New legal structure that could change the world
Almost by accident, the government has created a legal structure that could curb the power of both banks and shareholders, but also put monetary justice right at the heart of business. Antonia Swinson reports.
Radical Economics magazine
At the cutting edge of economic thinking lurks a new animal. It is a curious hybrid of a commercial company and a partnership, known as a Limited Liability Partnership (LLP).
This model could revolutionise the ability of the voluntary sector and social enterprises to make an impact in regeneration -and there is an irony here, given that the legal form was born at the very sharpest edge of commerce.
During the early 1990s, professional partnerships such as Arthur Andersen became concerned that their individual partners’ acceptance of liability for their company’s actions put them at risk of bankruptcy.
Long before Enron’s demise was a twinkle in regulators’ eyes, the City persuaded Jersey’s parliament to draw up an Act creating the UP -and the British government, fearing an exodus of partnerships to Jersey, passed the Limited Liability Partnership Act in April 2001.
For the first time anywhere in the world, it became possible to form a corporate body -an entity with a legal existence independent of its individual members -which had both collective limited liability and the mutual, co-operative characteristics of partnerships. There are now some 7,000 LLPs around the country, including one notable example established by Hilton Hotels in 2002.
Consultant Chris Cook, a civil servant turned City regulator and, latterly, director of the International Petroleum Exchange, was the first to grasp just what an extraordinary beast is the LLP. It has, he says, created a new asset class: not equity, not debt, but a co- operative, community-based medium of exchange.
‘When I pointed it out, I don’t think that civil servants in Whitehall were very pleased to find that they had accidentally created the essence of ethical economics,’ says Cook.
‘The LLP makes it possible for all stakeholders in an enterprise – staff, management, investors, suppliers and clients -to be members of an Open Capital Partnership (OCP), which replaces the usual adversarial contracts of debt- and equity-based models.’
In essence, all these stakeholders are brought inside the partnership, meaning that their interests are aligned. This is quite a change from traditional structures, which pit stakeholders in competition against each other.
Let’s say that Bloggside Regeneration holds a brownfield site, whilst Bloggshire Islamic Community Arts (BlCA) needs a workshop in which to train local people to produce patterned Islamic tiles for the growing UK market.
BlCA becomes the first ‘occupier member’ and Bloggside Regeneration becomes the ‘capital member’ of the new Bloggside Community LLP, with BlCA paying Bloggside Regeneration a peppercorn land rent.
A new workshop, costing £100,000, is acquired using money from a Community Development Finance Institution (CDFI), which becomes the LLP’s second capital member.
The CDFI then receives two per cent of BICXs total revenue. As a ‘capital rental’ paid for the use of finance, equivalent to those paid for the occupation of land, this payment does not count as interest, making an LLP an acceptable financial structure for strict Muslims.
Hence, rather than a contract whereby a debtor organisation pays interest to a creditor, or an investor buys part-ownership of a company in the form of shares, both financier and beneficiary join a partnership whose revenues are then shared.
Perhaps the most potent application for LLPs, however, is their ability to draw in private finance for public projects, offering an alternative to private finance initiatives.
By drawing the users and stakeholders of a service into its ownership, LLPs could build community link.. and ensure that the aims of a service’s financiers are aligned with those of its providers and users.
‘I see a role here for council and trade union pension funds,’ says Cook. ‘The rate of ‘rent’ paid for use of the capital could be set perhaps four per cent above inflation.
‘This would be unaffected by Bank of England interest rate decisions; it’s not lending, but taking a proportionate share of gross revenues. With risk spread among the partners, it would be less risky than shares, more profitable than gilts, and more accountable and transparent.’
At present the LLP animal is young, untested, and just lurking at the outer edges of the economy. But, given its consensual and pragmatic nature, it is surely only a matter of time before its track are more widely seen.
How extraordinary it would be if, just as crocodiles outlived dinosaurs, the wee beastie of the LLP one day replaces the old debt and equity models of global capitalism. .
Antonia Swinson is an award winning journalist and writer: A leading campaigner on monetary reform and /and value taxation, her new book Root of All Evil? How 10 Make Spiritual Values Count is published by St Andrew Press £7:99.
Radical Economics magazine is produced by New Economics Foundation (NEF) http://www.neweconomics.org