Between 2007 and 2016, the European Commission invested € 1.8 billion in a new policy initiative called JESSICA (Joint European Support for Sustainable Investment in City Areas). Since especially European cities perceived a shortage of investment dedicated to urban regeneration projects, JESSICA shall finance more than 2,000 higher risk projects in order to create an economic stimulus. At the same time, JESSICA is part of a general paradigm shift in EU-policy, since its most innovative element is to introduce an alternative to traditional grant funding by providing financial instruments – namely loans, guarantees and equity capital – on a revolving base. This means that instead of financing sustainable urban development projects with grants that are – once paid out – lost for good, revolving financial instruments for successful projects may generate a capital backflow enabling Managing Authorities to reinvest in new urban development projects. 

In order to channel funds effectively to sustainable urban projects, the institutional framework of the JESSICA-initiative intends to set up urban development funds as financial intermediary. The special challenge of JESSICA is to combine these financial engineering instruments with integrated urban planning issues in a sustainable fund model. Thus, the three main objectives of the JESSICA- initiative are (i) to promote urban development projects as economic stimulus, (ii) to provide cost-effective, long-term financing to support urban transformation in a sustainable fund model and (iii) to mobilize private capital for public-private partnerships. Concerning the latter, the JESSICA-initiative shall attract private investors and banks to finance sustainable urban development by providing catalytic first-loss capital via UDFs that lowers the risk and enhances the return of private investors, therefore making more projects feasible and overcoming existing market failures. However, at the end of the first EU-programming period to introduce revolving financial instruments (2016) it is not yet clear whether the new policy approach is as effective as European decision-makers believe. This is mainly because up to now there is no empirical evaluation available on how successful JESSICA has been so far in achieving its ambitious objectives. 

Therefore, we first develop a conceptual base to efficient urban development funds. Our succeeding empirical approach is the first one to cover the impact of this innovative EU-initiative in all 28 EU member states by making outcomes of the policy change measurable in monetary terms through regression analyses. Our main findings reveal that absorption of funds to be invested in sustainable urban projects takes far longer than expected due to the complex structure of the fund model, which in return leads to higher costs. Impact measurement of external effects seems to be a great challenge for fund managers, too. Apart from that, no private investors or banks have contributed their own equity/risk capital in the JESSICA-initiative so far. Based on these findings, we develop practical implications on how to reform the JESSICA-initiative in the current EU-programming period. At the same time, our work is the first one to give research implications on how to derive key success factors for sustainable urban finance, especially addressing the challenge of impact measurement and ultra-long financing horizons.