Public authority interventions are a justified means to remedy market failures. We apply this idea in the context of urban development projects by analyzing the three main market imperfections, namely external effects, imperfect competition and incomplete information. For (combinations of)the three types of imperfections, we derive whether funding is appropriate at all and which are suitable types of funding –either grants or success-dependent measures. Depending on the sensitivity to the respective imperfections, we categorize range of urban development projects which are suggested to be chosen for Urban Development Funds under the JESSICA initiative. Finally, we suggest a procedure for the general screening of regions suitable for funding through Urban Development Funds.

As urban areas are nowadays the engines of economic growth for the whole region, politicians rivet more and more on problems connected to urban development. Most importantly, the question of how projects which enhance urban life should be funded raised concerns. The European Commission reacted to this topic by the introducing of the JESSICA (Joint European Support for Sustainable Investment in City Areas) initiative for the 2007-2012 Programming Period of their Structural Funds. Within this initiative, resources can be invested in so-called Urban Development Funds (UDFs) which should pass the money on to projects eligible for funding. In contrast to traditional grant financing, the JESSICA instruments(loans, equity, guarantees)have a revolving character. As the Commission launched the initiative only some years ago, research on the advantages of the new instruments and their appropriateness for several project types is not ably absent up to now. The most reliable sources in these fields are evaluation studies carried out for the European Investment Bank (EIB) for regions of various member states. These studies are conducted by consultants from different organizations and do of ten not have a scientific research background. Hence, the results give interesting insights into possible projects suitable for the implementation of JESSICA, but they need to be carefully questioned. This will be covered by the paper at hand.