11 Co-operatives Amendment Bills, 2012 Regulatory Impact Assessment

11

Co-operatives Amendment Bills, 2012Regulatory Impact Assessment

Contents

Introduction Background Policy objective Policy options and risk assessment Analysis of impacts RIA findings, Recommendations and

Responses

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Introduction

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The presentation relates to the Regulatory Impact Assessment (RIA) on the Co-operatives Amendment Bills, 2012

In addition to RIA, the Co-operatives Amendment Bills were considered by NEDLAC

Background

Prior to the 1994 democratic transition, most successful co-operatives were in the agricultural sector, and responsibility for co-op development vested in the Department of Agriculture

Modernisation of the sector facilitated by a Co-operative Policy Task Team - led to the drafting of the Co-operatives Act 14 of 2005, which is now subject to amendment

Regulatory impact assessment of Amendment Bills: Why is amendment needed, and what does it try

to achieve? Is the amendment likely to achieve the desired

outcome? Evidence-based policy-making

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Policy objective

Key objective: provide employment opportunities and support growth, by providing the co-ops with an enabling legal framework, and financial and non-financial support

Specific operational objectives include: To increase the survival rate of registered co-

operatives To establish institutions dedicated to co-

operatives development To increase the proportion of co-operatives

with formal legal status, which can receive dti financial and non-financial support

To reduce the cost of doing business for co-operatives

To improve the quality of information on the co-operative sector available to the dti

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Policy options and risk assessment

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Options and risks

Policy options: RIA best employed early in policy development

– allows full identification of policy options This RIA carried out very late in the policy

formation process - largely limited to examining the difference between the status quo and the policy proposals embodied in the Bills

Risk assessment Risk addressed by the Bills is that South Africa

will not follow an optimum growth and employment creation path without a strengthening of co-operative support systems

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Analysis of impacts

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Introduction

Impact of changes proposed by the Bills were examined in ten key policy areas, as follows: Voting structures Name reservation requirements Business plan requirements Reporting and record-keeping requirements Accounting and auditing requirements for co-

ops Reserves Winding up, deregistration and judicial

management Co-operatives Development Agency Co-operatives Tribunal Exemptions from labour law

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Voting structures

Proposed changes weaken one member, one vote principal at large and secondary/tertiary co-ops Appropriate for more complex commercial

relationships at larger co-ops Allows secondary/tertiary co-ops to take into

account differing sizes of members Also allows for more efficient proxy voting

1010

Name reservation

Proposed change requires co-ops to reserve their name at registration

Does not however require that the name should be cross checked against the Companies register, however

Would be preferable to include this as a requirement

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Business plans

Proposed change would require co-ops to lodge a business plan on registration Help to improve management and thus

sustainability? CDA would then provide business plan

development services Costs would be incurred by both the CDA

and the co-ops themselves, and there is insufficient evidence as to whether the impact would be positive 1212

Reporting and record-keeping

A number changes proposed relate to an attempt to improve the quality of regulatory data, by tightening up reporting requirements

At present, very few co-ops report, and those that do are larger and already sustainable

New reporting requirements would probably fall mostly on same group of established co-ops – little improvement in data quality likely

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Accounting and auditing requirements

Poor accounting and auditing systems at co-ops affect their sustainability – Bills propose changes in these areas

However, the costs of implementing accounting and auditing systems are proportionally higher in smaller businesses – affordability a key concern

Proposed compulsory requirement on co-ops to prepare social and management and performance reviews increases costs relative to other business types Only 10% of co-ops in 2009 could report on

their turnover level 70% made R50 000 revenue or less per annum

1414

Category size limits

Results suggest that category size limits for various kinds of accounting and auditing should be revised, to address affordability issues

Recommendation: Category A (less than R20 000 revenue): not

required to submit any accounts or review thereof

Category B (R20 000 to R2m): required to submit a compilation of accounts but no review thereof

Category C co-ops (over R2m): PIS of less than 100 - independent review of accounts; a PIS of more than 100 - undertake an audit

1515

Reserves

Proposed change loosens requirements to hold 5% reserves, but imposes Ministerial controls on reserve use and reporting on reserve use

Very few co-ops have sufficient accounting systems to determine appropriate reserve levels or report on reserve use New requirements would be felt mainly by

established co-ops Little impact on improving sustainability of

emerging co-ops likely

1616

Winding up, deregistration & judicial management

Bills introduce a much more comprehensive winding up, deregistration and judicial management system for co-ops

Independent of current companies system: Allows unique needs of co-ops to be taken into

account But a new unique system likely to be slower

and more expensive Alternative approach:

In the Bills, include only the ways in which winding up for co-ops will deviate from that used for other businesses

Use the current Companies Act systems and processes

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Co-op Development Agency

Total spending on co-ops in 2009/10 was ~ R223m

Maximum spending at the CDA per annum planned at R620m – substantial increase

Proportionality can be assessed in comparison to SMME spending Co-operatives contribute 3-7% of the economic

contribution of SMMEs Government spending on co-op development is

5% of national spending on SMMEs, and 16% of provincial SMME spending

CDA would take co-op spending to 31-34% of SMME spending: well beyond proportional economic contribution

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Effectiveness of co-op development spending

Can use current development schemes as a measure of likely impact of future development schemes

Current CIS grant system: disbursed R118m since 2005, to 578 recipients 4 727 new jobs have been created

However, jobs have been at co-ops which since failed

Cost per sustainable job created in the range of R772 480 to R124 905

Economic value added per job per annum ~ R2 900

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Co-operatives Tribunal

Proposed Tribunal functions include investigative and decision-making functions, as well as support/ administrative functions (maintaining the register and providing technical support)

Mix of functions will make effective organisational design difficult

Ways of working with the Companies Tribunal should be investigated

2020

Exemptions from labour law

2005 Act exempts worker co-ops from some provisions of labour law

Potential for “bogus” worker co-ops to be formed to exploit this loophole: evidence that this is in fact occurring

No clear international precedent on how to handle this

Bills propose to remove the exemptions: actual impact should be carefully monitored

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RIA Findings Recommendations and

Responses

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Impacts 1 and Response

Amendment Impact Findings/Recommendation

Voting structures

Negative impact on co-op principles, positive impact on management needs of larger co-ops : both unquantifiable

Appropriate balance of protection of co-op principles against the needs of larger co-ops, should be adopted

Response to RIA Findings

No comment

2323



Name reservation

Administrative costs ~ R275 000 p.a. Cost of trademark crosschecks ~ R95 000

Some additional, unquantifiable costs

The current proposal should be amended to include a requirement to cross check names against the companies register

Response to RIA findings

CIPC will use the same data be used for companies’ register which will be an automatic cross reference

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Business plans

CDA expenditure on advisory services on business plans ~ R11.2m

No data available on planned improvement in co-op output & sustainability

More data needed on impact of support services on co-op and SMME performance

Requirement dropped from legislation


It is no longer a legislative requirement for co-operatives to submit business plans with registration – one of NEDLAC outcomes

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Amendment Impact Findings/ RecommendationReporting & record-keeping

Costs to co-ops ~ R0.1m to R0.9m

CDA costs ~ R96 500

Compliance likely to be low, and from established co-ops which already report - net impact unlikely to be positive


CDA to assist especially small scale primary co-operatives to comply with reporting and recordkeeping requirements to improve good corporate governance and management systems to improve the viability of co-operatives and to reduce the excessively large failure rate for, especially small scale primary co-operatives. Improved data base on co-operatives will assist with decision making and the provision of appropriate support measures


Amendment Impact Findings/ Recommendation

Accounting and auditing requirements

Accounting and auditing compliance is unaffordable for the bulk of co-ops - key reason for current low levels of reporting

Category size and reporting requirements should be adjusted to take into account affordability issues and consistency with reporting requirements for other business forms


The Amendment Bills proposes different auditing/review requirements for the different levels and categories of co-operatives. It provides for a special dispensation for Category A primary co-operatives. This is done to reduce the regulatory burden for co-operatives. The determination of the limits to apply to the different sizes of co-operatives will be specified via the regulations. The recommendations on category size are noted.


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Reserves

Cost of reserve reporting requirements ~ R0.4m to R0.9m annually

Unquantifiable cost of reduced management flexibility

Little evidence to support case for Ministerial controls on reserve use


The Minister will only provide guidelines on reserves


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Winding up, deregistration and judicial management

A unique co-op winding up system likely to be less efficient and more costly, but take better account of needs of co-ops

Unique needs of co-ops can be protected while using more efficient existing winding up mechanisms


The provisions does not impose the legal process of Judicial Management on co-operatives. It provides co-operatives with a protective measure in the event of the co-operative being confronted with orders of provisional Judicial Management. It provides that the Tribunal must provide support to the concerned co-operative. Only when the Tribunal is unsuccessful in transforming the co-operative , will the provisions pertaining to Judicial Management apply. Although the Bill cannot preclude a person from exercising his/her right to seek an order for Judicial Management, it can at least attempt to provide a cushion of protection to co-operatives


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Co-ops Development Agency

Level of increased spending on co-ops would be disproportionate to their contribution to the economy

Current support systems inefficient: cost per job created ~ R772 000, value added per job ~ R2 900 p.a.

Evidence of more cost effective performance in current grant schemes needed before spending more via the CDA

Final size of the CDA may need to be reduced


The aim is to provide more focussed and integrated financial and non-financial support services to co-operatives to respond to the unique challenges facing co-operatives. The intention is not to rollout the agency using new infrastructure, instead, co-location through existing infrastructure will be utilised for housing the operations of the agency. It will also involve the relocation of existing programmes


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Co-ops Tribunal

Smaller scale of the Co-op Tribunal suggests it will be less cost efficient on a per-case basis than the Companies Tribunal

The potential for the Co-op and Companies Tribunals to combine resources should be investigated


Noted recommendation by RIA


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Exemptions from labour law

International precedent is not clear

Potential for damage to worker rights if exemptions are maintained

Should proceed with removing labour law exemptions

Impact of doing so should be evaluated in a predetermined period of time

The current proposal should be implemented and re-evaluated to determine its impact in a predetermined period of time


Noted recommendation by RIA

Secret

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11 Co-operatives Amendment Bills, 2012 Regulatory Impact Assessment