January - June 2019

Will infrastructure unlock the investment potential of Africa?

The Steinhoff Saga Management review - University of Stellenbosch Business School

January – June 2019

Will infrastructure unlock the investment potential of Africa?

By Linda Velenkosini Buthelezi

  • June 2019
  • Tags Features, Finance

15 minutes to read

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The link between FDI and a solid infrastructure

Africa has been known for its lack of basic infrastructure development. But the critical question is: To what extent does infrastructure development impact growth in foreign direct investment in Africa? It is hypothesised that adequate infrastructure improves the efficiency of a country and lowers the cost of doing business, thus attracting the flow of investment funds.

This paper investigated the relationship between infrastructure development and foreign direct investment in Africa spanning 30 countries between 2003 and 2016. The period under review includes the global economic crisis. The countries represented all the regions of the continent – Southern, Western, Eastern and North Africa.

Utilising the Africa Infrastructure Development Index (AIDI), which ranks countries based on their infrastructure development, the study is one of the first to measure the link between foreign direct investment (FDI) and the development of water supply and sanitation, information and telecommunications technology (ICT), energy and transport as published annually by the AIKP and the African Development Bank.

FDI comes in various forms – including opening a subsidiary … in another country, acquiring a controlling equity interest in an existing foreign company, or facilitating a merger or joint venture with a foreign company.

Why does Africa rely on FDI?

A well-established domestic financial and capital market sector is crucial for sustained economic growth in any country. However, in developing countries, no such markets exist which presents critical challenges to growth and stability. And even if they do exist, there are not enough local investors with the capacity to take advantage of the economic opportunities available. This forces these countries to rely on a flow of capital from developed markets by means of remittances, donor funds, foreign direct investments, equity funds, bond funds, investment portfolios and/or other forms.

For the purposes of this paper, FDI is regarded as the investment made to acquire a lasting interest in enterprises operating outside the investor’s home economy. FDI comes in various forms – including opening a subsidiary or an associate company in another country, acquiring a controlling equity interest in an existing foreign company, or facilitating a merger or joint venture with a foreign company. FDI can also include the provision of project finance or facilitating the transfer of technology and managerial skills from the source country.

The need for FDI is driven by factors such as political and economic institutions of governance, level of infrastructure, openness to trade, economic freedom, labour markets, import and export opportunities, skills levels, macro-economic stability, proximity to important markets, market size, and the availability of natural resources. However, high inflation, political instability and conflict do deter FDI.

Unlike other investment types, FDI invests in physical capital and is therefore partially irreversible as much of the costs associated are irretrievable should the firm decide to disinvest.

Between 2010 and 2016, on average, the FDI inflow into the sample of 30 African countries equated to 4% of GDP annually with the highest FDI recorded at 45.8% and the lowest at 0%. GDP grew by an average of 4.9% which is higher than the world average has been for several years. The average GDP per capita was US$2,211.876, with the lowest at US$173.9164 and the highest at US$10,716.22.

During this time, FDI was not entirely dominated by investments in mining and extractive industries but rather by investments in technology, media and telecommunication, retail and consumer products and financial services. Private investment opportunities have also emerged in infrastructural sectors such as education, healthcare and security which were previously highly dominated by the public sector. This diversification has provided a division of economies in some markets, where the haves use private services and the have-nots use the mostly inadequate and inefficient public infrastructure that is beset by delays and interruptions in service provisions. Some countries, though, have managed to improve public infrastructure to a level where it directly competes with private infrastructure.

FDI … assists the recipient country to import technology and thereby catch up with economically developed countries

However, the consistency of FDI and the monitoring of trends are problematic. For example, a country’s level of FDI may be positively affected by a large investment into a well-established entity, which results in the FDI for that year being a deviation from the average. Large single transactions unlikely to be repeated will show a significant decline in the following year. FDI is also impacted by global investment trends. The United Nations Conference on Trade and Development reported that FDI fell by 13% in 2016 as global economic growth remained weak and world trade volumes posted poor gains.

The benefits of FDI

Countries have been trading with one another for many centuries as economies need to export goods and services to generate revenue with which to finance imported goods and services that cannot be produced domestically. To leverage comparative advantages in other countries, some companies move their production plants across borders or invest in countries where they can make a profit. Developing countries, on the other hand, need FDI to augment domestic economic growth and to bridge the financial gap.

Unlike other investment types, FDI invests in physical capital and is therefore partially irreversible as much of the costs associated are irretrievable should the firm decide to disinvest. It assists the recipient country to import technology and thereby catch up with economically developed countries, boosting the country’s infrastructure stock through the facilitation of newer, faster and more productive technology.

A new trend has therefore emerged where governments seek investment in private infrastructure

Inhibiting factors to international investment include unreliable energy provision, the high cost of transport and non-functional utilities – although these can be promoting factors if they function efficiently. A new trend has therefore emerged where governments seek investment in private infrastructure projects from multilateral institutions to reduce the perceived risks of some projects or to encourage FDI investors pursuing a project in the area to invest in the lack of infrastructure to support their operations.

The impact of infrastructure on FDI

Infrastructure refers to the basic physical and organisational structures and facilities integral to the social, political and economic life of any nation. It includes assets such as buildings, roads, power supplies and ICT, and enables not only the well-being of the society that benefits from it but is increasingly becoming an important base on which to build economic development.

Economic infrastructure refers to the physical infrastructure such as transport, energy, communications, water and sanitation, while social infrastructure refers to health, education, commercial and security or defence.

Africa is faced with a significant infrastructure deficit. Infrastructure is mainly concentrated in urban areas or near big cities. Even then, outdated and inadequate urban plans fail to take into account the social, political, economic and environmental contexts of urban development in Africa.

Of the 674 million people worldwide without access to electricity, 90% are in sub-Saharan Africa. Energy has a positive and statistically significant effect on FDI inflows.

At present, Africa’s ability to attract FDI is hampered by the following in particular:

  • Energy: Sub-Saharan Africa consistently ranks low in terms of energy production compared to other developing regions. The entire continent produces less than 100 gigawatts of power. Of the 674 million people worldwide without access to electricity, 90% are in sub-Saharan Africa. Energy has a positive and statistically significant effect on FDI inflows. However, Africa’s unreliable power and water supply and the high cost of transport make it difficult for international investors to manufacture and produce efficiently on this continent.
  • Transport: Transport infrastructure is found to be less developed than other types of infrastructure with some countries indicating close to zero transport infrastructure development. It is further interpreted that an increase in air transport (passenger and freight), more kilometres of tarmacked road as a percentage of the total road network, more kilometres of railway lines, and adequate port infrastructure are key determinants in attracting FDI into a country.
  • ICT: One of the categories of infrastructure that has greatly improved over the last 10 years is information and telecommunications with $25 billion invested by private investors and operators between 1995 and 2005. Mobile telephone services in particular leapfrogged other infrastructure sectors. Hence, in some regions, the number of people with access to adequate water and sanitation is less than one in three, yet more than 90% have access to mobile telephony services. The higher the ICT development, the more efficient the economy, contributing to productivity and economic growth indirectly by attracting more FDI. However, most of the developing countries lack ICT infrastructure, which is enormously costly for locals and first needs to be built up to get to the level where it can help to attract FDI.
  • Water supply and sanitation: This has an important role in attracting FDI. The United Nation’s Sustainable Development Goals state that the lack of access to improved water supply and sanitation services imposes high costs on society, especially the poor. Yet despite the importance of water for development, 82% of governments have indicated that financing was not enough to reach national targets for drinking water.

… in some regions, the number of people with access to adequate water and sanitation is less than one in three, yet more than 90% have access to mobile telephony services.

The African region is known as a net recipient of FDI capital flows. Investments lead to possible imports of associated machinery and equipment, as well as the export of the projects’ outputs as operations begin, and as profits and invested capital are repatriated as the project matures. FDI flows have an impact on a country’s balance of payments since most FDI investments are accompanied by imports and exports into and out of the country.

This study found that few countries had consistently high FDI inflows over the reporting period. In countries where FDI exceeded 10% of GDP, this was due to investment in oilfields by the major oil companies and China’s investment in rail, road and port infrastructure.

Countries with higher levels of GDP per capita attract higher levels of FDI, particularly as they can attract better skills and benefit from production factors, better education and adherence to the rule of law.

What does the future hold for FDI in Africa?

African governments should continue to focus on the development of their economies to ensure that their economies grow faster than their populations. The implementation of the Sustainable Development Goals should be the focus of every country on the African continent. The large number of African countries in the low-income category is one of the factors making it difficult to attract meaningful FDI, even as infrastructure development improves.

The large number of African countries in the low-income category is one of the factors making it difficult to attract meaningful FDI, even as infrastructure development improves.

  • This article is based on the MPhil in Development Finance research assignment of Linda Velenkosini Buthelezi. He is a graduate of the University of Stellenbosch Business School. His supervisor was Dr Ashenafi Fanta, senior lecturer in Development Finance and programme head of USB’s PhD in Development Finance.

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The megaproject sponsor as leader: What does he/she look like and how does one choose the right person?

The Steinhoff Saga Management review - University of Stellenbosch Business School

January – June 2019

The megaproject sponsor as leader: What does he/she look like and how does one choose the right person?

By Willem Louw, Jan Wium, Herman Steyn and Wim Gevers

  • June 2019
  • Tags Features, Leadership

20 minutes to read

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The key role of the project sponsor in megaprojects

The importance of the sponsor role, including its contribution to the success or failure of a project, is widely recognised in project management literature. References to the sponsor’s leadership are equally prevalent in the literature reviewed. Executive sponsors are primarily allocated to strategic projects that are complex/complicated, high-risk and very visible. A megaproject is thus entitled to a sponsor from the most senior ranks within an organisation.

This paper explains how leadership theories can be used to identify instruments that can help to assess the leadership style and attributes/traits of such a sponsor. A framework is then proposed to identify assessment instruments to evaluate the leadership style and attributes/traits of project sponsors.

But first, what is a megaproject?

A megaproject is seen as a large-scale, complex venture that typically costs US$1 billion or more, takes many years to build, involves multiple public and private stakeholders, is transformational, and influences millions of people.

A megaproject is seen as a large-scale, complex venture that typically costs US$1 billion or more, takes many years to build, involves multiple public and private stakeholders, is transformational, and influences millions of people.

The element of the complexity of projects deserves some attention in the context of executive sponsors and their leadership. This calls for extraordinary leadership capabilities and management skills. Hence, various researchers have shown that there is a positive correlation between project success and the capacity of the executive sponsor to recognise complexity as soon as possible.

Sponsorship and leadership

The authors started off by defining the terminology sponsor/sponsorship in the project context. Six key themes emerged from this review:

  • The sponsor role is at a senior level in the owner (or client) organisation.
  • The sponsor role contains substantial dimensions of leadership (as opposed to being just a management role).
  • The sponsor is responsible for creating an effective governance framework for the project.
  • The sponsor is the owner of the business case for the project.
  • The sponsor is positioned structurally on the interface between the owner and project organisations, such that decision-making and support to the project manager are enabled, particularly for issues beyond the control of the project manager.

The sponsor is positioned in a specific organisational context — i.e. between the business (permanent organisation) and the project (temporary organisation). It is primarily the upward relationship between the sponsor and the board/senior executive, and the downward relationship between the sponsor and the project manager(s) that forms the basis for the identification of the sponsor’s leadership requirements.

The authors also looked at the myriad of definitions of leadership, and at the difference between management and leadership. They concluded that there is a need and a place for both governance and decision-making in the role of the sponsor, and that it is unwise and incorrect to separate leadership and management in the role too forcefully.

A megaproject … calls for extraordinary leadership capabilities and management skills. Hence, various researchers have shown that there is a positive correlation between project success and the capacity of the executive sponsor to recognise complexity as soon as possible.

The critical relationship between the sponsor and the project manager

The relationship between the sponsor and the project manager is critical. Well-informed and insightful sponsors will realise that they are the senior partner in a relationship based on collaboration. Accordingly, the sponsor will not trespass on the typical responsibilities of the project manager in executing the project.

Some researchers have pointed out that the best project performance is achieved where there is close collaboration between the sponsor and the project manager. Appropriate communication between them is as important.

The authors found that the role of the sponsor as leader in a collaborative relationship with the project manager is addressed to a limited extent in the literature. Similarly, it seems as if very little has been written about decision-makers applying their minds before the appointment of the sponsor to the project.

The leadership effectiveness of the sponsor

Leadership effectiveness can manifest itself in multiple ways. It ultimately depends on how well the leader chooses on a daily basis between a diverse set of behaviours. These behaviours can vary from setting direction that inspires and providing emotional support, to ensuring that the required governance is in place and is adequately monitored. Integral to effective leadership are the concepts of leadership styles, interpersonal skills (specifically emotional intelligence), and attributes and traits. It is accepted that there is no best way to be a leader, and that there is no single set of attributes that will guarantee project success because the personalities of leaders and their followers and the contexts of projects vary.

The relationship between the sponsor and the project manager is critical … insightful sponsors will realise that they are the senior partner in a relationship based on collaboration.

Leadership styles selected for evaluation

The leadership styles identified below have been included based on the availability of a style assessment instrument, on project management relevance and on being current:

  • Transformational leadership: A component of the Multi-factor Leadership Questionnaire (MLQ) assessment instrument
  • Transactional leadership: A component of the MLQ leadership assessment instrument
  • Situational leadership: Referenced in the project management context
  • Authentic leadership: Measured with the Authentic Leadership Questionnaire (ALQ)
  • Servant leadership: More contemporary literature discussion, and possible to measure
  • Charismatic leadership: A distinct component of the Leadership Behaviour Inventory (LBI) leadership assessment instrument in the South African context
  • Visionary leadership: A distinct interface with emotional intelligence
  • Complexity leadership: Potentially answering the questions of complex vs complicated, and the possibility for use in the context of a megaproject
  • Shared leadership: Addressing the phenomenon that organisations are migrating to a knowledge-driven era in which multi-cultures and multi-geographies are prevalent.

Evaluation of selected leadership styles

Vision is regarded by many researchers as the first key skill that the sponsor requires. In addition, the development of vision for the project needs to be both compelling and powerful in order to align those involved with the project.

The transformational, charismatic and visionary leadership styles are part of what is termed “new-genre” leadership theories. They incorporate concepts such as symbolic leader behaviour; being visionary; communicating inspirational messages; surfacing emotional feelings; propagating ideological and moral values; and being intellectually stimulating. Visionary leadership is pertinently influenced by the act of vision creation. However, it is not a leadership style that is accompanied by an operationalised and validated measurement instrument.

Vision is regarded by many researchers as the first key skill that the sponsor requires.

From the literature analysis on leadership, it is possible to contextualise the role of the executive sponsor in an “identification of leadership” construct in the following way:

  • Leadership within the sponsor profile is a given.
  • Assistance to the decision-makers responsible for the selection of the sponsor is available. The leadership style of the incumbent can be determined via an operationalised and validated assessment instrument.
  • There is no leadership style that on its own contains all the elements required for effective leadership.
  • Outstanding leadership relies significantly on the action of putting into words and feelings a viable and inspiring vision.
  • Identifying whether the sponsor has the ability to be visionary can be performed via the MLQ and LBI assessment instruments. This can ensure that the project remains linked to the strategy of the parent organisation.

By using the construct above as a filter for screening the nine leadership styles selected, four styles remain for further consideration: transformational, charismatic, servant and authentic leadership.

There is no leadership style that on its own contains all the elements required for effective leadership.

Authentic and servant leadership are different from transformational (and charismatic) leadership. Some researchers say that creating an inspirational vision to motivate followers is not necessarily the forte of an authentic or servant leader. The intent of reducing the number of theories is not to reduce them to an absolute minimum. Rather, it is to identify leadership styles that enable the decision-makers to assess practically the leadership style of the designated sponsor on a megaproject prior to appointment.

The authors conclude that transformational and charismatic leadership styles are the preferred styles to be tested when identifying an executive sponsor for a megaproject. Both leadership styles have measurement instruments: for transformational leadership it is the Multi-factor Leadership Questionnaire, and for charismatic leadership it is the Leadership Behaviour Inventory.

At this juncture it is important to note that there is a relationship between the emotional competencies of the leader (including, emotional expressivity) and a range of leadership theories.

Conclusion on leadership styles

No leadership style on its own contains all the elements required for effective leadership, and no single theory covers all aspects of leadership behaviour. The authors believe the same argument can be offered for executive sponsorship.

Emotional intelligence within the leadership context

A number of leadership styles acknowledge that outstanding leadership relies significantly on the action of putting into words and feelings a viable and inspiring vision. Part of “putting into words and feelings” includes the concept of emotional expressivity – a communication style that contains distinct elements of variation in voice, facial expressions, eye contact, and coherent gestures of the hands. Emotional expressivity, combined with emotional competencies such as self-awareness, emotional expressivity, self-monitoring and empathy, are important dimensions in the broader context of emotional intelligence (EI).

Three conceptual models dominate the field of emotional intelligence: the Salovey-Mayer model, the Goleman model, and the Bar-On model. The Bar-On model in particular is based on the wider construct of emotional intelligence and social intelligence (ESI), and there is a significant predictive and evidence-based relationship between EI and transformational leadership.

To determine the EI of leaders at executive management level, the skills- and trait-based EQ-i assessment instrument can be used. The results indicate that it is very important for individuals to know specifically what traits and attributes are required on different occasions to perform the executive role successfully.

What leadership attributes and traits are required of executive sponsors?

First, the authors looked at the term traits, traditionally referred to as “personality attributes”. These typically include personality attributes as well as motives, values, cognitive abilities, social and problem-solving skills and expertise.

A comprehensive list of leader attributes can be compiled from the literature and thematically grouped into the following: strategic attributes, leadership and management attributes, the ability to deal with ambiguity and complexity, motivation, communication, openness to learning, networking and decision-making.

Attributes that can be obtained from experiential learning include:

  • An understanding of business case development, and seeking input and consensus on the contents of the business case among executives in the organisation
  • An understanding of basic project management concepts, and understanding and commenting constructively at a high level on scope, risk, schedule and cost management
  • The ability to understand and respond to the results of independent reviews of the project, and to hold the team accountable for such results
  • The ability to manage self within the time commitment agreed (both short- and long-term), with time management being a significant part of self-management
  • Sufficient knowledge of the business, its operations, market and industry so as to make informed decisions.

Positional attributes include appropriate seniority, credibility and (personal and positional) power within the organisation, and the active participation of the sponsor on the project throughout the life cycle of the project.

Researchers agree that these attributes “rarely exist in one person”.

Models for leadership attributes and traits identification

Next, the authors looked at the psychometric measurement tools that can be used to identify a sponsor for a megaproject. These instruments include the Belbin Team Role Profile, the Neuroticism-Extraversion-Openness Personality Inventory, and the Myers-Briggs Type Indicator. The instruments were identified after engagement with two South African companies in psychometric assessments, JvR Psychometrics and BIOSS Southern Africa.

Outstanding leadership relies significantly on the action of putting into words and feelings a viable and inspiring vision.

Instruments for the measurement of leadership attributes and traits

In addition to the two leadership style measurement instruments, the measurement instruments listed in Table 1 can help to identify the leader attributes and traits of the sponsor. Collectively, a framework is thus proposed to identify assessment instruments for the leadership style and leader attributes/traits of a project sponsor.

Table 1: Psychometric and other measurement instruments typically used in South Africa to identify leader attributes and traits

Name of instrument Purpose used for / identification of:
Cognitive Process Profile (CPP)

Developed for and distributed by Cognadev UK/SA

Capability (including identifying the way the individual thinks when dealing with new information and solving problems of varying complexity; also assessing the individual’s potential for cognitive development.)
Bar-On Emotional Quotient Inventory (EQ-i)

Developed by Bar-On and made available by JvR Psychometrics SA

Emotional Intelligence (EI) (including self-perception, self-expression, interpersonal, decision-making, stress management, and well-being)
Critical Reasoning Tests — i.e. the Critical Reasoning Test Battery (CRTB)

15 Factor Questionnaire (15FQ). Developed by Psytech International and delivered by Psytech SA and others.

Reasoning ability (including measuring critical verbal and critical numerical reasoning skills. Designed for testing of executive managers.)
Occupational Personality Questionnaire (OPQ)

Developed by Saville et al. and distributed by JvR Psychometrics SA / Psytech

Personality (including influence, sociability, analysis, creativity, change, structure, emotions, and dynamism)
Giotto

Develop by Rust for the Psychological Corporation in the UK, and distributed in South Africa by GiottoSA

Workplace integrity behaviour (instrument developed to unravel complex nature of personal integrity as it relates to the workplace)
Hogan Personality Inventory (HPI)

Developed by Hogan Assessment Systems, Inc. and made available by JVR Psychometrics SA

Personality (including adjustment, ambition, sociability, interpersonal sensitivity, prudence, inquisitiveness and learning approach)
Belbin Team Roles, developed by Belbin Measures high-level reasoning ability (Critical Thinking Appraisal); personality (16 scales of the Cattell Personality Inventory); and outlook, via a Personal Preference Questionnaire (PPQ).

Nine clusters for team roles (company worker, chairman, shaper, plant, resource investigator, monitor-evaluator, team worker, completer-finisher).

Neuroticism-Extraversion-Openness Personality Inventory Revised (NEO-PI-R) model, developed by McCrae and Costa Focus on personality (extraversion, conscientiousness, openness, (low) neuroticism, agreeableness)
Myers-Briggs Type Indicator (MBTI) developed by Briggs and Myers Provides indication of and measures the psychological preferences of individuals when making decisions and how they perceive the world. The MTBI identifies 16 distinctive personality types.

Four pairs of Jungian theory based alternative preferences: Introversion/Extraversion; Sensing/Intuition; Thinking/Feeling; Judging/Perception.

 Although the list of recommended leadership attributes is comprehensive, it is optimistic. It is unrealistic that one individual should possess all of these attributes. Additional effort is therefore needed to identify the essential attributes of a sponsor.

It is clear from Table 1 that there are an adequate number of measurement instruments or tools to determine the leadership attributes/traits of a leader. As an example, the Cognitive Process Profile and Critical Reasoning Test Battery instruments can be used to deal with the attributes that focus on critical thinking skills, ability to handle ambiguity, and dealing with complexity.

Both the transformational and charismatic leadership styles contain the ability to develop a compelling and powerful vision for a project.

In a related perspective, the Project Management Institute (PMI) argues that it is beneficial for executive sponsors to perform a self-evaluation of their skills (to be read in the broader context of leadership styles, attributes and traits). By inference, the authors deduce that this self-evaluation should be performed very early in the “allocation of the sponsor to the project” action. This deduction is based on the statement in PMI that the self-evaluation is even more valuable if the sponsor has a very good appreciation of sponsor requirements. This creates an opportunity for sponsors to focus on those skills in which they are strong. For skills that the sponsor lacks, the assistance of specialists should be obtained.

Conclusion

The paper confirms that the executive sponsor on a megaproject is primarily a leader who requires the ability to put into words and feelings a viable and inspiring vision, and then ensures that the project remains synchronised with the strategy of the business organisation.

Leadership theories can be used to identify instruments that can help to assess the leadership style and leader attributes and traits of a sponsor. The styles of transformational and charismatic leadership seem to be the most appropriate for megaproject sponsors. Both the transformational and charismatic leadership styles contain the ability to develop a compelling and powerful vision for a project. The measurement instruments referred to as the MLQ Form 5X and the LBI can be used to determine the leadership style of a designated sponsor.

  • Find the original journal article here: Louw, W., Wium, J., Steyn, H., & Gevers, W. (2018). The megaproject sponsor as leader. South African Journal of Industrial Engineering, 29(November), 173-187. DOI: http://dx.doi.org/10.7166/29-3-2058
  • Willem Louw is from the University of Stellenbosch Business School.
  • Prof Jan Wium is from the Department of Civil Engineering, Stellenbosch University.
  • Prof Herman Steyn is from the Department of Engineering and Technology Management, University of Pretoria.
  • Prof Wim Gevers lectures at the University of Stellenbosch Business School.

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What does the future hold for co-operative financial institutions in South Africa?

The Steinhoff Saga Management review - University of Stellenbosch Business School

January – June 2019

What does the future hold for co-operative financial institutions in South Africa?

By Master Mushonga, Thankom G. Arun and Nyankomo W. Marwa

  • June 2019
  • Tags Features, Finance

23 minutes to read

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What is this study about?

All over the world, co-operative financial institutions (CFIs) play a key role in assisting financially excluded communities with lower incomes with improved access to finance. Yet, there has been a decrease in the number of CFIs in South Africa. What drives this industry and what does the future hold for CFIs in this country? To find out, this study set out to:

  • Understand the qualitative performance drivers and inhibitors of CFIs by applying the Delphi technique
  • Identify internal and external factors determining performance by applying a SWOT analysis
  • Forecast future developments that must happen in the co-operative finance industry to drive performance in the next 10 years and help craft growth strategies.

 

The ranking-type Delphi technique was used to gather expert opinions from those working in or with financial co-operatives. From the 22 future developments identified by these experts, six growth strategies within the control or influence of management were drawn in the areas of technology, people, marketing, culture shift, environmental and policy interventions. In essence, this study presents a CFI performance ecosystem based on identifying the key drivers, inhibitors and strategies to achieve high-performance growth in this sector.

Not a single financial co-operative has received government recapitalisation following the recent global financial crisis.

The playing field

Financial markets failure is one of the challenges facing many economies as large banks tend to engage in credit rationing of small to medium enterprises (SMEs) and marginal communities, citing information asymmetry and transaction cost challenges. The situation has worsened over the past two decades due to mergers and acquisitions reducing the number of banks. It was found that increased bank market power resulted in increased financing constraints for SMEs across 20 European countries. It was also found that credit-constrained SMEs depend on trade credit, but not bank loans, and that the intensity of this dependence increased during the financial crisis.

A recent banking market structure study found that co-operative banks facilitate access to bank financing, reduce financial costs, boost investments, and favour growth for SMEs. It was found that regions in which co-operative banks hold a strong position are characterised by the rapid pace of new firm creation, while the opposite applies in the majority of cases for local banking markets dominated by foreign-owned banks. Unlike traditional banking institutions, co-operative financial institutions are member-focused deposit taking and loan granting institutions, and are efficient in generating borrower-specific information, which can address “informational” distance.

The role of CFIs in providing ethical and social finance is a loud call for researchers to understand their qualitative performance drivers and inhibitors by engaging co-operative finance experts to enhance their performance.

A number of studies have looked at how CFIs, which are grassroots innovations, have performed during and after the global financial crisis compared to investor-owned banks. Not a single financial co-operative has received government recapitalisation following the recent global financial crisis. Statistics from the World Council of Credit Unions, a global trade association for credit unions and financial co-operatives, shows CFIs’ total assets reached $1,8 trillion and served 236 million members in 2016, up from $1,2 trillion and 177 million respectively in 2007. The one member, one vote system ensures CFIs serve common needs rather than the needs of a handful of individuals as in the case with traditional banks. However, effective governance depends more on the willingness of members to exercise their ownership rights by expressing their views to the board of directors and holding them accountable for value creation. CFI performance is targeted towards optimising value, service and profit, and minimising costs.

The one member, one vote system ensures CFIs serve common needs rather than the needs of a handful of individuals as in the case with traditional banks.

The CFI penetration rate in South Africa is the lowest in the world at 0.06% compared to Kenya (13.3%), Rwanda (13.8%), Togo (26.7%), Australia (17.6%), Canada (46.7%), United States (52.6%) and Ireland (74.5%). The worldwide average is 13.5%.

South Africa passed the Co-operative Banks Act in 2007 and formed the Co-operative Banks Development Agency (CBDA) in 2009 with a mandate to formally regulate, supervise and develop the sector. There has been a decrease in South African CFIs and membership from 121 and 59,394 in 2011 to 30 and 29,818 respectively in 2017. The decrease can be partly explained by the CDBA’s prescribed minimum membership and share capital contribution at 200 and R100,000 respectively. The implementation of the regulation could have been harsh to small but growing CFIs.

Financial inclusion in South Africa and the role of CFIs

In South Africa, nearly 8.5 million adults are excluded from the formal financial system. In total, 77% of all adults have a bank account. However, if the social grant beneficiaries (nearly 5.1 million) are excluded, only 58% are banked. About 51% of adults are borrowing from various sources to supplement their limited resources – 46% from non-bank financial institutions (NBFIs), while only 14% are borrowing from banking institutions. Only 5% are using credit for developmental reasons. In 2016, 33% of adults were saving, with 15% saving through banks, 14% saving with NBFIs, 8% with informal institutions and 11% saving at home. Previous attempts to increase financial inclusion through the Mzansi account (an entry-level bank account targeting the mass population in 2004) failed. The Mzansi accounts were perceived as not meeting the aspirations of those aiming to climb up the financial services ladder, making CFIs a suitable alternative.

The CFI penetration rate in South Africa is the lowest in the world at 0.06% … The worldwide average is 13.5%.

CFIs help to bridge the financial exclusion gap by pooling members’ financial resources together for on-lending to the same members. As member-driven organisations operating within a common bond, they are better placed to reduce informational opacity and high transaction costs which usually result in credit rationing in credit markets.

This enables members to break the poverty trap caused by lack of economic opportunities and low productivity due to lack of access to financial services. Since CFIs are owned and operated by members, they have an objective to maximise the services provided to members. This suggests that profit maximisation is not an ultimate objective, since there are no non-member suppliers or customers to exploit.

What does the literature say about CFI performance drivers and inhibitors?

Seven streams of empirical papers are dealing with the performance dynamics of CFIs: industry professionalisation (governance), policies, technology diffusion, social capital, outreach, economic trends and sector perception. Various studies reveal that co-operatives established with the social purpose of serving poor communities have the real possibility of becoming sustainable and effective – but only if they adopt a radical commercial approach to organisational development. Professionally managed CFIs are found to be attractive to middle-income earners.

CFIs … enable members to break the poverty trap caused by lack of economic opportunities…

From the literature review, we summarise that each of the seven forces can be either a driver or inhibitor depending on its strength or weakness in influencing CFI performance, as depicted in Figure 1 below. CFIs thrive on a community’s social capital: if social ties are weak, that will affect their performance. Social networks and technology enable financial innovation at grassroots and swift financial solutions delivery in a cost-effective manner, while its low adoption raises costs and restricts convenience. A wider membership outreach is therefore important for meaningful capital and savings mobilisation. In addition, professionally managed co-operatives attract membership as institutions with weak governance structures and incompetent staff perform poorly.

Figure 1: Forces that drive and inhibit CFI performance

Using the Delphi method as research methodology

Quite a number of studies have compared traditional surveys and the Delphi method regarding their strengths and shortcomings. Based on these studies, we judge the Delphi method to be a stronger methodology to carry out a rigorous inquiry from co-operative finance experts on complex questions requiring collective judgement. Rather than attempting to assemble a statistically representative sample, the Delphi method uses a purposely selected panel of experts to comment on a problem or situation. The rationale for this design choice is that a non-representative sample of experts is more equipped to arrive at a correct decision than a representative sample of non-experts.

This study used the ranking-type Delphi, which identifies and ranks key issues – typically used in business to guide future management action or research agendas.

The selection of experts is the most critical requirement to improve the credibility and the validity of the process. We divided experts into four panels: CFI management, regulators, CFI associations, and consultants or capacity builders. The advantage of multi-panel Delphi studies is that they account for multiple expert perspectives. We ended up with 36 experts of which 50% were CFIs managers. Our experts are quite mature, averaging 44.7 years in age, with 10.8 years of working experience in the CFI sector.

The questionnaires sent out to the experts contained a maximum of six questions to avoid overburdening them given their time constraints. The administration of the ranking-type Delphi involved three steps: brainstorming of factors; narrowing down the original list to the most important ones; and two rounds of ranking important issues. We then use the Wilcoxon Ranked Pairs Signed-Rank Test recommended for Delphi studies to assess convergence across two rounds.

…the sector needs to address deficiencies in corporate governance, technology and negative perceptions … to attract a mixture of membership

We based the study findings on the final rankings of the mean score in Rounds III and IV. All issues are ranked based on Round IV mean scores, starting with the lowest mean score, that is, ranked as the most important in descending order. Mean scores in Round IV are lower than in Round III, which is an indication that collectively the experts revised their rankings downwards considering the opinion of others, as expected in a Delphi study.

The drivers of CFIs’ performance

The identified drivers (strengths) to CFI formation and performance are quite diverse. However, the major drivers seem to be leveraging on social capital to eradicate poverty. These drivers were:

  • Pooling more savings together for on-lending to members
  • Strengthening the community bond for development
  • Improving the savings culture through CFI formal mechanisms
  • Using CFIs to create community businesses through access to finance
  • Providing easy access to credit for CFI members compared to banks
  • Using CFIs to meet community financial needs at low cost
  • Using CFIs to pool capital together for on-lending profitably
  • Giving members ownership and control of CFIs effectively
  • Offering competitive pricing of loans compared to moneylenders
  • Improving financial literacy among CFI members
  • Facilitating positive economic impact as members’ well-being improves
  • Growing membership and savings from organised groups (like rotating savings and credit associations or stokvels)
  • Helping to fight the debt trap caused by moneylenders
  • Providing capacity building support from CBDA on CFI governance

 

Unexploited potential (opportunities) for CFI performance is dominated by social, governance and economic drivers:

  • The ability to diversify financial services to meet member needs
  • The ability of CFIs create an opportunity for the community to own their bank
  • The ability of CFIs to expand by incorporating informal savings clubs
  • The adoption of financial technology to improve efficiencies
  • The ability to reduce poverty, unemployment and social inequality
  • The potential of CFIs to expand the market to the unbanked
  • Improving discipline in the community on financial matters
  • The potential of CFIs to dominate in financially excluded areas
  • Improved governance of the CFI as members are owners
  • Avoiding exploitative neoliberal bank charges
  • The opportunity to receive social grants on behalf of members
  • The ability to provide high interest rates on savings
  • The possibility of issuing transactional cards for convenience
  • Free capacity building from CBDA and BankSETA
  • Helping members out of the debt trap of moneylenders
  • The ability to create a middle class through improved access to finance
  • Favourable legislation allowing registration as a cooperative bank (CB) or secondary cooperative bank (SCB).

… the sector needs to address deficiencies in corporate governance, technology and negative perceptions … to attract a mixture of membership

The inhibitors of CFI performance

The inhibitors to CFI performance are split into internal (weaknesses) and external (threats) factors. The major inhibitors are technological, economic, governance, social and perception factors. Specifically, the major internal weaknesses were:

  • Low adoption of technological banking systems
  • The weak capital base of CFIs, which means they cannot absorb credit risk
  • Low managerial skills to lead CFIs profitably and sustainably
  • The poor marketing of the CFI concept to the greater public
  • Lack of strong cooperative movement, leading to a fragile sector
  • A poor savings culture among members
  • Lack of participation on the National Payment System (NPS)
  • The inability to retain talent through competitive market salaries
  • Weak membership and savings growth
  • CFIs are banking with banks, so they risk losing members
  • Weak corporate governance structures
  • Weak risk management systems
  • Tight cash flow positions
  • Low innovation to develop appropriate financial products
  • Poor activism by members in the governance system
  • No deposit insurance guarantee to protect members
  • Unattractive premises appealing to middle and upper class

 

CFIs also face external threats:

  • Stagnant membership growth due to poor public perception
  • The high failure rate of CFIs, which affects community confidence
  • Wrong perception that CFIs are for the poor only
  • Policymakers’ interest in banks, which cause them to neglect CFIs
  • High unemployment, which affects the ability to save
  • Economic challenges, which affect savings
  • Competition from loan sharks, which leads to over-indebted members
  • The weak performance of the economy, which affects savings
  • The high cost of the banking system, which CFIs cannot afford
  • Competition from informal schemes and pyramid schemes
  • Competition from commercial banks on member savings
  • The inability to attract qualified staff due to poor perception
  • No special tax rate for social enterprises such as CFIs
  • High insolvency of CFIs
  • Lack of deposit insurance to attract the middle and upper classes

The recent call for more ethical and socially responsible banking … positions CFIs to play an important role going into the future

Developments to drive CFI performance over the next 10 years

The ranking of 17 out of 22 future developments changed significantly during the various rounds of expert opinions, suggesting that our experts are more concerned with the sector’s future. The experts gave the rankings much attention by reconsidering their previous rankings after learning from each other. The top-ranked propositions are technological, marketing, human, policy, environmental and economic in nature. These were the future developments they considered:

  • The adoption of technology to improve convenience and efficiencies
  • Effective publicity of CFIs’ real social impact in communities
  • CFI-specific qualifications for the leadership and staff
  • Improving transparency through internal and external audits
  • Enabling CFIs to participate in the National Payment System to appeal to all
  • Improving CFIs’ corporate governance structure through training
  • Creating a common national CFI brand such as Volksbank
  • Diversifying financial services to appeal to all
  • Improving members’ saving culture through financial literacy
  • Launching national campaigns to encourage people to join local CFIs
  • Enhancing CFIs’ financial sustainability to attract stakeholder interest
  • Improving CFI location appearance to appeal to all
  • Implementing a national CFI sector strategy to guide players
  • Providing tax exemption status for CFIs as they are social enterprises
  • Rebranding the CFI concept to appeal to all classes
  • Targeting organised groups to boost membership
  • Requiring government entities to also save in CFIs as juristic members
  • Strengthening the National Association of CFIs in South Africa (NACFISA)
  • Establishing a secondary cooperative bank (SCB) to act as CFIs’ bank of last resort
  • Strengthening CFIs’ capital base through member contributions
  • Recognising that a performing economy and political stability are necessary
  • The contribution of CFIs towards the deposit insurance protection

… co-operatives established with the social purpose of serving poor communities have the real possibility of becoming sustainable and effective – but only if they adopt a radical commercial approach to organisational development.

Figure 2 below shows the performance of CFIs to be a coevolution of different forces affecting each other at the same time. The width of the arrows reflects the response weights, with the largest being the most important.

CFI performance ecosystem
Figure 2: CFI performance ecosystem with arrow width indicating level of importance

What did the study find?

The key contribution of this study has been the identification of drivers and inhibitors of CFI performance. Based on the identified issues, it is clear that the sector requires collective stakeholder efforts to move it forward. The major drivers for CFI formation and performance are social ties and the need for economic empowerment followed by outreach from organised groups and the members’ need for organisation self-governance. Given the social networks in stokvels, the common bond is strong, making it easier for the formation and growth of CFIs.

With South Africa’s history characterised by exclusion, CFIs are seen as one of the instruments for economic empowerment through improved access to financial services. Members feel equally empowered to govern their CFI without the dominance of certain individuals. Although policies do not appear to be more important in driving performance, they do provide an enabling regulatory environment for the formation and performance of CFIs.

On the other hand, negative perceptions of the sector and low technology adoption have been identified as the biggest inhibitors to CFI performance. CFIs are not currently viewed as an alternative banking solution for a cross-section of society. Negative perceptions hinder them from penetrating affluent market segments, a situation worsened by low technology adoption which would enable them to offer members cost-effective diversified financial solutions. Further outreach is also affected by the poor appreciation of the CFI concept and its value proposition. While poor governance and restrictive policies seem to have moderate impact on performance, they will have a huge effect when left unattended. Hence, the sector needs to address deficiencies in corporate governance, technology and negative perceptions as a matter of urgency to attract a mixture of membership from the broader population.

The second objective was to identify strategies that can be implemented to position CFIs for future success. Our experts agreed on these seven strategic alternatives to focus on in the next decade: technology, people, marketing, culture shift, policy, environmental and economic. Since technology was identified as the second most inhibitor to performance, it is ranked as the most urgent priority for implementation followed by having competent human capital from the board of directors to floor staff. Perception transformation can be achieved through effective marketing and brand awareness campaigns. Unfortunately, economic fortunes in South Africa are unlikely to improve soon given the drought, high unemployment, weakening exchange rates and rising food prices.

The resignation of President Jacob Zuma in 2018 was expected to restore some confidence in the economy. Investment drives and reforms have been launched to attract new foreign direct investments. Also, having a vibrant National Association of CFIs in South Africa (NACFISA) and setting up a deposit insurance scheme are unlikely to be achieved soon. The implications might be that the sector will remain unattractive to the middle-class, and policies advocacy is difficult given an ill-funded association body. There is a need to pay attention to these issues including having a lender-of-last-resort for liquidity support. However, culture transformation is likely to require more effort to build better capitalised and more responsive CFIs which are member-centric through targeted financial literacy programmes. Beyond 10 years, culture transformation and environmental issues are likely to be more important given their role in building a resilient sector.

In the aftermath of the global financial crisis, CFIs provide a fundamental perspective on how proper financial intermediation should be conducted in a non-speculative way after most bank customers were disappointed by investor-owned banks. The recent call for more ethical and socially responsible banking takes into account the balanced needs of society, the environment and the economy, and positions CFIs to play an important role going into the future. To play this increasing role, CFIs will need to understand their performance drivers and inhibitors and develop alternative strategic options to achieve sustainable growth.

  • Find the original journal article here: Mushonga, M., Arun, T. G., & Marwa, N. W. (2018). Drivers, inhibitors and the future of co-operative financial institutions: A Delphi study on South African perspective. Technological Forecasting and Social Change, 133, 254-268. https://doi.org/10.1016/j.techfore.2018.04.028
  • Master Mushonga is a PhD candidate in Development Finance at the University of Stellenbosch Business School. His research interests lie in the field of inclusive financial innovations, financial systems development and the implications of disruptive innovations, especially in smallholder farming.
  • Prof Thankom Arun is a Professor of Global Development and Accountability at the University of Essex Business School. He is also a Professor Extraordinaire at the University of Stellenbosch business School.

Dr Nyankomo Marwa is a senior lecturer in Development Finance and Econometrics at the University of Stellenbosch Business School. He also teaches at academic institutions in Canada and Tanzania. He is a founder of Maige Management Consultancy, a firm focusing on SMMEs and family business development and consultancy.

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Taking a closer look at the efficiency and profitability of 19 agricultural cooperatives in Mpumalanga

The Steinhoff Saga Management review - University of Stellenbosch Business School

January – June 2019

Taking a closer look at the efficiency and profitability of 19 agricultural cooperatives in Mpumalanga

By Thembi Xaba, Dr Nyankomo Marwa and Dr Babita Mathur-Helm

  • June 2019
  • Tags Features, Finance

17 minutes to read

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Why measure the performance of agricultural cooperatives?

Cooperatives serve as vehicles of economic development as members or small producers combine to benefit from economies of scale and to increase their collective bargaining power. In South Africa, agricultural cooperatives also play a key role in promoting economic inclusion. To better understand the significance and economic role of cooperatives, the researchers conducted a performance evaluation to establish if the cooperatives are fulfilling their economic role.

…It has been noted that cooperatives behave differently in terms of profitability as they are user-owned and user-controlled, and serve the interests of their members.

 

Performance evaluation can enable a firm to identify underlying problems and to establish benchmarks, which in turn assists with decision making. Also, performance analysis helps to drive the survival of a firm. This study analysed the efficiency and profitability of 19 agricultural cooperatives to establish whether efficient cooperatives were equally profitable, can withstand economic shocks, and can achieve economic gains for its members.

What does the literature say about agricultural cooperatives?The cooperative as a firm: Studies on the cooperative behaviour of firms agree that agricultural cooperatives seek to minimise costs or inputs in order to maximise profits. Various theories have been put forward, taking into account the effect of cost structure and product demand constraints on profits. Some researchers see cooperatives as aggregate economic units, with a vertical integration model, where each independent enterprise seeks to maximise profits. This means agricultural cooperatives operate as a single integrated firm that maximises profits through inputs from different firms, performing different functions, and yet are brought under single managerial control. However, this does not take into account the agency problem where the objectives of the agent are not the same as that of the principal. The challenges are horizon problems, as cooperatives are seen to focus on short-term earnings rather than long-term earnings and sustainability. In addition, cooperatives need to balance social needs with economic fairness. Suffice it to say, as much as members are entitled to the net income generated by the cooperative, they are equally residual risk bearers of the firm’s net cash flow. This study acknowledges the opposing views. However, it has adopted the classical theory of a firm – that of minimising cost and maximising output for profit optimisation.

In South Africa, agricultural cooperatives also play a key role in promoting economic inclusion..

 

Agricultural cooperatives and efficiency evaluation: Performance evaluation through efficiency measurement takes a look at the ability of a firm to produce the maximum output possible given input constraints. This study employs technical efficiency (TE) which measures the performance of a firm using the extent to which it deviates from the best practice frontier given a specific dimension: cost, inputs, output or profit. Two frontier estimations are usually employed when measuring efficiency, namely Stochastic Frontier Analysis (SFA) and Data Envelopment Analysis (DEA).

  • Stochastic Frontier Analysis: SFA is a parametric approach used to estimate the productivity and efficiency of a decision-making unit (DMU). SFA creates a framework that can analyse firms that do not succeed in optimisation, or are not fully efficient, by comparing firms to ‘best practice’.

Various studies have compared the performance of cooperatives with investor-owned firms, with results signifying that cooperatives were less efficient and profitable than investor-owned firms.

 

Data Envelopment Analysis: DEA as a non-parametric method introduced the efficiency measurement which generalised the single output and single input ratio to multiple inputs and outputs without requiring pre-assigned weights. The methodology emerged as an alternative to the traditional regression method analysis. The units that lie on the ‘surface’ are defined as ‘efficient’ decision-making units.

Agricultural cooperatives and profitability evaluation: Profitability can be measured as the net income over total expenses or the excess revenue over total expenses, or as return on assets (ROA) which is income before interest and taxes divided by total assets. Within the theory of the firm, optimal prices and quantities are determined by setting the cooperative’s marginal cost equal to the marginal revenue, which means that profit becomes the cooperative’s performance indicator. It has been noted that cooperatives behave differently in terms of profitability as they are user-owned and user-controlled, and serve the interests of their members. The economic benefit of members remains the core foundation for income generation and sustainability as members are entitled to the net income generated by the firm. Empirical studies have always employed the traditional financial ratio method to measure the performance and profitability of a cooperative.

… overall, cooperatives demonstrated low rates of asset efficiency

 

About agricultural cooperatives, efficiency and profitability

Agricultural cooperatives and efficiency: Various researchers have investigated the performance and technical efficiencies of agricultural cooperatives using an input-oriented DEA model to measure technical efficiency (TE) scores, and Tobit regression. The regression estimates showed TE was negatively influenced by the number of farmers, age, plot size and off-farm income. In South Africa, some researchers investigated the efficiency levels of grain cooperatives in competitive markets using DEA and financial ratios, and found that increased competition led to the increased efficiency.

Agricultural cooperatives and profitability: Various studies have compared the performance of cooperatives with investor-owned firms, with results signifying that cooperatives were less efficient and profitable than investor-owned firms. Some researchers used traditional financial ratios to measure the profitability of investor-owned firms against those of cooperatives. They found that, overall, cooperatives demonstrated low rates of asset efficiency. These studies show that measuring financial performance employing traditional ratios such as return on assets (ROA) and return on equity (ROE) has been tested on cooperatives. This study focuses on ROA as a measurement for profitability, as opposed to ROE. The argument is that with ROE, cooperatives have limited return on equity capital as the business pays strictly limited dividends on equity capital invested in the organisation. Another limitation is that the value of an enterprise may exceed the value of members’ patronage. In the South African context, since agricultural cooperatives are funded by the government, employing ROE will distort the performance results.

…The results demonstrate that technically efficient firms do not always translate into profitable firms.

 

Agricultural cooperatives’ efficiency and profitability: The debate on whether firm efficiency is directly related to profitability is ongoing. One study measured the branches of a Portuguese bank and found that their efficiency has a positive effect on profits, although high profitability did not necessarily directly relate to high efficiency. Another study looked at Tanzanian financial cooperatives, showing that the majority had low profitability and low efficiency levels. Hence, there is a need to explore both dimensions in empirical studies. This study used ROA as a measure, noting that all the financial statements provided by the agricultural cooperatives have total assets as a variable.

How was the research conducted?

In this study, Data Envelopment Analysis (DEA) was used to measure efficiency while Return on Assets (ROA) was used to measure profitability. The study also employed a profitability-efficiency matrix to determine the correlation between profitability and efficiency.

… management needs to investigate how best to allocate resources in order to remain relevant within an environment characterised by increased competition.

 

This study used data from the Department of Agriculture, Forestry and Fisheries’ 2015-2016 Annual Report on cooperatives, and selected cooperatives from Mpumalanga. The study selected the 19 agricultural cooperatives in Mpumalanga that complied with Annual Financial Statement reporting. These cooperatives’ efficiency scores were measured by using pure technical efficiency and scale efficiency based on DEA. A frontier function approach was also employed. The frontier methodology measures how a decision-making unit is performing relative to its peers. Frontiers are important for the prediction of technical inefficiencies in the industry. DEA is widely used in agriculture due to its consistency in production, profit and cost functions, with the notion of minimising input or output orientation, or maximising profit.

To measure technical efficiency, total assets and total expenses were used as input variables while revenue and profit were used as output variables.

Policy makers need to investigate other drivers of efficiency and profitability when measuring the performance of a firm to influence future policy directives.

 

 

This study also created an efficiency-profitability matrix, which provides management with an overview of areas that can be improved to achieve higher efficiency and profitability. The matrix divides a firm’s performance levels in four quadrants, where Quadrant I represents the sleepers (high profitability but low efficiency levels), Quadrant II represents the stars (high efficiency levels and high profitability ratios), Quadrant III represents the question marks (with low efficiency levels and low profitability ratios), and Quadrant IV represents the dogs (high efficiency levels with low profitability). The stars are therefore those decision-making units that convert their inputs into outputs efficiently while at the same time recording high profits.

What did the study find?

From the results, the median score for efficiency was 68%, which means that the DMUs’ combined efficiency rate was at 68%, and that there was a resource wastage of 32%. However, looking at individual DMUs, only 21% of the DMUs are 100% technically efficient, operating at constant returns to scale (these DMUs demonstrated that the size of the cooperative has an impact on its efficiency levels). From the efficiency analysis, profitability was decomposed using the ROA methodology. Each DMU efficiency was then measured against profitability.

The median for profitability in this study was 10%, with 37% of the DMUs above the 10% average. The technical efficiency and profitability dimension was employed to test for a positive correlation between efficiency levels and profitability. The results showed that some DMUs were operating at above efficiency levels while some were operating at a loss. The results showed there was no positive correlation between efficiency and profitability.

Overall, it is important that agricultural cooperatives find a balance between their social role and economic development.

 

The median for profitability in this study was 10%, with 37% of the DMUs above the 10% average. The technical efficiency and profitability dimension was employed to test for a positive correlation between efficiency levels and profitability. The results showed that some DMUs were operating at above efficiency levels while some were operating at a loss. The results showed there was no positive correlation between efficiency and profitability.

The efficiency-profitability matrixThe matrix showed an even distribution between the stars and sleepers in the quadrants. In total, 26% of the firms have high efficiency and high profitability. These firms are best performers and considered as stars. What this means is that 5 out of 19 cooperatives have high efficiency levels with high profitability ratios (stars), while another 5 have high profitability and low efficiency levels (sleepers). The sleepers will have to improve their resource allocation, which may result in them moving to the stars quadrant.

The majority of the DMUs (8 out of 19) are in Quadrant 3, meaning they have low efficiency levels and low profitability. These firms need to reconsider their operations as they are wasting resources. They should also look at how they are impacted by competition and the economic downturn, and whether their service is still relevant. Only one DMU was in Quadrant 4, indicating it was high on efficiency and low on profitability, which means it is using its resources efficiently while operating at a loss.

… there is a need for a turnaround strategy that focuses more strongly on efficient resource allocation and on measures and systems to thrive in a highly competitive market.

 

What is the way forward for these cooperatives?

This study explored efficiency levels and profitability ratios of 19 agricultural cooperatives in Mpumalanga, linking efficiency levels with profitability to see if efficient firms are also profitable.

The results demonstrate that technically efficient firms do not always translate into profitable firms. In this regard, management needs to investigate how best to allocate resources in order to remain relevant in an environment characterised by increased competition. Policy makers need to investigate other drivers of efficiency and profitability when measuring the performance of a firm to influence future policy directives.

Policymakers should appreciate that agricultural cooperatives also have a socio-economic role to play and that members’ patronage is inherent as these cooperatives are user-owned and user-controlled. Future policy decisions should factor in empowering the agricultural cooperatives as firms, enabling them to manage resources efficiently while being profitable, resulting in sustainable organisations.

Overall, it is important that agricultural cooperatives find a balance between their social role and economic development. Cooperative members need to review their position on the cooperative as a business, rather than an entity that services users’ needs. Hence, there is a need for a turnaround strategy that focuses more strongly on efficient resource allocation and on measures and systems to thrive in a highly competitive market.

  • Find the original journal article here: Xaba, T., Marwa, N., & Mathur-Helm, B. (2018). Efficiency and Profitability Analysis of Agricultural Cooperatives in Mpumalanga, South Africa. Journal of Economics and Behavioral Studies, 10(6), 1-10.
  • Thembi Xaba is a PhD candidate in Business Management Administration. She is currently the Chief Executive Officer of the Deciduous Fruit Development Chamber (DFDC-SA).
  • Dr Nyankomo Marwa is a senior lecturer in Development Finance and Econometrics at the University of Stellenbosch Business School. He also teaches at academic institutions in Canada and Tanzania.
  • Dr Babita Mathur-Helm is a senior lecturer in Organisational Transformation and Development, Transformation Management and Gender Empowerment at USB.

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