Greg MacLeod and Chris Ling
Published August 31, 2009
Three or four billion dollars leave Nova Scotia in investment every year; very little comes back. Practically none is invested outside of Halifax, a buoyant economy. Like most of Canada, private development and government institutions are concentrated in metropolitan areas. The economic and social challenges of smaller communities in Canada are a major problem. Unemployment levels in metropolitan Canada are around 7 per cent. In non-metropolitan areas it is around 20 percent.
Local models for community-based economic development are starting to emerge. The Banking Community Assets (BCA) Group, a community venture finance group located on Cape Breton Island in Nova Scotia, Canada, is one such initiative. The BCA Group was established in 1989 in response to the community’s need for economic development. Greg MacLeod recognized the need for such an institution and led its creation.
The overall purpose of the BCA Group is to generate employment in the local area by supporting businesses that have strong potential for success and that are committed to the local community. A primary consideration is BCA’s ability to repay investment. The organization raises money and invests in businesses that are locally-owned and controlled. Employees are encouraged to invest in and participate in local businesses as well, enlarging local ownership and commitment.
BCA is directly responsible for the creation of over 250 direct and 500 indirect jobs. Over a period of twelve years, BCA became a complex consortium that strengthened the network of community-owned businesses in the local area, as well as providing investment and support for small, privately-owned businesses. Compared to many socially-oriented funds, the BCA initiative is small. The Chicago Shore Bank (http://www.sbk.com/) is worth hundreds of millions and the Québec Solidarity Fund (http://www.fondsftq.com/) is approaching the billion dollar mark. The total BCA portfolio is barely $3 million. What is significant is that BCA is not located in a metropolitan centre. Rather it is located in a persistently troubled economy in transition. The resource-based economy of Cape Breton has been in decline with some of the highest unemployment levels in Canada (12.8% in December 2005 and 17.2% in March 2009 compared with a national average of 5.9% in 2005 and 8.0% in 2009 (StatsCan, various dates)). Venture finance companies and many key agencies of government regarded out-migration as the only “rational” solution for areas like Cape Breton.
BCA was not started by any large organization such as a government, a large labour union, or a corporate business complex. While the BCA founders would have welcomed such support, it simply was not there. BCA is an example of a handful of people accepting the challenge of setting up a community venture finance company with very little backing in an economically depressed area. Another noteworthy aspect is that the founders did not have expertise in finance. It was always a matter of groping along, experimenting with different structures. Eventually, through trial and error, a viable business corporation has emerged.
Each member of the BCA Group has a different governance structure.
BCA Holdings Ltd: is a not-for-profit company. The members are volunteers who are asked to join by the existing board. The members elect the board every year.
BCA Investment Co-Operative Ltd is a profit-making company. It sells common shares to investors every year. These member investors elect the board every year.
BCA Venture Capital is a regular profit-making company. It is wholly owned by BCA Holdings Ltd. The board of directors is appointed by BCA Holdings Ltd.
Initially, BCA waited for opportunities to develop and appear. The group soon found, however, that opportunities seemed to be quite scarce. Hence, a new organization was formed: Cape Breton Innovation Research Centre (CBIRC). This is a joint venture between Cape Breton University and a number of local business leaders who had been active in BCA. The basic idea is that the group seeks out new ideas for business and tries to implement them.
The boards of both BCA Holdings Ltd and BCA Investment Co-operative have made legal management contracts with Cape Breton Innovation Research Centre (CBIRC), so that CBIRC is the operating arm or fund manager for the other two BCA companies.
The plan is that CBIRC will be the only company with staff as the Directors consider that a portfolio under $3 million cannot justify staff. Financial management is controlled by volunteer directors with the assistance of a qualified chartered accountant, who is retained on a fee-for-service basis.
Sustainable Development Characteristics
Community groups in many countries take on public service activities and rightly demand that the government provide financial support for such activities. Most grants provided by government last one year and require annual applications to be repeated. This involves many negatives for community groups. First, the process consumes a lot of energy; worst of all, such groups feel constrained to please government. Second, when governments entered the age of deficits and most grants were eliminated, many community activist groups were disbanded. This is disadvantageous for civil society and the building of social capital, particularly linking, that is, bridging and vertical, social capital, which has been identified as the most critical for communities to move from ‘getting by’ to ‘getting ahead’ (Dale and Onyx, 1995). This was the context in which the leaders in New Dawn (a Community Development Corporation in the Cape Breton region and sister organization to the BCA group) and BCA tried to make their organizations self-sustaining and independent of government favour and budget cycles.
A community-business corporation like BCA is similar to a conventional business from the point of view of most operations. For instance, it must generate enough money to pay expenses and must deal with management and control problems. Iit is profoundly different, however, in many senses. A few of those differences are the following:
- The key motivation is community improvement with profit being a means, and not an end in itself.
- The total BCA complex is not simply owned by shareholders, but operates as a trust in the interests of the local community.
- It is localized, builds on the local community, and is normally not moveable and not subject to being “bought out.”
- It depends upon a high degree of volunteer involvement.
A criticism of the modern business corporation is that it has no loyalty to any one community, and in an increasingly globalized world, operates more and more independent of place. It is an institution that is self-contained. National corporations have developed into multi-national or international corporations that are sometimes bigger than most national governments (and are subject to no one particular government). When the conditions in one country become less profitable, the modern corporation simply moves to another country.
A community business corporation is rooted in a particular geographic location; it is place specific and is resistant to buy-outs from outside corporations. It is a debatable question whether it is possible to have business corporations so tied to one geographic area and still remain competitive. Most large corporations will vigorously oppose such a structure in the interests of business flexibility. Corporations like Mondragon in Spain (http://www.mcc.es/ing/index.asp), and smaller ones like New Dawn and BCA in Cape Breton, have disproved the theory that successful corporations have to be place neutral, and indeed, may be a critical economic diversification strategy by local communities to counter-balance the effects of exogenous shocks imposed by the global market place. Because of these experiences, a new economic theory is evolving called “place-based development” (Hudson, 2000; Williamson, 2002)
Critical Success Factors
The board of BCA Holdings Ltd has agreed that any director elected to the board of BCA Investment Co-operative also sits as a board member on BCA Holdings. Upon the advice of investment specialists, both boards have agreed to maintain the management contract with CBIRC for a minimum period of five years. Existing directors of CBIRC have agreed to remain as directors for five years. These measures were intended to protect the BCA complex in its early years, and to ensure longer-term stability.
The development of the BCA model was built on learning from other successful examples of community development corporations such as Mondragon in Spain which integrated different elements of business: production, retail, research, university education, and finance.
The creation of a partly professional board contradicted the accepted wisdom in community development circles on obtaining widespread community representation in a “grass roots” fashion. Investors, however, do not have confidence in amateur boards. Most people want to know who will control the money. Greater credibility is established if successful, experienced business people are seen to be making the decisions. If a businessperson refused to invest at least $5000 in BCA, there were two possible reasons. If he or she could not afford it, that would indicate a lack of business acumen. If the person were successful and refused to invest, then that would indicate a certain ‘meanness’. The technique of asking people to “put up or shut up” was quite an effective way of identifying and selecting board members consistent with its values and operating principles.
Its investment strategy, based on simplicity and risk reduction:
- the company must be commercially viable;
- the company must be seen as improving the local community good in some sense;
- the company must be locally owned and controlled by more than one owner;
- the majority of investment is secured by real property; and,
- only investments over $75,000 were considered, since a number of government-related agencies were already available to service small-scale loans.
Community Contact Information
Cape Breton University
tel 562-2420 or 567-0000
This case study of the BCA Group by Greg MacLeod was made possible through a research grant from the Social Science and Humanities Research Council of Canada. For more detailed information and bibliographic references please consult the web sites: http://faculty.uccb.ns.ca/tompkins or www.ced.ca.
The role of investor ‘angels’: Angels are investors who have disposable wealth to invest, but do so out of more complex motivations; a special interest, which could be environmental, social or personal. The angel frequently becomes personally involved with the client enterprise and also contributes key human capital that contributes to future success. The return is some return on capital, but also the thrill of accomplishment.
When Enterprise Cape Breton Corporation (ECBC) offered an interest-free loan of one-half million dollars and BCA needed to raise one-half million dollars within six months to access it, word was spread through its informal network (without a prospectus BCA was not permitted to advertise). Presentations were made to various organizations. People were buttonholed on the street and invited to invest. Within six months, BCA had raised more money than was required and commenced negotiations with ECBC.
Since BCA did not have an operating grant of any kind, operating capital was a problem. The board strictly forbade any expenditure of capital for operating expenses. All operating expenses had to come from earned income. In this, Cape Breton University (CBU) provided support. Through co-operation between CBU and the local community college, BCA was given free physical space to begin operations. Some students were engaged and volunteers used to get the system operational at minimal cost. The first part was subsidized by the Tompkins Institute of CBU at a level of perhaps $10,000 per year for two years, another type of ‘angel’ investor.
In practice, applicants to BCA usually had secured conditional agreements for loans and investments. A typical business may have a commitment from a bank, from a government agency, some personal money, and then an additional amount to complete the package. In the case of the Ingonish Ski Group, for example, they had a commitment from a government agency for $800,000 to purchase a new ski-lift if they could find a private investor willing to invest $150,000. BCA Holdings acted as the private investor and thus levered $800,000 with $150,000. Investment packages are usually made up of a number of blocks. Thus a group like BCA can mean success or failure in the completion of the investment package.
BCA’s structure is unique. This may be a result of the diversity of resources from which it was created, although none of the strong, established community business groups agreed to join the group. Many such ideas that appear simple and logical encounter tremendous resistance from inertia and the comfort of established structures.
What Didn’t Work?
Early in the development of exploring community investment vehicles, there were many avenues pursued that did not prove successful, some of which included the following.
- 1987 New Dawn Enterprises had formed a “local investment committee” to seek means to finance new ventures. After much consultation with accountants and the Securities Commission, the member dropped the idea as being too complicated.
- In spite of much discussion with community-based development groups, the group could not break down divisive parochialism, referred to in French, as “l’esprit de clocher”. For example, the group tried to convince fishermen and small fish companies to join in an umbrella company called Bras d’Or Sea Products, but was unsuccessful.
- In 1989, a company called Folktech was developed to introduce computer-assisted procedures to various community-based groups in Cape Breton. Most groups did not see the relevance of this kind of technology so the project was shelved.
- Attempts to develop a complex of collaborating and co-operating community businesses in Cape Breton and the Atlantic region were not successful. Community groups were happy to send delegates to conferences and join networks of various kinds, but they were not ready to co-operate commercially. Many of the community economic development groups saw themselves as fulfilling the function of advocacy or popular education, preferring to leave commerce to business persons, instead spending a lot of energy in seeking government grants to support their administration.
- Co-operators Insurance was approached to become partners in setting up a community investment company. After a number of meetings, Co-operators funded a study that examined financial initiatives across Canada such as Solidarity Québec. The result pointed out the good sense of such a venture. Co-operators eventually, however, declined to join the enterprise, following which Credit Union Central in Halifax was approached. The argument was made that the BCA approach was a continuation of the credit union movement, whose pioneers had preached about the need to control local capital for local development. In the end, the Central board declined to join since they saw their mission as focused on domestic finance and not business development.
It was extremely difficult for BCA to entice investors with no tax advantage whatsoever, showing the importance of strategic government policy designed to build existing capital in a community, not destroy it (Dale and Newman, 2008).
Financial Costs and Funding Sources
The three initial founders each contributed $5,000 to create an operating kitty of $15,000. A small board was organized and they asked their friends to lend money to the fund with an interest rate of four percent. This increased the fund to $50,000 in the fund. A few months later they heard that the local federal agency had offered $500,000 to the local Chamber of Commerce if they could match it in setting up a local venture capital company, which the Chamber declined. Immediately, the BCA Group applied to receive the $500,000. The federal agency would lend the money to BCA if BCA could raise $500,000 matching money within six months. BCA managed to achieve the goal and finally, along with 100 conditions, the federal agency lent the money to BCA Holdings.
In 1999, the provincial government initiated a programme called the Community Economic Development Fund Programme. According to this programme, a community group could set up an incorporated company and sell shares for local investment. For money invested up to $50,000, the investor could receive a 30% tax credit. The shares are also eligible for RRSP funds. This was very attractive since it meant a reduction in income tax for investors. Since BCA Holdings was not for profit, the group organized BCA Investment Co-operative. The same people were in both organizations, but now there were two BCA companies. Between 1999 and 2000, BCA Investment Co-operative raised $1.2 million.
BCA Holdings Ltd is designed for low-risk investments since investors receive no tax credits. In general, investors who place amounts of $25,000 and more receive 5 per cent return, and for lesser amounts the return is 4 per cent.
BCA began to raise funds in January of 2000 for the BCA Investment Co-operative, and investors purchased $730,000 in common shares. In the first seven months, ten proposals were examined. The proposals covered a wide diversity from high tech to food products. Most of these initial proposals were declined because of too many unknown factors as BCA is not a lender of last resort and takes great care in choosing investments that their board understands and sees as having good long-term prospects.
Investors may invest in the BCA group in different ways:
- Make a loan to BCA Holdings and receive regular interest at 4% or 5%. BCA has never missed a payment to such investors.
- Buy preferred shares in BCA Holdings and receive a dividend at 4%. Since the income tax rate is lower for dividends this is equivalent to 7%.
- Buy common shares in BCA Investment Co-operative and receive a 30% provincial tax credit as well as a dividend beginning in year two.
Institutions and businesses prefer the first two methods since they do not receive tax credits.
For the 30% tax credit, investors are allowed a maximum of $50,000 per year. Some board members will invest $100,000 and divide it between two fiscal years. The BCA accepts anything from a minimum of $1,000 up from supporters. BCA's success is dependent upon a lot of small individual investors contributing to a larger pool of capital for local community development.
The new interest in setting up structures such as BCA can be attributed to the realization that the traditional systems are not working for the benefit of the many citizens and local economies. On one hand, centralizing globalization squeezes out economically weak people and economically weak communities. On the other hand, western governments have reduced their commitment to regional economic development and social programs in an effort to reduce deficits. After many failures in their attempts to establish economic equity, most governments have relegated the task to free market forces. Indeed, governments have tended to intervene to assist large corporations through tax systems, research grants and trade liberalization.
Social commentators such as Heilbroner (1992) are pessimistic, and see the destructive nature of the traditional economic and commercial systems. Drucker (1993) notes:
“The mega-state has all but destroyed citizenship. To restore it, the post-capitalist polity needs a “third sector”, in addition to the two generally recognized ones, the “private sector” of business and the “public sector” of government. It needs an autonomous social sector.”
Drucker sees the new community-oriented business sector as a counter-weight to the abuses of the free-market system. In his pioneer study of the Canadian voluntary sector, Quarter (1992) argues that the survival of democracy will depend upon citizen participation in new forms of social economy.
Traditional corporate enterprises such as General Motors, Fiat, Siemens, or Shell Oil tend to centralize more and more, closing out branch plants in small communities in order to increase profits. Banks also tend to close branches and replace them with banking machines. Venture finance companies normally locate in major centres and invest mainly within a radius of 100 miles. More than ever before, large corporations have become international, moving from country to country according to the level of economic enticements. The result has been high unemployment in many smaller communities.
Communities all over the world are attempting to form alternative business structures. Thus, we can speak of the “third way” or the “third sector.” These new business structures are not completely private because they take on a public mission to serve the common good of the society. They are not completely public, however, because they are not controlled by elected government bodies. Since these new kinds of community businesses share the purpose of public service with government, they should qualify for financial incentives and programs given to other similar organizations. This type of assistance is very important, especially in the start up of new ventures. It should not be the kind of “core funding” that made so many community groups weak and dependent. It should resemble the kind of financial assistance given to private for-profit companies. Many hundreds of millions of dollars in interest-free loans, and forgivable loans were given to companies in Canada during the last quarter of the century. For instance, the government of Nova Scotia gave $20 million to Michelin to encourage them to remain in the province during the 1990s. Much of the government assistance given to large corporations has been siphoned off into the global system where there are no direct place-based benefits. If such money were given to the many businesses in the community business sector, the potential growth and multiplier effects would have been enormous.
In spite of their widespread presence, traditional forms of social economy have not been adequate in the face of the enormous economic changes that took place during the last thirty years or so. The social economy has been mainly concentrated in the retail-consumer area and in domestic finance through credit unions. It has not been flexible enough to serve as an instrument for job creation and economic survival in marginal economies (Laidlaw, 1975).
A new and rising response to unemployment and marginalization in many communities is the formation of community business enterprises. The concept of community enterprise is distinct, however, from cooperatives that are ambiguous over their mission (Melnyk, 1985) seeing their primary goal as service to their member shareholders or employees. A community enterprise has a concern for the wellbeing of the overall community. Priority is given to the common good over the private good.
The community enterprise may or may not involve worker ownership, but it must always involve majority local ownership and control. A community business corporation must generate enough money to pay expenses, and must deal with the management and control problems faced by most businesses. The key motivation of a community enterprise, however, is community improvement, with profit being a means and not an end in itself. A community enterprise is not owned by shareholders or workers, but operates as a trust in the interests of the local community. A community enterprise is localized, builds on the local community, is normally not moveable, and not subject to being “bought out”. A community enterprise depends upon a high degree of volunteer involvement.
The most notable case of a successful community business is that of Mondragon in northern Spain. Although this multi-billion dollar social-economic initiative is employee-owned, it is not a traditional uni-functional worker-owned co-operative. It is called “The Mondragon Co-operative Corporation” and includes a multi-functional complex of integrated co-operatives. One of the major keys to the Mondragon success is its related “community finance company” (MacLeod, 1997).
What we are seeing is really a reformulation of the concept of a “business corporation.” Gower (1969) has pointed out that the mass sale of publicly-traded shares by large corporations has not made them more democratic and accountable. Rather, he says, shareholders have become only fictional owners of the company (Gower, 1969). He claims that company law in most western countries is in urgent need of drastic revision to recognize this new reality. He states that managers have taken control of most large corporations and there are doubts about whether they are acting in the best interest of shareholders or the public. Community business corporations are part of the response to the new reality, and that lawmakers and governments should adjust public policy to accommodate this reality.
The term “community business corporation” defines a class of businesses that are specifically set up for the purpose of improving the local community and creating jobs. They are multi-functional or multi-sectoral which distinguishes them from most co-operatives. Clearly, there is a necessity for organizing new kinds of business corporations to perform the task that the conventional, dominant corporations do not, and perhaps cannot do, particularly in smaller- and mid-sized communities.
Investment Policy Tensions
On the one hand, BCA directors were volunteers out to help the community. Many fledgling businesses that could not get support elsewhere saw BCA Investment Co-operative as a lender of last resort. The BCA Group could be viewed as a charity out to help create jobs. On the other hand, the executive committee members were business people. They were adverse to business failure and they did not believe in investing in a business they did not think would be successful. Much discussion went on between the social good and the business good. The unanimous conclusion was that the BCA would only invest in businesses that were likely to be successful, with a role to help make them so. The board thought that a generous investment policy might only create short-term jobs, and would not contribute to long-term sustainable community development. The directors very clearly opted for the long-term approach and the management team adopted strong criteria for investment approvals. BCA Directors sincerely thought that this was the best way to help build up a strong economic base in the community, and its long-term viability is testimony to this strategy. One of the strengths of the model, therefore, is the private-university-public leader partnership created through the diverse composition of its Board.
Most venture capital companies specialize in one sector. Some companies are focused on high-tech business; hence, they assemble a staff knowledgeable in that sector. Others may concentrate on mining, or pharmaceutics. The idea is that the staff and directors have sufficient knowledge about the field to make a serious decision on investment. This works fine in large metropolitan centres like Toronto or Montreal. In smaller communities, however, the market is too dispersed for such specialization. Thus, the BCA Group decided to function as a universal investor. With some experience, however, the BCA found that it was simply not knowledgeable about many sectors and, thus, could not make sound decisions.
Detailed Background Case Description
Large metropolitan cities often prosper in macro-economic terms. Yet, there results a growing underclass of individuals who are under constant threat of being marginalized. Part-time employment rises and wage levels drop. At the same time, social assistance is restricted, programmes for affordable housing terminate, and unemployment insurance is cut back. Individuals are at greater risk in the large centres while in the smaller areas, the community itself, as a socially viable unit, is being dismantled. In large urban centres, unemployed people have greater access to support services. Investment companies and government tend to favour larger centres over more rural centres, and of course, the diversity of employment options is much lower in smaller communities.
On the other hand, smaller centres often offer more personal support from peers and extended families to the unemployed, however, this does not necessarily result in increased employment opportunities. The unemployed person in the non-metropolitan area can count on a complex infrastructure of family and neighbourhood support and while there is no money to hire a plumbing contractor, a skilled neighbour will help fix the plumbing. It is not unusual for a group of neighbours and friends to help put a new roof on the house of a friend. The negative is that there is such little hope for new business development in the typical single-resource based economy community.
With a worldwide employment decrease in the resource-based economy, a huge gap has developed between the centre and the periphery or between the metropolitan and the non-metropolitan. This is especially serious since the non-metropolitan areas are usually where traditional cultures flourish and grow. The metropolitan centres usually conform to the world-wide patterns dictated by the market. It is called “massification” of culture. Rural and small town life in most countries has been a fertile soil for the production of a great deal of culture. Culture, tradition and social relationships have no place in macro-economic management. In community business they do.
Most governments have favoured metropolitan growth and centralization. They claim that this brings economic growth and higher income for the nation. In Canada, even small provinces like Nova Scotia have adopted a growth centre plan favouring concentration of industry and universities in the capital of Halifax emulating the growth pole of Boston-Cambridge, which benefited from spin-off growth caused by concentration of scientific resources.
As explained above, the information/global economy impacts on metropolitan areas and non-metropolitan areas in very different ways. Thus, while new community business structures are required in both cases and the principles are the same, the structures will be different. Small places have very little infrastructure, especially after the government resettlement programs which dominated the last fifty years. Government policies favouring the centralized metropolitan model have developed programs that support selected growth centres in every region. While the economy in a string of major centres across Canada prospered, smaller places faced a brain drain as well as a capital drain. Of course, this was true in most other countries from China to Mexico.
Activists in both large places and in small places have developed a common consciousness that the system is not working well for threatened individuals and threatened communities. In Canada, as well as the United States, community activists have increasingly begun to experiment with new forms of corporate business as an alternative to the dominant corporate system.
A small group associated with New Dawn Enterprises had been discussing the need for a community investment company for two years. Organizers were fearful of the risks and legal hurdles. In 1989, MacLeod invited two key people to his house and discussed the problem. The three decided to jumpstart the process with each contributing $5000 to create a kitty of fifteen thousand dollars. A small board was organized and they asked their friends to lend money to the fund with an interest rate of four percent. Soon they had $50,000 in the fund. A few months, later they heard that the local federal agency had offered $500,000 to the local Chamber of Commerce if they could match it in setting up a local venture capital company, which the Chamber declined. Immediately, the BCA Group applied to receive the $500,000. The federal agency would lend the money to BCA, if BCA could raise $ 500,000 matching money within six months.
BCA managed to achieve the goal and finally, along with 100 conditions, the federal agency lent the money to BCA Holdings. This proved to be an extremely complicated affair, involving two law firms and an accounting company in a process which lasted several months. During the process, the organizers kept in close contact with the Nova Scotia Securities Commission, which provided useful guidance. Government development agencies, such as the ECBC, were simply not prepared for, nor accustomed to, dealing with an investment company not motivated by profit maximization, and that had extensive and diverse networks, partnerships and alliances throughout the community. A delegate from ECBC was invited to participate on the BCA board as a non-voting member. Although BCA avoided the grants approach, the free flow of information proved to be very productive.
The Atlantic Canada Opportunities Agency (ACOA) in Moncton was approached for some money to do a feasibility study for a regional investment company. The study formed the basis for BCA Holdings Ltd, incorporated in 1989. The name was intentionally conservative since most people are reluctant to invest money in a company that sounds overly romantic like “New Dawn” or “Shining Waters Housing”. This was a not-for-profit company under the Companies Act. The effect of using this legislation is that BCA is technically a corporation and philosophically a co-operative since each member has only one vote. BCA Venture Capital Ltd, a regular profit-making company, was then set up to act as a fund manager. Since the corporate structure does not allow dividends to be paid or fees to be collected by directors, the corporation does not pay income tax. There is a legal obligation to reinvest all monies earned in a manner to benefit the local community. While it is a corporate structure for public benefit, it is not technically a charity and thus cannot issue charitable receipts. In effect, the structure was developed to suit the circumstances and intentions of the supporters of the BCA. It had two divisions:
- a banking-trust institution (BCA Holdings Ltd, a not–for-profit); and
- a venture management company which could act as a conduit for investment funds (BCA Venture Capital Ltd, a conventional profit company)
By March 1989 there was a committee of twenty people from a cross-section of community groupings. They agreed on the following mission statement.
“To establish a financially successful Cape Breton-based financial institution which will assemble capital primarily in Cape Breton Island and reinvest those funds in stimulating economic activity in Cape Breton Island.”
The board of directors of BCA was designed to include both community leadership and business expertise. Its first board included:
Jim Kehoe (president of a major construction company)
Steve Farrell (mining engineer)
Greg MacLeod (philosophy professor)
Cathy MacDonald (organizational consultant)
Eric Latimer (retired banker)
John Currie (owner of an engineering firm)
(John Eyking, a prominent farmer and community leader, was soon added.)
The development of the BCA model was built on learning from other successful examples of community development corporations such as Mondragon in Spain which integrated different elements of business: production, retail, research, university education, and finance. Mondragon has 160 employee-owned cooperatives, involving over 30,000 member owners, with sales grossing $3 billion dollars US in 1991. Mondragon cooperatives are twice as profitable as the average corporation in Spain with employee productivity surpassing any other Spanish organization. It has its own bank, a research institute, an entrepreneurial division, insurance and social security institutions, schools, a college, a health maintenance system and a health insurance cooperative. Of course, Mondragon has grown immensely with 100,000 workers in seventeen countries and sales are over 18 billion. It would be more useful, however, for community groups to look at Mondragon as it existed in the 1980’s.
The first challenge and opportunity arose as BCA was negotiating with ECBC for an interest-free loan. Reserve Mines is a small community between Sydney and Glace Bay, which formerly depended on the local coal mine. It happens to be the site of the first credit union in English speaking Canada, founded in 1933 by Dr. Jimmy Tompkins, the famous pioneer of community business development in Eastern Canada. With the closing of the local mine and outmigration, however, the credit union suffered from the general economic decline. In the early 1990’s their building was dilapidated and unusable, but the credit union could not get financing for a new structure. Eventually community leaders approached BCA in search of a solution.
After much discussion, BCA proposed a joint venture. A new co-operative company was set up called Tompkins Development Ltd. BCA purchased land at the key intersection and proceeded with plans. BCA convinced the credit union group that it was better for them to collaborate and become tenants of a bigger structure. In this process, the business members of BCA convinced the committee of the importance of being business-like. For instance, Tompkins Development Ltd, the new company, had to sign a turn-key contract with BCA giving over full authority on key decisions, although consultation was ongoing. The fee for this service was five per cent. The building cost $500,000, so that the service fee brought in $25,000 as income. This was a key strategy for success: it is a serious mistake for community businesses to provide services free of charge. Providing services free of charge is heart-warming, but it detracts from financial sustainability.
BCA insisted on signing up 70% of the tenants before building, in spite of pressure from the credit union leaders. The traditional approach by community groups is to build, and then seek tenants. So, from the first, sound business techniques were part of the BCA style. “Sweat equity” is also an important element to note in the subsequent success of this project. It is not just about financial capital, but valuable in-kind capital, especially access to expertise and sharing the risk. Several board members had experience in construction so their advice saved money. Two strategies made the project viable: first, BCA acted as general contractor, saving ten to twenty percent of costs; second, BCA negotiated an understanding with the trade unions whereby union workers were paid the union rate of $22.00 per hour, but donated $5.00 per hour to the community project. The CBU faculty also helped with the engineering design and business professors developed the business strategy. With a traffic flow study, BCA was able to recruit Tim Horton Donuts as the anchor tenant, and the regional library, and the Nova Scotia Credit Union League agreed to rent space for historic displays. These tenants provided enough projected revenue to justify construction and pay the mortgage.
The depleted coal mining village of Reserve Mines had suffered from unemployment levels of over 40% for a long time. Hence, the addition of a sparkling, brick and glass building on the main corner was a major event. Besides the 25 construction jobs, the building has created approximately thirty permanent jobs in the local community. More than that, it has become a gathering point for local people, group and committees to socialize, gather and meet, creating space for building different types of social capital.
Tompkins Place set the tone for BCA. It deviated from many conventions. It included a so-called social business like a credit union and a traditional business like Tim Horton Donuts. Yet all the tenants paid rent that would retire the mortgage in twelve years and provide an equity base for Tompkins Development Ltd.
As Tompkins Place was completed, more people took notice of the BCA Group. With $750,000 in the treasury the board began to consider various requests. While there were a good number of small projects where entrepreneurs borrowed money and repaid the loan, Appendix A provides a brief description of some key investments made by BCA.
- To what extent does the BCA ensure the businesses they are investing them are themselves sustainable (and not just economically so)?
- How replicable is this model to other communities?
- Is there a relationship between space for social capital and economic revitalization?
- Does place-based economic development contribute to sustainable community development?
Resources and References
“Community Business Works.” (1982). A report by the Calouste Gulbenkian Foundation report. UK Branch, London.
Dale, A. and L. Newman. (2008). Social capital: a necessary and sufficient condition for sustainable community development. August 11th,
Druker, P. (1992). Post Capitalist Society. [n.p.], Butterworth-Heinemann.
Gower, L.C.B. (1969). The Principles of Modern Company Law. London: Steven & Sons.
Heilbroner, R. (1992) Twenty-First Century Capitalism, Toronto: House of Anansi.
Laidlaw, A. Outline of an Address presented to a Community Development Workshop for the Atlantic Provinces, Wolfville, Nova Scotia, January 29, 1975.
MacLeod, G. (1992). Mondragon. Community Business Series. Sydney, NS: Tompkins Institute.
MacLeod, G. (1997). From Mondragon to America: Experiments in Community Economic Development. Sydney, NS: UCCB Press.
Melnyk, G. (1985). The Search for Community: From Utopia to a Co-operative Society Montreal: Black Rose Books.
Quarter, J. (1992). Canada’s Social Economy: Co-operatives, Non-profits, and Other Community Enterprises. Toronto: James Lorimer & Co.
Richardson, B. (1997). “Corporations: How Do We Curb Their Obscene Power? “ Unpublished internet paper. <email@example.com>. 1 April.
Stiegler, B. (1999). Le Monde Diplomatique. Supplement sur l’Avenir 2000-2099. December.
Yearbook of Cooperative Enterprise. (1992). Plunkett Foundation.
Appendix A: Example projects
A&B MECHANICAL (INDUSTRIAL PLUMBING AND HEATING): In 1992 an old, established industrial plumbing and heating company went bankrupt. The owners were retiring and there was no one to take over. The workforce was highly qualified and they attempted to reconstitute the company. The big obstacle was capital. The workers simply did not have the personal assets so the banks refused financing. BCA was approached and provided the capital. The support was based mainly on the character of the employees who became shareholders. The workers were members of the Plumbers Union and agreed that all workers would receive the same union rate of pay regardless of their management role. The company began with five shareholder workers but the average number of employees was usually around 25; at times, there were 200 union members on the payroll of A&B Mechanical Ltd. This company recently carried out a million dollar expansion and now has a solid record in major contracting, an exceptional success.
BRAS D’OR LAKES INN. http://www.brasdorlakesinn.com/ St. Peters is a small village in the middle of Cape Breton. When the small hotel went bankrupt many people became concerned. This hotel, built of cedar, was the central building in the village. BCA attempted to work with a local First Nations Group located close to St. Peters. In the end, the native group backed out of the agreement. After so much expenditure of time, BCA decided to proceed on its own in the hope that other community partners would be found. BCA was especially encouraged to purchase this hotel by many people who feared that too many local businesses were being bought by outside companies. Since taking over the hotel BCA engaged a variety of managers but none were willing to make a long-term commitment. This seemed to be the kind of business best done as a “Mom and Pop” operation where management makes a long term commitment. After losing some money on this operation, BCA Holdings persuaded a number of individuals to purchase shares from BCA and to take responsibity for management and possible sale.
BCA organizers learned an important lesson in the case of the hotel. Community investment groups cannot manage what they invest in. A key consideration is that each client must have adequate management skills for successful implementation. BCA board members have always been happy to advise, but they know that they must limit themselves to that advisory role. After that lesson, BCA has been extremely reluctant to become involved in in some very worthy and wonderful community business projects because they judged that there was no long term management capacity in place.
CHER RADIO: CHER Radio was the last locally owned media outlet with other radio and newspaper companies owned by national chains. When this company went bankrupt, BCA made a purchase bid out of concern for loss of local access to the media. Outside monopoly control of commercial radio is unacceptable to many community people in Cape Breton. The previous owners had lost over one million dollars in this business so that the risk involved was considered high. Recognizing that an “orphan” radio station is at even higher risk, BCA made a special effort to assure strong management support. Thus a joint venture agreement was made with an Atlantic Canadian chain of broadcast companies. The Chain became a minority partner and provided technical expertise. Most community groups launching into business will find that management is a key challenge. Most university business schools do not encourage their best graduates to work in the community business sector.
EAST COAST ROPE: In late 1992, a high-tech rope manufacturing company went bankrupt in Cape Breton. In an extremely fast procedure, the Canadian Imperial Bank of Commerce called for the sale of the assets withing a few weeks. Directors of BCA Holdings expressed shock at the possible loss of the heavily subsidized company and offered to negotiate, but the bank refused to slow the process. Within weeks American Manufacturing Ltd. of Louisiana purchased the machinery and attempted to move it to the United States. The community was outraged and blocked the roadways to prevent the plant machinery from being moved. Local church groups maintained a vigil in front of the plant so that the American company could not take the machinery which was high tech and world classs. BCA Holdings put together a group to take over the plant under the name "East Coast Rope". BCA Holdings provided $ 250,000 and outside investors were recruited to put up $ 750,000. Care was taken to assure that 51% remained local. BCA Holdings wass the largest single shareholder.
Management is delighted with the high quality and strength of the rope being produced. Approximately 30% of the product is sold on the West Coast of Canada. Upwards of 35 people are being employed on a 24 hour basis. Although BCA encouraged the workers to become shareholders, the workers preferred to form a labour union. Most labour unions are not comfortable with the notion of worker ownership.
SYDNEY MINES COMMERCE PLACE. In 1999 the main street of Sydney Mines had become desolate with plywood on the windows of several empty stores. BCA purchased several of the dilapidated buildings on the key corner in [date]. Local clergy were contacted and a new community co-operative was formed. The clergy-led co-operative sold shares and a new building was built. In the Sydney Mines case as well as the Reserve Case, these new buildings brought a new sense of hope to these former coal-mining towns. New service jobs were brought into the area and the new buildings became a focal point for local socializing, again creating space for social capital formation. From an investment point of view the risk was not very high and the benefits were numerous.
It should be noted that, generally, banks and venture finance compaines are risk adverse for financing the ventures just mentioned. In a very real way, BCA has been an alternative to the conventional banking systems which simply don’t function well in stressed economies. BCA has invested and survived without any grants or tax credits of the sort available to Nova Scotians investing in government approved companies such as Toronto-based “Working Ventures”.
WENTWORTH CONDOMINIUM. A group of local community leaders purchased the old and abandoned Nazareth House to build a new, four story condominium. The building, located by the beautiful and historic Wentworth Park, was a symbol of the past and is now giving way to “The Wentworth Plaza”, a symbol of the future. This will be a modern four story condominium similar to what is available in Halifax and Toronto. It came to the attention of the BCA Group that retired people were leaving Cape Breton to buy and live in condominiums in other parts of Canada. They soon came to the conclusion that retired people with solid pensions would stay if good quality condo living were available. Also, they found that many retired Cape Bretoners in other parts of Canada would return if condominiums were available. Organizers noted that there was no shortage of affordable housing in the area for low and middle income earners – but there was a lack of high-end low maintenance accommodation for professional retirees. With prices ranging from $100,000 to $280,000, it seemed like a good deal to someone paying $400,000 in Toronto for equivalent accommodation. BCA Holdings and Tompkins Development Ltd bought the land, found an architect and recruited clients. At this point the community group found that it too difficult to raise the six or seven million required, and so they sold the project to a commercial company and it will be built by Joneljim Ltd. The project helped to provide some counter to an economic and brain drain of professional retirees, employed local trades people and helps revitalize the downtown and local tax base.
Canmac Economics Ltd. estimated the total direct, indirect and induced economic impacts of the project to be:
Construction phase: generate $2.8 million in household income, employ 86.4 person years and add $3.62 million in GDP.
Operations phase: generate on an annual basis $369,000 in household income, employ 15 persons and increase GDP by $506,000.
Appendix B: TRACK RECORD BCA GROUP
Although almost every community with a population over 50,000 has a business research group, there is none in Cape Breton. We are arguing that this is fundamental in the new economy. Thus we have set up the Cape Breton Innovation Research Centre which is part of the Tompkins Institute at Cape Breton University and is linked to the BCA Investment Group.
The present proposal by CBIRC has grown out of thirty years of experience by a team of people including both business leaders and university professors. The activity was organized through the Tompkins Institute at Cape Breton University. While we were not the only element involved, our participation was essential for every one of the following projects. We have picked only the major projects as examples. CBIRC is an attempt to systematize the process we have used over the years. We wish CBIRC to become self sustaining and to be a partnership with faculty, BCA Group and local business leaders and with government. The outputs will be new business developments.
Cape Breton School of Crafts - now the CB Centre for Design
New Dawn Enterprises now employing over 150 people with assets over 15 million
New Deal Development on Northside ( est 1983)
- Golden Pond Housing Cooperative
- Apartment Building ( 2008- over one million)
BCA Group which launched the following
Tompkins Centre in Reserve Mines ( Tim Hortons)
Bras d’Or Lakes Inn ( rescued after bankruptcy)
East Coast Rope ( which generated Polysteel)
A & B Mechanical ( over 30 employees)
Commerce Centre in Sydney Mines
Through BCA Group
Wentworth Condominium (financed by BCA initially)
Laurentian Energy ( through BCA Investment Cooperative as largest single shareholder) Includes Fabrication plant ( recent order $30 million)
Northside Fish Plant..since sold to Louisbourg Fisheries
Cheesecake Plant..in process of re-opening
Wood Pellet Plant