Co-operatives Amendment Bill: Departmental briefing

NCOP Trade & Industry, Economic Development, Small Business, Tourism, Employment & Labour

28 November 2012
Chairperson: Mr D Gamede (ANC, KwaZulu-Natal)
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Meeting Summary

The Department of Trade and Industry briefed the Committee on the aims, objectives and wording of the Co-operatives Amendment Bill [B17B-2012]. A brief history of the Bill was given, and the objectives of the amendments were fully described, which were essentially aimed at improving the failure rate of cooperatives, and addressing past problems in co-operative governance, structures, compliance and sustainability. New institutions were to be established to streamline cooperative support. Differential requirements were introduced, to cater for three different categories of cooperatives, according to their size. A reporting framework was being introduced to address previous lack of accountability by management, and transparency of members, which included a social report and annual financial statements (although some cooperatives could apply for exemption).  The use and purpose of Reserve Funds was more specifically defined, with minimum and maximum reserve fund levels. Although cooperatives registered prior to2005 were allowed to retain proportional voting rights, the voting rights for all new registrants were clearly defined Juristic persons would be able to join primary cooperatives, and it was now specified that secondary and tertiary cooperatives could be formed only by operational entities. Apex structures were being introduced by establishing three operational sectoral tertiary co-operatives at national level, and five operational multi-sectoral tertiary co-operatives at provincial, district or local level.

Cooperatives would be required to have a constitution, which must include the terms of office of the directors, details on repayment in the event of a member’s death, details on whether a cooperative was open or closed, and the annual financial statements must set out all business transactions with members and non-members, with fines set for non-compliance. This would also address tax problems in the past. Proxies were being regulated, and proxy appointments must be made in writing, including a validity period. The body giving advice and recommendations was renamed as the “Advisory Council”.

A new Cooperative Development Agency would provide a one-stop-shop for developing co-operatives, and it would have provincial or district representation, co-located with existing services. The objectives and functions, both financial and non-financial, were set out. A central Co-operatives Tribunal would be set up to deal with the problems, in the past, with the lack of enforcement of legislation, lack of dispute resolution and judicial management, as well as to ensure regulatory compliance, and assist with judicial management, winding-up, deregistration, conflict resolution and liquidation. It was now specified, to avoid abuse of employees, that every person must be treated as an employee under the labour legislation. A framework with clear functions was set up to avoid duplication around development of cooperatives, as an Inter-Provincial Co-ordination Committee on Co-operatives was to be established, and coordinating structures were required at province and municipality. The institutions would be introduced over time, for reasons of affordability.

Members felt, and the Parliamentary Legal Advisors agreed, that there should be further extensive public consultation, although the Department indicated that this had already been done. The tagging of the Bill was questioned, and this was distinguished from the requirement for consultation. Members raised questions on the tax issues, the reasons for the high failure rate of cooperatives in the past, consultation with CONTRALESA, land tenure difficulties, and how the Bill tackled ownership and contribution of work in cooperatives. It was noted that a guide to the Bill, using plain language, would be written and would be available in all languages. Members stressed the need also to involve the Department of Agriculture, Forestry and Fisheries, and Department of Rural Development and Land Reform. 

Meeting report

Co-operatives Amendment Bill [B17B-2012]: Briefing
The Chairperson outlined the importance of Co-operatives Amendment Bill (the Bill), not least due to the proposed establishment of agencies within the provinces, and advised that provincial consultation would be required. For this reason, the feedback on the Bill could be provided to the Department of Trade and Industry (dti or the Department) only in early 2013.

Mr Sipho Zikode, Deputy Director General:
Empowerment Enterprise Development Division (EEDD), Department of Trade and Industry, confirmed that the dti had held extensive consultation at provincial and national level, and welcomed the feedback of the Committee.

Mr Jeffrey Ndumo, Chief Director, Cooperatives Development, Department of Trade and Industry, provided background on the Bill. The Co-operatives Act (the Act) had been promulgated in May 2007. Subsequently, some problems with that Act were raised, including complaints by National Economic and Development Council (NEDLAC) that companies were making employees members of co-operatives in order to be exempted from employment legislation. On 15 November 2008, the Minister of Trade and Industry approved the amendment of the Act.

National and provincial public workshops were run between June and November 2009 to prepare for the drafting of the Amendment Bill.  Consultations were also undertaken with the economic and employment clusters, and the NEDLAC process concluded on 13 July 2011. The Bill was submitted to the state law advisors and was certified in February 2012. Cabinet approved the Bill on 14 March 2012, it was adopted by the Portfolio Committee on Trade and Industry on 9 November 2012, and passed by the National Assembly on 22 November 2012.

Mr Ndumo noted that the Bill aimed to strengthen governance, accountability and transparency of co-operatives and to provide a differential dispensation for co-operatives. It aimed to reduce the regulatory burden for co-operatives. The cooperative structure was to be boosted, to allow for organic growth informed by own needs and requirements and to enable unity. It also aimed to enhance compliance, co-ordination, administration and sustainability of co-operatives, and to establish co-operative institutions in order to streamline support for co-operatives and ensure alignment across all three spheres of government.

Mr Ndumo presented the core challenges and amendments addressing these objectives (see attached slides for full details).

In relation to cooperative governance, he pointed out that there had in the past been a high failure rate and lack of clarity on corporate identity. The Bill listed co-operative values and obligations to comply with co-operative principles and a Code of Good Governance.

It aimed to address the previous lack of accountability by management, and transparency of members, as well as the high failure rate and lack of clarity on the corporate identity of co-operatives.  The Bill provided a reporting framework, which added the submission of social and management decision reports to the annual financial statements.  These addressed the unique associational aspect and business aspect of co-operatives.  The social report must be prepared by the cooperatives’ board, setting out the constitutional vision, mission, goals and code of social responsibility, and assessing the social impact and ethical performance.  The management decision report, also prepared by the Board, would assess legal and constitutional compliance.

Primary Cooperatives were to be defined in categories, to address the high cost of compliance for smaller co-operatives, by introducing a differential dispensation for auditing and accounting activities.  Category A were survivalist to small cooperatives, Category B were small to medium, and Category C were medium to large.  Differential reporting requirements under each category were detailed (see slide 10), including the exemption of survivalist co-operatives from any financial reporting.

Provisions on the Reserve Fund were now included to address the lack of clear guidelines on purpose, reporting and use of reserve funds. The Bill provided for minimum and maximum reserve fund levels (based on net asset value) and Ministerial guidelines on recording, usage and reporting of reserves.

Cooperatives formed prior to 2005 had been able to structure voting rights proportionately.  The Co-operatives Act of 2005 eliminated that right. The Bill retained the right, for co-operatives registered prior to 2005, but defined the voting rights for new registrants, including defining limits for Category C Primary, Secondary and National Apex co-operatives.

The Bill addressed whether juristic persons could join primary co-operatives. A Primary Cooperatives, defined as a co-operative whose objective was to provide employment or services to its members and to facilitate community development, could be comprised of five natural persons, or two juristic persons, or any combination of five persons.

Secondary cooperatives could be formed only by two or more operational primary co-operatives.

Tertiary cooperatives had previously been formed by non-operational secondary co-operatives, but now it was stipulated that two or more operational secondary co-operatives could form a national apex, whose objective would be to advocate and engage organs of the state, the private sector and stakeholders.

The Bill also addressed the previous lack of provision for a single apex structure to unite the co-operative movement, through the establishment of three operational sectoral tertiary co-operatives at national level, and five operational multi-sectoral tertiary co-operatives at provincial, district or local level

The Bill dealt with the constitution of co-operatives (see slides 17-20). It aimed to avoid compromises to democratic control, by enforcing the registration of a constitution, in a prescribed format, for all co-operatives.  Constitutions had to set out terms of office for directors, reappointment rights and manner of rotation, as well as a provision for the extension by two years of the period for the repayment of the nominal value of membership shares, in the event of death of a member. The constitutions could also provide for the appointment of non-executive directors.

Previously, there had been little clarity on whether a co-operative was ‘open’ (where it could undertake transactions with non-members) or ‘closed’ (where it could undertake transaction only with members). Now, the constitution must clarify this point. All annual financial statements must give an indication of all business transactions concluded with members and non-members.  This further addressed the tax issue, in which closed co-operatives only worked at cost, with no profit accumulation. This would give greater clarity on the functions of the cooperatives. A fine not exceeding R 1 000 000 might be levied against a co-operative or director found in contravention of this requirement.

The position of proxies was now being regulated. Clear guidelines were required to clarify that members might only appoint one proxy, and that appointment must be made in writing, signed by the member and include a validity period. Additionally, members may carry not more than 5% of total membership as proxies.

Previously, there had been mention of an “Advisory Board”, but this suggested legal and decision-making powers, when in fact the role was limited to giving advice and recommendations. It was to be renamed “Advisory Council” and the functions would be clearly defined.

To address the lack of tailor-made support for co-operatives, the Bill now established a new Cooperative Development Agency, to provide a one-stop-shop for developing co-operatives. This Agency was to be represented at provincial or district level, through satellite branches co-located with existing services, in terms of Memoranda of Understanding with the Member of the Executive Council responsible for economic development in the province, or the municipal council.  The objectives and functions of the support, both financial and non-financial, which must be provided by the agency were set out (see slides 26 and 27).

A central Co-operatives Tribunal would be set up to deal with the problems, in the past, with the lack of enforcement of legislation, lack of dispute resolution and judicial management. This Tribunal would ensure regulatory compliance, and assist with judicial management, winding-up, deregistration, conflict resolution and liquidation.

There had been problems in the past with abuse of employees and circumvention of the Labour Relations Act and Basic Conditions of Employment Act. All employees must be treated as employees under the labour legislation, whether they were members or non-members, including members of worker co-operatives. Exemptions would only be allowed where this could be too difficult, and based on conditions that will be stipulated in regulations made by the Minister of Trade and Industry, in consultation with the Minister of Labour.

The Bill aimed to ensure effective and non-duplicative co-operation in the development of co-operatives,  between municipal, provincial and national government, by establishing a framework with clear functions and setting out administrative and procedural arrangements.

An Inter-Provincial Co-ordination Committee on Co-operatives was to be established, and the Bill set out clear provisions in relation to composition of members, its functions and the frequency of meetings.

In addition, the Bill was clear that there must be establishment of provincial interdepartmental and municipal co-ordinating structures, to provide coordination.

Adv Charmaine van der Merwe, Parliamentary Legal Advisor, said that this concluded the legal perspective. She too felt that the Bill must be taken through a thorough public consultation process.

Mr B Mnguni (ANC, Free State) asked whether Ms van der Merwe was suggesting that there had been insufficient consultation on the Bill.

Adv van der Merwe assured him that there had been extensive consultation at the NA level, but her concern was that the NCOP must also undertake consultation.

Mr F Adams (ANC, Western Cape) asked whether the Department of Economic Development had been consulted, as he could not see it listed.

Mr Zikode confirmed that the Department of Economic Development was adequately consulted, at both Ministerial and Departmental official level. This department had suggested additions to the definitions of workers co-operatives.

Mr Adams asked why the Bill was tagged as a Section 75 Bill, not a Section 76. A great deal of the Bill affected the provinces and municipalities, and he referred to the Memorandum on the Objectives of the Bill, in paragraph 6.

Ms E van Lingen (DA, Eastern Cape) suggested that limitations under Schedule 4 mandates would prevent the Bill from being tagged as a Section 76 Amendment.

Adv van der Merwe replied that the tagging of the Bill and the consultation required were different issues. A Section 76 amendment must meet specific requirements to determine if it was an ordinary Bill affecting the provinces. Regard was had to Schedule 4, dealing with Section 76 of the Constitution. This did not include anything on intergovernmental co-operation or financial obligations for a province or municipality. The Bill only amended the registration requirements for an entity and therefore was not an amendment under Schedule 4. 

In relation to consultations, although the NCOP rules (which were being amended at the moment) did not explicitly state that the Committee must facilitate public consultations, section 72 of the Constitution stated that the NCOP must enable public involvement in all legislative processes of the Council, including those under Section 75.  The effect of a section 75 Bill did not remove the need for provincial consultation. However, it did change the voting procedure because it would not require provincial mandates.

Mr Mnguni asked what was causing the high failure rate of co-operatives, and how these amendments would improve the situation. He was particularly interested in the tax issues.

Ms M Dikgale (ANC, Limpopo) asked whether the Congress of Traditional Leaders (CONTRALESA) had been consulted, in particular in relation to land issues.

The Chairperson asked whether the survivalist co-operatives were likely to be incentivised to remain small, in order to avoid more complex auditing and accounting requirements.

Mr K Sinclair (COPE, Northern Cape) asked how the Bill would tackle ownership issues in co-operatives, pointing out that often only a minority of members contributed towards profitability.

Mr Ndumo replied that there were a few key reasons for business failure. Firstly, it was recognised that there were complexities in managing the democratic association of members. It was recognised that the current ownership enabled a lot of cooperative members to “free ride”.  The Bill set out principles designed to tackle this problem, and to clarify which members would be entitled to payments, through the Codes of Good Practice and Good Governance. There were, in particular, policies on remuneration of cooperative members, based on effort.  Arguments as to contributions had also given rise to significant conflict within co-operatives in the past, and this would be addressed through the Tribunal and conflict resolution framework. 

Secondly, there was confusion over running a co-operative, rather than an enterprise with employees. Managers did not appreciate the collective nature of running a co-operative.

Thirdly, levels of education and literacy had been problematic. The demands of running a co-operative had been addressed through planned courses and training in areas such as bookkeeping, the co-operative principles and collective entrepreneurship.

Fourthly, land ownership had indeed been a problem, and there had been engagement with CONTRALESA, as this was essential to tackle issues of land tenure.  Traditional leaders had sometimes undermined co-operatives by changing their minds over land use, especially where land agreements were not sealed in contracts.

The Chairperson asked whether the Bill was now written in plain vocabulary.

Mr Zikode replied that the Bill would be simplified in a guide booklet. 

Mr Ndumo added that this would be translated into all South African languages.

Ms van Lingen asked whether there would be subsequent legislation to support municipal co-operative support services.

Mr Adams asked about funding of the institutions in the Bill, since these were not included in the dti Annual Report.

Mr Zikode replied that in order to make the implementation of the institutions affordable, they would be introduced gradually, and they would “piggyback” on existing institutions. National Treasury would be making small increases in the budgets.

The Chairperson asked whether other exemptions would require Ministerial approval, or whether they would be delegated to provincial level.

Mr Ndumo replied that the decision-making would be decentralised. The exemptions would be clearly defined in order to achieve this.

The Chairperson stressed that the Department of Agriculture, Forestry and Fisheries, and Department of Rural Development and Land Reform were also instrumental to co-operatives. He also stressed that there would be challenges in achieving the shared offices in the municipalities and provinces.

Ms Dikgale recalled that the role of the traditional leaders was enshrined in chapters 11 and 12 of the Constitution. She said that the statement that traditional leaders were possibly causing a tension for co-operatives highlighted the need for them to be consulted, so that they could better understand how to comply with the Bill.

Ms van Lingen asked how the land tenure issue was to be funded, and whether the Bill made provision for this.

Mr Ndumo replied that this must be addressed through the laws governing land tenure, which required provisions for co-operatives; it was a matter outside the scope of this Bill.

Mr Zikode added that the dti and the Department of Rural Development and Land Reform were discussing the amendments required to the land tenure legislation.

Mr Adams confirmed that this Committee would start the provincial consultation immediately.

The Chairperson advised that the Committee would meet with the dti again at the beginning of 2013.

The meeting was adjourned.


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