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COSATU Submission on theDraft Co-Operatives BillSubmitted to the Department of Agriculture on, 30 March 2001 |
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COSATU Submission on theDraft Co-Operatives BillSubmitted to the Department of Agriculture on, 30 March 2001 |
Table of Contents
1. Preface and ProcessCOSATU welcomes the opportunity to comment on the Draft Co-operatives Bill published by the Department of Agriculture [hereafter "the Draft Bill"]. As we will further elaborate below, we believe that the co-operative sector has a vital role to play in the economy. Many of our structures and members, as well as our former members who have been retrenched, are active in co-operatives.
Our regional structures have either made or are planning to make submissions at some of the provincial hearings which have been held on the Draft Bill. We appreciate the invitation to participate in the Co-operatives Working Group and look forward to the opportunity, through this group and other channels, to participate in the drafting process from this point forward. This document thus constitutes our initial submission into the process, and we reserve our rights in this regard.
The version which we are commenting on here was issued by the Department for comment in January 20011 . Our submission starts by setting out COSATU's overall approach to the co-operative sector, before dealing with the Draft Bill itself. In terms of the Draft Bill we comment on the drafting and structure, before going into various substantive issues in the Draft Bill, and finally commenting on several additional issues not covered in the Draft Bill. In certain respects we believe that the Draft Bill requires complete redrafting, and we would like to be part of such a process. In other areas we feel that the legislation can be improved through amendments. As far as possible, we suggest amendments which give effect to our proposals in the course of this submission. For ease of reference, proposed deletions are indicated in [square brackets and underlined] and proposed additions in bold and underlined.
2 Introduction and background
Regulation has always formed part of the co-operative policy and institutional environment in South Africa. The first South African legislation on co-operatives was enacted in the early 1920s under the title of the Co-operative Societies Act 28 of 1922. Since then the Co-operatives Societies Act 29 of 1939 was passed, which focused mainly on the agricultural sector and farming. This legislative framework was both overhauled and repealed by the Co-operative Act 91 of 1981 which provided regulation for the formation, incorporation, functioning, winding up, and general regulatory role and powers of the registrar. Again in 1993 the Co-operative Amendment Act 37 was passed. This amendment departed in many ways from the core principles of co-operatives and opened the way for the degeneration of the co-operative movement and conversion of co-operatives into companies.
Alongside the main body of national legislation, many homelands like Transkei, Bophuthatswana, Ciskei, KwaZulu and Lebowa passed legislation. While many co-operatives were formed under these homeland laws, several of these co-operatives were merely controlled by bureaucrats or existed on paper. In the 1990s those co-operatives that still existed, but were registered under homeland legislation, have also been brought within the ambit of the 1981 Act, first, through a proclamation by the Registrar and then later through the Agricultural Laws Extension Act of 1996.
While the legislative framework for co-operatives in South Africa is skewed in favour of agriculture and prompts the need for review and reform, many countries in the world are also changing both legislative and institutional policy for co-operatives. In the former Central and Eastern Europe and many countries of the Third World the adoption of structural adjustment programs and the transition to market economies is opening the way for a market based as opposed to a top-down model of co-operatives. This means co-operative policy defines co-operatives as businesses and locates them within the private sector. Any attempt to view co-operatives as being part of a co-operative or social sector with distinct legal, development values and principles from businesses is jettisoned. State policy for co-operatives is then regarded merely as providing an administrative framework.
In the South African context COSATU believes that co-operative policy and legislation has to disengage both from a top-down approach to co-operatives as well as the market-based approach. To this extent, state support and policy for co-operatives has to create a co-operative environment that would be conducive to the development of a powerful and viable co-operative movement and sector. Hence policy legislation must be enabling - it must provide a clear and accessible regulatory framework, a host of incentives and institutional support. Policy should also be activist, making necessary interventions to directly promote a co-operative sector and in particular to assist emerging co-operatives. Support, technical training, after care and even capacitating work should be spread out amongst several organisations - Apex bodies, co-operative federations, NGOs, Training Co-operatives, specialised training centers, tertiary institutions and so on - so that a powerful network is built up around and within the co-operative movement. The state has a crucial facilitating role in this regard.
South Africa has a rich and diverse history of co-operatives. This includes a large, relatively informal sector of stokvels, burial societies, and other forms of community savings organizations. Although participants in such enterprises may not consciously define themselves as co-operative members, such experiences of organic co-operative activity can form the basis for a strong and vibrant co-operative movement in South Africa. Legislation needs to draw on such experiences, and respond to the challenge of drawing existing and nascent co-operatives into a regulatory net as well as providing appropriate support and capacity building.
As discussed both in the preface and in section 5 of this submission, we believe that the Draft Bill has the potential to frame the development of this sector; however, it has a number of serious shortcomings both in structure and content. Our key criticisms of the Draft Bill are that the structure and style are confusing and inaccessible; the language and content are overly corporate and business-oriented; the relationship between the state and the co-operative sector needs clearer conceptualization; the Draft Bill is not sufficiently rooted in member ownership and control.
3 COSATU's Vision and Principles for the Co-operative Sector
The key principles that underpin our approach to the building of co-operatives are as follows:
3.1 Co-operatives as a key component of social capital
Co-operatives play an important role in the provision of economic and social needs of the working class and the poor. They are used to provide economic and social needs through democratic participation, rather on a "free market" basis. They attempt to subordinate the operation of the market forces within the broader objectives of meeting socio-economic needs. Their rationale is based on the need to promote a more equitable distribution of resources and facilitate democratic forms of ownership. There are a variety of both economic and development benefits to its membership and society as a whole. They can generate the economies of scale and income distribution, foster a democratic ethos, facilitate access to economic ownership for the poor and the working class and provide economic services at a reasonable cost. Their primary activity is to fulfill the needs of their members and communities, rather than maximise profit.
3.2 A self reliant and self managed co-operative movement
Co-operatives existing by themselves or as "islands" are not sustainable and are prone to collapse or degenerate. This is further exacerbated by liberalisation and the general opening up of the economy. COSATU believes that for co-operatives to develop and grow it is essential to ensure that a powerful, self reliant and self-managed movement is built. This is consistent with international principles and ensures that co-operatives privilege their relationships with each other over those with other kinds of economic enterprises, and thus secure and strengthen their economic viability. Internationally, the experience of the Mondragon worker complex, the landless workers movement in Brazil and the worker co-operatives of the Italian "Red Belt" area of Emilia Romagna affirm this point.
3.3 Co-operative Sector as a key component of the economic transformation process
COSATU believes that political democracy, without socialising the economy cannot be able to resolve the legacy of apartheid. Sustainable development requires people to have a substantive access and control of their economic and social resources to fulfill their own needs. The co-operative sector is an important vehicle to ensure that people have access to and control economic resources and assets to fulfill their needs. Co-operatives provide measures for allowing the poor and working people to participate in the mainstream economy and development process as owners, rather than as non-owners. However, success of the co-operative sector shall, to a large extent, depend on the way government makes the necessary institutional interventions and provides resources towards its vibrant operation.
Some basic co-operatives networks already exist in the country. They mainly operate within the small-scale activities in townships and in rural areas. Their operations are constrained by a lack of access to finance, limited access to markets and lack of institutional support from government. It is critical to ensure that these constraints are addressed by government to bolster sustainability of co-operative sector in the country.
3.4 Job creation
Given the massive unemployment crisis facing South Africa and the hemorrhaging of jobs that has taken place over the past few years, retention and creation of jobs is a policy priority. Co-operatives, properly supported and managed, have a key role to play in creating quality, sustainable jobs which are not purely subject to managerial decisions based on profit maximisation. The local economic activity which can be fostered by co-operatives can also stimulate indirect job creating effects in economically depressed areas. Having said this, it is important that co-operatives do not become an excuse for retrenchments or outsourcing.
4. Drafting and Structure of the Bill
It has been over a year since the Department of Agriculture initiated a policy process around a legislative review of the 1981 Act and its subsequent amendment. The development of a more coherent and overarching co-operative policy framework should ideally have entailed a Green and White Paper process. While several workshops have been held and numerous discussion documents have been generated on the limits of the current regulatory regime together with a legislative review agenda, this process has not facilitated a wider policy debate and framework on co-operatives policy to emerge. The provincial hearings currently underway could go some way towards broadening this important process. Submissions made through this process need to be incorporated into the next version of the legislation, and the drafting process from here needs to be made more participatory. Building on the invitation to COSATU to participate in the Co-operatives Working Group, we propose that the drafting team itself should be broadened and democratised to include a representative from COSATU, the Co-operative Movement (NCASA) and relevant Non-Governmental Organisations.
The Draft Bill is written in very technical legal jargon and is hence not accessible, simple and user friendly. The structure of the draft is also not user friendly. It is set out in an illogical way and does not have a plain and simple sequence of provisions. For instance, the chapter headings begin with a long list of definitions, and proceed in chapter 2 to merely focus on the powers of the Registrar, rather than focusing first on the co-operative principles that underpin the Bill. These problems limit its usefulness as a guide to emerging or even established co-operatives on how to run their enterprises.
A related concern (going to content as well) is that the Draft Bill is too prescriptive in some respects. There is a great degree of diversity amongst co-operatives in South Africa - from survivalist micro rural co-ops to massive commercial agricultural co-ops, as well as a huge range of sectors. Legislation which attempts to provide an overarching framework for such a heterogeneous sector needs to be sensitive to this. Specifically, different types of co-ops could have substantially different policy and regulatory needs. While there is a value to having overarching legislation for the sector, we should be cautious of prescribing requirements and operating rules which may be not universally appropriate.
The next draft of the legislation should take this into account and consider a simpler, shorter piece of legislation. It may be useful to supplement such legislation with sectoral regulations which set out registration requirements and other relevant aspects for co-ops in the different sectors (transport, housing, finance etc). The legislation should set out clear principles for the co-operative sector which will guide the interpretation and implementation of the legislation, and according to which regulations can be benchmarked.
In terms of style, we propose that the Draft Bill be simplified and shortened. Furthermore, certain of the provisions can be clustered under broad themes which also assists with simplifying the Bill. It be redrafted in simple and plain English, with minimal cross referencing, and short and clear sentences. We also suggest a reordering of the structure of the law, possibly in the following way :
- Part One - General (including basic co-operative principles) ;
- Part Two - Incorporation;
- Part Three- Governance of the Co-operative;
- Part Four - Special Kinds of Co-operatives;
- Part Five - Restructuring;
- Part Six - Administration;
- Part Seven - Remedies and Sanctions;
- Part Eight - Miscellaneous Provisions.
We have observed that large chunks of the Draft Bill are transplanted from the Canadian legislation. While there is certainly a role for drawing on international experiences, other countries' legislation - particularly developed countries with completely different socio-economic structures to ourselves - cannot serve as a blueprint for our own legislation. We suggest that the drafting team, in developing the next draft of the legislation, pays particular attention to those parts of the Draft Bill which have been copied from Canadian or other legislation and that where appropriate such sections be rewritten to enhance their relevance to South African conditions.
5. Concerns and recommendations on the sections of the Draft Bill
In the analysis that follows an attempt is made to provide a critical view of some of the key provisions of the Draft Bill. These provisions in the main relate to:
- Co-operative principles and identity contained in the bill;
- Kinds of co-operatives and the co-operative model; and
- The enabling and regulatory role of the state.
This exposition is also meant to provide practical recommendations to change the bill.
5.1 Co-operative Principles and Identity
5.1.1 The Title of the Act
Currently the Draft Bill refers to the short working title: " Co-operatives Bill" which will become the Co-operatives Act 2 . While this title will merely be used for citation purposes once an Act, it might be useful to consider a new title. The Previous Act of 1981 has an association mainly with white agricultural co-operatives. The new Act should provide a title that conveys the idea of a new law meant for a new purpose.
Recommendation:
The Bill should provide the following title for the Act: "Self Managed Co-operatives Act".
5.1.2 Preamble
(a) There seems to be an implicit tension pertaining to the conceptual relations between co-operatives and government in the preamble. While the autonomy of the co-operatives is fully asserted, it also asserts that:
independent, self-reliant, self-responsible, self-managing and financially viable co-operatives can be a catalyst for the government to achieve its objectives.
While COSATU acknowledges the development linkage between a co-operative sector and government's development objectives, we believe that it might be appropriate to broaden this as per the following formulation:
Recommendation:
Redrafting of this sentence in the following manner:
Independent, self-reliant, self-responsible, self-managing and financially viable co-operatives can be a catalyst for [the government to achieve its objectives] economic development and redistribution of resources.
(b) While the preamble of the Bill sets out the main goals of the Bill and which would help with interpretation there is a specific sentence which provides that :
Co-operatives are to be operated on co-operatives basis underpinned by sound business principles. [emphasis added]
There could be an implicit tension in this sentence. Business principles are associated with values like aggressive individualism, competitiveness, market efficiency and so on; whereas co-operatives are primarily institutions that are meant to meet the needs - social, economic, cultural and even spiritual - of their members and the wider co-operative movement. While large surpluses could be made this is not the central objective of a co-operative. If co-operatives were to adopt business practices, this should be out of choice and should not be prescribed through legislation. In general in a producer co-operative members benefit by ensuring secure full time employment as opposed to "cost cutting" for profit maximisation; credit union members benefit mainly by obtaining cheap loans at minimal or no collateral; members in a consumer co-operative benefit by obtaining discounted goods and service for patronage and so on. Of course, co-operatives do need to be well run and manage resources effectively, but this should not be conflated with "business principles".
It is also relevant to refer to the basic values of a co-operative as defined by the International Co-operative Alliance and which state that:
Co-operatives are based on the values of self-help, self-responsibility, democracy, equality, equity, and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility, and caring for others.
At the same time, these core values of a co-operative are grounded in a set of principles which have their origins in the pioneering co-operative experiment in Rochedale England around the 1800s. These principles have been the bedrock of co-operative development over the centuries and are enshrined in several international instruments including the Statement of Co-operative Identity adopted by the International Co-operative Alliance (a point developed below).
Recommendations:
(1) The sentence in the preamble should be changed to read as follows:
The operation of a co-operative shall be informed by internationally accepted principles which have been defined as: voluntary and open membership; democratic member control; member economic participation; autonomy and independence; education, training and information; co-operation among co-operatives and concern for community.
(2) Any reference to co-operative business throughout the Bill should be removed and where applicable replaced with the words:
Co-operative activity.
5.1.3 Defining a Co-operative
The ILO, in the Co-operative (Developing Countries) Recommendation:, 1966 (No 127) defines a co-operative as follows:
an association of persons who have voluntarily joined together to achieve a common end through the formation of a democratically controlled organisation, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking, in which members actively participate.
The Bill provides a definition of a co-operative, which is consistent with the definition provided by the International Co-operative Alliance i.e.
a co-operative means an autonomous association of person or persons united voluntarily to meet their common economic and social needs through a jointly owned and democratically controlled enterprise registered in terms of this Act.
A limitation of this definition is that it does not provide rights for non-managerial staff who are not members of a co-operative. Many user or service co-operatives have member owners who are beneficiaries of ownership and control rights however the non-managerial staff do not share these rights. For example, in a consumer co-operative, if the workers are not member volunteers, all the non-managerial staff are treated as employees and their association with the co-operative is defined by the employment contract. Worse still some co-operatives would be inclined to use casual and temporary workers if rights are not defined for these workers within the law.
Recommendations:
(1) The definition of " member" should be changed and it should read as follows: any person or entity including non-managerial staff accepted by a co-operative to be a member thereof.
(2) Under the chapter dealing with membership, particularly section 48, which deals with conditions of membership the following sub-section should be added: All non-managerial employees of the co-operative shall be given membership of the co-operative.
5.2 Kinds of Co-operatives and The Co-operative Model
5.2.1 Classification
The Draft Bill 3 provides for three forms of co-operatives: primary, secondary and federal. A secondary co-operative is defined 4 as: Two or more primary co-operatives joining together to form a secondary co-operative.
While a federation is defined as: A co-operative whose membership is composed substantially of two or more secondary co-operative entities, federations or leagues of co-operative entities.
In general the Bill utilises internationally used terminology to define the various forms of co-operatives. However, the Bill does not define a primary co-operative.
Recommendation:
A definition of a primary co-operative needs to be provided which ensures that the main characteristics as well as the distinction between the primary co-operative and other forms of co-operatives is clearly articulated. In other words, the definition of a primary co-operative must emphasise that its members are human beings or persons and they are not composed of juristic entities.
5.2.2 Developing co-operatives
The intention of the Bill as set out in its long title and preamble attempts to ensure that those who were previously disadvantaged can participate in and benefit from co-operatives. However, beyond the enabling support and environment this Bill would create it is necessary to ensure that co-operatives in previously disadvantaged communities are nurtured and not inhibited by onerous legislative requirements. To this extent the bill provides for an exemption under section 20(d) which states:
If applicable, a declaration signed by the incorporators that the co-operative will comply with all the requirements of this Act within two years from date of registration
Recommendation:
While we believe this is a useful provision, developing co-ops need to be more systematically dealt with in the legislation as additional special provisions may be required to assist their development. Developing co-operatives should be eligible for special programmes and assistance, as is the case with SMMEs at present. In fact some of the existing SMME assistance programmes could be extended or modified for developing co-operatives, taking cognizance of course that co-operatives are not SMMEs and should not be treated as such. A definition for developing co-operatives would need to be included in the legislation to ensure that other co-ops are not able to take advantage of special provisions which are not targeted at them. The definition could include length of existence, income, and possibly number of members (these thresholds could be prescribed in regulations if necessary).
5.2.3 Sectoral co-operatives
In the 1981 Act provision was only made for three kinds of co-operatives - Agricultural Co-operatives, Special Farmers Co-operatives and Trading Co-operatives. The Draft Bill provides for various kinds of co-operatives, which can be established in terms of the general principles set out in the law 5. These co-operatives can be formed and exist in various sectors and industries in the South African economy. This kind of flexibility in the law is welcome. At the same time special provision is made for Agricultural and Farmers Co-operatives 6, Financial Services Co-operatives 7, Housing Co-operatives8 , Worker Co-operatives9 , Transport Co-operatives10 and Medical Co-operatives11 . In all the relevant chapters set out for these kinds of co-operatives additional requirements, exemptions from specific legislation and operating and definitional principles are set out.
We believe that for this section to be useful as a guide and legal framework for specific categories of co-operatives, it needs further development. Our comments in section 4 of this submission can also be referred to in this regard. We give some indication below of some of the following problems which we have observed with the provisions dealing with special co-operatives. However, substantial reworking is required in this regard if the overarching co-operatives legislation is also to cover these specific categories.
Agricultural and farmers Co-operatives
In the past the provision of cheap loans to farmers co-operatives and drought relief funds through the Land Bank (as well as tax incentives) were important to stimulate the development of these co-operatives. The Draft Bill while it has a section12 on loans to farmers in the contents/arrangement of the Act, does not set out specific provisions on this section- it is blank or missing in chapter 18. In this regard COSATU believes that loans to emergent black farmer co-operatives need to be privileged and a provision should be made for the Land Bank to provide cheap loans to these co-operatives, below the market rate of interest.
Financial Services Co-operatives
Two major problems exist in this Chapter. Firstly, these kinds of co-operatives exist through exemptions to the Banks Act, provided by the Registrar of Banks. These exemptions which allow for the formation of national regulating bodies like SACCOL or FSA are normally onerous and constrain the development of co-operatives in relation to mainstream commercial banks. For instance, credit unions in SACCOL cannot develop a savings and credit base beyond a particular size; village banks can only have a commercial bank as a link bank etc. The Draft Bill, particularly chapter 19 does not address this issue but merely re-enforces the status quo. Secondly, section 289 compels the establishment of one central self-regulatory body for all financial services co-operatives. This means SACCOL, FSA, FINASOL and so on which are self regulating bodies for different kinds of financial service co-operatives have to disband and become part of a state imposed structure. This section violates the voluntary basis of co-operative development and is not consistent with the standpoint of co-operative principles.
Recommendation:
One option would be to substantially rework this section so that it becomes adequate and appropriate to govern financial sector co-operatives. A second option would be to set out the framework for financial co-operatives through regulations in terms of this legislation. A third option would be to remove Chapter 19 from the Bill and allow the status quo to prevail until such time as a separate law is provided for financial services co-operatives which addresses the constraints of the exemptions provided by the Registrar of Banks, under the Banks Act. In places like Ireland where credit unions are most developed separate legislation exists for them.
Worker Co-operatives
Section 298(a) allows for non-members to be directors of the co-operative. This detracts from the imperative of having autonomous co-operatives. Technical experts and consultants can be consulted by the co-operative and even employed as part of the managerial staff but they should not be given a right to be directors.
Recommendation:
(1) The definition of a worker co-operative be formulated as follows: "worker co-operative" means a co-operative whose prime objectives are to provide employment to its members and to operate an enterprise in which ownership and control rest with the members;
(2) Section 298 (a) should state: all the directors of a worker co-operative must be members that are employees of the co-operative;
5.2.4 The Number of Persons
The minimum thresholds set out for incorporating a co-operative are contained in section 19 (1). It states inter alia that the minimum number required to establish a primary co-operative is seven founding members. This threshold is consistent with the minimum number of persons required to form a public company and in this sense is not arbitrary. At the same time in other countries like Italy separate thresholds or requirements are set for different kinds of co-operatives. For instance a service cooperative might require a minimum of 12 people for its formation. In the Draft Bill different membership requirements are provided for the various kinds of co-operatives in Chapters 18 - 23.
We feel that the minimum requirement to establish a co-operative should not be an obstacle. In a developing co-operative (see section 5.2.2 above) the initiation of a co-operative should happen even though the basic minimum requirement of membership is not there. Over time this can be overcome as the co-operative develops. At the same time, the economic activity of some co-operatives may not require large numbers of people. Hence we believe in the need to provide for a membership requirement for small co-operatives. Internationally, the threshold is sometimes set between 3 and 7.
Recommendations:
We propose that a subsection be added to section 19 which sets out the exceptions to the rule. This section 19(1) should provide the following exceptions:
1. The incorporation of developing co-operatives would be exempted from this requirement until they develop to a point specified by this law to meet its requirements; [a maximum timeframe could be specified in this regard]
2. Smaller co-operatives with a minimum of between 3 and 7 members may also be exempted subject to approval by the registrar of co-operatives.
5.2.5 Co-operative governance
(a) Chapters 6 (Corporate Governance), 7 (Management and Officers), 8 (Capital Structure) and 12 (Supervisory Board) are relevant in this regard. The drafting is not based on a clear understanding of the nature of co-operatives, and of the relationships, the distribution of rights and powers and the institutional structures that constitute co-operatives. In addition, it would seem that drafters have not drawn on the historical experience of co-operatives and both the factors that have contributed to success and failure of co-operatives. These chapters impose a model of co-operatives that is antithetical to the principles of co-operatives and seems to be crudely imposing a "business conception" of a co-operative. It is almost as if the drafters want co-operatives to be a hybrid company of sorts.
In the first place the terminology of the Bill in these chapters uses terms like "shareholders" interchangeably with "members" and also the term "board" replaces "Supervisory Board" and sometimes the latter is referred to as the "Board of Directors" and so on, which makes reading confusing but also points to the implantation of a conceptually flawed model. Members of a co-operative are at the heart of a co-operative and they should be either referred to as "members" or "worker owners". The Board of a co-operative should be referred to as the Board of Directors.
Recommendation:
Change the terminology as suggested above.
(b) In section 89 the law makes it compulsory for co-operatives to employ managers. It states: A co-operative must have at least two executive managers or a greater minimum number that is set out in the statutes or byelaws.
This provision is unacceptable and should be drafted in a way that is not mandatory. Such a formulation would ensure that co-operatives could choose to either employ managers or even utilise the Board of Directors as a management structure. In short, it should allow for a range of self-management options. While the Bill in section 90 (3) confers day-to-day managerial powers on managers, this should be qualified to mean the day-to-day operational decisions that implement the overall policy decisions approved by the Board of Directors. In addition, that while Executive Managers will attend Board meetings13 the law must be explicit that they do not have a right to vote in those meetings.
Recommendations:
(1) Section 89 be redrafted so that it is not mandatory. The use of the word may would alter the meaning and provide the more appropriate formulation;
(2) Section 90(3) should be redrafted as follows: Executive Managers will be responsible for day-to-day management of the co-operative as approved by the Board of Directors as part of the overall policy framework of the co-operative;
(3) Section 93 should include a subsection that states: Executive Managers will not have the right to vote in meetings with the Board of Directors;
(c) While the Bill upholds the principle of one-member-one vote14 , this is undermined by vesting control and democratic decision-making rights in external owners. This is the worst aspect of the model being imposed by the drafters and is contained in the provision for Investment Shares in section 104. These provisions are a recipe for co-operatives to operate de jure as companies with external shareholders. This was the cause of the failure of the first co-operative in Rochedale England and subsequently has cautioned the co-operative movement about such an open model of non-member ownership. In addition, the drafters have conferred on investment shareholders voting rights 15 and rights to make decisions in meetings of investment shareholders16 including the election of directors to represent their interests17 . Such an arrangement undermines the principles of a co-operative and merely reduces them to capitalist enterprises that are meant to realise the interests of shareholders. Put crisply, the objective of realising the needs of members or worker owners is undermined and supplanted by the rationality of providing returns on investment for investment shareholders. To address capitalisation of co-operatives the more important sources are ordinary member contributions, re-investment of surpluses as well as the Guarantee Fund.
Recommendation:
A complete re-conceptualisation of the legislation is needed in this regard. The provision in section 104 for Investment shares and all supporting provisions be deleted from the Bill. A redrafting process could look at alternative provisions where required.
(d) Chapter 12 that deals with the Board of Directors or Supervisory Board does not provide for sub-structures of the board that can contribute to self- management. Basically the Bill omits any provision for the creation of sub-committees underpinning the board. Such a provision would enable the participation of members or worker owners in the management of the co-operative and is necessary for the diffusion of power and democracy in the co-operative.
In addition Section 151(2) provides for members of the co-operative to appoint experts to serve as directors. This provision opens the way for persons with technical knowledge to dominate the co-operative and ultimately control it. While it might be necessary to have expertise and advice provided to the co-operative this can happen through the employment (even part time) of non-voting managerial staff or the co-operative can solicit professional advice as and when it requires it without conferring decision-making power on such individuals and giving them a formal place on the board of the co-operative. In places like India such provisions have allowed bureaucrats to control co-operatives and ultimately reduce them to instruments of patronage and control.
Recommendations:
(1) Chapter 12 provide a section for the constitution of voluntary board sub-committees. The sub-committees should be convened and chaired by members of the board. The number of such committees should be left to the discretion of the board and minutes of the subcommittees must be kept and submitted to board.
(2) Section 151(2) be removed.
5.3 The Enabling and Regulatory Role of the State
5.3.1 The Role of the Registrar and Registration
The most important administrative competency of the Co-operatives Bill is given to the Registrar of Co-operatives18 . This is very much like the power given to the registrar of companies and is essentially about ensuring the registration and incorporation of co-operatives as per the law. In other words the registrar administers the Act or law. The powers of the Register derive both from the provisions of the law and regulations made in terms of this Act19 by the Minister. Beyond ensuring the formalities of registration are adhered to and a register of co-operatives is maintained the registrar has a host of other functions defined within other chapters and sections of the Act. For instance, the Registrar has the power to redirect a co-operative to change its name20 as per the law, receive annual financial statements of a co-operative21 , appoint auditors for co-operatives unable to appoint auditors and approve the fee 22 , power to ensure the dissolution of a co-operative under conditions defined by the law 23 , power to investigate a co-operative if there are financial irregularities or a co-operative contravenes the Act 24 or is requested to conduct such investigation by a person with an interest in the co-operative 25 and also the registrar has the power to apply for direction to a court in respect of any matter concerning the Registrar's duties under this Act 26.
COSATU is concerned that the proposed powers of the Registrar are too discretionary and that some reformulation may be needed in this regard. The legislation should set out principles for the Registrar to guide the interventions for example, preventing discrimination and unfair exclusion of potential members, preventing fraud especially through the misrepresentation of a private enterprise as a co-operative, and ensuring maximum access to co-operatives especially by the poor.
We also propose the incorporation of sufficient checks or balances to ensure the registrar does not abuse his/her authority. For instance an aggrieved party can apply to the court to challenge a decision by the registrar27 . Alternatively the Co-operative advisory Board/Forum can also be appealed to for intervention in a dispute with the Registrar28 . Consideration should be given to the Advisory Council having an appeals sub-committee as the first step. The effective functioning of the Registrar through regulations made by the Minister would be important and would have to be influenced by the policy process.
In addition, given that auditing is very expensive and important for a co-operative, particularly to safeguard the interests of its members, it is important that in situations where co-operatives cannot afford to have an audit the Registrar ensures this happens free of charge.
Recommendations:
(1) When the Minister makes regulations to guide the effective functioning of the Registrar in terms of section 11, the exercise of this power must be taken into a compulsory process of consultation with the Co-operative Advisory Forum. This means section 11(a) should have a subsection 11(2) which states:
The Minister has to consult with the Co-operative Advisory Board/Forum when making regulations
(2) In addition we propose a subsection to section 11 dealing with regulations. We propose the inclusion of a sub-section to deal with "Procedure when issuing regulations" as follows:
11(2) the minister must comply with the following procedure when intending to issue regulations, after consulting the Co-operative Advisory Forum:
(i) the intention to issue the regulations must be announced by notice in the Government Gazette and at least one other means of communication circulated throughout the Republic,
(ii) The notice must state-
- that a draft regulations has been developed for comment, and
- the nature of the draft regulation, and
- where the copy of the draft regulation may be obtained,
- where comments are to be returned to,
(iii) a period of least one month from the date of the announcement must be allowed for interested parties to comment on the regulations;
(iv) The Minister should give written reasons for rejecting any comments.
(3) The Registrar must not only appoint and agree on the fee to be charged for an auditor in the case of a co-operative unable to do so, as per section 124, but should also ensure the service is paid for and supplied free of charge where necessary. In addition developing co-operatives must be guaranteed of this kind of support. Section 124 should read as follows:
Where the co-operative, including developing co-operatives, is unable to appoint a chartered accountant or firm of auditors referred to in this Act, the Registrar may approve the person nominated by the co-operative to audit the books of a co-operative for one financial year end. The fee payable to the auditor appointed, in this manner will be approved and where necessary paid for by the Registrar.
5.3.2 Amalgamation, Conversion and Re-organisation/Rearrangement
Beyond the role and functions of the Registrar, chapters 10 and 11 which deal with the amalgamation, conversion and re-organisation/rearrangement of a co-operative, are the most important direct regulatory powers that the state has to impact on the development of the co-operative movement. Hence, it becomes important that these competencies are both enabling and facilitative for the development of the co-operative movement
While the provisions on Amalgamation in Chapter 10 seem to provide an adequate and user friendly framework for co-operatives that want to consolidate their operations, both the provisions on conversion and re-organisation/arrangement could undermine the development of an autonomous co-operative movement. Firstly, section 142, which deals with co-operative conversion to any other form of juristic entity, is problematic in that it reduces co-operative policy primarily to a means to ensure that co-operatives serve as a basis for the development of capitalist enterprises. This is rejected firmly by COSATU.
Secondly, given that co-operative formation is voluntary, and both consistent with international principles and the South African constitution, co-operators may exercise other options before choosing to form a co-operative. If co-operators want to set up another form of economic entity they are free to do so at the beginning or as a separate entity to the co-operative. Once co-operators accept the need to associate and form a co-operative this entity is grounded in that voluntary consensus and hence has to be respected throughout the life of the co-operative. Section 145 which provides a right to dissent to those opposed to a co-operative converting to another juristic entity, undermines the founding consensus of the co-operative and merely deals with opposition to conversion by trying to "buy-out" the dissenting member owner. This could also open a loophole for those wanting to abuse special programmes geared towards the promotion of developing co-operatives as a smokescreen to subsidise private businesses.
The legislation should not undermine co-operatives by providing for conversion to other forms of juristic entity and instead should ensure that the developmental impact of co-operatives, which includes redistribution, is maximised. To this extent, the state should provide for conversion of other juristic entities to co-operatives. In particular, worker takeovers and buyouts of businesses and their conversion to co-operatives should be encouraged and legislatively supported.
The power of the state to control co-operatives through the re-organisation/re-arrangement provisions, while necessary in the context of insolvency might be a threat in others. "Re-arrangement" seems to provide for the restructuring of a co-operative, which might lead to job shedding and ultimately job losses. In the main the provisions of the Bill, namely sections 146 to 148, are not drafted in a clear and unambiguous way. The drafting is convoluted and confusing, and "re-organisation" and "rearrangement" are not clearly conceptualised within the structure and drafting of these sections. In short there is an ambiguity which suggests on one hand, the re-organisation of a co-operative in the context of an insolvency which gives the court powers to change the statute of the co-operative including its directors. On the other hand, it seems a co-operative can re-arrange itself, including rendering itself insolvent and placing itself under liquidation using the "arrangement provisions" in section 147(1). More fundamentally, it seems that the definition of "arrangement" in section 147 opens the backdoor for co-operatives to become other juristic entities either through a division of their business or amending the statutes of the co-operative or transferring their assets and so on. This further allows for the courts to undermine the development of an autonomous co-operative movement.
Recommendations:
(1) Section 142 (on conversion) as it stands, together with all other attendant provisions be removed from the Bill; and be replaced by a conversion provision which allows other juristic entities to be converted into co-operative. This provision must define a procedure firstly for the Co-operative Advisory Forum/Board to conduct a feasibility study of a worker led conversion of a juristic entity. Secondly, it should provide for a business plan to be drawn up by the workers involved together with assistance from the Guarantee Fund. Thirdly there should be a special court or other appropriate institutional vehicle to which both the feasibility study and the business plan should be presented for a decision or order. Fourthly, it should provide for the registrar to draw up the necessary conversion statutes based on the order of the special court.
(2) Section 146 on re-organisation should clearly and unambiguously deal with a situation of insolvency and all other matters related to "re-arrangement" be deleted. The legislation should ensure that, in the event of insolvency, members/workers are protected and given priority over other creditors. Furthermore, the court should be given powers to consult with both the Co-operative Advisory Forum/Board and the Guarantee Fund for technical assistance in a situation of insolvency and re-organisation (Under powers of Court section 146 (5)); and in the light of this give consideration to allowing the worker owners an opportunity to run the co-operative under the supervision of the court.
(3) if there are other legitimate objectives which need to be met by conversion and/or reorganization, these should be drafted taking into account the concerns raised above.
- Co-operative Advisory Board
The Draft Bill 29 provides for a policymaking institution to work alongside the Minister to provide advice and dispute resolution functions on a host of matters. This policy institution, which appears to be largely transplanted out of the new Namibian legislation, is a positive idea. While the composition and functions defined in the Bill are largely similar to the Namibian Co-operative Advisory Board, there is a need to model this institution on South African realities and policy. In the first instance, it is important to recognise that South Africa does not have a developed co-operative movement and therefore it is not viable to house policy functions in any of its emergent national apex bodies. Put differently, the state still has a pivotal role to play to enable the co-operative movement in South Africa. Secondly, the South African context requires a host of support organisations within the co-operative environment. These organisations have to be accredited, given voice in the policy process and governed by certain guidelines and standards so that co-operatives benefit. Finally, given the active participation of trade unions within the co-operative sector and the emergence of trade union linked co-operatives, as well as the role of labour as a major stakeholder in broader economic issues, it is important to ensure that trade unions have a voice within this new policy body.
At the same time, the name of the policy institution provided for in the bill is confusing. "Co-operative Advisory Board" can be confused with the normal "board" of a co-operative or a watchdog structure normally referred to as a supervisory board. It would be advisable to change the name of this institution in the Bill.
Most importantly the power of the Minister to consult this body is not mandatory. In other words the Minister has the prerogative to decide whether to consult the advisory board or not.
Recommendations:
(1) The name of the policy institution should be the Co-operative Advisory Forum. This should reflect where relevant in Chapter 13.
(2) Section 193 should include the following functions for the Advisory Forum:
- Provide accreditation for support and training bodies, as well as, maintain and supply to the public and co-operative movement a register of such bodies;
- Set out standards for support and training programs, as well as, regular evaluations; · Manage and dispense funds for training and support to co-operatives;
- Provide guidelines to the registrar of Co-operatives for the gathering and provision of co-operative statistics;
- On request by trade unions, carry out feasibility studies for the conversion of other juristic entities into worker owned co-operatives;
(3) Section 194 should add a provision for three persons to be nominated by the trade unions in South Africa; (4) Section 194 (d) - after the words "development corporations", the words "and other training and support organisations" should be added.
5.3.4 Guarantee Fund
From international and local experience it is apparent that the failure of co-operatives to acquire capital has led to collapse of many co-operatives. This happens mainly in the context of start-up and even during the operations of an established co-operative. The Guarantee Fund in Chapter 17 is a novel response to ensure that co-operatives are capitalised. In Italy a similar fund was established and is called the "Mutual Fund". In this fund all co-operatives have to contribute about 3% a share of their net yearly profits. Co-operatives that do not pay the 3% contribution lose their tax benefits and any other advantages by the regulations in force. Also any residual assets of any liquidated co-operative is transferred to the Fund, following deduction of the paid-up capital and any accrued dividends.
The main purpose of this Mutual Fund consists exclusively in the promotion of new co-operatives, the financing of co-operative development initiatives, with a preference for programmes aimed at technological innovation, the increase in employment and those concerning the least developed areas of the country. The envisaged Guarantee Fund in South Africa is deficient in the following respects in terms of the Italian model and what is required in South Africa.
Firstly, it seems as though the Fund will be constituted as a co-operative or association with a board and executive managerial personnel as well as members (i.e. co-operatives) who will contribute to the Fund. The drafting of this Chapter does not have a section or provision that deals explicitly with membership of the fund but merely suggests in parts that membership would be voluntary. With the important support that such a policy instrument will provide for the development of co-operatives and the co-operative movement in South Africa it is necessary that membership be encouraged for all co-operatives and this be linked directly to tax benefits and allowances. In other words, if a co-operative does not contribute to the Guarantee Fund then it would not qualify for tax exemptions.
Secondly, while the objectives of the Fund under section 243 emphasise assistance for co-operatives that experience capitalisation problems or require recovery assistance, such a Fund has an important role to support interventions by the trade union movement in situations where workers want to buy out or take over existing businesses and convert them to co-operatives.
Thirdly, the powers and role of the board is not developed clearly in section 258. It would be necessary for such a board to have the power to determine policy for the Guarantee Fund based on the legislation and bye laws that are developed. It would also have to have important oversight over the Executive employees and should be accountable both to the Minister and the Co-operative Advisory Board/Forum, as well as the members of the Fund, to which it must present annual reports.
Fourthly, this Fund should not just receive initial capitalisation from the government as per section 264. This fund should be allocated and given an annual contribution by government both for operating expenses and actual capital. This should be part of the firm policy commitment of government to build the co-operative movement in South Africa and hence none of the money provided by government should be recoverable as provided for in section 265. Such a contribution by government would also overcome the problem of paying management out of the surpluses of the Fund30.
Fifthly, in terms of section 269, which deals with Financial Assistance to Co-operatives, this Fund must provide proper technical support to co-operatives to assist with the development of co-operative business plans. In this regard, this section does not deal adequately with co-operatives that are starting up or are the result of conversions. In such situations the financial assistance of the Fund should depend on the outcome of the technical planning done. In Mondragon in Spain, the Co-operative Bank has a planning team, which works with co-operatives to develop their business plans, sometimes over a two to three year period. This is a very technical and thorough process but which has ensured an almost zero failure rate for the past fifty years. If the Fund adopts aspects of this model then it also has to be capacitated with the necessary technical expertise and therefore appropriate staff would have to be employed including several accountants; market researchers and so on.
Recommendations:
(1) A section on membership be added to Chapter 17 which also provides that members would not qualify for tax benefits and allowances under this law unless contributions are made to the Fund; an exemption to this could be contemplated for developing co-operatives for a certain period of time to allow them to establish themselves, subject to appropriate conditions; (2) Section 243 should include the following objective:
(d) assist workers with conversions of businesses into co-operatives;
(3) Section 258 which deals with the powers of the Board be redrafted to include the points made above; (4) Section 264 be changed to provide for ongoing government financial assistance to the Fund to cover both operating expenses and part of the capital needs of the Fund; (5)Section 269 should provide for Technical Assistance to be provided to co-operatives- whether starting up, established or in the context of conversions to co-operatives- for the development of business plans.
6. Outstanding Policy Issues and Recommendations:
6.1 Institutional responsibility for co-operatives
To a large extent the location of the administrative machinery, including the registrar's office, is an issue that is up in the air given that the Bill is silent on this question. Although the Draft Bill has been published by the Department of Agriculture, it deals with co-operatives in general and not only agricultural ones. Co-operatives policy is at present largely managed by the DTI, and this appears to be the most appropriate institutional home. However, it is important that co-operatives are not conflated with SMMEs as it is a qualitatively different sector requiring a different policy regime.
Co-operatives cannot just be another DTI program or project and should not be ghettoised as co-operatives policy managed by a "desk". Instead co-operatives have to be central to the industrial policy framework of the DTI and have to be mainstreamed and located in a fully fledged co-operatives structure within the Department, which includes the registrars office, the loan guarantee fund, the policy forum and any other projects and programs necessary to develop co-operatives. There are numerous reasons that make this necessary. Firstly, the development of a co-operative sector in the economy would be greatly facilitated by its location in this key economic Ministry. As an active state interventionist industrial policy emerges the prospect of locating co-operatives at the center of such an accumulation strategy becomes essential to foster linkages with investment, technology and training opportunities. In this sense co-operatives would occupy a place at the cutting edge of an expanding economy. Other relevant departments should also establish co-operative desks or directorates.
Following on this is the need to nurture and incubate co-operatives and the co-operative movement in sectors and sub-sectors of the economy against external competition and a liberalised economic environment. Taken further co-operatives can from below spur on local economies and even build sustainable and self reliant communities, in the context of an increasingly unstable global economy. Thirdly, co-operatives can contribute significantly to growth, income redistribution, job creation, asset formation and provide institutional links for the excluded and marginalised to the mainstream economy. In South Africa the secondary agricultural co-operatives or marketing co-operatives involved in the production of seasonal grain have proven this point in the past for "poor whites". Besides contributing about R22.4 billion to GDP they produce or market many consumable food products in the local economy, from peanut butter, sunflower oil, packed nuts, beans and so on. Internationally this has also been proven. In Italy, in 1998 Lega Co-operative had a turnover of 51,060 billion lira and a membership base of 4 519 145. In Germany co-operatives (793 in number) involved in small-scale industry, services and commodities, with about 300 000 members had a turnover of 160 billion DM in 1998.
Besides having a co-operatives department within the DTI and a policy framework that promotes co-operatives within industrial development, it is also essential for co-operatives and the co-operative sector to have a high profiled champion in government. In many countries - like in Italy (there is a Minister of Labour and Co-operatives), St Lucia (has a Minister of Local Government and Co-operatives and is an idea being promoted throughout the Caribbean by the ILO), Swaziland (has a Minister of Agriculture and Co-operatives) or certain provincial governments in Canada (like in Ontario) - Ministers are explicitly in their portfolios given the responsibility for championing the interests of the co-operative movement.
Recommendations:
(1) A consolidated Co-operative Directorate be set up in the Department of Trade and Industry, which would house the registrar, the loan guarantee fund, policy advisory forum and any other policy projects and programs necessary to build co-operatives in South Africa; and
(2) Consideration could be given to amending the portfolio of the Minister of Trade and Industry to Minister of Trade, Industry and Co-operatives. (3) Setting up of co-operatives desks/directorates in other relevant departments.
6.2 Tax Policy
Co-operatives are subject to normal company taxation under the Income Tax Act (58 of 1962) with special provisions like:
- Investment, annual and scrapping allowances on storage buildings and improvements to buildings
- Allowances for losses in storage from damage
The most important tax provision for co-operatives is the payment of bonuses to members which can be deducted from co-operatives' taxable income subject to conditions.
Prior to 1976 agricultural co-operatives only paid income tax on profits from non-members turnover. Since 1976 co-operatives have been taxed at the company rate of tax which is 30%. In Section 27 of the Income Tax Act co-operatives have special concessions like an annual allowance of 5% on the cost of any building or improvements to any building used; special machinery allowance of 50% on the direct cost, etc.
Surpluses of co-operatives declared as bonuses within 6 months of the year-end also can be deducted for tax purposes - this is a key concession under the present legislation. The amount of tax deducted is limited to taxable income before deduction of bonuses, repayment of loans etc.
The Draft Bill does not provide any provisions for tax issues possibly because tax laws deal with it. There is a need to ensure that co-operatives are incentivised and supported in their development through tax concessions and allowances.
Recommendation:
There should be a joint policy process involving the Departments of Trade and Industry and Finance, the South African Revenue Service, the organised co-operative movement and other relevant stakeholders around the tax regime affecting co-operatives. Tax policy for co-operatives should be geared towards promoting this sector, particularly developing co-operatives, without undermining the integrity of the tax system, opening loopholes for tax avoidance by the corporate sector, or substantially reducing the amount of revenue available for public spending. Targeted tax concessions could be considered including the following:
- The exemption of all co-operative transactions, bonuses and surpluses from taxation, for a specified period, with the exception of the large established co-operatives;
- Further special provisions for developing co-operatives as defined in the legislation;
- Retention of existing allowances for co-operatives within the Income Tax Act 58 of 1962.
6.3 Training Networks For Co-operative Development
In the past the office of the Registrar of Co-operatives provided technical support for established (mainly agricultural) co-operatives in three areas: (1) good management practice, (2) co-operative education (3) specific co-operative technical advice. This kind of technical support never reached most of the black co-operatives in South Africa and in the current context the scale of technical support required to build the co-operative movement far outstrips the capacity of the Registrars Office.
At the same time, co-operative federal bodies, apex organisations, NGOs, tertiary institutions (like universities and technikons), government departments and other specialised agencies in the country can be brought together to provide an essential network of technical support organisations that can contribute to the development and sustainability of the co-operative movement.
Recommendations:
(1) The office of the registrar of co-operatives continues its technical support program; (2) Government should fund a comprehensive training programme, targeted in particular at developmental co-operatives and potential members. The programme could be delivered jointly with NGOs and technikons.
(3) The Co-operative Advisory Forum/Board become the main co-ordinating and accreditation body for a national training network (see more above).
6.4 Cooperative Statistics
In chapter 2 the core duties and functions of the registrar are set out. These include the main administrative functions and information collection, through the register of co-operatives. It is important for the purpose of policy and strategy development for the co-operative movement that regular statistics, broken down into appropriate categories, are generated by the Registrar's office and disseminated to the public on an annual basis.
Currently and over the past few years this has been done through a departmental publication called Statistics of Co-operatives in the RSA. These statistics have not come out regularly and have only provided detailed information on certain aggregated categories: the number of established and developing co-operatives, number of co-operatives that are inactive, the value of turnover and value of assets. It might be necessary to derive other economic information from these statistics like the contribution of co-operatives to employment, GDP, exports, foreign exchange earnings; contribution to output in particular sectors of the economy and so on. The Co-operative Advisory Forum/Board could play a role in defining such needs. Hence it is necessary to provide for the Registrar to have a policy function to provide statistics on co-operatives in South Africa defined in law.
Recommendation:
Under chapter 2 of the bill, which deals with the purpose, application and administration of the Act, the following section should be added:
17. Provision of Statistics The Registrar shall provide, on instruction from the Co-operative Advisory Board/Forum, annual statistics on co-operatives in South Africa.
Footnotes1 This Draft contains 24 chapters, 321 Sections and 184 pages, whereas the previous Draft Bill has 322 sections, 23 Chapters and 140 pages. The main difference between the two versions is that in the earlier version the definitions were not arranged as a separate chapter, which is the case in the later version - definitions constitute chapter 1 and it contains many more definitions. It also seems that the section headings are missing in parts and the Chapter dealing with Management and Officers in the new Bill is shorter as compared to the same chapter titled - Directors and Offices in the previous Bill. The previous Bill seems to have conflated elections and procedures of board directors with the role of managers and this has extended the chapter from section 89 to section 112.
2 As per section 321
3 Section 19(1)
4 See Definitions at (Ii)
5 See Chapter 3 on Basic Co-operative Principles and Incorporation.
6 Chapter 18
7 Chapter 19
8 Chapter 20
9 Chapter 21
10 Chapter 22
11 Chapter 23
12 Section 281
13 Section 93 (2)
14 Section 50(1) and section 17(1)(f)
15 Section 38(4)
16 Section 104 (3)
17 Section 104 (5)
18 Chapter 2
19 Section 9
20 Section 34
21 Section 121
22 Section 124
23 Section 206
24 Section 217
25 Section 218
26 Section 233
27 Section 235
28 Section 193
29 Chapter 13.
30 Section 266 and section 267
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