Cooperative Advantage Explored: Theoretical Constructs, Empirical Observations and Case Studies

1. Cooperative Advantage Explored: Theoretical Constructs, Empirical Observations and Case Studies

2. Cooperative Advantage • Paper basically looks at cooperative advantage in terms of institutional form (advantage from members and human resources view point to a large extent implied) • Section 1 Literature Review – Theoretical Constructs and Empirical Findings • Section 2 Innovative Cooperatives and Cooperative Innovations • Section 3 Case Studies • Section 4 Summary Conclusions

3. Theoretical Constructs and Empirical Observations • Purist view; Corporation the only efficient structural form • Canberra View that cooperatives are “dinosaurs” based on following premises • Less efficient as do not seek to maximize profits • Access to third parties essential to raise capital • “One vote one Member” spells disaster • Is democracy gone mad & has no place in profit maximization • Prevents profit maximization • Is inequitable • Leads to bad "governance"

4. Using game theory techniques it is established that cooperation is a winner (Axelrod). Time and again • Seeding defectors into an environment of cooperators, the defectors’ numbers decrease and disappear • Seeding cooperators into an environment of defectors, number of cooperators slowly increases and takes over the environment

5. Answer perhaps to be found in internationally accepted definition of cooperatives • Is a pointer to its moral advantage as an organization • Although tautological, implies by definition that any other form would fall short • Cooperative values endow institutional advantage, particularly self-help, self-responsibility, democracy etc. • Cooperatives are people centred and hence likely to design products for member needs • Corporates are capital controlled and emphasis on getting satisfactory return on invested capital

6. Cooperative principles give priority to broader community needs which makes for cooperative advantage differential • Transaction costs analysts claim inherent superiority for cooperatives on account of their contractual – institutional design, which determines alliances with various stakeholders, and in turn, their transaction costs, inevitably incurred in a world of non-perfect markets in the process of information gathering, negotiation and enforcement of contracts • As long as markets are complete and perfect, transaction costs would be zero and returns to factors of production would be the same no matter the form of the organization i.e. whether it is a cooperative organization or Investor Oriented Firm (IOF)

7. Hence raison d’etre of cooperative organizations arises in a world of imperfections • Also explains why cooperatives most likely to be successful when formed of people most subject to market imperfections • Cooperatives have advantage in economizing on these costs on all three counts of bounded rationality, asset specificity and opportunism • Even where perfect information is found to exist, the costs of gathering, storing and processing information and then negotiating after evaluation an agreement across n persons tends to increase in proportion to a number raised to the nth power • costs become progressively higher with imperfections in information, inability to store a lot of data at the same time, inability to evaluate the various outcomes and inability to choose the best outcomes

8. In such an environment, cooperatives perform better than their rivals, especially where members bound by a common set of values meet each other in repeated games • linkages with members establishing thereby a unique relationship with them and pooling of resources of members also enables cooperatives to hedge against uncertainties of autonomous contractual market forms and the associated problem of opportunistic behaviour of trading partners • vendor relationship of all factors vis-à-vis the firm to be found in an IOF; is not the case in a cooperative enterprise due to member links, which make members the owners and hence bring synonymity between individual and institutional objectives • Investment in assets otherwise hindered by the asset-specificity problem is made possible through membership in a cooperative and can substantially reduce implied transaction costs

9. Contrary claims regarding cooperative advantage, however, arise from a comparison of property rights in a cooperative vis-à-vis those in an IOF • Supporting analysis focuses on inefficient behaviour of cooperatives on account of problems in horizon, non-transferability and control • Horizon problem which results in under investment in the cooperative originates in the owners’ claim on net cash flow from assets being less than the assets’ productive life, thus resulting in lower return to owners as compared to the true return from the assets • The problem is further aggravated in case of intangible assets such as “brand” loyalty • Since claims cannot be bought and sold, members’ ability to diversify or concentrate asset portfolio to reflect preferences for risk diversification is affected • Since claims cannot be concentrated, monitoring and enforcement of contracts as well as innovation is likely to be affected with fewer resources being allocated for this purpose • The control problem, in the absence of share market performance as an indicator to evaluate managerial performance, is further aggravated by the inequality between patronage benefits and shares. Consensual opinion amongst members is all the more difficult as a result

10. Horizon problem being tackled through: • Instituting linkages and proportionality between investment in shares and patronage, restrictions on open membership as well as benefits to non-members etc. • Clarifying property rights is believed to create investment initiatives • Partial solutions found to exist to the non-transferability problem, such as development of an informal share market (witness the Gujarat sugar cooperatives) • Intensive internal monitoring is expected to take care of the control problems

11. Realization of transaction cost advantages themselves subject to certain preconditions: • enabling legal environment and policy framework allowing cooperatives to work and take decisions autonomously • Advantages in terms of services rendered, both economic (higher prices for products and lower prices for inputs) and welfare (health, education, transport services) offsets a purist definition of efficiency in relative terms of return to investment/equity

12. Cooperative advantage difficult to prove indisputably but can be only deduced or observed in some cases and hence stated to exist • Benefits are difficult to measure • Tangible or direct - net margins or savings • Intangible or indirect - cooperatives’ effect on market price levels with cooperative presence by itself acting as a moderating influence on monopolistic/monopsonistic behaviour of companies in an otherwise unbridled market situation, quality, and service • Some evident initially become more obscure with time • Benefits are greater for some types of cooperatives or in specific areas and may be economic or social in nature • Cooperative advantage from democratic functioning – allows maximization of own profits, rather than profits of the cooperative

13. Member individuals are enabled to increase their incomes in a number of ways through joint action • raising the general price level for products marketed or lowering the price level for supply purchases • reducing per unit handling or processing costs through economies of scale • distribution to members of net savings in the operations • upgrading quality • developing new markets • Cooperatives provide services at cost to members leading to `demonstration effect’ on competitors • Cooperatives provide members • Services not available or improve existing services • Cooperatives can provide information and encourage production oriented to current market requirements by developing producer plans based on market specifications such as grade, size, time etc. • Enable small members to acquire ‘muscle in the market place’ • Due to their non- profit and service-at-cost principle, performance is pushed closer to the competitive norm • Through pooling products of specified grade or quality, cooperatives can meet the needs of large scale buyers better than individual farmers • Safety net perspective helps the producer retain control of its product up the marketing chain

14. Telling fact that while most businesses experience maximum growth in a trade cycle upswing, cooperatives have experienced their most rapid growth in periods of economic difficulty - pointer to safety net value • Collective action perspective throws up two general conditions for cooperative advantage • when cost of collective inaction is greater than total internal and external costs of organizing collective action • less likely to occur with heavy load (self and social demands) and less power (defined as resource base like abilities, position, possession, alias etc.) to cope with such load • Although the collective action approach can explain presence or absence of cooperation, it does not ensure the genesis of a cooperative and it is here that Transaction Costs analysis becomes important

15. Cooperatives can ensure environmentally friendly sustainable development • Cooperatives are important schools of democracy, a fact which cannot be ignored • Competitive advantage is an organizational strength that places a firm ahead of its competition in creating customer value • advantage arises from tangible resources, intangible resources and core competencies • competitive advantage of cooperatives has lain in encountering market power, creating cost efficiency, generating returns from adding value, providing risk reduction through market access, pooling, balancing plants, maintaining the market, diversification and selective vertical integration

16. Empirical Results • Different findings • Porter and Scully - 1980 study of dairy cooperatives: • average cooperative fluid milk processing firm only 75.5% as efficient as a private firm • Cook and Iliopoulos: • when fresh investment in a cooperative project is highly rational, cooperatives have decided to invest in the project where there is: • closed membership policy • forward marketing agreements • transferable and appreciable shares • others where such terms and conditions are not clear have shown lesser inclination for the same • Clarifying property rights can help improve cooperative chances

17. Porter and Scully results not universally valid • So long as cooperatives give their members certain benefits in terms of higher return for their products, lower prices for inputs and better marketing channels, they can still be said to have an advantage • Such “advantage” is empirically difficult to establish • Serious empirical study further hampered by: • absence of adequate data on comparable units within the same sector for the two organizational forms • absence of market prices for many of the cooperative services to members, which makes it difficult to quantify these services • Gentzoglanis’ study: • comparable cooperative and IOF in Canada • studies liquidity, leverage, profitability ratios etc. • not statistically different • concludes that the use of equity capital and other forms of market instruments have provided cooperatives with a competitive advantage, permitting them to show performance not different from the IOF

18. Pestoff: • analysis of performance of Swedish consumer and producer cooperatives • ten largest firms in terms of employment and sales • stresses relevance of effectivity concept • Effectivity to capture economic, democratic, political, human resource and ideological dimensions, in addition to efficiency • Humane aspect of cooperatives stressed in Cooperative principles • Member education and training a continuous process and a vantage point • Ultimately, question about the future: • ‘Does being a cooperative give us any resource or capability that is competitively superior, rare, inevitable, appropriable only by members, durable and without substitute? • Relationship with its members and human face gives competitive edge over other organizational forms although difficult to measure

19. Cooperative Innovations • Cooperatives innovating in various ways • make-over which can improve their competitive strength • Cooperative innovations in • finance, ownership (and consequently governance structures) and cooperative services • first two interrelated as innovative capital structures often include various degrees of external ownership resulting in changes in governance structures

20. Mismatch between member investment incentives and cooperative capital needs • pressure on the classical cooperative ownership form • Cooperative solutions • Introduction of delivery rights that are subject to member investments with an adjustable capital-to-produce ratio • Market-based pricing mechanisms and distributing residual earnings as rewards to production-linked, member invested capital • Non cooperative solutions

21. Separating the transaction relationship from the investment relationship: • Introduction of production de-linked member capital instruments • Issue to non-member parties of shares that generate performance based returns • Delinking transaction and investment benefits leads to a breach in member solidarity • Innovations include: • Appreciable and/or internally tradable shares • Externally tradable subordinate bonds • External corporate investors at subsidiary or group level • Public listing of preferred stock • Conversions into farmer owned limited liability companies • Converted Listed Cooperatives (CLCs) and

22. Hybrid Listed Cooperatives (HLCs) seek to combine cooperative objectives with access to external capital: • External investors as a class of members • Irish Model - This is a form where cooperative establishes a subsidiary whose shares are publicly traded; cooperative continues representing members’ interests • Finnish Model - cooperatives bring subsidiaries to stock market retaining a controlling stake in these companies through the introduction of a separate class of shares exclusive to members and with stronger voting rights

23. Listed Subsidiaries – cooperative continues own business but lists its subsidiaries • Listing Value added half of split business – cooperative splits business into commodity business and value added company • stock listing for the latter and delivery rights for the former.The benefit is that members keep control over their market access and fair prices and obtain financial revenues from their value added shareholding • The distinction between cooperative and non cooperative solutions: • principles regarding ownership rights to residual income • sensitivity to business performance being with members proportional to transacted volume

24. Bekkum study of 50 hybrid cooperatives: • Going public out of financial necessity unwise from cooperative ownership point of view • Farm level production and member-related processing business not being internationally competitive correlate highly with marginalization of cooperative ownership following public listing • Maintenance of some collective form or organization for `members’ essential, else almost certain loss of control • Mechanisms for dividend reinvestment or alternative form of on-going `member’ capital raising required to avoid member ownership being watered down towards zero over time • A collective preferential supply and processing contract or at least a mutually agreed periodic negotiating process with the listed entity and on behalf of the `members’ appears to be crucial in order to avoid shifts towards external sourcing • Arrangements for undisputable `member’ price determination, e.g. based on external benchmarks or accountable price movements in end markets, not vulnerable to year-end profit determination • Exercise of collective control through differential voting rights to alternative classes of member vs. public shares

25. New type of cooperative approach: • used by marketing cooperatives with some aspects of production cooperatives • individuals, often migrant farm workers combine equity • purchase or lease tracts of land • elected by the members allocates the land to each family member, who then assumes production responsibility • membership on a family basis • BOD establishes quality and performance standards • Land allocation Board decision and marketing by cooperative leads to fully responsive production patterns through land allocation power and exclusive marketing arrangement • Helped migrant workers achieve economic and community status

26. Case Studies • Successful cooperatives that have delivered benefits to members exhibit ‘Cooperative advantage’ at work • Sugar Cooperatives • each sugar cooperative has led to integrated development of downstream cooperatives and backward linkages with farmers • in Maharashtra187 educational institutions, which include 9 medical colleges and 4 engineering colleges; 90 social initiatives focusing on cultural centres, libraries, rural hospitals and health centres, Krishi Vigyan Kendras etc; and 44 economic Institutions such as Banks, Milk Federations, Poultry Farms, Transport and Employees Credit Societies etc.

27. Spinning Cooperatives • Sangola Cooperative Spinning Mills offers: • remunerative prices to cotton growers • training guidance inputs • development of orchards • seminars for farmers • mulberry plantation and a demonstration and training centre for women • social forestry • watershed development programme • animal husbandry activities etc. • monthly eye camp • community marriages • awards to meritorious students • cooperative industrial estate

28. Dairy Cooperatives • Dairy cooperative edifice based on Amul model • incremental return of Rs.40,000 crores annually generated by initial investment of Rs.2000 crores, over 20 year period under OF Programme • women empowerment • study of three selected milk sheds - Bikaner, Sabarkantha and Periyar showed average milk yield milk production per household, price received by milk producers, level of employment per capita daily intake from milk all higher in cooperative villages than in the other villages • 70% members had only one or two milch animals • Transport Cooperatives (Labour) • Koppa Cooperative formed after a lock out by the workers • salaries much higher than competitors • free travel facility for their families • educational expenses • health and insurance facilities amounting to nearly 80% of the salary received • 14% bonus, 8% dividend and 5% honorarium • 18 different facilities for workers • four schemes for members, scholarships etc. • contributed Rs 25,000 to the Tsunami victims in 2005

29. Women Cooperatives • SEWA combines labour, cooperative and womens’ movement • has shown that informal workers can be organized • has adopted a campaign approach for organizing women • Home based workers (for piece rated minimum wages, minimum wages for all trades), labour and service providers (construction workers, head loaders, small factory workers, casual workers, paper pickers), street vendors, integrated approach (for insurance, health, savings) • benefits estimated at Rs 22 lakhs for 67,000 women beneficiaries in 2002-03 • Some causes • Cause of beedi rollers, who are entitled by Law to Provident Fund, but are not being covered • For the first time negotiations between agarbati workers and employers for health insurance and wage increases • Historic victory for home based workers with adoption of an ILO Convention in 1996 • Negotiations with Government of Gujarat (GOG) to establish a tri-partite Board for minimum wages and other demands of kite makers • Advocacy to consider street vendors in Gujarat resulting in several hundred street vendors being helped with identity cards, lorry numbers, basic facilities like water, sanitation, electricity etc.

30. Setting up of a Tripartite Board for head loaders and provision of various benefits such as maternity benefits, health, insurance and child care • Demand of paper pickers, estimated at around 30,000 for collection of waste paper from Government offices • Organization of construction workers, catering workers, cleaners and other urban industrial waste pickers etc. • Legal Cell to advice members • 10 women cooperatives, 7 land-based workers cooperatives, 54 milk cooperatives, 5 sale cooperatives and 9 labour cooperatives • The Federation helps marketing products of its members including exports • Fisheries Cooperatives Mudiali Fishermen’s Cooperative Society • A unique society set up byfishermen members who were driven to migrate to Calcutta docks as informal labour when the river dried up. • Developed completely indigenous bio-engineering system of cleansing the wastewater of the city and using it for pisciculture, as well as developing an ecologically balanced system to accommodate a large number of animals and plant species

31. The Society has made an important contribution to the environment and assured its fishermen members, a decent income and living • In addition to a daily wage, incentive bonus per day, benefits of leave encashment • Medical benefits, educational aid for their children, aid on the occasion of funerals and marriages, housing loans at low rates of interest and interest free loans for some consumer durables • An Anganwadi School, free homeopathic dispensary, free coaching for poor children along with free books and writing material, an art school etc.

32. Credit Societies • The Buldana Urban Cooperative Credit Society operating in the state of Maharashtra is engaged in various activities related to banking and finance. Its multi-purposes activities are as below: • Warehouses to store agriculture produce and earning rental income • Toll from construction of roads • Processing and member produce • Corporate general insurance agency • Hostel for students • Bhaktniwas at Tirupati • Working women’s hostel • Sugar factory earning profits • Public schools run through charitable trust • Leasing and developing public parks and gardens

33. Mulkanoor Cooperative Rural Bank and Marketing Society • Electrification of villages and farms • Bore wells for drinking water free of cost • Organizes family planning and eye camps • Provides life insurance facility • Contributes towards funeral expense • Accident policy and group insurance policy • A small training centre • Special scholarship fund to support the top ranking children in local high schools

34. Rare Cooperatives • The Erulla Snake Catchers Cooperative • 50% bonus and 50% incentive every year to members • interest free credit for construction of houses • free transport facility for bringing snakes to the society • dividend on shares • funeral expenses • medical allowance • educational loans • treatment expenses for those bitten by snakes and in fatal cases, compensation to the family

35. Summary Conclusions • In theory, cooperatives are seen as having institutional advantage due to their inherent Transaction Cost advantage and also their democratic functioning, which endows members with equity in their decision making • Although problems are seen to arise due to horizon, non-transferability and control issues, these can be tackled as has been discussed • Cooperatives’ welfare also give it certain added dimensions • cooperatives have adopted innovative ways to face problems in growing because of capital shortages due to member profile • Caution to ensure that cooperative strength not jeopardized by possible governance structural changes resulting • In practice, equally good, if not better than comparable IOF in terms of efficiency and performance • Case studies show cooperative success enhanced through various welfare measures • That a cooperative advantage does exist is undeniable, rooted in its moral advantage over other business organizational forms that delink the capital providers or investors from the organization itself, also distancing the firm from the other factor providers

36. However, in the ultimate analysis, an undisputed fact remains that no matter what theory points to, it is only through doing good business that a cooperative can actualize these and other advantages, which are hence crucially and indisputably a function of business performance

37. Thank You