The JenLi Manifesto – Part 3: Moving the mainstream economy towards a social economy

This part of the Manifesto describes how the ideas presented in Part 1 and Part 2 can be implemented through undertaking integrated development projects for the creation of self-sufficient communities – the approach has been named the Plexus Concept as a working title and summarised in the paper below.

montblancKarl H Richter will present the Plexus Concept on 11 Nov 2011 at the 5th Mont Blanc Meeting in Chamonix, this is an international forum for social economy leaders and the opening plenary of this year’s meeting will include Lula da Silva, former President of Brazil.

Plexus Concept Paper:

Moving the mainstream economy towards a social economy

Delivering education, not schools
…homes, not houses
…healthcare, not hospitals
To balance the interests of people with the interests of capital

The Plexus Concept proposes a new model for urban regeneration and development projects and Public Private Partnerships in helping to build stronger and more self-sufficient communities, using existing market-based tools to deliver social outcomes and economic stimulus. It combines a number of current funding mechanisms (national and international) into a multi-facetted package, to address complex socio-economic problems and, through an integrated approach, seeks to amplify the advantages and counter the disadvantages of each mechanism:

  • Tax Increment Finance (TIF) – private capital (typically bond finance) with State/ Municipal guarantees using hypothecated tax revenues, to deliver enabling infrastructure and capital projects (possibly supported by public land contributions akin to the Local Asset Backed Vehicle/ LABV principle)
  • Social Impact Bonds (SIB) – private capital to deliver future cost savings to government by focusing on preventative measures and social programmes, using pay-by-results remuneration
  • EU Structural Funds (ERDF, JESSICA) – use as catalyst and high-risk capital to open the door to private capital alongside public capital, reducing the cost of private capital and thereby using public capital more effectively
  •  EU Single Market Act and an EU Community Reinvestment Act – a legislative framework to encourage mainstream financial institutions to direct more capital towards socio-economic development, through say purchasing bonds to fund the above.

The approach of the Plexus Concept is to advance a robust intellectual framework for integrated socio-economic development, and to lobby Government to implement supporting policy and legislative changes. The objective is to improve the interrelationships between Government and current market-mechanisms, to assist with redressing public budget deficits by presenting a viable alternative to restrictive policies of fiscal austerity and/or tax increases. The Plexus Concept seeks to maximise socio-economic impact by using public resources and incentive structures to leverage private sector resources in achieving Keynesian-like stimulus, incorporating Government pay-by-results contracts, guarantees, and hypothecated tax revenues etc to attract private capital as well as to better align the objectives of private finance and the State in PPP’s.

Key Principles

The Plexus Concept promotes market-based principles of accessing future economic value in order to leverage private finance upfront, to pay for capital projects and/or social programmes which the State does or should fund, but now can’t afford. Aligning private financial reward structures to socio-economic outcomes and the objectives of civil society.

It’s not about loading development projects with more punitive taxes, these often retard the financial viability of projects and can prevent development from happening, particularly in a recession when values are depressed. If anything it is about reducing these taxes to create an incentive for development, but importantly replacing them with an alternative which is at least as valuable, if not more valuable to society. Also, stealth taxes like Community Infrastructure Levy’s and S106’s etc are ultimately upfront projects costs which need to be funded from development finance, are encumbered by the development risk of projects, and therefore developers need to make a “development profit” on them to ensure that their profit margins remain intact and that they can secure investment capital – this is based on how development finance is structured. It compounds an already difficult problem in recessionary times.

We know that successful urban development and regeneration requires the combined and coordinated efforts of capital projects, social programmes and economic stimulus[1].

There are two useful financial models/ instruments which have recently been introduced in the UK: Tax Increment Finance and Social Impact Bonds. However, they are currently being piloted and are used independently of each other. What is important about both of them is that they both attract private capital to undertake interventions which the State would normally be expected to do (either capital projects or social programmes). They incentivise participants through offering a share of the future value directly linked to the positive outcomes Gov would normally be seeking. NB align incentives and motivations around the achievement of positive socio-economic outcomes (either through the ability to drawn down on future tax revenues or through direct Pay by Results government remuneration).

This proposal is to explore how TIFs and SIBs can be integrated on projects in order to create more bang-for-buck in creating self-sufficient communities WITHOUT increases in taxes or direct public debt. In other words, Keynesian-like stimulus attracted from the private sector, thereby SAVING Government money.

Not only should this resonate with the current policies of UK Gov, but also be a practical solution given the current fiscal reality.

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One Response to The JenLi Manifesto – Part 3: Moving the mainstream economy towards a social economy

  1. Pingback: The JenLi Manifesto – Part 2: Attracting and leveraging philanthropic capital | Karl H Richter

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