Picture: ISTOCK
Picture: ISTOCK

Parliament’s portfolio committee on small business development recently returned from a five-day study tour to the Basque region of Spain, as well as Madrid. Our purpose was to visit the Mondragón Corporation, Spain’s leading exponent of co-operatives as an organising principle of business; learn from its successes and failures; and understand the role government plays in the co-operatives sector.

The development of co-ops has long been on the South African government’s agenda, but its track record is lamentable. A 2009 study by the department of trade and industry revealed that 88% of co-ops formed to date have failed. Since responsibility for co-ops was transferred to the department of small business development in 2014, their performance has not improved, while hundreds of millions of rands have been pumped into the sector to try to kick start it. Yet it remains moribund and lacking direction.

Mondragón has its roots in a technical college set up in 1943 in the town of that name by a Catholic priest, José Maria Arizmendiarrieta . He came equipped with an extraordinary mixture of idealism and pragmatic talent. His purpose was to instil a set of values in the community based on sharing and participatory humanism, while training the youth in technical skills. It was all about “socialising knowledge in order to democratise power”.

In 1956, five graduates of the college bought a small kerosene stove business and converted it into a co-op, which was followed in 1957 by the formation of a consumer co-op, and later by co-ops in the finance, retail, insurance, engineering and consumer durables sectors. Sixty years after its formation, Mondragón encompasses more than 266 businesses and is one of Spain’s largest industrial groups with a turnover of €12bn, with 75,000 employees. Its philosophy is summed up by its slogan, “Humanity at work”, and an approach to business in which “the generation of wealth has a single goal: the wellbeing of people and the community, achieved through competitive business and interco-operative solidarity”.

A more equal way

As one of the executives put it, the essence of Mondragón is not the alleviation of poverty but the creation and distribution of wealth in a fairer and more equal way. Mondragón and its home region have rooted their success in unswerving policy and strategy consistency with the co-operation of government, business and civil society over successive decades. Meetings with the Basque presidency, the ministry of economic development and the trade investment agency gave us a very clear picture of a common vision and admiration for Mondragón’s unique characteristics.

Their laser-like focus on innovation/technology, internationalisation and human capital development has paid dividends. Mondragón is the dominant business and employer in the Basque region, which boasts Spain’s highest GDP per capita at €37,000 and ranks top in Europe’s human development index, and seventh globally.

This is all the more remarkable when one considers that the Basque economy was on its knees in the 1980s, prompting the Basque government, in 1991, to invite US business strategy guru Michael Porter to advise them on a new direction. The result was a sectoral cluster focus with an emphasis on manufacturing, innovation and exports. Mondragón exemplifies its success in implementing this strategy.

To see how they did it, the committee visited the company’s headquarters and three of its co-ops — none of which conformed to our preconception of what a co-op is. The Ulma Group makes a wide variety of capital goods, including forklift trucks, conveyor components, handling systems and piping. Last year, it had sales of €728m, 70% produced for export or made in its international subsidiaries, and employs 4,685 people.

At the co-op level, success does not come from grants or handouts but from a rare combination of social entrepreneurship, committed leadership, co-operation and competitiveness

Fagor Arrasate, which makes die-pressing equipment and machine tools for the home appliances, aerospace, automotive and engineering sectors, employs 868 people and had sales of €248m in 2017. It is tiny compared to its competitors but, by SA’s  standards, rates as a medium to large business.

Mondragón University has more than 5,500 registered students and four faculties: engineering; business studies; humanities and education sciences; and gastronomic sciences. Each faculty operates as a co-op and together they offer 15 undergraduate, 13 masters and three doctoral programmes. Some 75% of its income is derived from student fees, and 25% from the private sector in the form of donations and research partnerships. The vice-rector referred to it as a university of knowledge transfer.

Remuneration policy

As we toured these premises we were impressed by the commitment to high-tech, skills development, innovation and an export focus. It was as if everyone we spoke to was reading from  the same script. This is hard-wired into their system and not forced onto them by some outside entity, while the government plays a supportive not a directing nor funding role.

It has not always been plain sailing, however. In 2013, one of its biggest co-ops, the Fagor consumer goods business, filed for bankruptcy after a disastrous expansion programme led to debts its sister co-ops were not willing to cover. Its 1,900 co-op member employees were absorbed into other co-ops in the group, while 3,500 wage-earning workers lost their jobs. The business was eventually bought by Cata, a Spanish competitor, which made no commitment to maintain its co-operative structure.

One of the most remarkable features of Mondragón is its remuneration policy: the highest paid executive earns no more than six times the lowest paid co-op member. This is made possible by its highly egalitarian culture, which is hard to replicate outside its home territory.

What can we learn from Mondragón and the Basque country’s achievements? First, at the co-op level, success does not come from grants or handouts but from a rare combination of social entrepreneurship, committed leadership, co-operation and competitiveness. At the regional level, success boils down to defining and relentlessly pursuing competitive advantage based on an educated and skilled workforce, and a global perspective.

While we cannot simply transplant these practices to SA, we must be prepared to examine how the principles they are based on can positively impact our own policy-making process and culture. This is essential if we are to achieve both a sustainable co-ops sector and prosperity in the wider economy.

• Chance is the DA shadow small business development minister.