Community infrastructure produces output that members of a community need or want. Today there are two primary sources of money to fund infrastructure — private corporations and governments. Private corporations raise money by promising investors a return on investment with a share of profits. Governments raise money by taxing corporations and individuals by taking a percentage of their profits or earnings.
Over time, in both cases, the money invested comes from community consumers. In both cases, private investors or governments end up owning community infrastructure.
There is a third way that has declined over the years. The approach is mutual benefit associations. Groups of consumers finance and hence own community infrastructure and receive a return on investment as lower prices. When a group works this way, it reduces the amount of money needed to produce the same quantity of goods and services as private companies or government funding. Productivity, in economics, is the ratio of the value produced divided by the cost to create it. Hence buying the same amount of goods and services for less money is an increase in productivity.
The third way does not interfere with either of the other two methods but provides an economically productive alternative. It integrates well with private corporations and the government as they continue to produce goods and services, while the third way offers a link between the two and all benefit. As a result, governments do not need to collect as much tax, and private industry does not need to pay as much tax.
The paradox of lower taxes, lower prices and higher profits is solved because the total system requires less money to operate. With community-owned infrastructure, money does not sit still. Instead, it circulates rapidly, is used by more people and hence is more productive. Community ownership can get more value from capital than either private investor ownership or government ownership. Investor ownership requires investors to extract a profit while government ownership conflicts with the government’s regulatory and tax-raising obligations. On the other hand, community ownership leads to downward pressure on prices and increasing capital productivity.
A Thought Experiment to Explain the Paradox
Imagine there are three owners of houses A, B and C. They all belong to the same mutual benefit association, and their houses are of equal value but in different locations. However, A wants to move to B’s house, B to C and C to A. They can set up internal contracts to allow this to happen without exchanging funds between each other. There is no transfer of money. There is a cost of setting up the agreements and making the transfers.
However, if they used the financial system to assist the transfer, they would separately go to a bank, borrow the money to pay for the house they were moving into and pay it to the old owner. When they received their money, they would pay off the loan to the bank. The extra costs are setting up the loan, securing it, a money transfer payment, and interest payments. The advantage of using the bank is that it scales and works for any number of transfers and any length of time. The extra cost for this convenience is the interest paid on the loans.
Modern technology allows us to build a transfer system with mutual benefit associations that scales and handles any asset transfer. The following sections outline how to transfer electricity generation assets and housing assets without incurring the cost of renting money.
Implementation
Implementing the third way requires a change to governance and information systems, but few day-to-day operational changes. The governance and information systems are reusable to fund any infrastructure and allows the seamless integration of products. It means customers and money can move at a low cost between communities and products.
The approach is well known but has fallen in popularity because those with more money use the system to their advantage. Capitalists operate capital markets as though they are the same as markets in goods and services. Markets work when the price is a good measure of value to the buyer. When two people want the same item, the one prepared to pay the most will obtain it. Unfortunately, the link between price and value does not apply to capital.
The buyer who values capital the most is without it, yet they pay the most to use it. Thus, it is an unfair market and it leads to inefficient allocation of capital. An example is Housing that becomes less affordable even if housing supply and demand are in balance. Other examples are stock markets where prices follow a random walk and viable businesses are purchased, stripped of their assets and fail from lack of capital.
The third way makes capital markets efficient by fixing the price and using capital value to the buyer to allocate capital. Achieving this is not obvious, but modern information technologies and artificial intelligence can create efficient capital markets with the value of the capital to the buyer, rather than price, determining the market outcome.
Governance
When consumers become investors, they take on the investment risk, but they also determine the rewards as buyers, and so there is no market to set the price. So instead of using the price to determine who receives contested goods, we use the value to the buyer to determine who buys. Thus, price is an approximation of value but is only one of the variables considered. When there are many equally qualified buyers from whom to select, the selection is random.
Agreeing to the rules on value is a critical part of the governance of a group. Likewise, dealing and deciding on rule transgression is essential to good governance. Service providers can handle most administration of groups paid from savings.
Importantly, members are free to move to other groups if the other groups will accept them.
When there is a choice of investors, the same principle applies. The value to the investor determines the allowed investment amount.
Investors and Buyer Benefits
When communities use external funds to invest in community infrastructure, the cost to the community is the profits, interest and capital gains taken out of the community.
When communities fund their infrastructure, they save these costs and share them between community investors and buyers. But, naturally, the savings vary with the infrastructure and the state of the economy. For example, it is approximately the cost of the infrastructure divided by twenty per year for electricity. With Housing, it is the cost of the property divided by thirty per year.
There are no up-front costs for buyers, and the obligations are to pay a minimum of the lower amount for the goods and services as they receive them. Buyers, however, receive 50% of the amount they pay as a future investment, so, if they can, it usually is worthwhile for buyers to pay more than the minimum allowed.
Investors have liquid investments that give a higher return than superannuation.
The extra obligation is to join a Co-operative and follow its terms and conditions. Co-operatives are mutual benefit organisations, and benefits come from working together so that members trust and help each other.
Summary of terms and conditions for a renewable energy co-operative.
- Buy and invest in renewable energy.
- Participate in the governance of the co-operative.
- Pay invoices on time and in full.
- Provide information as needed to calculate benefits and obligations.
- Report difficulties in meeting obligations.
- Work with other members to assist those members who have difficulty meeting their obligations.
Summary of terms and conditions for an affordable home co-operative.
- Occupy a home owned by the co-operative or invest in the affordable home co-operative.
- Participate in the governance of the co-operative.
- Pay Rent on time and in full.
- Minimum Rent is a fixed percentage of a member’s income. (typically 25%)
- Provide income information each month.
- Report difficulties in meeting obligations.
- Work with other members to assist those members who have difficulty meeting their obligations.
Buyer experience with Renewable Energy
The following outlines the buyer’s experience installing solar panels on their roofs, first with regular finance and then with co-operative finance.
With regular finance, an occupier of a house approaches a bank to borrow money to install solar panels on the house in which they live. The bank will not finance the panels if the occupier does not own the place. The bank may also extend an existing loan, give a personal loan, or provide money if they take out a mortgage on their house. The bank typically provides a personal loan at say 7% interest and requires repayment within five years. The buyer arranges the solar panels’ installation and takes the risk on the installation. Later if the buyer sells the house, they are unlikely to get a much higher price for the house because of the panels.
With co-operatives, an occupier approaches a co-operative and asks to become a member. If accepted, they pay $10 or more to purchase prepayments for electricity from the co-operative. The prepayments are refundable if the occupier leaves the Co-operative. The occupier agrees to follow the co-operative rules and asks the co-operative if they can install panels. If the occupier does not own the house, the co-operative negotiates with the owner to see if they are willing to install. Suppose permission is granted the co-operative works with the occupier and installer to find the best solution for the occupier. The co-operative estimates the average amount of power the occupier will consume per month from the roof and requests they set up a monthly deposit of 70% of the grid cost. Each month the amount owing is calculated. If the deposit is greater than the amount owing, it is treated as an investment and earns the equivalent of 5% in a savings account. If less, the monthly deposit is increased.
Investors of funds get the equivalent of 5% in a savings account, or for long term annuity investments, get 10% inflation-adjusted for 20 years. It compares to a superannuation annuity of 10% inflation-adjusted for ten years. If the investor is also an occupier and they leave the house, the investment moves with the occupier as it is in the co-operative, not the panels on the house.
Members who own prepayments can sell them for their face value to another member. However, they cannot sell discounts without an equal amount of prepayments.
Buyer experience with Housing
With the existing financial system, a house buyer searches the real estate market looking for a place to live. They find one, but before they can purchase, they have to obtain finance. With regular finance, they need a deposit and proof of income to cover the repayments. Then, they arrange the loan, which will have other conditions regarding the property they wish to purchase. Finally, after all the approvals and permissions, they purchase the home and repay the loan plus interest.
With Affordable Homes co-operatives, the buyer contacts Co-operatives with houses in the areas they want to live. The buyer supplies their income plus any other benefits they may receive in rental assistance. They agree to occupy the home as their primary place of residence and agree to the non-financial benefits they receive and provide.
Suppose the co-operative has a place or can purchase a suitable place. In that case, the co-operative determines if the applicant has sufficient income to become an occupier. A typical financial agreement will be for the buyer to pay a minimum of 25% of their disposable income. The 25% includes any rental subsidies. If there are many buyers for the same place, the Co-operative selects the buyer with a weighted lottery.
When the applicant is accepted, they start depositing the agreed rental amount as prepayments. They can deposit more, and they will earn discounts at the rate of 3.5% per annum each month. Thus, 50% of all rental payments become equity in the house they occupy. The equity becomes available as prepayments for use with another property when the occupant vacates the property or when the equity is equal to the market value of the property they occupy.
Investors of funds get the equivalent of 3.5% in a savings account, or for long term annuity investments, get 7% inflation-adjusted for 31 years. It compares to a superannuation annuity of 7% inflation-adjusted for 15.5 years. If the investor is an occupier and vacates the house, they retain their investment.
Members who own prepayments can sell them for their face value to another member. However, they cannot sell discounts.
Summary
With traditional capital markets, the main criteria to select a buyer is how much the buyer is willing to pay. With mutual benefit capital markets, investors receive a fixed return, and the value to the buyer determines the buyer selected. When there are many buyers with the same value, the buyer is selected by lottery. Mutual benefit capital markets promote sharing, human connections, and working together for the common good. In doing so, they cost less to operate and are economically efficient. As a result, they outperform traditional capital markets and lead to resilient wealthier communities.
