Growing pains | Co-ops require more than member financing: official
QUEBEC CITY — The billion-member worldwide co-operative movement must reconsider funding sources as co-ops look for financing to fuel the growth they need, says a groundbreaking international study.
But it will be a delicate balance for co-ops between continuing to serve the needs of their members and their social economy values, while making investment returns attractive enough for outside money interests.
“Within the co-operative movement, there is an increasing prioritization on access to capital,” Chris Harvey, global financial services sector leader for financial service firm Deloitte, told an international co-operatives summit held here Oct. 11. “This has become increasingly significant and difficult for cooperatives since the financial crisis (2008-09).”
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He presented a report “Funding the Future,” commissioned by the first international co-ops summit, that warned the traditional co-operative financing model of depending on member equity and investment plus debt financing no longer is sufficient or viable.
“The co-operative business model, while offering the advantages of access to member financing and often impressive customer loyalty, introduces a number of challenges in an uncertain, highly regulated economic environment,” said the report.
“Co-operatives must be true to their mission as they seek to achieve the greater financial flexibility needed to drive growth and compete successfully.”
The Deloitte study included a survey of senior officials at 36 large co-ops around the world.
Eighty-seven percent said they expected to have difficulty in the future finding funds for growth and half said they “expect to use nontraditional instruments to meet their financing needs.”
The report said money funds that are nervous about low-returning investments since the financial meltdown are a particular problem for financial co-ops.
Many co-op leaders said they are uncertain about being able to deal with another financial crisis.
“The concern is especially prevalent in the capital-intensive agricultural sector and the financial market-dependent banking and insurance sectors.”
Yet Harvey said the larger co-ops, which are anxious to grow and compete, have no option but to begin considering how to engage with non-co-operative capital funds, whether it is through more creative debt financing arrangements or development of a way to allow outside investors to buy shares without compromising the positions of loyal members.
“There comes a point in the growth of every co-operative when your members can no longer fund the growth needed or are not willing to do so,” he told a news conference after presenting his report to the summit, which attracted 2,000 delegates from around the world. “This really is one of the most critical and toughest issues facing the movement.”
It is an issue that Canadian co-operatives have struggled with for years. Part of their proposed solution has been to lobby for a co-op investment tax credit to attract funds.
Harvey said one of the most promising and innovative proposals is to develop a system of “hybrid shares” that could attract outside investors and co-op members alike.
But it would be a delicate balance between the traditional investor expectation of strong and rapid return on investment and the traditional co-op philosophy of lower returns but long-term services to members and society.
“It will require education, including making the argument that short-termism hasn’t served capitalism all that well,” said Harvey.
