Co-operatives Amendment Bills: public hearings

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Trade and Industry

23 July 2012
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The South African Institute of Chartered Accountants said that it was concerned over the definitions of a number of terms used in the Bills which might cause confusion as some accounting and auditing terms were very tightly defined. It preferred that the same accounting and auditing schemes be used for companies, close corporations and co-operatives. A rewording of the terms used would also allow other professional bodies to be included. SAICA was calling for the separation of accounting and assurance and to allow for exemption for certain categories of co-operatives. The Bills allowed for Annual General Meetings (AGM) to accept the auditor’s reports, yet AGMs could not decline an auditor’s report. The term “revenue” had not been defined neither had governance principles as only King III was recognised and this was too onerous. The requirement to hold accounting statements for seven years was onerous. SAICA asked that co-operatives not have more onerous requirements than companies; that the Companies Act terminology be used wherever possible and for the accounting framework of the Financial Reporting Council to be used where possible

Members asked what the implications would be if the monetary and social reports were not submitted; whether co-operatives needed different terminology, given that companies and co-operatives were different.  Members agreed that King III was too onerous for governance principles and asked what principles could be used for co-operatives to be run as businesses without their being hamstrung.

The National Union of Metalworkers of South Africa and the South African Clothing and Textile Workers Union joint submission commented that it was not easy to set up co-operatives and the unions had historically found them difficult to sustain without support. It felt the Bills and Act would help turn things around. The Bills were an endorsement of Recommendation 193 of the International Labour Organisation (ILO). The two unions encouraged the promotion of co-operatives as an empowerment tool, the establishment of a co-operatives educational academy, called for mitigating the impact of juristic persons’ participation in cooperatives, called for making it a crime to misuse the word co-operatives or to establish bogus co-operatives to side-step labour laws. It called for co-operative members to be people who actively participated in decision-making and had voting rights with autonomous control to prevent “fronting” and for members and non-members of co-operatives to be defined as employees. The Bills should consider the inclusion of clauses to cover the issue of worker buyouts as there was a high potential for buyouts, but co-operatives were hamstrung by a lack of resources, and their sustainability was hamstrung by a lack of training, business skills, and inter co-operative support.

Members were concerned that co-operatives should be a valid mechanism available to employees to save their jobs and survive. Members asked what could be recommended from the Labour Relations Act (LRA) which would be applicable to co-operatives; what were the typical success and failure indicators for co-operatives; and how should co-operatives relate to established labour and not be rivals. Members said that in other countries co-operatives had a high impact on unemployment and had made a huge difference. What model of co-operatives did the two unions have in mind? Members asked how the legislation could be strengthened to prevent its abuse and ensure a supportive enabling environment and if the two unions thought bogus co-operatives would still be able to be established under the new legislation.

The South African Local Government Association said the survival rate of co-operatives was 12%. Organised local government was very concerned that it had not been consulted and believed that this was a flaw in the consultation process undertaken by the Department. Local government had to be engaged because municipalities needed to be made aware of their role and there were major differences between traditional development policies and the Local Economic Development (LED) approach adopted by municipalities. It questioned how sustainable the Bills would be as it seemed to be a form of the Companies Act rather than a Co-operatives Act. Were they a vehicle for enterprise/social development or for Broad-Based Black Economic Empowerment (BBBEE)? The challenge for government would be to find a balance between providing strategic enabling support while co-operatives were initiated through self-identified opportunities. Opportunities created through government support needed to ensure that an exit strategy for that support was in place. It felt that the Reserve Fund was a government objective rather than something that co-operatives wanted. The administration costs for name changes and regulatory compliance would be additional costs co-operatives would have to carry. It asked what were the implications for rural areas. It called for local government to be part of the advisory council or board. It was concerned that co-operatives would duplicate what other existing agencies such as the Small Enterprise Development Agency (SEDA) and Small Enterprise Finance Agency (SEFA) were doing. SALGA welcomed further national dialogue and discussion.

Members asked for a response by the Department on the serious criticism raised about its consultation process; asked if the Department had consulted with SALGA and the Department of Co-operative Government and Traditional Affairs; asked for SALGA’s views on the role of the financial, management and social reports and its view of the Department of Higher Education input on the co-operatives education academy; asked if SALGA had a problem with government supporting co-operative and for clarification of the terms “local area” and “local content”.

Meeting report

South African Institute of Chartered Accountants (SAICA) submission
Ms Juanita Steenkamp, SAICA Project Director: Governance and Non-International Financial Reporting Standards (IFRS), said that SAICA preferred that the same accounting and auditing schemes be used for companies, close corporations and co-operatives, as the creation of new terminology or the use of old terminology with a different meaning would confuse the market. The Annual Accounting Report was a defined accounting term and asked that definitions be included in the Bills for what was meant by financial statements, social reports and management reports.  There was no such report as an Auditor’s Annual Accounting Report nor was there an Independent Reviewer’s Annual Accounting Report. Auditors provided an audit report based on the definition in the Auditing Professions Act and an Independent Reviewer provided an Independent Review Report. There was no such term as an Independent Reviewer Report on the market currently and an Independent Reviewer could only, currently, come from an accredited auditing body. SAICA suggested that the terminology be reworded so as to allow other professional bodies to be included. SAICA was calling for the separation of accounting and assurance and to allow for exemption for certain categories of co-operatives. Assurance was determined by the monetary threshold of the various categories of co-operatives, however the term “revenue” was not defined. When would “revenue” be defined and would it be forward-looking revenue or backward? The Bills allowed for Annual General Meetings (AGM) to accept the auditor’s reports, yet AGMs could not decline an auditor’s report. On the question of governance principles, it was not defined and only King III was recognised, but that this was too onerous. The Bills also required accounting statements to be held for seven years which was also onerous. SAICA asked that co-operatives not have more onerous requirements than companies and that Companies Act terminology be used wherever possible and for the accounting framework of the Financial Reporting Council to be used where possible.

Discussion
Mr G McKintosh (COPE) said the Department had to accept the SAICA proposals because what was sought was a low threshold to entry.

Ms S van Der Merwe (ANC) proposed that the Department comment on the submission.
 
Mr G Selau (ANC) asked what the implications would be if the monetary and social reports were not submitted.

The Chairperson asked whether, given that companies and co-operatives were different, co-operatives needed different terminology.

Mr X Mabasa (ANC) asked to what degree SAICA had worked with co-operatives.
 
Mr N Gcwabaza (ANC) said that King III was too onerous on governance principles and asked what principles were needed for co-operatives to be run as businesses without being hamstrung.

Ms Steenkamp replied that SAICA was situated all around the country, but was not in the townships thus SAICA wanted the reporting to be open to other professional bodies as the way the Bills were currently worded, they permitted only SAICA members to do the audit reports.

Regarding governance, she said that King III was to be aspired to, but should not be made mandatory. She said reports were mandatory but had been given different names which would cause confusion.

National Union of Metalworkers of SA / SA Clothing and Textile Workers Union submission
Mr Woody Aroun, NUMSA Parliamentary Liaison Officer, said it was not easy to set up co-operatives and the unions had historically found them difficult to sustain without support but felt the Bills and Act would help turn things around.

Mr Simon Eppel, Researcher at SACTWU, said the Bills were an endorsement of Recommendation 193 of the International Labour Organisation (ILO). The submission encouraged the promotion of co-operatives as an empowerment tool, the establishment of a co-operatives educational academy, called for mitigating the impact of juristic persons, called for making it a crime to misuse the word co-operatives or to establish bogus co-operatives to side step labour laws. These bogus co-operatives were mushrooming. Campaigns against bogus co-operatives had been attempted but had not been successful because the current law had loopholes.

In light of Recommendation 193, co-operative members had to be people who actively participated in decision making and had voting rights with autonomous control to prevent “fronting”. Members and non-members of co-operatives had to be defined as employees and therefore the rights and obligations of employees would apply. In Clause 73 which substituted item 6 of Part 2 of Schedule 1 of the
principal Act: Sub clause 4 called for exemptions to be granted by the Minister of Labour or the Bargaining Council which would empower the Bargaining Council to issue compliance notices. He said Sub clause 3 would open a hornet’s nest and proposed that the word “applicable” be removed from “(3) All worker co-operatives must comply with applicable labour legislation”.

On the issue of mitigating the impact of juristic persons on co-operatives, he said the Bills did not put enough limitations to participation in co-operatives by a juristic person. He said there were different levels of categories and the category A and B co-operatives would be vulnerable to the influence of Category C co-operatives, as juristic persons would be used for “fronting”, undermining ILO Recommendation 193 and juristic persons did not embody co-operatives principles internally. He recommended that partial inclusion in category C could be considered for them.

What was not included in the Bills and should be considered was the issue of worker buyouts, as there was a high potential for buyouts, but co-operatives were hamstrung by a lack of resources, and their sustainability was hamstrung by a lack of training, business skills, and inter co-operative support.

Discussion
Mr McKintosh was concerned that co-operatives be a valid mechanism available to employees to save their jobs and survive.

Mr Mabasa asked what could be recommended from the Labour Relations Act (LRA) which would be applicable to co-operatives. What were the typical success and failure indicators for co-operatives? How should co-operatives relate to established labour and not be rivals?
 
Ms Van Der Merwe asked how legislation could be strengthened to prevent its abuse and ensure a supportive enabling environment.

Mr B Radebe (ANC) said that in other countries co-operatives had a high impact on unemployment and had made a huge difference. What model of co-operatives did NUMSA/SACTWU have in mind?

The Chairperson said there was a need to comply with labour legislation. Did the two unions think bogus co-operatives would still be able to be established under new legislation?

Mr Eppel replied that he was sure new loopholes would be sought but they had consulted widely and many people felt the legislation had merit.

Mr Aroun said that the Constitution guaranteed worker rights and one could not be selective about applying them, but there were exemption clauses in the current legislation. Job creation was desired but the rights that workers had fought for could not be compromised. The Bills showed a commitment to the education of co-operatives’ members but the Department had said that co-operatives colleges fell under the ambit of the Department of Higher Education (DHE). NUMSA/SACTWU wanted to see progress on this issue. NUMSA had sent a delegation to Argentina to study co-operatives. Workers there were in control and involved in decision-making. Legislation had to allow for intervention if this was not so, as co-operatives were a form of collective ownership.

South African Local Government Association (SALGA) submission 
Mr Douglas Cohen, Economic Development Specialist at SALGA, said the survival rate of co-operatives was 12%. Organised local government was very concerned that it had not been consulted and believed that this was a flaw in the consultation process undertaken by the Department. Local government had to be engaged because municipalities needed to be made aware of their role and there were differences between traditional development policies and the Local Economic Development (LED) approach adopted by municipalities.

He said the document was disconnected to local government. The Bills saw municipalities as a key role player but municipalities had not been consulted. He questioned how sustainable the Bills would be as they seemed to be a form of the Companies Act rather than the Co-operatives Act. Were they a vehicle for enterprise/social development or for Broad-Based Black Economic Empowerment (BBBEE)?

He said there was a great deal of regulations for auditing and independent review. He asked what the reach and turnaround times for the Tribunal would be. The challenge for government would be to find a balance between providing strategic enabling support while co-operatives were initiated through self-identified opportunities. Opportunities created through government support needed to ensure that an exit strategy for that support was in place. The Reserve Fund was a government objective rather than something that co-operatives wanted. The administration costs for name changes and regulatory compliance would be additional costs co-operatives would have to carry. He asked what the implications for rural areas were. Local government should be part of the advisory council or board. There was concern that it would duplicate what agencies such as the Small Enterprise Development Agency and Small Enterprise Finance Agency were doing. SALGA welcomed further national dialogue and discussion on the issues.

Discussion
Ms Van Der Merwe asked if the Department could respond to the serious questions raised on its consultation process.

Mr Jeffrey Ndumo, dti Chief Director of Co-operatives, said that the process of developing the Bills had been over a period of three years, with all work being published in the Government Gazette. The Department had engaged with the Economic Cluster where these issues were discussed. It had gone to all the provinces and it had invited all the municipalities to engage through the three tiers of government and through their own provincial structures. The co-ordinating committees and the provinces were expected to bring these matters to the attention of the departments and municipalities. It had adhered to all the necessary avenues according to the consultative process.

The Chairperson asked if the Department had consulted with SALGA and the Department of Co-operative Government and Traditional Affairs (COGTA).

Mr Ndumo said the Department had consulted with COGTA but not with SALGA directly, only through COGTA.

Ms Van Der Merwe said there was a need to look at how municipalities could implement co-operatives.

Mr Radebe asked if Saambou and Volkskas would have developed without government support. Did SALGA have a problem with government supporting co-operatives?

Mr Gcwabaza said that if government did not give co-operatives support then the private sector would destroy co-operatives. In addition, government could provide a market for co-operatives’ goods and services. He wanted clarity on SALGA’s stance on the issue of government’s exit strategy. He said the Reserve Fund requirement was because co-operatives were failing due to a lack of capital reserves. What were SALGA’s views on the role of the financial, management and social reports and their view of the DHE input on the co-operatives’ education academy.

The Chairperson asked for clarification on the terms “local area” and “local content”.

Mr Cohen said the government should exit when a co-operative was mature and sustainable. “Local content” was defined as within the borders of South Africa, yet LEDs of municipalities were trying to boost local area development.

On whether the Bills would address the challenges, he said there were existing agencies and was this not just duplicating them.

On the Reserve Fund, he said it implied that government knew what was right.

He confirmed that the submission was the SALGA mandated input but that it had not gone through SALGA’s National Executive Committee process.

The meeting was adjourned.


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