Committee Reports::Report No. 06 - Development and Management of Small Business Co-operatives::15 July, 1986::Report

This Report represents further progress in the second phase of the Committee’s programme of work.

This Sixth Report on the Development and Management of Small Business Co-operatives is laid before both Houses of the Oireachtas in accordance with paragraph (6) of the Orders of Reference of the Joint Oireachtas Committee on Small Businesses.

INTRODUCTION

During 1984 and 1985 the Committee published four sectoral reports as the first phase of its work:-

The Committee decided to publish reports on the following topics for the second phase of its work:-

We decided to examine the issues affecting the development of smaller co-operatives as we feel that this form of business entity has a useful, if untapped, employment potential.

However, the achievement of this potential requires appropriate support structures and a new legal framework.

The Committee wishes to thank all of the individuals, agencies, and representative and other bodies, who have assisted in the production of this Report.

CHAPTER I - BACKGROUND

1.1 The Co-operative Response to Unemployment

According to the third annual report of the OECD on the Employment Outlook, unemployment in the 24 member states grew from 10.3m. in 1970 to 31.5m. in 1985.

A disturbing feature of this growth in unemployment is that it is increasingly concentrated among the long term unemployed and among the young. Indeed, the share of youth in the long term unemployed has risen from 31% to 37.5% during the period 1979-84.

While high levels of unemployment are common throughout Europe the problem is particularly acute in Ireland, partly due to the young age structure of the population.

The official figures for May 1986 show that 234,000 people are registered as unemployed in Ireland, which at 17.7% of the workforce is the second highest in the EEC.

In addition, up to 40,000 people are now involved in a variety of Government sponsored training and special jobs schemes, including the Social Employment Scheme, Team Work, Work Experience Programme, and the various AnCO training schemes.

In our situation we will need to create between 15,000 and 20,000 net new jobs each year into the next century, simply to prevent unemployment rising further.

In most European countries, including Ireland, Government agencies, community groups, and trade unions have been promoting various employment initiatives within the general framework of co-operative business entities.

It is in this context that we have decided to examine the potential for small business co-operatives in Ireland and the obstacles to achieving that potential.

1.2 Defining a Co-operative

“An association of persons who have voluntarily joined together to achieve a common end through the formation of a democratically controlled organisation; making equitable contributions to the capital required and accepting a full share of the risks and benefits of the organisation in which the members actively participate”.

The Congress of the International Co-operative Alliance met in Vienna in 1966 and set down six generally accepted principles with regard to co-operatives:-

(i)Membership should be voluntary and available to all persons who can make use of the services of a co-operative and are willing to accept the principles of membership.

(ii)Co-operative societies are democratic organisations. Members should have equal voting rights and participation in decisions affecting their co-operatives. Co-operatives should be administered by persons elected or appointed by the members.

(iv)The surplus or savings arising out of the operations of a society belong to the members and should be distributed in such a way as to ensure that no one member gains at the expense of others.

(v)All co-operative societies should make provision for the education of their members, officers, and employees, and of the public in the economic and democratic aspects of co-operatives.

In a word, the essence of a co-operative is mutual self-help. In the case of a co-operative business profitability is a subordinate rather than a principal objective.

The essential legal difference between a co-operative business and a private firm is that in the case of the co-operative, ownership and control are vested in the members on the basis of equality rather than in proportion to financial interest, whereas in the case of a limited company control is determined by the size of individual shareholdings.

1.3 Forms of Co-operative

The variety of co-operatives is wide and not all are run as business entities, some being entirely social in objectives and operation.

(i)Producer Co-operatives: In this type of co-operative, majority ownership and control rest with the suppliers of the raw materials and the workers are employees. In Ireland agricultural co-operatives are the main type of producer co-operative, many of which are now substantial business concerns.

(ii)Consumer Co-operative: Membership of this type of co-operative is derived from patronage and a shareholding in the ownership of the co-operative. In some countries consumer co-operatives are involved in the retail trade. However, the main examples in Ireland are housing co-operatives, the members of which have come together to obtain a site and provide their own housing.

(iii)Community Co-operatives: These co-operatives aim to provide or improve the economic and social structure of a locality and the shares are owned by local households. In Gaeltacht and other Western areas they have as their objectives the development of local natural resources and tourism and the provision of public utility services such as piped water.

Many community co-operatives, both urban and rural, provide work space and seed capital for new small businesses within their localities and there is a growing community co-operative involvement with a diverse range of manufacturing and services businesses.

(iv)Credit Co-operatives: Essentially these co-operatives are involved in managing savings for and providing credit facilities to their member shareholders. In some countries credit co-operatives have become major banking institutions. In other countries, including Ireland, this type of co-operative is represented by locally based individual credit unions.

(v)Worker Co-operatives: These co-operatives, which may be in either the manufacturing or services sectors, are owned and controlled by the people working in them. All workers are generally eligible for membership. Worker co-operatives arise out of two situations:

(a)Start-up: Where unemployed people come together to start their own business and provide their own jobs;

(b)Conversions or Phoenix Co-operatives: Which arise out of closures in manufacturing industries when the workers purchase the assets and resume trading as a co-operative.

1.4 The Focus of this Report

In line with its Terms of Reference the Committee will focus on the needs of those co-operatives which are run as business entities, essentially small co-operatives operated as manufacturing and services businesses. Most of these co-operatives operate on a worker or community basis.

In evidence to the Committee representatives of the State agencies with a role in this area stated that the number of small business co-operatives is growing. In 1981 there were 30 trading co-operatives, mainly in the Gaeltacht. There are now 47 of these co-operatives, on a countrywide basis, as follows:-

CHAPTER 2 - WHY CO-OPERATIVES?

2.1 The Advantages and Disadvantages of Co-operatives

Although there has been a revival of interest in the co-operative idea throughout Europe as a response to the growing levels of widespread and chronic unemployment, not even their most enthusastic advocates regard co-operatives as the ultimate solution to unemployment.

However, co-operatives are increasingly seen as a third force, in addition to State and private enterprise, through which a growing number of people are seeking to solve their own employment problems.

It can be said, on the basis of evidence from some European countries, that properly funded and well managed small co-operatives can be an important extra dimension to both job and wealth creation.

As the co-operative form of enterprise is based on principles of democracy, common ownership, and equal participation by members, it may be argued that the co-operative structure is superior to that of the conventional firm.

However, in practice, there are negative aspects to co-operatives which need to be faced with the same level of realism as the positive aspects, the disadvantages as much as the advantages.

A failure or reluctance to acknowledge and examine the disadvantages as well as the advantages of co-operatives, must inevitably lessen the prospects for co-operatives to reach their full potential.

2.2 Disadvantages

It has to be conceded that in general small private firms in Ireland are underfinanced and often inadequately managed. In the case of small manufacturing firms, marketing horizons are limited to the domestic market, indeed often confined to the firm’s own locality.

However, given these inadequacies, it is quite clear that our small firms are a dynamic, growing, and job creating sector of the economy.

There are now approximately 28,000 people employed in small manufacturing firms, which were assisted under the Small Industries Programme during the 1970’s and these jobs are well dispersed throughout the country.

There is not at this stage any similar track record by which co-operatives could be evaluated. We remain to be convinced, in the absence of data with regard to track record or failure rate, that co-operatives can generally be as successful as private small firms.

The formation of a co-operative can often be a well intentioned but poorly defined response to a local unemployment situation. The lack of clear objectives, an understanding of the level of commitment required and the necessary organisational skills, often result in no tangible achievements and may in the end actually add to frustration within a community.

While fully acknowledging that unemployment is our principal social problem, we have to say in all honesty that high unemployment in itself is not a justification for co-operatives. The justification must be that a proposed co-operative has a good prospect of success by being fully capable of remunerating the main factors of production, particularly capital and labour.

There is a danger that the main motivation behind a decision to establish a co-operative may be one of idealism or of a simplistic notion of pure democracy within the workplace. A business formed on this basis will almost inevitably fail.

The democratic structure of a co-operative could have an adverse effect on flexibility in decision making. In a co-operative situation, particularly where the workers are also the owners, managers may find themselves being directly accountable to employees in respect of day to day decisions which are part and parcel of the management function.

The implementation of management decisions might be more difficult in a co-operative than in a conventional firm.

In such a situation the operational efficiency of a co-operative could be impaired, and the quality of management decisions would be progressively affected.

It would also become increasingly difficult to attract and retain good managers.

2.3 Advantages

A firm operated on a co-operative basis, in which the workers are participating as shareholders, will have a different framework of industrial relations and will not be subject to the problems arising from traditional tensions between management and workers.

In recent years, governments in Ireland and elsewhere have introduced taxation incentives to encourage the acquisition of shares by employees in the companies in which they work.

The purpose of these measures is to reduce the level of confrontation between management and employees by giving employees an ownership stake in the firms which employ them.

Co-operatives are a logical extension of the principle of wider share ownership. They offer a higher level of shareholder participation in that each shareholder has an equal voice, irrespective of the proportion of shares which he holds.

People working within co-operatives are working for themselves. Therefore, they have a more positive motivation to work harder and more effectively.

Co-operatives offer people a better means of realising their potential by demanding a higher level of personal responsibility from their members.

A well run co-operative can harness community goodwill at consumer level by exploiting the social as well as the commercial aspect of the venture.

CHAPTER 3 - HISTORY AND DEVELOPMENT OF CO-OPERATIVES

3.1 The Origins of Co-operatives

Although agricultural co-operatives are far more important in most European economies than other types of co-operative, the origins of the Co-operative Movement are urban rather than rural.

The first co-operatives developed in the industrial areas of Britain and Europe during the first half of the nineteenth century.

These early co-operatives were involved in retail or manufacture and were very much products of the Industrial Revolution.

The manufacturing co-operatives were formed on the basis of job ownership and had close links with early trade unionism.

In Ireland the Co-operative Movement had its origins in the agricultural sector where it predominates to this day.

In the remainder of this chapter we set out the main co-operative developments in this country.

3.2 Agricultural Co-operatives

The first agricultural co-operative at Ralahine, Co. Clare lasted from 1831 to 1833. However it was not until Horace Plunkett formed the first creamery co-operative at Drumcollogher, Co. Limerick in 1889 that the modern agricultural co-operative movement began.

The Irish Agricultural Organisation Society Ltd., renamed the Irish Co-operative Organisation Society Ltd. seven years ago, was formed in 1894 as a central promotional and advisory body for the developing agricultural co-operatives.

By 1920 the number of co-operatives reached a peak of 1,114 and turnover for that year was £14.5m.

In the late 1960’s and early 1970’s there was considerable rationalisation of dairy co-operatives, under the influence of impending EEC membership. As a result of these amalgamations and mergers some of the dairy co-operatives are among the very largest business entities in the country.

The 1984 Annual Report of the Irish Co-operative Organisation Society Ltd. lists 151 member co-operatives involved in a variety of activities including milk processing, livestock sales, stores, fish, and horticulture.

Total membership was estimated at 123,000 and employment at about 16,000. Total turnover was £2.75 billion.

3.3 Housing Co-operatives

Co-operative housing is fairly well established in several countries and developed in Ireland during the late 1960’s.

To date over 100 co-operative home ownership building schemes have resulted in the construction of 2,500 houses in both rural and urban areas. Sites were, in the main, acquired from local authorities.

The National Association of Building Co-operatives Society Ltd., (NABCO) is the umbrella body for housing co-operatives and is registered under the Industrial and Provident Societies Acts.

Building co-operatives in this country are formed to provide housing on an individual ownership basis in a locality.

The objectives of NABCO also include the promotion and organisation of housing co-operatives with other forms of tenure, in addition to individual ownership. These forms of tenure would include rental co-operatives and co-ownership co-operatives.

Although co-operative housing is outside the scope of this Report we support the NABCO view that payment of State grants, mortgage subsidies and local authority loans should be available for all categories of housing rental and co-ownership co-operative and, that building society mortgages should also be available to these co-operative entities.

3.4 Credit Unions

The Irish League of Credit Unions, which is the credit union representative body, describes a credit union as “a group of people who save together and lend to each other at a reasonable rate of interest”.

The Credit Union Movement started in Germany in the mid-19th century and the basic principles laid down and which are still the basis of modern credit unions were:-

(ii)loans would be made for provident or productive purposes at rates of interest members could afford;

(iii)the character of the member would be the most important security for his or her loan;

The first Irish credit union was established in 1958 and the movement has grown significantly in the meantime. In both the Republic and Northern Ireland there are 500 credit unions, of which nearly 400 are in the Republic. There are nearly 750,000 members, 8,000 volunteers and over 500 fulltime staff.

The Credit Union Act 1966 defines credit unions, the purposes for which they may be registered, and their powers.

Under this legislation loans are payable only to members and the term of a loan may not exceed five years.

While membership, in practice, is almost entirely on a personal basis, Section 6(4) of the Act does provide for membership by any legal person “other than a natural person, the majority of the members of which are, and continue to be eligible, for membership” of a credit union.

In some countries credit unions lend to corporate bodies such as co-operatives. This practice has not developed in Ireland where credit unions are generally small and locally based.

However, credit unions do provide loans to suitable individual members for business ventures.

An interesting development in promoting links between a credit union and co-operative business ventures is the decision by the Co. Limerick based Cois Sionna Credit Union to establish a separate co-operative type entity to:

(i)promote a network of worker co-operative enterprises based on the Mondragon concept in Spain (see Chapter 5, Pages 41 to 45);

(ii)identify people, both interested and suitably qualified to set up a co-operative type enterprise;

(iii)provide the necessary training specific to the co-operative type of organisation.

Each new worker co-operative enterprise will become a member of the Credit Union Group of enterprises, having first satisfied a co-ordinating committee in relation to specific criteria and commercial viability.

Cois Sionna is contributing the initial share capital of £30,000 to this new entity for use as seed capital in funding approved projects.

Support is also being provided by the Youth Employment Agency and SFADCO, which will monitor progress as a basis for other similar developments.

3.5 Community Co-operatives

The first community co-operatives emerged in the 1960’s in the West of Ireland. These co-operatives are now involved in a variety of social, economic, and business activities, both in rural and urban areas.

In addition to the 29 community trading co-operatives already mentioned in Section 1.4, there are a number of other community co-operative entities which, rather than starting new enterprises, provide business advice and support services including premises to local people who want to start their own businesses.

3.6 Workers Co-operatives

Workers co-operatives operate almost exclusively in the industrial and services sectors.

Although many European countries have workers co-operative movements going back to the last century, this movement is still in its infancy here.

However, successful workers co-operatives have developed here in recent years and there is a growing interest in this form of enterprise.

Workers co-operatives in Ireland now manufacture a range of goods including furniture, clothing, footwear, and pottery. On the services side there are workers co-operatives involved in activities such as video productions and catering.

3.7 Trade Unions and Co-operatives

3.7.1 Historic Commitment to Co-operatives

Since their inception in the nineteenth century the trade unions have been officially committed to the development of co-operative enterprises. Indeed, the founders of early trade unionism were the same sort of people who established the first worker co-operatives. Both trade unions and workers co-operatives were seen as means by which workers could organise themselves for mutual aid.

Although workers co-operatives did secure a niche for themselves in some European countries, the scale of their development did not come remotely close to that of the Trade Union Movement.

In Ireland a commitment to worker co-operatives may be found in the constitution of the Irish Congress of Trade Unions and of the individual major unions.

However, this commitment notwithstanding the Trade Union Movement here has not been involved to any extent in the development of workers co-operatives.

3.7.2 The Decline in Trade Union Membership

The rise in unemployment in the advanced industrial economies has been accompanied by a decline in trade union membership. Those general unions which cater largely for workers in manufacturing industry have suffered the most.

In the U.S. less than 20% of workers now have trade union membership, compared with nearly 40% at the end of the Second World War.

In Britain, membership of unions affiliated to the TUC was nearly 12m. in 1980 but now stands at 9.5m.

The decline in trade union membership is less pronounced in other European countries but the pattern is similar. The May 1986 issue of Social Europe, an EEC publication, estimates trade union membership in Ireland at between 48% and 50% of the workforce for 1980/82 and at 47% or 48% for 1983/85.

Even if there were a significant improvement in the levels of overall employment in Ireland and in other European countries, it is most unlikely that such an improvement would be matched by increased trade union membership.

(i)the continuing decline in traditional categories of employment arising from newer technologies;

(ii)a growing proportion of the workforce employed in small firms, which lend themselves less easily to union organisation.

3.7.3 Trade Unions and Co-operatives

In recent years there has been a revival of European trade union interest in worker co-operatives. To some extent this change has come about on an ad hoc basis, as unions have been drawn into supporting their members in the promotion of co-operatives as a response to factory closures.

However, trade unions are becoming more interested in worker co-operatives on a strategic basis, as a particular response to unemployment, in which they can become involved.

In Ireland there is a re-evalution underway of the historical official trade union commitment to worker co-operatives, as exemplified by:-

(ii)the establishment of the FWUI Unity Fund for workers co-operatives in January 1986 (see Chapter 4, Page 24).

CHAPTER 4 - THE ISSUES AND THE PROBLEMS

4.1 Introduction

In this chapter we examine the major issues and problems related to the development of small business co-operatives:

4.2 What are the Legal Problems?

The most striking fact about the legal framework for co-operatives in Ireland is that there is no legal definition of a co-operative, although the Credit Union Act 1966 uses the expression “co-operative societies” to describe credit unions.

In practice co-operatives are legally incorporated under the Industrial and Provident Societies Acts 1893-1978 which are administered by the Registrar of Friendly Societies, for whom the Minister for Industry and Commerce has statutory responsibility. The main piece of legislation is still the 1893 Act.

Any type of business may be registered under these Acts. On registration, a society becomes a body corporate with limited liability which conveys the power to enter into contracts and to obtain and give security for credit.

A society is obliged to have its Accounts audited by a public auditor just as in the case of a company or any other form of business.

However, the scope of the Industrial and Provident Societies Acts is not confined, neither by law nor in practice to co-operative societies. The fact is that the objectives normal to most companies would be acceptable under the terms of these Acts.

The larger dairy co-operatives have both industrial and provident societies and private limited companies as subsidiaries.

Kerry Co-operative Creameries Ltd., a registered industrial and provident society, has approached the Registrar of Friendly Societies on the issue of forming a public limited company as a subsidiary.

The main legal differences between industrial/provident societies and companies are:-

(i)a minimum number of seven shareholders is required for a society with no upper limit. The minimum number for a private limited company is two persons with an upper limit of fifty;

(ii)persons under twenty one years of age may not be members of the management committee of a society, whereas they may be company directors if over eighteen;

(iii)the interest of each member in the shares of a society may not exceed £6,000, except for agricultural or fishing societies where the limit is £20,000. In the case of a private company there are no upper limits for individual investment in shares, subject to the issued share capital of the company.

(iv)Societies that wish to obtain private loans or raise more than £10,000 in share capital in any period of six months, must obtain the prior approval of the Registrar of Friendly Societies. There are no such restrictions on companies;

The present legislation does not impose any obligation to have co-operative rules governing such issues as one shareholder - one vote and limited dividends.

The lack of a legal definition of a co-operative has resulted in a variety of organisations registering under the Industrial and Provident Societies Acts and calling themselves co-operatives, e.g. investment societies.

4.3 Finding the Finance

Most small business co-operatives are formed as a local response to unemployment or by workers trying to save their jobs. In these circumstances the problems of raising the necessary capital for a project can be relatively more difficult than in the case of a conventional business.

(i) Community Fund Raising

The promoters of small business co-operatives often resort to extensive fundraising in their local communities through collections, bingo, raffles, dances, and other similar activities.

(ii) Redundancy Money

In the case of worker co-operatives redundancy money is often an important source of seed capital.

(iii) State Sources

There is a considerable level of financial support available from State sources for co-operative ventures.

The incentives for manufacturing industry offered by the IDA, SFADCO and Udaras na Gaeltachta are available to small manufacturing co-operatives, including:-

-Feasibility Study Grants of 50% of costs subject to a maximum grant of £15,000.

-Fixed Assets Grants of 45% and 60% of costs of buildings and new machinery, depending on location.

-Training Grants of up to 100% of the cost of training programmes.

-New Product and Process Development Grants of 50% of costs.

The Enterprise Allowance Scheme operated by the National Manpower Service under which a grant of £50 per week is paid to an unemployed married person for one year to become self employed. The allowance for a single person is £30 per week.

In addition, a number of incentives are available from the Youth Employment Agency under the Community Enterprise Programme. These incentives, which apply to both manufacture and services, include:-

Enterprise Worker Grant: a maximum grant of £17,500 available to community groups to employ a “resource person” for 12 months to advise and assist with the development of business ideas into job opportunities for young people.

-a maximum grant of £10,000 towards a manager’s salary;

-a maximum grant of £2,000 towards marketing development costs;

-a maximum grant of £2,000 towards financial and administrative costs.

Wages Subsidies: of up to £3,750 in respect of each worker for a new manufacturing venture and £2,500 in respect of selected services businesses.

For a new co-operative manufacturing venture State sources can account for 80% of start-up funding. However, for a services business the level of available State funding is much lower. To qualify for finance from the Youth Employment Agency not less than 75% of employees in a venture must be less than 25 years of age.

Full details of all State incentives available to small business co-operatives are attached as Appendix I.

(iv) Trade Union Funds

An interesting development is the adoption at the 1985 annual conference of the Federated Workers Union of Ireland of a proposal to levy 10p per week on each member for three years beginning January 1986 “to make available to the union a fund to assist the objectives of the union with particular regard to building a link to its unemployed members”.

The levy is projected to raise £750,000 over three years and the fund will make grants, provide loans, and take shares in the enterprises in supports.

Although supported by the Irish Congress of Trade Unions there are no proposals at present by other unions to adopt similar schemes.

(v) Credit Unions

The Irish Credit Union Movement, although substantial in itself, is comprised of small, independent, and locally based credit unions engaged in personal lending.

Although loans may be provided to members for investment in business ventures, there are legal and practical obstacles to direct lending to bodies corporate. The main practical obstacle is the small scale of operation of the individual credit unions.

In some countries credit unions are linked to their own banks and other financial institutions.

The Cois Sionna Credit Union co-operative business venture referred to on pages 14 and 15 of this Report is an example of a larger credit union becoming involved with small co-operative businesses.

(vi) The Banks

Although co-operative banks are a feature of some European countries, co-operatives in Ireland are generally dependent on the commercial banks for their loan finance.

The lack of a widespread small business co-operative movement, and a lack of collateral to secure bank loans, means that raising bank finance can be a difficult issue for small co-operatives.

Although there are several sources of finance available for co-operatives, funds for investment in share capital and long term loan finance are limited. Consideration needs to be given to more appropriate mechanism for co-operative financing.

4.4 Management Development

In all of our sectoral reports we highlighted the critical importance of good management to the success of any small firm. As we said in our Report on Manufacturing Industry “All research in business success and business failure reaches a universal conclusion that effective management is the key ingredient of success and weak or inadequate management is the primary cause of failure”.

Although management weaknesses are a feature of Irish small firms generally, the problem in small co-operatives is relatively greater.

The basis on which many of these co-operatives are established, either as a community response to unemployment or as an employee response to a factory closure, means that there is usually little or no management expertise within the initial co-operative grouping. Although there may be production management skills within a workers co-operative venture, the general body of management skills must either be built within the co-operative or brought in.

These other skills include financial management and marketing, which are fundamental to the successful operation of a modern business.

Any external support for co-operatives, including grants, must have management development as its central objective. Indeed, management development for co-operatives is as much a key issue as finance.

4.5 Is there an Adequate Representative Structure?

There are three representative groupings outside of the State sector which have a direct interest in and advocate the development of small business co-operatives - the Irish Co-operative Organisation Society Ltd., the Co-operative Development Society Ltd., and the Irish Congress of Trade Unions.

(i) The Irish Co-operative Organisation Society Ltd. (ICOS)

Formed in 1894, ICOS was formerly known as the Irish Agricultural Organisation Society Ltd. ICOS is a co-operative of co-operatives and is financed by its member co-operatives. It is directed and controlled by a national council of thirty two members and has a consultative function with various Government Departments.

ICOS has a staff of twenty five and provides advisory and representational services to its member co-operatives in such areas as legislation, education and training, grant applications and project planning.

Although still overwhelmingly involved with agricultural co-operatives ICOS has become more involved with community co-operatives in recent years. The Youth Employment Agency has contracted with ICOS to work with it in supporting some of the new community co-operatives now starting.

One ICOS staff member, funded by the YEA is now working on identifying suitable pilot schemes for community co-operatives.

In evidence to the Committee ICOS representatives stated that the provision of a proper independent representation service for small business co-operatives would require three fulltime professional staff and a budget of £150,000 per annum.

(ii) The Co-operative Development Society Ltd. (CDS)

The Co-operative Development Society Ltd. was founded thirty one years ago to promote industrial, service, customer, and worker co-operatives in Ireland.

In a submission to the Committee the CDS claims to have helped fifty three affiliated societies and last year to have received over eight hundred and fifty requests from various groups and individuals interested in setting up co-operatives.

Model rules, approved by the Registrar of Friendly Societies, are provided by the CDS. The total cost for a new society to register with CDS rules is £40, of which £20 is retained by the CDS and £20 is paid to the Registrar of Friendly Societies.

The only other source of funds available to the CDS is an annual membership fee of £15 payable by each of its fifty three affiliated members.

(iii) The Irish Congress of Trade Unions

Although not directly involved in representing worker co-operatives ICTU has published a Report on Worker Co-operatives which advocates that Trade Unions and Trades Councils should support and promote the development of worker co-operatives as one of a number of constructive responses to unemployment.

A Workers Co-operative Network was established by existing workers co-operatives in 1984, but progress has been slow. This concept is supported by ICTU which recommends links between trade unions and the Network.

Small business co-operatives, as a significant movement, are still in the early stages of development. The question as to whether the existing umbrella bodies are appropriate to their needs or, are capable of meeting these needs, is becoming increasingly relevant.

4.6 The Role of the State Agencies

The Community Enterprise Programme is the focus of the State’s support for community enterprise in general and for co-operatives as a particular form of community enterprise.

In 1984 a Community Enterprise programme Approvals Committee was established by agreement between the Department of Labour, the relevant State agencies, and community voluntary groups. This Committee which has delegated powers from the Youth Employment Agency is responsible for overseeing the programme.

The State agencies involved are the Industrial Development Authority, Shannon Free Airport Development Company, Udaras na Gaeltachta, AnCO, and the National Manpower Service, together with the Youth Employment Agency which has a co-ordinating role.

There is a formal joint operating agreement between the agencies which has as its objectives:-

(i)to provide an integrated, logical package of assistance to small business co-operatives,

(iii)to get the maximum benefit for the State from the combined resources of the agencies.

The State agencies claim that the arrangements in place provide for joint decision making on projects, common formulation of policy, sharing of information and problems, and complementary use of staff resources in servicing demand for projects.

In evidence to the Committee representatives of the State agencies identified the particular development problems and needs of small business co-operatives as:-

A. Planning and Development Stage

(iv)the need to find products and services which represent viable opportunities and which will not cause direct displacement of existing jobs;

B. Start Up and After Care

(v)the need to supplement financial resources available to groups through their own efforts, such as fundraising, with adequate grants from the State;

(vii)the need to develop marketing concepts and the normal disciplines of a commercial operation;

(viii)the need to sustain the business as an ongoing entity without continuing state grant support.

On the training side AnCo, in co-operation with the Youth Employment Agency, is developing and implementing training initiatives aimed at strengthening co-operative business skills.

(i)A ten week pre-co-operative course to identify and establish the potential for a co-operative in terms of the skills and commitment within the group and the business idea being proposed.

(ii)A twenty week course aimed at groups, who, having developed an organisational base, have identified a commercially viable project for which they possess the core skills, but require intensive training in business management, enterprise, and co-operative skills.

While acknowledging the wide level of State support available for co-operative businesses, the Committee is also concerned at a perception of widespread confusion attributed to the multiplicity of State agencies.

CHAPTER 5 - INTERNATIONAL COMPARISONS

5.1 The Revival of Co-operatives in Europe

In the last 10 years there has been a widespread revival of interest in small business co-operatives in most European countries, as part of the search to the problem of high and endemic unemployment.

In the EEC countries (excluding Spain and Portugal) the numbers employed in these co-operatives nearly doubled from 290,000 to 540,000 workers and the number of co-operatives from 6,500 to 13,900 between 1978 and 1983.

The co-operative revival has been most evident in those countries that provide for co-operative development through:

(iv)a State support structure for co-operative development, in terms of advisory services, grants or subsidies and/or tax incentives.

In this chapter we examine co-operative development in France, Great Britain, Italy, and Spain.

France and Italy have highly developed co-operative movements and the Mondragon movement in Spain is the most sophisticated co-operative undertaking in Europe.

5.2 France

5.2.1 History and Development

The first co-operatives appeared in the 1830’s and were generally of an artisan nature such as carpentry, shoe making and printing.

The Co-operative Movement developed during the nineteenth and early twentieth centuries with the result that France now has a well developed co-operative sector including agriculture, consumer, workers, and credit co-operatives. Co-operative savings banks in France include some of the largest banking groups in the country.

Workers co-operatives are the dominant form of co-operative in the industrial and services sector. At the end of 1985 there were 1,263 workers co-operatives in France and the total employment came to 36,114. Although workers co-operatives have been affected by recession, new start-ups are now running at between 250 and 300 each year compared with 100 each year in the late 1970’s.

The General Federation of Workers Co-operatives established in 1884 is the representative body.

5.2.3 Legal Aspects

There is a wide diversity of law governing co-operatives in France. In this section we look at the legislation covering workers co-operatives as it is most relevant to the industrial and services sector.

The workers co-operative legislation of 1978 sets out the following basic principles:-

(a)Worker production co-operatives shall be associations of workers of any category or occupation who have decided to work together within a business managed either directly by themselves or through the intermediary of representatives elected from amongst their members.

(b)The principle of freedom of association shall apply and all members shall enjoy equal powers, irrespective of their contribution to the capital of the business.

Under general membership rules set out in the legislation any person employed for not less than one year by a co-operative may apply for membership and a decision may be taken by a simple majority at a general meeting of members. Individual co-operatives are also allowed special schemes covering automatic admission and dismissal of employees who refuse to apply for membership after a certain time.

The legislation also controls the allocation of profits, which are divided into three categories:

(a) A Dividend on Capital

The dividends payable on shares may not exceed 25% of the net operating surplus, and the maximum dividend payable to external shareholders may not exceed the rate payable on government bonds.

(b) Bonus to Employees

Not less than 25% of the net operating surplus must be allocated to employees by way of a bonus. However, these bonuses may be allocated to a ‘workers’ participation fund for a minimum of five years, thereby receiving total exemption from both company and personal taxes.

Not less than 15% of net operating surplus must be allocated to an indivisible reserve fund.

Although the 1978 legislation defines a workers co-operative, sets out a code for membership and participation, and regulates the allocation of profits, it also sets out clearly that worker co-operatives are commercial companies with the same obligations as private and public limited companies.

5.2.4 Finance

Funding available to workers co-operatives in France arises from the following sources:

(ii)a seven year loan from the Co-operative Expansion Fund operated by the General Federation of Workers Co-operatives. The amount of loan is never more than the amount invested by the workforce;

(iii)government financial assistance either in the form of development grants based on the number of jobs created and the amount of investment, or long term loans from the State run Economic and Social Development Fund;

(iv)local authorities may, under the 1978 legislation, provide grants to workers co-operatives. However local authorities are precluded from giving any form of subsidy to private businesses;

Raising the necessary loan capital from either commercial or co-operative banks is a problem due to assets being insufficient to secure a loan. Local authorities may provide loan guarantees.

5.3 Great Britain

5.3.1 History and Development

Britain was the first country to develop co-operatives, just as it was the first country to be affected by the Industrial Revolution. The main emphasis was on consumer and workers co-operatives which were mainly industrial. However progress was uneven.

The consumer side of the co-operative movement developed into a major force in the British retail trade by the first half of this century. However, the rise of multiple grocery and other retail chains in the 1960’s and 1970’s, which achieved greater economies of scale, resulted in the decline of consumer co-operatives. Although the Consumer Co-operative Movement still had 10.2m. members by the end of 1980, its retail market share had declined to 6.4%.

Industrial co-operatives never really developed to any serious extent and were very much at the margin of the British Economy.

However since the late 1970’s there has been a revival of interest in industrial - and service - co-operatives as a response to the growing levels of unemployment.

In 1980 there were 305 co-operatives employing 5,300 people. By last year there were 1,300 co-operatives employing well over 10,000 people.

5.3.2 Legislation

The legal framework for co-operatives is very much the same as in Ireland - the Industrial and Provident Societies Acts and the Companies Acts.

However, there is specific co-operative legislation embodied in the Industrial Common Ownership Act of 1976 which defines ‘a co-operative enterprise’ and ‘a common ownership enterprise’ in British law.

A co-operative enterprise is defined as a body controlled by the majority of people working for it, the income of which is applied to the benefit of the members.

A common ownership enterprise may take the form of a company or co-operative society registered under the Industrial and Provident Society Acts.

Only workers within a common ownership enterprise may be members, all members have equal voting rights, and in the event of the winding up of an enterprise remaining assets must be transferred to another common ownership enterprise or used for charitable purposes.

5.3.4 Representative Body

The Industrial and Common Ownership Movement (ICOM) is now the principal representative body for industrial and service co-operatives in Britain and its model rules are adopted by most new co-operatives.

5.3.5 State Agencies

Various development agencies in Britain have a role in co-operative development. However, in 1978 an Act was passed which established the Co-operative Development Agency (CDA) as the State agency specifically concerned with the promotion of co-operatives and carrying out advisory, research, and educational functions.

The CDA has a small staff and limited funds. It is mainly concerned with the initiation of local development agencies, usually by local authorities, and the publication of booklets on co-operative development, as well as a directory of co-operatives.

5.3.6 Finance

In addition to redundancy money and financial assistance from some local authorities, co-operatives in Britain have access to the Manchester based Co-operative Bank which handles some 60% of British co-operative business.

The Co-operative Bank is a subsidiary of the Co-operative Wholesale Society consumer co-operative. The Bank, which has full clearing facilities, has a traditional customer base of co-operative societies, trade unions, and co-operative society members.

Although the Bank is a major lender to co-operatives, this lending is less than it might be due to a lack of collateral from co-operative members.

5.4 Italy

5.4.1 Introduction

Italy has the most developed co-operative movement in Europe with 120,000 co-operatives in all, embracing the full range of economic activities.

Some of the largest business entities in Italy, including the ninth largest construction firm and the ninth largest insurance company, are co-operatives.

There are three representative bodies for co-operatives. These bodies each cater for the full range of co-operatives. Individual co-operatives may also be members of a Consortium which provide specific services to co-operatives or raise funds on their behalf.

5.4.2 Legal and Financial

The legal principles governing co-operatives are very similar to the French situation.

Capital is limited to 30m. lire (£14500) per person for a manufacturing co-operative and each member may lend a maximum of 40m. lire (£19500) to his co-operative.

(ii)remuneration of members capital subject to a maximum dividend rate of 5% and total dividend payment not exceeding 50% of profits;

The State owned Banca Nationale di Lavoro has a co-operative fund which will fund 70% of required investment in a viable co-operative project at a very low rate of interest.

There are State grants available for the promotion of co-operatives taking on unemployed persons between 15 and 29 years of age. Co-operatives also benefit from corporation and local tax concessions.

5.5 Spain

5.5.1 Mondragon - Development

The biggest and most successful non-agricultural co-operative movement in Europe is centred on the town of Mondragon, Galicia, one of the Basque provinces of Northern Spain.

The Basque provinces of Spain have a strong industrial tradition. However, the region incurred a high degree of economic and social devastation as a consequence of the 1936-39 Spanish Civil War.

In Mondragon the co-operative idea was developed as a response to these circumstances. The first practical expression of co-operative development in Mondragon was the establishment of a co-operative technical college in the early 1940’s. This institute now provides a full range of technical education at all levels.

In 1956 the first manufacturing co-operative named Ulgor, was established with 24 employees. Ulgor, which started with the manufacture of cookers, is now a major manufacturer of “white” goods for the Spanish and other EEC markets. For example, gas cookers manufactured by Ulgor captured 8% of the U.K. market in 1985.

More industrial co-operatives were founded. By 1960 some 400 people were employed in 8 co-operatives. The growth in employment was rapid - 3,395 by 1965, 8,570 by 1970, 13,169 by 1975, 18,058 by 1980.

Recession in the 1980’s has resulted in job losses in some of the industrial co-operatives. However there have been no failures of individual co-operatives nor have there been compulsory redundancies. There has been redeployment of workers between co-operatives.

Ulgor, the first co-operative, is still by far the largest of the industrial co-operatives with 2,200 employees. However, there are now 90 industrial co-operatives in all producing a full range of manufactured products including “white” goods, machine tools, earth moving equipment, bicycles, bus bodies, building materials, and electrical components. Total sales for 1985 came to $1,000m., including exports of $250m.

In addition to the industrial co-operatives there are 70 other co-operatives, comprising 40 or so schools in which the Basque language is the medium of teaching, 14 or so housing co-operatives, 6 moderately successful agricultural co-operatives, and a very successful chain of consumer stores.

A major and dominant institution within the whole Mondragon movement is Caja Laborel Popular (CLP), which has an integral role in co-operative finance.

5.5.2 Co-operative Structures at Mondragon

Although Ulgor, the first industrial co-operative was established in 1956 against a background of general disadvantage, it did have the positive benefit of a specific Spanish legal framework for co-operatives. While these laws were framed with agricultural co-operatives in mind, they did stipulate that there should be an identity or near identity between those who work in a co-operative and those who own and control it.

Co-operatives also enjoyed a tax holiday from corporation profits taxation over the first 10 years.

Within the industrial co-operatives at Mondragon each worker is a shareholder with one vote which is exercised at assemblies of shareholders. These assemblies elect Boards of Control for six year terms, with one third of the membership retiring every two years by rotation.

Although an assembly may overturn these provisions, and have done so on occasion, the distinction between overall policy making and executive management is generally preserved.

In general, all workers in a co-operative must be shareholders. Outside shareholders are not permitted.

For each new co-operative member there is a probation period. On successful completion of the probation period the new member must subscribe approximately £2,500 by way of share capital, in the case of an existing co-operative either as a lump sum or over a period not exceeding two years. The initial investment in a new start-up co-operative is about £5,000 per worker.

The actual shareholding of a co-operative is in two categories - ownership by individual workers and indivisible ownership vested in the co-operative as a whole. Twenty per cent of new capital subscribed is transferred to the indivisible fund and individual shares are alloted in respect of the remaining 80%.

The treatment of profits varies but not less than 20% must be transferred to the indivisible funds, 10% must be allocated for social and educational purposes outside of the co-operative, and the maximum dividend payable to industrial shareholders is 6%. The application of these rules means that 90% of the annual profits of most co-operatives are normally re-invested.

With regard to salary/wage levels there are differential limits to ensure that managerial and technical staff of high calibre may be attracted at market rates. In the larger co-operatives the maximum salary/wage differential is 4.5:1

As a general principle, wage levels are kept in line with the wages paid in conventional companies.

5.5.3 Finance

The growth of the industrial co-operatives has been parallelled by the growth of Caja Laborel Popular, the bank established in 1959 to cater for the financial and technical needs of the co-operatives.

The CLP is responsible for finding the funds required to finance the individual co-operatives.

(ii)overall direction through a Contract of Association between the CLP and each co-operative funded by it;

The Contract of Association spells out the key organisational, financial, and other guidelines to which the loan recipient must conform. There is no security for loans but an informal commitment to profitable operation is sought.

The Contract of Association guidelines stipulate a co-operative must agree plans and budgets with the CLP and submit results on a monthly basis.

The CLP also has a core of highly trained professional intervention staff responsible for launching new enterprises and rescueing co-operatives in difficulties.

5.5.4 Outlook

Mondragon has been examined and reviewed by economic and financial experts representing a variety of political philosophies and there is a general consensus that it has been successful.

However, it has coped with the recession of the early 1980’s by sacrificing profits to maintain jobs. It also has to face the same challenges on its home market as the rest of Spanish industry, arising from Spain’s EEC membership. However, the Mondragon co-operatives are generally regarded as being among the more efficient industrial units in Spain.

Mondragon is still a unique development which has not been repeated in either the rest of Spain or elsewhere in Europe.

CHAPTER 6 - CONCLUSIONS

6.1 The Need for a Framework

The first thing that needs to be affirmed is that Ireland already has a strong Co-operative Movement.

Although industrial and service co-operatives have not yet been developed on a significant scale here, there is substantial co-operative activity in other areas of the Economy. We have a large and highly developed system of agricultural co-operatives. The Credit Union Movement has, within a space of less than 30 years, become a major force in personal savings and credit, and there is a significant housing co-operative movement.

We are encouraged by the recent growth here in community and workers co-operatives and believe that the future potential for these forms of enterprise may be seen in what has already been achieved in other European countries.

We therefore fully support the development of small business co-operatives as a new force which can play a significant role in job creation.

We accept that, given the lack of a co-operative tradition in the industrial and service sectors, initial progress will be slow.

We feel that there should be a series of five year plans, agreed between State and co-operative interests, for the development of a movement of small business co-operatives.

The first five year plan should be modest in its objectives and aim for a target of, say, 250 or so small business co-operatives employing approximately 2,500 people by 1992. The achievement of this target would provide a firm foundation for further major development, of say 1,000 additional jobs annually in small co-operatives.

However, not even this modest target will be attained by 1992 within the existing inadequate and incoherent policy framework.

There is now an absolute need for Government, State Agencies and other public authorities, and co-operative representative bodies to provide an effective framework of support for small co-operatives.

In the remainder of this chapter and in Chapter 7 - Recommendations, we set out what needs to be done under the headings of:

We believe that the implementation of our recommendations would directly cost the Exchequer between now and 1992, about £1m. over and above what is already available in State support services for co-operatives. However, the cost of proposed tax concessions for investment in small co-operatives is not quantifiable, but we do not believe that it would be significant.

6.2 A New Co-operative Act

The existing Industrial and Provident Society Acts do not define a co-operative and are sufficiently wide to allow for registration by a wide variety of businesses, including businesses which are not co-operative in character.

The existing Acts also contain a number of restrictions on investment in share capital and borrowing by registered societies, which are not imposed on firms incorporated under the Companies Acts. We believe these restrictions should be removed.

We believe also that the Co-operative Movement, particularly in Agriculture, is already of such significance within the Economy, as to justify specific co-operative legislation. Within this legislation there should be specific provision for industrial and service co-operatives.

Although we believe the case for a new Co-operative Act is overwhelming, the lack of such legislation in itself is not fundamental reason for the failure of industrial and service co-operatives to take root in Ireland on any widespread basis.

It should be remembered that agricultural co-operatives have developed successfully within the confines of the Industrial and Provident Societies legislation.

(i)provide a positive legal framework for co-operative development which would give legal recognition to co-operatives in their own right.

(ii)prevent the legal use of the term “co-operative society” by other than genuine co-operative ventures.

(iii)remove existing irritating restraints in areas such as raising share and loan capital e.g. the limit of £6,000 capital per member.

6.3 Finance for Co-operatives

In a European Parliament Working Document of May 1986 on “the Contribution of Co-operatives to Regional Development” it is stated that “access to financing remains one of the most important problems facing co-operative organisations. The survival and success of new co-operatives depend directly on their financial resources and on the existence of appropriate economic mechanisms. In addition, in rare cases co-operatives gain access to financial resources with which to create equity capital”.

We concur with this assessment and regard it as particularly relevant in Ireland.

Small business co-operatives have very restricted sources of finance such as redundancy money, local fund raising, the Enterprise Allowance Scheme, and the incentives available from the State Agencies.

As the personal resources of the participants in new co-operatives are likely to be extremely limited, they will generally be unable to provide adequate funds for investment in the share capital of their co-operative.

Many of our existing conventional small businesses, particularly in the manufacturing sector, are already under-financed in that they have a weak equity base.

We regard appropriate longterm funding mechanisms as an essential pre-requisite for the development of a successful small business co-operative sector. Furthermore, unless these mechanisms are developed our small co-operatives face a bleak financial future.

We believe that there is a need for co-operative venture funds which would take a minority equity interest in small co-operatives and provide long term loan capital in exchange for co-operative development redemption bonds.

We feel that the Trade Union Movement with 441,000 members in the Republic, the Credit Union Movement, and existing large agricultural co-operatives would be in a position to establish such funds.

We also believe that the tax system should be modified to encourage investment in these funds.

While an Irish co-operative bank would be desirable we do not see a bank organised on a co-operative basis being established for the foreseeable future.

However, we would favour the establishment of a revolving fund which would provide loan finance for small business co-operatives.

In addition, it would be an important function for any new co-operative representative body to establish the bona fides of small co-operatives generally with the banking system.

However, the Committee is disappointed that the Banks have shown little interest in small business co-operatives to date and exorts them to facilitate the development of these co-operatives through support for venture funds and a revolving fund, and through the provision of working capital.

6.4 A New Focus on Management Development

Within the critical area of management development for co-operatives there are two major issues:

(i)the development of relevant management skills within a co-operative, either through training co-operative members or buying the necessary skills from the outside;

(ii)the separation of the day to day executive management function from the democratic policy making structure in the same way as all other working skills.

We acknowledge the usefulness of the existing AnCO courses of 10 and 20 weeks duration aimed at providing management skills for groups establishing co-operatives.

However, management development for and within co-operatives is of such critical importance that it is not just a task for State agencies in isolation.

(i)Management Development Grants are both adequate and seen as the most important element in any grant-aid package;

(ii)State Agency aftercare be focused primarily on ongoing management development;

(iii)the proposed co-operative representative body concentrate on educating co-operative members on the critical importance of good management and the need to separate the day to day management function from policy making within the co-operative. Emphasis on the freedom of management should be a primary aim;

(iv)the proposed co-operative representative body in conjunction with AnCO and selected VEC’s would devise courses in co-operative management;

(v)the exposure of co-operative management here to the operation of co-operatives in selected European countries.

6.5 A Single Representative Body

We have already briefly described the three non-State bodies concerned with the development of small business co-operatives.

(i)ICOS, which does assist with the development of small co-operatives, but is primarily focussed on the larger agricultural co-operatives.

(ii)Co-operative Development Society (CDS), which was established 30 years ago, to foster and support small industrial and service co-operatives but which has no fulltime staff nor other necessary facilities.

(iii)ICTU, which although not a representative body, advocates the development of a Network of worker co-operatives.

Small business co-operatives here, as a movement, are at the very early stages of development. It is critical that they be represented by a strong, unified, and independent umbrella body.

At present, ICOS alone is an effective representative organisation for co-operatives, but mainly in the area of larger agricultural co-operatives.

A similar body, but with a greater urban representation, is required to represent smaller co-operatives.

It is incumbent on the various bodies to come together and devise a suitable structure. The maximum co-operation between those groups that most advocate support for co-operatives should be automatically assumed.

6.6 Improved State Agency and Local Authority Services

There are a number of State agencies working together in the Community Enterprise Programme and they operate within the confines of a joint operating agreement.

Although the State agencies perceive that they are offering a single service, this perception is not always shared by their clients. Indeed, there is an element of confusion among the public with regard to State support services for co-operatives.

We were also struck by a lack of knowledge as to what is available under the Community Enterprise Programme and are concerned that to qualify for the full range of incentives a minimum of 75% of employees in a co-operative must be under 25 years of age.

The Community Enterprise Programme was initiated by the Youth Employment Agency to encourage job creation efforts within communities, and as such, the remit of the Programme is much wider than the development of co-operative businesses.

We feel that the State support for small business co-operatives needs a single focal point, particularly at the start-up stage. The principal focus for project assessment should be the prospect of viability. Considerations such as the age of the participants, whether it is being started in a community context or by unemployed workers or as a ‘phoenix’ situation, should be secondary.

We feel that there is a need for a Co-operative Development Centre within or allied to the State structure which could provide a feasibility study and central information service to prospective co-operative groups.

Moreover, we would see this Centre as the central processing and grant approval unit, on an agency basis, for all start-up or stage one business co-operative projects, and as the co-ordinating unit for State agency aftercare.

We feel that the Irish Productivity Centre with its Board representation of Employers and Unions, and its consultancy and business development services, including worker participation, should be responsible for this unit.

We believe that this type of setting for the provision of State support in a co-ordinated way to start-up business co-operatives would lead to a new emphasis on project and management appraisal and development.

We see this approval and aftercare service applying to the start-up and first year, or so, of operation of a new small business co-operative. We would envisage that the more mature co-operatives would have the same relationship with the existing State agencies, as would any conventional business.

With regard to local authorities we believe that they should have a much more direct role in the development of small business co-operatives and that there is a need for much stronger links between local authorities and the State agencies in the area of co-operative development.

CHAPTER 7 - RECOMMENDATIONS

7.1 Legislation

7.1.1 A New Act

A new Co-operative Act should be introduced which would define a co-operative and set out the legal framework for the structure and operation of co-operatives. The legal definition of a co-operative should be within the parameters of the six principles set out by the 1966 Congress of International Co-operative Alliance, particularly:

(ii)Equal voting rights for all members irrespective of the size of their shareholding.

(iv)Recognition that a surplus or saving out of operations belongs to the members and that no one member should gain at the expense of others.

7.1.2 Forms of Co-operative

The legislation should formally acknowledge the different forms of co-operative including Producer, Consumer, Credit, Industrial and Service, and Community. There should also be specific recognition of a Small Business Co-operative as a trading co-operative with not more than 50 employees.

The new Act should also specifically recognise a Workers Co-operative as a co-operative in which the majority of membership is comprised by the persons directly employed within the co-operative.

7.1.3 Indivisible Funds

There should be provision in the Act for the creation of indivisible funds within a co-operative, which would represent capital of the collective membership rather than individual shareholders.

7.1.4 Outside Shareholdings

Membership of a small business co-operative should generally be confined to individual natural persons.

However, specific provision should be made for co-operative venture funds taking not more than a 25% shareholding, with or without provision for redemption, in a co-operative where this is part of a funding package on the lines of the Mondragon Contract of Association (Pages 44 and 45).

7.1.5 Lawful Use of ‘Co-operative Society Ltd.’

Only a co-operative society registered within the terms of the proposed new Act with the Registrar of Friendly Societies should be permitted to use the words ‘Co-operative Society Ltd.’ as part of its title. There should be appropriate penalties for unlawful use.

7.1.6 Harmony with Companies Acts

The Act should remove existing restrictions on co-operatives with regard to the minimum age of directors, limits on individual shareholdings, and the raising of loans and debentures. The legal commercial requirements on a co-operative should be the same as those on a limited company.

7.1.7 Provision for Sale of Shares by Members

In the case of a small business co-operative the Act should provide for (i) the redemption of his or her capital by a worker member on reaching retiring age and (ii) the sale of an existing member’s capital after a minimum period to a new applicant for membership, subject to the agreement of the remaining co-operative members.

7.1.8 Minimum Number of Persons to form a Co-operative

The existing requirement of a minimum of seven persons to form a co-operative should be reduced to four.

7.1.9 Employment Legislation

The employment rights of a worker member within a co-operative, and related disputes, should be dealt with under the relevant Employment Legislation e.g. Redundancy, Maternity, Protection and Unfair Dismissals, and not under Co-operative legislation.

7.2 Finance

7.2.1 Co-operative Venture Funds

We recommend that the Finance Act 1987 provide for Co-operative Venture Funds which could be organised and sponsored by:-

(iv) a co-operative or grouping of co-operatives, e.g. existing dairy co-operatives;

(i)invest cash for a minority shareholding in a small business co-operative, but not more than 25% of the shares of any co-operative would be held in this way, and there could be an optional provision for the eventual sale of these shares to the individual co-operative members;

(ii)provide long term loan finance by way of redeemable co-operative development bonds at a low rate of interest for terms ranging from 10 to 20 years;

(iv)provide loan guarantees to start-up co-operatives seeking bank loan and overdraft finance.

We would favour larger venture funds on a regional basis which could have access to a full range of business expertise.

A financial package negotiated between a venture fund and a co-operative should be covered by a Mondragon style Contract of Association covering management, organisational, and financial matters and providing for regular reports on performance.

The members of these funds would be individual credit union, trade union, community group, or co-operative members. They would hold shares in their funds for a minimum of 10 years. Surpluses generated by these funds could be allocated on an equal basis to the individual shareholder and to an indivisible reserve.

As an incentive to individual investors we recommend tax relief at the marginal rate in respect of investment in the shares of such funds, subject to an annual upper limit of £10,000 investment.

Venture funds should be free to invest in both manufacturing and service co-operatives.

7.2.2 Revolving Fund

We recommend that a revolving fund be instituted to provide loan finance for co-operative start-ups. The finance for this fund could be made available initially on a goodwill basis from existing large companies, large co-operatives, financial institutions, and other private and public bodies e.g. National Development Corporation.

7.2.3 Enterprise Allowance Scheme

We recommend that the allowance available under the Enterprise Allowance Scheme, currently £50 per week for a married person and £30 per week for a single person and unchanged since 1984, be increased to £60 and £36 per week respectively and, that a second year of the Scheme be initiated on a reducing basis.

Where funds provided under this scheme are intended for investment in a co-operative the allowance for the first year should be £100 per week, irrespective of the marital status of the recipient.

The Committee also recommends greater flexibility in the eligibility of persons wishing to participate in the Enterprise Allowance Scheme, in the case of certain claimants on the live register for 13 weeks who are ineligible for unemployment assistance due to the means test. The Committee advocates that a personal signing on for 13 weeks should suffice and that there should not be a means test.

People who have been made redundant and who can produce a P.45 form should not have to fulfil the 13 week requirement.

7.2.4 EEC Funding

We support the recommendation (5.8) in the European Parliament Working Document on the Contribution of Co-operatives to Regional Development to the effect that the European Investment Bank minimum loan to an undertaking be reduced from 25,000 ECU’s (IR£18,000 approx.) and feel it should be 10,000 ECU’s.

We also agree with the statement that “this minimum sum (of 25,000 ECU’s) is, as a rule, too high for small and medium sized enterprises, particularly co-operatives”.

7.3 Management

7.3.1 Management Recruitment

Where it is not possible to develop appropriate management skills within a co-operative a manager should be recruited from outside but should be obliged to become a co-operative member.

Any Contract of Association or other type of agreement between funding bodies and co-operatives should specify salary differentials for required management skills.

However existing co-operative members should be fully involved in managerial appointments.

7.3.2 Management Development Grant

There should be a specific Co-operative Management Development Grant available to all start-up industrial and service co-operatives with a minimum workforce of 4, provided such co-operatives are regarded as viable. The grant should be £10,000 for 1 year, but should be renewable for a second year.

This grant should be available to help cover the salary of a professional manager or for the remuneration and development of management within a co-operative.

7.3.3 Developing an Understanding of Management

It should be a priority for the proposed co-operative representative body and the State support services to develop an understanding of the concept of management among co-operative members so that the democratic structure of co-operatives is not a hindrance to good management practice.

Annual participation by management Committee members and executive management at specified co-operative management courses should be a condition of State assistance.

7.3.4 Overseas Experience

To facilitate the formation of a core of first class co-operative managers in Ireland, we recommend a limited management secondment scheme to co-operatives in European countries. This scheme would involve AnCO funding the secondment of between 5 and 10 suitable personnel each year to successful European co-operatives in return for a commitment to work in an Irish co-operative for not less than the two immediate subsequent years.

7.3.5 Management Education

One fulltime and one part-time co-operative management course should be provided on an experimental basis by two Regional Technical Colleges in co-operation with AnCO and the proposed co-operative representative body.

7.4 Representative Body

We recommend that there be one - and only one - representative and independent umbrella body for small business co-operatives.

In line with the co-operative principle of self help and the need for independence we believe that such a body should ultimately depend on its members for funding, as is the case with any representative body such as the Small Firms Association, RGDATA, or ICOS itself.

However, we accept that such a body will not get off the ground without a State subvention.

We therefore recommend that a State subvention of £150,000 be allocated for each of the first five years and £50,000 for each of the next five years.

Although ICOS is a fully structured organisation with long experience, its image is rural and mainly related to large agricultural co-operatives.

However, it is the only co-operative representative body with fulltime staff and administrative resources, and for this reason alone should have a pivotal role in the development of a representative body for smaller co-operatives.

We therefore recommend that ICOS initiate discussions with existing small business co-operative support groups and State agencies with a view to putting proposals to Government for the formation and operation of an appropriate representative body, in return for Government support as recommended.

(i)be the recognised channel of communication between small business co-operatives collectively, and Government and other public authorities;

(ii)develop an awareness among members of co-operative principles and the need to match them with sound business practice including good management;

(iii) co-operate with the educational sector in the development of courses relevant to co-operatives;

(iv) keep members informed of co-operative related matters through leaflets, newsletter, and advisory services;

(v)create and maintain an awareness among members of co-operative developments in Europe;

(vi)develop links with banks and other financial institutions to promote an image of co-operatives as standard lending risks.

7.5 State Agency and Local Authority Support

7.5.1 Co-operative Development Centre

We recommend the formation, within the structure of the Irish Productivity Centre, of a central business Co-operative Development Centre, which would serve as the principal focal point for all State support services for business co-operative ventures at the start-up stage.

This Centre would comprise an Approvals Committee, chaired by the IPC and with representation from other relevant State agencies, and the necessary staff resources. In addition to IPC staff, there could be staff seconded from other State Agencies.

The Approvals Committee, would have full decision making autonomy, for the approval of a composite package of grant aid and other support services, already provided by existing agencies, to new co-operative businesses.

We also recommend that the Centre would provide an initial screening assessment for new co-operative ideas and a quick response as to prospects for viability.

Proposals with serious potential for conversion into viable businesses should be assessed on a more intensive basis by way of feasibility study.

We believe that a unit of this type, with responsibility for assisting small co-operative businesses in their early stage of development, including aftercare services, would greatly facilitate co-operative groups and lead to many more new co-operatives.

7.5.2 Removal of Age Restriction

We recommend the removal of the condition that not less than 75% of the workers in a co-operative must be under 25 years of age to qualify for the full range of incentives available under the Community Enterprise Programme.

We believe that incentives for the creation of co-operative employment should apply to all age groups without discrimination.

7.5.3 Local Authorities

We recommend that local authorities become much more involved with co-operative enterprises through the allocation of incubation or start-up premises, and by the promotion of co-operative ventures by existing development staff. Two per cent of the IDA annual construction budget should be earmarked for this purpose.

Foreword