The Name's Bond... Brummie Bond!
Blogged by David Bailey, John Clancy and Mike Olley
Paul Dale's piece last week in the Birmingham Post raised the fascinating possibility that Britain's big cities - including Birmingham - could be given the power to raise funds for regeneration by issuing bonds via the money markets if the Tories get back into power after the next General Election.
Whilst we're delighted to see Council Leader Mike Whitby backing these ideas, the politicised nature of the announcement (i.e. the Tories will do this if elected) glossed over what was actually a recent clear history of cross party, non-politicised support for the idea and should certainly not be regarded as copyrighted by the current council leadership.
In Birmingham, the idea of the city issuing 'Brummie Bonds' to fund infrastructure, housing and other investment was first floated in 2003 by (then) Labour Birmingham City Cllr John Clancy and if anyone was most associated with the concept, it was him. But Clancy developed the idea with the intention of making it a Birmingham citizens' issue without the party politics getting in the way.
We suggest that this needs to be de-politicised so that we can make progress on the idea ASAP.
Councillor Clancy repeatedly made speeches in the Chamber from 2003 onwards about the importance of localised economic self-determination by the city and how City Council Bonds were widely used in 'mature' economies throughout the world, especially in the USA, Canada in Europe. This drew on ideas he had developed with David Bailey in an article in the journal Renewal back in 1997.
Clancy believed that housing, large infrastructure projects (transport and roads) and long-term investment in local businesses was the best use for Bonds. He frequently began and ended his contributions with the rallying cry: "The name's Bond, Brummie Bond!"
In October 2004, a speech he made in the council chamber re-iterating this point was picked up by the Evening Mail (see here).
As hoped for, there followed a rare show of cross party support, and the idea was supported by Council leader Mike Whitby (Con) as well as others then on the Labour and LibDem benches, including then Labour Councillor, Mike Olley, who also frequently stressed the need for municipal finance structures to be re-instituted, such as via a municipal bank.
All three main parties in Birmingham recognised that here in the UK, a centralised system of government means that local authorities are not allowed to raise funding directly from the market and that this should change.
Clancy's last speech in the Council chamber before retiring in April 2005 was a final call for Brummie Bonds to be developed as a clear way forward for the city, and Clancy and Olley have continued to bang on about the idea of Bonds and local, municipalised financing of industry, housing and other key investment in recent blogs and comments here at The Birmingham Post.
The Bond idea is that financial institutions would buy bonds from the city council and earn interest, and the council would then be able to use of the money, typically for up to 20 years, before repaying the bond.
This might not only provide a safe place for investors (including pension funds) to place their money during some pretty turbulent times in the world's financial markets, but could provide key funding towards schemes like a new Birmingham library, swimming pool, metro extension... or even social housing. Use of such funding in the US for housing is commonplace.
However, the difficulty with tying the idea to the Conservative Party and a possible future Conservative Government, means that instead of getting on with this and seeking further permissions to issue Bonds at a crucial stage in the economic cycle, it will get kicked into the political long grass, which would be a tremendous shame.
Indeed, the council has already actually issued Brummie Bonds. The current Tory-LibDem controlled council, importantly with cross party support, was given permission by the Labour government for a huge Bond issue in 2005. This was for ÃÂ£215 million-worth of Brummie EuroBonds which financed a loanstock debt-swap, to refinance the future of the NEC (see link here).
So the City has recently issued Brummie Bonds on the European Bond markets with appropriate permission, admittedly tied quite clearly to existing 'debt' rather than new debt and should endeavour to do so again now.
Why now? Well, this is the best time in the economic cycle to issue state-backed bonds. And city council bonds would have the status of a state-backed bond, making them very attractive indeed to institutional and other investors.
At the beginning of a recession and in a context of financial turmoil, money always looks for safe-havens like government Bonds. In addition, where there is a risk of deflation, as there would now appear to be, Bonds become even more attractive in the money markets. The interest paid to the bondholder can consequently be small, but cover the deflationary effect and then a bit more.
Birmingham, then, could issue Bonds now, by seeking permission now, to take advantage of the current economic environment and get much better terms and paying much lower interest (significantly lower than the banks, by the way) on the Bonds. The situation at some as yet unspecified future date, with an as yet unspecified future government will effectively be missing the boat (or bus). The time is ripe now. That's why the politics should be taken out of it. A Tory-LibDem controlled council should, with Labour opposition support approach a Labour government.
Local councils haven't recently been able to issue bonds off their own bat so far as this would have the effect of increasing government borrowing on-balance sheet. For most of this last economic cycle this was not regarded as very good, both in the context of the European Stability and (No) Growth Pact, or with regard to Sterling.
Clearly, the stage we are now at in both the longer and shorter economic cycles means that much of this is out of the window. The stimulus and growth packages planned by the Obama presidency, Brown in the UK, and in parts of Europe will involve a significant loosening of the purse strings. In the Eurozone, the Stability Pact has been (belatedly) eased somewhat.
Now, therefore, is the time to approach the government for permission to issue bonds. We need to get it factored into the figures while the big anti-recession borrowing decisions are being made. The economic self-determination point is as valid in a recession as ever, if not more so. How a government plans to spend to stimulate growth needs to be decentralised and localised / regionalised.
Birmingham should try to get a slice of the pie which will be being made anyway and have some control and management of how that slice of pie is eaten. Economic self-determination needs to be asserted in a recession. There's no better time.
Mike Whitby also recently took up Clancy and Olley's original proposals floated some years ago of re-creating a municipal bank offering loans at reasonable rates of interest to families and businesses. Again, while we're pleased to see Whitby running with the idea, this wasn't new.
Indeed Mike Olley posted a comment on this very Blog-site reiterating his support for this a week before Mike Whitby announced his intention to develop the idea himself, in the latter case again without any acknowledgement of the cross-party nature of these ideas.
Mike Whitby does, however, deserve credit for introducing some interesting and genuinely innovative ideas of his own to the debate. He recently raised the possibility of using the council's access to financial markets and its powers to provide asset-backed finance to businesses in the city and those who want to invest.
The Council appear to be looking at a range of possibilities, including a 'reverse PFI' arrangement whereby the council could buy physical assets (properties, machinery and business equipment), and lease them back to local businesses.
As the Post has noted, this inverse PFI (or 'IPFI') would provide the business with operating capital and security of tenure, while enabling the council to use the asset as security against which to increase its 'prudential borrowing' - a system which allows councils to borrow without the consent of central government, as long as they remain within their own affordable borrowing limits.
If the government refuses to allow the issue of Brummie Bonds then, undoubtedly there will be cross-party agreement that the government is wrong!
All of this offers some exciting possibilities. As we've noted in previous blogs, the British government is currently relying on the bailout and the recapitalisation of the British Banking system as the way to bring bank liquidity into the system and, in particular, to supply liquidity to small and medium sized enterprises.
But the real problem is the short-termism endemic within the UK banking and business investment systems. If that goes unreformed, even in the short-term, some of the public money going into re-capitalising the banks could simply end up throwing good money after bad.
Rather, we suggest something a bit more radical. As we've noted before (see here), why couldn't some funds (the excess over what the banks actually needed for adequate re-capitalisation) be held back and remain in the hands of municipal or state banks specifically to micro-invest long-term in small firms in a way that the unreformed banks still show little sign of embarking upon.
We'd suggest that a revamped Birmingham Municipal Bank not only issues bonds for infrastructure and housing but also to enable the Council to make investment in business and SMEs, and for the very long term.
Also, if you're interested in what the Americans are doing on this front, have a look at this link.
David Bailey is Director of the Birmingham Business School and John Clancy is a former Birmingham City Councilllor, venture capital solicitor and runs two SMEs including MediaFuturesAlert.com. Mike Olley is Manager of the Broad Street Business Improvement District.