DESPITE a cabinet intervention launched two years ago to ensure that government departments pay contractors within 30 days, many small businesses that do work for government still do not get paid on time.
The intervention follows an instruction note issued by the national treasury in November 2011 mandating provincial and national departments to report to their relevant treasuries monthly on the number and value of invoices paid after 30 days, and the number and value of invoices older than 30 days that have not been paid.
Bimonthly reports are submitted to the Forum of South African Directors General and periodically to the Cabinet and the president’s co-ordinating council.
Although the presidency says the intervention has yielded some improvements, many departments continue to pay after 30 days.
There has been no record of disciplinary action taken against departments for failing to pay suppliers on time, despite this being an offence under the Public Finance Management Act (PFMA), punishable by up to five years in jail.
A report released by the department of performance monitoring and evaluation earlier this month — “The 2012 state of management practices in the public service” — revealed that last year 56% of the 156 national and provincial departments met the legal requirements of paying suppliers within 30 days.
Nearly half of departments didn’t submit figures to the national treasury or didn’t submit them on time.
The report noted that there had been some improvement in payments being made more timeously to suppliers, mostly in national departments that don’t have regional offices.
A presentation to Parliament in May showed that the number of invoices that remained unpaid after 30 days, among national and provincial departments, peaked in April last year at more than 50 000 (valued at R2.5-billion) before declining to about 24 000 (R1.2-billion) in December.
One business owner, Nafcoc Free State chairperson Cunukelo Konziwe, believed the cabinet’s intervention had been a “wake-up call” to departments because late payments were “killing” small business.
He said even though departments were starting to pay timeously, there had been little change at municipalities, which don’t form part of the cabinet intervention.
Released last month, the national treasury’s local government revenue and expenditure report for the third quarter showed that fewer municipalities paid on time compared to a year ago.
On June 30 2013, 73% of the creditors’ book of municipalities (including utility providers such as Eskom) was settled within 30 days, down from 85% at the same time in 2012.
Free State municipalities had the highest percentage of creditors outstanding for more than 90 days at 66%, followed by municipalities in Mpumalanga (59%) and Limpopo (54%).
Although in the Western Cape the payment of suppliers within 30 days had improved, with 99% of contractors paid within 30 days (up from 94% in the same period last year), it worsened in municipalities in most of the other provinces.
Lize Strauss, president of the Soutpansberg Chamber of Commerce, said some of her 100 members have opted to no longer do business with the Makhado Local Municipality because of late payments.
She said the municipality, which is currently undergoing a turnaround strategy, has had to get service providers from outside the area to tender for contracts.
Another chamber head, from the North West, who asked not to be named, said her municipality routinely paid suppliers 90 days or more after receiving invoices.
Her chamber has been meeting with the local municipality regularly to resolve the issue of late payments, but it appears that the meetings have “been in vain” because “late payments persist”.
Part of the problem, she said, was that the municipality employed “unqualified people in the accounts department” and struggled to collect rates and taxes from residents.
A quarter of rates and taxes are paid to municipalities within 90 days, a situation that has remained largely unchanged over 2012, according to figures from the treasury.
At national and provincial departments, late payments can largely be attributed to administrative and managerial weaknesses, said the director general of the department of performance monitoring and evaluation, Sean Phillips.
These include “the absence of an invoice tracking system”, the “lack of standardised business processes and timeframes” for processing invoices and “managers not delegating” the approval for the processing and payment of invoices to lower officials.
Phillips said it is a legal requirement for departments to pay suppliers on time, adding that non-payment of suppliers on time is an act of financial misconduct in accordance with clause 38(f) of the PFMA, and National Treasury regulation 8.2.3.
“An accounting officer is guilty of an offence and liable on conviction to a fine, or to imprisonment for a period not exceeding five years, if that accounting officer wilfully or in a grossly negligent way fails to comply with a provision of clause 38 of the PFMA,” he said.
He said in terms of the Public Service Act, heads of national and provincial departments are responsible for ensuring that there are consequences for poor performance by officials.
In turn the executive is responsible for ensuring that there are consequences for heads of department who fail to institute disciplinary action where required.
But Phillips — who did not have figures on the number of officials who have been dismissed for repeatedly failing to pay on time — said little disciplinary action has been taken against officials guilty of gross negligence, such as going on leave when there are unprocessed invoices left in their in-trays.
“Unfortunately, in some instances, heads of department and executive authorities fail to carry out their responsibility to institute consequences for poor performance,” said Phillips.
He said a combination of support from the national treasury to departments to improve their payment systems on the one hand, coupled with increased consequences for non-compliance, is required.
His department has been encouraging departments to put in place either electronic or manual invoice tracking systems, as the 2012 state of management practices in the public service found that most of those departments that made improvements had put in place invoice tracking.
Phillips said the office of the accountant general within the National Treasury is also considering putting in place an electronic invoice tracking system across government.
In some cases suppliers submit incorrect or incomplete invoices, but Phillips pointed out it was up to public servants to identify such cases and return invoices to the supplier for correction.
He said it also appeared that in some instances public servants held back payments until frustrated suppliers paid them a bribe.
Last year at the launch of a provincial unit to address late payments (expected to become operation in the third quarter of 2013/14) North West MEC for Finance Paul Sebegoe said he was aware that some suppliers were compelled to pay “appeasement fees” to speed up payments.
Sebegoe’s spokesperson Kesalopa Gill said the department had called on service providers and members of the public to report officials involved in such conduct.
Gill said so far no claims had been forwarded to the department or the MEC’s office.
She added that one anonymous listener had called a national broadcaster alleging that officials requested an “appeasement fee” for a payment to be expedited but that the department had followed up on the matter and found that there was no evidence to support the allegation.
Yet despite thousands of invoices still only being settled after 30 days, the Small Enterprise Development Agency (Seda) which launched a call centre in September 2009 to tackle late payments to small businesses, says things have begun to improve.
Seda spokesperson Marius de Villiers said since the inception of the Public Sector SMME Payment Assistance Hotline the agency had run campaigns to raise awareness of the call centre among public entities, which he said helped to bring about a change in the attitudes among public servants.
“There has been a huge improvement in the amounts collected between the two financial years, which shows that government departments are getting into the habit of paying small businesses on time,” said De Villiers.
Since the call centre’s inception, 11 953 cases have been opened (from over 28 000 calls logged), with 9 750 having been settled and R355.8-million facilitated in late payments (over R46.8 million in the 2012/13 year).
At present 290 business owners are waiting for payments totalling R180.2 million.
New campaign to boost quicker payments
Although the Cabinet is trying to get government departments to speed up payments to suppliers, a local small business association hopes that a new initiative will help get more big companies to pay small business owners on time.
The Prompt Payment Code, initiated by the National Small Business Chamber (NSBC) and modelled on a similar initiative under the same name in the UK, aims to get large companies to pledge to pay small suppliers within 30 days.
Signatories also commit to provide guidance to suppliers on payment procedures and pledge to advise suppliers within seven days if an invoice is incorrect.
Last month Nedbank became the first signatory to the code, in which it also committed to paying vendors with an annual turnover of less than R5-million within seven days of receipt of invoice.
NSBC chief executive, Mike Anderson, said one of the biggest challenges that many of the association’s 67 000 members experience is the poor payment terms by big business and government.
Each company that signs the code will be allowed to display a logo on their website of the code, which links to www.promptpaymentcode.org.za.
However, Anderson said his association would also endeavour to get the government to participate in the initiative.
“This will give the code more substance. Like in the UK, it took some time to build momentum, but it did take off,” he said.
A number of large companies have specific policies in place to pay small suppliers promptly and also have specific terms for very small or black-owned suppliers — ranging as low as seven days.
FNB, Sasol, Pick n Pay and Standard Bank pledge to pay suppliers within 30 days of invoice, while Woolworths pays within 45 days.
Val Bosman, chief executive of FNB’s enterprise and customer services, said the bank’s average payment period for firms with an annual turnover of R35-million and below is currently 21 days from the date of invoice.
Sasol spokesperson Alex Anderson said the petro-chemical company pays over 90% of suppliers within its requirement of 30 days on invoice.
“When we are not in a position to pay, it normally revolves around incorrect documentation from suppliers where there are duplications and price differences, which are the most prevalent issues,” said Anderson.
He said Sasol had also implemented a contact centre and formal query management process to resolve payment issues.
Sasol, like many large companies, has been able to score black economic empowerment (BEE) points through settling invoices from black-owned small enterprises within 15 days.
However, Keith Levenstein, BEE consultant and chief executive of EconoBEE, said early payment is being phased out, with the minister of trade and industry Rob Davies having gazetted in November last year to downgrade its importance from 15 BEE points to about two points, while the revised BEE codes — still to be finalised — do the same.
He believes that if companies are not going to get much recognition for shorter payment periods, they are unlikely to pay early.
“There are some very small businesses, with no bank facilities or overdrafts that will not be able to supply to the larger corporates because they cannot wait for payment.
“These small businesses are being hurt by the proposed policy changes,” he said.
He said he believed the minister has reduced the number of BEE points available for shorter payments over concern that it was being abused — as in some cases companies took a settlement discount upon making early payment.
This article originally appeared in the Mail & Guardian on 27 September 2013: http://mg.co.za/article/2013-09-27-00-government-departments-fail-to-pay-on-time
Stephen Timm is a