Part 2 of The Situation of Co-operatives in Africa (1994) 1.6.2 Credit ceilings and increased interest rates: Credit ceilings and increased interest rates are introduced as stabilization measures. Virtually all IMF programmes include conditionalities related to these measures. The credit squeeze is generally pushed further by the need for governments to borrow on the domestic capital market in order to service their foreign debt. Given the size of these service obligations, the crowding out of the private and co-operative sectors from the capital markets can be a serious impediment to investment and growth. A particular problem facing all co-operatives involved in agricultural produce marketing is the shortage of crop finance, i.e. credit that will permit purchase of produce and prompt payment to farmers. In a liberalized market (see below) the co-operatives have to compete with other business operations for credit. Times are then past when government agricultural marketing monopolies, incorporating the co-operatives as agents, were provided preferential access, and access with government guarantee, to credit (albeit often too little and too late). Co-operative organizations often find themselves in a difficult situation when they have to compete for credit on markets where credit limits are imposed and interest rates are increased. For historical reasons far too many co-operatives are simply not credit-worthy. They are considered high risk clients by financial institutions and treated accordingly. Even if loan applications are not outright rejected, loans extended are below credit needs. As crop finance and working capital cannot be secured, the volume of business is threatened. Inadequate crop financing is particularly damaging. If competitors with better access to finance can pay farmers cash on delivery, co-operatives often find it hard to compete. Cash on delivery is a particularly powerful competitive advantage. The failure to meet this competition means loss of business. For co-operatives with fixed capacities in processing (coffee plants, cotton ginneries, oil expellers, large cereal mills, tobacco factories, tea factories, for example), a reduction in throughput and capacity utilization caused by inadequate access to working capital can start a downward spiral of decreased throughput, decreased profitability, further reduced credit- worthiness, still further reduced purchases and throughput, and so on. High interest rates place demands on the borrowing organizations to use funds efficiently in order to bear the burden of high capital costs. As we will discuss further in section 8.4, far too many co-operative organizations have a low level of business efficiency and find it difficult to cope with the burden of high interest rates. Co-operatives in the financial sector will obviously also be affected by changes in monetary policies. Co-operative banks will find that re-financing facilities with the central bank are restricted and that reserve requirements reduce their lending capacity as credit limits are imposed. At the same time the co-operative financial institutions should welcome finance sector reforms which permit real interest rates. Whereas such reforms open up long-term potentials for developing deposit facilities for co-operative members, it hardly has this effect in the short run. As the co-operative banks feel the chill on a liberalized market where they have to compete with other financial institutions, they often find it necessary to tighten their policies which may not always seem to be in the interest of the co-operative movements. One common bank response is to look for clients (both for depositing and borrowing) outside the co-operative movements. Furthermore, the co-operative banks tend to introduce more stringent screening criteria which results in rejections of loan applications from within the movement to the consternation and dismay of many. As part of a structural change within the co-operative movements these developments may be necessary. At the same time they create tensions and raise important questions about loyalties and purpose. Credit Unions tend to be less affected by monetary policy reforms. Their funding base and their lending operations are primarily with their members. To the extent that surpluses (deposits over lending) are to be invested, raised interest rates are beneficial. 1.6.3 Devaluations: We have already noted that devaluations are intended to shift consumption from tradeable to non-tradeable and production in the opposite direction, i.e. from non-tradeable to tradeable. When looking at the effects of devaluations for the agricultural marketing co-operatives in Africa, it matters whether these co- operatives are marketing agricultural produce which is tradeable or not. If the produce is exported, devaluation means that higher prices will be received (measured in local currency). Such higher prices are expected to promote increased production which would also allow wider margins and offer increased business opportunities. In other words, volumes may expand and profits may increase. To a disproportionately large extent exportable agricultural products are produced by women farmers. A boom in export crop production following from currency devaluations would tend to favour male producers rather than women producers. Business operations, including co-operative business operations, would be attracted by an expanding sector and would tend to grow in that sector. This might be in conflict with ambitions to serve women farmers. However, the experience with the structural adjustment programmes so far does not show that devaluations have had particularly strong effects in terms of increasing agricultural export production. The reasons are not entirely clear other than for perennial crops for which a considerable time lag can be expected for a production response. Initially the price increase following a devaluation tends to increase trading margins unless the government intervenes to capture windfall profits. Co-operatives under severe pressure from inadequate trading margins would initially find their situation improved. They would also be in a position to increase their procurement prices to farmer members or to pay bonuses. This happened for instance in Uganda when a major devaluation in 1992 gave coffee exporting co-operatives a windfall profit which permitted bonus payments. At the same time, widening trading margins may attract new actors if markets are simultaneously liberalized. If these new entrants offer competition, trading margins will shrink and the co- operatives may find themselves loosing market shares, resulting in an overall loss of income. The development of the coffee market and the experience of the coffee co-operatives in Uganda may again be taken as a practical illustration of such changes. Co-operatives dealing in non-tradeable agricultural products i.e. those products which are sold on the domestic market are generally not much affected in their trading operations from a devaluation. On the other hand, co-operatives trading in imported agricultural inputs, implements and machinery may be strongly affected by a devaluation. The combined effect of price resulting from devaluations and the removal of subsidies common on many types of agricultural inputs, notably chemical fertilizer, has often resulted in a reduction of demand. Co-operatives with an extensive involvement in input supply will then find that part of the base for their operations disappears. Furthermore, the co-operatives may find that the remaining customers/members asking for this service are the larger ones as poorer members are the ones to cut their demand first. The co-operatives will obviously also find that devaluations make imported goods far more expensive thereby putting pressure on already tight budgets. Generously dimensioned fleets of vehicles will turn out to be a financial burden, for instance. 1.7 Political transformation: ****************************** Concurrently and related to economic change, most African countries are also in the midst of a process of political transformation. Under internal and external pressures ruling interests have had to give room for an increased role of civic society and introduce measures providing for increased pluralism. Part of this process is the introduction of multi-party systems in several countries. The evolving democratization in Africa is significant to the co-operative movements in several ways. Combined with a retrenchment of the State and an expanded role for the private sector in the economic field, democratization opens the possibility for co-operative movements to become truly popular organizations independent from the State. Furthermore, a democratization of the society at large facilitates a deepening of the democracy in co-operative organizations. The political changes can also cause problems. Beside the church, the co-operative movement in a country is generally the most widely established organizational structure penetrating the rural areas. As such it has very considerable potential political power and will attract the interest of competing political forces. The control of a co-operative movement means the control of a considerable power base. A co-operative movement which is seen to represent certain political interests will antagonize competing interests. In the African context co-operatives may not be respected as non-political popular organizations. Rather, they may be subject to political interests and rivalry for control. In the past, many co-operative organizations were more or less closely linked to the ruling political interests. When new political interests take over, the co-operatives are seen to represent a defunct, defeated and often suspect order of the past. There are examples when co-operatives in this situation are suppressed. There are also instances in Africa when political interests have co-opted a co-operative movement after political liberalization. Such influences will make it more difficult to transform previously state controlled co-operatives into independent and efficient business organizations. 1.8 The status of co-operative organizations: ********************************************* As an introduction to the discussion in this section there are particular reasons to re-emphasize the problems of making generalized statements about co-operatives in Africa. We are acutely aware that situations vary from country to country, from one branch of the co-operative movement in a country to another and that differences are found at all levels down to primary societies. There is indeed a risk that we make unwarranted generalizations based on insufficient empirical evidence. However, there may also be a risk that we as cooperators are inclined to hide behind the more successful exceptions because the reality seems overwhelming and because we become defensive when the co-operatives we believe in are subject of criticism. As we discuss in the section on methodology, the following arguments are primarily based on in-depth and first hand information from one (relatively strong) movement, first hand, but less in-depth information, from another movement and finally on ad hoc observations and advise and response from African cooperators. 1.8.1 The strengths of the co-operative movements: In order to put the discussion which follows into a perspective it is essential to outline the strengths of the co-operative movements in Africa at the very outset. The most significant strength of the co-operative movements derives from their very many committed, diligent and skilled members. This is by far their most valuable asset. This core of committed members are the ones who have the potential to face the challenges ahead and lead the movements to a successful exploitation of the opportunities which now present themselves in the wake of economic reform and political transformation. Of similar great importance is the strength imbedded in the principles on which the co-operative movement is based. The ideological dimension of the co-operative movement is perhaps even more relevant in an era of market liberalization where imperfections may prove harmful to poor farmers who are cheated and exploited. Under such circumstances co-operative principles will always be appealing and co-operative activities will contribute to a system of checks and balances which is always desirable in a society. The co-operative movements are generally by far the most well organized non-political structure in Africa with the widest coverage in terms of membership and space. This organizational structure, with all its deficiencies constitutes an important asset. Furthermore, over the years the co-operative movements have developed skills in a range of fields from accounting, grain storage and warehouse technology, produce quality assessment, transport and logistics, just to mention a few. In varying degree the co-operative movements also possess physical assets, such as storage facilities, processing plants, transport equipment, repair workshops, etc, which can be of strategical importance for successful penetration of a liberalized market. In these respects co-operatives are often ahead of their competitors. Taken together these are strengths and assets of no small magnitude. Having said that, we have to recognize that some of them are not necessarily of immediate and direct full relevance in relation to the problem we are facing. The problem is a change in the external environment which relates to one specific dimension of the co-operative movements namely their business efficiency. Therefore, when we look at the position of the co-operative movements in the following sections, we have reasons to focus on those dimensions which have a direct bearing on business efficiency. Therefore, our focus may seem to give a lop-sided picture. So it may be but so it should be. Unless the co- operatives can meet the challenges they are facing as business organizations, they will perish 1.8.2 Disengagement from the State: One of the most promising and positive developments for the co-operative movements in Africa lately is the trend towards a defining of the movements from the State. In section 6.1 we discussed the serious implications of government control and interference in the past which effectively prevented the co-operatives from developing into member-owned, member-controlled and member-managed popular organizations. The current trend to disengagement provides a historical opportunity for the co-operative movements. While this trend is clear, the process moves at different paces in different countries. Many countries have enacted new legislation which grants co-operatives independence. Still it is not entirely clear what these co-operative acts mean in practical terms. Loop-hole paragraphs and ambiguous formulations leave room for rather different interpretations in many cases. These ambiguities will have to be tested in practice before more definite opinions can be presented on the real nature of the relationship between governments and the co-operatives. Political trends are likely to have a strong influence on what interpretations that are made. This is also likely to mean that interpretations will vary from time to time. A revised legislation does not always settle relationships which are not clear between governments and co-operative movements. Typically, the financial relationship is not settled with outstanding claims and counter claims from both sides. Often asset ownership (grain stores, processing plants, vehicles, etc) is not clear. The responsibility for default with banks accruing in the implementation of activities which co-operatives were instructed to undertake by governments (agricultural produce trading operations, farm credit schemes, etc) is frequently a matter of dispute. More subtle dimensions of the relationship relate to the role that co-operative movements have played as a part of the political structure in many countries. In this regard differences are particularly great between countries and generalizations are hence particularly difficult to make. However, in most countries the ruling political structure was not neutral and uninterested in an organization (the co-operatives) with national coverage and out-reach to a large share of the population. Therefore, the co-operative movements were understandably not only used to implement "development" activities such as provision of marketing services. They were sometimes used for political purposes to wield support from the rural population. All this is changing as part of political transformation towards pluralism and multi-party systems. Nonetheless, in the present transition period reminiscences from the past are in&operation in varying degree. The practical implications may vary. Causal observations suggest that they may include government (political) influence on election of office bearers and the selection/employment of senior officers, particularly at higher levels. At times there is also evidence that there may be political resistance to the closure of defunct and bankrupt co-operative organizations, particularly at the intermediary level. In conclusion it seems that the trend towards disengagement of the co-operative movements in Africa from the State is clear. While decisive steps in that direction have been taken in many countries, there are still question marks as to the specific and practical nature of these steps. Many of these question marks are to the detriment of the co-operatives and constitute an obstacle to adjustment. 1.8.3 The capital base: Far too many co-operatives suffer from a very weak capital base with insignificant member capital and heavy indebtedness. For all purposes scores of them are bankrupt. Not even excellent managers and enlightened boards could do much to salve them. However, it should be underlined that in many movements also those co- operative units which are not hopeless cases often are in more or less serious trouble with a weak capital base, heavy indebtedness and demanding debt service obligations. The implications of heavy indebtedness and limited credit-worthiness have already been discussed in section 6.2 pointing out the vicious circle which limited access to working capital (notably capital for produce procurement) tends to create. In many instances co-operatives have tied up capital in low return assets (land, buildings, etc) in the name of diversification while at the same time their core activity (trading in agricultural produce) suffers from shortage of working capital. 1.8.4 Business efficiency: Most co-operatives in Africa have a damaging experience of being used by governments to implement policies and programmes in the agricultural sector which in the past perhaps was the most regulated and administratively managed part of the economy. Management of the sector was a matter of public administration rather than business administration. As a consequence of the nature of the relationship between the governments and the co- operative movements, this mode of operation came to characterize many movements. The task tended to be viewed as a matter of physical handling, logistics and cash flows rather than service provision, profitability and sound capital structures. The context in which the co-operatives operated simply did not promote business-like operations. It did not foster the development of entrepreneurial capabilities in boards and among managers, and it did not attract entrepreneurs as managers. Often managers were appointed for other reasons than their entrepreneurial capability. Scores of unsuccessful attempts to diversify activities, often on more competitive markets than that of the core activities, also bear witness to problems with business efficiency. This experience was not the "fault" of the co-operative movements and does not in any way discredit the principles on which the co- operative movements are based, nor does it prove that co- operatives cannot be efficient business operations. The context within which the co-operative movements evolved conditioned and constrained the formation of efficient business operations. However, it is important not to feel complacent after having demonstrated that the reasons for inefficiency in co-operative organizations largely are external rather than inherent thereby fending off unbalanced criticism. While the reasons are not unimportant, it is far more important to assess how far the business efficiency of present co-operative organizations will take them in defending their positions on an increasingly competitive market. Unfortunately, the overall impression is that business efficiency is comparatively low in many co-operative organizations. Although there are exception and important exceptions, it would be fatal to "hide" behind these exceptions and fail to accept that they are exceptions. There may be a tendency to do so in times when the co-operative movements are criticized and when the tone of the debate reflects ideological considerations (on both sides) and is raised by emotions. The lack of confidence in the co-operative organizations is also evidenced by the limited share capital that their members have been willing to invest. It must be recognized that this lack of willingness, rather than an insufficient savings capacity, explains the low level of share capital contribution. 1.8.5 Activity profiles: Many co-operative organizations at different levels have one or a few core activities. In Africa, the core activities generally relate to agricultural marketing. In addition, co-operatives have often engaged themselves in provision of credit and in supply of agricultural inputs as a logical extension of their marketing activities. However, diversification has often gone further and co-operative organizations are found to engage in service operations such as consumer stores, beer halls, hotels, petrol stations, etc, production operations including agricultural processing, livestock ranching, poultry farming, carpentry, brick making, handloom weaving, etc. as well as other activities such as investment in housing, office buildings, etc. In many movements there is a deliberate trend towards diversification. Diversification is also often mentioned as a way to counter the expected negative effects of external change on the core activities. It can be noted that many activities undertaken by co-operatives in the name of diversification, particularly at the intermediary level, are questionable when they are judged from a member service point of view. The direct service to the general membership of investments in office buildings, livestock ranching, operation of petrol stations, carpentry shops, canning factories, hotels, bars, etc. is often next to non-existent. Diversification into such activities is often justified with the indirect benefits that will accrue to the members through the profits which are expected to be generated. Far too often this argument is proven invalid as such activities more often than not are unprofitable while tying up capital that could have been used for the core activities. The managerial implications of diversification are often overlooked. To manage a range of diverse activities is demanding. For managements which are not up to the task of managing the core activities such additions become overwhelming. Co-operative organizations often enter into production activities without recognizing that such activities generally are far more complex to manage than trading activities. In summary, diversification in weak organizations has overburdened managements and contributed to reduce overall business efficiency. Far too often diversification has also directly contributed to reduced economic performance by adding loss making activities. 1.8.6 Organizational structure: Co-operative primary societies are generally federated into a three and at times a four, their organizational structure. The argument here is not whether this structure has been adequate or not. Rather the argument is where in such a structure the resources, the power and the interest have tended to gravitate. The intermediary level has generally played a very significant role. Large volumes of agricultural produce have been handled at this level and flows of money have been substantial. To perform their functions organizations at this level have had to command considerable resources in terms of transport equipment, storage facilities, processing capacity and personnel. Centralization within the structure has often meant that accounting, auditing, loan application screening and loan administration tasks at society level often have been retained at intermediary level. Given the crucial role of the intermediary level, the functioning of the system has depended upon the development of the organizations at this level. As a consequence much donor, government and movement interest has focused at this level. In addition to the role as a spokesmen for the movements, apex organizations have been seen as supporting units to the intermediary level. External donors have often assisted in developing the apex level as well. This does not mean that the primary level has been totally ignored. The government has monitored the primary society level as well. The apex organizations and the intermediary organizations have implemented a range of development activities at primary society level. However, this does not alter the general observation that the focus of interest, the focus of resources and also the focus of development activities, including donor supported activities, has primarily been on the apex and the intermediary levels. Obviously not all situations correspond to this description. The coffee co-operatives in Kenya are a striking exception where the primary societies are very strong although not necessarily independent from the intermediary level.