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The New Economy In Practice 2: “Savings Not Suitcases”

In my last blog, I expained how people in my home county, Dorset, have come together to re-localise and democratise energy generation. In doing so we were following the lead of Pat Conaty, an inspiring pioneer of the new economy. In his recent book The Resilience Imperative[1], Pat tells of the need to focus on key sectors (food, energy, housing and care services), while understanding that to enable the success of any new ventures we will need to “reclaim finance” and “reclaim the commons”.

I first encountered Pat when I was working at the new economics foundation in the late 1980s. One of the projects we worked on was the setting up of the UK Social Investment Forum, as we both had an interest in ethical finance and in particular what was known as socially directed investment (as opposed to the screening of institutional funds, which is known as socially responsible investment).

The community share issue that I described in my previous blog, proved to be very successful – Dorset Community Energy (DCE) sought £352,000 to undertake eight solar PV installations, and in the end was oversubscribed despite having only 19 days to secure the funds, due to a sudden policy shift by the UK government. DCE will soon be generating electricity on a total of ten schools and four community buildings, following our previous, smaller share issue in June.

In this blog I want to explain a little more about the financial mechanism that allowed us to “reclaim finance” and raise nearly £0.5 million in just a few months. One of the key inspirations was a group of cooperatives in the Basque country of Spain – the Mondragon cooperatives[2]. I had first learned about these in 1979 from a BBC documentary, and have been following their progress ever since. I even had the chance to visit Mondragon in 2013 with two alumnai from Schumacher’s economics programme.

Mondragon’s founder was a Catholic priest, Don José Maria Arizmendiarrieta, who had responded to high unemployment in the 1950s by setting up a technical college. Subsequently he encouraged five 

graduates to set up a cooperative – ULGOR – so that they could create themselves better conditions of work. At its heart was an innovative financial mechanism, the internal capital account (ICA), which is a way of “reclaiming finance”. New worker members had to deposit the equivalent of €13,000 in today’s money into this ICA, and then would receive a proportion of any profits until the time they left the company. Mondragon cooperatives also “reclaim the commons” by holding the assets of the company in a trusteeship legal structure, so that it can never be sold to external investors. This innovative legal and financial arrangement has underpinned the long-term success of the cooperatives.

However Don José Maria soon realised that if the growing network of cooperatives (soon there were five) was to expand further, they would need to find additional capital, over and above the funds invested by new workers or reinvested from profits. He therefore proposed in 1959 the creation of a bank – the Caja Laboral - which would create a local “reinvestment” mechanism. With the slogan “savings not suitcases” – to highlight the point that if local people did not reinvest in the cooperatives, young people would leave the area – the bank was established and has underpinned the expansion of Mondragon, which now employs 85,000 people in around 100 cooperatives.

The story of Mondragon was the key inspiration behind the setting up of Wessex Reinvestment Trust, an organisation I co-founded in 2002 with the help of Pat Conaty. Together we produced a feasibility study which focused on how we might meet two key needs in Dorset and two adjacent counties – Devon and Somerset – in order to support thriving rural communities:

  • the need to support local employment;
  • the need to support the creation of affordable housing.

The group of people behind Wessex Reinvestment Trust (WRT) were working in various sectors of the rural economy, including local food initiatives, small business development and renewable energy, and all of us could see the need to take a holistic approach. It was clear that there was a need for low-cost finance, in order to support the development of a new wave of rural enterprises, and so WRT was conceived as a “community development financial institution” (CDFI). We also wanted it to engage with the development of assets such as workspace and housing, and so we labelled it a “community asset reinvestment trust”. One of the key organisations in the WRT group is Wessex Community Assets.[3]

Our first two financial mechanisms were loan funds:

  • A home improvement lending service for low-income homeowners, to help them meet the “decent homes” standard (e.g. better insulation or creating a new bathroom where the only had an outside toilet). This service is run by one of WRT’s network of companies – Wessex Resolutions CIC – which works in partnership with 20 local councils, and has made loans of £8 million with virtually no defaults.
  • The second was a business loan service, using a £0.5 million fund provided by central government, who at the time wanted to see a network of local CDFI’s. This made a large number of loans, but was hampered by three government policies – firstly, that we should only lend to businesses that had been refused by bank (on the presupposition that there were businesses out there that are “viable but not bankable”). Not surprisingly this led to a higher than expected rate of default. Secondly we were encouraged to provide unsecured loans, in particular to start-ups, and this meant that the risk of default was much higher (contrast this with, for example a home improvement loan secured against the value of the house). Thirdly the government changed its policy of supporting local CDFI’s, and decided that future tranches of capital would be provided only to social investment organisations with a national reach. WRT therefore made a decision to pass its business loan portfolio to a national CDFI, the Frederick’s Foundation.

Reflecting on the experience, we felt that, while debt finance would still be a critical element of many organisations’ funding packages, it was time to look at new financial mechanisms. In particular we wanted to explore whether equity finance – where investors provide funds in exchange for a share of future profits – might be a potential source of funds, particularly for early stage enterprises. There is a challenge in bringing equity finance into cooperatives and social enterprises, because it usually gives investors rights not only to the profits, but also control on a “one pound, one vote” basis. In addition it gives the right to a percentage of the assets of the company, and this can encourages management to seek to grow, while investors are always looking at opportunities to sell up at a profit.

WRT had a number of enterprises it was looking to finance, e.g. sustainable housing projects, local food enterprises and workspace projects. In 2007 we secured research funding from the Friends Provident and Esme Fairbairn foundations, and after investigating many possible ways forward, we eventually focused on a very old structure, the Industrial and Provident Society, and in particular on a variation of this called the Community Benefit Society.

This had a number of interesting features – it allowed members to invest directly into an enterprise, or invest into a fund which could be on-lent to other enterprises. The maximum permissible shareholding at the time was £20,000 and shares are “par value” so they always stay at the original level. The organisation is “common ownership” with an asset lock, so shareholders cannot sell off the company and divide the assets amongst themselves. Most importantly, we found that Community Benefit Societies were potentially exempt from the strict and costly regulations that govern companies seeking to raise equity finance.

However to re-establish Community Benefit Societies as a vehicle for raising equity finance it was necessary to develop new model rules, negotiate with the Financial Services Authority to get agreement on requirements for share issues (e.g. new wording in prospectuses to warn investors about risk and the need to put social return ahead of financial profit) and negotiate with the tax authorities to secure acceptance of the tax reliefs such as the Enterprise Investment Scheme.

A number of pilot share issues were launched, including one by Local Food Links Ltd to support the development of a school meals enterprise (an initiative I will talk about in my next blog), and WRT also established a service to allow other organisations to establish as, or convert to, a Community Benefit Society. WRT itself used the new model rules to establish a new member organisation, Wessex Community Assets, which has helped around 100 organisations to establish as Community Benefit Societies and raise many millions from community share issues, including Dorset Community Energy. More significantly community benefit societies have in a very short space of time become a key social enterprise form in the UK, supported by a national Community Shares Unit, and by Cooperatives UK and the Plunkett Foundation. Partly this has been due to a reduction in grant funding from local and central government, but more importantly it is due to a growing recognition that equity finance provided by the local community can be as important as debt finance in any funding package.

The Community Shares Unit estimates that in the last few years, since WRT undertook its research into new financial mechanisms, an estimated £100 million has been raised by community benefit societies in such diverse areas as renewable energy, village shops, piers, football stadiums and organic farms. And all inspired, though they may not realise it, by pioneers like Pat Conaty and Don Jose Maria Arizmendiarrieta!

Read: The New Economy In Practice: Part 1 Community owned energy: Two steps forward, one step back!

 


Tim Crabtree has been involved in “new economics” for 30 years, after studying economics at Oxford University and then working for the New Economics Foundation for 5 years. He has experience in policy development, local economic development and business advice, and was the co-founder of a number of a successful social enterprises including the Wessex Reinvestment Trust group and Dorset-based Local Food Links Ltd – where he was responsible for developing farmers’ markets, food festivals, community gardening projects, a specialist workspace (the Centre for Local Food), a vocational training programme for young people and a school meals catering service employing 25 people which now supplies 31 schools.

After stepping down as chief executive of Local Food Links, Tim then worked for Cardiff University, researching the future direction of the community food sector. He continues to work with one of the Wessex Reinvestment Trust social enterprises - Wessex Community Assets - which co-ordinates the UK's largest programme of community land trust housing, as well as supporting community share issues in areas such as renewable energy and local food.

Tim has worked with international organisations such as the Resource Centre for Philippine Concerns and the International Institute for Environment and Development, for national organisations such as the New Economics Foundation, and for South West based organisations such as the Bristol & Avon Community Enterprise Network, Dorset Community Action and the SW Protected Landscapes Forum. He was a founder Director of the UK Social Investment Forum. Tim has a particular interest in reflective practice, both in the field of economics and also in mindfulness related disciplines (meditation, aikido and shiatsu) which he has engaged with since 1984.

 

[1] Conaty, P. and Lewis, M. (2012) The Resilience Imperative: Cooperative Transitions to a Steady-State Economy Gabriola Island, BC: New Society Publishers

 

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