Co-ops and the New Social and Health Services Market (1997)

This document has been made available in electronic format
by the International Co-operative Alliance (ICA)
April, 1997
(Source: ICA Review, Vol.90 No.1, 1997, pp.11-17)

Co-ops & the New Social & Health Services Market
by Carlo Borzaga and Alceste Santuari*

One of the characteristics of the recent evolution of the welfare system in
Western countries is the increase in the private supply of social and health
services, mainly provided by non-profit organisations. Both the number of
these organisations and their employment have been increasing over the last
years. This evolution has also encouraged the growth of new organisational
forms, combining the advantages of private management with a clearly
unavoidable commitment to the common interest. Among the newest
organisational forms there is also the co-operative one. This represents a
novelty per se to which may be added the transformations that the co-ops
engaged in these areas have undergone. In particular, it is worth mentioning
the change in the membership which progressively tends to consists of
stakeholders bearing different interests. Associations have also been
concerned with a similar process. 
Such change in membership has led to an organisation which can be
identified as "multi-stakeholder" and increasingly takes the co-operative
form. The paper intends to analyse the evolution of such form, with
particular reference to Italy.

Did a new organisational form arise in the provision of social services?

Until the '80s the private provision of social and health services was
organised mainly through foundations in the USA and by associations in
Europe. The growth of the sector caused an expansion and a strengthening
of foundations in the USA, whereas in Europe it led to a change in the
structure of the organisational mix with a reinforcement of the economic role
of association and the entry of co-ops into the sector.
Largely spread in the civil law systems, especially in France and Italy, the
association was born as a 'moral entity'  for idealistic purposes, originally
even hampered by the authorities of the State1 and rigidly separated from
companies at large. Accordingly, in the beginning, the association was
explicitly forbidden to carry out commercial and productive activities, thus
being distinguished by the absence of a continuous productive or
speculative activity. But progressively, with the growth of demand,
associations have been allowed to manage the production of social services,
but without being granted a full entrepreneurial status.
Unlike the association, the co-operative society is considered by all legal
systems as a firm with a mutual purpose. But since co-ops are often
established by groups of people who find some difficulties on the market,
they are generally regarded as enterprises with a specific social purpose and,
in European countries, they are generally limited in the distribution of
profits. Traditionally, co-operatives were characterised by the coincidence
between member and beneficiary and a membership composed by only one
category of stakeholder (workers,  farmers, or consumers). 

Moving from these legal forms, in many European countries, during the
1980s, new non-profit organisational typologies emergedin the provision of
social services. Associations have increased their involvement in the
production of services, often even beyond the limits permitted by the law.
Co-operatives, on the other hand, especially in Italy and Spain, have
broadened their range of service activities by working also, and often
mainly, in favour of beneficiaries other than their members. The associative
and co-operative forms have evolved quite markedly towards a new model
of organisation which displays the following characteristics:

a)	it produces various types of welfare services by explicitly pursuing a
goal which differs not only from profit but also from economic benefit
deriving exclusively for a specific category of members;

b) 	increasingly  it has  a membership which consists generally of
diverse stakeholders: users and workers employed in the organisation, or
workers and volunteers, or all three categories or, in addition, benefactor
members and representatives from public bodies;

c)	it undertakes democratic management which ensures participation by
the stakeholders in all decisions;

d) 	it does not necessarily adopt the non-distribution constraint,
although it can usually distribute profits only to a limited extent.

Whether it adopts the legal personality of an association or a co-operative - a
decision which depends on national legislation on such matters - this new
organisational form may be called, as has previously been stated, a 'multi
stakeholder organisation' in order to emphasise that it is characterised
principally by the heterogeneity of its membership.

Multi-stakeholder organisations producing social services for collective
interest operate in many European countries.3 In some countries (France
and Belgium), multi-stakeholder organisations mainly assume the
association form, although some co-operatives have been developing. In
other countries, like Spain and Portugal, where co-operative legislation is
more recent, provisions are made for the organisation of the multi
stakeholder co-operative form to perform only specific activities of
collective interest (helping the handicapped, education etc.). Furthermore, in
other countries where co-operatives are employed in organising social
services, the co-operative and associative forms used are the traditional
ones, especially co-operatives for consumption, work and production. But
there is a clear tendency to involve the workers or the consumers in the
management of the company4. In some cases, these organisations
developed spontaneously, like in the UK5;  in other contexts, they are the
result of a legislative action, like in Italy.
Italian Social Co-ops
The Italian social co-operative society, as provided for by the Act of 1991,
represents an important innovation both at the domestic and international
levels and presents one of the most developed paradigms of multi-
stakeholder organisations. The most significant aspects of social co
operation are the following:

a)	The beneficiary is, above all, the community or particular groups of
disadvantaged people within it even if they are not members6. These
innovative aspects are in line with the content of Laidlaw's report7 which
strongly backed the idea that co-ops should be more open towards the
community as response to the crisis of the traditional welfare state system.
Without denying its entrepreneurial nature, the social co-operative society,
which can be deemed as the natural evolution of the co-operative
phenomenon, has developed in those areas in which the demand for social
and health services is great and strong. In this respect, the social co-
operative movement seems to help the outcome of the crisis of the historical
welfare model.

b)	Membership may consist of different stakeholders such as:

-	members who perform an activity in the co-op and, in turn, yield an
economic utility from such a performance (workers, managers);

- 	members who directly benefit from the specific activity of the co-op
(elderly people, handicapped, services' users);
- 	members who volunteer in the co-op in "a personal, spontaneous
and free manner without any profitable aim" - they cannot be more than
50% of the total number of employed workers according to the Act of 1991.
- 	financing members and public institutions.

The social co-operative can, therefore, be regarded as the prototype of the
multi-stakeholder organisation.

Other  peculiar aspects of the Italian social co-operative societies are:

1.	They can manage two different types of activity: either they can
carry out activities in the area of health, social or educational services or
they can act as firms for professionally integrating disadvantaged people in
the labour market. 
2.	Social co-operative societies are recognised as having particular and
privileged relationships with local and national authorities which are often
ruled by means of special agreements and are granted some tax benefits.

The Act of 1991 does not prevent co-ops from distributing profits but it
provides for a limitation to such distribution. Indeed, the Act states that the
amount of profits to be divided must not be higher than 2% of the rate
applicable to the bonds issued by the Italian Postal Service and that there is
no possibility of distributing any benefits of the assets should the co-op be
wound up. Therefore, social co-operative societies are free to choose
whether or not to divide any profits among their members.
Multi-stakeholder versus Non-profit Organisations
The main characteristic of a multi-stakeholder organization is that it is
usually established and managed in the interest not only of one stakeholder
but of several stakeholders, mainly consumers, workers, volunteers. This
makes it different from profit-making organizations, traditional non-profit
organizations and co-ops which are set up and managed by and in the
interest of only one kind of stakeholder. Such peculiarity gives the multi-
stakeholder organization some advantages, of which we hereby examine
only the most important ones. Multi-stakeholder organisations seem to offer
significant advantages compared not only with profit-making organisations
but also with traditional non-profit ones.

Firstly, multi-stakeholder organisations, from the efficiency point of view,
can perform better than traditional non-profit organisations. First of all,
control over them is exercised by categories of stakeholders, consumers and
volunteers different from those who receive monetary benefits from
membership of the organisation - workers in particular. This should in itself
ensure a certain amount of control over costs, especially when services are
supplied against payment. Moreover, participation by consumers, who are
often also involved as co-producers, reduces production costs by favouring
their direct engagement in production, also by voluntary work, and by
reducing the incentive to adopt opportunistic behaviour. The direct
involvement of workers in management also helps to reduce costs, because
it is thus possible to simplify the system of control on opportunistic
behaviour and to favour flexibility in the use of labour. Also positively
affecting efficiency is the labour provided by volunteers, who contribute to
the organisation's activity without charge and whose participation is often
highly specialised.

Secondly, on the demand side, a multi-stakeholder organisation may be an
efficient response not only to market failures associated with the existence
of information asymmetries but also to the other kinds of failure
characteristic of welfare service production. With respect to information
asymmetry failures, the advantages of multi-stakeholder organisations are
not inferior to those of non-profit organisations. 

The former, in fact, add to the constraint in their ability to distribute profits,
the  active control by consumers through the participation of consumer
representatives in the organisation's membership and administrative bodies.
The particular legal form that assigns a vote to every member prevents
control from being assumed by a few stakeholders, restricts the managers'
decision-making power, and facilitates access to the information required to
monitor the organisation's activities8. Besides ensuring just as much control
by consumers when necessary, the multi-stakeholder organisation also
seems able to cope with other failures that characterise the production of
welfare services, such as those provoked by rationing (of capital for
example), market power, non-rival consumption goods, difficulties in the
transmission of preferences, existence of asymmetries to the detriment of
the organisation.
Two typical cases demonstrating the ability of multi-stakeholder
organisations to deal with specific market failures are the production of
services requiring the involvement of the consumer, and work integration
initiatives for disadvantaged workers. As regards the former case, it is well
known that not only is a social service that involves the consumer different
from the same service without such involvement, but also that certain social
services - especially those for prevention - cannot be produced or are
inefficient if they do not directly involve the consumer. This capacity for 
involvement is one of the prerogatives of the multi-stakeholder organisation.
Work integration initiatives address the failure - of both market and the
government - to guarantee adequate training to the needs of certain types of people. 

Thirdly, further advantages of multi-stakeholder organisations compared
with non-profit ones lie in their better ability to attract resources, mainly
financial, and their potentially greater efficiency. Since multi-stakeholder
organisations are not wholly constrained in the distribution of profits, and
since in some cases they may partly remunerate capital (that subscribed by
financier members or made available by members in the form of loans), they
are better able than non-profit organisations to finance not only routine
activities but also development projects. This capacity to remunerate capital
albeit to a limited extent  - has favoured the development in all the European
countries of financial institutions specialised in gathering ethical savings and
in investing in social initiatives.

Finally, unlike the great non-profit organisations, the multi-stakeholders are
more susceptible to change in demand and to the market entry of more
efficient organisations. Their chances of survival when demand and
profitability decline, or in the face of increasing competition by more
efficient or innovative organisations, is limited by the fact that they are often
under-capitalised and that workers and consumers are sensitive to salary and
price conditions as well as to the quality of services. 

These advantages compared with the non-profit organisation are matched by
relatively minor disadvantages. Two deserve particular mention: higher
transaction costs, owing to the greater complexity of the decision process,
and a lesser capacity to attract donations, owing to the organisation's less
'donative' character. This latter disadvantage, however, does not seem to be
particularly severe: donations, in fact, have never been a significant source
of income outside the Anglo-Saxon countries, and even in the latter their
importance has diminished markedly over the years.

The paper endeavoured to show that privatisation of the supply of welfare
services has been leading not only to an increase in the relative importance
of non-profit organisations in many European countries, but also to the birth
and consolidation of a new type of organisation characterised more by the
mixed nature of its membership than by the non-distribution constraint. This
has created room for the development of co-operatives and more specifically
of multi-stakeholder co-ops, which appear to be better able to respond to the
need for services, taking into account all the economic and social aspects
involved. The institutionalisation of the multi-stakeholder organisation in
the form of multi-stakeholder co-ops has only just begun, and it seems that
too little attention has been paid to its innovative impact. More attention to
its characteristics and potential is required especially by the co-operative


1.	In France, for example, it was only in 1901 that the legislature
passed a statutory act by which associations were recognised as subjects at
law, no longer to be suppressed or destroyed as they had been during the
Revolutionary period.

2.	Nonetheless,  in the literature they are not considered as non-profit

3.	See Social Enterprises: a chance for Europe, CGM-CECOP,
Brussels, 1995 and "The contribution of social enterprises to the creation of
new jobs: the field of services to people", CECOP-REGIONE TRENTINO
Conference, Trento (Italy), 12-13 December 1996; UNITED NATIONS,
Cooperative enterprise in the Health and Social Care Sectors. A Global
Review and Prospects for Policy Coordination, Geneva, 1996.

4.	A. PESTOFF, "Beyond exit and voice in social services. Citizens as
co-producers", in P. 6 & I. VIDAL (eds), Delivering Welfare, Centre
d'Iniciatives de l'Economia Social, Barcelona, 1994 and "Renewing Public
Services and developing the Welfare Society through Multi-stakeholder
Cooperatives", Journal of Rural Cooperation, 1996.

5.	For further details, see R. SPEAR, Social Co-ops in the UK, in
"Social Enterprises: a chance for Europe", op. cit.

6.	Indeed, the Act of 1991 provides that social co-ops are to carry out
their activities "for the general benefit of the whole community and for the
social integration of citizens".

7.	See A. LAIDLAW, Rapporto al Congresso dell'ACI del 1980, in
"Rivista della Cooperazione", n. 5, ottobre-dicembre, 1980.

8.	A. BEN-NER - T. VAN HOOMISEN, "Nonprofit Organisations in
the Mixed Economy", in A. BEN NER - B. GUI, "The Nonprofit Sector in
the Mixed Economy, Annales de l'Economie Publique Sociale et
Cooperative, vol. 62, n. 4, 1991.

9.	B. GUI, "Le organizzazioni mutualistiche e senza fine di lucro. Un
approccio unificato al 'terzo settore'", Stato e Mercato, n. 31, pp. 143-157,
1991. This statement warrants more careful analysis than is possible here:
such analysis would reveal the existence of comparative advantages with
respect to for-profit organisations.

*	Professor Borzaga is Associate Professor  of the Economics
department at the University of Trento. He is President of the Institute  for
the Development of Non-profit Enterprises (ISSAN). Dr. Santuari is
currently the Coordinator of ISSAN. He is also the Editorial Director of the
Journal on Law & Management of Non-profit Organisations published in