On several webpages of this website it has been suggested that the Cooperative Business Model as used in rural poverty alleviation development projects is too administratively cumbersome to be competitive with the often vilified Private Traders, and any benefits negotiated for the benefit of the smallholder producers is consumed in the inefficiency of the cooperative business model. This then results in most project being unable to survive without continuous and often substantial donor assistance and outsider facilitation. Thus it might be desirable to numerate some of areas where the cooperative model could and often does lose the envisioned competitive advantage, and the smallholder producers are better off working through the private traders. This could be both from a financial as well as convenience perspective. The listing excludes the use of credit clubs with the prospects of farmers’ crops being confiscated to pay off their neighbors’ loans. An issue that normally renders the development cooperatives to near complete irrelevance in the beneficiaries communities total economic activities.
Development Cooperatives’ Loss of Competitive Advantage
- The administrative procedures for operating cooperatives relative to private traders are considerably greater as discussed in detail on Another Page. With the consignment selling of produce and pre-ordered of inputs, there are considerably more administrative activities, including accounting to do. There are costs associated with these activities that need to be recovered from the overhead charges once the facilitation effort ends. Unfortunately, administrative costs are normally substantially underestimated in planning a business venture.
- Physical facilities are very easy to justify in terms of nice offices, warehouse facilities, and processing equipment. While the capital costs are reasonable for the donor to provide as part of the facilitation effort, maintenance costs including the utilities, fuel, etc. will have to be paid by the cooperative once the facilitation effort ends. Compare this to the limited physical facilities or even temporary buying points often used by the private traders that keep their overhead costs down.
- Proximity to the farms: If cooperatives are investing in large permanent facilities and expecting the farmer to come to them with their goods, while the private traders are working via scattered temporary buying point, the private traders will be more convenient to reach and get a competitive advantage with cheaper transport cost for the farmer. Often farmers, even smallholders, have to rent transportation if only a bicycle or ox-cart.
- Permanent support and labor staff for the cooperative vs. temporary day laborers for private traders, often working on a piece meal basis. Overhead is again lower for the private trader.
- How about the above the competitive salaries most NGOs pay the local staff as an incentive to work with expatriates. When the facilitation effort is over will these people accept a more competitive wage, or will there be some massive staff turnover.
- How about the project vehicles and all the running around that is done in the facilitation effort. Will that continue once donor funding ends? Will the hired, salaried cooperative manager consider the project vehicle use a perk of his position available for private as well as business use, or perhaps some hybrids use slanted more toward private use? If so overhead costs will skyrocket!! Granted the initial capital costs of the vehicles can be part of the facilitation effort, but not the operating costs, including an escrow account for the eventual replacement.
- Thinking of hired managers, if they are from outside the project area, as is often the case, then the cooperative will be responsible for housing and travel allowance to visit families. That again will substantially run up the overhead costs. In contrast the private traders could easily be indigenous to the community and incur no such costs or even a line item for the costs.
- Trucks for transporting goods either inputs or produce. Like other vehicles, easy to justify with the facilitation effort, but expensive to maintain once that ends. Compare this to private traders who rent trucks on an as need basis or even use public transportation like the tops of those overloaded buses. Do you think all those goods are personal luggage, or traders moving goods around cheaply!!
- Individual commodity vs. multiple commodities. Most projects are oriented around a single commodity such as soybeans, sunflower, or paprika, while the private traders usually deal with the full range of crops the farmers are producing in the area. The multiple commodities spread any fixed costs over all commodities and thus lower the overhead cost for each one.
- An overall Financial Management Strategy that emphasis retaining goods in kind as long as possible, monetizing only what is needed to meet immediate cash requirements and needing the immediate cash payment. The marketed amount could easily be 10 to 15 kg, an amount a woman can conveniently carry on her head. This can greatly prolongs the marketing period and overhead costs, particularly if involved in single commodity with staff spending most of the time loafing waiting for commodities to come in, but getting paid. This could also increase the lag time between consigning goods and receiving payment, as it will take longer to bulk sufficient goods to get the bulk benefits.
- Desire for Cash Payments & Distrust For Consignment with a 3 or 4 up to 6 weeks delay in getting paid. This appears well recognized, but no one wants to make an adjustment in the business model to accommodate this.
- The need for Consensus Building as part of the governance of the cooperative. It is mostly time and effort that the facilitation period can contribute, but once external funding ends, it will have costs associated with it particularly for the cooperative management, and there could also be lost economic opportunity for participation. During the facilitation effort you may get people to volunteer for some of this, but will they continue once donor assistance ends?
- Social, Non-Business, services that cooperatives often plan to provide that have to be funded from overhead costs. This would include extension services education and medical clinics.
- Pilferage: More likely cooperatives will have higher levels of pilferage. One of the reasons most small enterprises are restricted to being family enterprises is that as wages get closer to starvation margin, the temptation to pilfer increases. Thus you need someone with a strong vested interest in the profits to supervise all labor inputs, and this has to be a family member.
How much of the negotiated benefits have been consumed with these items? How often are they included in the evaluation of the development project dependent on the cooperative business model?