Episode 4: Financial instruments help The Hague meet ambitious sustainability goals

Welcome to a new episode of the fi-compass Jam Sessions podcast. My name is Chiara Continenza and I will be your host today.

Today’s guest is Ton Overmeire, manager of The Hague’s holding fund. Welcome Ton, and thanks for joining us.

Thank you for the invitation to this podcast. It is always a pleasure to talk about the financial instruments of The Hague.

Ton, fi-compass has recently published a series of short videos showing how financial instruments are helping the city of The Hague achieve its climate goals and develop more sustainable infrastructure.

Before we dive into the reasons why you decided to work with financial instruments, can you run us through some examples of the projects that have been financed with financial instrument and what their impact has been so far on the quality of life of the citizens of The Hague?

As you can see in those movies, there are different types of projects that are financed by financial instruments and projects that contribute to our policy goals. This is one of the strengths of financial instruments; the ability to finance a range of different types of projects: small projects, that are very important for the neighbourhood and the local community, but also big projects with an impact on the city’s infrastructure. The first project that was financed in The Hague, but also in The Netherlands, was financed by our energy fund, which is called ED – Energy Fund The Hague (Energiefonds Den Haag). It was a small project at the local football club – FC Laakkwartier - and the fund provided a small loan to the club so they can invest in a triple solar roof. Although it was a small project, the football club is an important asset for the community. This project shows that, as a city, once you have something quite complex set-up, when beginning with financial instruments - like setting up an urban development fund - once the process is set up, it becomes easily accessible. This is the case even for small initiatives like the one from the Laakkwartier football club. It also shows that even small loans like financial instruments can make a difference.

Another project financed by the same energy fund is the first geothermal heat station in the city, which is located in The Hague south-west area and that will eventually provide green energy to 4.000 homes and businesses. This will help the city of The Hague achieve the ambition to become carbon neutral by 2030.

So Ton, why did The Hague decide to work with financial instruments? And how are ESIF financial instruments helping you meet your policy goals?

We were introduced to financial instruments through the JESSICA initiative in the programming period 2007-2013. With the economic crisis that came, we started to think about attracting money to the city. We have always been very successful as a city in financing urban development projects, in the old ways, with the help of ERDF (European Regional Development Fund). With the economic crisis and the lack of private finance available in the market for some of our key projects, we thought that financial instruments would be a good solution.

Not everybody believed in it from the start within our city, but what helped was that we wanted to continue to be successful with the programming of our ERDF money. We had heard a rumour that revolving funds would become more and more important in the period of 2014-2020 and that gave us the political will as well, to start a small pilot and to see if it would work in our city, to assess the potential of financial instruments, build the structure, gain the skills, the know-how. We started small, but had hoped for more.

It is interesting indeed to see how you started small in 2013 and then achieved so much in the current programming period. What steps did you take to set up these financial instruments?

We called the European Investment Bank and we asked for help. They helped us a lot with all the legal structures that were needed. Then we created the holding fund and then the investment strategy for that holding fund which was approved by the city of course. We wanted to create two funds: one on energy efficiency and the other one on space for entrepreneurs. Once it was set up, the holding fund started with the procurement of the independent fund managers, then we did the state aid notification and we started working on the project pipeline.

You need projects to invest in, because without projects there is no need for an investment fund and that is really difficult work when you work at the city, because it’s a different way of thinking. We were very lucky to have had good fund managers to help us and also to help find projects that were bankable, so that’s what we did. But now, the structure is there and it proves to be working well. The fund has started to deliver the results. Following the success of these results and of the pilot, we decided to invest additional resources from our own budget and from the national budget, as well as the ERDF money from the programming period 2014-2020.

We started with two funds, of €4 million and now we are at €50 million from both ERDF and public money.

What role does the independent fund manager play in this structure?

The fund manager must make the fund a success of course. You need an independent fund manager that understands how the city works, what the city thinks is important and also that understands how the market works. The fund manager gets an investment strategy from the city, but it is his or her job to deliver the results that are wanted and needed from the investment strategy. It is also the task of the fund manager to make sure that the fund is revolving and that it will generate revenues so we can invest again.

We started for instance with the fund for space for entrepreneurs. We thought about all the projects and as we knew that banks were not willing to finance these projects before that 70% was sold, we started with the FRED Fund. The interesting thing was that the fund manager understood much better than we did where the market failure was. The reason why it was not 70% sold before the project started, was because there was no possibility for the entrepreneur to get a mortgage when the building had not been built yet.

What the fund manager can do is help the project developer with the investment and at the same time help the entrepreneur with the mortgage or the loan. This way, you invest in both sides of the market failure and you make the project a success. With the second loan, you make it revolving for your first loan.

Regarding the other example of the geothermal heat station, which is a huge investment, I would have never thought about giving it a loan and at the same time do an equity investment to control the huge amount of money. This is something only a banker with experience can think of. A good fund manager can help make the project a success.

And now looking ahead: what are your plans for the use of financial instruments in the next programming period?

As I work at the department of urban development, we are in the business of building cities, so for that reason we hope to be able to continue our work with financial instruments. We are not in for the money, but aim to make The Hague a better place to live and to work in. We are a growing city, so we need new housing. On top of that, our biggest ambition is the ambition to be carbon neutral by 2030. We also need to realize our ambitions to develop the economy in the city, especially now with the new economic challenges of Corona. These are elements that we want to have in our investment strategy, which will be linked to the new ERDF programme.

While we have learned that if you start small you can grow and now we have reached that scale, we want to speak to other investors, public and private, to say that we have a working structure in The Hague, we have and deliver good projects also with return, so there is an investment opportunity for investors.

We are currently developing detailed plans for our energy sufficiency programme, which will require huge investments in new energy sources, infrastructure improvements, in public and private housing. We believe that financial instruments will have an important part to play in this, in the financing of this programme.

Now to conclude, Ton, we would like to ask you for a piece of advice that you would like to give to other cities who are considering setting up their own financial instruments.

What would be a piece of advice you would give to other cities who are considering setting up their own financial instruments?

The first thing that comes to mind is the Just do it slogan from a sports company. I am a marathon runner, not a very ambitious one, but I enjoy running city marathons so I think that Just do it would be a good state of mind.

Start small! Maybe with your last year’s ERDF money in case you still have available in your current programme. Start small like we did in The Hague, learn what is working in your local situation, and build a relationship with the fund manager, with other banks and projects. After that start to think bigger. As your ambitions grow and your project pipeline is developed, you will be able to hopefully go forward like we hope to be able to do, and meet your goals.

In conclusion, use your money from the ERDF programming, from one period to the other and because the money revolve when a project is a success, you will have more money to spend in the next programming period as well.

That would be by advice: just try and start.

Thanks a lot, Ton, for your availability to share your very successful experience with FI with us today. It was a real pleasure to talk to you.

Thank you and thank you again for the short movies that you have made from the five projects, I hope they will inspire others as well to work with financial instruments.

Thank you again, Ton. A big thank you to our listeners for tuning in today for this new episode of the fi-compass Jam Sessions. If you have any questions or want to suggest a new podcast topic, send us an email at info@fi-compass.eu. Don’t forget to follow us on Social Media and to subscribe to the podcast on the main podcasting platforms. We wish you a nice day ahead!