Whoever took on Channel 5 was going to have a difficult enough time with a national station, without having to provide local programming as well. Occam's razor comes to mind on this one.
Although I think the plan was that C5 launched on a regional basis in much the same way ITV did, but with one franchise holder rather than several. It didn't get very far - but no doubt would have had a much better chance of success in the 90s than what happened recently.
I think one of the key reasons it didn't happen was because ITV didn't want to compete for advertising at a local level and of course the franchises had just been awarded for ITV on the presumption they'd have a monopoly on local commercial TV in the area.
All ifs and buts of course but had C5 been used to strengthen television production in the regions and launched on a regional level then what subsequently happened with ITV may have been very different. Jeremy Hunt and co. kept refering to the US market when launching their UK local channels and the truth is there it is competition that makes them thrive, whether affiliated to networks or not. There are not many examples, if any, in the US, of local markets with just the one local station.
Shouldn't that have been posted in the "John Logie Baird has Invented Television"