Italian Cooperative Finance: A deeper look for Working Today

1. Italian Cooperative Finance:A deeper look for Working Today Noémi Giszpenc Ownership Associates, Inc. April 2007

2. 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.

3. 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.

4. 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

5. 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

6. 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.

7. 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

8. 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 (M&A, 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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 (it’s 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

16. 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 socialcoops • 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

17. 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 Italy’s “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

18. 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 BNP’s 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

19. Holmo MPS HOPA BNP P&V JP Morgan 71.1% 13% 5.4% 4.5% 4.6% 1.4% FINSOE 50.2% of ordinary stock (32% of total capital) MARKET 49.8% of ordinary stock 100% of preferred stock ordinary stock (62% of total capital) preferred stock (38% of total capital) Unipol Ownership Structure Strategic members:

20. 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

21. 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 dev’t funds

22. 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%.

23. Sources Used • La promozione cooperativa, M. Bulgarelli and M. Viviani, eds. 2006 • 2004-2005 Bilancio sociale: Relazione dell’Amministratore 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