Relying on Cooperatives: Taxpayers Expectations

Most of you who have followed my website and internet postings over the past few years, will recognize I have some severe reservation over the near 40-year reliance on cooperatives or producer organizations to funnel assistance to smallholders. As I have often mentioned I think they are administratively too cumbersome resulting in excessive overhead costs to be competitive with the often-vilified private service providers. The cooperative business model is heavily promoted by academia for its social desirability without getting into comparative business accounting that would quickly show they are non-competitive in an overall financially Suppressed Economy serving impoverished countries for which most of the population as limited spending power placing tremendous downward pressure on consumer prices and profits.  Consumer Prices are often only 1/4th to 1/5th USA prices. This can result in the overhead costs exceeding the limited financial benefits from bulking input purchases or production output sales. When this happens, relying of cooperatives, will actually force beneficiaries deeper into poverty despited the massive rehortic about poverty alleviation. Much of the extra Overhead Costs can easily be identified and listed. Thus it might be appropriate to look at what interested taxpayers are expecting from development projects and how far this is from reality.

An estimate of what interested underwriting taxpayers are expecting from development cooperatives could be obtained from pre-lecture surveys I asked over a four year period of students taking an upperclass/graduate level class I team taught at Colorado State University. Many of the students were in the Peace Corps Master Program offered at CSU or otherwise interested in going into the Peace Corps. The survey questions, the students answers and my commentary with estimate actual valurs on the response follow:

  1. As a percent saving of cost for inputs procured or percent additional price on produce marketed, what would you anticipate being the minimum competitive advantage to the individual smallholder member in working through a cooperative compared to obtaining these services via private traders?

Student average reply: 24.12%

That is a high expectation and more than I would expected in a pre-lecture survey. However, my actual estimated based on what limited information I have been able to synthesize over the past several years is Minus 10 to 15%.  Advantage to the private dealers to provide the smallholders the best financial and most convenient returns, even when they appear to arbitrarily dictate prices. Just too much overhead expenses particularly when the cooperative employ outside professional managers with requiring housing, transport, etc. This is coupled with the limited profit margins available to the private traders due to limited purchasing power of the general impoverished population’s placing downward pressure on consumer prices. 

2. What is the maximum percent of the input purchase price or commodity selling price would you accept for overhead costs, handling fees, commissions, surcharges, or other fees charged to the members to cover the cooperative operating costs for assisting its smallholder members?

Student average reply: 19.9%

Even though administrative costs are usually grossly underestimated, initially I would have considered this a reasonable estimate, but after interviewing the Central Growers Association in Kitwe, Zambia and there acknowledging the overhead costs of 35%, I will accept that. The Association had monopoly control on the tobacco auction, and that was virtually their only business with members side selling all their other crops contrary to Association by-laws.   

 3. At the end of the initial 5 years of donor funding, subsidies, and external facilitation, what is the minimum percent of the total beneficiary pool you would accept as active members in the cooperative to consider it a valid business service?  Below this level of participation, you would consider the cooperative an ineffective business model and your project a failure.

Student’s average estimate: 60%

My best estimate of active participation is 10% based on a couple article distributed to the class but also recently during a Farmer-to-Farmer assignments in Madagascar.  During the assignment the project senior advisors acknowledge an optimistic estimate of only 15% which I would consider closer to 10%. Can 10% or even 15% be considered a successful intervention?

4. What would be the maximum percent of “side selling” or “side purchasing” you would accept. Above this level you would consider the cooperative system ineffective in serving its membership? Side selling are goods which, according to contract obligation to the cooperative by-laws, should be handled via the cooperative that are intentionally diverted by members to private traders.

Student’s average estimate: 19.7%

My best guess is 60 to 70% based on interviews with CLUSA in Zambia. I think most of what is consigned represent in-kind loan repayments. I also wonder how much of the side-selling is to avoid leveraged loan repayments through the credit clubs after some members default on their repayments.  If 60 to 70% of the goods are being diverted around your program, how can it be considered a successful program?

5. Synthesis the percent active participation (3) and tolerance to side selling (4) into an estimate of the minimum market share the cooperative should have to be a viable business model serving the community. Show computations.

If you had 60% participation and accepted 20% side-selling, you should expect the cooperative market share to be 48% of the total community’s business. However, the more limited participation of 10% and side-selling of 70% the cooperative market share would be about 3%. I would think this would be too trivial a market share to make a major impact on poverty alleviation even if the overhead was more reasonable. Remember most projects are denoted by community and not individuals, thus result should reflect total community involvement.

6. What is the maximum time lapse (in weeks) you would accept after smallholders have consigned their produce to the cooperative for them to receive their funds:

a. As per cooperative commitment?

Student estimate time: 2.6 weeks

 Zambia the promise was 3 weeks very consistent with expectations

 b. As a historic record of average time of payments?  

Student estimate time: 3.9 weeks

 Zambia normally delivered in 6 weeks after promising 3

 c. As a maximum delay in payments?

Students estimated delay:       6.3 weeks

In Zambia estimate was 12 weeks. A lot of this could be related to manual banking through the postal system rather than electronic banking. However, the more critical question is how this all relate to the overall financial management strategy of most smallholders which is to retain produce in-kind as long as possible, only selling what is needed for immediate cash need, but needing the immediate cash. The retention of good at home will extend the crop marketing period for none perishable crops to 10 months after harvest but require immediate cash payments with no delays. This makes the cooperative model exceptionally inconvenient.

7. How much of a discount on what the cooperative receives for consigned produce to be marketed would you expect smallholders to accept for an immediate cash settlement for their produce from private traders?

Students’ estimate:  22.2% 

  As reported in Zambia and reiterated elsewhere was 20%, and the students were right on.

8. What is the maximum number of years since a cooperative’s inception you would accept before the cooperative starts paying the promised dividends to it members as stated in the by-laws and promoted by the organizers?  Dividends being defined in the normal sense as profit sharing over and above the competition. This definition is often distorted in claiming to be paying dividends.

Students’ estimate: 3.7 years.

To the best of my knowledge no dividends have every been paid worldwide other distorting the definition to make a project appear successful. Given the high overhead costs mentioned earlier, it is highly unlikely that dividends can be paid as the overhead costs exceed the financial benefit. Not included in the survey would be what would you accept as a minimal percent of the financial benefit for bulking or other profitable activities to be distributed to the farmers as a dividend. I would expect at least 50%.

9. What is the minimum percent of cooperatives established as part of development projects funded with your tax dollars to survive for at least 2 years without donor assistance, subsidizes, or facilitation for you to consider the program a success and good investment of your tax dollars?

Students’ estimate: 55.5%

The two years represent two complete agronomic cycles. The expectation being if you can survive through two full cycles the chance of success is realistic. However, to the best of my knowledge no cooperative initiated as part of a development project has survived without continuous facilitation and subsides. Instead they collapse as soon as facilitation effort and external financing ends. Perhaps before the last advisor clears the departure lounge for the flight home!!

From the tax payers’ perspective are the students’ expectations realistic? Do the values the students offered represent reasonable initial targets for the parameters in question that would separate a successful from failed projects? From the implementing NGOs’ perspective how consistent is my estimates to your experience? Should these questions be included in routine evaluations and reports for development relying on cooperatives. Should project reporting also be expected to explain any deviation from these expectations as part of their routine reporting? Why are these questions rarely if ever included in project reporting? Does this represent just embarrassment or a cover-up of project failure and squandered funding? If these questions were part of reporting process would we have move on from relying on cooperatives decades ago and have considerably more effective development project that would actually alleviate poverty?

25 June 2019
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