The place for co-ops in our economic recovery

In the months ahead, we will start to see the impact of COVID-19 on small- and medium-sized businesses as government subsidies taper off. While the timing and extent of this tapering remains contentious, it is reasonable to say that ongoing dependence on emergency measures, such as Jobkeeper and Jobseeker, is unsustainable for the economy and undesirable for most businesses.

SMEs will be fundamental to recovery, and strategic, thoughtful support of their endeavours must be part of any plan Australia undertakes. We cannot rely on corporate Australia alone to drive returns and create jobs; we need a recovery that stimulates small business to become medium-sized business and we need medium-sized business to step into the void to create jobs and stimulate regional economies.

At the same time, we want SMEs to feel secure enough to invest in innovation and research that will help grow new industries to further Australia’s recovery. The Federal Government’s Modern Manufacturing Strategy, announced this morning, recognises both the importance of SMEs to our economic prosperity and stability and how critical innovation will be to our success.

The co-operative model can provide a significant contribution to the growth of medium and larger-sized business. They bring together local industry to scale sustainably and grow strong, sustainable businesses that distribute returns to members and the local community. To realise this potential, co-operatives and mutuals need the investment in business support infrastructure that the government’s Strategy can provide.

Building the middle

The problem, as recent studies have demonstrated, is that small businesses experience an inevitable ‘ceiling’ to their growth when they hit around 20 employees, likely because a capital investment would be required to spur these businesses onto the next level. The pressing issue of insolvency protections ending, and the tsunami of business closures predicted, also hangs over businesses working hard to stay afloat. So, how can small businesses steady their own foundations while attempting to bridge this gap? They can form a collective in which they can maintain independence but operate in their market as a much larger organisation – becoming a co-operative.

Co-ops reduce the cost of doing business and mitigate risk for member-owners. They do this by sharing costs, and by pooling their produce together so there is one transaction, instead of many. When they market their goods, the pricing, selling and shipping costs are shared, instead of being multiplied many times.

For members, the co-op offers the opportunity to grow in a sustainable way, reducing both the cost of operating and the risk of innovating, all while creating local jobs and uplifting local supply chains. Co-ops leverage the benefit of scale without undermining autonomy, diversity and individual relationships.

Proof of the success of the co-operative model can be found across the country and in virtually every industry in Australia, from banks and credit unions, dairy farms and fisheries to carshare services, micro-breweries and general stores. The largest amongst them has a $4.5 billion turnover each year and is comprised of nearly 4000 members who are also small enterprises.

One of the limiting factors for co-ops and mutuals for many years was the perceived inability to raise external investment capital without losing member control. During Scott Morrison’s time as Treasurer, this restraint was addressed through the introduction of Mutual Capital Instruments (MCI) allowing co-ops and mutuals to actively seek capital investment that can support the pursuit of new revenue streams, process innovation and technology upgrades, while retaining the integrity of the co-op model and the ‘one member, one vote’ ethos that underpins it.
 

Co-operative clusters

The co-op business model can bolster the number of medium-sized businesses while creating local jobs in regional communities. It can also help reinvigorate Australian manufacturing. The Business Council of Co-operatives and Mutuals’ (BCCM) Federal Budget submission presents a plan to leverage the co-operative business expertise of BCCM and the nation’s leading co-operatives to support more SMEs to collaborate, scale and contribute to the economic recovery.

Instead of funding businesses directly, BCCM will deliver the infrastructure that Australian co-ops and mutuals need to work together, expand their operations and increase profitability after COVID.

The plan recommends the establishment of two co-operative business development clusters around strong existing co-ops. The clusters will build business support infrastructure (investment finance, innovation support, professional services, labour sharing and other capacity building) that all co-ops and SMEs wanting to join them can benefit from. 

International examples of this approach are found in manufacturing and industrial zones across Europe. Italy’s Emilia Romagna region in the north of the country, once an economic backwater, now boasts Italy’s most prosperous regional economy on the back of its agricultural co-operative cluster. In Spain’s Basque region, the Mondragon Corporation is a consortium of more than 264 industrial firms employing 81,000 workers. It’s Spain’s tenth largest industrial conglomerate with turnover of 12.2 billion Euro.

In Australia, the complexities of running a manufacturing business through bushfires, drought, floods and now COVID-19, are best understood by individual businesses at the coalface. In a co-op, this knowledge and experience does not get lost amongst competing shareholder concerns – it is the very purpose of their existence. They exist to co-operate for the benefit of the group.