Stop the bleeding: Economy can’t take payment delays

Money is the bloodline of any economy, and for businesses to thrive, its steady flow and circulation are critical. Cash is king. However, when this is not the case, the resulting effect is devastating for the entire business ecosystem due to its adverse impact on profitability, productivity and trust. Supply chains cannot be sustained and value chains are decimated.

Increasing cases of delayed payments by the national and county governments to numerous businesses are alarming. They impede effective circulation of money in the local economy, adding excessive strain to businesses already balking under other market factors.

CASH FLOW

Unfortunately, the hardest hit by this trend are key drivers in bringing the ‘Big Four’ plan to fruition. For instance, due to the late harvest last year, the government, in order to continue with the maize flour subsidy programme, had to buy the maize imported by local millers, who are still owed 80 per cent of the total debt, in excess of Sh2.5 billion. This has put a huge strain on their cash flows and they cannot buy adequate maize and wheat from farmers.

Reimbursement owed to the millers for the transport cost incurred in transferring maize from the port to the mills under the programme has also been delayed, forcing them to take maize in lieu of cash payment.

Another conspicuous example is the money owed to media houses regionally and at the national level. Last week, one of the largest employers in the country, Nation Media Group, recorded a 35.5 per cent drop in profits from the previous year owing to provisioning for unpaid revenue of Sh856 million by the Government Advertising Agency (GAA). The sector is owed over Sh2.5 billion.

SLOW OPERATIONS

That tremendously slows down the operations of the media houses and undoubtedly hampers their ability to be effective in the core mandate to inform and educate citizens. It also affects the companies’ ability to offer quality employment and significant output.

A 2015 European Central Bank report, ‘Governments’ Payment Discipline: The Macroeconomic Impact of Public Payment Delays and Arrears’, shows unexpected delays in payment significantly reduce corporate profits since they alter the present discounted value of payment. This is especially so in our case as there is no interest applied on reimbursements or arrears. The report found that the delays reduce profit growth by 1.5 to 3.4 percentage points.

LOWER SALES

Since that has a ripple effect, suppliers of these companies and other businesses in the value chain are also severely affected.

Worst of all, small- and medium-sized enterprises (SMEs), which rely on a much urgent supply of cash to run their day-to-day operations, are crippled and, in many cases, become bankrupt. Other macroeconomic effects could be the increased cost of credit to companies — already, this is a huge impediment to the growth of the manufacturing sector.

A look at a long-standing issue such as the value added tax (VAT) refunds owed to manufacturers paints this picture clearly. The refund has been very slow because of the required administrative process. This means a lot of money, running into billions of shillings, is held up in government processes, forcing manufacturers to borrow heavily due to cash flow constraints.

Last year, our retail sector was at near-collapse as some of the largest supermarket chains were caught up in arrears amounting to more than Sh40 billion to suppliers. The inability for supermarkets to absorb locally produced goods translates to lower sales by manufacturers already owed billions by both the national and county governments.

SUPPLIER AGREEMENT

The Ministry of Industry, Trade and Cooperatives and industry stakeholders led by the Kenya Association of Manufacturers (KAM), conducted a study on regulations for prompt payment and a code of practice to help to ‘stop the bleeding’. Recommendations included a review of the payment period to a shorter time and establishment of a legal framework to curb the culture of late payment, as per international best practice.

To discourage late payment, the European Union’s Directive 2011/7/EU provides for statutory interest as a redress for the aggrieved party in the supplier agreement. A supplier is entitled to interest from the day after the date or payment period.

Businesses are bearing increased cost of operation due to factors including the cost of electricity, fuel and high taxes as citizens suffer an increasing cost of living. We cannot afford to aggravate this by reducing businesses’ capacity to function productively.

The government must act fast and salvage our position as a preferred investor destination in Africa.

Mr Gudka is the chairman, Kenya Association of Manufacturers. [email protected]