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Strategy similar to smoking in a dynamite factory

A world record in co-operative failure.

The way hundreds of thousands of poor South Africans are coaxed by politicians and officials into formalising their informal activities by registering co-operatives is a dangerous exercise that will yield dividends of inflamed expectations. A 2014 study for the Free State University on the state of co-operatives in the Free State Province proved (again) the state is a dismal incubator of enterprise. The only unexpected element was that the failure rate even exceeded previous benchmarks.

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In 2013 more than 2 000 new co-operatives in the Free State province registered with the CIPC (Figure 1). That is 175 new co-operatives every month. This was achieved by a massive drive by a range of public sector officials reporting to politicians in all three spheres of government. However the impacts on poverty, unemployment and inequality are negligible. The situation in other provinces will not differ materially.

Although new legislation on co-operatives was passed under President Mbeki, the Zuma administration went into overdrive: The dti launched a Co-operative Incentive Scheme, the Free State Premier’s Office had a provincial wide campaign, the Free State Department of Economic Affairs & Tourism (Detea) supports co-operatives (like their counterparts in other provinces), and at national level both the Department of Agriculture and the legions of community development workers have goals of forming new co-operatives.

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Figure 2 demonstrates the performance of the State as enterprise incubator: of the 1269 registered Co-operatives in Thabo Mofutsanyana District (Bethlehem-Harrismith-Qwaqwa area) only 388 had a telephone number in the CIPC records which raises a question how an enterprise can conduct its business without a telephone. All those with telephone numbers were phoned, but in only 131 cases the (mostly cell) numbers were still in use and answered. Of these only 48 co-operatives described themselves as still active and of the active only seven indicated that they were after formalisation not worse off than when they were still an informal business. Only in two cases co-op members indicated that turnover improved a bit.

What is really annoying is that both politicians and officials are well aware of this failure pattern. Over the years there have been numerous studies highlighting this trend.

  • In 2009 a Baseline Study for the Eastern Cape Department of Economic Development concluded that “the majority of co-operatives are operating at the level of survival and the sustainability of their operations is an ongoing struggle”.
  • In 2010 the EU Delegation sponsored a study on co-operatives that highlighted an 88% failure rate of co-operatives as well as the illogical concept promoted by CoGTA of ward-based co-operatives.
  • In 2010 then Deputy Minister of Trade & Industry, Maria Ntuli briefed the Parliamentary Select Committee on Trade and International Relations, stating that only 132 of the 22 030 co-operatives then on the CIPC register complied with requirements despite more than R1 billion being disbursed to co-operatives from 2005 to 2009. She also acknowledged that officials at all tiers of government had a very limited understanding of co-operatives.

Despite that, the creation of thousands of additional co-operatives continued since 2010 with more funds and efforts being pumped towards that end in a typical single loop strategic approach: if it doesn’t work we’ll try it again. In the Annual Appraisal Plan of Detea the creation of even more co-operatives is entrenched, resulting in officials being more motivated by creating new co-operatives to achieve their personal assessment requirements, rather than focusing on what could be good for the economy.

The failure of co-operatives and the wastage of public resources in the pursuit of co-operative creation can therefore not be ascribed as unforeseen consequences (as Government is now shirking accountability for the disastrous impact their visa decisions have by killing off tourism enterprises and jobs as well as forfeiting forex and so contributing to rand weakness). The extremely dismal outcome of the co-operative drive is well documented in the public sphere and therefore public knowledge: any politician or official pretending ignorance in this regard is playing the same game as white South Africans who pretended that they did not know what apartheid did to African families.

Since creation of more co-operatives result in a pat on the back with appraisal targets being reached, no one has the courage to state that the king has no clothes. In this process poor people are lured by prospects of government contracts to formalise their informal activities.

Mesmerising poor people in a process that is destined to result in desperation is akin to smoking in a dynamite factory. Taken together with the already violent protests in numerous communities about ineffective service delivery, this is a dangerous route that Government is pursuing.

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The only way the co-operative strategy in South Africa can strike gold would be for Government to convince the Olympic Committee to list failure of co-operatives as an event for the 2016 Olympic Games (In Figure 3 the OECD data is based on the 2015 OECD Publication: Entrepreneurship at a Glance.) It should be noted that the co-operatives in Thabo Mofutsanyana became quickly “entrepreneurially extinct” despite public sector support, while the survival rate of unaided enterprises after 5 years in the OECD countries range from 58% in Sweden to 28% in Portugal.)

(The Enterprise Observatory is a recently established Not-for-profit research company exploring entrepreneurial spaces. Contact details: jowes@intekom.co.za)

Johannes Wessels, Director of the Enterprise Observatory of South Africa

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