The opinion expressed in this blog post does not constitute legal advice and is provided for interest only. The views expressed do not constitute the views of my employer.
Business-to-Government (B2G) challenges
It is always interesting to question why a particular business prefers not to involve itself in any business with the public sector (i.e. through public procurement mechanisms such as tenders). One finds that the answers are generally quite similar and can even be categorised into broader themes. W
hilst some of these themes are more obvious than others, this 3-part series of blogs will focus on the less apparent topics to which entrants into bidding markets may or may not be aware of.
“The Liquidity squeeze”
One of the greatest challenges faced by businesses, particularly Small Medium and Micro-sized Enterprises (“SMMEs”) transacting with the public sector is that of liquidity (the ability to cover immediate and short-term debts and obligations). This challenge can often result in a so-called ‘two-front war’ for any SMME.
The liquidity challenge frequently stems from Government’s failure, the reason for which is speculative at best, to pay suppliers/service providers (“Contractors”) on time. Ordinarily, Government is required to pay Contractors within 30 days, unless an agreement between the parties determines otherwise. However, paying Contractors within the 30-day period has arguably become the exception rather than the norm in public procurement despite the payment period’s unequivocal peremptory status in Treasury Regulation 8.2.3. In fact, it is not uncommon to hear of payment periods in excess of 180 days.
This is a practice that has been perpetrated for quite some time and its problem status is still apparent given the fairly recent issuance of a National Treasury Circular on 28 March 2018 (“the 2018 circular”).
The perpetuation of delayed payment is concerning not only because it is in violation of the public finance regulatory framework (MFMA, PFMA and accompanying regulations) but also due to its impact on a fundamental and universal objective of public procurement, to promote and support the growth of SMMEs. Delayed payment by Government places SMMEs in the middle of a two-front war where they must satisfy debts owed to their creditors, often the same creditors which provide goods and materials required by the SMME to complete the particular Government contract, and continue to perform the contracted services without payment. If the SMME is unable to settle its debts it faces the risk of non-performance to Government on one front and, on the other front, that of commercial insolvency and liquidation by its creditors. A possible consequence of either is the ‘black-listing’ of the entity and/or its shareholders and/or its directors on Treasury’s database of defaulters.
The question arises as to how we address this challenge. Further regulation is quite simply not the answer and, as we often find in this highly fragmented regulatory environment of procurement, implementation is the crux of the problem. If regard is had to previous circulars and instruction notes issued between 2009 and 2011, it is perhaps optimistic to believe that any significant change will result from the 2018 circular. In any event, the 2018 circular reminds Accounting Officers that any officials responsible for late payments of invoices and claims commit financial misconduct or at least ordinary misconduct. Further, the 2018 circular warns Accounting Officers of their duty to institute disciplinary steps against such officials or face an adverse finding of non-compliance.
Perhaps this reminder of relatively obvious regulatory provisions is an indication of the solution to this challenge. Accountability and oversight. Unfortunately, the OCPO still requires “teeth” and sufficient independence from any governmental institution (including Treasury) in order to effectively exercise oversight and bring about accountability for transgressions like late payment.
What challenges do you find in your Government contracts? What deters your business from tendering for work for the public sector? Comment below.
Brooks Legal 