European Investment Bank - SPRUCE evaluation: final report

Executive Summary

This report sets out the findings of the final evaluation of the Scottish Partnership for Regeneration in Urban Centres ("SPRUCE") fund, undertaken by the Indigo House Group ("Indigo House") on behalf of the JESSICA Holding Fund Scotland (JHF Scotland).

The 10-year investment period for SPRUCE ended on 28 November 2021 and the report contains a series of conclusions and recommendations which could provide a benchmark for future generations of similar type funds in Scotland.

It builds on the interim evaluation which was completed after the initial investing period for the fund ended (with 7 projects funded at that stage) and the findings are broadly consistent.

Overall, we found:

• SPRUCE has been successful in supporting the economic growth strategy of the Scottish Government at a very challenging time. Over £135m was invested in 18 urban development and energy efficiency projects by November 2021.
• The 18 SPRUCE funded projects have delivered a range of social, economic and environmental benefits in Scotland (including land remediation, business space, jobs, carbon savings and some additional community benefits) which would not have occurred in the timeframe and priority areas had SPRUCE funding not been available.
• The case studies demonstrate that the benefits from the SPRUCE fund for Scotland extend well beyond the financial considerations. In particular, the place making impact of some of the projects has enabled wider regeneration of areas which otherwise would not have happened in the absence of SPRUCE. The Guardbridge project in St Andrews is an example.
• SPRUCE achieved strong leverage with £425m of capital invested from third parties through the process (a leverage factor of 4) against total investment of £0.5bn in the 18 urban development and energy projects funded by SPRUCE.
• The SPRUCE capital was deployed more than once with £135m of facilities provided from £94m of capital subscribed (so a recycling factor of 1.4 over the 10 year investing period of the fund). Our analysis suggests the fund would be fully recycled over a 15 to 20 year period.
• On the basis of the evaluation completed, SPRUCE represents the most economically advantageous option for achieving a set of desired impacts. SPRUCE demonstrates considerable value for money to the public purse when compared against alternative pricing interventions including non-repayable grant and/or other structured financing.
• The operating structure of the SPRUCE fund has been self-financing with interest earned on the loan book covering the fund management costs. There has been no further call on the public purse to fund the ongoing revenue costs of operating the fund which is another important and distinguishing feature.

SPRUCE helped to bridge a development funding gap in otherwise viable projects so contributed to getting things built. It is therefore fair to say that SPRUCE has been a successful intervention where access to capital has been problematic for infrastructure projects. In addition, the final evaluation found that:

• The rationale for the investments made was found to be consistent with the investment strategy; The business space projects are supported by significant demand/market need and the SPRUCE funding is justified by market failure. The energy projects address wider socio- economic (including fuel poverty) and environmental concerns.

We also found:

• There was strong awareness and recognition of SPRUCE in the property market but still very low levels of engagement with SPRUCE within the Local Authority market, which was a missed opportunity. Feedback from the operation of similar funds elsewhere in the UK suggest much closer working relationships with the local authorities.
• Some of the feedback around the relatively modest scale of the limits on individual projects during the interim evaluation suggested these may have been preventing otherwise eligible projects coming forward. However, some of the projects invested in since 2017 have involved larger sums.
• Other challenges experienced with SPRUCE in the initial period, were consistent with the feedback received in the final evaluation. For example, the process was found to be longer and more onerous than they may have expected and some of the project sponsors also commented on the level of fees involved. That said, project sponsors found Amber, the fund manager, reasonable to work with. SPRUCE involves a considerable amount of public money (Scottish and European funds), and the investors may consider some of these observations to reflect good governance of the fund, including satisfying European regulation that would not form part of a standard commercial funding agreement. Good stewardship of the fund was demonstrated.
• Whether the spread of projects was sufficiently balanced to deliver is difficult to quantify. For example, our analysis suggests a concentration of spend on similar projects (mainly office developments) and so it is fair to say that there could potentially have been more energy projects and more investment in deprived communities beyond Glasgow and Edinburgh City Centres. However, that said, we highlighted in the interim evaluation that shorter term lending will maximise the financial performance of the fund, and so there may have been a tendency towards funding projects where the payback period is relatively short (Grade A office accommodation being an example).
• Prioritising the output targets in directing SPRUCE resources to deliver the desired impacts is important. The output targets take on increased significance with each 'recycle' and the longer the intervention runs. Consequently, it is important that the output targets have sufficient attention and play an active not passive role in the resource allocation deliberations. Again, the importance of this point increases relative to the size of the fund and the impact it can have at the national level. It is not clear the extent to which this was a key consideration. As a result, our analysis found a concentration of SPRUCE funding in Grade A office accommodation projects.

In terms of the structure of the SPRUCE fund:

• The original intention was to increase the total funding available through co-funding from other partners and the Royal Bank of Scotland (RBS) was initially expected to provide an additional lending facility of £25m. However, RBS did not co-invest in any of the projects which SPRUCE funded. Additional funds were invested providing a total of £94m capital all in. However, that said, significant leverage has been secured at the project rather than the fund level and this is an appropriate financing mechanism.
• The interim evaluation found that the 10-year term is too short to optimise the impact of the recycling, as a proportion of the fund is unlikely to be reinvested as originally intended because it is not being repaid until 2023. We acknowledge these timeframes were well understood at the outset. The recycling achieved was 1.4 times (i.e., £135m from £94m).

Our analysis also found that the investment led approach of SPRUCE is potentially applicable in a much broader public policy context as follows:

• In addition to funding core urban projects such as land remediation, business space and energy efficiency which the initial tranche of projects have demonstrated, our analysis suggests the SPRUCE model may well be an appropriate funding mechanism for other areas of public policy. This could include mixed use site development (where it is sometimes difficult to extract commercial and residential uses); offices; industrial, warehousing and distribution facilities; research and development facilities; site remediation and access; other physical development that supports economic growth; energy efficiency, energy storage; and energy generation from solar, wind, hydro and waste to energy projects.
• The investment led approach could be usefully targeted to address market failure in other sectors of the Scottish economy. Examples would include the creation of mainstream affordable credit programme to tackle market failure in the financial services industry, and creation of an affordable fuel programme to tackle market failure in the energy markets. These examples would be directly aligned to the regeneration aims of the Scottish Government but would perhaps be beyond the eligibility criteria of the current SPRUCE fund.

Conclusions

SPRUCE has successfully contributed to the economic growth strategy in Scotland. It has delivered several significant benefits to the Scottish economy at a very difficult time, including through the Global Covid Pandemic. It demonstrates significant additional value compared to traditional grant or other funding interventions and offers considerable potential to deliver impacts of scale across Scotland as part of a long-term strategic plan.