If the government or the private sector paid every supplier it owed money to immediately prior to the Covid-19 declaration of National State of Disaster, it would have injected at least R27 billion into the economy which would have mitigated the devastation of the lockdown for businesses. It could have meant the difference between a business surviving or collapsing. The Eastern Cape alone owes suppliers R2.4 billion.
The problem of late or non-payment of suppliers is a perennial problem. Both government and the private sector are culpable.
This problem affects all businesses, large and small. One industry where it is apparent that large companies can be impacted in a major way is in the construction sector. In a September 2019 Research Report, prepared by the University of Johannesburg for Master Builders South Africa, the issue of late or non-payment is cited as one of the major causes of both large firms who are better capitalized as well as SMME firms struggling to survive. The Report found that in 2018, the construction industry was struggling primarily due to non-payment by government departments, state owned entities and municipalities.
But by far, SMMEs are disproportionally affected as they usually do not have the reserves that many large companies have.
Data on the exact number of SMMEs in South Africa differ significantly. The Small Business Institute conducted a study of small businesses in the formal sector. Using data obtained from SARS documentation, UIF as well as Stats SA, for the period 2011 to 2016, it estimated the number of SMMEs to be 250,000. The first stage of the findings is contained in a report titled Baseline Study of Small Businesses in South Africa.
A survey of 520 small businesses conducted in October 2019 by international small business technology company Xero, found that 91% of SMMEs were owed money longer than the period they contracted for.
The survey found that on average the small businesses surveyed are owed R 99,801 at any given time. If we use the number of formal SMMEs in the Small Business Institute Report and multiply this by the average amount outstanding in the Xero report, it amounts to almost R25 billion. The survey found that 47% of the businesses cited cash flow and late payments as two of the biggest obstacles to their growth prospects.
But I would like to focus on the government in this article for two reasons. Firstly government is responsible for regulatory and policy interventions that help grow the economy. Secondly government is the largest procurer of goods. Its estimated annual expenditure for the 2020 financial year was R800 billion.
The government is aware of the problem of late payments. At a meeting with the Black Business Council in November 2019, President Ramaphosa acknowledged that late payment of suppliers by government is a major problem and apologized. Through the Public Finance Management Act (PFMA) and its regulations, government has provided that departments and state owned entities must pay suppliers within 30 days or on the agreed contractual dates. But few entities adhere to this. It is sometimes not for lack of trying by the political heads of departments. At least one Minister, the Minister of Public Works and infrastructure, Patricia De Lille, publishes a monthly update on outstanding invoices. Her office also monitors payments on a weekly basis.
The political heads may want the government policy to be implemented but officials who are interacting with suppliers at various levels, seem for the most part completely indifferent to such policies. The main reason for this is that there are no consequences for officials who flout these policies and therefore non-compliance continues.
What makes the conduct of these officials particularly immoral is that whilst denying suppliers payment for work done, they get their salaries on the same day every month. Even more reprehensible is that they and the particular entity enjoy the benefit of the goods or services the supplier has rendered, often for years before they pay, if they pay.
Suppliers who are victims of such conduct are caught between pleading with officials for payment and after trying this for some time, resorting to litigation. The problem is that any action such as litigation or even just escalating the matter to more senior officials might expose such suppliers to victimisation. They fear they might not get work again, all the while hoping that they might yet get paid. It’s a soul destroying cycle of hope and despair.
The impact on productivity is another problem that late payments burden SMMEs with. In its survey, Xero found that SMMEs spend on average 89.5 working hours per annum (equivalent of 2 working weeks) following up on their payments.
The broader economic ramifications are well known and have been raised by business organisations repeatedly, namely that when suppliers are not paid, they cannot plan for growth as they are focused on short term goals including just surviving from month to month; they cannot meet their obligations to SARS and they cannot pay their own suppliers, creating a knock on effect.
Mediation is more expeditious and less adversarial than time consuming litigation. When suppliers have proper advice about their rights and have professionals stepping in between them and the officials, it enables them to focus on their core business.
The only effective long term solution is to hold officials directly responsible. The first step is to make timeous payment of suppliers a key indicator in their performance management contracts.
Furthermore, when there is a complaint of late or non-payment and it is found that an official is responsible, such official should be subjected to a disciplinary process.
Until such steps are institutionalized, late payments is sadly a burden to be borne by those brave enough to venture into field of entrepreneurship.
Qunta is a director of Pholosang Fee Facilitation Services (Pty) Ltd https://www.feefacilitation.co.za
The article was first published in the Sunday Times