What's a social co-operative, can it help create a Big Society?

Back in May 2010 Bob Cannell and I were attending a European Conference for worker co-operatives, when we heard the news that David Cameron had not just be talking about the Big Society and worker co-operatives as vacuous election rhetoric, but he actually meant it.... (well as much as a politician can)

My tweet:
"Reading a cabinet office paper on how the new government in going to build a #bigsociety, with worker #coops http://s.coop/ix amazed.. 3:11 PM May 19th via web"

The section of the paper that excited me:
"We will give public sector workers a new right to form employee-owned co-operatives and bid to take over the services they deliver."

Our initial response as good co-operators; was to admit that UK worker co-operatives didn't have a history delivering public services and using principle 6, we asked around our European colleagues for people who did; and did it well. 

This led us on fascinating journey to Italy (sadly only proverbially speaking) and the "social co-operative" a term we don't use the UK. In this blog I want to explain a bit more about social co-operatives in Italy, whether this model might offer a more well rounded or sustainable solution than the current thinking,  I will leave to you to muse (and to comment below).

Do read my blog, but to summarise:

Social co-operatives are: businesses where the primary purpose is to benefit the community through delivery of public services, they have a proper asset lock (not like ex-CIC like ECT spring to mind...), and most importantly are democratically owned by a combination of: the people who work in them (paid or unpaid), beneficiary's and investors.  With my own ethos being, workers should make up the majority of that membership and shareholding. 

They don't act alone but are part of regional and nation federations, so that they can remain small and locally based but have the economies of scale and specialist services to compete.


They operate in a legislative and financial framework where they can grow and become sustainable as a sector by receiving tax advantages for re-investing their profits into the support and development of the sector, creating a positive feedback loop.


Definition of an Italian social co-operative
A social co-operative in Italy is defined in the law (law 381/91):

This law recognised social co-operatives as organisations that primarily benefit the community, or groups of disadvantaged people. There are two types identified in the law:
Type A - Deliver health, social or educational services.
(Closest UK example is Greenwich Leisure)
Type B - Integrate disadvantaged people into the labour market. (30% of employees much be disadvantaged.)
(Closest UK examples is social firms like Daily Bread)


The interesting bit for co-op people is the primary purpose. In the UK (and before this change in 1991, in Italy) the primary purpose of a co-operative is to benefit a co-operatives members, not the general public. That concept is similar to the purpose in Societies for the benefit of the community (Bencom) or Community Interest Company (CIC).

Members may be:

• People who work or manage in the co-operative
• People who directly benefit from its services, such as a disadvantaged or marginalized community
• People who are unpaid volunteers in the co-operative - (must be less than 50% of total workforce)
• Funders of the co-operative - in practice mostly local government/ public agencies.

The majority of members tend to be the  workers and volunteers, with beneficiary's, investors and public agencies in the minority.

Social co-operatives are permitted to distribute profits, subject to the following conditions:

• Distributed profits are restricted to 80% of total profits
• Profit per share - no higher than 2% of the rate on bonds issued by the Italian Post Office
• No profits - or other assets - can be distributed if the co-operative is dissolved. (like common ownership co-ops, or the stricter asset locks in Becoms & CIC's

Other usual company/co-operatives things apply: separate legal personality, limited liability and as usual for a co-operative voting is one member one vote.

Income:

• Predominately contracts with public authorities
• Contracts with 3rd parties
• Trading direct with the public 

Size:
Social co-operatives tend to be small (20-50 employees) and locally based (this was a product of legislation not allowing co-operatives to operate in different areas and thereby remain locally focused)

Co-operative history in Italy
In Italy there has been a long tradition of co-operatives both consumer co-operatives and worker co-operatives. Emilia Romagna in particular is held up as one of the most successful regions in the world for worker co-operatives (Did a blog on them here with further reading).
 
The social co-operative movement started in the 70's and was born out issues like: the tradition of the family's role delivering health and local care diminishing, lack of state provision to meet this widening gap and the inefficientcy of that provision. They are also less open to corruption and the involvement of organised crime, particularly prevalent in southern Italy.

As mentioned above in 1991 legislation was introduced that recognised the reality of what had been happening since the late 1970s; that a movement of ‘social co-operatives’ became established to provide services to the public, rather than for their own members.  Legislation in Italy also favours co-operatives and social co-operatives specifically as they are seen as inherently in the public good.

For more info on legal/history read this 2002 paper from Social Enterprise London, which is a great read, especially the insight into social enterprise hopes/dreams for the UK 8 years ago.  Shame the main characteristic of  social co-operatives has been forgotten, just imagine what we could have created 10 years ago if we had kept with the concept of democratic member control and not the cult of the "Social Entrepreneur"... but i digress.

Growth of social co-operatives
Italy leads the world with over 800,000 people working in the co-operative sector, about half of which are in worker or social co-ops. At the end of 2005 there were 7,363 social co-operatives in Italy employing over 244,000 people.  They are divided into 4,345 social co-operatives of type A, 2419 of type B and 284 consortium mixed co-operatives (Type A and Type B). These social enterprises engage 244, 223 members. Their entire turnover is estimated at € 6.4 billion. More info here.
(will add more recent figures if I can).

Success factors

From reading the different sources mentioned in the wider reading section, most interestingly an excellent report by the Canadian Worker Cooperative Federation.  There are a number of factors that hve affected the  success of social co-operatives in Italy (and successful worker co-operative economies more generally)

Membership
A key element of the strength of Italian co-operatives is their mix of members. It is not compulsory to have members who represent the interests of service users, workers and volunteers, but it is common. And where it happens there is evidence that it contributes to the success of the co-operative.

Government Support
It is recognised in Italy that their social objectives make them very different from profit - orientated, dividend-distributing companies and they should therefore be treated differently both legally and fiscally.

Preferred supplier status
Although there have been issues with "state aid" and private sector lobbying to reduce perceived breeches in EU competition law. Social co-operatives have very often retained preferential treatment when it comes to tendering for public service contracts over traditional private sector businesses. In 1996 the law was changed so that any organisation could tender for contracts, but there were minimum requirements which only social co-operatives would normally meet.

Taxation
Specific tax breaks and benefits include: reserves are not taxed, lower corporation tax, lower NI on disadvantaged employees, tax exemptions for private donations to organisations, including social co-operatives. There are further tax benefits available to people buying ‘solidarity bonds’ issued to finance not-for profit activities.

To receive tax benefits, businesses have to (obviously) be legally defined as social co-operatives and meet certain standards (% or profits re-invested/passed to central funds etc).

Finance
Social co-operatives are typically highly dependent on public contracts - and public bodies pay 60 to 90 days in arrears (sounds familiar). In general co-operatives find it difficult to raise funds from the market/capitalist investors (due to ownership structure, not focused on shareholder return).

There are a number of grants schemes, ethical and patient loan funds, that support the growth in social co-operatives particularly interesting is:

The ‘Marconi Fund’. In return for helpful tax exemptions. Co-operatives in Italy must invest 3% of their annual income in the Marconi Fund to finance new co-operatives.

Co-operatives of all types must put a proportion of there annual net profits (30%) into their indivisible reserves, which over time can become a considerable source of liquidity and soure for future investment.

Since 1992, 3% of a co-operatives profits have to be placed into co-operative development fund. The three largest co-operative federations in Italy each have their own fund. The largest of these is Legacoop’s Coopfond which has a capitalization of $340 million (US$). From 1994 to 2001 alone, Coopfond invested $101 million to help create 7,300 jobs. (original figures here)

Co-operative federations can arrange special loan facilities at low rates of interest, through regional agreements with banks. Every member co-operative has a privileged relationship with that bank through its membership of the federation.  (This would do wonders for our membership recruitment drives)

Co-operative Federations
The Basevi Law mandated that co-operatives had to join a federation. These federations are now well endowed (membership fees are 0.4% of a co-operative’s annual sales) and have members throughout all of Italy. The result is undeniable political influence, and a strong sense of solidarity with the wider co-operative movement.
 
There are regional and national co-operative federations, that play a pivotal role supporting new, developing and established co-operatives. There main roles are:

To offer a range of common services to members including: payroll, accountancy, training, management consultancy, marketing, preparing joint tenders and fundraising for bigger projects.

Act as strategic advisors and agents in supporting social co-operatives taking on contracts from municipalities. Some actually act as the primary contractor and sub-contract operations to their members.

They act a lobbying/campaigning organisation to ensure co-operatives have voice in Italian and EU discussion on legislation.


They also fulfil a useful role in enabling the sector to grow, without individual co-operatives expanding beyond their capabilities. Rather than co-operatives constantly taking on new contracts, broadening their services having to deal with the inevtaible issues of growth.


They assist co-operatives with the creation of spin-off co-operatives (similar to how mondragon works). In this way, co-operatives remain small and local enough for members identify and a be properly involved in management of the business.


Legal framework
And finally as mentioned throughout, there is a long standing statutory legal and regulatory framework for co-operatives, they are defined and can therefore receive specific support and benefits and responsibilities.


I hope this gives you an insight and do read the sources i have pulled from. I'll end with a question:  

Would your Co-operative?:

• Put 3% of your income and profit into a fund to support the wider co-operative economy.
• Be restricted on how much profit you can distribute to yourself and put 30% into reserves.
• Have a common ownership clause so you cannot sell the business and the assets must be passed to Co-operatives UK if you did wind up?
• Give Co-operatives UK 0.4% of your annual sales as a membership fee.

But you would:

• Be legally defined by law and therefore more sure of our status as a co-operatives (and those you might trade with and people who might trade with you)?
• Receive preferential tax breaks and treatment when tendering for public contracts?
• Have a fully resourced federal body that can offer business services, advice, support and capital/loans when you need it?
• Have a size and strength with fellow co-operatives that you can fight your corner and play a significant role in improving society.

Wider reading

Social co-operatives in Italy: Lessons for the UK ,Social Enterprise London

The Rise of Social Cooperatives in Italy, Antonio Thomas, 2004 (have a pdf copy but can’t find a free one online)

The social economy in Italy 
Economics, Cooperation, and Employee Ownership: The Emilia Romagna model Logue, J, 2006.

Social enterprises in Italy- The experience of social co-operatives, Carlo Borzaga and Alceste Santuari (2000)

Italian Social Cooperatives, Wilda M. Vanek