Municipalities have a bad name in business, but choose the right one and you’re set.
Doing business with local government can either be excellent or dreadful for your company’s cashflow – depending on where in the country you are operating. The recent collapse of listed construction company Sanyati has highlighted the potential effect of non-payment by government departments on the private sector.
A broader picture of non-payment has begun to emerge. Details provided to the Democratic Alliance by the Eastern Cape’s minister for finance, Phumulo Masualle showed that 12 731 businesses in the province were owed R1.4-billion in excess of 30 days by various Eastern Cape departments as at the end of March this year.
However, the concern is not only a provincial one. Two recent reports showed that doing business with local government departments could be just as problematic.
First, the issue of non-payment by municipalities was highlighted in a national treasury report released in June. The report looks at each province’s local government revenue and expenditure, including outstanding debts as at March 31 2012.
Second, the auditor general’s report on audit outcomes for local government, released in July, paints a picture of audit health for municipalities by province.
Interestingly, while some province’s municipalities revealed comparatively clean audit results and quick payment times, the findings did not always correlate. Quick-paying provinces did not always house the municipalities with the cleanest audits. And in some cases, slow-paying areas had cleaner books.
According to Pavlo Phitidis, chief executive of Aurik Business Incubator, a company needs to “understand who you are doing business with”, Combining these two factors – the speed of payment to suppliers and audit health – provides an indication of local government as business partners in each province. These local indicators also provide insight into provincial government paying patterns.
The economic hubs
Fair to middling audit health and generally quick payment to suppliers
If you want to be paid on time, do business with Gauteng’s municipalities, or so indicates the treasury report. It shows that 98.4% of the province’s municipal invoices were paid within 30 days. This was mirrored by recent drives for supplier payment by some provincial departments. Following suppliers’ complaints of nonpayment, Gauteng health minister Ntombi Mekgwe met affected businesses in September 2011 and highlighted the department’s commitment to pay.
But the DA’s Jack Bloom said on July 12 that there were still questions around payment. “I suspect that the Gauteng health department still owes huge amounts to local governments and other state entities, as it has been giving priority to paying private suppliers.”
Gauteng’s finance minister, Mandla Nkomfe, did not respond to requests for comment on the matter.
The province did not receive a single clean local government audit, but it had no adverse ones either. Nine of its 15 municipalities were audited “financially unqualified with findings” – the second-most favourable audit outcome – and the remaining audits were deemed “qualified”.
According to the treasury report, 96% of all invoices were paid by municipalities in KwaZulu-Natal within 30 days, making theirs the second-best payment history in the country. But a report in Business Day on June 4 claimed that engineering firm Sanyati was owed more than R30-million by the KwaZulu-Natal provincial government. Ina Cronje, finance minister for the province, did not comment on the matter.
Only 5% of South Africa’s municipalities received clean audits, which put “a question mark on the quality of information provided” in the report from treasury, said Phitidis.
KwaZulu-Natal boasted five clean audits – the best in the country. Forty-seven of its 61 municipalities were deemed “financially unqualified” and two had adverse audits.
About 85% of suppliers to municipalities in the Western Cape can expect to be paid on time – the third-best payment record in South Africa. The Western Cape’s minister for finance, economic development and tourism, Alan Winde, said: “The Western Cape provincial treasury has implemented … strict management of invoices from the time of receipt to disbursement” by date stamping all receipts.
Winde said the province’s strategy, launched in August last year, was “aimed at dealing with all red tape, including the late payment of suppliers”. This strategy, he said, was creating an “enabling environment” in which “local businesses can grow and employ more people”.
The Western Cape housed two clean municipal audits and 20 of its 30 municipalities received “financially unqualified” results. At the time of the report, the province had no adverse audits – although five audits were still outstanding.
Slow payers showing cleaner audit outcomes, or unhealthy audit outcomes in provinces that pay moderately well
The treasury report says 74% of this government’s municipal payments were timeous, whereas 17% were outstanding for more than 90 days.
This province’s comparatively moderate payment timeline is coupled with 18 adverse audits, which means its 45 municipalities received more adverse results than any other result. There were no clean audits, but 13 municipalities were financially unqualified.
Nosisa Sogayise, senior manager for the Eastern Cape communications services unit, highlighted the recently increased efficiency of the provincial departments in the province.
The problem, she said, was aggravated by some suppliers hoping to circumvent the quality assurance processes. “Towards the end of the financial year, departments aggressively facilitate the submission of invoices to avoid accruals. On the other end, suppliers hurriedly finalise projects to enable the payment in that particular financial year.”
She said some suppliers “take advantage” of this by keeping invoices until the busy period in the hope that “they will bypass the verification process” (a process to check that contract stipulations have been met before contractors are paid). To combat irregularities, the Eastern Cape treasury has developed an accountability framework to promote sound financial management, said Sogayise.
The report pegs timeous provincial municipal payments at 77%. However, about 18% of its invoices were more than 90 days old.
Mpumalanga’s finance minister, Pinky Phosa, said: “More is being done to pay service providers within the stipulated time frames, but this is hampered by factors such as the late submission of supporting documents, for example payment certificates, or incomplete banking details.”
Measures taken to improve turnaround time include the regularisation of monthly reporting systems, awareness campaigns and “empowering the officials in the supply chain management with skills” to run effective processes. “The government is committed to improving its payment rate to 100%,” Phosa said.
The province had four clean audits and seven were financially unqualified, but six of its 22 municipalities had adverse audit outcomes.
Timeous payments were made to 68% of the Northern Cape’s municipal suppliers, according to the report, but 21% of payments were outstanding for more than 90 days.
The Northern Cape’s minister for finance, economic affairs and tourism, John Block, did not respond to requests for comment on the matter.
Auditing revealed no clean municipal audits. Eight municipalities were “financially unqualified”, but 10 out of 32 municipalities received adverse results and there were nine audits outstanding at the time of the report.
Lagging payer with flagging audit health, but ‘committed to progress’
Municipalities in Limpopo were recorded as having paid only 40.9% of invoices on time. About 56% of invoices were more than 90 days overdue. With the textbook saga shining the national spotlight on payment issues, Nokubongwa Mdlalose, media liaison for the local treasury, said there had been a recent improvement in payment times within departments.
“In January, the Limpopo treasury introduced a system to monitor and track whether payments were made within 30 days. In June alone 78.96% of payments were made within 30 days.”
This is an improvement on the roughly 60% of payments made on time in January by Limpopo departments. Mdlalose cited the slow process of verification as the main reason for delay in payment.
However, according to Phitidis, more than half of all municipalities do not have qualified engineers.
“If there are no qualified engineers, then there is no one to check up on your work and you can’t get paid.My message for small business is to make sure the government department you are considering doing business with has the capacity to assess your work rapidly after completion.”
Although the majority of the province’s 30 municipalities received negative audit outcomes (12 qualified and 10 adverse audits), the province also had two clean audit outcomes.
Slow payers with unhealthy audit outcomes
Only 39.6% of invoices were recorded as paid within 30 days in North West. The percentage of invoices due after 90 days was 44.7%.
However, on May 17, North West minister for finance Paul Sebegoe announced the establishment of a unit to address quicker payment to suppliers. He said he was aware that some suppliers were compelled to pay “appeasement fees” as a guarantor for speedy payment and that he was committed to cracking down on this.
“We will do everything in our power to enhance relations between government and suppliers and minimise ill practices that seek to corrupt the system,” he said.
At the time of the report, 15 of the province’s 24 audits were outstanding. There were no clean audits, two financially unqualified audits and five adverse audit outcomes.
The report described Free State municipality payment to suppliers within 30 days at a dismal 23%. A shocking 63% of invoices were more than 90 days overdue. Seiso Mohai of the Free State treasury did not respond to requests for comment on the matter.
Lessons for small business
According to Phitidis, the treasury’s statistics of payments being owed for more than 90 days did not give a representative figure of how old the debts in each of the provinces were. “Those debts could be one or two years old,” he said. “The age analysis is not accurate.”
Overall, said Phitidis, small business owners needed to “pick their local government institution well”. If the department or municipality showed delays in the tender process, “then that already says they are malqualified or underresourced”.
“If you choose to do business with such an institution, then you do so at your peril,” he said, adding that small business owners needed to start cultivating a “back-office” mindset. If businesses started up with administrative structures in mind, transacting with government institutions would be a smoother experience.
Business owners need to take accountability for their decisions and “stop outsourcing blame”, he said.