Low-Profit Companies from Best Practice to All Practice

This content explores low-profit companies, defining them as those generating a 0-3% rate of return per year. It delves into motivations such as sustainability and public welfare, discussing unit of measurement, return intervals, best practices in farming, energy supply, sustainable banking, and fair trade. Additionally, it highlights examples of regional citizen stock corporations and citizen energy companies in Freiburg.

• Low-Profit Companies
• Sustainability
• Best Practices
• Finance
• Freiburg

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1. AEEE Conference Freiburg 2021 Oct 7-9 Low-Profit Companies from best practice to all practice Christian Fahrbach christian.fahrbach@web.de www.low-profit.eu License: CC BY

2. Low-Profit Companies / AEEE / Freiburg 10/21 Contents 1 Introduction 2 Best practice 3 Classical finance 4 Transformative finance 5 Conclusion 2

3. Low-Profit Companies / AEEE / Freiburg 10/21 1 Introduction Definition An investment or company is low-profit, just in case it generates a rate of return of around 0-3% per year. Motivation Sustainability (SDG) Public welfare 3

4. Low-Profit Companies / AEEE / Freiburg 10/21 Unit of measurement Rates of return have the same unit of measurement as ordinary interest rates, 1/annum and is usually given in percent (%) Example rate of return = 0.02 1/a 100% = 2% 4

5. Low-Profit Companies / AEEE / Freiburg 10/21 Low-Profit Non-Profit For-Profit 0% 5% Rate of Return Figure 1 : Return intervals 5

6. Low-Profit Companies / AEEE / Freiburg 10/21 2 Best Practice Farming / food industry Energy supply Sustainable banking Housing Fair trade 6

7. Low-Profit Companies / AEEE / Freiburg 10/21 Regional "citizen stock corporation Currently no dividends to the owners NDR 2019: https://www.youtube.com/watch?v=HWT-r0bVfu4 Regionalwert AG M nsterland 2020: https://www.youtube.com/watch?v=bZboBLUCSq0 7

8. Low-Profit Companies / AEEE / Freiburg 10/21 Citizen energy company / stock corporation Shares are not traded on the stock exchange, but on their own platform Magazine: https://www.energiezukunft.eu/service/magazine/ 8

9. Low-Profit Companies / AEEE / Freiburg 10/21 Other low-profit energy suppliers Green Planet Energy eG EWS Elektrizit tswerke Sch nau eG Prokon eG Counterexample NaturEnergy GmbH & Co. KG o Subsidiary of Naturstrom AG o Crowdinvesting via subordinated loan, interest: 2.5 - 4.0% p.a. 9

10. Low-Profit Companies / AEEE / Freiburg 10/21 Mietsh user Syndikat GmbH Association of 166 house projects and 15 project initiatives, each house project its own Ltd. Funded with direct loans from 1,000, interest up to 1.1% p.a., time period: 6 months ARD 2019: https://www.youtube.com/watch?v=EvwacmiYSGA WDR 2019: https://www.youtube.com/watch?v=g6Zb29RMyHk 10

11. Low-Profit Companies / AEEE / Freiburg 10/21 Membership: 5 shares of 100 each Dividend around 1-3% p.a. according to the resolution of the annual general meeting 11

12. Low-Profit Companies / AEEE / Freiburg 10/21 Fair Trade Explanatory video 2019: https://www.youtube.com/watch?v=U9iL85gRexk 12

13. Low-Profit Companies / AEEE / Freiburg 10/21 Limits of best practice Limited to social niches Dependent on philanthropic investors financing gap Get out of the niche How do you get from best practice to all practice? 13

14. Low-Profit Companies / AEEE / Freiburg 10/21 3 Classical Finance Perfect capital market Without Taxes and subsidies (state) Transaction costs Inflation 14

15. Low-Profit Companies / AEEE / Freiburg 10/21 Asset pricing model (William Sharpe 1964 et al.) Expected rate of return = risk-free interest rate + expected risk premium Applies ex ante to all real assets (common stocks, shares in a Ltd., real estate ...) 15

16. Low-Profit Companies / AEEE / Freiburg 10/21 Example 1 Risk-free rate (Libor, Euribor) Risk premium 1 % 4 % Expected return = % 16

17. Low-Profit Companies / AEEE / Freiburg 10/21 Bank account (1%) Bank loan (5%) Bank Equity (5%) Company Investor Figure 2: Classical corporate finance 17

18. Low-Profit Companies / AEEE / Freiburg 10/21 Received view If companies generates a rate of return of 5% p.a. and more, then these are profitable competitive attractive for investors creditworthy for banks 18

19. Low-Profit Companies / AEEE / Freiburg 10/21 Crucial question How can we modify classical finance in favor of low-profit investments and companies? 19

20. Low-Profit Companies / AEEE / Freiburg 10/21 4 Transformative Finance Market imperfections Taxes and subsidies (state) Transaction costs (bank fees, etc.) Inflation Sustainability

21. Low-Profit Companies / AEEE / Freiburg 10/21 Approach Negative interest rates (after taxes) -3% to -5% Two economic strategies (1) Central bank's negative interest rate policy (2) Fiscal policy with taxes and subsidies Precondition Abolish banknotes (Rogoff 2016) 21

22. Low-Profit Companies / AEEE / Freiburg 10/21 (1) Negative interest rate policy (Kenneth Rogoff, Larry Summers et al.) The central bank's base rate is negative prime rate < 0 Additional measure Compensate small savers (subsidize savings) 22

23. Low-Profit Companies / AEEE / Freiburg 10/21 Example 2 Small saver Interest rate Government subsidy for savings - 3 % 4 % Interest rate with subsidy = % 23

24. Low-Profit Companies / AEEE / Freiburg 10/21 Example 3 Large investor Risk-free bank account Interest rate 1 million - 3 % Wealth at the end of the year: abolish banknotes 24

25. Low-Profit Companies / AEEE / Freiburg 10/21 Example 4 Large investor (real assets: common stocks, shares in a Ltd. ...) Libor / Euribor Risk premium - 3 % 4 % Expected rate of return = % 25

26. Low-Profit Companies / AEEE / Freiburg 10/21 Example 5 Bank loan (available for all market participants: individuals, housholds, societies, municipalities ) Libor / Euribor Risk premium Bank charges - 3 % 4 % 1 % Interest rate on bank loan = % 26

27. Low-Profit Companies / AEEE / Freiburg 10/21 Bank account (-3%) Bank loan (2%) Bank Equity (1%) Company Large investor Figure 3: Corporate finance (negative interest rate policy) 27

28. Low-Profit Companies / AEEE / Freiburg 10/21 Two-agent economy Positive interest rate for small savers (private individuals, societies ) 1 2% Negative interest rate for large investors (wealthy individuals, banks, insurance companies ) -3% to -5% 28

29. Low-Profit Companies / AEEE / Freiburg 10/21 Large investors (10%) Small savers (90%) Figure 4: Share of total investors 29

30. Low-Profit Companies / AEEE / Freiburg 10/21 Small savers (33%) Large investors (66%) Figure 5: Share of total wealth 30

31. Low-Profit Companies / AEEE / Freiburg 10/21 Interest rate for small savers bank loan 2% Subsidy 1% Return on real assets -3% Risik premium -5% Base rate = Interest rate for large investors Figure 6: Negative interest rate policy 31

32. Low-Profit Companies / AEEE / Freiburg 10/21 (2) Fiscal policy with taxes and subsidies The central bank's base rate is positive Prime rate > 0 Government measures Wealth tax on risk-free assets Subsidized low-interest loans Fahrbach 07/20: https://www.postwachstum.de/ postwachstumsoekonomie-zwei-wege-fuehren-nach-rom-20200702 32

33. Low-Profit Companies / AEEE / Freiburg 10/21 Wealth tax on risk-free assets Daily and fixed deposit accounts, government bonds ... Instead of previous taxes on capital income Flat rate Tax allowance Example 6 EU-wide wealth tax of 3% per year on all risk-free assets over 100,000 33

34. Low-Profit Companies / AEEE / Freiburg 10/21 National taxes on capital income Uniform, EU-wide wealth tax on risk-free assets Figure 7: Wealth tax instead of income tax 34

35. Low-Profit Companies / AEEE / Freiburg 10/21 Example 7 Large investor Interest rate Wealth tax 1 % 3 % Interest rate after taxes 2 % abolish banknotes 35

36. Low-Profit Companies / AEEE / Freiburg 10/21 Example 8 Risk-free asset Interest rate Tax allowance Wealth tax 1 Mio 1 % 100 000 3 % Tax debt at the end of the year: 27 300 abolish banknotes 36

37. Low-Profit Companies / AEEE / Freiburg 10/21 Rate of return after taxes Expected rate of return after taxes [ Euribor wealth tax rate ] + risk premium risk-free rate after taxes + risk premium Applies to all real assets (common stocks, shares in a Ltd., real estate ...) 37

38. Low-Profit Companies / AEEE / Freiburg 10/21 Example 9 Large investor (real assets: common stocks, Ltd., real estate ...) Libor / Euribor Expected risk premium Wealth tax rate 1 % 4 % 3 % Expected rate of return 2 % 38

39. Low-Profit Companies / AEEE / Freiburg 10/21 Taxes with regulatory purpose When risk-free assets are taxed higher, investors tend to ask for real (risky) assets provide companies with equity at low cost so that companies can make more low-profit investments. 39

40. Low-Profit Companies / AEEE / Freiburg 10/21 Example 10 Government subsidized low-interest loans Libor / Euribor Risk premium Bank charges Government subsidy 1 % 4 % 1 % 5 % Interest rate of subidized loan = 1 % 40

41. Low-Profit Companies / AEEE / Freiburg 10/21 Figure 8: Subsidized loan State Bank Government subsidy Bank loan Household Company Subsidized loan Equity Low-profit investment 41

42. Low-Profit Companies / AEEE / Freiburg 10/21 Subsidy Wealth tax (3%) State Subsidized loan (1%) Savings (1%) Bank Equity (2%) Large investor Company Figure 9: Corporate finance (fiskal policy) 42

43. Low-Profit Companies / AEEE / Freiburg 10/21 = Base rate Subsidized loan Interest rate for small savers 2% 1% Return on real assets Wealth tax on risk-free assets -3% Risik premium -5% Interest rate after taxes for large investors Figure 10: Fiskal policy for transformative finance 43

44. Low-Profit Companies / AEEE / Freiburg 10/21 5 Conclusion Two economic strategies 1) Negative prime rate (-3% to -5%) government subsidy for savers 2) Positive prime rate (1-2%) wealth tax on risk-free assets subsidized low-interest loans 44

45. Low-Profit Companies / AEEE / Freiburg 10/21 Two-agent economy positive interest rates for small savers (1-2%) negative interest rates (after taxes) for large investors (-3% to -5%) Precondition abolish banknotes (Rogoff 2016) 45

46. Low-Profit Companies / AEEE / Freiburg 10/21 Discussion How can investors be prompted to participate in low- profit companies? the central bank and the state create favorable financing conditions for low-profit companies? 46

47. Low-Profit Companies / AEEE / Freiburg 10/21 Bibliography Fahrbach, Christian and Weiser, Annika: Low-Profitim Kontext der UN-Nachhaltigkeitsziele. In: Wirtschaft neu lehren - Erfahrungen aus der pluralen, sozio- konomischen Hochschulbildung, Wiesbaden 2021. (http://www.low-profit.eu/wordpress/wp- content/uploads/Fahrbach-Weiser_2021_Chapter_Low-ProfitImKontextDerUN-Nachh.pdf) (https://link.springer.com/book/10.1007%2F978-3-658-30920-6) Fahrbach, Christian: Postwachstums konomie zwei Wege f hren nach Rom, Blog Post- wachstum, I W 07/2020. (https://www.postwachstum.de/postwachstumsoekonomie-zwei- wege-fuehren-nach-rom-20200702) Fahrbach, Christian: Postwachstum und die drohende Verteilungskrise, Blog Postwachstum, I W 10/2019. (https://www.postwachstum.de/postwachstum-und-die-drohende- verteilungskrise-20191015) Fahrbach, Christian: Low-Profit-Investitionen bewerten, finanzieren, f rdern, M nster, Vienna 2014. (http://www.lit-verlag.de/isbn/3-643-50588-0) 47

48. Low-Profit Companies / AEEE / Freiburg 10/21 Fahrbach, Christian: Low-profit seminar, L neburg 01/2021. (https://www.exploring- economics.org/en/discover/syllabus-low-profit-investment-funding-pricing/) Fahrbach, Christian: Financial market seminar, L neburg 01/2021. (https://www.exploring- economics.org/en/discover/syllabus-stable-financial-markets/) Friedrich, Adriana: Low-profit explanatory video, L neburg 01/2020. (http://www.low-profit.eu/wordpress/wp- content/uploads/mysimpleshow_Restore__1__Low-Profit-Investitionen.mp4) Rogoff, Kenneth: The curse of cash, Princeton University Press 2016. Sauga, Michael: Kenneth Rogoff, Harvard- konom rechnet mit st rkerem Minuszins. In: Der Spiegel 04/2020. (https://www.spiegel.de/wirtschaft/service/kenneth-rogoff-rechnet-mit- staerkerem-minuszins-a-b5cf877f-c5fc-437b-a8f4-714dee554b8a) Wikipedia: Low-Profit-Organisation, Low-Profit-Investition, Low-profit limited liability company, 2021. 48

49. Low-Profit Companies / AEEE / Freiburg 10/21 Thank you for your attention 49