Changing to a Customer-oriented Culture
It was noted in the empirical section (see Chapter 5) that dairy and coffee cooperatives in Kenya are still embedded with supplier- and government-oriented culture. Although there is willingness to change into a more profit- and customer-oriented culture, the transition has been too slow. Some positive change in this direction was noted in the well managed co-operatives, but the fairly well-managed co-operatives still have much to improve and it may now be too late for them to survive.
Co-operatives need a change of culture to be able to compete in the liberalised environment, where markets require customer orientation and suppliers require ever-higher payments and the organisation needs growth, liquidity and solvency.
Improving Financial Reporting to Members
In their financial statements, Kenyan dairy and coffee co-operatives express payment to members (for their crop) as a percentage of the total turnover (in coffee or milk sales). This is due to the general norm given by the Ministry that members should be paid at least 80% of the total sales value of the crop. While such a gross percentage can give an indication of the internal efficiency of co-operative, it does so only in stable production and market environments, where the processing technology remains static. Should the added value of processing increase, the payment percentage share of raw material is likely to decrease because such improvements would allow the co-operative to set a higher end-product price. Such an improvement in the processing technology and subsequent increases in production would also improve employment in the long run. Therefore, current financial reporting practices, which overvalue raw material costs within the society, may actually discourage new investments for value addition. Are there alternative ways to report member interest in the financial statement?
The expense item: Member payments for raw material received in cooperative financial statements should include payments to members for raw material at the realistic current market price. At the moment, co-operatives use this expense item to adjust their financial result to zero profitability for tax purposes. All other services like transport and AI should also be priced correctly at their current market prices and reported in the co-operative financial statement according to their purpose. This is important for the following reasons:
1. Members would acknowledge the market costs of the services that they use. They would then allocate their use of those services better. Free and low-cost services would be used more. In addition, if certain services were perceived to be of major importance for the long-run strategic development of the society and their own long-term benefit, that service would also be used more if it were financially subsidised.Reforming Kenyas Tax Laws
2. By using market prices, managers of the society would gain additional information on the efficiency and profitability of various services like transport, dairy plant or coffee factory processing. This would undoubtedly lead to more efficient management of resources.
3. In the financial statement, the payments for raw materials or other costs and excess earnings8 should be separated to better describe the profitability of the society and the contribution of each service to that end. This would provide information to both to the members and managers whether coffee or milk production is profitable or not. Such data would also help members and managers to figure out that the co-operative generates profits and they must decide what should be done with the profits. Should the money be paid back to the members or invested in the co-operative to finance its growth? This would help develop a new kind of understanding of capital investments and capital formation in cooperatives, since such a decision would be an explicit choice made by members and managers instead of an automatic transfer of profitability into raw material payments or price reductions on services. In this way, the co-operative may generate capital internally prior to making any capital investment decisions.8 The problems of measuring return on cooperative equity is discussed by Cropp et al. (1998).4. In the long run, such a separation of various kinds of payments to and deductions from members and explicit profitability figures would eventually lead to better capital investment decisions and improved capital formation. This separation would lead to more explicit consideration of profitability of capital investments in liberalised markets. We would expect that these capital investments would enhance technology and production levels in rural areas, which would attract more labour into rural areas.
Because taxation is based on the profitability of a society, management tends to counter this by making higher payments to members in order to reduce the profitability of the society to zero. Consequently, tax revenues to the Government from the societies are very low. An effect, of the suggested changes in financial accounting above, would be to raise profitability, which would lead to paying higher taxes especially in the short run.
To encourage capital formation, it would important to allow societies to set up capital investment reserves. A capital investment reserve is an internally generated tax-exempted reserve used to set aside funds to meet foreseen future expenses or investments. The allocation of internally generated surpluses to such a fund could be make tax-exempt on the provision that investments should be made no later than five years otherwise the reserve would become taxable. As a result, the Government would not loose any tax income, because it does not currently gain much from the societies. In the long run, Government would benefit from tax income due to improved capital formation within societies and taxes paid by the additional employed staff.
Reducing Delays in Financial Reporting
Financial reporting to agricultural co-operative members in Kenya is notoriously slow. Typically, financial information is disclosed to the members with more than a years delay, which further reduces transparency in transactions and makes management as well as member monitoring of the co-operative business next to impossible. The member consensus in the sampled co-operatives was that this delay was excessive, that annual financial statements should be audited within a four-month time period, and that all Annual General Meetings should be held within six months after the end of the financial year. Implementation of these reforms would make co-operative management more accountable to members and a closer connection could be maintained between actions and financial figures. Excessive delays do not serve members interest. Only a dishonest management will benefit from long delays.
The major cause of these delays in the examined co-operatives appeared to be the low level of automation of their financial accounting and reporting systems. None of the societies examined used computers for financial reporting purposes. Some of the sample societies served very high numbers of members and had consequently high volumes of transactions, but only one society had acquired a computer, which was not yet put into operation. In stark contrast, two out of three of the private companies used computers for financial reporting. These two companies were also quite dynamic from a production and marketing point of view.
Computerisation of financial reporting would improve the societies in several ways:
1. The financial reporting within a society would be faster. Managers would get information without long delays. This would also improve the timeliness of managerial responses to the unexpected changes.Each society should be computerised with a simple bookkeeping system, which can create simple monthly financial reports, especially financial statements. In a similar vein, the unions should also be computerised, but each society should keep their own accounts. As the societies do not much differ from each other, a uniform bookkeeping system may be developed for all societies. This would make the system cheaper and easier to manage at union level.
2. The accounting function would become more efficient. Less people would be required for accounting work, because all the computerised phases of the accounting system would become simpler, including the input and storage of information and the preparation of financial reports and financial statements.
3. Auditing would be easier, because auditors familiar with the bookkeeping programmes would not have to manually go through all the programmed features of the bookkeeping system.
4. The members would get their information in time and semi-annual reporting would also be possible without any additional effort.
5. Once the reporting system would be working properly, the managers would have more time to plan for the future of the society.
What would be the best strategy for computerisation?
Computerisation is not only a technical problem to be solved, but it provides, more importantly, a seed of change of the organisational culture and a tool to upgrade communication and norms. This is expected to fundamentally modernise the management of co-operatives, which is urgently required in the whole East African sub-region.
However, interventions have to be introduced with care and tested on a small-scale pilot basis in only a few selected co-operatives that appear most ready for computerisation as a means for increasing member participation and improving coop business performance. Computerisation should be introduced in highly participatory and non-threatening manner and there should be a strong training and sensitisation component in collaboration with a local NGO or private firm.
Once tested, the approach could be gradually replicated within Kenya by developing a phased computerisation-cum-training strategy for the targeted cooperatives and for key Government officials. The replication phase would focus on field testing of the approach and development of materials, which would culminate in the development of a national computerisation and training programme with strategies based on the test experience.
Implementation could later be extended also to the other countries of the sub-region, possibly in the beginning in either Uganda or Tanzania.
Hiring More Qualified Managers
Management committee members in Kenyan agricultural co-operatives are expected to serve on a voluntary basis. Committee members do not receive any salary, but only a sitting allowance for their management work. The employed managers receive salaries paid either by the society or the union, but the salaries are not competitive compared to the private sector firms. This practise is still common, because the Ministry used to set the salary scales earlier during monopoly era of co-operatives. For co-operatives to attract qualified staff, they will have to compete with private companies in paying comparable salaries and incentive bonuses Bonus wages to employed managers and honoraria to committee members could be partly based on profits to motivate them to act in the best interest of the members and to improve capital formation within the society. When losses are incurred, punishments such as loss of incentives and retrenchments should also be applied. Co-operative unions employ many of the society managers and pay them salaries, which are ultimately financed by a society commission paid to the union. This type of secondment belongs to the Government controlled era, which dilutes member control. By direct society employment, managers would be better accountable to the management committee and the members of the society. This would, in turn, make management and member control more effective.
Improving Co-operative Business Training
The above suggestions will not have positive effects unless they change the current practices and the way both members and managers structure the purpose, aims and activities of the societies. Therefore, training of the members and managers is important. Such training should stress the following:
1. First, business rather than the social dimension of co-operatives should be emphasised, which would include focus on accounting, marketing and administration of co-operatives. Members should have basic training in the understanding of financial accounting and interpretation of financial statements so that they will be able to maintain accountability pressures over managers. This training should also introduce the required changes in financial accounting and the improved role of the members within the society. Managers need also to gain improved skills in controlling the society activities by training in management accounting and finance.
2. Managers need to learn new marketing skills and techniques to compete in the liberalised markets and satisfy customer demands for higher quality products. Such training is very important to improve quality control considerations. Currently, there are no such pressures on the members and therefore, the concerns of quality of the raw material lies with the members without any major pressures from the society.
3. Training in business administration will be important both for the members and the managers. This includes issues such as development of a good business plan and its implementation to the operational level, control and payment systems and a proper governance system.