…Suppliers plead with Govt for speedy payments
By Hilary Mare
THE issue of Government late payments to creditors has gained prominence during this time of Government credit and debt crisis. Coincidentally, this issue has surfaced at a time when Government has rolled out a memo demanding a mandatory certificate of good standing for all payments made to contractors and government service providers.
Justus Mwafongwe, commissioner in the inland revenue department at the Ministry of Finance stated that Government only conducts business with those who are tax compliant in terms of submission of statutory tax returns and payment of taxes hence the introduction of a certificate of good standing as a pre-requisite for contracting any person to provide goods or services.
“If a contractor or service provider does not provide a valid certificate of good standing at the time of claiming any payment for work done or service rendered such payment should not be made.
“Any contractor or service provider who fails to provide a valid certificate of good standing must be referred to the IRD in order to get a letter indicating how much tax arrears to be withheld and transferred into state account,” he added.
Shortly after this, the business community lifted the discourse on Government payments and pleaded with the finance ministry to come up with a quick payment policy as some contractors and supplier particularly SMEs have gone for up to 120 days without receiving a cent for services rendered or goods supplied.
A letter written to Works Minister Alpheus !Naruseb by the business fraternity argued that a culture of late payment by Government is preventing Namibian businesses, especially SMEs, from investing in growth and fully contributing to economic recovery.
“We are certainly of the view that cash flow is the lifeblood of any business. Businesses need cash to buy supplies, pay employees, service debt and invest in equipment and training; this cash usually comes from receipts for sales. This therefore posits that when a business incurs the cost of providing goods and services upfront, being paid on time is very important. If payment is not received within the agreed payment period, the supplier incurs additional costs chasing payment.
“Reduced cash flow may mean planned investment in the business cannot go ahead and may prompt the need to borrow more. In extreme cases, late payment can result in a profitable company going bust and this can have a knock-on effect triggering the insolvency of other companies further down the supply chain.
“We would want to further encourage and ask Government to implement a prompt payment policy carried out by all central Government departments. We feel Government has not evaluated the prompt payment commitment to determine its effectiveness in helping small businesses. SMEs tend to sit at lower levels of the supply chain and SMEs’ representatives believe some large contractors hold on to cash paid promptly by Government in order to boost their own working capital, rather than passing it down the supply chain. Despite this, government has not evaluated the impact of either the current or previous prompt payment commitment,” expressed and explained the letter. Currently, Government has been dogged by a number of financial challenges from a battle with the teachers’ union for increased salaries to an outlook downgrade by rating agency Fitch.
Finance Minister Calle Schlettwein in addressing this challenge last week said that earlier in the year he had tabled the 2016/17 budget in Parliament as a means of pro-growth fiscal consolidation which reflects a continuing commitment to making public service delivery more efficient, by reducing wasteful expenditure and achieving better value for taxpayers’ money.
“Allocations to areas such as travel allowances and overtime have been lowered significantly, while purchases of vehicles and furniture have been postponed in many cases, and Fitch has welcomed this approach in its statement.
“Government will continue to address these challenges head on, and the Ministry of Finance will not shirk its duty in maintaining the macroeconomic and fiscal sustainability that is crucial to our development. Thus, the Government will reinforce its time-tested approach to responsible public finance management, pro-growth fiscal policy and macroeconomic stability in the upcoming mid-year budget review for 2016 and the next MTEF,” he said.
Essentially it must be noted though that the policy of paying Government’s suppliers promptly should bring financial benefits to Namibia businesses because if invoices are paid more quickly this enables businesses to reduce their overdrafts, thereby reducing their interest payments. Prompt payment should also reduce the cost to businesses of chasing public sector bodies for payment of overdue invoices, and the wider economy will benefit from fewer failed businesses.
In terms of costs, the working capital Government has available to fund its operations falls when it pays its suppliers promptly. If Government has less cash than it needs (in part because it has paid its suppliers promptly), it will need to borrow to make up the shortfall, or else reduce its spending elsewhere in the short term.
Like private agents, governments have some discretion on when to pay their bills and other obligations.
The outstanding payments of governments are, however, different in various respects from trade credit among private sector agents.
First, within the private sector, paying a bill shifts liquidity across firms, but does not affect aggregate private sector liquidity. Second, given the size of the Government, particularly in other countries, its payment policies are important to a large base of suppliers.
Third, the government is at the same time a debtor and creditor, but in a very distinct way, as most of the funds owed to the government are taxes, i.e., unrequited payments, whose payment terms are set by the Government.
The discretion governments have in choosing when to pay may be foreseen already in contracts that include explicit or customary trade credit, but it can also go beyond that if governments miss due dates and fall into arrears. Payment traditions and expectations vary across sectors, but as long as the situation is static the impact should be limited. If a Government has a tradition of taking a long time to pay bills, then suppliers will price the cost of such credit into the goods supplied. There could still be some limited impact, though, as firms with extreme credit constraints may then not be able to do business with the Government.
Efforts to accelerate payments and reduce existing stocks of arrears could be a helpful way of boosting the economy and typically would not increase deficits as long as all spending was properly accounted when it accrued.
Conclusively and essentially Government decisions on the speed of effecting payments have important repercussions for the economy.
Confidente. Lifting the Lid. Copyright © 2015