FINANCING ESTABLISHMENT AND DEVELOPMENT
The main reason for the need for larger amounts of money in a commons initiative is to acquire assets – infrastructure. We call the infrastructure capital as it is, unlike labour and inputs, something that is used in the process of providing services but not used up. It will last many years and the cost for this infrastructure can be allocated over time. The financing of this infrastructure can be allocated over time too, being gradually paid back over the life-time of the infrastructure.
The money can come from the members of the community, or from outside; (you will hear the term foreign capital in this context).
The diagram above shows how revenue is used to pay wages and inputs as well as diverted to cover payments to owners and to service debt.
There are two main ways to get larger amounts of money into the organisation: as pre-paid fees and charges for service, as loans from owners, members or non-members, and as shares in a limited company or membership share in a cooperative.
Easiest to issue are pre-payment bonds. For example, a cooperative wanted to start a bakery. They asked for loans of about 300 Euro as pre-payment on bread. Bond owners then got their investment back as bread for 300 times 1.06 Euro. The dividend or interest on the loan was paid back as bread.
The main use of shares is to make money when you sell them. However they can be used aggressively(*) offering benefits to shareholders.
The diagram below shows the various forms of organisation and the kinds of investment instruments open to them.
We provide just an overview here. For your initiative you will need to research further what applies for the laws of your country, local rules and the design of your commons initiative.
*Aggressive shareholding or associate-ship means accepting that solely financial returns are uninteresting, rather ownership provides opportunities to realize personal goals like learning how to do something, learning about something, making a social impact, gaining access to goods and services at competitive prices, socializing in certain circles etc.
Capitalization of resources
Big thanks to Chris Cook who has pioneered the approach of capitalizing assets.
Let us say that you want to invest in a commons but have no spare money to put in – but you do have a warehouse (or truck, or web hotel, or advertising agency). You can use the service the warehouse offers (i.e. warehousing goods) to invest in the project.
You will need to defer some or most of the payments you normally get for your services. On the other hand you will be able to get a regular income stream.
You enter into agreement with the commons initiative that you will provide your service up front, and be given a regular share of the revenues when they start to flow in. The amount of the share is regulated by contract and requires that all parties are transparent in their dealings.
the advantage to the commons initiative is that they do not need to find money to acquire the service and you as contributor get to invest in the project with your resources and gain long term returns.
Let us say you have money to invest in the commons.
This is especially useful to the commons as they need to purchase infrastructure capital before they can start production. But you need a return on your investment. Chris proposes an agreement whereby your input of capital is paid for by a share (nth) of the returns. Illustrated below as capital lenders, those who use the initiative pay a fee and the more who use it the higher the income and the larger your nth share becomes.
Chris often illustrates this approach with a diagram similar to the one below.
Following the money flow from the bottom, entities provide money, assets or competence to the commons and share in return a proportion of the income.
Transparency is assured through the mutual governing body.
One benefit of this type of approach is that those who put money into the commons initiative share the risks and rewards. A bank that lends money will require interest whether the operation goes well or not.
Typical questions that a prospectus will answer on this topic include:
- What capital infrastructure is needed?
- How will you finance the acquisition of this infrastructure?
- Who will provide the money?
- How will they be remunerated?
Capital Partnerships as described in the P2P wiki