Italian Cooperative Finance

Italian Cooperative Finance:
A deeper look for Working Today
Noémi Giszpenc
Ownership Associates, Inc.
April 2007
OA, Inc.
Follow-Up to Questions
1. 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
2. Indivisible reserves:
what are they and how do they function?
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After paying interests, patronage, dividends,
taxes, etc., the rest goes into indivisible
Often this does not amount to much, especially
in early years, necessitating other sources of
Follow-up to Questions (cont.)
2. 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% taxfree from 1977 until 2002.
OA, Inc.
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.
Follow-up to Questions (cont.)
3. 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
– 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
OA, Inc.
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
OA, Inc.
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
, Inc. assistance). There was little financing, only in special cases.
Italian Coop Finance:
Member Loans
• “most efficient” instrument for Legacoop
• 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
OA, Inc.
Coopfond Areas of Activity: Two
"characteristic" areas
1. "Promotion": providing risk capital to new
coops & new companies controlled by
Other allies are: Unipol Merchant for complex
operations (M&A, IPO, etc.), local and sectoral
For small and medium worker coops and social
coops there is CFI, a source of private equity
2. "Development": providing credit to
disadvantaged areas (mostly the South) &
existing social coops.
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Other instruments: P.I.CO Leasing for leasing
real estate and Fondo Unipol Banca for
Coopfond Areas of Activity:
Other Areas
3. "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. "4% fund": financing for studies and
research on coop themes, training and
communication on coop culture.
OA, Inc.
Coopfond Investment Process
• Coopfond does not assume entrepreneurial
responsibility directly; assumes only minority
• Preliminary investigation of projects:
proponents arrive after having obtained a first
approval from local associations.
– Nevertheless on average only 1 in 4 proposals are
– Often during the first technical interviews the
proponents themselves withdraw their projects,
due to a better idea of the risks involved.
OA, Inc.
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.
OA, Inc.
Coopfond: Project Phases
1. 1st contact: preliminary evaluation of
entrepreneurial idea
2. pre-evaluation: phase of analytic evaluation
of the documentation provided by proponent
3. evaluation: phase of checking and validating
the project. All projects brought to the Board
of Directors are given an evaluation rating.
4. contract: phase of formalizing of financing
and agreements among members.
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Coopfond: Project Phases
5. management and conclusion: phase of
monitoring the agreed upon business plan
until the end of the participation or the
definitive payback of the financing.
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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
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
OA, Inc.– Pure start-ups have the greatest failure rate.
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
OA, Inc.– Also, dividends allow the fund to stay in the black
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
OA, Inc.– Consultation for Financing
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
OA, Inc.
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
OA, Inc.
Unipol Ownership Structure
Strategic members:
JP Morgan
100% of
preferred stock
49.8% of
ordinary stock
preferred stock
(38% of total capital)
OA, Inc.
50.2% of
ordinary stock
(32% of total capital)
ordinary stock
(62% of total capital)
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
– 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
• 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
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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
OA, Inc. profits into tax-free reserve. Prevalent 70%.
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
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