed debt service by the final recipients or equity remuneration through investment exit. Therefore, the Fund shall invest only in Projects that are technically and, together with the investment of the Fund, economically viable.
For any form of investment, the Fund shall carry out appraisal of estimated business performance based on, among others, the Discounted Cash Flow (DCF) and Debt Service Coverage (DSCR) methods. The Fund will assess investment, operating costs and revenues throughout the project cycle in order to determine (i) the financial return on investment through the financial net present value of the project (NPV) and financial internal rate of return (IRR) and (ii) the debt service capacity measured by the DSCR ratio.
Following standard investment appraisal practice, cash flow forecasts will be estimated for a certain time frame, typically covering the lifetime of the investment made by the Fund, unless the specific features of the project require a longer investment horizon.
Additional analysis shall be made of the related general feasibility of the project, its technical viability and performance and all related risks, including, but not limited to business, structure, market, off-taker payment, construction, social and environmental, legal and documentation, etc.

Special attention will be paid to the social, economic and environmental value created by the Projects. Thus preliminary social impact assessment will also be performed. Through the use of any of the tools of program evaluation or business practice (such as Benefit Cost Analysis or Social Return on Investment) the Fund will aim to determine, to the extent possible, the Project specific output indicators, outcomes and impacts of the investment.
The social impact assessment comprises three major steps: definition of the Project’s social value proposition that is core to its desired social outcomes; quantification of social value by listing the top three social indicators most strongly correlated with desired social outcomes and that can be tracked as part of normal business operations; and monetization of the social impact value the Project aims to create over the next 10 to 20 years. The impact-value chain normally specifies financial, human and other inputs required for operations; activities; measurable outputs produced; and outcomes or changes in terms of the social, environmental or economic issues the Project seeks to address. The Fund would compare the forecasted data, provided by the Project promoters to existing comparables or statistical data (up to the extent it is existing or available), so that it can verify that the preliminary social impact assessment has been done correctly.
Upon performing all necessary analysis the Fund shall take a financing decision.

Selection criteria:

The following selection criteria shall be applicable to each Project assessment:

  • Compliance with OPRD objectives. Since the financial resources allocated to the Fund are provided by OPRD, it is crucial that all Projects comply with the objectives of its Priority Axis 1 “Sustainable and Integrated Urban Development”.
  • Contribution to OPRD quantitative outputs. Taking notice of the outputs under OPRD, the Fund will focus on projects that will facilitate the achievement of the target values of OPRD’s Priority Axis 1 – number of projects improving the physical environment, attractiveness of the Cities and risk prevention, number of improved health, educational, cultural and social services facilities, and number of renewed, rehabilitated, renovated industrial zones.
  • Compliance with the Fund’s objectives and other strategic documents. It is a key prerequisite that the supported Urban Projects contribute also to the achievement of the specific and overall Fund’s objectives and are in line with the Fund priorities.
  • Being part of Integrated Plan / Municipal Plan for Development and other local strategies. According to the provisions laid down in the OPRD and taking into account that this is one of the key requirements of JESSICA instrument, it is essential the interventions implemented in the project to be included in spatial planning, namely Master Plans, Municipal Development Plans and / or District Development Plan.
  • Maturity of the Urban Projects. The Fund will prioritise Projects with completed feasibility studies and work design, economic analysis and financial model. This approach is based on the timing requirement with respect to the preparation of the entire set of documents needed for Project submission and implementation.
  • Revenue generating. All selected Projects need to be revenue generating in order to recover the investments provided. In addition, these shall have the capacity to raise financing for future Projects.
  • Financial covenants. In the process of analyzing the Projects the following basic financial parameters shall be used – normal equity IRR, normal debt IRR, debt service coverage ratio, debt equity ratio, debt / EBITDA ratio, etc.
  • Profitability. The projected profitability of Projects without Fund’s support is expected to be lower than normally required by the market so that with typical forms of financing the Projects could not have been realized.

Еligible Beneficiaries And Costs:

Projects can either be organised as a separate activity block normally within the legal structure of the promoter / sponsor or can fall under a separate legal entity e.g. a Special Purpose Vehicle.

Investment in Projects will be made with eligible expenditures determined by the Structural Funds (“SF”) Regulations.

Excluded investments:

  • The creation and development of additional financial instruments, such as venture capital funds, loan funds or guarantee funds.
  • Investment in projects in any of the sectors or linked to any of the activities specified in Article 1(2) of Regulation (EC) 800/2008, i.e. aid to export-related activities towards third countries or Member States, specifically: aid directly linked to the quantities exported, to the establishment and operation of a export-related distribution network or to the other current expenditure linked to export activity as well as aid contingent upon the use of domestic in preference to imported goods.
  • Enterprises in the shipbuilding, coal, synthetic fibres and steel industry, as well as fisheries and agriculture.
  • Undertakings subject to an outstanding recovery order following a previous EC decision declaring an aid illegal and incompatible with the internal market.
  • Interest on debt, decommissioning costs of nuclear power plants and recoverable value-added tax.

Conditions for private co-investment:

Private co-investments will either be in the form of equity or any other contribution whose repayment is at least partially subject to the Project’s economic success. Standard senior loans or investment amounts benefitting from guarantees or first loss clauses do not qualify as private co-investments.
Special conditions for co-investments by the Fund
Whenever investing own resources, the Fund will respect arm’s length principles and keep transparent records for reporting, monitoring and auditing purposes.
In case the Fund intends to invest its own resources on terms different from those applicable to the resources provided by JHFB, the conditions will be assessed by an independent еxpert. The same is true in cases when the Fund provides in-kind contribution as a co-investor to a Project, where the value of the contribution also has to be assessed by an independent expert.

Special conditions for co-investment at Project level:

Article 78(6) of the Council Regulation (EC) No1083/2006 allows private or public co-financing to be effectively paid in cash or in kind at the level of urban Projects . According to the SF Regulations, private or public co-financing paid at the project level would only be eligible if complies with the following conditions:

  • The Fund retains overall responsibility for the investment operation including subsequent monitoring of the contributions from the operational programme according to the funding agreement;
  • The expenditure paid by such private or public entities is reported formally to the Fund which is responsible for verifying the reality and eligibility of the expenditure claimed; and
  • The audit trail is maintained down to the level of the payment of private/public co-financing to the Projects.