11 Co-operatives Amendment Bills, 2012 Regulatory Impact Assessment

Contents  Introduction  Background  Policy objective  Policy options and risk assessment  Analysis of impacts  RIA findings, Recommendations and Responses 22

Introduction 33  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 44

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 55

Policy options and risk assessment 66

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 77

Analysis of impacts 88

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 99

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 1111

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 1313

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 R 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 R revenue): not required to submit any accounts or review thereof  Category B (R to R2m): required to submit a compilation of accounts but no review thereof  Category C co-ops (over R2m): PIS of less than independent review of accounts; a PIS of more than 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 1717

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 1818

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  new jobs have been created  However, jobs have been at co-ops which since failed  Cost per sustainable job created in the range of R to R  Economic value added per job per annum ~ R

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 2121

RIA Findings Recommendations and Responses 2222

Impacts 1 and Response AmendmentImpactFindings/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

Impacts 2 and Response AmendmentImpactFindings/Recommendation Name reservation Administrative costs ~ R p.a. Cost of trademark crosschecks ~ R 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 2424

Impacts 3 and Response AmendmentImpactFindings/Recommendation 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 Response to RIA findings It is no longer a legislative requirement for co-operatives to submit business plans with registration – one of NEDLAC outcomes 2525

Impacts 4 and Response 2626 AmendmentImpactFindings/ Recommendation Reporting & record- keeping Costs to co-ops ~ R0.1m to R0.9m CDA costs ~ R Compliance likely to be low, and from established co-ops which already report - net impact unlikely to be positive Response to RIA findings 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

Impacts 5 and Response AmendmentImpactFindings/ 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 Response to RIA findings 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.

Impacts 6 and Response 2828 AmendmentImpactFindings/Recommendation 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 Response to RIA findings The Minister will only provide guidelines on reserves

Impacts 7 and Response 2929 AmendmentImpactFindings/Recommendation 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 Response to RIA findings 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

Impacts 8 and Response 3030 AmendmentImpactFindings/ Recommendation 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 ~ R , 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 Response to RIA findings 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

Impacts 9 and Response 3131 AmendmentImpactFindings/ Recommendation 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 Response to RIA findings Noted recommendation by RIA

Impacts 10 and Response 3232 AmendmentImpactFindings/ Recommendation 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 Response to RIA findings Noted recommendation by RIA

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