Estabilidad, movilidad y cumplimiento del

4.1.1 Financial Analysis

The independent legal experts behind this study and members of the Saarland working groups con- ceived the following “in-house model” during a number of meetings as a solution to the governance problems of the Saarland Community Development Fund (see Figure 4).

Figure 4 – CDF as “in-house” loan fund

This CDF is set up in the federal state ministry as an administrative department without its own legal entity. The fund should extend loans to municipalities and/or companies. The necessary banking li- cense of the SIKB should be “used” for this purpose.

The financial institute sees itself as merely a disbursing bank undertaking no credit risk, which the CDF alone should bear. The refinancing should occur in three equal parts from ERDF resources, state resources and a CEB loan to the fund.

Use of the banking license in this model must comply with all regulations of the German Banking Act. In concrete terms, this means the credit and financial aspects of the project must be evaluated (bringing in outside experts if necessary), the lending decisions must be made by the holder of the banking license, and the financial institute is responsible for both monitoring the loan and bearing

State of Saarland

MEET

MESA

_ministries

Administrative department

(fund management)

1. Community Development

Fund as inhouse solution

Co-

finance

(state)

Loan

(CEB)

Project 1

Project 2

…

SIKB (where appropriate

with advisory board)

- project review

- lending decision

- loan controlling

- capital adequacy

Loan

Loan

Loan

ERDF

(funds man.

agency)

the risk of credit default. Furthermore, depending on the project borrower, the bank must also back the risk with capital. Therefore, how well this model works financially depends in the end on how well the holder of the banking license makes lending decisions. If the individual project types are found to not be creditworthy and there is a considerable risk of default, they would not pass the bank’s requirements and would not be financed.

Against this backdrop, it does not seem possible that the ministerial fund management makes lend- ing decisions (as has been foreseen in the discussion so far). If the CDF is refinancing with credit, the implicit acceptance of a lower probability of repayment also seems debatable. The case of a ministe- rial decision maker without banking license and banking know-how (KWG) overriding a lending deci- sion (for a project actor eligible for funding but not creditworthy) also seems problematic (“the fund manager makes the funding decision”). Moreover, the capital requirement of a bank and thus its fi- nancial collateral appears to be at risk. The alternative of lending exclusively to municipalities seems quite ineffective given the communities’ debt situation, not just in the Saarland. Extending purely subordinated loans does not fit the foreseen project financing of real estate and land development. Furthermore, the JESSICA regulations stipulate that the UDF should be established either as a new company with its own legal personality or as a fixed part of a financial institute, where it would be recognised as its own accounting entity. The fund property held and managed by the ministry (in- house model) is currently not foreseen and might also contradict the principle of “independent fund management”.

4.1.2 Legal Analysis

In this model, requests for JESSICA funding and loans are directed to the “fund management”, which is merely an administrative department at the state ministry (in-house model). The fund manage- ment also makes the lending decisions. The SIKB simply functions as a paying agent and signs the loan contract with the borrower in the name of and on behalf of the state (in reference to the fund set up there as a separate asset). The lender is the state.

Extending cash loans is a lending transaction according to § 1(1.2.2) KWG, if the lending is commer- cial (i.e. long-term and with the aim of generating profit) or to an extent required by a commercial enterprise; the latter is regularly the case when there are 100 loans or more, or when there are 21 loans or more with a total volume of more than EUR 500,000. Once this threshold has been reached, regulations prohibit the state in said paying agent model without a banking license from extending loans (directly) unless they are purely subordinated loans (loss participation clause/qualified subor- dination agreement), since they are then not viewed as loans according to the regulation.

Implementing the in-house model is problematic from the perspective of the Structural Fund regula- tions. According to Article 43(2) of Regulation (EC) No 1828/2006, a UDF shall either be its own legal entity (similar to the venture capital model in Chapter 4.5) or a fixed block of finance within a finan- cial institution – such as the SIKB.10

10 Urban development funds are financial engineering instruments (Article 3(2c) of Regulation (EC) No 1080/2006, Ar- ticle 44.1 of Regulation (EC) No 1083/2006) which must be independent legal entities … or a separate block of financ- ing within a financial institution (Article 43(3) of Regulation (EC) No 1828/2006, amended by Regulation (EC) No 846/2009). References in this study to Article 43(3) of Regulation (EC) No 1828/2006 are understood to be references to this norm in the revised version.

This is where an in-house model, which includes a separate asset of the state as a separate account- ing entity in the form of a settlement account through which the SIKB merely directs money in the name of and on behalf of the state (paying agent model), fails. In this case, the separate asset of the state would not be an independent legal entity but a block of financing in the state. However, the lat- ter is only possible “within a financial institution” according to the Structural Funds regulations. In addition, there would be the problems of financial regulation.