How to in­vest in ne­glected neigh­bor­hoods

Baltimore Sun Sunday - - COMMENTARY - By Eric K. Hontz

While the cur­rent fo­cus in Bal­ti­more is rightly on end­ing the en­demic vi­o­lence in our city, as a way to fos­ter sus­tain­able change, there needs to be op­por­tu­ni­ties for cit­i­zens to make a de­cent liv­ing and to live in a safe home. That will only come when there is in­vest­ment in the city’s most un­de­vel­oped ar­eas.

Prior to dein­dus­tri­al­iza­tion and the block bust­ing that led res­i­dents to flee city neigh­bor­hoods, Bal­ti­more was home to many in­no­va­tive mid-sized busi­nesses that al­lowed res­i­dents to find de­cent work, build wealth and pro­vide for their chil­dren. The pat­tern of dis­in­vest­ment and de­cay has man­i­fested in to­day’s cy­cle of in­creased crime, re­duced busi­ness ac­tiv­ity and fewer op­por­tu­ni­ties for re­main­ing res­i­dents.

While Bal­ti­more’s tax base and de­posits at fi­nan­cial in­sti­tu­tions are in­creas­ing, inequal­ity is in­creas­ing and large ar­eas of the city re­main un­able to ac­cess des­per­ately needed in­vest­ment.

The ob­sta­cle for city lead­ers, uni­ver­si­ties and busi­nesses vested in Bal­ti­more’s suc­cess is how to break that cy­cle. Per­haps, they should con­sider the model of the Euro­pean Bank for Re­con­struc­tion and De­vel­op­ment (EBRD), a bank owned by 69 na­tions, the Euro­pean Union and the Euro­pean In­vest­ment Bank, which in­vest in pri­vate en­ter­prises with com­mer­cial part­ners. The EBRD of­fers a va­ri­ety of fi­nan­cial prod­ucts, in­clud­ing loan and eq­uity fi­nanc­ing, guar­an­tees, leas­ing ser­vices and trade fi­nance. More im­por­tantly, un­like a tra­di­tional bank, the EBRD pro­vides pro­fes­sional de­vel­op­ment through sup­port pro­grams where the cost of con­sult­ing ser­vices is sub­si­dized by the bank.

Bal­ti­more’s in­sti­tu­tions should band to­gether and look at form­ing a sim­i­lar bank to con­nect pri­vate cap­i­tal in­vest­ment to neigh­bor­hoods that need it the most. By part­ner­ing with im­pact in­vest­ment funds and other sources of cap­i­tal, the bank has the po­ten­tial to in­duce the bil­lions needed in cer­tain neigh­bor­hoods of Bal­ti­more that have sur­vived decades of dis­in­vest­ment and ma­l­in­vest­ment that can lead to eco­nomic losses rather than fi­nan­cial growth.

Only in­ten­tional fo­cus on these neigh­bor­hoods and their res­i­dents can break the cy­cle of poverty and cre­ate a vir­tu­ous cy­cle of pros­per­ity and op­por­tu­nity that will make a stronger Bal­ti­more for every­one. A re­con­struc­tion and de­vel­op­ment bank could be founded by govern­ment and in­sti­tu­tional part­ners who take eq­uity stakes in a pub­lic-pri­vate ven­ture.

Through eq­uity con­tributed by Bal­ti­more, the state of Mary­land, univer­sity en­dow­ments, foun­da­tions and im­pact in­vest­ment funds, Bal­ti­more’s bank could get govern­ment, foun­da­tion and com­mer­cial buy-in. More­over, the num­ber of in­sti­tu­tions with di­ver­gent in­ter­ests would pro­vide over­sight and sound gov­er­nance in a checks and bal­ances sys­tem that would shel­ter against scan­dals like the ones our city has re­cently seen. By lever­ag­ing the bank’s eq­uity and a part­ner­ship model, the bank could drive bil­lions into Bal­ti­more’s com­mu­ni­ties.

Ma­jor fi­nan­cial in­sti­tu­tions have a gen­uine de­sire, mo­ti­vated by reg­u­la­tions as well as com­pet­i­tive mar­ket pres­sure, to do more in Bal­ti­more, but there are clear rea­sons why they do not. More­over, ma­jor fi­nan­cial in­sti­tu­tions and their reg­u­la­tors are look­ing at how they can bet­ter ful­fill their obli­ga­tions un­der the Com­mu­nity Rein­vest­ment Act, which en­cour­ages fi­nan­cial in­sti­tu­tions to meet the credit needs of the com­mu­ni­ties in which they do busi­ness, par­tic­u­larly the needs of low and mod­er­ate in­come neigh­bor­hoods. The prob­lem that many banks sub­ject to the CRA face is a lack of in­vest­ment op­por­tu­ni­ties that meet the banks’ spe­cific re­quire­ments for risk ver­sus re­turn. This gap is where the Bal­ti­more’s re­de­vel­op­ment bank can step in to work closely with eco­nomic de­vel­op­ment groups within the city, such as the Bal­ti­more De­vel­op­ment Cor­po­ra­tion.

Fur­ther­more, Bal­ti­more’s re­de­vel­op­ment bank can work with ex­ist­ing com­mu­nity de­vel­op­ment fi­nan­cial in­sti­tu­tions, such as Har­bor Bank CDC, to pro­vide in­creased fi­nanc­ing op­por­tu­ni­ties, bet­ter rates and more op­tions for Bal­ti­more’s small and mi­cro busi­nesses. This in­vest­ment would have a mul­ti­plier ef­fect, just as those with EBRD fund­ing, that would in­crease the reach of the bank to the small­est en­ter­prises in the city in com­mu­ni­ties where op­tions for af­ford­able cap­i­tal are rare.

The re­con­struc­tion and de­vel­op­ment bank can get city and state agen­cies, lo­cal uni­ver­si­ties and phil­an­thropic foun­da­tions go­ing in the same di­rec­tion. En­trepreneur­ship sup­port pro­grams in Den­mark and else­where have shown that cre­at­ing low-cos busi­ness ser­vices so­lu­tions for small and mi­cro en­ter­prises re­duces the risk of fail­ure and leads to the cre­ation of more of these en­ter­prises. With sev­eral schools of busi­ness and two law schools, Bal­ti­more has a pool of in­tel­lec­tual tal­ent that can be bet­ter en­gaged.

While pub­lic banks and com­mu­nity de­vel­op­ment banks ex­ist in the United States, the con­cept of a pub­lic-pri­vate bank aimed at com­pre­hen­sive re­de­vel­op­ment of a city has never been em­ployed in the United States. This is an op­por­tu­nity for Bal­ti­more to take the lead.

Eric K. Hontz ([email protected]) is a se­nior pro­gram of­fi­cer at The Cen­ter for In­ter­na­tional Pri­vate En­ter­prise.

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