Notes From The Margin

October 18, 2007

The wider implications of Hardwood Housing, The Enterprise Growth Fund and Politicians

We on the margin have been following the first real engagement of the upcoming silly season with a passing interest. We’re sure that the other blogs will dissect the particulars of the Mascoll/Murrell/Hardwood/EGF situation ad nauseum. We would like to take a slightly broader view of this, consider the following:

  1. Government has set up the Venture capital funds like the Enterprise Growth Fund and the Innovation Fund etc. to help develop small businesses who have great ideas but limited access to capital. These funds deal specifically with entrepeneurs who would by their very nature scare a commercial bank’s risk management department.
  2. The means of functioning of these funds is to take equity positions in (invest in ownership of) these relatively high risk ventures. In doing this the funds will typically take a controlling interest and award the entrepreneur “sweat equity” if he has no funds of his own to put into the operation.
  3. The EGF and its like, ARE  government funds, (Taxpayers money) and should be subject to the PAC etc.
  4. There is considerable discretion in how these funds invest, obviously if the funds are invested badly the fund will go bankrupt so there is an economic reality that the fund managers have to deal with but they do have considerable leeway in making investment decision.
  5. It is THEORETICALLY possible for abuse to happen, for example for a politician’s friends to get preferred access to the funds (We are NOT saying that is what happened with Hardwood) and there does need to be some oversight to avoid this.
  6. It is also THEORETICALLY possible for someone with a political axe to grind to pick on a random EGF company and drag it through the mud in an effort to get some of the mud to stick to a particular politician. (Once again, we are NOT saying that is what happened with Hardwood)

 Now here’s the rub…

How many entrepeneurs are looking at the Hardwood housing political theatre show, and deciding that they will not approach the EGF because of the risk of becoming collateral damage in a political crossfire?

And just to be even handed…

What level of confidence can the EGF give to the public and politicians on their investments as they are playing with taxpayers dollars?

Let us hope that we can find an answer to this, otherwise we may be compromising one of the most promising ways to advance economic enfranchisement of our working class.

Marginal

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5 Comments »

  1. NFTM, maybe the broader question that you should explore is whether the EGFL is operating in accordance with its mandate. I had a look at this institution’s website – http://egfl.bb -which summarises the background to its establishment as follows:

    In the report “Institutional Framework for the Future Direction of Development Finance in Barbados”, one of the major findings was that “the establishment of a new Development Finance Institution was necessary to replace the Barbados Development Bank, but the role of Government in the activities of this institution should be limited.”

    It is within this context that Enterprise Growth Fund Limited was established as a private sector led institution in which:

    Government would play a catalytic role through tax concessions and the provision of seed capital; and

    The private sector would provide the capital and manage the enterprise.

    On January 2, 1998, EGFL commenced operations as a limited liability company.

    If the EGFL is indeed a private sector managed and financed institution, as it was intended to be, should it be “playing with taxpayer dollars”. In short if has been established in the manner that was intended why would it become a political football. Perhaps you should investigate whether the EGFL is not another good idea gone bad.

    Comment by Linchh — October 18, 2007 @ 5:40 pm | Reply

  2. My point in the post is that at least in concept the EGF is a damn good idea that addresses a crying need in the society. And from what I’ve heard (off of the political platform) generally fulfills it’s purpose quite well.

    I don’t have a problem with government using taxpayers money to set up a fund such as this, however I think most people would be right to be concerned if there is no oversight. Note that I am NOT saying that there IS abuse, I am saying that unless there is transparency there is the potential for abuse.

    Also the need for transparency, makes the EGF vulnerable to the political potshots that have been coming over Hardwood Housing, whether they deserve them or not.

    This lack of transparency could in the long run undermine the willingness of persons to access the funds, which in turn would be a pity because as I said, it’s a damn good idea that we need to have functioning properly.

    Marginal

    Comment by notesfromthemargin — October 19, 2007 @ 1:46 am | Reply

  3. NFTM, you seem to have concluded that the Enterprise Growth Fund “is a damn good idea that addresses a crying need in the society”, but your knowledge about its performance seems to be based on what you have heard off the political platform, and not on any specific analysis of its results.

    You talk about the need for “transparency” as a means of mitigating the potential for abuse, but I wonder whether you should not be more specific in explaining what you are talking about. I don’t understand what you mean when you say “(T)his lack of transparency could in the long run undermine the willingness of persons to access the funds”. Indeed, it seems to me that it is the prospect of excessive public scrutiny of the structure and operations of individual projects which has been highlighted by the current discussions of Hardwood Housing Finance Inc, that is likely to discourage investors from seeking the assistance of EGFL. So, perhaps, you would not expect “transparency” to extend to details on particular investments.

    If the source of EGFL financial resources had been private contributions, as it appears was the original intention, would there have been the same concern for public disclosure regarding individual investments?

    The difficulty that I have with the operation of the EGFL, which appears to be a publicly funded venture capital fund (VCF)is that your concepts of public accountability and transparency seem to be incompatible with the manner in which private businesses normally operate. Private VCF’s provide capital finance, management, and market access to investors, but they do so with some expectation of making considerable profit from their investments, they do not expect every one to be a success. Indeed, on a global basis, evidence has shown that, on average, 40% of VCF investments fail, while another 40% tend to stagnate, but that 20% really take off and do well.

    What we have, in the case of the EGFL is an institution whose directors are private inviduals who have no financial stake in its investments, take no risks in making decisions on the allocation of resources, and thus, will not benefit when an investment decision proves to be spectacularly successful. This is not to suggest that the current directors of the EGFL do not use their best efforts to invest its resources to the best of their ability.

    None of my comments are intended to suggest that there is not a need for financial mechanisms to assist potentially viable projects. However, the discussion of HHFI raises the question whether venture capital financing is necessarily the most appropriate approach in every case.

    Comment by Linchh — October 19, 2007 @ 4:46 pm | Reply

  4. Trinidad Express
    Sunday 25th November 2007

    ‘Cloud over New Minister’
    ‘Bank sues Mariano Browne for embezzlement’

    Just remind me who was a previous Chairman of Caribbean Commercial Bank and the Enterprise Growth Fund?

    Comment by Adrian Loveridge — November 25, 2007 @ 11:58 am | Reply

  5. Adrian,

    To be fair, it should be noted that this is a civil suit and not a criminal one. However the comment is noted.

    Marginal

    Comment by notesfromthemargin — November 26, 2007 @ 12:35 pm | Reply


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