Up and Running NI operates outlets in Belfast’s Wellington Place and Newry’s Francis Street and claims to be the leading specialist running and walking shoe retailer in Ireland.

When owner Michael Jenkins began the business in 2005, he chose the franchise route. His business is now the largest franchise in the Up and Running group – and the relationship of the Northern Ireland operation is more independent of the brand franchise than is normal.

“We decided to go on a franchise basis because we were buying into a level of expertise and we were buying into a UK running network,” explains Jenkins. “We could hit the ground running! We achieved in two years what would probably have taken us five years to do.

“We are very much part of that network, but we look at it now as being part of a buying group. We have complete control of the business in Northern Ireland.”

Jenkins puts down his business’s success to three factors – working hard on pre-trading preparation and a big focus on both networking and personal in-store service. “I did a year’s groundwork before we launched – market research and establishing personal contacts,” he says. “The networking is absolutely crucial.”

Although Jenkins is an experienced manager in the retail sector – he was previously with the Dixons Stores Group – he adopted an unusual approach when forming Up and Running. While starting the business, he also did a masters degree in marketing, entrepreneurship and strategy at the University of Ulster’s Jordanstown campus.

Although it was hard work doing both things together, Michael has no regrets. “It was very, very difficult – but worth it,” he insists. “One of the things that [the course] taught me was the importance of networking. We applied that from day one of our business and that has given our business a very strong foundation. We have worked very hard at business relationships and personal relationships.”

Much of the personal relationship focus is in the shops, where the employees are themselves committed athletes. That gives them genuine expertise when selling running shoes. The stores also use ‘digital gait analysis’, which examines the way a runner’s feet hit the ground. This is used to ensure the shoes are appropriate for the way a person runs or walks.

Jenkins explains that the three factors to determine the correct shoes for a purchaser are comfort, fit and running gait. “If someone buys a running shoe in a sports shop or online, there is only a one in four chance of them buying the right shoe,” he says.

Up and Running also sells runners’ accessories and sports nutrition drinks, where the business is again the market leader, says Jenkins. Now the business is in the process of strengthening its online presence, through its website. “We have had six really enjoyable years in Northern Ireland, now we are looking at a new growth strategy and in early 2012 we are launching our website upandrunning.ie.”

Up and Running NI operates an online ‘Talkback’ forum, in which the company fields questions from amateur athletes and other people interested. The service now has 1,500 users and another 10,000 followers. “We are very excited about this and we are looking to reinvent ourselves on a multi-channel basis,” says Michael.

With a stronger online presence, Jenkins intends to further build the Up and Running NI brand – which is already strong through its sponsorship and key partnership with sporting events. It is an official training partner of the Belfast City Marathon and helped the event grow in the last six years from 8,000 runners to 21,500 participants.

Up and Running NI also partners with the Belfast Telegraph to support the annual ‘Runher’ event for women, which in just five years has grown into the third largest indigenous running event in Ireland. “We are now one of the biggest women’s running events in the British Isles,” adds Michael. “We have close to 10,000 women who have run our event.”

Although still a young business, Up and Running - like Runher - has come a long way and intends to go the distance.

The Co-operative Banking Group has submitted a bid for the 632 Lloyds TSB branches that the state-rescued bank is being forced to sell under European Union competition rules. But Co-op Banking Group chairman Paul Flowers told the News that the proposal is low risk and is not ‘betting the bank’.

“The overarching strategy is still to offer a compelling co-operative alternative,” explained Flowers. “That means we have to punch above our weight and make certain we achieve better scale – because a bank which currently has 2% of the domestic market of the United Kingdom - albeit with a bunch of really lovely customers who value what we do, and who value the bank’s services, and, in particular, a bunch of institutional customers, local authorities and others, who know we are a good bank – still is insufficient scale.

“If we are really going to offer a ‘co-operative alternative’, we need to achieve much greater scale, which is why the prospect of making a bid for the Lloyds TSB carve-out is quite crucial. We have had to weigh-up – and are still weighing-up – the pro’s and con’s of that possible deal.

“We have put in a firm bid for the process, which we agreed at the board two or three weeks ago, and we are awaiting a decision of the Lloyds’ board on that matter. Two days ago [on the 23 November], Lloyds announced that there were only two bidders left in the process, which is ourselves – which happens to be the only bank with any scale – and NBNK, which is effectively a private equity outfit, led by Lord Levene and a number of other peers from the House of Lords.”

There is a deep irony here for the co-operative movement, as one of the better known peers who has taken a position as a director of the NBNK banking operation bidding against the Co-op is Lord McFall, who as John McFall was a Labour and Co-operative MP and chair of the Treasury select committee.

“I am saddened and disappointed that a former Co-operative MP has not seen the light,” said Paul. “But notwithstanding that, we are clearly the only credible bidder. The Lloyds board has to decide by the end of December whether to do a deal with ourselves or NBNK or to do what is called an IPO.”

IPO is an ‘Initial Public Offering’ – in other words floating the 632 branches that are up for sale as a separate new company on the stock exchange. However, there are two problems with that approach. One is that the market for new share listings in the current climate is weak. The second is that this would be a demanding task for Lloyds, potentially distracting them from focusing on turning round the bank. This is particularly true as its only recently appointed new chief executive, Antonio Horta-Osorio, is currently on sick leave, recovering from exhaustion.

“If I was sitting round the Lloyds Group board table, and even if I was unhappy with the nature of the bids being offered, I would probably want to cut and run and do a deal,” suggested Flowers. “We are serious about wanting to do a deal that could offer us considerably greater scale, bring with it not just 632 branches – including the entire former Scottish TSB estate and the entire former Cheltenham & Gloucester estate – and which would enable us to have a much greater presence within the home market.

“It seems to me that if we are actually serious about the proposition that we offer- and we are – that we are a really good relationship bank – again, we are not perfect, we could always be a bit better – but on all the polls that are conducted on the standard of service offered in high street banks, we always come out number one. Always.

“If we actually believe that, then we would make that potential deal a success. If we have self-belief in what we are offering as a co-operative alternative, then we are much more likely to project that to the customers that we acquire from Lloyds through the deal.”

The issue of attrition has been raised by some commentators who have been concerned by the bid from NBNK as a new start banking operation. The suggestion is that if NBNK does take over the Lloyds TSB portfolio, it may do little to increase competition in the market – customers could simply opt back into the remaining Lloyds business, leaving NBNK with merely a rather expensive collection of real estate.

The Co-operative Banking Group has analysed its potential exposure to that risk and believes it would be largely immune. Flowers points to studies of comparable previous deals and argues that the Co-op’s high quality of customer services would lead to it retaining the vast majority of acquired customers.

One of the things clear from Flowers’ carefully worded comments is that the bids may be difficult for Lloyds to compare. While NBNK’s bid is understood to be worth £1.5bn, Paul refers to the Co-op bid as being structured to provide Lloyds with an incentive for the deal to succeed. This would potentially protect the Co-op from the risk post-disposal that Lloyds would seek to recover the lost customer base.

Flowers strongly rejects the suggestion that bidding for Lloyds – which would multiply the size of the banking operation, potentially giving it a 7% market share – is an all or nothing throw of the dice. “We are not betting everything,” he insisted. “When you see the things that you will eventually see, you will see that it is not betting everything. Far from it, in fact. It requires investment, but nothing like the scale of investment that has been speculated about in the financial press.”

That is not to say that the bid is risk free for the Co-op. “There are always risks. In terms of the financing, it carries some risk. You never get anywhere in developing that sort of business unless you take some risks. If you look at co-op models in different parts of the country or the world, co-ops that have never taken any risks are mainly dead and buried.

“But the co-ops that have taken risks in order to develop the model and develop the business are the ones who get the prize of sustaining and developing their business. So, of course you must take some risks, but you must quantify it and understand what it is. And that is what we are trying to do.”

Despite the determination of the Co-operative Banking Group to win the bidding war for the Lloyds’ branches, it also has a strategy in case it is unsuccessful. Paul Flowers explains that alternative strategy in the second half of his interview with the News in the next issue.

Second part of Paul Flowers interview

In the last issue, Co-operative Banking Group chair Paul Flowers explained the approach taken by the Group in its bid for a portfolio of 632 Lloyds TSB branches that are potentially being sold. In the second half of that interview, Flowers explains the Group’s alternative strategy.

“If we don’t acquire the Lloyds TSB branches,” said Flowers, “then our strategy is still to grow organically and to still seek investment of several hundred million pounds over the next few years, to enable the bank branch network to grow, to roughly 500 branches, as opposed to the [current] roughly 340 odd and to clearly target certain areas of primary current account customers – private individuals – and to clearly target institutional customers as well. That takes a lot longer, so my clear preference is to do the sort of deal which is currently available, not withstanding that that brings with it some obstacles and some risks.”

Whether or not the Lloyds’ bid is accepted, the main risk facing the Co-op, said Flowers, is the risk of further economic decline, not least in the eurozone. Happily, says Paul, the Co-op has very little exposure – “almost non-existent” - either to sovereign or currency risk in the eurozone. “The issue is that if that goes badly wrong, that will affect everybody. There will then need to be such structural support to enable every institution to be sustained. Actually, our model of doing business has not needed structural support. We have been very liquid and very cautious and very prudent about how we run our business .”

Under proposed new banking capital liquidity requirements, banks will need 9% capital reserves. The Co-op is comfortably above that at 9.6% and seeking to hit 10% - though both RBS and Barclays will be in trouble according to some analyses if those capital levels come in at a time when sovereign debts in the eurozone are being written-off.

By contrast, the Co-op is sitting pretty – even though Moody’s credit ratings agency recently downgraded the Co-operative Banking Group. This reflected indications from the Government that if the financial crisis hit rock bottom, the Co-op is not regarded as one of the systemically essential banks that are ‘too big to fail’ and would need government rescue. However, as Flowers stressed, the Co-op was the only bank recognised by Moody’s in the same assessment as becoming even less likely to fail – because of its liquidity buffer and prudent management.

“Some people seem to have ignored that,” complained Flowers. “So the agencies do understand that we are a well run, well managed, bank.

There is, though, a further challenge, which could also be a risk. Ironically, the Co-op is investing in branch networks – and potentially investing much, much more – when the future of bricks and mortar branches is unclear. The Co-op has been, after all, a pioneer of internet banking, particularly through the Smile brand.

Flowers explained that in terms of customer profile “there is a differential” between the Co-op and other banks. “We seem to have a more articulate and marginally more affluent customer base than most other banks,” he said. “The image of the Co-op Bank that used to pertain of being a down-market bank for the poor is not true at all and we know where our current customer base is and we know we need to extend that customer base from that pretty stable core that we have already got – which is now approaching 600,000 primary current account customers, people who do all their main banking business with us, we have one and a half million total accounts – and we know from the studies that we do that we have to extend that out to other cohorts of people.”

“You have to weigh-up the relativities of how your customers do their banking,” continued Flowers. “Our branches are well run. We know that lots of our customers want to use branches and value the customer relationship and we are trying to develop the range of other products that we sell through those branches, as well as through the other channels, internet and telephone.”

And the cross-selling of other financial products – particularly mortgages, but also insurance – helps to explain the renewed focus on branch banking, which has been backed post-Britannia merger by a massive investment in new IT systems. “Branch banking ain’t dead yet!,” stressed Flowers.

“£750m of investment [in I.T.] over a period of time is being delivered through the world leading companies who do these systems, Infosys, based in Bangalore, and their partner Steria, based in Delhi. Some of that has already been rolled out to general acclaim and happiness, particularly to our corporate customers and the rest of it is being rolled out in the next two years and will be finished by the end of 2013.”

The installation of the new IT has involved a close relationship between the Co-op and the two contractors, with hundreds of staff from India being located at any one time in Manchester. “We have a board sub-committee, which has independent expert advice, which enables the board members to keep an eye on the progress of the development of that system and to ask appropriately well informed questions. So we are doing our best to keep executives on the straight and narrow.

“We will have a state-of –the-art I.T. platform that will be the best of any bank in the UK or Europe.” That will lead, if all goes well, to a much higher level of cross-selling of products to customers and make it much easier for staff to understand customers. However, emphasised Flowers, the expectation is that staff levels will increase, not be cut.

While the Co-op does not want to take on the role – to an extent carried out in recent years by the Nationwide – as being the saviour of weak building societies, Flowers said the Co-op has been actively involved in supporting some societies by providing liquidity where necessary, “against good collateral!”. “I think that was welcomed and appreciated by our colleagues in the building societies,” he said. “If there are building societies in the future that want to associate themselves with us in building a vibrant co-operative sector then we will be very happy to talk to them and work with them, whatever form that work takes.”

Flowers warned that there could be further difficulties and consolidation amongst building societies. “One has to question the future going forward for that whole sector unless they find a way of transforming themselves, not least when a number of them have been reduced in terms of their ratings to effectively junk bond status, which is where some of them are now at, which prohibits them from doing any sustained business in terms of capital markets and stymies their opportunity to do anything other than loans for mortgages and savings, the margins on which are tight. They have to examine where they are going.”

Paul demonstrated the extent to which he is anything but a typical bank chairman when he revealed his strong sympathy for the ‘Occupy’ anti-banking movement, suggesting this presented an opportunity for the co-operative movement. As a Methodist minister, Flowers believes that both the demonstrators and the church need to recognise they have roles in moving society on from the crisis.

“I was in New York a few weeks ago and I went to see the Occupy Wall Street people,” said Paul. “If I had been asked by a journalist while I was there, I would have said they were on the side of the angels – that they were entirely demonstrating about the right things. They were right to protest the huge excesses of the market and the way that they had exhibited, and continued to exhibit, enormous greed.

“It is right that we find ways of objecting to that. We can admire the resolution and the courage of those young people, who have been demonstrating in lots of places. But you still then have to find a way through between the gross excesses of an uncaring and unthinking capitalism, where people are still only seeing their own personal interests and the provision of responsible decent banking and other financial services, which we need, but which need to be provided in a way that they are respected and trusted. I would hope that the young people who are demonstrating, with all their wonderful idealism, would see that you have to find a pragmatic way through.

“We need to keep on reminding people that there are people who are providing financial services who do have a more ethical perspective. We are not perfect – who is? But we still need to try to provide something that people want to have, which is provided well and ethically.”

Ethical considerations have also governed Paul’s own life. He recently stood down as a Labour and Co-operative city councillor in Bradford, given the commitments he has as chair of the banking group, deputy chair of the Co-operative Group and a Methodist minister, as well as a councillor. “I thought that after 10 years, I had done my bit,” he says. “It was impossible to sustain all of it.” An understandable conclusion.

]]> http://www.paulgosling.net/2011/12/co-op-bids-for-lloyds-branches-co-operative-news/feed/ http://www.paulgosling.net/2011/12/ethics-in-retailing-co-operative-news/ http://www.paulgosling.net/2011/12/ethics-in-retailing-co-operative-news/#comments Wed, 21 Dec 2011 18:03:11 +0000 paul.admin http://www.paulgosling.net/?p=797

Manchester’s hosting of the International Co-operative and Mutual Insurance Federation’s biennial conference was a great success. But amidst the presentations from chief executives of some world’s largest life and non-life insurers, arguably the stand-out contribution came from Nigel Waite, a consultant with the Canford Centre for Customer Development. He has been a marketing director with Lloyds and Barclays and is honorary professor of marketing at Nottingham University.

These days, Nigel concentrates on advising financial services firms on integrating the principles of fairness and value into their marketing strategies. He intervened several times during the ICMIF conference to emphasize the connections between the co-operative principles and the need for the finance sector to turn its back on practices that brought global capitalism to its knees and destroyed the personal wealth and wellbeing of millions. The News took Nigel to one side during the busy conference schedule to ask him how, in his opinion, the co-operative movement should respond to the financial crisis.

“First and foremost, co-operatives are commercial organisations, and so they have to, in their chosen segment – whether that be insurance, or banking, or funerals, or in food retailing – aim to be excellent at what they do and to give good value for what they do,” said Nigel.

“But I think they have to go beyond that. It’s a philosophical point – my view is that capitalism is the best way to allocate scarce resources. And the capitalist model is, I think, as opposed to the collectivist model, the most environmentally sustainable approach.

“The difficulty is that it [capitalism] has to work according to certain rules. And it is the absence of rules regarding values-based strategies - and the unbridled pursuit of growth as the primary purpose of commercial organisations - that has caused the crisis that we have experienced these last few years.

“Now it has come to a head. The issue of trust, and the lack of trust, has undermined the relationship of consumers with the financial services industry for decades. So it is a case of co-ops being in the market place, providing products and services where there is a genuine need, doing their best in terms of value for money, but doing it in such a way that they safeguard the interests of the stakeholders and operate in a way that ensures the sustainability of communities and the wider environment.”

One of the strong points that Nigel made in one of his contributions from the conference platform was the disconnect between banks that had strong corporate social responsibility (CSR) policies on paper, yet adopted practices – notably in the case of RBS – that were high risk, overly aggressive and commercially unsustainable. But was there a parallel, we asked Nigel, with parts of the co-operative movement that had got into bad habits by trading off their history and, until recently, failed to deliver in some respects on the standards – such as the condition of the retail trading environment - that consumers expected from them.

“You have two extremes there,” responded Nigel. “If you look at the [co-operative] supermarket side in the past, they have talked a good game, but very often as a consumer your customer experience has been extremely disappointing – poor quality products, for example, particularly on fresh fruit and vegetables.

“And that is why it [co-operative food retailing] has had to up its game. And I think the current ‘tag line’ of ‘good with food’ – and that seems to be reading across to ‘good with money’ as part of a consistent theme – is absolutely bang on. It has to be based on this fundamental principle that you have to compete with the best in terms of customer experience – so the retail side had to up its game in terms of consumer experience. It is improving, but it has a long way to go.”

Nigel went out of his way at the conference to praise the quality of retailing at Waitrose and the rest of the John Lewis Partnership. So should other parts of the co-operative family learn from this?

“It is a very different shopping experience at a Waitrose - and you do pay a premium, it has to be said, over its major rivals. But it has illustrated that you can combine that quality standard of products at a reasonable price in a way which is socially responsible and ensuring that the interests of staff are properly recognised and which is environmentally sensitive as well.”

So if these are the principles and approach that should be adopted in retailing, how might this translate in financial services – in particular for mutual insurers? “Let me give you an example,” explained Nigel. “The Co-operative’s general insurance business has introduced a new product aimed at young drivers, whereby they can elect to have a black box installed in their car and in real time it monitors their driving performance.

“Now this is a very real issue. I speak as a father of four and it costs more to insure a car than it does to buy the car. That’s because of the recklessness of a small minority of young drivers. The vast majority of young drivers who are not lunatics are penalised through these enormous premiums.”

Nigel argues that the use of technology to address a real consumer problem of restricted and costly access to an important financial product is an excellent approach. It brings together best practice in the use of technology, with an enlightened understanding of the principle of fairness, while creating opportunities for young people who otherwise risk exclusion from employment. It may also have a positive impact on drivers’ behaviour, by creating an incentive to drive safely.

“There is also an opportunity for a better environment, because there will be less cars written-off, lower repair bills and for the insurers there will be lower claims,” added Nigel. “That is a very concrete example of a great initiative coming from a co-op.”

What this illustrates – particularly from the Co-operative Banking Group – is the use of technology to recognise consumers’ personal circumstances and to move away from a long-standing practice in retailing to cut costs by treating all customers as the same. Comparable moves are being adopted in food and drink retailing, suggests Nigel, with Coca-Cola no longer selling just one recipe and in the one type of well-known bottle. Now it has a variety of recipes and a range of containers.

“We have moved from one homogenous type of segmentation, to a multiple approach to segmentation,” explained Nigel. “We even now talk about a segment of one.

“If you are in the service field, it actually lends itself more to customer identification, on the basis of this segment of one, than it does in the mass markets. But the problem historically has been that one-to-one, real time, interaction is expensive.

“So [the question] is how can the service environment recognise the individuality of the consumer and satisfy this concept of the segment of one individual. I think the black box from the Co-op Insurance was a great example of a real attempt to do just that.”

The launch of the International Year of Co-operatives is an opportunity to take stock. New York was the obvious place for the launch, given that the Year has been declared by the United Nations – and its headquarters are in the ‘big apple’.

However, it would be understandable if many co-operators felt there could be more suitable places for the launch – Manchester, for example. This concern would seem to be supported by looking at the latest figures produced by the International Co-operative and Mutual Insurance Federation. No US mutual insurers make it into ICMIF’s top 20 – nor do any from the UK.

Instead, ICMIF’s largest member is Japan’s Zenkyoren, which is far larger than any other mutual insurer both in terms of its life and non-life business. However, the absence of US and UK mutual insurers from the list is not a complete story – sadly not all mutual insurers are members of ICMIF. The UK’s largest mutual insurer is Royal London – which is in the process of enlargement, through the takeover of Royal Liver. It would be in the top 20 were it an ICMIF member.

Similarly, New York Life would make it into the list were it a member, given that it manages over $283bn in assets. Northwestern Mutual is even larger, with $1.2trn of life cover under protection. Both mutuals would make it into the Fortune 500 list if they demutualised. Sadly, many other US financial mutuals have demutualised in recent years - though it should be recognised that historically some US insurers have gone the other way, initially incorporating as joint stock businesses, but then converting to mutuals because of the better economics achieved through mutualisation.

The point is that dismissing the United States as simply the home of shareholder capitalism is misleading. As the current Occupy Wall Street campaign demonstrates, there is an admirable tradition in the US of radicalism and co-operation.

As this column has reflected previously, much of rural America receives electricity only because of energy supply co-ops that operate on much lower margins than joint stock companies would contemplate. (It is worth noting that the International Co-operative Alliance is next month seeking to create a new energy sector co-operative group, reflecting the significant growth of energy co-ops around the world. A meeting in Cancun in Mexico this month is intended to kick this off.)

I spent some of my summer this year in New York and I was struck by the destination board of one of the bus services that passed me, on its way to the ‘Co-op City’. This is situated in New York’s Bronx district and is one of the largest housing developments in the world. It would be wrong to hold this up as a beacon of socialist living: the vast settlement comprises large numbers of owner-occupied apartments and its history involves loan defaults and fraud.

But it does illustrate the reality that co-operatives are a form of organisation that is widely recognised in the United States. Similarly, many small housing developments operate through joint ownership of common living spaces and are termed ‘co-ops’. Again in New York’s Bronx, the largest food distribution centre in the world is Hunts Point – a co-operative in the sense that it is jointly owned by the companies that operate from there.

According to the US’s New Economics Institute (not to be confused with the UK’s New Economics Foundation, my favourite think-tank), we are about to see a big increase in the use of co-operative structures in America. This follows the meltdown of Anglo-Saxon capitalism that led Pauline Green of the ICA to say the other day rather grandly – but probably with complete justification – “The investor-led model has failed.”

The NEI suggests that America is now in the midst of what it terms “evolutionary reconstruction”. As evidence for this it points to the growth in popular movements against the excesses and destructive impact of investment banking seen at Occupy Wall Street. This is, judging by British television, supported by people across traditional social divides, with many angry white collar pensioners showing their support for the movement. There is also a parallel in the strength of feeling evident in Athens and Rome against austerity programmes.

But this movement is not only characterised by the negative, but also by the positive, suggests NEI. It illustrates its argument by reference to many new workers’ co-operatives being established across the US, with other businesses involving worker engagement through ESOPs - Employee Stock Ownership Plans (termed Employee Share Ownership Plans in the UK).

According to Gar Alperovitz of the NEI: “At the heart of the spectrum of emerging institutional change is the traditional radical principal that ownership of capital should be subject to democratic control.”

It may be far-fetched to expect a revolution for social change to emerge from the United States, but these are very interesting times. As I write, it appears that the eurozone – and possibly the European Union itself – will be saved because of the backing of the bail-out fund by the vast sovereign reserves of China. Those reserves, we should remember, have been created off the back of state capitalism and state manipulated currency exchange rates. The previously dominant capitalist structures are indeed under threat.

The balance of wealth and the world’s balance of power is currently shifting. Much of Europe can expect to lose its traditional position of financial privilege. Perhaps the same will happen, more slowly, in the United States. As citizens lose those privileges, not to mention a substantial part of the value of their pensions (along with being forced to retire later), they are getting angry.

This may not be a time of revolution, but in global terms it is a time of profound reorientation. The last period in which there was a strong parallel of large scale international trade that then went into a period of protectionism – as could happen in the coming years – caused such strong trade competition between countries and their governments that it led to the First and then the Second World War. An alternative parallel is the 1920s and 30s, which is no more comforting.

As we witness the risks of the break-up of the European Union we should bear in mind those grim historical warnings. It is probably too much to hope that a resurgence in co-operative enterprise will deflate those nationalist sentiments that are now growing. But the traditional virtues of co-operation and solidarity are needed today and they stand a better chance than for many years of earning a hearing.

But let us consider the lessons of history as we celebrate the International Year of Co-operatives.

]]> http://www.paulgosling.net/2011/12/new-york-new-york-co-operative-news/feed/ http://www.paulgosling.net/2011/12/building-society-shareholders-become-bad-bank-bondholders-co-operative-news/ http://www.paulgosling.net/2011/12/building-society-shareholders-become-bad-bank-bondholders-co-operative-news/#comments Wed, 21 Dec 2011 18:01:23 +0000 paul.admin http://www.paulgosling.net/?p=795

Although building societies are owned by their members, some also have ‘shareholders’. However, building society shareholders have a very limited role – they are investors, with no additional votes beyond their status as society members.

Holders of building societies’ ‘permanent interest bearing shares’ (PIBS) are the equivalent of bondholders in a bank, or other company. And this is where the problem originates for investors in PIBS issued by the former Bristol & West Building Society. When the society was acquired by the Bank of Ireland, the holders of PIBS were automatically treated by the Bank of Ireland as bondholders.

There are similarities between the holders of PIBS and bank bondholders. In both cases the holders of the investments are not preferential creditors in the event of a collapse of the business and they receive a good rate of interest to compensate for the risk they enter into.

However, there are also significant differences between the positions of PIBS holders and bank bondholders. Bondholders understand the risks they are taking, or they should do if properly advised, and enter into these risks knowingly. This was not necessarily true for those who invested in Bristol & West PIBS.

Building societies are traditionally low risk financial institutions. Until the global financial crisis, few people expected societies to hit serious trouble –especially a strong and stable institution like Bristol & West. Moreover, in the 1990s, when the Bristol & West PIBS were issued, it was not realistic to predict that it would be taken over – let alone by a foreign institution.

The Bank of Ireland hit very serious trouble after it acquired Bristol & West. The financial crisis that rocked Ireland hit the Bank badly, causing it to pull back from some of its UK engagement. It does, though, still have a major financial services joint venture with the Post Office.

In 2009, Bank of Ireland had to make provisions of €4.5bn for potential losses on loans for commercial and residential properties and development schemes, after the Irish property boom went to bust. As a result, the bank required over €5bn in extra capital to cover actual and potential losses. With the support of the Irish government and new investors, the bank has survived – but its bondholders had to accept large write-downs (or ‘haircuts’) on their investments.

This is where we come to the £75m in PIBS issued by the former Bristol & West Building Society. Under the terms of an offer to buy-back the bonds, the Bank of Ireland offered the over 3,000 holders of PIBS less than 20% of their surface value. This led to a vigorous campaign, and a legal action, on behalf of the PIBS holders. Bank of Ireland relented and made a revised offer, which was twice as good as the previous one – but still involved PIBS holders losing 60% of the value of their investments. That offer expired last month, with many of the PIBS holders again rejecting or ignoring the offer.

Holders of PIBS who held out are campaigning for a more generous outcome. Issues include whether the Bank of Ireland should still be regarded as a ‘basket case’; whether the largely successful recapitalisation means the bank can be treated as healthy; and whether holders of PIBS have a legitimate and ethical case to be treated as a special case. The Bank of Ireland and the Central Bank of Ireland – as regulator of the banking sector – clearly feel that the PIBS holders have already been treated generously, compared to Bank of Ireland’s own bondholders.

Leading the campaign against the position of the Bank of Ireland and the Central Bank, representing many elderly investors, is Mark Taber of advisors Fixed Income Investments. Taber points to recent remarks by Ireland’s finance minister Michael Noonan – when he was trying to reassure the markets – that the Bank of Ireland is now “if anything, over-capitalised”. This suggests, says Taber, that BoI does now have the capacity to fully honour the Bristol & West PIBS.

One of the points made by Taber in his continuing correspondence with the two Irish banks is that holders of the PIBS could not have expected this outcome when the shares were issued and that the Irish regulator has let them down in the supervision of the Bank. He points to the Scheme of Arrangement for transferring oversight of the Bristol & West PIBS to the Irish regulator in 2007. This stated: “In addition to seeking Court approval of the Transfer, Bristol & West and the Bank of Ireland have been working closely with the regulators, the FSA and the Irish Regulator, to help ensure that their customers are not adversely affected by the Transfer.” In practice, says Taber, this assurance proved false.

In his most recent correspondence, Mark wrote: “The Central Bank of Ireland accepted responsibility for regulating the issuer of the former B&W PIBS, which were known to be held by thousands of small, unsophisticated UK investors, and should honour its commitment to ensure that they are not adversely affected by the Transfer. This should include ensuring that they are not adversely affected by the change of regulator, country of issuer and law of remedy applying to their investments. To date the Central Bank has completely failed in this regard.”

Taber says that it is unfair that vulnerable and mostly elderly holders of PIBS were given offers with short deadlines, with the potential alternative that the investments could become completely worthless. He argues that while this was approved by Ireland’s Central Bank, such an arrangement would never have been accepted by the UK’s Financial Services Authority. Mark suggests that this violates the promise made when supervision of the PIBS was transferred to Ireland.

However, as far as the Bank of Ireland is concerned, the matter is fully resolved. A spokeswoman told the News: “The offer has concluded. We have no further comment.”

Even if, as the Bank of Ireland hopes, that dispute is history, it highlights the fact that holding PIBS can be more risky than some investors had assumed. Other building societies have also issued PIBS, including the Nationwide and the Kent Reliance – which controversially entered into a joint venture with JC Flowers to take over its operations last year. This raises interesting questions for those investors in Kent Reliance.

A spokeswoman for Kent Reliance said: “The status of the PIBS changed on vesting [when the joint venture took over the operations of the building society]. They have been replaced with instruments with the same value for the same holders: they were replaced with perpetual subordinated bonds.”

No doubt holders of the former Kent Reliance Building Society PIBS will hope that the experience of the Bristol & West PIBS is not repeated.

Business Month – December 2011

Up and down

Up

Average weekly earnings in Northern Ireland rose 1.5% in the last year. Incomes are 20% below the UK average, but the trend is contrary to the UK as a whole – where earnings remained stable.

VAT in Ireland is to rise from 21% to 23% in this month’s Budget in the Republic. The rise is expected to increase retail demand in the North from cross-border shoppers.

Research and development investment in Northern Ireland increased 8% last year, to £483m.

Down

The FTSE 100 lost 10% of its value in two weeks in November, but remained above its low in early October.

Retail property vacancies in Northern Ireland fell in the last quarter from over 17% to 13% - but Northern Ireland remains the UK region with the highest proportion of vacancies.

Consumer confidence has fallen for the fifth consecutive month and is now at a record low, according to the Nationwide’s Consumer Confidence Index.

House prices in Northern Ireland are still falling, according to the latest survey by RICS of its members. Some 30% report lower prices, while 69% said they were unchanged. But there were signs of increased sales.

New homes’ prices are also falling: in the last quarter the average price for a new home was £144,600, some £20,600 below the figure in the same period last year.

PfG seeks 25,000 new jobs

Over 25,000 new jobs will be created in Northern Ireland, if plans in the Programme for Government are successful. The Programme also seeks to attract £300m from Foreign Direct Investment, increase the value of manufacturing exports by 15%, stimulate £300m in indigenous research and development and increase visitor numbers. The Executive intends that by 2020, there will be 4.5 million visitors a year to Northern Ireland, supporting over 50,000 jobs.

For the first time, the Executive also made a clear pledge in the Programme to seek the devolution of Corporation Tax rates and to cut these to a level that is competitive with the Irish Republic.

However, enterprise minister Arlene Foster said that the eurozone crisis meant that implementing the Programme’s economic strategy was going to be difficult. “With that in mind, our overarching goal remains the pressing need to strengthen our competitiveness through a focus on export-led growth,” she explained. “To achieve this we will continue to prioritise the need to deepen and diversify our export base in order to increase employment and wealth across Northern Ireland,” she said.

“There are certain sectors and markets where we believe we have the greatest potential to succeed. At the same time, we recognise the need to be responsive to new national and international market opportunities.”

She added: “Rebalancing and rebuilding the economy are the twin goals we have identified in order to become more competitive and we have outlined a range of actions and investments to achieve this. We have also included targets to monitor our performance.

“This is an ambitious strategy and one that requires a partnership approach, from the Executive and public sector, as well as companies and the workforce within the private, community and voluntary sectors. I would encourage all stakeholders to take the time to carefully consider and respond to this document and play their part in helping us deliver the right economic strategy for Northern Ireland.”

Weak prospects for NI economy

Northern Ireland is predicted to grow its economy by just 0.8% next year and 1.1% the year after, according to the downgraded outlook published in Ernst & Young’s Economic Eye. It forecasts further job losses in the public sector and in manufacturing in the coming months, as economic activity constricts because of the global and eurozone crises.

While the Republic did well to shows signs of recovery earlier this year, E&Y expects that it will return to recession in the latter half of this year. Domestic demand is predicted to decline further in the Republic next year.

E&Y welcomed the Programme for Government, but said it could be 2021 before the Northern Ireland economy recovers to generate a net additional 25,000 jobs – the number of jobs the Programme aims to generate by 2015.

Neil Gibson, economic advisor to E&Y, said: “The PFG is an ambitious policy document which strikes the right tone of local responsibility for growth whilst recognising the necessity to expand the region’s export base. The Economic Eye forecast suggests that meeting the targets set out will be very challenging indeed, particularly those relating to job creation.”

E&Y expects unemployment here to rise to 7.8% next year and to 8.3% in 2013, as the impact of public sector cuts are felt. It believes there is little prospect of Northern Ireland generating additional employment through exports and suggests that employment recovery will be gradual, with unemployment still at 7.1% by the end of the decade.

The official unemployment figures may be boosted, adds E&Y, through welfare reform moving people who are currently economically inactive onto the unemployment figures.

Executive urged to rescue retail sector

Northern Ireland’s large retailers have urged the Executive to take decisive action to support the troubled sector. The Northern Ireland Retail Consortium has delivered a five point plan to the Assembly’s finance committee.

The NIRC is urging the Executive to abandon the proposed Large Retailer Levy and fund the extension of the Small Business Rates Relief Scheme by other means. Other measures proposed include a wider rates reduction scheme - lifting the rates burden on all commercial and domestic properties in an attempt to lower costs and boost retail demand. The Executive is also being asked to move urgently to overhaul the planning system, to commit to a programme of workforce skill development and to introduce Business Improvement Districts on an accelerated basis.

NIRC Director, Jane Bevis: “The Executive is right to be looking to help small businesses through rate relief, providing it is fairly funded. That means all sectors which stand to benefit should contribute. There also needs to be a focus on collecting bad debt and reducing the cost of local government in Northern Ireland with the ultimate aim of lowering rates for all, households and businesses alike.

“Retailers are at the heart of our towns and cities but many need a shot in the arm. Reforming the planning system and prioritising town centres, along with urgently legislating to create Business Improvement Districts, would give a much needed boost to regeneration efforts. Finally, retailers want to see their commitment to staff training matched by national initiatives to improve the skills of the Northern Ireland workforce.”

Figures produced by NIRC suggest that retailing footfall in Northern Ireland has fallen by 5.5% in the last year – the third worst regional performance in the UK.

Rates burden ‘higher out of town’

Retailers in out of town locations often pay higher rates burdens than do their competitors in town and city centres in Northern Ireland, according to a leading firm of surveyors. The disclosure challenges the assumptions made by some campaigners seeking protection of traditional retailing areas.

“Large out of town retailers are paying higher rates per square foot than large retailers in town, but it depends on the strength of the out of town location – for example, retailers at Sprucefield are paying far more than those in Lisburn City Centre,” said Nicholas Rose of RHM Commercial. He added that retailers at the Bloomfield and Springhill shopping centres also pay higher rates than those in Bangor town centre.

Rose said that the debate over retail rates had been misled by the arguments put forward by some, who have claimed that inner city retailers are effectively subsidising out of town centres. “The problem is that people do not compare like with like when they are making these bold assertions,” he explained. “Typically, they compare small shops with large out of town foodstores, which is comparing apples and oranges.”

The view that out of town retailers are paying more in rates than comparable retailers in urban centres was confirmed by a person closely involved in discussions on the possible imposition of a large retailers’ levy, who spoke anonymously.

However, Glyn Roberts, chief executive of the Northern Ireland Independent Retail Trade Association, said that it was “absolutely not true” that out of town retailers pay more in business rates. “They are actually paying less per square foot than town centre retailers,” he said. “We don’t believe the rates bill they pay fully reflects the fact that they have free car parking. We believe that car parking should be a factor [in the rates bill].”

A spokeswoman for the Department of Finance and Personnel attempted to clarify the situation. “‘For out of town shopping centres that have free car parking, the rateable value of individual shops takes into account the advantages of this free car parking - although it is not accurate to say that business rates are levied on these car parks, per se,’ she explained.

Department ‘prepared for Southern Cross failure’

The Department of Health, Social Services and Public Safety was engaged in a series of meetings with the failed care homes provider Southern Cross prior to the transfer of operations of the homes to other businesses. The disclosure was made to Business Month in response to a Freedom of Information Act request.

Contingency meetings were convened by the Health and Social Care Board, at which both Southern Cross and DHSSPS were present, dating back to June this year. In the initial meeting, the Southern Cross representative suggested that it was “unlikely” that any landlord would take legal action against the company for non-payment of rent, “the only scenario that would force Southern Cross to go into administration”.

Yet Southern Cross – the largest care homes operator in the UK – is to cease trading before Christmas. It has now transferred 743 homes across the UK to other operators, leaving just five operational homes and four non-operational homes to be transferred.

In the meetings, Southern Cross warned government officials that “fees in Northern Ireland were less than the total cost of providing care”. It was also clear from the meetings’ minutes - although detail on individual homes was redacted – that at least one of the 25 Southern Cross homes in Northern Ireland required significant investment.

As the summer passed, the financial crisis at Southern Cross intensified because of the company’s commitment to pay above inflation rental increases to homes’ landlords at a time when occupancy rates were falling.

Officials responded by holding weekly teleconferences to keep abreast of the situation and to plan for the transfer of Southern Cross homes to other operators. The conversations involved the other devolved governments in Scotland and Wales, the Department of Health and the Association of Directors of Adult Social Services.

Minutes of the meeting make clear that health minister Edwin Poots was aware of the actions taken. The report was told “the minister appeared content with the current approach i.e. it was the responsibility of the Southern Cross Company to deal with its own financial affairs and that HSC only intervene (press statement) when necessary”.

Consumers complain about used cars

More than 70% of complaints to the Consumerline trading standards help line in the first 10 months of this year were about the sale of used cars. Most of these 1,000 calls related to faults that were revealed after cars had been purchased.

Other leading causes of complaints – over 13% of calls – were related to misleading claims by traders, or the failure of sellers to provide full information. A further 7% of complaints were about substandard service.

Stephen Thompson, Consumerline manager, said: “We continue to receive a high number of complaints which are often due to some traders refusing to deal with legitimate complaints or provide appropriate compensation. We want to help people understand their rights when buying a used car from a dealer and we are working with the industry and local authority trading standards to get this message across. Dealers who fail to treat customers fairly or sell cars that are defective could face enforcement action.”

Ennis is lead Invest NI

Mark Ennis, executive chairman of SSE Ireland, is to become Invest NI’s new chairman from January. SSE Ireland is the Irish division of the SSE group and is one of the largest energy businesses on the island.

Enterprise Minister Arlene Foster said: “The position of chair of Invest Northern Ireland is a challenging job and it is essential that in times of economic difficulties, we have strong and effective leaders who are equipped with all the skills and knowledge needed to deliver change.

“Mark….. has gained extensive business development experience across large and medium-sized businesses. I am confident that his experience and drive will prove vital as we tackle the challenge of rebuilding and rebalancing the Northern Ireland economy.”

Foster thanked outgoing chairman Stephen Kingon for his work. “Stephen has made a significant contribution to the success of Invest NI during a difficult economic period,” she said. “Throughout the last five years, he has consistently shown strong leadership in response to the economic downturn. I have also welcomed the strong lead he has given to implementing the changes which I have sought following the Independent Review of Economic Policy.”

Up

UK inflation rose to 5.2% in September, up from 4.5% in August.

China’s inflation rate has risen to 6.1%, having averaged 4.25% in recent years.

United States’ inflation rose to 3.9% in September, up from 3.8% in August.

Heating fuel costs have risen 49% since the onset of the financial crisis in August 2007.

UK unemployment rose to 8.1% in the three months to August – the highest rate for 15 years.

Down

Consumer confidence, as measured by the Nationwide Building Society, has fallen for four successive months and is near its all-time low – recorded in February of this year.

Construction sector output in Northern Ireland fell by 7.0% in second quarter of this year against the first quarter, and by 14.4% on the same period last year. It is now almost 50% below peak activity, recorded in early 2007.

NI homes amongst cheapest in UK

House prices in Northern Ireland are amongst the cheapest in the UK, according to the latest Halifax UK price index report. Both Londonderry and Craigavon are in the top ten of affordable average property prices.

Homes in Derry cost an average of £868 per square metre and those in Craigavon are £870 per square metre. All the other ten cheapest locations are deprived areas of Northern England or Wales that have suffered from extreme industrial decline.

Northern Ireland has a clear lead in the top ten of places where property prices have appreciated least over the last decade. Belfast is first, Lisburn second and Bangor fourth. The table ignores the interim price inflation and subsequent crash. Following the boom and bust in the property sector, Belfast average home values are today just 25% more than they were ten years ago: by contrast they have risen by 160% in Peterhead, near Aberdeen.

Ballymena and Craigavon also feature in another of the Halifax top ten lists – with the largest average property sizes.

4,000 public sectors jobs go

Four thousand public sector jobs have been lost in Northern Ireland over the last year, according to analysis from accountancy firm PwC. The public sector has cut jobs more quickly and more deeply than was expected, says PwC – but it warns that the full pain of job losses has yet to be felt in Northern Ireland.

Across the UK, 240,000 fewer people worked in the public sector in the second quarter of this year, compared to the same period last year. There have been large employment losses in English local government, central government, particularly in the defence and education sectors, and in public corporations, including the BBC and the Post Office.

Many more jobs have been lost in the public sector over the last year than have been created in the private sector. Where there has been private sector job creation, this has focused on part-time rather than full-time posts, says PwC. However, if the analysis is spread over a longer period – from December 2009 to June this year – the picture is very different. Over that period, 290,000 public sector jobs were lost, while 600,000 private sectors jobs were created.

In Northern Ireland, the public sector staffing reduction represents 1.8% of those employed a year ago. PwC expects the rate of job losses here to accelerate over the next year. The firm warns that with little economic growth coming through, there is a significant chance of a double dip recession.

Dr Esmond Birnie, PwC’s chief economist in Northern Ireland, explained: “In percentage terms, Northern Ireland has experienced the lowest level of public sector job losses amongst the 12 UK regions, well below the North East and South West of England where the percentage fall has been between 5 to 6%.”

Creative industries prove important

The creative industries are worth over £700m a year to the Northern Ireland economy, according to statistics produced by the Department of Culture, Arts and Leisure. In 2008, the gross value added from the creative industries sector was £737m, equal to 4.2% of regional economic output.

Some 31,000 people in Northern Ireland are employed in 2,200 creative industries’ businesses, says the report. This is equivalent to 4.1% of jobs and 3.2% of businesses.

Minister Carál Ní Chuilín said: “The creative industries are recognised across the world for their potential for job and wealth creation. The sector can help to rebuild and rebalance our economy by stimulating the innovation, R&D and creativity needed to drive export focused growth.”

According to the Northern Ireland Science Park, an additional 25,000 jobs could be produced by exploiting opportunities in the knowledge economy sector, which could generate an additional £3bn a year to our economic output.

Invest NI to launch small firms loan scheme

Invest NI is seeking approval to launch a £50m loan fund for small and medium enterprises. The scheme has to be approved by the Financial Services Authority before it can go live – which is hoped will happen by early next year.

The agency wants to address a growing problem of SMEs’ difficulties in accessing funds. Figures produced by the Department of Enterprise, Trade and Investment found that SME success rates in applying for a bank loan have fallen dramatically in the last four years – from 92% in 2007, to 65% in 2010. The decline has been steeper than in the UK as a whole, with SMEs in Northern Ireland having had more success in 2007 than was the case with the GB counterparts.

For micro-business, access to bank lending has collapsed to an even worse extent. Firms with less than 10 employees now have only a 45% chance of getting a bank loan, compared with an 89% probability in 2007.

Invest NI’s initiative to address the crisis was welcomed by the Federation of Small Businesses. John Friel, FSB Regional Chairman, responded: “Access to capital remains a key concern for many of our members. These funds will hopefully help to address this issue directly, and will indirectly also serve to increase the pressure on our banks to start lending again. It is vital that small business owners gain access to the finance they need to help their businesses grow and revitalise the economy.

“However, the introduction of this loan facility should be only seen as the first step in a bespoke package of measures aimed at improving economic conditions that will ensure doing business in Northern Ireland is a much more attractive prospect for existing indigenous firms and prospective overseas investors.”

The move by Invest NI follows its admission that it must return £17m to the Northern Ireland Executive because it was unable to spend all its funds for supporting inward investment. It is unclear whether Invest NI will be permitted to continue providing grant assistance to inward investors beyond early 2013, because of a change in European Union rules.

Invest NI declined to comment on the small firms loan scheme until it is approved by the FSA and failed to respond to a request for a comment on its underspend.

BT upgrades North West telecoms

Londonderry is the first place in the UK or Ireland to have a rolled-out high speed broadband infrastructure, BT has announced. The roll-out is part of BT’s commitment to Derry’s status as City of Culture 2013 and supports the Digital Derry initiative, intended to establish the city as the best place in the island to establish a digital business.

All street cabinets in Derry are now upgraded with fibre-to-the-cabinet technology, offering super high speed broadband connectivity to 39,000 properties. Download speeds of up to 40Mbps are now available, which will increase next year to up to 80Mbps. High speed broadband is available on an open access basis via BT and its competitors.

Colm O’Neill, chief executive of BT in Northern Ireland, said: “The delivery of this ambitious project within a tight timescale involved vision, collaboration and commitment from stakeholders who shared a common objective to realise Derry’s aspiration to be a digital champion.

“This next generation broadband network will provide a future-proof foundation to support Derry’s economic, social and cultural aims, and we are proud to be at the heart of many of the pioneering projects this exciting city has planned for this generation and the next.”

In a further move to improve the broadband infrastructure across Northern Ireland, the Department of Enterprise, Trade and Investment has approved an additional £215,432 to improve broadband access in rural areas. The funding has been awarded to North West Electronics through the £1.9million Northern Ireland Broadband Fund, which is co-financed under the European Regional Development Fund Sustainable Competitiveness Programme 2007-2013.

North West Electronics will extend its existing fixed wireless network to offer a range of broadband services to business and residential customers in the Dungannon, Larne, Antrim, Fermanagh, Down, Armagh, Ballymena and Newry areas. The project will use the Derry-based Project Kelvin telecommunications infrastructure to increase speeds to the areas of need.

Enterprise minister Arlene Foster said: “There are areas of Northern Ireland where a fixed line solution is not possible for technical and commercial reasons. The Broadband Fund enables local businesses to demonstrate how a range of technologies can deliver broadband services to rural users. On completion by March 2012, this project will deliver access to broadband services of at least 10Mbps to business and residential premises, in areas where access has been limited.”

NAMA promises ‘no fire sales’

Ireland’s National Asset Management Agency has again ruled out any ‘fire sales’ of properties either side of the border and says it is willing to be patient while it waits for asset values to recover. Frank Daly, NAMA’s chairman, told a private Northern Ireland Chamber of Commerce briefing that NAMA will work in Northern Ireland to help stabilise the market, generate transactions, provide liquidity and encourage phased asset disposals.

Mr. Daly told the meeting that the Agency was committed to listening to stakeholders in Northern Ireland with a view to helping devise tailored local solutions. “We want to ensure that our approach is appropriately tuned for the Northern Ireland market,” he said.  “We have developed good relationships with policy makers in Northern Ireland and [with] other stakeholders and we will continue to listen carefully to what they have to tell us.”

Francis Martin, President of the Northern Ireland Chamber of Commerce, responded: “A healthy and functioning banking sector is key for growth and NAMA’s role in supporting the distressed sectors in banking is a crucial step in strengthening our financial institutions and rebalancing our economy.”

In a briefing to the Irish Dail, NAMA told TDs that it was unhappy that UK banks were disposing of assets in Ireland at prices that were too low and were having the effect of depressing values.

Meanwhile, finance minister Sammy Wilson announced that Peter Stewart is stepping down as a NAMA director and as chair of the NAMA Northern Ireland Advisory Committee. No replacement has yet been announced.

Large retailers make tax plea

The proposed new levy on large retailers should either be scrapped, or substantially amended, says the Northern Ireland Retail Consortium in its response to consultation by the Department of Finance and Personnel. NIRC – the sister body to the British Retail Consortium – has urged MLAs to give the measure full scrutiny and not use the accelerated passage procedure to rush it through the Assembly.

Finance minister Sammy Wilson plans to use the Large Retailer Levy to pay for rate relief for small businesses. But NIRC argues that the draft measure is badly framed and would in practice subsidise many large businesses – including bookies and banks – that operate from small premises.

NIRC says the relief should either be restricted to genuine small retailers or all large businesses should contribute. It also believes the measure should be time-limited. Without those changes, says NIRC, inward investment could be put in jeopardy.

Northern Ireland Retail Consortium Director, Jane Bevis, explained: “The retail sector has the potential to attract major investment to Northern Ireland. It’s in a position to drive community regeneration while creating jobs. But, instead of appreciating that the sector is a key part of rebalancing the economy, the Executive is preparing to single it out for extra taxation.

“We understand that small retailers face tough times, which is why we support small business rates relief as a short-term measure. But it must genuinely be targeted at small businesses and it must be designed so that it doesn’t deter inward investment.”

Tesco, a member of the NIRC, said publicly that the proposal put at risk its investment plans. Sammy Wilson told the Assembly that “Tesco’s response to this has been — I choose my words quite deliberately — absolutely pathetic.” He continued: “Here is a major company that is used to bullying its way around. However, it is not going to use bully-boy tactics on something that the Assembly has looked at, that has been proposed in the Budget and is a sensible way forward.”

Northern Ireland’s latest unemployment figures are very worrying. An extra 500 people began claiming unemployment benefit in September. The unemployment rate here is now 7.6% - up from 7.0% a year ago, though still below the UK average of 8.1%

This may see reassuring, but it is not. Northern Ireland has a vast troop of ‘hidden unemployed’. This is reflected in Northern Ireland’s unwanted position at the top of the economic inactivity league table. Some 27.0% of Northern Ireland’s working age population is economically inactive, significantly above the UK average of 23.3%.

Some economic inactivity is good – particularly the young adults investing in their future by attending university and college. Others who are economically inactive are exercising personal choices: they may have taken early retirement, or are bringing up families.

This is far from the whole story – a large proportion of the economically inactive would like to work if only they could. And in Northern Ireland, even more people are becoming economically inactive than are becoming officially unemployed: another 4,000 working age people became economically inactive in the last quarter.

But, says Richard Ramsey, chief economist of the Ulster Bank, this trend is about to reverse. In future we will see many more people who are currently classed as economically inactive move into the official unemployment figures

as a result of the Government’s welfare reform programme. Ramsey predicts tens of thousands of people in Northern Ireland will transfer in the coming months.

“Economic inactivity is going to fall and unemployment rise,” suggests Ramsey, “just because of welfare reform.” The first signs of this are already apparent through the big increase in female unemployment, he says. However, the scale of economic problems and changes to lone parent entitlement are also causing more women to do small amounts of part time work, causing them to no longer be classified as economic inactive, but also not being fully reflected in the employment numbers.

It can be argued that once the reforms have been fully implemented, there will be a positive impact in the sense that Northern Ireland will have to confront the full scale of its problem of its worklessness. “You will get a more realistic unemployment rate, perhaps of around 12%, if you incorporate those who are classed as economically inactive, but who in reality are unemployed,” argues Ramsey.

Ideally, policy-makers would like to see a substantial increase in Northern Ireland’s employment rate: at the beginning of this year it was 65.8% in Northern Ireland, compared to 70.5% across the UK. If the focus was on that measure rather than on the unemployment figures, we would have a clearer idea of the dire state of Northern Ireland’s economy.

There are several reasons for the low levels of employment in Northern Ireland and these need to be properly understood if they are to be corrected. Arguably, the most important factor is skills. Some 39% of the economically inactive have no qualifications – by contrast only 15% of those who are economically active have no qualifications.

Other factors play a part. Northern Ireland has the second largest proportion of lone parent families of all UK regions – only London has a higher rate. Single parents comprise 13.3% of Northern Ireland households, compared to a UK average of 10.7%. Unsurprisingly, the employment rate for lone parents is much below that of average working age adults. Another issue is the bigger percentage of Northern Ireland households with children than elsewhere (33.9% against an average of 27.8% across the UK).

Interestingly, men with dependent children are much more likely to be working than those without. There is much less difference for women – but there is a big variation between the proportion of women who are working and have one child and those with three or more, who are much less likely to be employed. This is another important factor, as many more families in Northern Ireland have three or more children than in the UK as a whole.

The challenge of the very high rate of economic inactivity was recognised in the UK Treasury’s recent paper that considered how to rebalance the Northern Ireland economy. However, no policy proposals were put forward on how to correct this – merely the question to be considered during consultation of to what extent “welfare reform has the potential to reduce economic inactivity…. and increase economic growth”.

Nor does anyone believe that there are easy solutions to the problem of economic inactivity. A report published earlier this year by Sheffield Hallam University’s Centre for Regional Economic and Social Research (CRESR) explained the deep-seated nature of the problem and suggested it will worsen.

In the pre-recession period – which might now be regarded as an economic boom – there was a sharp fall in both unemployment and economic inactivity on a UK-wide and Northern Ireland basis. The sharpest falls were in the areas with the highest claimant counts. But the recession has increased both official unemployment and economic inactivity, affecting most severely those areas, such as Northern Ireland, that traditionally have the highest levels of unemployment.

Much of that earlier rise in employment had been in the public sector. We are now undergoing a sharp fall in public sector employment, which is one of the explanations for the rise in unemployment and economic inactivity. Job losses in the public sector are intended to continue, with the obvious severe impact on Northern Ireland, which remains highly dependent on the public sector.

According to the Sheffield Hallam research, things now look bleak for those areas with traditionally high unemployment. The report concludes “there is little hope that benefit claimant rates in Britain’s weaker local economies will be reduced to acceptable levels by 2020 – at least not within the framework of present and planned policies”.

The report also concludes that there is little chance the private sector will generate sufficient jobs to reverse current unemployment and economic inactivity trends.

Christina Beatty, a principal research fellow at CRESR and a lead author of the report, shares Richard Ramsey’s view that many more people will migrate from economic inactivity to official unemployment in the coming period. “I think it will speed up and quite rapidly,” she predicts. The relevant changes to welfare benefits include more people being classed as fit for work and more lone parents about to be regarded as available for work. The social impact of this will be compounded by the benefits of more people becoming means-tested.

“As unemployment goes up, an element of that is moving people from inactive benefits to active benefits,” explains Beatty. She believes that when all the welfare reforms are in place this will have the effect of increasing the total official unemployment figure in the UK by about a million. This could catch many observers by surprise, she suggests. ”I am not sure people have thought this through to the final conclusion.”

The trend of increased joblessness will be further exacerbated by rises in the retirement age, which will reduce the supply of employment. Without creating a substantial flow of new jobs, it is difficult to see how the welfare reforms will improve economic performance – particularly in a region with a weak economy, such as Northern Ireland.

Along with rising rates of unemployment, more people without work will have to either live off the earnings of a household member in work, or from their savings – until these are exhausted. The prospect is grim. Beatty no doubt speaks for many when she says, “I’m glad I’m not looking for a job at the moment.”

For several years, the default position for major public infrastructure projects in the UK has been the Private Finance Initiative. But the situation has abruptly changed in recent months, with the coalition government taking action on the public spending deficit and so reducing the build-up of future liabilities. Concerns about PFI have been added to by the increased cost of finance during the recession.

Anxieties have been backed by extremely critical reports from the two most powerful House of Commons select committees, which have both just examined the impact of PFI. The chair of the Public Accounts Committee, former Labour minister Margaret Hodge, described PFI as “a better deal for the private sector than for the taxpayer.”

Meanwhile, senior Conservative MP, Andrew Tyrie, speaking as chair of the Treasury Select Committee, said: “We can’t carry on as we are, expecting the next generation of taxpayers to pick up the tab. PFI should only be used where we can show clear benefits for the taxpayer.”

The tide, it seems, has turned for PFI. Yet the need for public infrastructure improvement remains urgent – especially in Northern Ireland. We need major road schemes, renovation of our water supply and sewage systems, new schools, more social housing, hospital improvements and the regeneration of much of our urban environment. Without this investment, our public services will deteriorate and our economy will be held back. But how can we pay for infrastructure improvement?

The key agency for delivering improved public infrastructure in Northern Ireland is the Strategic Investment Board. Although its profile is not as high as it was a few years ago, the Board emphasises that it is very busy doing the practical things needed to bring down the costs of government procurement, with more of its advisors situated within departments. It is also engaged in several major schemes – in particular, the Cookstown police training college and the redevelopment of the Maze, including overseeing the creation of a development corporation for the site and the recruitment of a board for this.

Another key SIB project is the new hospital at Enniskillen, which is progressing well, says the SIB. Unlike other major projects in Northern Ireland, the Enniskillen hospital was financed through the PFI – though the credit crunch and Irish banking crisis caused severe difficulties in signing-off the project.

But in general terms, Northern Ireland has been less dependent on the PFI than has been the case in England. Despite this, ministers and officials here have to look at new ways of financing public infrastructure. The signs of this were clear at a recent private event, when an Executive minister raised the question of using tolls to pay for new roads. Much of the focus, in fact, is now likely to be on similarly generating and using future revenues to pay for new infrastructure.

This approach is gaining much greater attention from the UK Government, where Treasury minister Danny Alexander has given his support to the use of ‘Tax Incremental Financing’. English local authorities are being allocated more powers to borrow to pay for major infrastructure projects, with the repayment costs met from higher levels of future income.

While this approach is unlikely to work for projects such as schools that do not normally generate revenue, it is widely used in the United States for transport projects. In fact, this use of TIF is nearer to the original intention behind the PFI when introduced by the John Major government for selected transport projects, such as the Heathrow Express rail link and the Docklands Light Railway.

A recent example of the use of TIF in the UK has been the decision to help pay for London’s Crossrail through an uplift in the business rate. This is justified by the improvement in the quality of infrastructure for London’s businesses and also the assumed increase in property values. The same principle underpins the likely use of TIF by English local authorities.

But it is to Scotland that the Northern Ireland Executive may be tempted to look most closely for inspiration. Scottish Nationalists have long been sceptical about PFI and were unhappy at what they saw as excessive profits taken by PFI contractors. As a result, they set-up the Scottish Futures Trust, whose alternative to PFI has been described as being ‘not-for-profit’.

This description is slightly misleading, as private sector contractors still generate a profitable return on their work. But the system does prevent special purpose vehicles being created in order for contractors to pool together to bid for contracts and then generate ‘super profits’ through high returns on equity investments. Instead, SFT ensures substantial public sector client engagement in project management; no profit-distributing equity; and a cap on the return any private sector partner can obtain.

But alongside this non-profit distributing model for public infrastructure, SFT has also been experimenting – so far successfully – with TIF. SFT sees this as a potentially very important device for allowing major new infrastructure schemes to go ahead.

Two major projects using TIF have been given approval to assist with the Edinburgh Waterfront regeneration and the building of a 3,500 homes new town on the old Ravenscraig steel works. A business case for a third major scheme – the extension of Glasgow’s Buchanan Galleries shopping complex – is currently being finalised. Those first three projects should supply about £250m of public funding to unlock over £1.5bn from private sector financing. Three other major schemes are also being worked up by Scottish councils.

SFT argues that its approach is clearly working, demonstrating clear value across all its programmes. “We have already delivered over £129m of benefits and savings to the taxpayers of Scotland and that has been verified by the LSE [London School of Economics] and Grant Thornton,” says Neil Rutherford, associate director of SFT. “Cumulatively, we have brought in something like a quarter of a billion pounds [of infrastructure spending].

“TIF as a model is about growing the tool box. It’s a different way of doing things and brings in an additional revenue stream when things are difficult. We are capturing future business rates from the development as it comes on stream. We are paying for growth by using the proceeds of growth. This is seen as a key tool in the current environment.”

It is a tool that is likely to be increasingly attractive to ministers here – not least as they consider the implications of the delay and possible collapse of the A5 Derry-Dublin road project. New funding models are now desperately needed.

Box

How TIF works

Scotland’s government gave approval in March this year for the use of Tax Incremental Financing – TIF - to assist with the costs of the regeneration of the former Ravenscraig steel works. By using TIF, North Lanarkshire Council can use the assumed future business rates income generated by the scheme to pay-off the borrowing that will finance the initial elements of the scheme.

Projects to be financed through the £73m released via TIF are the upgrading of two key road links, land acquisition and site infrastructure works. All these activities must be carried out before the next stage of scheme development can proceed. It is predicted that the seed-corn public sector funds will release £425m of private investment.

The Ravenscraig area has several social and economic problems, compounded by the recession and the closure of the steel works in 1992. It is hoped that the project will lead to over 4,000 extra full time equivalent jobs, an additional 500 jobs during the construction phase and £112m of additional annual economic activity.

Londonderry retailer Total Golf provides an object lesson in how develop and grow at a fast rate, even in a recession. Exports and online retailing offer enormous opportunities.

Dermot Hegarty opened a shop in Derry’s Springtown estate in 2006 with two staff: he now has 13 employees and expects that to go up to 18 or 19 next year. As well as his retail unit in Springtown, he has a nearby unit where he warehouses stock for his online operation and, over the border, runs the golf shop at Buncrana’s North West Golf Course. A new three thousand square feet shop is opening soon at Derry’s Foyle Golf Course. And there are plans for yet another new shop, details of which are not being released as yet.

Dermot started out working in a golf shop in Derry. “I used to work there as shop manager,” he says. “That shop closed down . There was too much going on [in terms of product range] and I knew there was a market for the golf.”

It is the online operation – www.golfstoreeurope.com – that has delivered the majority of sales and a high rate of growth. “Online has been a problem for [golf] shops,” says Dermot. “But I put my resources online and took on a lot of staff. Online is the future.”

However, the returns from the online business are not merely being invested into the web-based operation, but also into bricks and mortar retailing. “So we are using the online [business] to extend our shop presence and make it an Irish company,” explains Dermot – giving a hint as to where the next new store outlet might be based.

The business has been growing at an annual 100% rate, which, Dermot concedes, is not sustainable. He wants the rate of growth to slow down now. “When something grows that fast, it’s unmanageable,” he says frankly. “We had to move warehouse and didn’t have the premises or staff.” Now the priority is to ensure that growth is well managed and supported by high quality customer services.

Part of the engine of growth for the online operation was a close working partnership with Belfast’s Export Technologies, which has provided the online trading platform. Export Technologies also runs the online marketing campaign for Dermot. The website is highly sophisticated, recognising the country in which a customer is accessing the site from and converting prices into local currency automatically.

At times of currency volatility, that can produce situations where GolfstoreEurope is offering goods at prices below those offered by other online retailers. This, admits Dermot, can irritate the manufacturers, but presents good sales opportunities for his business. “We have had a lot of problems recently with manufacturers,” he says. “A lot of our sales go direct to Europe. We are selling stuff into Europe and a lot of our stuff is being sold at prices lower than our competitors can buy it.”

Total Golf has become one of the largest retailers of golf products in the whole of Ireland, to a large extent because of the volume of exports. Dermot admits that can be a challenge. “There’s a lot of customs [documentation] you have to go through,” he says. “It’s something you don’t get trained for.” There is a particular difficulty with the paperwork for electronic golf trolleys, because of the regulations related to the exporting of products that contain batteries. “There’s lots of forms,” he sighs.

Exports are harder work, clearly, but Dermot emphasises, “It’s a big part of our business.”