When Tsholofelo Kungwane and fellow community members decided to start a recycling service three years ago, they chose to set up their enterprise as a co-operative. They hoped to tap into the millions of rand in grants and loans that government offers such ventures.
Her co-operative, Katlego Movement, was able to get support worth R7m ($520,00) from the departments of environmental affairs and social development in the form of a refurbished building and stipends to cover wages and training for 14 employees.
Though Katlego Movement has barely broken even, Kungwane is hoping that a R150,000 prize it received at the International Co-operatives Day in Nelspruit earlier this month will help finance a new plastic-cleaning machine that could boost revenue.
Kungwane is one of more than 600,000 South Africans who belong to co-operatives. But experts say government is setting many up for failure — through promises of grants and contracts — when very few even get out of the starting blocks.
By March 31 a total of 120,251 co-operatives were registered with the Companies & Intellectual Property Commission (CIPC). The number has shot up from 4,652 in March 2005. The CIPC said in its annual report last year that the perceived role of co-operatives in the empowerment of communities likely contributed to the rapid growth in registrations.
But few survive. A 2010 study by the Trade and Industry department found that of the 22,030 co-operatives registered between 2007 and 2009, a mere 12%, or 2,644, were still operating in 2010.
Johannes Wessels, director of the Enterprise Observatory of SA, blames government for giving the poor false hope by coaxing them into registering co-operatives.
In a 2014 study funded by the International Labour Organisation for the University of the Free State, Wessels found that only 131 of the 1,269 registered co-operatives listed in the CIPC records for the Thabo Mofutsanyana District (Bethlehem-Harrismith area) had working telephone numbers. Of these enterprises, only 48 were still active and just two said their revenue had increased since registering.
Wessels says the huge growth in co-operative registrations has been driven by an “ideological thrust” by the state and public servants chasing performance appraisal targets, rather than by community members responding to the needs of the market.
Wessels cites a recent study showing that the National Community Development Workers Programme and the department of social development’s Community Practitioner Programme setthe creation of one co-operative a month as a performance target.
In addition, he says, members of co-operatives consider promises of tenders as being crucial for success. This, he says, raises the question of whether the members of the new co-operatives really decided, voluntarily, to pursue business activities via a co-operative or whether they were influenced to do so to get public sector contracts and grant funding.
Fed by grants
Grants are offered to co-operatives by various state funds and departments. They amounted to almost R1bn between 2005 and 2009, according to a presentation by the department of trade & industry to parliament in 2010.
The Department of Small Business Development’s Co-operative Incentive Scheme (CIS) alone funded 1,167 co-operatives to the value of R283.5m between its launch in April 2005 and March 2014, a 2015 department of trade & industry report reveals.
Monitoring visits by officials in 2013 to two areas revealed that 13 vegetable co-operatives that received CIS funding to buy equipment and inputs were able to increase sales by 5%-10%. In addition six Tzaneen vegetable co-operatives were able to add an average of 15 employees and secure a contract with retailer Pick n Pay after getting CIS grants.
SA National Apex Co-operative president Lawrence Bale says he has repeatedly said members should start a co-operative informally first and register it only once it is trading.
“Co-operatives are formed by people themselves, and government’s role is to create an enabling environment for [the enterprises] to exist,” he says.
'Against co-operatives spirit'
Vishwas Satgar, chairman of the Co-operative & Policy Alternative Centre, says that in imposing co-operatives on people government is acting contrary to the spirit of voluntary formation, a basic principle of the co-operative movement.
He charges that government has not provided incentives for co-operatives to use their own capital to provide finance for their businesses.
What the state needs, he says, is to be much smarter in the kind of support it provides to co-operatives, and offer more education and training initiatives — tied to technical vocational education & training colleges, Skills Education Training Authorities (Setas) and other vocational training — to explain better what the co-operative model is.
“If you don’t work through that, you have a formulaic outcome that doesn’t hold people together,” he says.
He says co-operatives have mostly operated in a parallel economy, having failed to be incorporated into mainstream value chains. To make it work requires a leap to the solidarity economy, he says, which involves building a network. “But we are very far from this,” he adds.
The Department of Small Business Development’s chief director of co-operatives, Jeffrey Ndumo, says it’s a misperception that government is coaxing people to set up co-operatives.
“There is no co-operative that is established by government, but government goes out to mobilise communities to make them realise that there is the co-operative model,” he says. “People interpret this as government registering them [co-operatives], which is not true.”
As the CIPC requires one to have five members to register a co-operative, the model can create the necessary scale to address poverty, he says. He attributes the large number of co-operatives that fail to get started to people who establish them to take advantage of tenders that don’t materialise or come to a quick end.
Ndumo says small business development minister Lindiwe Zulu aims to put the Co-operatives Amendment Act out in the coming months for public comment.
Among other things, it aims to relax the audit requirements for smaller co-operatives. It also makes provision for the setting up of a co-operatives development agency, a tribunal to oversee disputes and a board to advise the minister on the sector.
Ndumo says a business plan was produced for national treasury in 2014, which proposed using largely existing resources such as grants as well as branches and staff of the Small Enterprise Development Agency (Seda).
Nomalungelo Klaas, the administrator of the Greater Uitenhage Sewing Co-operative, says she has not heard of the amendment act.
Her experience shows the challenges the sector is up against. When it was registered in 2006 the co-operative had 30 members, all women who had previously run an informal sewing organisation. But today there are just 13 members.
“They thought it would be like a big company. It’s not like that; you must go and market yourself,” says Klaas.
While the co-operative initially got R580,000 in grants from Standard Bank and Volkswagen to fund machinery and textiles, many of the women were after regular salaries and weren’t prepared to stick it out to look for contracts.
This led to a number of misunderstandings among the women, she says.
But four years ago a Seda business adviser helped the co-operative tie up an agreement to supply Woolworths. Today it supplies the retailer with 20,000 textile bags a month.
Then, two years ago, a notification from the SA Revenue Service (Sars) that the co-operative owed it R300,000 in unpaid Vat almost killed the enterprise. Only after clearing things up did Sars bring the amount owed down to R15,000.
Many, like Klaas, will be hoping that the long overdue co-operatives development agency will help wean their operations off the grants on which many exist.
This story originally appeared in The Financial Mail (go here for the original version). Follow Small Business Insight on Twitter at @Smallbinsight.
Stephen Timm is a