Intermediate outcome: Inadequate service provision to dairy farmers

Figure 10-7 Intermediate outcome: Inadequate service provision to dairy farmers Source: own compilation

In 1988 the Minister of Cooperative enacted a decree that the support policies for VUCs should aim at the achievement of the so-called “independent VUC” or “KUD Mandiri”

(Masngudi 1990, p. 31) (LC4). One of its assessment criteria was that the number of VUC members should be at least 25% of adult population in its working area – indeed a daunting task. As the fulfilment of the requirement was one of the prerequisites to access the govern-ment support policies, VUCs – at least those observed in this study – needed to recruit as many members as possible. This prompted VUCs to artificially inflate the number of coop members by also registering the family members of one family business – as it is the case for dairy farming –, although the membership regulation was ‘one business one membership’.

The number of members had indeed increased, but the number of actual businesses remained the same.

With such action VUCs have indeed many members, but a large proportion of them – if not most of them – are inactive, i.e. not running dairy farming. While inactive members do not contribute to the coop business, they are still expecting and officially entitled to the annual

surplus distribution. This means that VUCs have to bear additional “burden” of generating more surpluses to be distributed to the members:

We have currently 8,672 members; among them less than 1,000 are active members. So, if we go back to the basic principle of cooperative ‘from, by, and for the members’, such principle does not work. Because the around 7,600 inactive members are burden for all. It is difficult to apply the cooperative principle purely, because on the one hand we are obliged to increase the welfare of only active members but on the other hand we have also to increase the welfare of inactive members – this is a heavy burden. Very often the business is not by members but the gain is for members. For example, we have now loan service for purchasing motor bikes or electronic goods. This is not run by members, but the gain is for members. (Coop 4, lesser per-formance)

To cope with such situation, VUCs are then forced to reduce the operational costs, including the costs for providing services to dairy farmers. Consequently, the services provided by the coop tend to be minimal and inadequate (LC5). For example, dairy farmers complained that the quality of concentrate feed provided by the VUC had been deteriorating, presumably caused by decreasing protein content due to increasing raw material price, so that they had to source from elsewhere.

Usually with 1 kg additional concentrate feed we could get additional 2 litre milk, but nowadays it is not possible anymore. With additional 2 kg concentrate we can only have additional 3 litre milk because the quality of the concentrate feed is declining. (Dairy farmer 2, lesser perform-ance)

With regard to the misconception of cooperative principle, there is a common fallacy about cooperative that its chief end is to maximise surplus (mostly it is even called “profit”). Such erroneous conception is further reinforced by the regulation of performance indicators deline-ated by GoI. These indicators – the number of members, turnover, and most importantly sur-plus or profit – are used as assessment criteria in determining whether a VUC is classified as potential, capable, and thus eligible for receiving government supports or subsidies.

Unfortunately, the indicators give a wrong incentive to maximise surplus instead to concen-trate on providing collective services to support members’ business and thus increase mem-bers’ welfare – what actually the ultimate goal of a cooperative.

Although it has always been said that the main purpose of cooperative is to improve the welfare of its members, hitherto none of cooperative's performance indicators addresses this fundamen-tal aspect. From many reports of cooperative performance we have been reviewing more than 95% even never mentioned the improvement of members’ welfare. (Exp 5)

To maximise surplus VUCs thus follow two main strategies. The first strategy is to minimise the costs incurred for operational activities, including the costs for providing services to the members like extension, veterinary services, training and quality monitoring system. The

sec-ond strategy is to search for and invest in other “profitable” businesses than the dairy business – this is the underlying reason of the purposiveness of VUC. In fact, the multi-purposiveness of VUC is even perceived as a hindrance to further develop the dairy business.

Toward the question about factors inhibiting the growth of dairy farming one coop leader re-sponded:

There are several factors. One of them is the organisational aspect of the cooperative itself.

First, dairy business is a responsibility of the dairy unit in the cooperative. So it is only one among so many business units. The income from dairy unit does not return only to dairy farmers but to all members. Say, if we have 9.000 members, among them are only 200 dairy farmers. So from organisational point of view this is a disadvantage for the dairy farmers. This is a common situation in Central Java. (Coop 4, lesser performance)

In similar tone, another coop leader stated:

Actually, it is not the case that the cooperative does not have any resource at all to support the dairy farmers. But the problem is that dairy farming is only one part of the VUC. There are still many parts of VUC to be considered. These also require resources. So, the problem is not that simple. (Coop 5, lesser performance)

Besides the dairy business unit, VUC generally runs other business units such as loan service for various purposes (e.g. purchasing electronic goods or motorbikes), public transportation service (minibuses), payment of electricity bills, and retail shop selling daily consumer goods.

The VUC’s services are not exclusively for its members, but rather for everyone who happens to need the services. Hence, in this regard VUC closely resembles a regular business organisa-tion seeking the maximisaorganisa-tion of profit. When asked about his opinion on the criticism that VUC in general is doing business just like a normal enterprise, a cooperative leader re-sponded:

Yes, true. I am forced to do this [running various business units rather than concentrating on providing services to the members], because in practice my cooperative is demanded to yield profit. But if we only rely on the businesses by members, their contributions are too small. They do not possess the awareness of being a cooperative member or of partaking in the cooperative.

(Coop 4, lesser performance)

Since the ultimate goal of VUCs is to maximise surplus through the optimisation of different business units, VUCs allocate their limited resources (including the ‘efforts’ and ‘time re-sources’ of cooperative leaders) in accordance with their perception of the business unit’s prospects. Now, the prospects of dairy business – particularly during the “turbulence time” –

had decreased because while the relatively high complexity³⁰ of dairy business remains the same and even increases, the return from dairy business decreased since an increasing number of dairy farmers stop delivering the cooperative in the course of fierce price competition against intermediary traders (LF1). Thus, the motivation and drive to search for and invest in other profitable businesses became higher. The more intensive the efforts and time resources allocated for other coop businesses, the less are available for the dairy business. As a result, coop management allocate less efforts and time resources to optimise the services provided to its members (LC5) – collective services which are necessary to reduce the operational cost of each member and thereby improving their businesses performance.