Cooperative principles
Privileges, responsibilities and dependence
The new situation
The need for a revised strategy
Agricultural cooperatives have generally been set up to enable rural people to improve their economic conditions by working together This tradition of service to the community is still very much alive today. To succeed in realising this objective, cooperatives need to continuously develop to maintain their members’ loyalty bargaining power and market share against growing competition.
Successful cooperative service organizations generate income for their members through business transactions. Yet cooperatives are also democratically controlled member service organizations governed by a set of principles which give them a special identity Equality between members is regarded as important in maintaining group solidarity and is guaranteed through the one member one vote principle. Benefits are distributed according to each member’s ‘patronage’ or use of the cooperative’s services, rather than the amount of funds they have put into the business. This helps to maintain a certain balance among members by limiting the profits which can be made by members simply by providing investment funds to the cooperative. This system creates incentives for member loyalty and consequently strengthens the competitive position of the cooperative.
These principles shape the cooperative identity and describe their ultimate goal of collective self-help, which has inspired cooperative leaders and members throughout the world. The principles of cooperatives are, however, different from those used by other private businesses such as corporations (see Box I) and create distinct problems for cooperatives in raising capital, some of which will be dealt with in section 4.
Financial strategies can strengthen a cooperative’s economic and social roles when they encourage members to patronise the cooperative and become involved in democratic decision making in its business operations.
Box I: Comparison of cooperatives and private businesses
|
Features |
Cooperative |
Limited Company |
|
Corporate Objectives |
service to members, promotion of collective action,
participation of members through democratic processes, empowerment |
profit, competitive power and survival |
|
Ownership |
by members who join primarily to use services of the
coop |
by investors who may or may not be involved in the operation
of the enterprise |
|
Control |
one member one vote, regardless of shares held; prominence of
elected officers and board; considerable oversight and intervention by
government authorities in many countries |
one share one vote; prominence of elected officers, board and
management |
|
Nature of Subscribed Capital |
shares are purchased and redeemed at par; redemption may be
time-consuming; capital revolves as new members join and old members leave;
shares may be issued in lieu of cash payments to members or from deductions from
cash payments to members, from deductions from cash payments by members for
services used; regarded as the least expensive form of capital or source of
finance |
shares are negotiable (i.e. they can be bought and sold
freely, unless otherwise agreed by shareholders) but not redeemable; price
determined by negotiations between buyers and sellers or through bid/offer
transactions; regarded as the most expensive form of capital or source of
finance |
|
Financial Structure |
often dominated by members’ shares where credit is
difficult to obtain; dominated by debt when foreign or government assistance is
readily available; varies by type of industry or activity |
varies by industry and by firm |
|
Value of investment by Owners |
redeemable value of shares plus savings from favourable prices
offered by the cooperative on services used by the member |
market value of shares |
|
Distribution of Net Income |
in proportion to patronage, i.e., the extent of use of
services provided by the coop measured in financial terms |
in proportion to shareholding |
|
Return on Owners’ investment |
limited return on shares, limited by law, tax considerations
or by custom; benefits from use of services provided |
dividends as decided by the board of directors, plus
appreciation or depreciation in share values, depending on performance and
financial market conditions |
Over the past few decades, the promise of cooperatives attracted many supporters that were not members of cooperatives or that were not directly involved in the business of cooperatives. These have included government departments and donors such as the United Nations Food and Agriculture Organization and the World Bank as well as development assistance agencies of industrialised countries.
Support to cooperatives has been provided in the form of money and technical assistance as well as special privileges and responsibilities.
· Privileges have included: special or exclusive rights to deal in certain goods or commodities, such as milk or certain grades of cloth; fixed prices that are favourable to cooperatives or to their members; loans at low rates of interest; grants and tax benefits.However the results of this support have been mixed. Support has often led to dependency threatening the cooperative’s stability when there are changes in prices or in the degree of government or donor support. In many cases it has also undermined the cooperative’s financial and management independence, leading members to consider the cooperative as belonging to the government or other agency rather than themselves.· Responsibilities have often included: processing, marketing or provision of goods and services as requested by the government or donor agency.
External support for cooperatives is declining. This is the result of three new trends that have little to do directly with cooperatives:
· The decreasing flow of development assistance.Most donor agencies are now faced with budgetary problems and changing priorities of their own which have led to a decline in aid to the agricultural sector and to agricultural cooperatives, as shown in the graph below:
Declining ODA* to Agriculture (at 1990 constant price US$)
Source: Food and Agriculture Organization of the United Nations, Rome, Italy, Oct. 1996To summarise, cooperatives increasingly find themselves with lower levels of financial support than before, and are obliged to compete in the open market. As external assistance and government support declines and market competition increases, cooperatives will have to fend for themselves.* ODA = Official Development Assistance (includes bilateral and multilateral assistance to agriculture)
· The globalization of trade and deregulation of domestic markets.
Countries are removing barriers, promoting freer trade domestically and internationally. As a consequence, consumers are increasingly able to obtain cheaper goods and services from alternative and more efficient providers. Under these conditions, it is more and more difficult to reserve special privileges or offer special price benefits to cooperatives.
· Privatisation of state agencies and businesses.
The new owners of privatised state agencies such as marketing boards and banks are interested in dealing with cooperatives as business enterprises. The cooperatives’ roles as government-led sources of supply of agricultural commodities or vehicles of social change are not their concern. To work with these boards and agencies, cooperatives need to be efficient and well run competitors in the open market.
On the other hand, greater independence can create new opportunities for cooperatives to grow and prosper on their own terms, offering new ways of achieving the cooperative promise and potential.
Cooperatives need to adapt to these new trends, finding ways to finance their operations and to continue to compete, while maintaining cooperative principles and identity.
Cooperatives which do not adapt, and continue to rely on the reducing privileges and financial support from external non-member sources will be increasingly unable to compete with other, more efficient types of business.
