Companies that delay payments to suppliers will be liable to commercial interest rate on overdue amounts under a new procurement law for which the Treasury is preparing operating rules.
The newly enacted Public Procurement and Asset Disposal Act (2015) provides that entities which delay payments to suppliers shall incur additional charges for each day defaulted.
“The procuring entity shall pay interest on the overdue amounts… the interest and liquidated damages to be paid shall be in accordance with prevailing mean commercial lending rate as determined by Central Bank of Kenya,” reads section 140 of the new law.
Treasury secretary Henry Rotich said a team is currently preparing fresh regulations which will define the penalties and time frame within which payments must be made, especially to SMEs, which have borne the brunt of late payments.
“We want to ensure prompt payments especially to SMEs. This will be captured in the regulations which are currently being prepared,” said Mr Rotich in an interview.
Kenya is following in the footsteps of the 28-member European Union bloc which in February 2011 adopted a directive which provides that public agencies must pay for goods and services within 30 days while private enterprises must pay within 60 days.
Those in default attract a late payment interest pegged at eight per cent above the European Central Bank’s reference rate.
Late payment of invoices to small businesses has stifled Kenyan enterprises and poses risks such as cash-flow challenges, reliance on costly bank loans, job losses, and bankruptcy.
Kenya’s top three retailers — Nakumatt, Tuskys and Naivas — owed manufacturers Sh8 billion in unpaid dues as at September last year, with some payments dating back to early 2014, the suppliers then said in a protest letter.
Troubled supermarket chain Uchumi, which is battling a winding up suit linked to mounting overdues, owes suppliers a total of Sh3.6 billion and has turned to bank loans for financing.
The national government owes contractors and suppliers Sh111 billion while county governments were holding Sh37.46 billion in unpaid payments as at the end of June 2015, according to a report by the Controller of Budget.
The Kenya Institute of Supplies Management said penalising businesses for making late payments is in line with best practices and will offer a crucial lifeline to SMEs.
“This aspect was put in the law to prevent unnecessary delays or withholding of suppliers’ payment leading to them suffering—especially SMEs become bankrupt when their cash flow is choked,” said Chris Oanda, chairman of the body for procurement professionals.
Cash purchase orders
Mr Oanda said the new law requires all companies and government agencies to prepare a procurement plan every fiscal year, outlining items and services to be purchased and the allocated budget.
“So, a procuring entity has no reason not to pay their SMEs or any other suppliers on time following successful and complete performance of their obligations as per contract or LPO,” he said.
The headache of late payments has seen lenders such as Chase Bank, DTB and KCB as well as non-bank institutions like Umati Capital and Ranis Capital create special products to allow SMEs cash purchase orders upfront at a fee.
Tuskys, with an invoice period of between 60 and 120 days, last year signed a financing facility that will see its suppliers get payments from the DTB even before the invoices are due.