Loss of Competitive Advantage: 14 Points to Consider
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
- Administrative procedures: Managing cooperatives usually involve considerable more administrative activity relative to private traders as discussed in detail on Another Page. Typically, this is associated with the consignment selling of produce and pre-ordered of inputs, which require general management, transparent accounting, and storage management, well above the simplified operations of the competing Private Service Providers. These extra administrative activities must be paid for as part of the overhead costs for operating the cooperative., which in turn must come from the financial benefits of membership. However, in the overall suppressed financial environment these benefits might be severely limited and not be able to cover this extra overhead cost after the facilitation and external funding ends. When this happens continued participation in the cooperative, could result in the cooperative being forced to pay the farmers less than what is offered by private service providers thus forcing the farmers deeper into poverty. Unfortunately, administrative costs are normally substantially underestimated in planning any business venture.
- Permanent staffing: With the additional administrative requirements, as mentioned above, there is usually need for permanent qualified staffing. Even those who advocate for Cooperatives acknowledge the critical importance of good qualified managers with at least a diploma (Associate Degree in USA) or bachelor’s degree. This is proposed without considering the sustainable cost for hiring a qualified staff that most likely will have to come from outside the area. In additional to a qualified general manager you most likely will need an equally qualified accountant to manage the individual member accounts, and warehouse manager to accept and keep track of the consigned goods or distribution of the consolidated purchased inputs. Finally, there will be a need for some manual laborers to porter the good in and out of the warehouse. The latter most likely can be hired locally. Is there sufficient financial benefit to cover all the salaries and financial fringe benefits of this staffing need, let alone any in-kind benefits usually provided to transferred staff.
- Imported Staff Support: When you import qualified staff from outside the project area, as is often the case, the cooperative will be expected to provide adequate housing consistent with professional qualification and travel allowance to visit families. That again can 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 these costs.
- High Salaries & Wages: During the external funded facilitation period most implementing NGOs pay the local staff salaries and wages somewhat above the competitive rate. This is an incentive to work with expatriates and easily justified. However, when the facilitation effort is over will these people accept some more competitive wages, or will there be some massive and disruptive staff turnover of the more experienced staff necessary to effectively continue the management.
- Physical Facilities: Cooperatives usually require some physical facilities for storage of consigned goods as well as consolidated input purchases. They also need some office space to accommodate the general manager, accountant, and warehouse managers their records or computers etc. This could also include some processing value added equipment such as that needed to convert parchment to green bean coffee. This is very easy to justify and as part of the initial facilitation activities can be provided by donor from external funds. However, once external assistance ends all these physical facilities must be maintained including utilities paid, building and equipment repairs, occasional painting etc. 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, must hire transportation, if only a bicycle or ox-cart.
- Project Vehicles: With all the running around necessary during the initial facilitation effort to get a cooperative started, some utility vehicles are readily justified and can be easily and appropriately be provide during the period of external funding and facilitation. However, once the facilitation effort is over the operation and maintenance will have to be funded by the cooperative as part of the overhead costs derived from the limited financial advantage cooperative membership provides. During this time will the externally hired qualified general manager, accountant and warehouse manager still consider the vehicles a perk of their position and available for use for a combination of personal and business use, with a possible tilt toward personal. If so overhead costs will skyrocket!! Granted the initial capital costs of the vehicles can be part of the facilitation effort, but not the post funding operating costs, including an escrow account for the eventual replacement vehicles every 3 or 4 years.
- Trucks for transporting goods: As with the general utility vehicles trucks for transporting consigned goods and consolidated input purchases are readily justifies and can be easily purchased during the externally funding facilitation period. But, is this a good investment and can the trucks be efficiently utilized? How often are they used for only partial loads? It should be noted that often Private Service Providers will rent trucks as need and consolidate shipments with other traders or use public transportation like the tops of those overloaded buses. Do you think all those goods on top of the buses are personal luggage, or traders moving goods around cheaply!! Can this make a substantial difference in operational costs?
- 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 providing a competitive advantage to the private traders.
- Spillage & Pilferage: More likely cooperatives will have higher levels of spillage and pilferage then the private traders. This is associated to the additional handling going into and out of storage as necessary for consignment selling. Some of this could be combined as “careless” worker deliberated dump bags that break allowing the contents to be scooped up by the work crew and taken home. How are these loses distributed over the membership. Few farmers will accept the loss of a bag of grain spilled by careless workers or even a prorated loss if another member’s consigned bag is spilled.
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 must be a family member. With the private traders will most likely keep closer supervision on laborers handling goods, and even if spilled it would be between trader and laborer as the bag has already been fully paid for.
- Financial Management Strategy: With the limited banking facilities available to most smallholder farmers the overall Financial Management Strategy 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 while heading to the market. This can greatly prolong the marketing period and overhead costs, to as much as 10 months after harvest as noted by rice traders in Eastern Nigeria. These traders stated they rarely had difficulty purchasing rice until 10 months after harvest which would be well after the following crop was well established. This could be major problem if, as most cooperatives are, involved in a single commodity with staff spending most of the time loafing waiting for commodities to come in while 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 highly promoted but never quantified bulking benefits. Given the limited banking facilities and risk of keeping too much cash in the house, this might be well rationalized financial management strategy.
- Cash Payments & Distrust For Consignment: Based on past experience with government mandated cooperatives and other financial institutions with a 3 to 4 up to 6 weeks delay in getting paid most farmers will prefer cash and are often willing to accept a 20% surcharge or discount to deal with cash. This preference of cash appears well recognized by development workers, but no one wants to make any adjustments in their business model to accommodate this. The cell phone-based M-PESA banking/financing system appears to be a highly effective “grassroots” initiated means of moving money around while avoiding the carrying cash. It is well worth looking at in more depth in other countries. However, the question would be, with the typical business model would a cooperative have enough buying float to load onto their cell phones an effectively use this mobile banking system.
- Consensus Building: A major part of the promotion of cooperatives is the participatory governance. However, this requires a large amount of consensus building among members which means a lot of time and effort spent in meeting which requiring paying salaries to the salary staff and reducing the time they spend on serving the members. Hopefully, this is far short of the leverage compliance of the by-laws imposed on members of the cooperative to manage the irrigation system in Madibira, Tanzania. 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: Many cooperatives particularly those established as part of development efforts envision providing some social services to their members and communities. This could include extension services, children’s’ education, medical clinics, etc. However, usually overlooked is that these cost monies which must come from the limited financial benefit of membership, mostly in the form of bulking production for sale or consolidating input purchases. All of social services will reduce the cash returns to the beneficiaries which they often resent, particularly if only a small percent of the community is participating in the cooperative, but social benefits are distributed to the community at large.
How much of the negotiated bulking/consolidating financial benefits have been consumed with these items? Were they fully consumed just with employment of qualified personal including perks and fringe benefits? At what point did the burdensome administrative cost exceed the private traders profit margins? Did you get as far as the transport costs before this to was fully consumed? What is your management plan when the overhead costs exceed the private trader buying price? Will you be forced to pay the farmers less, lowering their profit margins and forcing them deeper into poverty? Will you ever be able to pay those promised dividends at the end of the season? What would be the probably that the cooperative will collapse once donor funding ends and facilitators fly home? Finally, would the overhead costs mentioned above amount to 35% as mentioned by the Central Growers Association in Kitwe, Zambia, which limited their business opportunity to only running the tobacco auction which they had monopoly control over with all other members’ business being side-sold.
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