You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

See my pictures in Instagram, @teguhidx.

Koperasi Cipaganti (Cipaganti Cooperative)

Lately in the media there are news that Koperasi Cipaganti Karya Graha Persada, or abbreviated as Koperasi Cipaganti (KC) only (literally meaning Cipaganti Cooperative, or Cipaganti Union), began having difficulties in paying monthly interest/yield to its investors, and of course these investors began to worried. Some peope think that a company listed on the Stock Exchange, namely Cipaganti Citra Graha (CPGT) is the same as KC, but it's not. Anyway, let's learn more about this case, is it just another fraud thing?

Koperasi Cipaganti, hereinafter referred to as 'KC', is one of the most prominent cooperatives in Indonesia. What is meant by ‘cooperative’ (or union) in Indonesia is a legal entity that has permission (from the Ministry of Cooperatives of Republic of Indonesia) to raise funds from the public, where the funds will be used to finance certain businesses. If you want to join the KC, for example, then you would sign some sort of agreement before a notary that you have joined the KC, and that you will deposit some funds to be managed by KC on certain business, and that you will receive monthly interest.

Cooperative is a legal entity that is much simpler than limited liability companies (Perseroan Terbatas/PT), but still could obtain funding from external parties. If you have a PT, then you can apply for a loan to the bank, issuing shares, or issuing bonds, through that PT. However, the process is not that easy. When you want to borrow some funds to the bank, for example, then you must provide an asset as collateral, and your PT should have been in operation for several years and has a proven track record of financial performance.

However, cooperatives are different. If you manage a cooperative, then as long as you can convince potential investors to place their funds into the cooperative, then holaa.. you got the money, and that’s legal! You do not need to give any collateral to the investors. All you have to do is to pay the yield/interest as promised.

The concept of cooperative is actually an alternative to any person or group of people who need funds/capital to expand a business venture, but do not have access to the bank or capital markets (if they want to IPO). So with this cooperative system, an entrepreneur can obtain capital or loan from his own relatives/partners, in which the funds are placed in an entity called the cooperative. This cooperative is considered as 'belong to all stakeholders', both investors and managers (of the funds or assets of the cooperative), although in fact it was only the manager who have access to the funds. The passive investors can not simply withdraw the funds, or sell the assets of the cooperative, because it was the responsibility of the managers.

The Weakness of Cooperative Systems

As a stock investor, I never interested to put investment in cooperatives, either KC or the other, because: First, I've never heard that an investor become rich from the cooperative. In the stock market, there are stories of huge success, but at the cooperative?

Second, when a company needs funds to expand the business, then the company will be clearly specifies how much the funds are needed, and about the usage of the funds, then they can apply for a loan to the bank, issuing shares, or issuing bonds. When the funds have been collected, then that's it, the event of fundraising is finished (company no longer trying to raise funds), and then the company can focus on business development using funds that had been collected earlier. For example, if you go buy shares on an IPO, and it turns out that the number of shares available are less than you want to buy, then the company in question will not issue new shares or raise the price of the shares, but your excess money will be refunded (hence there is the term of ‘oversubscribed’).

While cooperative? I don’t know about their business activities, but what is clear that their fundraising activities are never finished, as they’re continue to receive new funds. For example in KC, until now they are still accepting new investors, or receiving the additional capital from existing investors. The question is, when KC was initially need Rp100 billion to finance their coal business, for example, then when the funds collected from the public was more than that, say reached Rp150 billion, then what about the excess of Rp50 billion? As for finding other business opportunities, it is not easy, is it?

And this thing reminds me to the Ponzi Scheme again. If you check the history, the creator of the scheme, namely Charles Ponzi, was accidentally creating the scheme. In 1918, Charles, who was working at a grocery store in Boston, United States, received a letter from a company in Spain who asked him to send a catalog of products that are sold at his store. Inside the envelope, Charles found a coupon called international reply coupon (IRC), which can be exchanged with a piece of stamp. The Spanish Company sent the IRC coupon so that Charles can exchange the coupon for a stamp, so he does not need to spend any money to send the requested catalog into Spain.

Interestingly, when Charles went to the Post Office to exchange the coupon, it turns out that he received several stamps, while he only need one. The event of First World War causes the difference in value between the cost of postal delivery in Europe and United States, where a piece of IRC coupon can only obtain a piece of stamp in Italy or Spain, but in America, a piece of coupon can be exchanged with a number of stamps. As a result, Charles obtaining some cash when selling the unused stamps.

Charles soon realized that he had just discovered a business opportunity here. He went to his friends to borrow money, and promised them that he would return it within 90 days, plus interest. The money is used to buy IRC coupons from Spain, the coupons are then  exchanged for stamps in America, then the stamps were sold to make profit of several times. Charles managed to borrow money of US$ 1,250, in which he promised to give US$ 750 as interest. And in just the next 90 days, he was actually paying a total of US$ 2,000 to his friends.

And shortly afterward, the news about the 'investment opportunity' is booming. Charles had his friends lend the money back to him, even with a larger amount, including invite others to join. So Charles receive more much money. Only in less than a year, he managed receive US$ 420,000, and the number was continue to rise.

But after some time, Charles was no longer buy the IRC coupons because his supplier in Spain are out of stock, which means that he is no longer making a profit, but investors are continue to deposit more and more funds. And here’s the mistake: Charles let that happen, until he was eventually forced to pay interest to old investors using the funds deposited by new investors, because his 'investment company' is no longer making a profit.

And that was the beginning of the famous Ponzi Scheme, that named after him. We can see here that Mr. Ponzi was not intend to harm or defraud his investors, but his mistake was that he was too greedy, where he continues to receive new funds even though he could no longer make a profit.

Although not exactly the same, but the same thing could also happened to the cooperative, because a cooperative usually receive any money deposited by its members, no matter how large it is, while the manager of the cooperative is not necessarily able to find new business opportunities. When Koperasi Cipaganti (KC) is late in paying interest to its investors, the manager said that it was because the coal business (the business run by the cooperative) was sluggish due to the decline in the price of coal, so that they had difficulty in cash flows. But if so, then why to this day KC still receive capital injections from their members?

However, this does not mean that KC is running the Ponzi Scheme, as there is no evidence about it. But my point is, when the coal business is cannot generate any more profit, then how KC will use the funds belonging to the members of the cooperative, while the amount of the funds is continue to grow?

Conclusion

Koperasi Cipaganti is one of the cooperative that has been operating in Indonesia for a long time (if I’m not mistaken, more than 10 years), and so far  (except these days) it never had any dispute with its investors. If they having difficulties in paying monthly interest to their investors, it is because of an event that could not be avoided, ie the decrease in the price of coal, or another problem in another business (KC build hotel as well, but construction stalled). So it was more or less the same like when the coal company made a large profit in 2011, but after that their profits fell dramatically and also their shares, and eventually causing losses for investors who hold the shares.

And in contrast to coal companies that don’t give any fuck when investors protested about their poor financial performance (especially The Bakries, you cannot expect to see them!), KC management was responsible enough to at least be willing to hold several meetings with the investors. I, frankly, do not know how about the continuation of this problem, but if we see that the coal sector slowly but surely began to recover, then there may be hope that in the end KC will be eventually recovered, to be able to pay the interest to investors as usual.

Then about PT Cipaganti Citra Graha, Tbk (CPGT), a newly listing company in the Indonesia Stock Exchange, it is not a Koperasi Cipaganti, because it is impossible for a cooperative to hold an IPO (CPGT is a limited liability company, not cooperative). CPGT is one of the subsidiaries of the Cipaganti Group that specializes in the field of transport services, tourist travel, and rental of heavy equipment. While for coal and other businesses, it was held by other subsidiaries of the Group (so CPGT has nothing to do with coal). While KC, because it is not a company, then it was not a part of the Cipaganti Group. But KC is one of the shareholders of CPGT, ie 4.4% stake as of April 2014.

Cipaganti Group is one of the most prominent business groups in Indonesia, and the most unique as well because they also manage a cooperative (though not through the group), where the membership is open to the public, while they could obtain funding from banks or even stock market through the IPO. Some people might give arguments about this, but still, I think this Group is ‘unique’.

No comments: