VI. Conclusions and Recommendations

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  This document has been made available in electronic format
          by the Committee for the Promotion and
            Advancement of Cooperatives (COPAC)
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                     REPORT OF THE MEETING
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VI.  CONCLUSIONS AND RECOMMENDATIONS 

Group A Report
-------------- 
Chairman:      Mr. Panagiotis Kolyris 
Rapporteur:    Prof. M. S. Sriram 
 
The group had a semi-structured discussion on the various
points listed below. 


1)   Why do we need capital?: 
 
The discussion on why do we need capital was addressed in the
context of management functions. 
 
Capital generation should be a means to achieve something and
not an end in itself. A good "manager"  would ensure that the
capital generated by a cooperative would be put to good use.
The group recognized that generation of capital therefore had
to be "need based". 
 
 
2)   How do we generate it? 
 
The major part of this discussion concentrated on how to
generate capital. To make the discussion more focused, the
group agreed to make the following assumptions: 
 
a)   that the cooperative had an efficient management; 
 
b)   that there was no interference from the Government;  and  

c)   that there was a competitive environment. 
 
Whenever these assumptions were violated, the strategies
discussed were appropriately qualified. 
 
 
Strategy 1 : Guarantees 
 
Members could be asked to give guarantees, with their personal
assets as collateral security on a multiple of their share
capital.  The cooperative could borrow from financial
institutions, based on these guarantees. The special feature
of this strategy is that the members are investing faith in
the cooperative and not money at the outset. 
 
This strategy has three preconditions: 

-    that the banking system functions along commercial lines; 
      
-    that members agree to assume an obligation to supply a
     minimum amount of produce, which gives the bank
     confidence in the turnover and also makes the members
     involved;  and  
 
-    that the guarantees and obligations are readily
     enforceable by law. 
 
 
Strategy 2: Check-offs 
 
A compulsory levy or "check-off" system can be introduced to
collect from members payments due. The check-off should be
based on the total value rather than the number of
transactions generated by each member. This strategy is likely
to work better in controlled markets (coffee in Kenya,
resource-poor areas in India). The check-offs could be
indivisible, member-non-identifiable (Kenya) ormember-
identifiable (India). The Group felt that it would be
better if these were member identifiable. 
 
In relatively free markets this might be an ineffective
strategy unless the cooperative has a good management. But
even in open markets the strategy might be an important
mechanism to address the "free-rider-problem". 
 
 
Strategy 3: Retain Surpluses 
 
A concerted, conscious effort must be made to retain a portion
of profits under the indivisible reserves category. This
should ensure the stability of the cooperative even if a few
members withdraw their investments. 
 
Surpluses can also be retained by having member-identifiable
reserves, but indivisible reserves were preferred by the
group. 
 
 
Strategy 4: Exotics 
 
Various options are possible under this strategy: 
 
a)   Allowing for multiple shares and the allocation of voting
     rights according to the number of shares held with an
     upper limit so as to prevent easy takeover. 
 
b)   Determining capital contributions and voting rights in
     proportion to delivery. 
 
c)   Allowing for multiple shares and a single vote, with veto
     power for those who have a high stake. 

d)   Expansion of membership criteria to include suppliers of
     capital (complications could arise on patronage benefit
     sharing). 
 
e)   Creation of a subsidiary company to tap the stock market,
     providing that the cooperative has at least 51% shares in
     the subsidiary. 
 
f)   In case of higher level cooperatives, formation of
     joint-stock companies with primaries exercising full
     control.   

In the case of a federal or secondary level cooperative: all
agreed it was necessary to watch out for higher level
cooperatives trying to survive for the sake of their
managerial cadres and losing sight of the ultimate
beneficiary. 


Group B Report:
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Chairman:     Prof. Eberhard Dulfer
Rapporteurs:  Mr. Bernd Belkenhol, Ms. Elena Diacenco 

 
1)  Preliminaries: definitional issues 
 
Different forms of cooperative capital should be defined
(external, internal, institutional, divisible, indivisible,
etc.) 
 
Grading of the quality of cooperative capital might depend on
the point of view, for example: the management would favour
unallocated reserves, because they were long-term and cheap. 
The bank would have a similar view, but the member might
prefer allocated capital with a short term redemption
possibility. 
 
 
2)   Cooperative capital formation: important for whom and in
what sort of situation? 
 
-    increased market shares 
-    expansion into more capital-intensive activities 
-    export 
-    enhanced creditworthiness generally 
-    commitment, patronage 
 
 
3)   What works? (more or less): mechanisms for enhanced
capital formation: 
 
a)   direct investment (member share capital) methods (raise
     minimum number required per member) common equity. 
 
b)   retained patronage refunds (increase portion of retained
     allocated surplus) 
 
c)   per unit capital retained (raise the percentage of
     allocated revenue that is retained per year) (example:
     Tri-Valley Cooperative in the USA, where 18 percent of
     gross earnings revolved over 3-4 years) 
 
d)   maximize unallocated cooperative equity 
 
e)   raise non-member equity capital (relevant primarily for
     multi-purpose-cooperatives) 

f)   mandatory patron capital common equity (require a
     sub-group of cooperative members to raise extra share
     capital if they wish to initiate a new activity) 
 
g)   optional equity (preferred stock with cumulative returns)
     limited to members or communities where members live; 
     return is paid, if surplus permits (before common equity)
     
h)   agreements with investor-owned firms 
     -    Joint Venture 
     -    License Agreements 
     -    Joint Ownership of Profit Subsidiaries 
 
i)   transfer of a cooperative-owned business to a joint-stock
     corporation (involving leasing arrangements and supply
     contracts, etc.) 
 
j)   new generation-type of cooperative. Capital: purchase of
     delivery rights.
 
 
4)   Factors that influence cooperative capital formation   
-    Antitrust laws with waiver dispositions 
-    Monetary policy 
-    Flexible incorporation requirements 
-    Definition of property rights 
-    Independent, fast law enforcement 
-    Government direct ownership of cooperative capital 
-    Repression/liberalization of financial markets (input,
     produce, finance) 
-    Management quality (analyze capital requirements,
     informed about capital formation alternatives) 
-    Relations, communications, information between management
     and members 
-    Support infrastructure (farm credit system) 
-    Internal and external audit systems 


RECOMMENDATIONS 
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*    To Governments and Donors: 
 
All funding to cooperatives should be routed through the
cooperative movement; 
 
Cooperatives should accept funding in such a way that it does
not undermine the autonomy of the cooperative.  The danger is
that: 
 
(a)  donors have their own agendas, and  
 
(b)  in most cases governments are the main recipients of aid
     to cooperatives. 
 
However, in the movement from controlled to open market
economies, it is fair and reasonable for cooperatives to seek
support in making this transition.  In all cases, Principle 4
of the new Cooperative Identity Statement adopted by the
International Cooperative Alliance in Manchester in September
1995 should be the guiding principle. 
 
Funding should be aimed at real cooperatives, which might mean
by-passing federal structures and going directly to the
primary societies. 
 
 
*    To FAO and COPAC: 
 
Three position papers should be prepared on the following
topics: 
 
1)   Why is capital required in agricultural cooperatives,
     when is it required, and how can it be raised?  This
     paper should be written in easy-to-understand language,
     well-illustrated and aimed at a general reading public. 
 
2)   Practical guidelines for capital formation which would
     include a three-dimensional layout (not a prescription
     for use by agricultural cooperative managers) showing: 
 
     (i)   kinds of capital required 
 
     (ii)  types of capital available 
 
     (iii) the conditions of each type 
 
     This checklist should be developed from real-life cases
     of successful practices. It should consider, inter alia,
     the environmental factors and the different types of
     cooperative involved. 
 
3)   A study of the new institutional economics and farmers'
     cooperatives, covering, inter alia, effective instruments
     and incentives for capital formation. 
 
     FAO and COPAC should undertake further development of
     analytical techniques to assess the role of capital in
     agricultural cooperatives.