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A Targeted Approach to Worker Co-op Development:
Lessons from Mondragon and Northern Italy

Sherman L. Kreine

PACE of Philadelphia has used an extremely "targeted" strategy for developing worker-owned enterprises in the food business. Our results include a food-brokerage company, a lobster plant and distribution warehouse and a network of supermarkets (the O&O Store) in the Philadelphia area. The O&O stores are formally linked through a second-degree co-operative which sets standards for use of the trademark and tradename, establishes requirements for technical assistance, facilitates deals for goods and services for all stores and serves as a locus for discussion of common problems. Assistance is also being provided to a second worker-owned supermarket network and the conversion of a food-processing plant to worker ownership.

Advantages and Disadvantages

Targeted strategies offer several advantages. First, there is expertise which permits the rapid assessment of prospective deals. Second, by concentrating on businesses which have some similarities, it is possible to build links, formal and informal, and in so doing, create the potential for common problem-solving and economies of scale in the purchase of goods and services.

Targeting also has disadvantages. The flow of quality deals may be limited. Targeting also implies a lack of diversification and a vulnerability to changes in a local economy.

Mondragon

The PACE strategy was created after a careful evaluation of successful international experiences. The most elaborate network of targeted businesses is the Mondragon worker co-operatives in the Basque region of Spain. There, 85 industrial co-operatives employing about 20,000 worker-owners are individually linked through contracts of association with an entrepreneurial credit co-operative, the Caja Laboral Popular, whose board is controlled by representatives of member businesses. These businesses are also linked through several other second-degree co-operatives, which provide social-security benefits, health benefits and unemployment insurance, technical and other education for members, and technological research for the system. In addition, the individual businesses are formed into federations, both geographic and sectoral, to capture economies of scale and to undertake planning and development activities.

Northern Italy

PACE has also learned from the metal-fabricating industry of northern Italy. That system not only includes worker co-operatives, but non-coops in the same industry. Relationships among business which perform various portions of a manufacturing process are facilitated by a proactive trade association. Businesses are encouraged to form consortia to bid on some contracts although they may bid against each other on other jobs. The trade association also provides goods and services to the members, offering the benefits of economies of scale in pricing and in purchasing. The association identifies gaps in the capacity of the system and encourages the creation of new enterprises to fill those gaps. Those new enterprises are, in fact, the "targeted" businesses. Once created, they become a part of the larger system, competing and co-operating as appropriate.

As stakeholders in the northern Italy system, existing worker co-ops have a vested interest in assuring that new businesses succeed. However, there is no independent loan fund for new enterprises. Instead, each of the members in the system participates in a credit co-operative that serves a surety for a local bank loan to a new business. Loans are guaranteed with unencumbered assets of co-op members. That financial stake, and the authority to approve deals, prompts a level of scrutiny which has been instrumental in keeping loss rates extremely low -- less than one per cent.

Management development

The O&O group has also been influenced by the approach to management development in Mondragon and northern Italy. The northern Italy group identifies new managers from existing businesses in the system. O&O has already adopted this practice.

The Mondragon approach is even more elaborate. There, prospective managers are linked with business consultants employed by the Caja who, on a one-to-one basis, help to develop a business plan, and who also serve as a management consultant ("godfathers") as needed, after start up. In addition, the system develops managers through its technical-training school which has more than 1,000 students annually.

Consider also the scale of the financial and entrepreneurial divisions of the Mondragon system. The Mondragon bank has over 1,000 workers, 120 branches and 500,000 customers throughout the Basque region of Spain. As a credit co-operative of the associated co-operatives, its primary loan activity must be with those co-operatives. Its banking division performs all the usual functions of a modern savings bank. Its entrepreneurial division, with more than 100 employees, systematically goes about the process of creating new firms at the rate of five new industrial co-operatives per year. Its functions include the exploration of market and product possibilities, the training of managers and the development with them of specific business plans, the financing of start up costs, the packaging of the permanent loan request to the banking division and the provision of ongoing technical assistance.

A new approach

How do we get from here to there? We must not limit our vision of system participants to worker-owned business. The manufacturing network of northern Italy suggests that it is possible to create a dynamic system through linking worker-owned business with conventionally-structured businesses that share common needs. As the network of businesses expands, the employees and worker-owners become a natural constituency.
The financial institution we develop needs to be depositor-based, like Mondragon's Caja Laboral Popular or some of our most well-endowed American counterparts -- the Community Center for Self-Help credit union in North Carolina being an important example. It may be that we are simply talking about a proactive bank -- an entrepreneurial business-development bank.

On the other hand, perhaps we want something like The Solidarity Fund, developed by the Quebec trade-union movement. Legislatively created, and funded exclusively by payroll deductions of unionized workers, (with federal and provincial tax credits associated), its purpose is business development in Quebec, which may include worker co-operatives and other alternatively structured businesses. It is fundamentally a ventures fund. A major portion of its portfolio must be used for equity, rather than relatively short-term loans. It does not provide conventional banking services to depositors, but rather is obligated to pay out the initial investment plus the mandated return on that investment, at retirement.

Similar approaches more explicitly geared to the development of worker-owned businesses might identify other constituencies of investors, including members of religious organizations, women's organizations and organizations of minority groups.

In summary, targeted development has been extremely successful internationally, and in limited American experiments such as O&O. To take this model further we need to develop a depositor-based financial institution that is also entrepreneurial. That institution should have a governance that is dominated by businesses from the system that it is helping to create.

Sherman Kreiner has been executive director of PACE of Philadelphia for 10 years. He is currently president of the Lanark Development Corporation, a PACE-created enterprise-development organization. For more information he can be reached at PACE 2100 Chestnut Street, Philadelphia, PA 19103 (215)561-7079.

Reprinted from Worker Co-op: The Voice of Economic Democracy in Canada. Worker Co-op is published quarterly. A subscription costs $17/yr; $32/2 years. Write to Worker Co-op, 348 Danforth Ave. #212, Toronto, ONT, M4K 1N8

Published in the Connexions Digest #48, Winter 1989

(CX4721)

 

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