A case study of two producer organisations in Papua New Guinea: Lessons for cooperative policy and legislation

Abstract

Papua New Guinea recently revived its cooperative movement to drive rural development initiatives that rely on producer organisations to link small farmers to markets. The demise of the country’s first cooperative movement was attributed to inadequate capital and poor management. The New Institutional Economics theory suggests that these problems may only be symptoms of weak institutional and governance arrangements that characterise traditional cooperatives. This research examined the institutional and governance arrangements of two producer organisations in Papua New Guinea and analysed the impact of these arrangements on the achievement of their intended business strategies. The main purpose of this research is to inform the development of cooperative policy and legislation in the country. The timing of this study is opportune as the government is drafting new policy to guide amendments to Papua New Guinea’s 1982 Cooperative Societies Act. A qualitative, case study method was used to gather and analyse data. Two producer organisations established to process and market commodities produced by small farmers were selected as units of analysis. These organisations, a cocoa cooperative and a rubber company, differed in their value adding performance despite similarities in their patron (farmer) members and markets. Analysis followed a pattern matching approach to test propositions relating performance to institutional and governance arrangements. The low performing cocoa cooperative had investor unfriendly institutional arrangements that prevented its patron members from realising future capital gains. This not only discouraged investment but also encouraged members to take advantage of short-term opportunities by side selling to other buyers. In contrast, the high performing rubber company adopted investor friendly institutional arrangements. These arrangements were extended to strategic partners who contributed capital, market contracts, and expertise. While both organisations separated ownership from control, the cocoa cooperative was unable to take full advantage of centralised decision-making as it lacked competent directors and managers. For policy makers, it is recommended that cooperatives be allowed to issue non-redeemable, appreciable and tradable class B shares to farmers and strategic partners, but with restrictions placed on voting rights (to prevent partners from gaining majority control) and a code of conduct to safeguard the interests of farmers. For directors and managers, it is recommended that class B shares be sold to farmers as tradable delivery rights, or issued to farmers as tradable delivery rights ‘stapled’ to their membership shares. For donors, including government agencies, it is recommended that fledgling producer organisations should qualify for the same level of support regardless of their juristic status.