Contractors and suppliers will be protected from delayed payments if MPs approve amendments to the law to require all county and national government procurements to be accompanied by a bank guarantee.
The proposed law will compel national and county governments to acquire bank guarantees, which will see the lenders pay contractors if governments default.
Business owners have accused national and regional government departments of delaying payments to suppliers worth billions of shillings, hitting their cash flow.
Some contractors and suppliers have been forced to close shop as others battle auctioneers on loan defaults following delayed payments.
“The national and county governments shall make payments to the successful tenderer by way of a bank guarantee.
“The bank guarantee referred to under subsection (1) shall have effect after 90 days,” the Public Procurement and Asset Disposal (Amendment) Bill, 2020 sponsored by Thika Town MP Patrick Wainaina states.
A bank guarantee is an assurance to a beneficiary that the bank will uphold a contract if the applicant and counterparty to the contract are unable to do so.
Bank guarantees serve the purpose of facilitating business in situations that would otherwise be too risky for the beneficiary to engage.
Most bank guarantees carry a fee equal to a small percentage amount of the entire contract, normally 0.5 to 1.5 percent of the guaranteed amount.
This means the national and county government will have to part with some money to secure bank guarantees for all contracts if the proposed law sails through Parliament.
Having a bank guarantee in place reduces the risk to contractors because they know that, no matter what happens, they will receive payment.
The settlement of payments to successful tenderers by way of bank guarantee means that there will be no delay in payments of contractors.
If government does fails to settle payments within the 90 day period, a contractor will simply walk into the bank and collect his or her pay.
The law currently require the procuring entity to pay interest on the overdue amounts. The interest and liquidated damages to be paid is pegged on the prevailing mean commercial lending rate as determined by Central Bank of Kenya.