The Situation of Co-operatives in Africa (1994) - Part 2


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.