Pressure in emerging economies is building for reforms. Moving procurement online could cut costs and boost small firms' participation in state tenders. It could also help the state to pay them on time, as Chile is hoping to do with new stiffer rules.
A new procurement directive, under the state's procurement portal Chile Compra, makes it mandatory for the state to pay suppliers within 30 days upon receipt of an invoice. Public servants who fail to do so could face stiff administrative sanctions.
The new directive as well as a number of other changes to the procurement system came into effect on August 10 last year. They make a 2006 directive which made a general requirement for state agencies and departments to pay within 30 days, now mandatory.
Under the new rules suppliers will be able to see how long it takes on average for each department and state agency to pay each segment (from micro to large companies).
Chile Compra's national director, Trinidad Inostroza (pictured above) hopes by making the measure mandatory Chile’s comptroller general (similar to an auditor-general) will have more power to deal with late-payers in government. The measure has yet to be tested.
This may help to deal with the over 15,000 complaints of late payment that the agency received last year. A further over 19,000 related to complaints about the procurement process.
One fifth not happy
Presently the state isn’t doing too badly in paying contractors on time. In 2014 it paid micro firms the fastest, in an average of 20 days, small businesses in about 23 days (about the same as for large firms) and medium in 26 days, reveal ChileCompra figures.
Yet despite this, almost one fifth of payments to small firms were made past 30 days and 14% for micro enterprises.
Among the changes, new rules also permit small and micro firms that wish to share state contracts, to for the first time join together without having to form a new company. They also double the amount at which bidding companies must begin providing guarantees.
The measures come after a number of Chilean small business associations met with President Michelle Bachelet in October 2014 on the problem of late payments from both the state and private sector.
In June last year SME associations and representatives of big businesses signed a code for timely payment of suppliers facilitated by the Ministry of Economy.
'A haven for SMEs'
Over 125,000 suppliers do business with about 900 departments, municipalities and state entities through the Chile Compra portal.
In all 45% (or $5.5bn) of the value of contracts awarded in 2015 went to small and micro firms, a significant increase from the 34% in 2007, says Chile Compra. The 2015 level climbs to over 61% ($7.5bn) if one includes medium-sized firms.
Inostroza said earlier this month at the release of the figures that despite the economic slowdown, the public market had become a haven for thousands of entrepreneurs who do business with the state.
Get the right people
It's still unclear how successful Chile's new rules will be in getting the state to pay on time.
Various countries have tried a number of other efforts to promote timely government payments - from setting up call centres to putting in place special judicial centres to deal with unpaid invoices (see this earlier blog). They've done little to solve the problem of late payments.
What seems to be more sure to work is to focus on hiring the right public servants in the first place and then assisting them with training. An online portal driven by a professional and transparent body that monitors itself (as Chile Compra does) can also help.
It's then not surprising that Chile Compra in September last year became the first public procurement agency to adopt the UNDP’s index of good practices on transparency and integrity in the field of public procurement.
Timm writes on small business in emerging economies. He visited Chile Compra's offices in 2011. Follow Small Business Insight on Twitter at @Smallbinsight.
Stephen Timm is a