Italian Cooperative Finance: A deeper look

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Italian Cooperative FinanceA deeper look

• Noémi Giszpenc
• Ownership Associates, Inc.
• April 2007

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Follow-Up to Questions

• Fees paid to National Federations
• Other federations are similar to Legacoop, i.e.,
  ask for a fraction of a percent of sales annually
• In regions where the consumer Coop is strong (as
  in Liguria), it represents about half of payments
  to the Legacoop federation
• Overall, it represents about a quarter
• Indivisible reserves what are they and how do
  they function?
• After paying interests, patronage, dividends,
  taxes, etc., the rest goes into indivisible
  reserves.
• Often this does not amount to much, especially in
  early years, necessitating other sources of
  funding for investment in growth.

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Follow-up to Questions (cont.)

• Indivisible reserves (cont.)
• The percentage of profit going to indivisible
  reserves can vary. (About 87 on average.)
• Historically, Italian coops have paid very little
  patronage, putting most profits into reserves.
• Profits put in indivisible reserves were 100
  tax-free from 1977 until 2002.
• Now 70 of profits can go tax-free into
  indivisible reserves for prevalently mutual
  cooperatives
• 30 can go for non-prevalently mutual coops
• At present and in the future, the accumulated
  indivisible reserves are not sufficient for
  investment in growth.

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Follow-up to Questions (cont.)

• What are the typical terms of Coopfond?
• Typically a little more favorable than those of a
  bank--on average below Euribor rates
• However, there are more controls, which can be
  burdensome
• Banks rarely take an equity position in coops, as
  the Coopfond does
• While Coopfond is an investor, it asks that
  profits be returned to indivisible reserves
• When the coop buys back the shares from Coopfond,
  the conditions are concessionary, usually
  anchored to the rate of inflation.
• This is similar to how the other 3 coop
  development funds function

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Whence Coop Financing?

• Accumulated indivisible reserves (retained
  earnings), largely untaxed
• Reinvested patronage dividends
• Member loans
• Credit from banks debt. (short-term 85)
• Special consortia help coops interface with banks
• Credit from suppliers
• CCFS reallocates excess liquid capital
• Since 1992 law
• 3 of profits to development funds,
• and supporting (non-mutual) members

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Italian Coop Finance Historical Moments

• 50s and 60s Financing Troubles. Legacoop coops
• wanted to pursue regional and national strategies
  for growth
• Whereas Confcooperative coops were more focused
  on small landholders and businesses
• But they were unfairly denied credit by banks
• Not to mention cash-strapped by late-paying
  public entities
• Turned to self-financing
• This and short-term debt mainstays of coop
  investment
• Confcoop had mutual banks, but Legacoop was
  denied authorization to constitute credit bodies
• 1962 Group of Bologna coops buys Unipol
  insurance
• 1993 Watershed moment for promoting coops
• Before law founding 3 funds, promotion pursued
  through real, nonfinancial services
  (consultation, training, and assistance). There
  was little financing, only in special cases.

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Italian Coop Finance Member Loans

• most efficient instrument for Legacoop coops
• Supported development of consumer Coop, housing
  coops, worker coops, etc.
• Service to members better return on small
  savings than from bank
• Favored loyalty-building of member-client
• But only really useful for coops w/ many, many
  members, which are exceptional

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Coopfond Areas of Activity Two "characteristic"
areas

• "Promotion" providing risk capital to new coops
  new companies controlled by coops.
• Other allies are Unipol Merchant for complex
  operations (MA, IPO, etc.), local and sectoral
  funds.
• For small and medium worker coops and social
  coops there is CFI, a source of private equity
• "Development" providing credit to disadvantaged
  areas (mostly the South) existing social coops.
• Other instruments P.I.CO Leasing for leasing
  real estate and Fondo Unipol Banca for
  extraordinary investments.

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Coopfond Areas of Activity Other Areas

• "Stable participation" support for institutions
  that sustain coop activity
• local and national public financing
• Consorzi Fidi (Confidi) networks that improve
  the credit profile of cooperatives vis-a-vis
  banks
• these consortia provide guarantees for a certain
  percentage of the amount loaned to members, and
  negotiate better terms for members from banks.
• "4 fund" financing for studies and research on
  coop themes, training and communication on coop
  culture.

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Coopfond Investment Process

• Coopfond does not assume entrepreneurial
  responsibility directly assumes only minority
  positions.
• Preliminary investigation of projects proponents
  arrive after having obtained a first approval
  from local associations.
• Nevertheless on average only 1 in 4 proposals are
  approved.
• Often during the first technical interviews the
  proponents themselves withdraw their projects,
  due to a better idea of the risks involved.

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Coopfond Process Evaluation

• Every project evaluated based on the history of
  the proponents
• because at the center of a cooperative project
  there are always people.
• Then SWOT analysis of the market
  (opportunities/threats) and of the positioning of
  the new initiative (strengths/weaknesses)
• Michael Porter-style merchant banking analysis.
• Then evaluation of the cooperative interest
• Mix between competitive advantage possible with
  the internal cooperative market and the social
  relevance of the initiative.

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Coopfond Project Phases

• 1st contact preliminary evaluation of
  entrepreneurial idea
• pre-evaluation phase of analytic evaluation of
  the documentation provided by proponent
• evaluation phase of checking and validating the
  project. All projects brought to the Board of
  Directors are given an evaluation rating.
• contract phase of formalizing of financing and
  agreements among members.

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Coopfond Project Phases

• management and conclusion phase of monitoring
  the agreed upon business plan until the end of
  the participation or the definitive payback of
  the financing.
• After the disbursement, the life of the financed
  cooperative is followed by monitoring and
  annually it gets assigned a rating.
• In difficult cases an inspection function seeks
  to correct the management errors of the project
  leaders.

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Coopfond in Detail

• Coopfond is a non-speculative, non-profit seeking
  organization.
• Therefore rate of return on capital is not
  relevant
• Operationally, aims to contain costs and maintain
  the integrity of the cumulated 3 fund
• 261 million accumulated 1993-2005. About 2/3 of
  the contributions come from the 50 biggest
  cooperatives, from about 15,000 Legacoop member
  coops.
• Of 430 accepted projects, 42 were abandoned
• So far projects that have paid back are
• 49 (of 183 total) equity projects for 20.9
  million euro
• 22 (of 136 total) credit projects for 40.9
  million euro
• 8 (of 69 total) stable projects for 28.8
  million euro
• Pure start-ups have the greatest failure rate.

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Coopfond Leverage

• On average risk capital investments by Coopfond
  have mobilized investments of about 5 times the
  value
• I.e., have mobilized 1,500 million euro with
  direct financing of 300 million euro
• Beside investing in Confidi, public financing,
  and CCFS (its a member), Coopfond has BIG
  investment in Unipol
• has invested 30 of its total endowment in the
  Unipol group
• with the objective of having a big banking and
  insurance group to work with
• Also, dividends allow the fund to stay in the
  black

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More on CCFS

• From 1960s. 2004 Fincooper was merged into CCFS
• Consorzio Cooperativo Finanziario per lo Sviluppo
  
• Excess liquidity from coops used to fund
  development projects of other coops
• Working capital
• Advantageous credit for social coops
• often in partnership with Coopfond
• Pooling credit with other banks for medium term
  (3-7 year) loans
• Medium to long-term mortgages
• Project financing
• a way for coops to get more public contracts
• Loan guarantees
• Consultation for Financing

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More on Unipol

• Got its start in the 60s. Red coops had limited
  access to credit and insurance
• Wanted insurance because understood that it would
  be great to use reserves for investment
• Finally bought a spin-off car insurance agency of
  troubled car company in 1962
• Grew rapidly, during Italys golden age
• Has invested in the coop movement as well as
  associations of workers and unions and small
  business associations
• Now offers members of these associations
  discounts on insurance products

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More on Unipol (cont.)

• Suffered a setback in the summer of 2005 when
  attempted a takeover of BNL (Banca Nazionale di
  Lavoro) with improper methods.
• But negotiated a deal with Gruppo BNP Paribas for
  it to buy BNL and for Unipol to become BNPs
  privileged Italian partner for selling insurance
• BNP also bought 4.5 of FINSOE from Holmo
• And Unipol still on the lookout for ways to
  expand into the banking sector.
• Coopfond considers this important for financing
  coops

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Unipol Ownership Structure
Strategic members
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Just for Information Italian Cooperative Laws

• 1947 Basevi Law
• No dividend payments on capital over a legal
  limit
• No distribution of reserves to members
• Devolution of assets in case of liquidation
• 1971 Little Reform
• No transforming coops into ordinary companies
• 1977 no taxation of indivisible reserves

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More Laws

• 1985 Marcora Law
• Creation of Foncooper at the BNL for modernizing
  coops
• Founding of a fund for job-saving (buying
  businesses in difficulty or making new ones)
• Combined Confcooperative, Lega, Agci, and 3 major
  labor unions to form CFI (Compagnia Finanziaria
  Industriale)
• 1991 creation of social cooperatives
• Enterprises without profit motive, for social
  purposes, similar to our non-profits
• 1992 3 profit contribution to devt funds

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Yet More Laws

• 1992 creation of supporting members who can
  invest money in coops
• Have right of pre-emption during liquidation
• Have right of up to 5 votes, but collectively not
  more than 1/3 of all votes
• OR coops could emit preferred stock.
• Supporting members/preferred stock cannot earn
  more than 2 more than other members
• 2002 Distinction between prevalently mutual and
  non
• I.e. most business conducted with members or not
• Non-prevalently mutual only can put aside 30 of
  profits into tax-free reserve. Prevalent 70.

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Sources Used

• La promozione cooperativa, M. Bulgarelli and M.
  Viviani, eds. 2006
• 2004-2005 Bilancio sociale Relazione
  dellAmministratore Delegato Marco Bulgarelli,
  Coopfond, February 2006.
• Verso una nuova teoria economica della
  cooperazione, E. Mazzoli and S. Zamagni, eds.
  2005.
• Primo rapporto sulle imprese cooperative,
  Unioncamere and Istituto Tagliacarne, February
  2005.
• www.unipol.it
• www.ccfs.it
• www.cfi.it