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Opinion & Analysis

Taxpayers shouldn’t rescue Nakumatt

Shopper at a Nakumatt branch in Nairobi. file photo | nmg
Shopper at a Nakumatt branch in Nairobi. file photo | nmg 

If it were a bank, the troubled Nakumatt Supermarkets would qualify to be described as a systemically significant institution.

If it were to collapse, the reverberations and impact would be felt across the corporate sector - from manufacturers of fast-moving consumers goods, small and medium enterprise that supply groceries to the stores, its own lenders, and bankers to its suppliers.

The heat will also be felt by leasing firms that own the shelves in the stores and landlords who own the buildings where the stores are accommodated. The collapse of Nakumatt would also impact on development of large shopping malls.

This is because - unlike the South Africans - we practise a model where development of malls is predicated on one large supermarket such as Nakumatt to play the role of anchor tenant. The South African model allows more anchor tenants.

If Nakumatt falls, the viability and financial models upon which some of the existing shopping mall development projects are based may go belly-up.

Like commercial banks, Nakumatt holds billions in investments and cash belonging to third parties.

Yet I still don’t agree that taxpayer money should be spent on rescuing this giant. What we need to understand is how the chain fell into trouble in the first place.

I say so because the model for a supermarket chain like Nakumatt is a very basic sale of goods on credit transaction: you take someone’s goods, sell it for cash and pay the supplier in 30 days.

A good proportion of the goods in the store will be on consignment where the liability is only recognised at the point when the goods are sold for cash.

The supermarket only provides the shelves and the space.

In other words, large supermarkets like Nakumatt don’t own or put up buildings. Indeed, the problems of Uchumi Supermarkets started when it started deploying short-term working capital into investing in real estate.

Yet in Nakumatt’s case, no money has been invested in fixed assets.

Even the shelves and the ICT infrastructure, including the cash till is on lease. It is a lease-everything model. The big question, therefore, is the following: where is the black hole into which all cash has disappeared?

Because the company is asset- light, owns nothing, and holds a good proportion of its inventory on consignment, Nakumatt should be piling up cash to the rafters.

This is a company that should be keeping a large treasury department to be investing surplus cash and be lending some of it to liquidity-strapped commercial banks at handsome margins.

Problems start where the proprietor has the mentality of a dukawalla, where daily collections are treated as petty cash to be spent at the whim of the proprietor and his family. What are the policy implications? We must start thinking about a prompt payment law.

Capitalism cannot thrive in an economy where invoices are not paid on time.

There was a time when the excuse and standard refrain to a supplier demanding payments was “the cheque is in the mail”. Another well-known excuse given to suppliers is: “One cheque signatory is out of town.” It was common to find a government supplier waiting for weeks just because a junior clerk has hidden payment vouchers in his drawer to arm-twist suppliers to pay backhanders.

With the march of technology towards automated payment systems such as the real-time gross settlement system and the introduction of cheque-capping, limiting cheques to Sh1 million, it was expected that things would change.

Indeed, delay in payment of invoices by the government is what has undermined programmes such as the much-touted “access to government procurement opportunities” that allows 30 per cent of contracts to be given to the youth, women, and persons with disabilities.

Such well-meaning programmes have not achieved much because invoices are not paid promptly.

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