European Investment Bank - SPRUCE evaluation: final report

2. Overview of SPRUCE

2.1 Background to SPRUCE and The JESSICA Holding Fund

SPRUCE was originally set up in 2011 using the European Regional Development Fund (ERDF) as part of the "Lowlands and Uplands Scotland ("LUPS") operational programme and the European Commission's JESSICA initiative (Joint European Support for Sustainable Investment in City Areas). The JESSICA Holding Fund Scotland ("JHF") was set up a year earlier in 2010.

JESSICA is based on the premise that sustainable urban development is a key factor in the long term social, economic, and environmental success of our cities. It is expected to deliver improved longer term outcomes through creating value in the built environment and the communities that the fund serves.

It has enabled ERDF and match funding to be invested in urban projects in Scotland via loans. Returns from these investments are used to make new investments in new projects thereby creating revolving funds. Investments under the JHF Scotland have been provided by SPRUCE, the urban development fund procured and contracted by the Scottish Government.

2.2 Regulated Investment Fund

JESSICA is based on adopting a more commercial approach to the use of public funds to drive and deliver regeneration and economic development and so SPRUCE is a regulated investment fund. Unlike more traditional forms of public finance including urban development funding (particularly grant) SPRUCE could provide loans, mezzanine debt and equity investments to revenue generating, infrastructure and energy efficiency projects supporting regeneration in Scotland.

The fund is led by a private sector independent manager (AMBER infrastructure) with a private governance structure in place. The governance structure was set out in detail in the interim report which is available at SPRUCE-interim-evaluation-final-repor">Interim EvaluationSPRUCE-interim-evaluation-final-report/">.

2.3 Overview of SPRUCE investment activity in Scotland

Over the 10-year period from 2011 to 2021, a total of £94M was invested in the SPRUCE fund by the Scottish Government. Initially £49M in 2011, £15M in 2016 and £30M in 2018. Over that same period Amber utilised the SPRUCE capital to invest £135M in 18 projects. This supported total development activity of just over £0.5BN with £425M from third parties funding the rest. Recycling (or utilisation) of SPRUCE capital and the leverage achieved was good at 1.4 and 2.8 respectively. Leverage on the original £94M invested was 4.1.

At the time of completing the final evaluation:

• SPRUCE had invested in 16 urban development projects and 2 sustainable energy projects. The 16 urban development projects included 11 Office developments in Glasgow and Edinburgh (including preparatory land remediation work at Haymarket) and 5 industrial projects in Edinburgh, Glasgow, Lanarkshire and West Lothian. As already mentioned, case studies for each of the projects is provided in Appendix 1.
• A number of the projects have already repaid in full including some that have repaid early and the remaining 4 are due to repay over the next three years between Sept 2022 and Sept 2025;
• The operating structure of the SPRUCE fund has been self-financing with interest and fees covering the fund management costs. This means there has been no further call on the public purse to fund the ongoing revenue costs of operating the fund. This is an important and distinguishing feature with capital being put to effective use and reducing the requirement for revenue funding on the public purse;
• Of the £94M invested by the Scottish Government, £14M in total is being repaid in the form of interest and fees and £80M is being repaid as capital. At the end of the investing period (November 2021) a total of £7.7M in capital had already been repaid meaning there is a further £72.2M in capital to be repaid between now and September 2025.

Our analysis of the performance of the fund and nature of the investments made by investing period, by area and by sector now follows. This demonstrates that performance of SPRUCE varies and so prospects will be very much driven by, and dependent on, the balance of these aspects.

2.4 Initial Investing Period and Recycling Phase

A key premise of the approach was the creation of a revolving fund for recycling of capital into new projects. The fund was therefore clearly split into two 5-year phases. An initial investing phase from 2011 to 2015 and a recycling phase from 2016 to 2021. A total of 7 projects were funded in the initial investing phase and 11 projects were funded in the recycling phase. Table 1 provides an overview of the financial performance of the fund over the two phases.

Table 1 highlights a total of £48.6M was invested in the initial 5 year investing period and £87.2M in the recycling period. This funded total development activity of £232.6M and £286.5M respectively, suggesting SPRUCE funding as a percentage of the total development activity was lower in the initial investing period at 21% and higher at 30% in the recycling period.

It also shows:

• Capital was fully deployed (as indicated by the factor of 1) in the initial period and recycled from 2016 to 2021 (almost twice) giving an overall utilisation or recycling factor of 1.4
• The leverage achieved was almost 4 times (3.8) in the initial investing period and just over double (2.3) in the recycling period.

2.5 SPRUCE activity by sector

An overview of SPRUCE activity by three key sectors is provided in table 2.

Table 2 highlights:

• A total of £16M was invested in energy projects, £19M in industrial projects and £101M in office (including some mixed development schemes);
• There was growth in SPRUCE investments in both Industrial and office projects during the recycling phase compared to the initial investments made. Industrial investment grew from

£3.8M to £15.2M and office investment grew from £28.8M to £71.9M;

• No investment was made in energy projects in the recycling phase and this is perhaps disappointing given the strategic priority attached to energy in Scotland.

In addition, table 2 also details:

• Significantly higher leverage was achieved on the office projects than on the energy and industrial projects (3.5 compared to 1 and 0.7); and,
• Overall leverage was higher in the initial investing period than the recycling period.

It is important to note that the varying levels of leverage observed provide useful insight into the different characteristics of the sectors and specific projects SPRUCE has supported. They do not however, provide an appraisal of relative performance in the sense of good versus bad indicators of performance and should not be interpreted as such.

2.6 SPRUCE activity by Geography

An overview of SPRUCE activity by area is provided in tables 3.

Our further analysis by area highlights the following:

• Almost 75% of the SPRUCE funds were invested in projects in Glasgow and Edinburgh City Centre, a further 15% was invested in the wider Glasgow area and 11% in other areas in Scotland.
• Leverage in the City Centre projects was considerably higher at almost 3 to 4 times than in other areas (between 0.9% and 1.1%).

Overall the recycling and leverage metrics were good and tables 1, 2 and 3 highlight how they can change over time and depending on the portfolio of projects and key characteristics (including area) involved. These features are interesting to note and raise issues for further consideration in the design and delivery of future SPRUCE type funds including:

• A portfolio approach to investment will be required to maximise the use of the funds in terms of delivering the desired financial and broader socio-economic outcomes. This suggests a strong governance framework is required to maximise the allocation of resources in line with expectations and to monitor risk;
• The varying nature of the risk exposure and return necessitates a comprehensive understanding of the assets involved from both a property and financing perspective (both corporate and project financing arrangements) beyond the simpler terms of the loans being provided;

The analysis has shown that not all SPRUCE investments performed the same. That said, our analysis has also shown that SPRUCE is a highly tailored, facilitative financing facility meaning there is no simple cookie cutter/one size fits all administrative approach.