Unions – the Big Society is you

By Chris Cook

“Unions set to fight plans for £6bn cuts” was the front page news of the Financial Times yesterday, May 24th, in the aftermath of the well-trailed and assiduously leaked initial skirmish in what we are told is to be a long and multi-billion War of Austerity pitilessly fought out in the next couple of years.

Leaving to one side the question of whether austerity is necessary at all, it seems to me that the more imaginative of our union brethren might now realise that the government has set up a Maginot Line that they can and should simply route around to re-take the ground long since abandoned to the historic enemy.

Let’s have a look at what a new generation of networked unions might be able to do for their memberships now that the Tories and Lib Dems have opened up a new front – the so-called “Big Society”, which is seen as a threat but it is in fact an opportunity. A Big Society is a pretty good way of describing what unions used to be, rather than the Big Organisations they have become in a hundred years of attrition.

The Co-operative movement, and proponents of employee ownership, know that there is in fact a middle ground between State = Public and Private = Plc. Unfortunately, the self-evident advantage of a mutualist model which does not pay returns to unproductive shareholders, has been hamstrung for 150 years.

This is because Co-ops have always seen fit to use what are to all intents and purposes genetically modified versions of the Company legal form-such as Friendly Societies, and Industrial and Provident Societies, whose very names – only updated this year – were redolent of cloth caps and whippets.

The problem with all companies – neutered or not – is the conflict of interest known as the ‘principal/agency’ problem between the owners of the enterprise and the people who do their bidding.

There must be a better way, and the unintended consequences of the simplest legal form ever invented – the ‘open’ corporate body named the UK Limited Liability Partnership enables it.

Unions may now facilitate their members collectively – using whatever legal form works, but possibly a simplified form of Company Limited by Guarantee – forming Co-operatives. Then within a partnership framework agreement skilled union negotiators should be able to facilitate agreements between a staff co-operative and a management co-operative of equitable revenue-sharing arrangements.

But the key question remains. How can they fund the necessary fixed assets and working capital? As we know this MUST come either from the long suffering taxpayer or from shareholders.

Well, actually, no.

In Canada and Australia before that, gross corporate revenues were routinely put into ‘Income Trusts’ and Units were created and sold to pension funds who could not get enough of them because they were getting their hands on the revenues before the management did. In recent years partnership-based structures such as Master Limited Partnerships have shared revenues between investors with limited liability and no management control, and managing partners with unlimited liability and all the control.

These new ‘alternative’ investment mechanisms are, one way or another, as the man said “Close, but no Cigar”, each having its own drawbacks. Using the simple but radical UK LLP as a framework for investment opens up new possibilities for unions to outflank their old adversary and to win the peace.

Let’s have a look at some of these possibilities.

Venture Communism, and a Living Wage

This was essentially the approach of the perhaps the most fervently left wing members of the most fervently left wing union, the NUM, when they took over Tower Colliery in South Wales in January 1995 with their redundancy money.

It is now possible for union members to conduct staff buyouts with a new approach to financing by involving stakeholders as ‘Capital Partner’ investors.

This is possible in two ways: firstly investment in productive assets – such as the Royal Mail’s property assets – on the basis that the revenues gained from their use – and whether or not they remain in Royal Mail use is irrelevant – are shared proportionally with the property occupiers.

The City of Glasgow now has five municipal partnership LLPs all of which are funded conventionally, as far as I know. But I am aware of a > £1bn Capital Partnership in the hotel business: where the gross revenues were shared between the investors and the hotel company. More recently we are now seeing how at least two major store chains have recently filled pension Black Holes simply by transferring all or part of their properties to their pension fund and leasing them back.

Why should not the Royal Mail pension fund fill their pension Black Hole, not by using conflicted lease agreements but rather by sharing – via Capital Partnership – in the gross revenues from the use of assets which remain permanently in public stewardship?

The second mechanism for stakeholder funding is to sell production forward – through creating units redeemable in production – thereby receiving an interest-free loan. This would work beautifully for power utilities in particular, but there are many and intriguing variations if you put your mind to it.

A variation on both could be to enter into a partnership with a supplier. So when BA staff plan their buyout of BA, they might consider approaching a supplier of jet fuel – one of their riskiest costs – with the possibility that a jet fuel supply might be exchanged for a share in gross BA revenues. There are oil producing countries who might find such an Islamically sound model attractive.

These mechanisms enable union members to out-compete conventional buyers, who demand greedy >20% IRR (internal rates of return) and fund themselves with interest-bearing debt. In a Capital Partnership there is no capital repayment and no compound interest – just a Capital Rental paid for as long as capital is used. Unitisation of production is also interest-free. This means that a capital partnership will in all circumstances out-compete a debt-funded buyout.

A Capital Rental may be set at a reasonable level, because there is no risk that the capital will not be repaid, since Units are a form of Equity….just not Equity as we know it. Because a Capital Rental is reasonable it is affordable; because it is affordable it is more likely to be paid; because it is more likely to be paid it is less risky and; and because it is less risky it justifies a reasonable rate. QED.

Affordable Homes

My Danish grandfather was a master carpenter – and indeed we still have his ‘master-piece’ chest of drawers in the family. As a Member of the craftsman’s guild – essentially a union – he lived most of his long life in a spacious flat owned by the guild and subsequently in the guild’s superb sheltered accommodation.

Using the new possibilities for ‘co-ownership’ of property I have outlined on Labour List there is no reason at all – other than the odd tax wrinkle – why at least a part of a union member’s pension contributions should not be invested – at a reasonable, index-linked rate of return – in the capital invested in the house where he lives, rather than in (say) an Icelandic bank, the stock exchange casino, or at nominal rates of interest on bank deposits or government debt. This enables not so much a right to buy as a right to co-own, and union member occupiers could invest – as a perk of their work – via their pensions; and also voluntarily, either by simply ‘paying rent forward’ in cash, or even by doing the maintenance themselves – Sweat Equity.

Frankly, this co-ownership possibility alone would be a reason for many people to join a new generation of revitalised unions.

Credit where it’s Due

We are accustomed to thinking that banks are the source of credit, but this is rubbish – what they provide is a framework of trust, backed by a small amount of resources. It is our capacity to work which is the source of the credit which enables goods and services to be paid for, and for productive assets to be built. Once productive assets are created – their use value, and not a bank’s manufactured claim over it, is then the true source of long term credit.

If there were a way in which our IOU could be accepted in payment by suppliers we would not need bank credit at all. A suitable framework of trust could in fact originate from a simple Guarantee Society agreement which would be an integral part of union membership and form an additional ‘common bond’ between those members who wished to join. Guarantee Societies already exist in 18 European countries and enable businesses to club together to mutually guarantee bank borrowing, but this is now in short supply with or without a guarantee.

Through their consent to a Guarantee Society agreement, union members could enter into a mutual guarantee of credit advanced to their members by partner businesses. This Guarantee Society agreement could simply be backed by a provision made by both suppliers and union members into a default ‘pool’ held by a neutral custodian, and managed by a banking service provider, who would receive a service charge to cover agreed costs, plus a performance-based bonus related to default experience.

The result would be functionally identical to an interest-free, but not cost-free, credit line available to union members from partner suppliers. It is essentially an overdraft available at the union member’s option, not that of a bank.

So finally, I say this to unions. The above possibilities are only a few of those now open to you in a networked society. Stop fighting the last war, and demonstrating what you are against, and show us what you are for.

The Big Society is You.