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Economic sustainability as a matter of capital allocation

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When the editors of Indian Country Today asked me to write a column on
tribal wealth management, to mark the inaugural conference on that subject
at the Seminole Hard Rock Hotel & Casino, I smiled at the prospect that the
finance and business discourse in Indian country had arrived at a new and
unprecedented level.

However after a moment's pause, I stood back in my mind's eye to survey an
unexpected question.

This question may reflect a central challenge facing those tribal
leaderships that currently steward their communities into a renaissance of
economic empowerment from a past of dispossession, namely:

How does a tribe move forward from a historical position of "dispossession"
into an era of accelerated prosperity, without endangering either the
sustain-ability of that prosperity, or the equilibrium of its society?

It immediately occurred to me that I was being drawn towards an inquiry in
the direction of political process, and on towards the twilight zone of
polemic ideological debate which seems to characterize any discussion of
fiscal priorities.

However I quickly settled into the realization that this direction would
not reflect the qualities of balance and circumspection that define the
belief systems, community dynamics, and politics of inclusion cherished by
our indigenous cultures.

And once I realized this, the important question reformulated itself as
follows ...

How does a tribe strike an appropriate balance between cash flow
allocations towards sustainable growth of monetary capital and sustainable
enhancement of the community's social capital?

THE QUESTION OF BALANCE

The question of how to balance immediate, and longer-term requirements for
societal development with a cold, hard, society-neutral capital growth
strategy is of critical importance to successful tribal business leaders.

Such leaders are experiencing difficult competing pressures which include:

Uncertain profitability windows in the face of increasing competition,
market saturation, and perennial political uncertainty (eg: the casino
economy);

Limited life cash flows from non-renewable natural resource projects (eg:
mining projects);

Structural sustainability issues: (ie: short-term practical and political
pressures to transition out of a limited number of centralized,
tribally-owned profit centers into a more diversified, inclusive, and
sustainable tribal economy);

Immediate short-term pressures to respond to community skills deficits and
employment deficits; and,

The competing imperatives to preserve and grow monetary capital, on one
hand, and, on the other hand, to allocate substantial reserves for
community infrastructure, social services, and heritage purposes.

These challenges seem to demand hard choices between apparently mutually
exclusive "short-term versus long-term" options.

However, integrating the answers to the competing challenges is in my view,
not only possible, I believe it is a necessary and recommended strategic
remedy.

That remedy is found in an ongoing balancing exercise involving the
allocation of resources between current "proven" economic opportunities,
and longer term, less certain "social" investments (also referred to as
investments in "social" capital).

There is nothing unusual or radical about the concept of investment in
social capital. It essentially involves something that all governments, and
much of the private sector everywhere are doing to some extent. It
constitutes combinations of investment in education and training, in small
business incubation and support, and in venture capital opportunities.

In my view, the key to successful investment in social capital is to
engineer an appropriate "fit," so that wherever possible, the "social
capital" benefits give rise to self-sufficient and self-sustaining small
business undertakings which feed services and goods into the larger "core"
elements of the tribal economy, or which grow to become large active "core"
businesses in their own right.

THE ALLOCATION EXERCISE

At the outset, from a tribal leadership perspective, the "balancing" remedy
is achieved through an allocation exercise. It is an exercise of planning
cash flow "reinvestment" allocations from a tribe's core profit center(s),
into four essential areas. These are:

1. Reinvestment for growth in the existing core profit center(s), and in
any new active "core" business opportunities that the business leadership
may prioritize as important profit-oriented investment opportunities;

2. Venture capital (risk-oriented) investments in new, community-based
"start-up" businesses (for the purpose of diversifying the tribal economy
and creating small businesses which may feed larger "core" tribal
businesses, or which may grow, themselves, into "core" community based
businesses);

3. Aggressive investment in the community's training capacity respecting
business management and other business/employment skills (ie: investment in
the "social capital" of community human resources). Note that this kind of
investment should include small business "incubator" capacity, for the
support of new "start-ups" businesses; and,

4. Reinvestment of profits from the core profit centers, in conventional
passive investment vehicles such as publicly listed equity and debt
instruments.

This above-mentioned formula may depart from the classic pattern of active
business profits re-investment, because it has a stronger emphasis than
usual on investment in community skills training and small business
incubation, and on risk (venture capital) investment. However this focus
constitutes much more than a solution to basic social planning
requirements, such as the development of the local labor pool, and the
related incubation of local small business. It is also the critical path to
very important economic and financial strategies, namely, in the short
term, vertical integration of the local economy with the supply needs of
the community's core profit center(s) (such as a casino), and thereby, in
the medium term, creation of local economies of scale, as well as future
diversification.

The strategic objective is to develop a diversified class of
community-based entrepreneurs, and a reservoir of private community
capital, which will be prepared to take advantage of the next cycle of
growth opportunities.

An emphasis on such a skills training and micro-business incubation
strategy (achieved by some tribes through the creation of a local business
training and development corporation, which may in some cases be a modest
profit center in its own right) is consistent with the following entrenched
macroeconomic realities:

60 percent to 75 percent of any economy is generally driven by small
business undertakings; and,

The skills-based and services-based economy (otherwise known as the
"information economy") constitutes the substantial portion of any modern
economy.

WEIGHTING CAPITAL ALLOCATIONS

We have discussed above, the principle of diversifying between investment
in labor pool skills training, and small business incubation initiatives
(local venture capital opportunities) on one hand, and in expansion of a
major core community business, on the other hand, as a sound and integrated
local business and social community strategy.

The further question arises, how does a tribe go about determining actual
percentages in allocating cash flows from a core community profit center
(such as a casino, or a large natural resources project) among the
following portfolios:

Expansion reinvestment in the core business, (and/or in additional
strategic core business initiatives) in one portfolio;

Social capital/small business incubation in another portfolio; and,

Traditional passive (third party debt and equity) investments in yet a
third portfolio?

The detailed answer will only be revealed as a result of a thorough
examination of the strategic options and pressures in any particular case.
However, the key questions that should be considered in providing
guidelines will include the following:

How secure is the strength and longevity of the core tribal profit
center(s), and related monetary surpluses?

Does the investor tribe wish to incubate skills and small business
undertakings in other tribal communities as well as its own, as a strategy
towards larger scale vertical integration between such other tribes and its
own core profit center(s)?

Will the tribe be investing large allocations towards other core business
ventures in the short term, as a part of its overall diversification
strategy, which would temporarily limit the overall size of local business
incubation investment?

Will the tribe be pursuing its original core business expansion and other
core large business investments with or without joint venture partners,
and/or will the tribe have access to other third-party capital for such
expansion purposes, such that it may preserve cash flows from its original
core profit center for diversification in its "core" business portfolio,
and for investment in its strategic local business incubation portfolio, as
well as the passive portfolio?

And moreover, what percentages must the tribe allocate towards passive
versus active, business investments, for long-term heritage reserves, or as
a reserve to cover business or governmental debt which would crimp the size
of allocations to local business incubation?

The answer to these questions will be different for every tribe, because
they are determined by matters of art and circumstance more than science.

However, the prioritization and rationalization processes which will give
rise to decisions on such allocations may be guided by certain
Native-centric principles, proposed by this columnist as follows:

In the growth and consolidation phases of successful tribal business
initiatives, tribes should overweight on the side of investment in active
core businesses, versus passive investments. This may permit them to occupy
their own supply markets and thereby create additional profit centers which
simultaneously constitute a capital asset, a cash flow source, and an
employment base. This will also permit them to integrate and synergize
development of their social capital (through the development of
tribal-based small businesses which will supply the "core" businesses), and
to vertically integrate the business chain, wherever rational, and thereby
create economies of scale.

A decision should be made at the front end of the strategic "decision tree"
as to which large "core" active business investments should be added to the
existing "core" portfolio, in order to consolidate, diversify, and
stabilize core cash flow sources within the active business sector
portfolio. In this way, a core growth strategy may be sustained for the
purpose of driving both the social capital portfolio, and the passive
investment portfolio ... and all other allocation priorities should flow
from that front end decision.

Allocations should be reviewed frequently and revised in accordance with
new circumstances.

At minimum, a "business incubator" such as a community business development
corporation or community development financial Institution should be
established at the outset, to nurture and support a tradition of community
business initiatives. Local labor resources and skill inventories should be
assembled, and corresponding prospective core business needs should also be
inventoried.

Weightings in allocations to business incubator "start-up" opportunities
should at bare minimum be determined by reference to vertical integration
opportunities arising from existing and new large "core" tribal business
operations. However, such weightings should also be responsive to other
grassroots entrepreneurial initiatives in the community, as determined by
local and other demand markets other than the "core" tribal businesses.

Weightings in allocations to management and labor training should be
determined by quality of available business opportunities and projected job
inventories. A strategic emphasis should be placed on training allocations
to potential personnel who might develop talents capable of maximizing the
availability of quality reinvestment opportunities. This would include
potential entrepreneurs, business managers, financial services personnel,
and business professionals such as accountants, business analysts, etc.

Weightings to active business, versus passive investment, should in the
first instance, be determined with reference to the strategic "front end"
decision as to which "core" business markets to primarily occupy, and
thereafter, by reference to the quality of any additional "core" active
business opportunities which might emerge.

Weightings to a passive investments portfolio should, in large part, be
determined by reference to debt service and other fixed budget demands
faced by a tribe, which would require stable revenues and some liquidity.
The exception would be in a situation where cash flows from "core" active
business profit centers are sufficiently stable and diversified as to
substantially hedge against a liquidity crisis. This would permit a
reduction in the passive investments portfolio, and overweighting in
further active business initiatives, including "core" ventures and
vertically integrated "supply" businesses, as well as more speculative but
promising "start-ups."

The general rule in favor of overweighting in active "core" tribal
businesses is, of course, subject to the availability of quality active
business opportunities, and unsaturated markets. This requirement
underlines in bold relief, the importance of investing in the development
and incubation of an entrepreneurial class of business venturers, who may
provide investment and growth opportunities for subsequent business cycles.

In the event that reinvestment opportunities respecting existing "core"
tribal business sectors have reached saturation point, and that there is a
lull in the presentment of new business sector opportunities, and of
"supply" business opportunities, then overweighting in a passive investment
portfolio may be advisable, subject to a change in those circumstances.

Overweighting in a passive portfolio may also be advisable in circumstances
where the reward-to-risk ratio offered by a particular passive portfolio
investment market is so high that it merits overweighting in the passive
portfolio.

A NOTE ON FINANCIAL INSTITUTIONS

In reference to the strategic vertical institution of additional "core"
businesses, note must also be made of the financial services sector. This
sector is perhaps the most strategically beneficial sector in which to
venture, because such a vehicle may be acquired or developed not only as a
profit center and capital asset, but also as a platform of in-house
expertise which may be utilized to calculate proprietary tribal allocation
weightings discussed above, to execute such allocations, and to aggregate
additional capital for the purpose of feeding such investment allocations.

It is also of note that the best financial institutions consider social
capital to be of equal importance to monetary capital insofar as quality
expertise is of the highest order in assessing and' executing quality
transactions. The better quality financial institutions of the world
consider themselves to be in the business of developing people, rather than
money.

Accordingly, the development or acquisition of a financial institution
might harmonize perfectly with the "social capital" objectives of a tribe.
Such an approach would naturally support implementation of extensive
in-house employee training and development initiatives towards
profitability, financial capacity and productivity, throughout the complete
tribal economic and financial development effort.

Different kinds of financial services may be provided by the trust,
banking, securities and insurance industries respectively. Research should
be conducted to determine which best serve the needs of a particular
tribe's circumstances and strategies.

A NOTE ON INTERNATIONAL MARKETS

The strategies outlined in this article contemplate the assertive expansion
by a tribe into complementary core business sectors, in circumstances in
which domestic markets might be approaching saturation. It is always
prudent in such circumstances to consider expansion into international
markets, by way of foreign direct investment, particularly where there is
opportunity for proprietary cross marketing between domestic clients and
foreign operations and vice versa.

CONCLUSION

A number of tribal nations are entering an era of economic and social
development not generally experienced by indigenous local communities. Such
a phenomenon has not really occurred since the classic economic, social,
and cultural renaissance enjoyed by various mercantile city-states of Italy
in the 15th and 16th centuries.

A circumspect tribal leadership's approach to combining investment in
social capital with investment in the capital of conventional business
opportunity can reasonably be expected to enable sustainable long-term
growth for such communities and for their co-venturing communities. If
pursued wisely, it will also enable cultural renewal in modern Native
communities, to a similar extent enjoyed by those said renaissance
communities. It is indeed an exciting time for North American indigenous
peoples.

Paul Frits is a member of Six Nations of the Grand River. He practiced
Native rights and economic development law for many years before
establishing a Native business and finance consulting firm which
specializes in reinvestment allocation and international strategies.
Throughout the late '80s and the '90s, a large part of Frits' practice
involved Native Law, including the status of Aboriginal Rights under the
Canadian Constitution and international law. He travels extensively and may
be most easily reached at waterfront_strategies@hotmail.com.