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Finance, as it should be. An innovative social investment model in Messina, Sicily

I am just back from a seminar on technology policies to improve social justice and reduce inequalities. The seminar took place in Messina, on the northeast tip of Sicily: mainland Italy was just three kilometers away, looming across the strait. It was interesting in and of itself, and it ties back nicely onto our work on the Next Generation Internet, which is just starting now. But what was most interesting was the place that hosted us, Fondazione Horcynus Orca. The place felt… utopian. Built around the ruins of a 1st-century BCE Roman watchtower/temple, maintained by ex-inmates of the local mental asylum, meeting place of people in several businesses, from a local energy company to a beer manufacturer. Something was going on. So I asked.

It turns out Messina hosts an “advanced social district” (distretto sociale avanzato). In Italian, “district” carries the idea of production; a tightly integrated network of independent companies, competing on some arenas, cooperating in others (industrial district), of which Horcynus Orca is only a piece, specializing in the arts. As I spoke to Gaetano Giunta, a physicist and member of the small group of friends who quit their jobs to start it all in the late 1990s, I heard him mention values similar to Edgeryders’s own: freedom, happiness, beauty. Business, production and commerce are the weapons of choice, the main paths that lead to being able to uphold them sustainably.

I am only starting to study the district’s fascinating history and organizational architecture, so I will not talk about this now. But I do want to note an investment model mentioned by Gaetano that struck me as super-clever.

In 2010, activity in Messina had reached critical mass. Gaetano and his group were able to attract an largish investment, that went into the startup capital of an Italian social economy vehicle called a community foundation (fondazione di comunità). At that point, they had the problem of investing the money so that this capital would result in a revenue stream for the new foundation to do its job. They did not want to invest in financial assets, as they thought this would betray their mission of developing the local social economy. What could they do?

As they studied the problem, they realized that Italy had launched a plan of incentives to build up capacity in renewable energy generation. This was, in fact, the Italian implementation of a EU program called feed-in tariffs. Such program promised a long-term (20 years) subsidy to anyone installing solar panels or wind turbines.

So, they reached out to the community, and offered to partner up with basically everybody who asked: schools, hospitals, companies, small coops of households. Each partner would receive and steward a cluster of solar panels. The Foundation paid for the installation, and even let the partners keep the energy, to use or sell back to the grid. The Foundation itself gets to keep the subsidy. They ended up installing 2 MW of capacity. For doing all this, they spun off what they call an ESCO (Energy Social Company) called Solidarity and Energy. The ESCO then proceeded to use the foothold gained in renewables to further green the local economy, by pushing for increasing the energy efficiency of the housing stocks, and even inventing solar panels based on organic materials, like discarded oranges (!). They are low-efficiency, but super-cheap, and they come in colors (orange pulp is bright red in Sicily!), so they have a lot of potential whenever designers are involved.

Now, this is a very elegant move. In one go, they greened the economy; created a new local player who would further green it long-term; provided a tangible benefit for the local community; bought themselves a lot of goodwill; and turned a lump of “dead” money into a 20-years guaranteed revenue stream. Finance, as it should be!

My intention is now to spend a week or so in Messina, and really understand how they do it, also as inspiration for the future Reef.

I think I can swing hospitality for a few people, if I ask nicely and if we are ready to give back, for example organizing a small event on new co-operativism and post-capitalist enterprise. Also, they eat like gods. Is anyone interested?

Reposted from Edgeryders

Nation states vs. feral finance: the final battle?

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The financial crisis has broadened the scope of the economic policy debate. Pressed by their respective public opinions, world leaders need new ideas, fast. Despite this, one might be surprised by the way German Chancellor Angela Merkel and French president Nicholas Sarkozy dusted off the idea of a levy on financial transactions. Nowadays journalists are calling it Robin Hood tax, but in the 90s it was called Tobin tax and it was part of the intellectual arsenal of the anti-globalization movement. Even then, it was old news: Nobel laureate James Tobin first proposed it in 1972 (the original formulation was aimed at transactions of foreign currency).

The idea is to tax sales of financial assets (equity and/or bonds and derivatives) with a low rate (0.01-0.05%). That’s meant to be too low to discourage the migration of capital from low-yield to structurally higher yield assets (such as from equity in a stagnating company to equity in a highly profitable one), because such a shift happens only once, and the cost of the levy is quickly offset by the increased yields: this way, the market maintains its efficiency property. But such rate is high enough to discourage speculation, that is based on buying and quickly reselling the same assets.

The main practical problem with a Tobin tax is that, unless it is introduced everywhere at the same time, speculators can elude it simply moving to a financial market that does not levy it. In fact, some variants have been tried out in Sweden in the 80s. Results: low revenue, a sharp drop in transaction volume and eventual migration of many of the most active titles from the Stockolm to the London stock exchange. The tax was eventually abolished. So it does not work, right? Why bring it back into the debate?

It’s not quite that simple. It (probably) does not work to stop speculation and generate fiscal revenue. But it could work well for a different goal: driving the more instability-generating fringes of the financial sector (the same ones that make money off that instability, as Nicholas Taleb reminds us) off the country. Their flight can be painful: these are wealthy taxpayers, who supposedly bring prosperity. But it also could be liberating, because the financial sector has become politically very powerful: this (1) makes it very difficult to make economic policy, because the super-rich veto any move that does not imply benefits for them (as Nobel laureate Joseph Stiglitz reminds us); (2) enhances economic inequality, exasperating the non-super-wealthy 99% of the population; and finally (3) it is not even clear that having these rich guys around does bring much prosperity. They sure don’t pay much taxes: Warren Buffett recently declared that his tax rate is lower than his cleaning lady’s.

Are we looking at a cultural shift? Granted, the man in the street never trusted finance, and never understood it. But this is news to me: two world leaders of the standing of Merkel and Sarkozy aligning with people like tax expert and progressive blogger Richard Murphy – who applauded their joint proposal as “a welcome and overdue move […] if the feral banking economy is to be brought under control” (with the Guardian’s blessing). Why, in the 90s Attac’s militants campaigning for the Tobin tax during G8 meetings were treated as a disturbance by the police forces of those same states.

I am tempted to read this story as the final battle between two different organizing principles, nation states and global finance. Am I seeing ghosts?

Financial innovation for social business: what are the risks?

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Antonella Noya all’OECD (grazie!) mi ha passato un loro rapporto, The Changing Boundaries of Social Enterprises, in cui si cerca di fare il punto sugli ultimi dieci anni di impresa sociale nei paesi industrializzati. Sono stati anni importanti per questo settore, da tutti i punti di vista: di crescita e strutturazione, legislativo e anche finanziario. Da quest’ultimo punto di vista un riassunto potrebbe essere questo: le imprese sociali sono sottocapitalizzate, e stentano in particolare ad accedere a strumenti finanziari diversi dal prestito (loan) e dal contributo (grant). Molta innovazione finanziaria ha cercato di risolvere questo problema. Antonella Noya at OECD (thanks!) pointed me to their report The Changing Boundaries of Social Enterprises, in which they attempt to render the past ten years of social enterprise in developed countries. It’s been an important ten years for this sector, from all points of view: growth, legislation and finance too. From a finance perspective, an executive summary could as follows: social enterprises are undercapitalized and find it difficult to access financial instruments other than traditional loans or grants. A lot of financial innovation was thrown at the problem.

Il rapporto OECD fa un elenco impressionante: venture philantropy, prestiti “pazienti”, piattaforme di crowdfunding à la Kickstarter, indici per misurare la performance sociale degli investimenti come i Dow Jones Sustainability Indices e così via. Tutto bene? Sì e no. Sì, perché il problema esiste e si sta cercando di affrontarlo. No, perché si stanno facendo cose che ricalcano un po’ troppo da vicino la precedente ondata di innovazione finanziaria — quella, tanto per capirci, che ha portato alla crisi globale del 2008. The OECD report has an impressive list: venture philantropy, “patient” loans, crowdfunding platforms à la Kickstarter, social performance assessment tools like the Dow Jones Sustainability Indices and so on. All’s well then? Yes and no. Yes, because the problem exists and is being looked into. No, because it is being addressed in a way which is a little too reminiscent of that other wave of financial innovation, the one that gave us the 2008 global meltdown.

Considerate Blue Orchard. La loro idea è semplice: mettere in comunicazione gli investitori istituzionali (per esempio i fondi pensione), che vogliono comprare prodotti finanziari etici, con il microcredito. E come si fa? Per cominciare si fanno molti microprestiti. Ciascun prestito corrisponde a un attivo nel bilancio del microcreditore. A questo punto il microcreditore prende tutti questi piccoli attivi di bilancio, e li usa per garantire l’emissione di un’obbligazione (cioè uno strumento finanziario derivato da quello primario, cioè il microprestito) che poi rivende all’investitore istituzionale. Fatto! Quest’ultimo ha fatto un investimento etico senza bisogno di imparare a distinguere tra loro i microprestiti e i microcreditori. Per contro, l’istituzione di microcredito ha reperito liquidità aggiuntiva, e può fare altro microcredito. Perfetto, no?Consider Blue Orchard. It’s a simple idea: connect institutional investors (say, pension funds) wanting to invest ethically with microlending. How does that work? It begins with some institution making microloans. Each of them creates an asset in the balance sheet of the microlending institutions. Now this microlender takes all of these assets, packages them up and uses them as collateral to back a bond (which is a derivative product, its primary being of course the microloans) which he then sells to the institutional investor. And it’s done! The latter has been enabled to invest ethically without actually having to be able to tell which microborrowers to lend to. At the same time, the microlending institution has gained extra liquidity, and can go on to make more microlending. Great!

Non necessariamente. Questo processo in finanza si chiama cartolarizzazione: il suo effetto ultimo è quello di allontanare il debitore dal creditore finale. Prima della cartolarizzazione i mutui casa venivano concessi da banche locali, che conoscevano il debitore ed erano ragionevolmente in grado di valutarne l’affidabilità. Se quest’ultimo si trovava in cattive acque, la banca locale faceva il possibile per consentirgli di ristrutturare il debito: in fondo si trattava di un cliente e di un membro di quella comunità, ed era interesse della banca che la comunità che serviva fosse il più prospera possibile. Con la cartolarizzazione, però, il mutuo del signor Rossi viene impacchettato con altri in uno strumento derivato, e rivenduto a un investitore non locale: se va bene un fondo, se va male un hedge fund molto aggressivo. Appena Rossi ritarda con un pagamento, questo investitore non ha nessuna ragione di essere comprensivo: farà la cosa che gli conviene nell’immediato, visto che non partecipa alla comunità locale in cui Rossi vive. Cosa faranno i fondi pensione che comprano i prodotti Blue Orchard se dovessero trovare che i rendimenti sono troppo bassi? Se decidono che devono rientrare immediatamente dei loro crediti, quale sarà l’effetto di questo rientro sul microcreditore? Può essere costretto a rientrare a sua volta, compromettendo il beneficio sociale di avere investito sul proprio lavoro?Or is it? The process described is called securitization. One of its effects is to separate the borrower from the final lender (in this example the pension fund). Before they got securitized, home mortgages were issued by local banks, that knew borrowers personally and could assess their creditworthiness reasonably well. If they got it wrong and the borrower found it difficult to repay the debt, the bank would do its best to get him back on track, possibly restructuring her debt: after all, she was a client, and lived in the same local community as the bank. The more prosperous the community, the better things were for the bank. After securitization, all this changed: now John Smith’s mortgage is repackaged and sold to a nonlocal lender — a pension fund at best, a very aggressive hedge fund at worst. As soon as Mr. Smith starts falling behind with his payments, this investor has no reason to be understanding: it will try to maximize its immediate gain, as he has no stake in Smith and his community’s long-run prosperity. What will the pension funds that purchase Blue Orchard’s products if they find that the returns are too low? If they decide to exit fast, what will the consequences be for the microborrowers? Could they be forced to pay their debit back or lose their assets too? Could this wipe out the social benefit of the poorest of the poor investing in themselves?

Discorsi simili si possono fare per i “mercati di capitale etico” in via di collaudo in diversi paesi, come ETHEX nel Regno Unito o la Bolsa des Valores Sociais in Brasile. Il mercato azionario che conosciamo ha portato molti capitali alle imprese for profit, al prezzo di indurle a una prospettiva di breve termine: un buon risultato trimestrale è fondamentale per non perdere la fiducia del mercato. Cosa succederebbe alle imprese sociali le cui azioni (sì, alcune emettono azioni) fossero scambiate alla borsa di Londra o New York?Similar questions can be asked for ethical capital markets being rolled out in some countries, like ETHEX in the UK or Bolsa des Valores Sociais in Brazil. The stock market as we know it brought a fresh stream of capital to for profit enterprises, but at the price of making them focus away from long term growth and onto quarterly results. What would happen to social enterprises once their shares (yes, some do issue shares) are traded in Wall Street or London?

Sono domande inquietanti. Ma fare finta di niente sarebbe peggio: non abbiamo scelta se non cercare le risposte.These are unsettling questions. But looking the other way would be much worse: we have no choice butlook fo the answers.