Building on Self-Financing
This article provides an overview of various financing models used in the Province of Quebec and in other parts of Canada. My experience primarily comes from the worker/employee owned co-operatives, but as a co-op developer I also draw on inspiring stories from various forms of co-operatives.
This article builds upon, "Co-operative Development and Solidarity Financing", written by Joel Lebossé and published in Effective Practices in Starting Co-ops in 2007. The updated material provided on the Quebec experience has been provided by Pierre-Olivier Latrémouille and Alain Bridaut. Latrémouille works at the Reseau (RÉSEAU de la coopération du travail du Québec) a federation of worker co-operatives in Montreal, Quebec. Bridaut, is the president of La Coopérative Orion in Quebec City, president of the Canadian Worker Co-operative Federation (CWCF), and on the CICOPA Executive Committee.
Strong financing for co-ops has three players—the co-op’s members, the wider co-op sector, and the government.
- A co-op through its members has to demonstrate that it believes in itself by contributing and risking (initially through the purchase of member shares, and in subsequent years through retained earnings or accumulated surpluses), the financial resources to carry out its business. This is true for most businesses.
- This does not mean that the co-op’s members have to shoulder all the responsibility for its financing, nor does it mean that members need to have all of their individual investment up front.
- Building upon the principle of inter-co-operative solidarity and mutual support, there have been models developed, and shown to be beneficial, that share the responsibility for assisting new co-ops and co-ops that want to expand their business. The co-operative sector embodies these in both a supportive infrastructure and financial involvement.
- In regions where there has been strong co-operative development, the co-operative sector has cultivated government support to augment what the co-operatives can do by themselves.
In the Background:
In all the examples shown below, which speak mainly about gathering and utilizing the financial resources needed by co-operatives to carry out their business plans, there lies behind them a whole infrastructure of co-operative development groups which supports those co-operatives. They do this through public and member education, the provision of business advice and mentors for management and boards, and the development of government support and policies for co-operative businesses. Without these supports the financial models would not have been developed, nor would the finances be applied wisely, and the co-operatives be sustained.
Quebec has a high level of collaboration between the co-op sector and the Province of Quebec. It has an infrastructure comprised of co-op sector federations, provincially funded co-op councils, and provincial co-op associations. It has been built over decades. One point of collaboration that resulted in providing both a vision and a map to orient the development of co-operatives was the production of the Guide for Analysis of Social Economy Enterprises in 2004.
Players and Programmes:
As Lebossé states “the presence of the Desjardins Movement, a major financial institution with which nearly all Québecers have a connection (Desjardins has more than 5 million members), has contributed to the natural integration of co-operative reality into Québec society” (p. 182). With a provincial population of just over 8 million people, this means that over 60% of the people in Quebec are members of this credit union. With assets of more than $180 billion, Desjardins is the main bank in Quebec, commanding about 40% of the market.
In 1971 Desjardins joined with the CSN (Confédération des syndicates nationaux), Quebec’s second largest federation of unions, to form the Desjardins Solidarity Credit Union (CECOSOL) for the primary purpose to provide services to co-operative enterprises. Around 80% of worker co-ops are members of this credit union, which is the only credit union doing the majority of its business with organizations rather than with individual members.
During the early 1980’s when Quebec experienced a severe economic crisis, these co-operative-initiated institutions worked in tandem with a network of agencies which the Quebec Government developed, to support local co-operative and social economic activity. Registered as co-ops these regional agencies are called CDR (regional development co-operative) and have the mandate to help create co-ops and to ensure inter-co-operation between co-ops of different sectors.
There now is “strong” support for co-operative development among the general population, with Government legislators and bureaucrats, and in other parts of the economy. An illustration of such support is that in 2012-13 the Quebec Government contributed $30 million dollars to co-operative development. In that same year the Canadian Federal Government sent shock waves during the International Year of Co-operatives by cutting all co-operative development funds, and leaving a skeleton staff in the Co-operatives Secretariat. Although Quebec’s support is seen as strong in comparison to other provinces in Canada, it is important to note that co-operatives are still seen as a sub-option, and represent approximately 15-20% of new business creation.
In terms of structural support, there are a total of 18 federation-type organizations which are members of the Conseil québécois de la cooperation et de la mutualité. (CQCM). Between 1981 and 1987, 10 organizations were created. Then between 1990 and 1998, 8 new ones were added. In 2013, 3 of these federation are workers co-op federations (Forestry, Paramedics and the Réseau for all other types). These 3 are members of the Canadian Worker Co-operative Federation (CWCF). Add to that the 11 Coopératives de developpement regional (CDR) whose role is to help create new co-ops in their territory and support the development of existing ones.
In terms of proximity financing, we cannot overlook the creation in 1998 of the Centres locaux de développement (CLD) following the Politique de soutien au développement local et régional (April 1997). On the island of Montreal, nine (9) of the 18 CLD operate under the name of Corporation de développement économique communautaire (CDEC). There are 120 CLD’s across the Province that support economic development and job creation in their territory. They all manage a grant programme dedicated exclusively to social economy businesses (including co-operatives and non-profit organizations). The criteria are defined locally, and some entities exclude for-profit co-operatives which are then offered the loan programme, also accessible to co-operatives (10% of this programme is given out to social economy businesses). Between 2004 and 2006, there has been $37 million given out in grants to social economy businesses. (See http://www.mamrot.gouv.qc.ca/pub/metropole/partenaires/bilan_triennal_CLD.pdf)
An office of Desjardins called Desjardins Development Capital also offers three (3) types of financing to meet the specific needs of co-operatives in Quebec.
The purpose of this paper is not to list every programme accessible to co-operatives as there are multiple programs hailing out of different government ministries, so the above list is limited to the main actors.
To review the co-operative development carried out in the rest of Canada it is best done in reference to specific provinces for as noted above the Canadian Federal Government has been either passive or even hostile to further co-operative development. Before moving to specific provincial initiatives it is noteworthy to share two examples of this negative federal influence. The first is a decision made in 2011-12 to exclude the possibility of members of small co-operatives to invest their personal RRSP (Registered Retirement Savings Plan) in their own enterprises without a penalty. This practice was allowed for several years, but in 2012 The Canada Revenue Agency determined that no member with more than 10% of the co-operatives shares could participate in this self-directed RRSP programme which had been quite helpful to small worker co-ops.
The second example of the Canadian Government’s lack of commitment to co-operative development is related the creation of the National Co-operative Investment Fund co-ordinated by the Canadian Co-operative Association. The original plan was to seek a sizable Federal Government contribution to match the contributions of the co-operative sector. However, in 2011 that plan was abandoned because it was clear the Government was not interested. The co-operative and credit union sector picked up the challenge to fully raise a minimum of $20 million dollars from within their own resources. CWCF pledged $250,000 of its Tenacity Fund to leverage funds from other larger and wealthier co-operatives, credit unions, and federations. The strategy looks like it is working, with recent pledges of over $11 million.
- Nova Scotia
In 1993 the Province of Nova Scotia introduced the Nova Scotia Equity Tax Credit which encourages “local residents to invest in Nova Scotia small businesses. As an incentive, the Province offered a personal tax credit of 30 per cent to encourage investors to participate. The Equity Tax Credit allows equity investment in corporations, co-operatives and community economic development initiatives” ( http://www.gov.ns.ca/econ/cedif/background/history.asp).
The primary vehicle in which to invest is a CEDIF (Community Economic Development Investment Fund). From 1999 to March 31, 2013, over 7,500 investors have accumulated nearly $57 million for projects such as wind farms, farmers markets, a fair trade coffee workers co-operative, and community development agencies. This model of community investment has now been copied by other provinces, all seeing the tremendous value of keeping local residents’ equity for investing in local enterprises in their communities rather than transferring this equity to the discretion of global investment companies.
- Prince Edward Island, Manitoba & New Hampshire
Nova Scotia’s neighbouring province, Prince Edward Island, has recently announced creation of the Community Economic Development Business (CEDB) which is modeled on Nova Scotia’s CEDI. Stewart Perry compares Manitoba’s use of Equity Tax Credits and Nova Scotia’s experience with CEDIF in a paper Equity Tax Credits as a Tool of CED.
Although I am not familiar with the details, the State of New Hampshire’s Community Development Finance Authority has a tax credit for New Hampshire residents to invest in business & low income housing development called Community Development Investment Program (CDIP). It appears to be very similar to the Canadian provincial equity tax credit programmes.
All of these equity tax credit programmes are good opportunities for co-operatives to appeal to and utilize local investors’ commitment to their local economy and community to secure significant friendly capital to expand their co-operatives.
- Canadian Worker Co-operatives Federation
- Tenacity Works – this is an investment fund whose purpose is to create new and to expand existing worker-owned co-operatives in all regions of Canada. Tenacity Works is owned and operated by the CWCF (http://www.canadianworker.coop/tenacity-works).
“It was started using funds from the Canadian Government in a different era and now is a revolving loan fund used to invest in worker, multi-stakeholder and shareholder co-ops across Canada. The main purpose is to allow worker co-operatives to leverage a Tenacity Works loan to obtain additional financing from traditional banking institutions. To date, Tenacity Works has approved more than 35 loans that have supported over 200 jobs” (http://www.canadianworker.coop/tenacity-works).
- Indivisible Reserves – At the annual meeting of CWCF in 2012, the members passed a motion to educate themselves about the concept of an indivisible reserve. Following this educational effort they will consider instituting the use of indivisible reserves of co-operatives that are ceasing business or selling its business to another business, for future co-operative development. The concept of indivisible reserves is well known and integrated in Quebec and several countries in Europe. The principle is that the retained earnings that have been accumulated over the years by workers/owners’ labour should not be solely available to the workers who are members at the end of the co-operative’s life. There have been co-ops which have ceased operation because the members want to sell the co-operative to another business at a very high price. However, there is no compensation to the members who worked/owned at earlier stages in the co-op’s life. Often these founding members contributed significant sweat equity for which they were never compensated.
The usual practice is for these indivisible reserve funds to be transferred to the co-operative sector to be re-invested in further co-operative enterprises. Those who promote this policy and practice do so with a sense of equity with previous generations of workers, and with a commitment to the future to develop more co-operative enterprises. Indivisible reserves also give a principled message to private and government investors in co-operatives, that their investments are not going to shareholders and companies who will extract the funds from the local economy. Indivisible reserves are a strong vehicle for regional development efforts.
At CWCF’s upcoming annual meeting in October 2013, members will share their reactions to the idea of accepting indivisible reserves for themselves as a voluntary policy and whether they will recommend this policy to be included in the co-operative incorporation legislation in Canada and the other provinces beyond Quebec.
- Loans from a Credit Union to A Co-operative for Individual Members
A couple of years ago a very interesting variation for getting sufficient working capital from members who cannot afford to purchase the required membership shares was developed. Careforce Home Care Worker Co-op Ltd grew out of a private business where the owner was willing to sell the company to the workers. Unfortunately not all members could afford the membership shares they were obliged to purchase. Most of the new members received a modest wage, and several did not have sufficient credit rating to secure a personal loan to purchase the shares. Often, in these situations, the members could purchase the shares over time through a payroll deduction. Unfortunately, the new co-operative needed the cash to maintain operations.
Their credit union provided a loan to Careforce Home Care Worker Co-operative that was equal to the purchase value of the shares for those members who did not have sufficient funds. The co-operative deducted regular amounts from the paycheque of the members owing until their portion of the loan was repaid. The co-operative then pooled all the deductions from members who needed these funds, and made one payment to the credit union. This substantially reduced the credit union’s administration of many small loans that might have been created otherwise to each member. If the member left the co-operative before all the shares were purchased, the co-operative would pay the amount owing to the credit union for this member, and of course, repay the member the amount to buy back the shares purchased. This creative financing model gave a substantial boost to low income employees to become members, and to provide sufficient cash flow to the co-operative. As a result of this creative plan and other good management practices Careforce was the recipient of the 2010 Outstanding New Business Award given by the local Chamber of Commerce.
As Hazel Corcoran, Executive Director of CWCF, said when announcing the Federal Government cuts in funding during the IYC 2012, “Yes, it gives us very significant challenges, but it also makes our struggle clearer. Also, because government policies of austerity are also weakening the Canadian economy, it makes our movement much more important.”
I trust that the stories and experiences retold in this article inspire you with signs of what the co-operative movement can be. Through our creative use of some of these programmes we can realize that vision. In the places they have been used, the co-operative movement is vibrant. Perhaps, they will even inspire more governments to develop the policies and programmes which contribute to sustainable community and regional economies.
Tusz-King is Atlantic Director of the Board of Directors and Vice-President of the Canadian Worker Co-operative Federation (http://www.canadianworker.coop/). He is also a founding member and manager of EnerGreen Builders Co-operative in Sackville, New Brunswick, Canada (www.energreen.coop), and founding member and Chair of Open Sky Co-operative Board (www.openskyco-op.ca). Co-operative Developer and Diaconal Minister in The United Church of Canada, Eric is a husband and father in a family of four children and two grandchildren with his wife, Margaret Tusz-King.
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