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Professional management for agricultural cooperatives

Spotlight on Africa

Side-selling – when individuals opt for short-term benefits at the expense of long-term collective goals – is a major obstacle to the efficient performance of agricultural cooperatives in Africa. An initiative led by CTA and partners is seeking to address the challenge by improving cooperative governance, aiming to increase farmers’ revenues and the sustainability of rural communities.

Despite their massive potential as vehicles for sustainable production and collective marketing, agricultural cooperatives in Africa are failing to promote rural entrepreneurship and agribusiness on anything like the scale that they could. One statistic speaks volumes: some 40% of all agricultural production within the EU is sold through cooperatives but, in the case of Africa, that same figure is less than 5% – even though half of the rural villages on the continent have at least one farmer organisation or cooperative.

In an attempt to identify the cause of this lost opportunity, and find actionable solutions, CTA has embarked on a programme to train leaders, managers, trainers, service providers, policy and law-makers of cooperatives across Africa. The training is organised around six governance principles, which have been shown to be adopted by successful agricultural cooperatives.

Between May 2016 and February 2017, three cooperative leadership events were held in Madagascar, Malawi and Uganda to explore the current problems facing 300 cooperatives, and examine how the six-pronged approach can help to address them. In addition to training, these events involved surveys and simulations, which produced a detailed dataset of participants and their organisations, as well as new efforts to reform policy and legal frameworks for cooperative agribusiness development.

“Cooperative organisations are widespread in rural Africa and contribute to improved productivity, environmental sustainability and social resilience of marginalised and vulnerable farm households,” says CTA director Michael Hailu. “But, although they have enormous potential to improve farmer incomes and promote social growth, the agricultural cooperatives of Africa have so far largely fallen short in bringing about rural entrepreneurship and agribusiness.”

A major cause of the poor performance of many African cooperatives is disruptive side-selling by member-farmers. This involves farmers breaking an agreement to only supply buyers through the cooperative, so as to profit from a higher price from elsewhere.

Individual profits vs collective gain

“When member-farmers decide to sell on the side – through middlemen – they undermine the capacity of their cooperative to generate equity capital and finance its own operations and services, as a viable enterprise is expected to do,” says Dr Nicola Francesconi, senior adviser at CTA. “This problem is particularly common in Africa, affecting the health of cooperatives and the commercial performance of farmers.”

In most cases, the initial impetus for farmers forming a cooperative is for defensive purposes – to improve their bargaining power and help them to receive a better price for their produce. But while this stage is relatively simple, the transition to more offensive objectives, such as adding value to production and benefiting from economies of scale, can be far more challenging.

As well as convincing their farmers to engage in collective marketing, cooperatives need to ensure that the volume and quality of produce supplied by members is consistent. Offering price incentives and rapid, preferably on-the-spot, payment is essential so that farmers can repay the debts accumulated before and during the harvest. Strict sanctions need to be enforced for members who break the rules and side-sell to competitors. Overall, more professional management is associated with more efficient and successful cooperatives.

Custom-made governance for African cooperatives

A prime reason behind the failure of most African agricultural cooperatives in driving rural entrepreneurship and agribusiness is that policy and legal frameworks are often drawn up at international level, and are not well suited to the realities of producer cooperatives in Africa.

The six-point plan that has formed the basis of the CTA-led training initiative for cooperatives seeks to improve governance through principles that have been adapted from those of the International Cooperative Alliance (ICA). The cooperative principles of ICA are universal, in the sense that they are designed for cooperatives operating in different economic sectors and worldwide. CTA and its partners have specifically tailored these universal principles to prevent side-selling and boost collective marketing among African coops. The six resulting principles are:

  1. Regulate entry – Although open membership is a traditional cooperative principle, measures are needed to ensure that members are committed to sell collectively and that members’ supply does not exceed market demand.
  2. Incentivise exit – Members who are no longer interested in engaging in collective marketing should receive exit bonuses. It is better to have fewer but committed members.
  3. Democracy needs structure – Cooperative leaders and managers should anticipate and prevent members’ side-selling from the outset, spending time, energy and resources to define an adequate constitution and by-laws.
  4. Voluntary and tradable investments – Members should be able to choose what investments to make through the voluntary purchase of shares and allowed to trade the shares among themselves (upon board approval).
  5. Visionary leadership – External incentives, in the form of grants and subsidies can lead to members’ disenfranchisement and side-selling. Good leadership is therefore crucial, to communicate the risk and prevent the development of a dependency syndrome.
  6. Socio-economic change – Once a cooperative has satisfied members’ initial social needs, it has to be able to change and start pursuing more offensive or commercial objectives, such as collective marketing and value addition. A cooperative’s objective should be to strike a balance in its socio-economic impact.

The evidence from extensive testing at the three cooperative leadership events suggests that when these six governance principles are applied and enforced, cooperatives are healthier and farmers are wealthier.

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