30 March 2010

Bonds Set Local Economies Free

How does anybody in a local economy go about finding the money necessary to make something happen? Whether a local business, community group or the council they are likely to borrow it. Local people, meanwhile, deposit their money in a local bank branch. In a rather murky process this is then sent to the ends of the earth—perhaps even Iceland or the Amazon. It may be invested in something we know nothing of and might well disapprove of if we did, or used to ‘leverage’ the creation of more money. So when I go to the bank to borrow money to do something good it has already been on an extraordinary journey.

This reminds me of how milk from the cows in the field next door goes first to a large milk-processing factory, then to the bottling plant of Dairy Crest in Nuneaton, the to the central distribution hub of a supermarket chain elsewhere in the country, then back to the supermarket shelf where I can buy it. You can’t help wondering whether it wouldn’t be simpler to just take a jug and hop over the fence. When it comes to money, a local investment bond is that jug.

Local bond issues are a great way of enabling people to invest safely in their local economy—while also seeing a good return on their savings. They operate in essentially the same way as borrowing for national public spending: a trusted local body issues a bond (it could be a local authority or community group), which it guarantees to repay after a fixed period, and in return it borrows money from a local person or institution.

The money gained is invested in local infrastructure, for example a wind turbine or programme to retrofit local houses to make them more energy efficient. There needs to be a revenue stream to enable the issuer to pay interest on the bond, and eventually to pay back the loan. In the case of renewable energy projects the introduction of the feed-in tariff can produce this revenue stream. Bond incomes can be paid by generating energy and selling it to the national grid. Although no local authorities in the UK have yet followed this course, it was the method used to fund the upgrade of London’s tube network by Transport for London.

Although a local bond does involve borrowing money and paying interest, it is a deal between local people where no value leaves the local economy and no middlemen benefit. By contrast, the Bloomberg (NB) website notes that the Conservatives are suggesting that local authorities will be free to engage in borrowing through using bonds to raise money from capital markets. Without the local link—and democratic accountability—this is a financial fiddle to allow borrowing without it appearing on the government’s balance-sheet. And to enable the private sector to profit from local economies’ need for investment.

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