Co-operative Reform Process

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    This document has been made available in electronic format
         by the International Co-operative Alliance ICA 
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                         July, 1994

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              The Co-operative Reform Process
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2.1  The need for, and main fields of co-operative reform
**********************************************************

When the term `transformation' is referred to in the following
section this does not mean a change of form from co-operative
to another type of business (which has happened only in a
limited number of cases). The legislation relates rather to
the co-operatives' transformation from planned to market
economy.

Within the three co-operative branches discussed in this
section real transformation was only possible during the
validity of Code No 94/1988 and before the introduction of
Code No 42/1992, on the Adjustment and Settlement of Property
Relations in co-operatives. This took place only in
exceptional cases, the majority of co-operatives retaining
their co-operative character.

Slovak co-operatives were greatly in need of reform or
transformation, above all in the following areas:

a)   legislation, especially relating to housing and
     agricultural co-operatives;

b)   economic measures to implement the co-operatives'
     transition from planned to market economy;

c)   the membership: one of the most important assets of the
     co-operative movement.

The fact that reforms are taking place does not necessarily
mean that the Slovak co-operative movement will return to the
situation which existed before 1948. It is of the utmost
importance that the development of co-operatives in democratic
States, especially since the end of the Second World War,
should be taken into account as this will provide information
about the co-operative movement in conditions of market
economy. The details of the reforms will vary between
co-operative branches, but they should all be in accordance
with the three main points of the aim outlined in the
introduction.

The implementation of reforms also requires some changes in
the attitudes of Parliament, the Government and the public to
the co-operative movement. The co-operative theory and
co-operative history must be purged of the remnants of
Communist ideology. Only then can the necessity to create
conditions which control co-operative reform in the fields of
legislation, audit and property management be understood.

It is not due to the co-operatives that the reforms have
failed to be fully effective. The main reason for this is the
legislative measures passed without a thorough analysis of
previous development and present conditions. This has created
a large degree of uncertainty.

Agricultural co-operatives
**************************

In agricultural co-operatives the transformation process is
not finished. Suffice to say that the Law governing the
restitution of nationalised land was not passed by the Slovak
Parliament until October 1993. Agricultural co-operatives have
not been able to carry out internal structural transformation.
The majority have debts, and for this reason the banks are
unwilling to provide them with loans. Some co-operatives are
even facing bankruptcy.

Co-operatives are free to establish their own legal form, even
one which is not co-operative. However, in order to do so they
would have to settle their substantial debts. The State and
the financial institutions (banks) have first call on a
company's assets, the co-operatives' members would only be
able to make a claim once any debts to these parties had been
settled. For this reason, members are reluctant to liquidate
existing co-operatives and establish new ones. Thus, the
existence of many co-operatives is unclear, as is the material
position of their members.

The Association of Agricultural Co-operatives has already
submitted concrete proposals for the solution of such
problems. To date, neither Government nor Parliament has
examined the proposals, thus the transformation of
agricultural co-operatives cannot be successfully finalised.


Consumer co-operatives
**********************

The consumer co-operatives are faced with a different problem.
With the exception of fruit and vegetable sales by small-scale
producers almost all retail trade used to be in State or
co-operative hands. Furthermore, the State controlled the
whole of the wholesale sector, thus the consumer co-operatives
were significantly disadvantaged. However, the most
significant factor was that most of the State shops operated
in the towns, where the purchasing power was concentrated. The
consumer co-operatives had their main network in rural areas,
where the population is dispersed and higher percentage costs
are incurred for distribution, wages and other expenses.

One of the main tasks of reform is restructuring the retail
trade and establishing a supply network for the consumer
co-operatives. The following new types of operational units
were established:

-    KONZUM EXTRA shops, which sell food and cosmetics
     (surface area in excess of 150sq.mtr),

-    KONZUM MIX shops, which sell food, cosmetics and selected
     high-turnover consumer products (surface areas of at
     least 100 sq.m.),

-    DISCONT discount stores,

-    KOMPLEX retail outlets, which stock a rich assortment of
     consumer goods, and

-    DODO, a department store.

The co-operatives sell their smaller restaurants and hotels to
private entrepreneurs, eventually handing them over with a
commercial lease. They only retain control of such
establishments in exceptional circumstances, mainly when the
businesses are able to operate throughout the whole year.
These enterprises have the collective name "GASTRO". Through
the sale of their smaller units the co-operatives are able to
release money for the settlement of bank loans.

The new strategy seeks to create a unified external and
internal image, with own-brand goods and a uniform corporate
image for logos, shop decor, staff uniforms etc. This process
is evident throughout the consumer co-operative network, from
packaging and transport through to marketing.

The wholesale network is continually under scrutiny, with the
reorganisation of areas so as to optimise the supply of shops.
Where possible, central purchasing is to be introduced.
Profits from wholesale activities are being set aside for this
purpose.
In the long term, the establishment of supermarkets and
hypermarkets will be taken into consideration, as well as
expansion of the network of discount shops.
Computer technology will be used to evaluate new forms of
franchising in order to maintain the co-operatives' activities
whilst decreasing their expenses. The creation of new legal
entities in the form of holdings will be also taken into
consideration, so that higher-level legal entities - either
co-operatives or joint-stock companies - will retain a
controlling interest in them.

Housing co-operatives
*********************

A comparatively complicated transformation process is being
considered with regard to the housing co-operatives, and its
ultimate form has yet to be finalised. Despite this,
significant changes have begun to take place within the
housing co-operatives.

Even when the independence of housing co-operatives had been
given legal recognition, the construction of co-operative
apartments continued to be planned and realised by the State.
Furthermore, the housing co-operatives continued to be
financially dependent on the State. However, Law No 176 of
1990 permitted members to transfer their apartments, together
with members' rights and duties, to a third party. The
co-operatives' authorities respected this right.

In the seventies there were 800 co-operatives in Slovakia, and
their numbers were reduced to 80 within a short period of
time. In order to remove any injustice arising from the forced
merging of housing co-operatives, a proposed law permitted the
establishment of a new co-operative by its separation from a
larger, integrated co-operative. At the time of writing, 36
co-operatives have taken advantage of this new law. Six
housing co-operatives were established by separation. At
present, however, attempts are being made to form larger
co-operative units, especially for those co-operatives which
administer only one house, because of the problems of high
overheads, which have to be met directly by members.

The amendment of the Civil Code with effect from January 1992
abolished the law of 1964 which previously dealt with the
administration of flats. This significantly increased housing
co-operatives' independence from State.

Some, not insubstantial, problems have arisen from the fact
that the new commercial code does not distinguish between
individual types of co-operative, with all co-operatives being
seen as profit-making enterprises. This has created big
problems for co-operatives in the development of regulations.
There was an effort to adjust the members' entitlement to
claim a share in the co-operatives' assets, but as yet this
has not been successful.

Transformation Law No 42/1992 imparted to housing
co-operatives the legal obligation to transfer property rights
to their members on the latters' request. The Transformation
Law does not permit housing co-operatives to take on any other
legal form.

In 1993, Parliament approved Law No 182, referring to the
ownership of apartments and other forms of accommodation. This
Law gives co-operatives two years to sign contracts
transferring the ownership of members' apartments to those
members who request it on the basis of the previous
regulations. The price of the apartment  is set according to
the unpaid investment loan outstanding on the accommodation.
The State contribution previously provided does not have to be
repaid. The freehold of the land on which co-operative houses
were built are to be handed over to the co-operatives, which
have a duty to transfer it, free of charge, to the owners of
the accommodation.

It is clear from the above that the process of property
transformation and the interpretation of the transformation
law will be a long-term process, the end results of which
cannot be foreseen, because it depends exclusively on the
decisions of the membership.

Production co-operatives
************************

In production co-operatives the transformation process is
largely finished, with the exception of a few cases which are
still to be decided in court. The aim of the transformation
was to establish the State's claim on the co-operatives'
property and then to change co-operatives into co-operatives
of shareholders. In Slovakia, the State did not have any claim
against the production co-operatives' assets, so it was not
possible to do this.


At present, the co-operative assets consist of:

-    ownership of the co-operative (non-divisible funds),

-    the members' assets (property shares).

Both forms are controlled exclusively by the members and their
representatives. The State has no right to dispose of any
property belonging to the co-operative or its members.

The assets owned by production co-operatives are valued in the
region of 4.1 Billion Sk, of which property shares represent
1.9 Billion Sk1.

Despite the fact that the transformation law contains many
ambiguities, which result in different interpretations and
even contradictory regulations, the production co-operatives
have been able to avoid the biggest obstacles. This was
possible mainly because co-operatives and their associations
agreed on common procedure. There are 200 production
co-operatives, but only in three cases have queries needed to
be submitted to court for decisions.
The basic change to the previous situation was in the relative
value of members' shareholdings. Those entitled to claim under
the transformation law were given property shares. Thus
production co-operatives became co-operatives of shareholders.
Until 1990 each member's shareholding was valued at 500 Sk.
Following transformation, the average shareholding was twenty
to thirty thousand Sk. Opportunities to share property amongst
the members are limited, as it cannot easily be transferred to
another member or other individual. When a member leaves the
co-operative the value of his share in such property will be
repaid to him as part of the compensation share. By
"compensation share" we understand the member's claim on the
co-operative property at the time of their departure from the
co-operative. In other words, their share of the growth in
co-operative assets which has taken place during their
membership of the co-operative.

2.2  Government co-operative policies
***************************************

Evidence of the State's policy regarding co-operatives and
co-operative characteristics can be found in the preceding
section, especially in the part dealing with reform and the
transition process, which are under way and will continue to
progress within Slovak co-operatives for some time.

Immediately after 1989 it was possible to characterise this
policy as one which was unfriendly and even hostile. However,
until 1991 a more moderate policy was manifested by the State
bodies in connection with its acceptance of the transformation
law. At present it seems that Parliament and Government are in
a quandary as to what they should do with co-operatives.

State policy does not differentiate between entrepreneurial
activities, and regards co-operatives as being included in
these. The same economic and taxation regulations are applied
to all. Nevertheless, in individual co-operative branches some
variations are evident especially in tax questions and
regarding State subsidies.

Agricultural co-operatives
**************************

Within the agricultural co-operatives, immediately after the
transformation law was passed the Farmers' Co-operative Union,
submitted concrete proposals and requirements to Government,
dealing with the establishment of a State agricultural policy
which recognised the position of agricultural co-operatives.

>From 1989 onwards, State subsidies for agriculture (i.e. to
co-operatives) decreased significantly. At present they are
very much lower than the levels of agricultural subsidies
currently paid in West European countries. In 1993,
agricultural subsidies amounted to only 7.1 Billion Sk.

n the future, investment is needed to support those functions
which are not directly related to the production process. It
is presumed that supplementary means will be allocated to
protect the co-operatives against high interest rates, to
provide loans for "biological supplies" and cover part of the
costs of biological material, for the improvement of breeding
stock, to fund increased productivity (agro-chemicals,
fertilizers etc.), for assistance in quality control (genetics
and breeding), for employment support, (agro-tourism,
development of rural head offices) etc. The allocation of
subsidies is decided by tender on the basis of applications
from individual subjects. The Union of Agricultural
Co-operatives' representative is always a member of the
commission.

At the same time, two main questions must be examined in order
to  plan the production of agricultural produce:

-    the importance of co-operatives' contribution to the
     future agricultural production of Slovakia and
     co-operatives' relations with the private sector;

-    the quantity, quality and structure which such
     agricultural production will take, especially since it
     may be assumed that the opportunities for export may be
     limited (e.g. by the General Agreement on Tariffs and
     Trade and the European Union).

>From the beginning of 1991 the financial situation of consumer
co-operatives has gradually worsened in comparison with the
position before 1989. Interest rates were 6% till the end of
1990 for stocks of the wares. The whole amount of the supplies
was covered by bank credit in the central planned economy.
Suddenly, from 1 January 1991 interest rates rose to 24% and
fell to 17% during 1991 but this is still very high.

A new tax system came into force from the beginning of 1993,
and this adversely affected the consumer co-operatives. Even
prior to the liberalization of prices, the huge differences
between demand and supply within the market raised the prices
of all inputs. This had negative impact on all co-operatives.
The new income tax represents 45% of net profits and is
applied to all business activities. Furthermore, the
introduction of Value Added Tax has significantly increased
the price of all goods. Some other new taxes have also been
established: real estate tax, road tax, tax on the transfer
and sale of property, inheritance taxes and gift taxes.

The consumer co-operatives' plans are described in detail in
Section 2.1. Their implementation will depend on the
development of the State~s financial policy regarding
co-operatives, which will affect the co-operatives' ability to
compete with the private sector in economic and technical
terms. 

Housing co-operatives
**********************

The situation of housing co-operatives is still not clear (as
outlined in Section 2.1). The transition to a market economy
has had an immense effect on results achieved. It will be
especially difficult to reconcile the rapidly growing costs
of, and prices fetched by, new housing developments with the
changing financial circumstances of current and potential
members.

During the former regime, the Government regarded housing
co-operatives as a valuable tool for the solution of its
numerous and complicated housing problems. Housing
co-operatives were given land to use free of charge and
equipment provided. The State made financial contributions
towards construction costs and loans at favourable rates of
interest. In return for permitting certain organisations to
allocate some of the apartments to their employees, part of
the members' share costs could be covered. Co-operatives had
tax advantages for the purchase of materials, and maintenance
and repair works. Certain advantages also existed regarding
the taxation of wages.

All these advantages have now been discontinued. There is only
a limited range of subsidies for the installation of heating
systems, and the demolition of the substandard prefabricated
houses which had been built in the past.

The question still remains as to whether or not the State will
be willing and able to instigate a social housing policy. If
co-operative housing development is less advantageous for
citizens than obtaining an apartment in the private sector,
the future of housing co-operatives will be uncertain.

Production co-operatives 
************************

Production co-operatives are able to exercise a great deal of
freedom in the selection of activities. Each production
co-operative is completely independent, and is not restricted
to a certain type of product. Despite this, the co-operatives
have realised that it is advantageous for those pursuing
similar activities to join together for the performance of
such activities, which can be realised more profitably when a
bigger number of co-operatives works together. 

An exception has been created in the case of disabled persons~
production co-operatives in which at least 60% of the members
are disabled. At present the State provides these
co-operatives with certain benefits, especially in the form of
lower costs. The standard rate of income tax is set at 45%,
with a tax-free allowance of 5,000 Sk per person and 15,000 Sk
for those employees with a serious disability or health
problem.

>From August 1993, disabled people~s co-operatives pay only a
10% tax for pension and health insurance if at least 50% of
its members are disabled (the standard level of tax is 38%).
State support to such co-operatives takes account of their
specific conditions, especially the higher costs arising from
the need for specialised equipment. The State also recognises
that its disabled workforce is less able to adapt to new
conditions, and it is able to see that it is difficult to
identify suitable production programmes which are appropriate
both for the abilities of disabled persons and for market
conditions. In many cases disabled people also have lower
qualification.

In order to support the State's work for disabled people the
Slovak Union of Production Co-operatives has established a
rehabilitation fund, which makes a contribution to the State
budget of 2,000 - 3,000 Sk per year for each disabled person,
the exact amount depending on their level of disability.
It is still not possible for co-operatives to participate in
the privatization of State property, which may be bought only
by individuals. Originally the co-operatives tried to persuade
the State authorities to allow them to participate in the
privatization. No decision has as yet been made regarding this
matter, so co-operatives are still eliminated from the
privatization process. This is sometimes justified by the fact
that before 1989 the co-operatives were part of the Socialist
sector. This was not a voluntary decision of the co-operatives
and their members, but was a necessary condition of the former
regime's toleration of co-operative activities.

There have been some instances in which co-operatives were
"privatised" to form new commercial companies. This happened
prior to the passing of Transformation Law No. 42/1992, which
does not permit the privatisation of consumer, housing and
production co-operatives, but only the increase in members'
ownership of the co-operatives' assets. 

2.3  Co-operative legislation
*****************************

Co-operative legislation in Slovakia (and also the former
Czechoslovakia) is still influenced by the biased education
which citizens received during the previous regime. The
legislative process demonstrated, and still does to a certain
extent, the deputies' lack of knowledge regarding the problems
of co-operatives. Popular opinion still sees co-operatives as
the products of the Communist regime and supporters of
"Socialisation" within the national economy.

There is also a less popular opinion that the continuing
transformation and reform in the national economy, including
the co-operatives, is an unwelcome deviation from the
situation which existed prior to 1989. Although such opinions
have little influence, the number of dissatisfied people is
growing due to plummeting standards of living and the growth
in unemployment.

The removal of such incorrect views of co-operatives will
require the reeducation of the media, co-operative members,
State representatives and the public. Exceptionally important
is the provision of information to secondary schools and
universities. With this in mind, the associations of consumer
and production co-operatives developed an initiative to enlist
the assistance of the media in all its forms (press, radio and
television).

It is necessary to make a particular mention of the help given
by the International Co-operative Alliance (ICA) to the
Czecho-Slovak co-operatives during 1991 and 1992, the period
in which Transformation Law No 42/1992 was prepared. The
existence of co-operatives was seriously threatened at that
time. Under the influence of some, extremely
anti-co-operative, politicians, moves were made to bring about
the eradication of co-operatives as the "residue of Communism"
and to redistribute the co-operatives' assets in their
entirety. Only then might those affected decide to establish a
new co-operative: but this would be without legal and property
continuity, and minus the financial resources which had been
accrued by several co-operative generations. 
The Transformation Law is not perfect and does not fulfil all
the co-operatives' requirements, but it does allow them a
future.

The most influential legislation
********************************

Until 1948 Bohemia was governed by the old imperial Austrian
law No 70/1873 regarding profit-making and commercial
associations, and in Slovakia the old Hungarian commercial law
of 1875 was in force until 1954.

After the beginning of totalitarian regime in 1948, the new
"Socialist" constitution and Law No 187/1948 on the Central
Union of Co-operatives was accepted. These standards were used
to bring about the liquidation of some co-operative branches
and numerous co-operatives. For a long time they permitted
State authorities to intervene in co-operative affairs. In
1949 Law No 69, governing unified agricultural co-operatives,
was approved.

The first general co-operative law in Czechoslovakia was law
No 53/1954 regarding co-operatives and national co-operative
organisations. It formally restricted the rights of State
bodies to interfere in co-operative affairs. 

In 1959, Law No 27 on housing co-operative development was
issued. 1960 brought the new Czechoslovak constitution, which
defined co-operatives as "voluntary social organisations". 

The third section of the commercial code No 109/1964 set out
the basic framework for regulations, leaving the Central Union
of Co-operatives and the Branch Unions of Co-operatives free
to establish the other regulations themselves.

Law No 122/1975 made some changes to the activities of
agricultural co-operatives.

In its final moments the former regime tried to alter
conditions within the co-operative system, especially through
Law No 94/1988 regarding housing, consumer and production
co-operatives. This took many of its regulations from the
current law on State enterprises, but also freed the
co-operatives from some of their obligations.

In 1990, Laws No 162, on agricultural co-operatives, and No
176, on housing, consumer and production co-operatives, were
issued. They were not in force for very long. The new
commercial law No 513/1991 replaced all previous laws and
became the general legislation standard for all types of
co-operatives. Some of its shortfalls have already been
discussed.

Law No 42/1992 adjusted property relations and compensation
requirements in co-operatives. It defined the way in which the
co-operatives should become co-operatives of shareholders.
Some paragraphs of this law had to be repeatedly amended,
either because they contained contradictory regulations, or
because it was not possible to put them into practice.

At present Slovakia has no co-operative law. Co-operatives see
law No 42/1992, which regulates the mergers and separation of
co-operatives as discriminatory. According to this law, in
such cases the co-operative is wound up and any indivisible
funds are transferred to the National Property Fund
administered by State. In this way the State is able to
appropriate part of the private property of co-operatives,
which rightly belongs to their members. This regulation makes
it impossible, no matter what the conditions, to carry out
mergers or divisions of co-operatives.

The Co-operative Union of the Slovak Republic has already
submitted the amendments to this regulation. 


2.4  Changes in the co-operative movement and their impact on
     its structure
**************************************************************

Some aspects of structural changes have been already analysed,
especially in connection with the transformation of
co-operatives. Some additional data are now presented.

In 1989 there was a total of 635 agricultural co-operatives.
In the course of 1990 some bigger co-operatives were divided
to form smaller ones, so by the end of 1991 there were 965
co-operatives. After the transformation, by the end of 1993,
there were also twelve joint-stock companies and nine limited
liability companies.

The number of consumer co-operatives increased from 37 to 41.

The housing co-operatives divided some of the larger
co-operatives to form smaller ones, thus increasing in number
from 83 to 130. 

Between 1989 and 1993 the number of production co-operatives
increased from 113 to 196. In the course of transition two
co-operatives were changed to commercial corporations, nine
were abolished or left the Union and seven of the bigger
co-operatives divided to form 27 smaller ones. Two
co-operatives were merged.

Changes also started in the co-operative Unions. These had
begun in 1968, when two national unions (of consumer and
production co-operatives) were divided to form independent,
"national unions". These were:

-  the Czech Union of Consumer Co-operatives and the Slovak
   Union of Consumer Co-operatives,

-    the Czech Union of Production Co-operatives and Slovak
     Union of Production Co-operatives.

These Unions were of equal status.

Then another two Unions of Housing Co-operatives were
established:

-    the Czech Union of Housing Co-operatives and
-    the Slovak Union of Housing Co-operatives.

The Central Union of Co-operatives, which represented
Czechoslovak co-operatives in the ICA, remained unchanged
after 1968, but it did not have any power in economic matters
because, as regards planning, the co-operatives and their
unions belonged to the Czech and Slovak Government.

In April 1990 the Slovak Agricultural Co-operative Association
was established. In 1993 this became the Union of Agricultural
Co-operatives of the Slovak Republic.

In 1991 the functions of the former Central Council of
Co-operatives were taken over by the Co-operative Union of the
Czech and Slovak Federative Republic. After the division of
Czechoslovakia into two independent republics on 1 January
1993 this Co-operative Union was abolished.

A diagram illustrating the organisational relations within the
co-operative system is attached. See Annex 1.