Urban development funds in Europe : a theoretical and empirical analysis

Over the last decades, urbanisation rapidly increased in European countries and forced European policy makers to adapt to those changing circumstances. In 2006, the European Commission reacted to the arising urban needs by launching the JESSICA (Joint European Support for Sustainable Investments in City Areas) initiative to promote new instruments for financing urban regeneration and renewal. In contrast to traditional grant funding, this initiative aims to provide revolving financial instruments – equity, loans, and guarantees – organised as funds and co-financed by other investors. The four working papers of this thesis analyse the whole structure surrounding these so-called Urban Development Funds (UDFs). The first paper analyses the general need for urban development funding regardless of the financial subsidy instrument. It elaborates on measuring differences among cities, regions, or countries by the use of indicators representing numerous aspects of urban life. Principal Component Analysis is used to identify a small set of indicators relevant to the comparison of urban development for each of the three geographical units: cities, regions, and countries. The second paper focuses on failures in urban capital markets and their connection to urban development projects. It analyses three main market imperfections which justify public authority intervention. Depending on the (combination of) market imperfections connected to a particular category of urban development projects, either grants or revolving instruments – equity, loans, and guarantees – are the suitable subsidy means to remedy market failures and initiate project financing. The third paper combines and extends the results of the former two papers to reveal possible regional targets for the establishment of UDFs by a three step approach. The first step consists of computing a distance measurement between possible funding targets. The second step describes the movability through former funding, i.e., the funding efficiency measured by a Data Envelopment Analysis. The last step considers the market imperfections revealed by the needs of the respective urban projects. Finally, the fourth paper analyses whether a second level of funds is beneficial in the context of urban development support. A second level diversifies among first-level funds which have restricted investment universes such as regionally focused UDFs. This multi-level fund structure is beneficial for medium to high degrees of investor’s risk aversion due to the (low) costs incurred by this additional passive fund level. All in all, this thesis broadly covers a new and unexplored topic which is of high relevance to our society today and in the near future. The overall contribution is twofold. On the one hand, it provides tools for the analysis of several aspects of urban development and its financial support. These tools enable novel objective investigations for the establishment of UDFs which are not possible up to now. On the other hand, some general insights could be gained in the four papers. First of all, it was found to be important that funding decisions rely on indicator values for the considered geographical level to ensure the coherence of actual funding needs with the allocation of funds. Second, some types of projects suggested for UDFs should rather be supported by traditional grants. Finally, a second-level fund for urban development can indeed deliver risk reduction and should not remain a purely administrational unit.