Cooperatives Based Community Economic Development; KZN Cooperatives Development Model Pilot Project

Meeting report

Department of Small Business Development: Cooperative Development Model
Mr Mzoxolo Maki, Acting Deputy Director General, DSBD, said the purpose of the presentation was to brief the Committee on the framework for integrated development of the 12 agricultural cooperatives in KwaZulu-Natal (KZN), and to identify gaps and challenges confronting the DSBD’s Cooperative Development Model in respect of the 12 cooperatives. The Department also proposed some solutions aimed at improving the implementation of support measures to grow the 12 cooperatives in KZN.

The Department supported the 12 primary cooperatives, referred to as the ‘Balimi KZN Cooperatives’, and had entered into a memorandum of agreement (MoU) with Khowa Holdings in order to roll out support for the cooperatives using the greenhouse agriculture mechanism. The MOU stipulated different obligations for each party. The roll out was regarded as a pilot project that would test the feasibility and success of the Khowa model of developing agricultural cooperatives. Based on the outcome and primarily the success of the pilot, the model would be replicated throughout KZN to support communities under the chiefs and Amakhosi. The Department had provided Khowa with funding to provide various kinds of support, such as the purchase of fixed capital, land preparation, start-up inputs and access to markets for all 12 cooperatives. The cooperatives were distributed across five municipalities, including eThekweni Metro, uGu, iLembe, Harry Gwala and uMngungundlovu district municipalities.

Mr Maki said that the sustainability of the Khowa business model was based on the assumption or understanding that Khowa would secure the uGu fresh produce market prior to the implementation of the project. However, Khowa had not yet confirmed securing the rights to utilise the Ugu fresh produce market. The cooperatives were encouraged to work individually on securing their local markets (retailers and the community at large).

Once due diligence had been completed, the project summaries were packaged, presented and subsequently approved to the tune of R4 199 797 by the Cooperative Incentive Scheme (CIS) adjudication committee on 12 December 2015. After the approval, two claims were submitted. The first claim of R420 000 was paid to Khowa for project management which included installation, fencing of farms and other related activities. The second claim, which amounted to R3 945 632, was disbursed in instalments to the supplier, Wayhans Group, for irrigation systems, fences and other related interventions on 3 and 9 February 2016.

Some of the challenges were that the programme steering committee had not been established due to ineffective management and limited commitment to implementing the MOU on the part of the Department, and some of the equipment and infrastructure, input material such as seedlings and fertilizers, gates, and fencing were partially, or not, delivered. The Department’s inability to inform and identify strategic partners to form part of the implementation of this project also posed a challenge.

The support interventions were inadequate, and the DSBD had to consider reviewing the current offerings. For instance, the R350 000 had proved insufficient to kick-start a commercially viable project. The Department also learnt that it needed to assert its mandate to coordinate the efforts of all spheres of government and entities, guided by the Inter-Governmental Relations (IGR) framework. Most importantly, there was a need to institutionalise the pre-formation, formation, pre-investment and post-investment support to the cooperatives. Issues that had been raised by cooperatives during the workshops, if put in place and implemented better, would enable the Department to establish solid support for cooperatives.

Mr Maki concluded that the Department had so far funded 12 agricultural cooperatives to the tune of R4.2 million, and it considered this an achievement, or progress in the right direction. uLimo Cooperatives had successfully harvested 36 000 cabbages and sold all of them to the market, which had resulted in jobs created and sustained. Among the challenges that the Department had faced, it had proposed a number of solutions, including the establishment of the project steering committee with multiple stakeholders. It also planned to mobilise local municipalities to form part of the implementation of the project to ensure success, to mobilise funding raised by the cooperatives through internal and external sources to close the gaps identified, and to afford the project pilot status within the Department and set aside financial and non-financial resources to ensure successful implementation. It was reviewing the funding model for cooperatives to ensure the success and sustainability of the cooperatives.

Discussion
Mr H Kruger (DA) said he wanted to understand the cooperatives’ business model, and asked whether the 36 000 cabbages produced was a collective number for the 12, or for each cooperative. What had happened after the harvest, and how much money was left in the bank for the cooperatives to start the new season to sell to the market?

Mr S Mncwabe (NFP) referred to Khowa not securing the rights to utilise the Ugu fresh produce market, and asked for an update on securing those rights. With the Wayhans Group being awarded R3 million to provide the fencing equipment and other related materials, was there a progress report on how many cooperatives had received the equipment? The DG had spoken about the ineffective management of the DSBD -- why was that happening. How much profit was made after selling the cabbages, who provided the access to the market, and which market was that exactly, because it could be in the street for all one knew.

Mr N Capa (ANC) asked if the planning or implementation was facing seasonal implications, because in agriculture there were always weather implications. Was the Department trying to partner with the Department of Agriculture, Forestry, and Fisheries (DAFF) to contribute towards avoiding some of these issues. The DAFF had more human resources and skilled personnel who could help significantly in this. He also asked about how the issues of ineffective management were being addressed. What was being done by the Department to ensure that the projects were sustainable, as he had seen projects established but eventually fade off after they had been allocated a lot of money?

How were the cooperatives managing the funds? Did they have their own bank accounts and proper financial systems that could assist them to manage their finances sustainably? How many jobs had actually been created, because this had not been specified in the presentation? Did the DSBD consider having a tractor cooperative that would work together with the agricultural cooperatives to provide them with tractors instead of hiring them out, because a lot small farmers did not own the equipment that they used? With regard to the duration of the contract of Khowa, after so much time one would have expected that much could have been achieved with their assistance and partnership, but it did not seem that way yet.

Mr K Meshoe (ACDP) that in one part of the presentation, the cooperatives were regarded as pilot projects, but later it was stated that the projects must be afforded a pilot status -- was this a contradiction, or an error in the wording? What had been done to establish the steering committee, what commitments have been put in place to ensure that it was established, and when was it going to be established? Of the R4.2 million allocated to the cooperatives, how had the money been distributed to the individual cooperatives? If Khowa was securing the rights to the Ugu market prior to the implementation, why was the project implemented without that security from Ugu?

Mr R Chance (DA) asked how many millions of rands had been spent on the Cooperative Incentive Scheme since its establishment in 2007. He questioned whether it was sensible to need a pilot project now, because this was something that should have been done a long time ago, given that there had been a scheme established to support cooperatives under the Department of Trade and Industry (Dti). He suggested that the DSBD had adopted a bad approach with scheme, instead of designing a solid long-term solution from the inception of the scheme, or during the eight-year period that the scheme had been in operation.

He asked about when the pilot project had been set up, and what outcomes had been envisaged. He wanted know more about the transactional advisor outlined in the presentation. He queried figures in the presentation -- if one added up the sums paid out, it came to R4.365 million, but if one multiplied R350 000 by 12, this came to R4.2 million, which left an excess of R165 000. It seemed that most of the money had been paid to the Wayhans Group, which was responsible for ensuring that equipment was properly installed. He asked about the relationship between Khowa and Wayhans Group, and who was responsible for ensuring that the materials and equipment were delivered. Was the R165 000 paid to Kohwa, because if Khowa was paid R15 000 per month, then an explanation needed to be furnished on why the numbers did not seem to add up.

On page 13, the Department speaks of an achievement for spending money, he said spending money was not an achievement but what happens with the money that was being spent that was an achievement, anyone can spend money. The Department cannot boast about spending money as an achievement. Furthermore, he asked for statistics on how the 12 cooperatives spent the money the feedback was very limited and not detailed enough and that was problematic, because he would have expected that more details would have been provided on each cooperative, in terms the quantity of what it produces, people employed, how the money was spent etc., and he asked about the sustainability of the business of Kohwa.

Mr S Bekwa (ANC) said if one looked at the challenges that were facing the cooperatives and came up with lessons learnt, it was an indication that those challenges would be addressed. The provision of project management had been one of the solutions that it had proposed to ensure that the project became a success.

The Chairperson said that the DSBD had never adopted this as a pilot project -- it had just funded 12 cooperatives. After the funding had been allocated, the Committee had suggested adopting the 12 cooperatives and using this as a case study to identify the challenges or shortcomings, and to gradually produce a new system and model that would work. It was participatory development research – an approach that had been adopted by the Portfolio Committee. This would allow the system to continue working as it was before, in order to be able to identify the challenges, as the DSBD would not be able to provide appropriate resources or services before those challenges had been identified. The system had been closely monitored to identify the challenges and come up with appropriate solutions. Only now could systems be developed, based on what had already been seen and monitored. Those challenges would not have been identified if the model had been changed, because the DSBD and the Committee would not have been properly informed about the challenges that the cooperatives faced and come up with the right solutions. The DSBD had simply provided services only to allow the system to continue so that those challenges could be identified and addressed. If there were any additions from the Members that could build on what the Department was doing, that was more than welcomed, but those additions could come only after the ANC proposal on cooperative development had been considered.

DSBD’s response
Mr Jeffrey Ndumo, Chief Director: Cooperatives Development Unit, DSBD said that the gross income made by the cooperatives from the 36 000 cabbages was R246 000, and the profit after taking into account costs and tax could be provided only after that information had been made available to the DSBD.  

Regarding Khowa not securing the Ugu fresh produce market, the Department had engaged with Massmart to have them as one of the principal occupiers, but they had responded that at the moment this was something that they could not commit to. The DSBD had tried to get funding from the Small Enterprise Finance Agency (Sefa) to ensure that Khowa secured the fresh produce market, and this was something that was still being worked out. The key fundamental of the project was to secure the Ugu fresh produce market as a platform to allow support for all of the cooperatives in KZN to use it as a market to sell their produce.
There other markets at which some of the cooperatives could sell their produce.

The Chairperson asked who had actually secured the market for the 36 000 cabbages.

Mr Ndumo said the market had been secured by Khowa, and it had actually also negotiated the contracts to ensure that the cooperatives secured the sales for their cooperatives.

The Chairperson clarified that the only cooperative that had produced most of the 36 000 cabbages was the uLimo cooperative. It was a one hectare farm, and it had taken 14 weeks for that cooperative to arrive at that stage. The question was, who then bought the cabbages?

Mr Kgolane Thulare, Director, DSBD, said the products were bought by different people and role players in the market in and around the area.

The Chairperson said that when one did not know the answer, one should just say so, because this project had been closely monitored by the Committee, and the company that had bought the products had been Freshly Picked, which ensured that the quality standards and certification were approved so that the produce could be consumed by the retail big stores. The contract had been negotiated by Kohwa.

Mr Thulare said that with regard to the five municipalities, the DSBD realised that if there was a steering committee, it would be able to assist in achieving a much wider reach by assisting more cooperatives and coordinating with key stakeholders to strengthen the delivery model. The model that would be presented at a later stage would outline the different transversal agreements and MOUs with other key stakeholders, like the DAFF, to assist the DSBD to get more support. The Department was terming the project as a pilot project, but internally it did not have the proper project charters. The disbursement of the funding had been made to the service provider. It had not gone directly to the cooperatives, but straight to the supplier.

The Chairperson said the total amount given to each cooperative had been R350 000. How was that money distributed or spent by the cooperatives?

Mr Thulare said R15 000 had been paid to Khowa to provide support services, and the reminder was then used by the cooperatives for operational activities.

The Chairperson asked if Khowa had received R15 000 from each cooperative.

Mr Thulare said that had been the case, and more detailed documentation could be provided to support the figures.

Mr Chance asked what the R4 199 797 was for, because the figures did not add up, taking into account what each cooperative had paid to Kohwa.

Mr Thulare said the total amount payable had amounted to R4.2 million, but the DSBD could do a verification to ensure that the numbers added up. All the cooperatives had lease agreements that had been signed in respect to the respective lands that had been allocated to them.

The Chairperson asked who had assisted the cooperatives with the lease agreements.

Mr Thulare said the cooperatives had been assisted by Khowa.

Mr Maki said that the DSBD had made it clear that when it signed the agreement with Khowa, it proceeded as business as usual. What had been omitted at the beginning was to sign it off and let it run on its own, and it was not treated as a pilot project. The Department was taking corrective measures to ensure that adequate resources were being allocated to it, and that the attention and effort that it required it would be provided. The duration of the contract was three years. The Department had supported the project through financial and non-financial means, such as through the various partnerships with other municipalities and providing all the services that they needed. The expected outcome at the end of the agreement with Khowa was to ensure that the cooperatives remained sustainable and competitive. If we the DSBD saw that the project was viable, then it would be replicated throughout KZN and would not be confined the province, but KZN was a pilot province. The DSBD had seen the challenges and as it replicated the project in other provinces, it hoped that some of the challenges would have been addressed and would not be repeated.

Regarding the clauses of the contract, Kohwa’s responsibilities were standard, and the out-sourcing of the contract was based on the needs of the cooperatives, with the development partner working closely with Khowa.  When cooperatives presented their challenges, the Department attended to their needs in partnership with Kohwa.

The Chairperson asked what the meaning of the three year contract was.

Mr Maki said the challenge right now was that current interventions were not configured to deal with comprehensive issues raised by the cooperatives, and the DSBD conceded to this. Clearly, it needed to re-think its model on how it supported cooperatives, and then it would propose an integrated strategic approach to deal with the challenges and development of cooperatives, increasing the non-financial and financial support to cover all value chains, and improve their competitiveness and sustainability. It could be that R350 000 had not been the main problem, but rather the developmental approach that had been adopted by the government. There were a lot of issues that needed to be taken into consideration.

The Chairperson said that the Department had been quite open to scrutiny and adjustment to respond to the challenges that were faced, and it seemed that it was heading in the right direction, but it had to ensure that it pulled all the relevant stakeholders together.

Consideration of minutes
Members went through the minutes of 23 November 2016, and adopted them without substantive amendments.
 
The meeting was adjourned.