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19. 9. 2019 15:40

National Development Fund Ready for Launch: "Memorandum" Signed, Preparation of Pilot Projects Starts

Structure of the National Development Fund, 19 September 2019.
Structure of the National Development Fund, 19 September 2019.
Representatives of four banks - Česká spořitelna, ČSOB, Komerční banka and UniCredit Bank - signed a “Memorandum on Cooperation in the Implementation of Intention to Establish the National Development Fund” (the “Memorandum”) today with Deputy Prime Minister Karel Havlíček and with Jiří Jirásek, the CEO of the Czech-Moravian Guarantee and Development Bank (ČMZRB), in the presence of Prime Minister Andrej Babiš. This is a fundamental step aimed at creating conditions for the effective implementation of the long-term investment needs of the state in the area of infrastructure.

In June, the four Czech banks - Česká spořitelna, ČSOB, Komerční banka and UniCredit Bank - agreed with Prime Minister Andrej Babiš and with Karel Havlíček, Minister of Industry and Trade, that the Government and the banks would sign a Memorandum before the end of September, which would specify how the National Development Fund (the “Fund”) would be created and how it would operate. It was agreed that the Fund's investment strategy would be based on a sustainable financial model and on the principle of returns on funds invested in the supported projects. It was further agreed that the Fund would be linked to the preparation of the National Economic Strategy of the State, which would include, in particular, the National Investment Plan, the National Innovation Strategy of the Czech Republic and the Digital Czech Republic Strategy. Prime Minister Andrej Babiš noted on this occasion: "Projects supported through the National Development Fund will be channelled primarily to the infrastructure needed for a further growth of the country's economy, we expect investments in health, education or transport infrastructure."

Deputy Prime Minister Karel Havlíček added to his words: “All parties involved were very well aware and are aware that here is an extraordinary opportunity to create a project together that will significantly help realize the infrastructure investments that the country needs for its further development, which is one of the aims of the National Economic Strategy of the CR, that is being developed. The project has become a precedent for how the public and private sectors can work together on common goals and interests, while losing none of their specific status and mission.” 

John Arthur Hollows, the CEO of Československá obchodní banka, also confirms agreement on the ambition and focus of the joint government-private sector project: “We believe that the newly emerging National Development Fund will contribute to improving infrastructure, not only roads and railways, but also hospitals and schools or digital infrastructure. By providing the necessary initial capital for such projects, together with commercial loans and money from the new EU programs supporting innovation, it can be a means of multiplying investment in the real economy and of benefiting the economy and people in the Czech Republic, particularly in the regions”.

Philosophy and inspiration of the Fund

The National Development Fund is built on the idea that has been maturing over a sustained period of time and that has arisen from the fact that the country's investment needs for infrastructure development in the long term exceed the available volume of public funds needed to cover them and that this gap will increase further when the above-standard inflow of European Structural Funds is  reduced. The signatories of the Memorandum also believe that expert cooperation of the public and private sectors will also help speed up the preparation of investment projects. The fact that similar schemes are being developed and prove successful in the world as well as the fact that they are receiving support from the EU and from its institutions (for instance, from the European Investment Bank and the European Investment Fund) provided support for the design of the essential elements of the future Fund's operation.

Tomáš Salomon, Chairman of the Board of Directors of Česká spořitelna, comments on this occasion: “I am delighted that the dialogue initiated between the state and the private sectors has resulted in the signed Memorandum. The National Development Fund can become a very effective tool for financing long-term strategic government investments. Česká spořitelna wishes the Czech Republic to continue to prosper, therefore it supports the creation of the Fund and is prepared to actively participate in its establishment and in the selection of the first projects”. 

How will the Fund operate?

ČMZRB will be the Fund's founder and its sole shareholder. The Fund will have professional management that will respect the principles of prudent management and will abide by the legal rules of collective investment. The objective of the Fund's investment strategies will be the return on investment, achieving the maximum effect of investment in the project, and appreciation of funds invested to such an extent as to motivate and allow investors to enter the Fund as well as their long-term growth and, at the same time, measurability of the social benefits of the investment.

The attractiveness of the Fund for investors will also be helped by the fact that it will be established using standard mechanisms in accordance with the legislations of the Czech Republic and the European Union and that its design and objectives will therefore be transparent and comprehensible for potential investors, as well as the fact that the establishment and the following activities of the Fund will be subject to approval and supervision by the Czech National Bank (“the CNB”).

"The establishment of the National Development Fund is another logical step by means of which  ČMZRB fulfils its role as the national development bank, which is also reflected in the newly prepared strategy of ČMZRB, where infrastructure development will be one of the three pillars”, says Jiří Jirásek, the CEO and Chairman of the Board of ČMZRB, who adds: "Thus, together with private investors, we will also participate in financing the infrastructure of the Czech Republic, besides  supporting the business sector in the form of classic financial instruments”.

The Fund will provide a set of debt and possibly guarantee products that will not compete with the product offers of commercial banks in the Czech Republic. These will primarily include junior, i.e. subordinated and unsecured debt instruments, or possibly guarantee products with a higher degree of risk.

The Fund will thus significantly increase the investment capacity of the Czech economy by dozens of billions of crowns, and will therefore far exceed the effect that the mere mobilization of additional resources into the state budget would have. In this sense, the Fund is a real investment in the future.

Jan Juchelka, the CEO of Komerční banka, explains on this occasion: “Similar organisations dedicated largely to funding infrastructure projects, but also supporting small and medium-sized enterprises and housing have been operating successfully in France and in Italy, for instance, for more than 100 years. This is a new instrument for the Czech Republic that will help activate banks' balance sheets with excess liquidity and will let them work in a direction that will contribute to further improving the living standard of people in our country”.

National Investment Board is being established

In order to support the Fund, a National Investment Board will be established, jointly staffed by representatives of investors and the Government, which will act as an advisory body to the Fund and whose function will primarily be to approve its investment strategy. Mr. Vazil Hudák, who currently serves as Vice-President of the European Investment Bank, will lead the National Investment Board after his mandate in Luxembourg ends later this year. He says: “The Fund's architecture will reflect European know-how and modern investment standards thanks to advice from the European Investment Bank, not only in setting up the Fund, but above all in setting up its innovative forms of financing”.

What will follow now

In order to fulfil the assignment, a joint project team has been set up; ČMZRB participated in its work as the founder of the future Fund, in addition to representatives of the Ministry of Industry and Trade and of the aforementioned banks.

The next step after the signing of the Memorandum will be to prepare documents for applying for the CNB's license for the National Development Fund as an investment fund - a SICAV - pursuant to the Act on Management Companies and Investment Funds. All signatories of the Memorandum will cooperate in the preparation of the documents. The intention is to submit the application for the CNB's license before the end of this year. In parallel, the Fund's investment strategy, investment mechanisms and, last but not least, the staffing of the Fund's bodies, will be finalised.

The signatories of the Memorandum have also agreed to start working together with the Ministry of Regional Development, as the guarantor of the National Investment Plan, in the preparation of several pilot projects before the Fund receives the license. After the Fund receives the license, it will thus receive a set of pilot projects at an advanced stage of preparation already at the start, as well as the necessary know-how to support it in its activities, and, last but not least, also the investor confidence factor, which is a key prerequisite for the success of each investment fund.

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