How delayed State payments hurt economic growth

Delayed payment adversely affects businesses. FILE PHOTO | NMG

What you need to know:

  • Research shows increase in delayed payments reduces profit growth by 1.5 to 3.4 percentage points.

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 both the national and county governments to numerous businesses countrywide are alarming. Delayed payments impede effective circulation of money in the local economy, adding excessive strain to businesses that are already suffering from other local and global market factors.

Unfortunately, the hardest hit by this trend are key drivers in bringing the Big Four plan to fruition. For instance, due to the late maize harvest last year, the government, in order to continue with the flour subsidy programme, had to buy the grain imported by local millers.

Presently, millers are still owed 80 per cent of the total debt, which amounts to in excess of Sh2.5 billion. This has put a huge strain on their cash flows and in turn, they are unable to buy adequate maize and wheat from local farmers. Additionally, reimbursement owed to maize millers, for the transport cost incurred in transferring the grain from the port to the mills under the subsidy 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 national level. Last week, one of the largest employers in the country, Nation Media Group registered a 35.5 per cent drop in profits from the previous year, owing to provisioning for unpaid revenue of Sh 856 million by the Government Advertising Agency. Indeed, the entire media sector is owed over Sh 2.5 billion. This tremendously slows down the operations of the media houses and undoubtedly hampers their ability to be effective in the core mandate of informing and educating citizens. It also impacts the companies’ ability to offer quality employment and significant output.

A report by the European Central Bank in 2015 on Governments' payment discipline: the macroeconomic impact of public payment delays and arrears, showed unexpected delays in payment reduce corporate profits significantly since they alter the present discounted value of payment. This is especially so in our case as there are no interests applied on reimbursements or arrears. The report found that increase in delayed payments reduces profit growth by 1.5 to 3.4 percentage points.

Because delayed payment has a ripple effect, suppliers of affected companies and other businesses in the value chain are also severely affected. Worst of all, SMEs who rely on a much urgent supply of cash to run their day-to-day operations become crippled and, in many cases, bankrupt.

Other macroeconomic effects of this could be the increased cost of credit to companies – as it stands already this is a huge impediment to the growth of the manufacturing sector.

A look at a long standing issue such as the VAT refunds owed to manufacturers paints this picture clearly. The refund process has been very slow because of the required administrative process. This means that a lot of money, which runs into billions of Kenya shillings, is held up in government processes causing manufacturers to borrow heavily due to cash flow constraints.

Just last year, our retail sector was at a near-collapse as some of the largest supermarket chains were caught up in arrears amounting to over Sh40 billion to suppliers all over the country. The inability for supermarkets to absorb locally produced goods, translates to lower sales by local manufacturers, who are already owed billions by both County and National Governments.

Following this, the government through the Ministry of Industry, Trade and Cooperatives together with industry stakeholders led by the Kenya Association of Manufacturers, developed a study on regulations for prompt payment and a code of practice to help “stop the bleeding”. Some of the recommendations were; to review the current payment period to a shorter time and setting up a legal framework to curb the culture of late payment following international best practice. For example, to discourage late payment, the EU Directive 2011/7/EU provides for statutory interest as a redress procedure for the aggrieved party in the supplier agreement. According to this law, a supplier is entitled to interest for late payment from the day following the date or the end of the period for payment fixed in the contract.

At this point, businesses are dealing with increased cost of operation brought on by various factors including the cost of electricity, fuel and high taxes. Citizens on the other hand are dealing with an increasing cost of living. We cannot afford to aggravate this by reducing businesses’ capacity to function productively.

Government must act fast on this matter and salvage our position as a preferred investor-destination in Africa.

SACHEN GUDKA, Chairman of Kenya Association of Manufacturers [email protected].

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