Britain Forward: Core City Regions and Regional Development Banking

Many centuries ago, the County was an economic unit, the County Town at its centre. Surrounding farms and villages would bring their crops, woven goods, and other locally made products to the County Town on Market Days for trading. The economic significance of the County has been lost over the years. We need to re-establish the concept of Core Cities with their dependent regions. A start has already been made with Britain's Core Cities Group representing eight major British cities and their surrounding, dependent regions. This concept can quickly be expanded across the whole country.

For each Core City Region, a Regional Development Bank is established with the objective of job creation, business and industrial expansion, and infrastructure improvements within the region.

While the commercial banks deal with customers' day-to-day needs such as current accounts, mortgages and loans for big-ticket consumer purchases, newly established Regional Development Banks would provide investment for regional business and industry on an ongoing partnership basis, their decisions based on a rigorous assessment of quality standards and guided by an overall regional investment strategy. The structure and role of the typical RDB can be visualized as follows.

Regional Development Banks (RDB) are licensed by the Regional Development Bank Commission and authorized by the Commission to make investment loans up to a global value as determined from time to time by the RDB Commission in conjunction with current Central Bank policy and prevailing economic conditions. Each RDB is evaluated separately and individually in terms of loan capacity dependent on specific circumstances of the region in which it operates.

Loans are made to encourage and develop new startup enterprises large and small, to expand existing enterprises, and for major regional infrastructure, the latter in conjunction with local authorities and national planning.

In each and every case, the granting of a loan is preceded by the preparation and presentation of a thorough and complete business plan providing full working detail, proposed use of the loan funds, and precise projections of sales, income and expenditure as appropriate for each project, as well as anticipated repayment schedule.

In order to ensure the most secure possible foundation for the enterprise or the project, as well as the ultimate security of the loan, each RDB maintains a register of specialist firms, contractors, business advisors etc who can be called upon to verify loan clients' cost estimates and provide setup advice in forms varying from design of factory premises to promotion and accounting. Skilled commercial, architectural and technical advice is thus available, either to assist existing enterprises or to promote new ones.

Once launched, the new enterprise manages itself but the Bank guarantees continuing support in return for a flow of data from which the new enterprise's progress can be monitored – production, sales, profits and so on. Once the loan has been granted, all transactions of expenditure and income will be recorded daily in real-time in the Bank's data store, and accumulated each month when actuality is compared with projections using the Bank's computer model.

A Standard Audit Format for accounting and quality/productivity performance would facilitate a follow-up monitoring process through which the investing banks are provided continuously with performance data from recipient companies, thus ensuring the safety both of the investment loan, the recipient business and all those involved with and dependent on it. Discrepancies will be flagged by the system. The individual loan supervising agent will review the month's performance with the client, and any variations from projections can be analyzed and remedied as necessary. If anything begins to go wrong, the Bank can give timely help, with advice or further finance if appropriate.

In the case of larger businesses, the investing bank may well appoint a Director to the Board, as already practiced in Germany. Careful monitoring will be to the advantage both of the investing bank and the recipient business, as well as to the regional economy: bankruptcy is not contributive to economic stability and prosperity.

The ongoing partnership concept also assumes longterm commitment, ensuring finance for secure long-range planning and productivity investment, as well as research and development into new-generation products and services in conjunction, perhaps, with more specialized venture capital funds. Furthermore, as the lead partner, the RDB can insist on compliance with all quality and best-practice standards.

The highly successful Mondragon cooperative group in Basque Spain illustrates this ongoing relationship between investment banking and recipient business. The Workers' Bank serves three mutually inter-dependent functions: it provides investment as a local development bank, offers technical and financial advice for business startup, then monitors production, quality, and financial performance in a process of ongoing cooperation and partnership.

The Project itself becomes the loan collateral.

The Bank's operation is formally divided into two halves. One deals with finance. The other half comprises specialist sections, providing skilled commercial, architectural and technical advice either to assist existing enterprises or to promote new ones. Once launched, the new enterprise manages itself but the Bank guarantees continuing support in return for a flow of data from which the new enterprise's progress can be monitored - production, sales, profits and so on. If anything begins to go wrong, the Bank can give timely help, with advice or further finance if appropriate. Another similar and highly successful banking enterprise, the Grameen Bank, operates on the same basis.

A major distinguishing feature of the RDBs is that a total project, from design through production and management to sales, becomes the loan collateral, rather than the personal assets of individuals. The RDBs exist to create new business and new wealth where none previously existed, not (in the words of comedian Bob Hope) "to lend money to people who can prove they don't need it".

RDBs, being authorized to create loans based on project collateral, are not required to maintain "reserves" in the current banking sense. A bank's reserves are instituted as, and traditionally regarded as an insurance against losses, but in practice insurance is no better than the risks it insures. The RDBs rely for their security on thorough research of loan projects, on a close working and constructive partnership with the loan recipient, and a detailed follow-up of results.

RDBs charge a fee to cover administrative costs. All RDBs report monthly to the RDB Commission, indicating the value of loans and successes or problems with loan clients. All RDBs also report their monthly administrative costs which are compared on a standard scale which allows weightings for number of clients and value of loans. The Bank with lowest administrative cost becomes the current benchmark which others should attempt to emulate. Banks are encouraged to compare notes on costs and cost-saving measures while maintaining the highest possible quality of loan assessment, follow-up, and overall customer service.

RDBs will also insure loans with Commission-approved insurance institutions, the cost of premiums would naturally reflect the success or failure rate of individual Banks' loan portfolios. Banks' loan books would also be regularly scrutinized by the Commission with regard to prudence and security.

The RDB would prove a powerful catalyst at local level, providing finance and subsequent ongoing supervision for business and industrial development, together with investment capital for regional infrastructure.

Secure investment for Regional Infrastructure

Infrastructure investment in cities is efficient and good value for money, but currently the core cities routinely struggle to fund the really major schemes. Take regional transportation for example. Nottingham has developed one tramline, and agreed a second, in the time it has taken its German twin - Karlsruhe - to build 14 lines. Funding streams, financing options, bidding and approval processes are too complex and time consuming.

The Core Cities Group report published in conjunction with PricewaterhouseCoopers, Unlocking City Growth, looks at a model based on tax increment financing. The proposal is to borrow against future income to provide major infrastructure, for example from an uplift in business rates, retaining this temporarily to pay back borrowing.

Applying the model to four live case studies from the cities, the report demonstrates that by using this approach, increases of between 50% and 80% can be achieved in housing, jobs and economic output. It also allows cities to share in the growth dividend, to get a return on their own investments, something that may become increasingly important in a different economic future.

Here's a case in point. Acres of flourishing weeds adorn derelict docks and warehouses on Edinburgh's northern shoreline by the river Forth. In 2007 city planners were busily drawing up 30-year projects to build 30,000 houses, as well as hotels, offices, shops and parks on the waterfront. Then the credit crunch hit. Now plastic sheeting shrouds a bankrupt developer's half-built luxury flats. Forth Ports, the docks company, has written down the value of much of its extensive landholding to zero.

City bosses, however, think they can get things going again. Their immediate problem is finding the £484m they reckon is needed to build roads, schools and other public facilities. In the boom years, local authorities routinely demanded and got a big slice of that money upfront from property developers. These "developer contributions" have now disappeared, and recession means that Edinburgh, like most councils, cannot sell surplus land and property to fill the hole.

The city's solution is to copy an American approach called Tax-Increment financing (TIF). The idea is to draw a boundary round an area, borrow to pay for basic infrastructure and repay the loan from the increase in property-tax revenues inside the redeveloped zone as private firms start building.

Edinburgh hopes to test out TIFs on a square mile in the suburb of Leith, borrowing £50m to build roads, a dock for mooted cross-river ferries and a new pier for the former royal yacht Britannia, now a tourist attraction moored behind a modest shopping centre. Dave Anderson, the city's development director, hopes that 2,200 houses, plus shops and offices, will follow. Accountants PricewaterhouseCoopers reckons all this will pull in an extra £280m in business rates (property taxes) over the next 30 years, more than enough to repay the loan.

Other similar plans are being considered. Newcastle wants one to build a "science city" geared towards commercialising university research. Leeds hopes a TIF will accelerate growth as it tries to create 20,000 jobs in its Aire Valley business park. Birmingham plans to raise £1 billion for seven road and rail schemes across the West Midlands.

Over in the USA, Chicago now has 158 such zones, covering 29% of its land and 13% of its property by value. Businesses were leaving Chicago's Loop before it became a TIF district in the 1980s; now the zone is thriving.

The TIF concept fits in exactly with Regional Development Banking, and provides a perfect example of the sort of impetus Regional Banking can provide local economies, and that's in addition to the Banks' financing of private industrial expansion and new projects.

During the period of Germany's rapid economic growth after 1945, its Regional Banks, the Landesbanken fulfilled much the same function of financing and promoting local economic development and industry, often having a bank representative on a major recipient company's board. However Germany's banking community later took up the anglo-american model, preferring the straight stock market approach.

In the USA, the Bank of North Dakota (BND) is the only entity of its kind in the nation - a state-owned bank dedicated to promoting commerce, industry and agriculture. BND offers numerous low-interest loan programs in collaboration with a lead lender to meet the financing needs of most any new or expanding business. Financing economic development is the thrust of Bank of North Dakota efforts. The Bank providing financing to stimulate economic development in the state for both business and agricultural lending services.

The Regional Development Banks would, like all areas of the banking sector, be strictly regulated to ensure the responsible use of created credit and investment funds, and would in addition be confined in their activities to their own specific region. Within these qualifications they would be endowed with a substantial degree of autonomy in tailoring to regional needs both the quantity and the recipients of investment. They would also be able to set their own charges (interest rates) based on administrative costs and loan insurance; this would be possible through each RDB's "insulation" from other regions and the national economy as a whole. This is important: frequent historical examples have shown situations in which the south of England is “overheating” a situation thus calling for recessionary tactics, while other areas are still struggling with unemployment and lack of infrastructural investment.

The specific purpose of the RDBs is to promote regional growth and employment to the fullest extent possible. Thus the onus falls on the Bank to prove grounds for rejection of a loan. The success or failure of any RDB will ultimately be measured by the prosperity of its home region.

With Regional Development Banks set to work immediately on private and local government projects, jobs can be created very quickly in secure, well-financed business projects. And British Industry, traditionally starved of capital, can at last receive the funds to "do the job properly" from the start.

Industrial Revival

The credit crisis has exposed the risks of an unbalanced economy. Our objective as a country must be to define the policy and financial mechanisms required to encourage an expansion of manufacturing as part of a more balanced economy. We have to be ruthlessly honest about both the scale of the competition we face and the focused action which other countries are already taking to promote manufacturing.

The first priority should be to stop treating manufacturing as a relic of the industrial revolution. High-value-added manufacturing brings huge benefits. It penetrates the economy of the entire country, not just London and the south-east. It pays well but avoids bewildering distortions of income. It drives and enables a broad range of skills and stimulates the growth of services. In short, it creates wealth.

The benefits are seen clearly in Derby, where around 11,000 people are employed by Rolls-Royce and a further 15,000 in its supply chain. Nearly 12% of the city's workforce is involved in high technology, the highest figure in the country, and the number of skilled employees is 2.4 times the national average. Derby's contribution to the British economy, measured by gross value added, is growing faster than that of any other city.

Manufacturing generates over three-quarters of R&D investment made by British businesses. This creates a strong technology base which opens new options for all businesses. It is a fact that almost all developed and emerging economies have well articulated plans to capture and promote this sort of manufacturing. Britain risks being the only country out of step. We need an economic route map for attracting and retaining high-value- added investment, identifying Britain's competitive advantages with ruthless honesty and prioritizing both public and private investment accordingly.

This is not about protectionism or “picking winners”. It is simply an acknowledgment that most nations with these goals have a clear strategy for achieving them, with that clarity being part of their competitiveness. Britain's success in the 2008 Olympics was based on precisely the sort of competitive assessment and focused investment that we must bring to our economic decisions. It has sent a strong signal to aspiring young sportsmen and women. The same can be true of the signals sent to young people in education if we bring a similar clarity to addressing our economic competitiveness.

Britain still retains a strong industrial capability and science base. By setting the right priorities we can begin to develop a more broadly based economy, with greater resilience and stronger exports. We will see a high-value-added manufacturing sector with deep product knowledge enabling growing services, and renewed demand for science-based subjects in schools and universities. It is entirely feasible that this new direction can be set in 2009 and that today's economic difficulties can create the right conditions to catalyze this fundamental shift in attitude and policy.

Once again, we return to a strong sense of regional pride and identity to energize this objective, and to the region’s development bank to provide the means.