Profit related loans for economically disadvantaged regions

Abstract

There is an increasing recognition that economically disadvantaged areas do not have an inherent capacity to regenerate economic activity or to deliver automatically socially propitious outcomes. In such circumstances, there might be a strong case for public sector intervention of various types. In what follows we a case for the provision of financial resources for the establishment or consolidation of community social, and other, regional enterprises. The circumstances underlying the impotence of markets to solve financing issues are explored, and some attention is given to historical attempts to address the problem. Most importantly, we outline a potential new approach for the public sector in this area. An important and novel aspect of the exercise involves the government providing some proportion of the required finance in the form of a loan to be repaid by the enterprise only when and if the project becomes economically successful. This form of government intervention, known as income related loans, is designed to limit the extent of economic risks faced by the relevant enterprise, and has the desirable equity characteristic of repaying to taxpayers some return to their investment. Through reference to the Higher Education Contribution Scheme it is explained that the essential bases of this form of public sector approach to financing investment is well established, both conceptually and in administrative terms.