5. COOPERATIVE SHORTCOMINGS

5.1 Background
5.2 Cooperative Cohesion
5.3 Cooperative Reform and Restructuring
5.4 Local Cooperative Development
5.5 Economic Viability

5.1 Background

With 800,000 members, serving the majority of Zambia’s small scale farmers, and a country-wide infrastructure, the agricultural service cooperatives have a considerable potential of contributing to the uplift of the rural population.

The cooperative movement has, however, for a long period of time been burdened with serious weaknesses and problems. The three basic weaknesses are: the economic viability of the major activities undertaken, the cooperative leadership and management capacity, and the lack of democratic control by the members.

As indicated earlier one major cause of this has been government interference and control.

A feeble equity base of virtually all cooperatives is one fundamental problem that has jeopardized their viability and development potential. The dependence on commission from the government, rather than a market based trading margin, on its main activity of maize marketing, has been a major contributing factor. This dependency and weak economic base has contributed to the low level of motivation for cooperative membership and participation among small scale farmers, and a low quality process for electing cooperative leaders.

In attempts to address these shortcomings the cooperative movement has for some years been involved in a process of implementing a comprehensive strategy for reform and development, with a focus on the primary society level. The strategy derives from the institutional learning experience of ZCF over many years, and is aimed at responding effectively to the needs of the small-scale farmer members. External collaborating partner cooperatives, in particular the Swedish Cooperative Centre (SCC), have been participating in this process through a support programme that was started in 1982. Active cooperative restructuring has also been taking place at the cooperative union and apex body levels.

5.2 Cooperative Cohesion

The weak cooperative economy has contributed to considerable intra-cooperative friction and competition for scarce resources. In the struggle for economic survival each cooperative organization has to a large extent fended for itself. The benefits of united action, by applying the principle of cooperation among cooperatives, has therefore remained largely unrealized. As a result the cooperative movement has often failed to display unity in response to major government policy initiatives.

The narrow economic base has also made it difficult for the cooperatives to effectively compete in the labour market for qualified and experienced manpower. As a result the quality of most staff has been inadequate. The level of commitment and calibre of board members has also been low. Board members have often not adequately appreciated the need for member serving commercial operations, and because of a low equity participation, they have not had a sufficient commitment to the organization.

Another effect of the above has been the cooperative inexperience in effectively representing the interests of the small scale farmer members. Zambia’s less than a thousand large scale farmers through their own association, which is affiliated to ZCF but de facto operating separately, have been a more effective and respected pressure group than the whole of the cooperative movement. The latter, with its rather diverse membership, has had difficulties in identifying its mandate and orientation as an interest group, and has been mostly active in lobbying for the narrower interests of the cooperative unions and the apex organization than for their primary members and their cooperative societies.

The major external factor that undermine democratic control relate to the substantial role of government in the promotion, direction and operations of the cooperative movement. The internal factors include that cooperative principles are not sufficiently known or understood by the members, that the financial stake of the members in their societies is limited, and that the economically weak societies offer only limited benefits to their members. This situation also characterizes the relationship between all the tiers of the cooperative structure.

5.3 Cooperative Reform and Restructuring

The structure of the cooperative movement remains in need of consolidation and rationalization. A process has therefore been initiated aimed at restructuring the PCUs and DCUs, and ZCF to adjust to the emerging liberalized market environment and to implement its own new strategies. It is intended that this will include the rationalization of the current 3-tier cooperative structure in each province, as well as of each PC and DCU. Key to the success of this restructuring and reorientation will be the development of competent business management and member service.

A vigorous reduction of staff and partial reorientation of activities has been ongoing for about two years in many cooperative unions. This process was accelerated by the drought in 1991-92 that drastically reduced the turnover of most unions. The restructuring so far has however mainly been done in an ad hoc manner within each union.

A study^8. of several unions carried out in 1991 concluded, i.a., that there were significant opportunities for the cooperative unions to develop their business for the benefit of their members and the economy as a whole, despite the current serious transitional difficulties. The opportunities highlighted were in particular: (i) to help increase farm income through crop exports; (ii) support improved farm efficiency through appropriate input distribution and producer prices; (iii) agricultural processing for improved produce value and income; and (iv) assist in effective smallholder credit allocation and recovery. There will most likely be regional differences in a rational cooperative structure in the provinces, depending on the varying geographical and agricultural economic conditions.

⁸ Coopers & Lybrand: Diagnostic Review of the Cooperative Movement. May 1991

⁹ Report on the Conference for Senior Cooperative, Government and Donor Officials on Cooperative Development and Economic Structural Adjustment Programme by Continental Management & Consultancy Services (COMACS), October 1992

ZCF has been actively engaged in the restructuring and further rationalization of it operations. As a result the number of ZCF employees was reduced by more than half during 1992, from about one thousand to less than five hundred. The changes resulted in better headquarter supervision and coordination of ZCF’s various business activities, and a sharper focus on the representative and cooperative development roles of the apex body.

The ZCF Development Services Division (ZCF DSD) was created following a ZCF Board decision in 1991. The division was formed as a result of recognizing the fact that promotion of cooperative development was the most important objective of ZCF and that the function needed to be elevated from a department to an operationally autonomous division.

As a division of ZCF, ZCF DSD enjoys operational autonomy from the head office but like the other divisions, depends on head office for policy guidelines. The main objective of the division is to promote primary cooperative society development, pursued mainly through the implementation of the cooperative movement’s primary cooperative development and training activities. Its operations are increasingly funded by resources generated within the cooperative movement itself but the bulk of its financial resources has continued to be external funding from the SCC and SIDA.

5.4 Local Cooperative Development

Though ZCF’s efforts over the past years have contributed considerably to the development and growth of the cooperative movement, the primary societies and their members, still constitute the weakest link in the cooperative structure. Resources made available by or through ZCF DSD are therefore aimed at strengthening this base through the provision of integrated services based on the expressed needs of the PCS members. The division also has a special focus on disadvantaged groups, in particular women.

The development objective of ZCF DSD is to achieve the self-reliant development of primary cooperative societies, for the effective furtherance of the economic and other interests of their members. This will entail the fostering and consolidation of independent and democratically functioning small farmer cooperatives, operating as viable and competitive business enterprises for the purpose of providing economic and other services to their members, men and women alike.

The activities supported in the pursuance of this objective are those carried out by ZCF DSD through its integrated approach (INAP) to primary cooperative society and disadvantaged group development.

The main features of INAP are the following:

(a) A conscious process of broadly based participatory PCS member prioritization, planning and commitment of own resources is a precondition for access to support.

(b) For a PCS to qualify for support it, and the DCU to which it is affiliated, must meet certain criteria in respect of potential viability, independence, commitment to cooperative development and member control.

(c) The support package offered to a certain society is flexibly tailored to the priorities identified by the society itself.

For a transitional period of cooperative reform and consolidation subsidies will, however, continue to be provided for training, research, programme co-ordination, technical assistance, the retaining of competent PCS staff, the financing of viable marketing activities, especially those by women groups, and the development of adequate cooperative equity capital.

The INAP support to primary cooperatives and women’s groups is directed at supporting income generating activities that are identified by cooperative members, and at the provision of complementary services, such as training and information dissemination. The support is provided, in a manner designed to enhance self-reliance and sustainability in the implementation of such activities.

INAP aims at assisting in the development of the full economic and social potential of a cooperative society and its members. Particular attention is directed at women’s and other informal groups who carry out, or have the potential to undertake, economic activities.

The integrated support is provided to a selected number of societies and women’s groups, normally over a minimum period of three years. This is based on the view that by concentrating the available resources in this way a greater development impact will be achieved. This in turn is expected to lead to demonstration and spread effects.

A precondition for the provision of each support element, requested by primary cooperatives and informal groups, is a contribution from their own resources. This serves to foster commitment, self-reliance and a sense of ownership.

5.5 Economic Viability

(a) Overview of the current situation

The majority of cooperative societies and unions are, as previously mentioned, in a very weak financial position, mostly as a result of their involvement in the marketing of maize. This trade has been heavily regulated by the government, which has had as its primary objective to provide affordable food to the urban consumers. Because of this, and the poor and deteriorating state of the state budget, most farmers and in particular agricultural marketing cooperatives have received a sub-economic compensation for their work.

This state regulated marketing activity is an example of cooperatives being saddled with an activity which is of enormous importance to the government and the national economy but which is loss making and therefore not self-sustaining to the cooperators. As the government has considered this cooperative activity to be crucial from a social, economic and political perspective, and as it partly has been coercing the cooperatives to carry it out, the cooperatives are fully justified in demanding full compensation for their services. From a theoretical business point of view the internal rate of return (IRR) has been lower than the opportunity cost of capital for the cooperatives, and the compensation should be based on that difference.

The strengthening of cooperative finances is particularly important in the evolving market economy. Previously, in performing government regulated functions, cooperatives had access to mostly government owned storage facilities and other marketing infrastructure, as well as government guaranteed bank overdrafts for crop financing. With liberalization such facilities are no longer freely available. The cooperatives find it difficult to obtain bank financing for necessary business investment and activities, including agricultural marketing, due to their weak asset and equity base.

(b) The economic position of the PCSs

The division of income from agricultural marketing between cooperative unions and the primary cooperative societies has not been satisfactory. The economic position and development of the PCSs has been undermined by their receipt of an inequitable share of the income generated, resulting from the tight control of their economy by the cooperative unions. This has been exacerbated by the withholding even of the agreed funds by the PCUs/DCUs for the their own use, and the lack of information to the societies about their economic position with the unions.

As a result the business of agricultural marketing has been a consistently loss making operation, particularly for the PCSs. Due to the general absence of market price signals in this regulated market the cooperatives have also to a large degree lost the motivation to be cost-conscious. Although international comparisons are very difficult to make, the indications are that the transaction costs for cooperatives in maize marketing have been considerably higher in Zambia than in countries where they have been operating in a less regulated market and been exposed to competition.

The hammermill processing of maize to meal, a normal PCS activity, has more often than not also created losses. While the price for milling has not been regulated in a formal sense, the widespread perception of cooperatives as social community organizations has tended to keep milling charges at sub-economic levels. The third normal business activity in the PCSs, retail shop operations, has generally performed better and often yielded a small surplus.

The total share capital of all registered primary societies in 1991/92 was K31 million, of which K6 million constituted the share capital for agricultural PCSs. The average shareholding was K95 per member and K50,000 per society in the non-agricultural societies, most of which were in savings and credit unions in which member savings constitute the bulk of the share capital. For the agricultural PCSs the share capital was K22 per member and K7,500 per society.

The total equity capital, including share capital, reserves and balanced surpluses, was generally several times higher than the share capital. A recent study^10. of PCS economic performance data on a sample of active agricultural PCSs found that the share capital during the 5-year period 1988-92 constituted an average of 14 percent of the total equity capital. The total equity capital per PCS in the sample was K380.000, equivalent to K252 per member. This represents an extremely small capital base, which furthermore has been eroded by escalating inflation over the years.

¹⁰ Analysis of Economic Performance Data for Multipurpose Cooperative Societies in Zambia by I. Skarby Nordlund (Draft, June 1993)

(c) The economic position of the DCUs

A feasibility study^11., commissioned by ZCF and carried out by a team of consultants, on the establishment of DCUs was undertaken following the policy announcement by the government in 1988.

¹¹ Feasibility Study on the Formation of District Cooperative Unions by J T Milimo, C Mwila, B Mwape, S J Chimbwayinga. (January 1989)

In order for the DCUs to venture into other business activities that could generate surplus, such as increasing their marketing and processing of other crops than maize, the study recommended the two necessary prerequisites of a strong capitalization and a well qualified management. Fresh share capital needed to be raised both from the owners, the affiliated PCS, and ZCF in the form of preferential shares. In addition the district level assets of the PCUs should be transferred and, as a supplement, long term loans from the government needed to be obtained.

As earlier indicated the DCUs were, however, formed rapidly without fulfilling any of the mentioned preconditions. The resulting situation is that this new tier in the cooperative movement has become seriously undercapitalized and that its viability is in jeopardy. At the end of 1991 there were 34 DCUs owned by a total of 746 affiliated PCSs. The total paid up share capital was K2.6 million, corresponding to an average of K76,000 per DCU. The equivalent average for 1990 was K63.000 in 29 DCUs, representing a considerable increase in nominal terms but a decrease in real terms due to an annual inflation rate of over 100 percent. The indications are that this already weak equity base has since been further eroded by deficits in the business operations of most DCUs.

The relationship between the PCUs and the DCUs still remains to be clarified in most provinces. The district level assets of the PCUs have generally not been transferred to the DCUs, resulting in strained relations. In a few provinces the PCUs have managed to keep tight control of the DCUs, despite the fact that the latter now are the affiliates and owners of the PCUs. In other provinces the establishment of the DCUs has led to rivalry between the two tiers and as a result a very low level of cooperation. As a group the DCUs have taken over most of the maize marketing functions of the PCUs, while the latter have focused increasingly on other activities, such as large scale processing, transport operations, and various urban based business activities.

(d) The economic position of the PCUs

As late as in 1991 maize marketing accounted for 70-90 percent of the turnover of the PCUs. As mentioned above this government regulated activity was loss making regardless of the volume of maize handled. It follows that the economic and financial position of the PCUs has been very weak.

The previously referred to 1991 study of PCUs indicated that the total turnover averaged some K750 million, while the share capital in 1991/92, amounted to an average of K558,000. It was concluded, however, that share capital had been eroded by accumulated losses in most PCUs, resulting in a negative equity capital/net worth in all but a few unions.

The options available for the PCUs in this situation included the devolvement of activities to the DCUs and closing down; devolvement to DCUs while retaining some limited provincial activities and support functions; and restructuring and commercializing around the core activities of servicing the cooperative membership and affiliated DCUs through the processing and export marketing of their produce.

(e) The economic position of ZCF

The economy of ZCF has for some years been stronger than that of the other tiers of the cooperative movement. Member subscriptions from its affiliated PCUs and other cooperatives, which in principle should be the mainstay of the finances of the apex body, have however played a negligible economic role.

During most of the period since its formation the economic backbone of ZCF was provided mainly by its commercial services operations. These have increasingly been supplemented by insurance services, transport operations, and more recently by its grains storage and marketing activities. The latter currently constitute ZCF’s main source of income and surplus.

As with the other tiers in the cooperative movement, the share capital of ZCF, amounting to some K3.2 million at the end of the 1991/92 financial year, is very limited in relation to its turnover, which totalled over K2.1 billion. The operational surpluses generated by ZCF has however made it possible to Build up considerable reserves. The surplus, which had been at the level of 4-5 percent of the turnover during several years, was almost 22 percent in 1991/92, before provision for bad debts. Its total equity capital, including reserves and retained earnings, stood at over K1.3 billion at the end of the 1991/92 financial year. The positive results of ZCF continued during the 1992/93 financial year, and preliminary figures indicate that the total equity capital exceeded K3.4 billion at the end of 1992.

The financial position of ZCF has been negatively affected, however, by the involvement of the cooperative movement in the state regulated maize marketing activities. As a result, ZCF’s current assets included over K1.2 billion in net claims on cooperative unions at the end of 1992, who in turn had large outstanding claims on the government. The ZCF claims on the unions, for which no special reserves had been built up, may be doubtful to a considerable extent.

(f) Economic self-reliance

The ZCF and cooperative movement strategy is to actively plan for and promote self-financing in several ways, both separately and supplemented by external funding. It is realized that it is critical, in the present situation, that cooperative equity capital and other forms of finance from within the cooperative movement be increased radically to secure its survival and further development.

The plans include an increase of the crop financing capability of primary societies through loans in kind from members at the outset of an agricultural marketing activity, and different incentives for raising share capital from members, such as matching grants. Many PCSs have also in recent years raised the minimum share capital per member from K10 to K100 or higher, with some societies in the process of raising the amount to K1,000.

The basis for the success of such efforts is that the members perceive that they are benefitting from the services of their cooperative, and wish it to expand its activities. This aspect must be further underlined by eliminating the problem of “free riders”, i.e. to make the conditions for members as favourable as possible compared to those of non-members, and thereby also encourage the latter to join.

One tangible way of showing such benefits, which needs to be introduced but has not yet been normally practiced, is to provide patronage refund, and possibly also dividend or interest on member shares. Such refund and interest does not necessarily need to be paid out in cash but can be credited to the members’ share accounts, or other accounts that they may have. To reduce the risk of depletion of share capital, through withdrawals of such funds, it would also be advisable to define the minimum share capital as a proportion of the volume of each member’s business with the cooperative.

Savings activities in the cooperative movement have been ongoing for a number of years. Considerable experience has been gained and sizeable funds mobilized. These activities have provided the basis for the new decentralized cooperative savings scheme (DCSS), in which a major responsibility for the deposit services lies with the PCSs that wish to introduce this activity. The DCSS is currently at an early stage of implementation. It is planned that it will gradually expand to cover the whole country, and increasingly become an important factor in cooperative financial self-sufficiency, both at the local level and for the Cooperative Bank (COBZ).

An important additional self-reliant option is to encourage joint ventures between financially strong cooperatives and weaker cooperatives with attractive business opportunities. ZCF has adopted a policy whereby it is offering its collaboration to cooperative unions in this manner, with the intention of making better use of its relative financial strength for the benefit of the cooperative movement. Some such projects, mostly regarding investment in agricultural processing plants, are presently under consideration.