Domestic arrears: Trouble of local suppliers owed by government

Tuesday July 9 2019

A truck loaded with steel products. Delays by

A truck loaded with steel products. Delays by some spending agents of government to settle payments of local suppliers has pushed many businesses into folding operations. PHOTO BY RACHEL MABALA 

By Ismail Musa Ladu

Government which is the biggest spender (business player) in the country, has over the years been a bad debtor.
Bearing the brunt of delayed payments are local suppliers of goods and services to the numerous Ministries, Departments and Agencies (MDA) of government.
As a result, several local businesses have been left on the brink of collapse, with many winding up operations due to limited resources.
Given the magnitude of what is at stake, some entities have taken to the Courts of Law after several MDAs failed to clear their debt obligation within the promised time lines.
A case in point is businessman Habib Kagimu, including four other companies where he serves as the chairman versus Standard Chartered Bank Uganda Limited.

The case
One of his company, Habib Oil Limited, was obligated to submit fuel (petroleum products) to Electromaxx, a private company. It secured a payment guarantee from Electromaxx in addition to issuing a bank guarantee worth $2m (Shs7.5m) as well as personal guarantees of $ 9,100,000. Debenture over fixed and floating assets were also created as well as legal mortgages.
Repayment of the facilities (loan) was to be sourced from payments made by Electromaxx. However, as it turned out, there were some delays in payment to Electromaxx by Uganda Electricity Transmission Company limited (UETCL), a government agency (parastatal) whose primary purpose is to make bulk electricity purchases and transmit the electricity along high voltage wires to local and foreign distribution points.
Despite notifying the financier (the bank) of these delays, demands for repayment, notice of default and recall of the loan and a notice of sale of Mr Kagimu’s properties never stopped, culminating into years of a legal battle in the Commercial Court in Kampala.
This is just one case among so many, with devastating consequences to businesses and business owners. There are multiple cases of local suppliers dragging the government to court over non-payment. Stories of frustrations after years of broken promises by government have become a permanent fixture.

Adding insult to injury
Government, following an investigation, has since found out that nearly Shs430 billion has been fraudulently included into the domestic arrears book, bringing the total domestic arrears owed to local suppliers of goods and services by MDAs to almost Shs3 trillion.
This money, according to an audit conducted by Ernst & Young, was meant to be paid to suppliers who do not exist—ghost suppliers.
The audit by the Ministry of Finance, according to Mr David Bahati, the state minister in charge of finance planning, revealed that supplies to government ministries, departments and agencies worth shs427 billion couldn’t be traced to any supplier yet it is part of the overblown domestic arrears hovering at Shs3 trillion.
When contacted for this article last week on Thursday, the director budget at the ministry of finance, Mr Kenneth Mugambe, said the domestic arrears, money government owes local suppliers’ amounts to Shs1.2 trillion after verification. Before that, it was at staggering Shs2.8 trillion. He further disclosed that move to classify about Shs800 billion is also underway, but what is evident is that at least Shs400billion is the amount of money being contested following the verification done by the outsourced audit firm.
Speaking at a meeting to sensitise suppliers and contractors held earlier in Kampala about the e-procurement system that the Public Procurement and Disposal of Public Assets Authority (PPDA) will partly roll out this year, Mr Bahati said: “We have learnt that out of Shs3 trillion of domestic arrears, Shs427b which can do so many things, has been inflated. That money cannot be accounted for. There are no invoices and other documents to show that those items were procured.”
He continued: “The audit had found that some suppliers had submitted fake supporting documents to back up their claim for payment of no goods supplied.”

Manufacturers
Manufacturers, under their umbrella association, the Uganda Manufacturers Association (UMA) have are not only frustrated about the development but also opposed to it.
Speaking during a luncheon they organised recently at Lugogo in Kampala, Mr Daniel Birungi, the UMA executive director, said the whole idea of government not paying its due debt within stipulated timelines is not only bad for business but also the economy which is already struggling to create enough jobs for its population.
Before that, Mr Deo Kayemba, the UMA vice chairperson, told the Speaker of Parliament Ms Rebecca Kadaga that many of the association members are unable to compete in production. Others are cutting back on jobs instead of expanding the labour force and many more are being driven out of business, thanks to the government’s inability to keep its part of the bargain—pay up its debts.
For that, the manufacturers issued a warning to the government, cautioning MDAs to pay up or issue promissory notes that can enable businesses secure funding elsewhere instead of locking up their working capital.

BUBU effect
Just like Mr Birungi and Mr Kayemba, Dr Fred Muhumuza, an Economics lecturer at Makerere University School of Economics, believes the outstanding arrears government owes local supplier don’t bode well with the Buy Uganda, build Uganda (BUBU) policy.
“By delaying payment to local suppliers, the government by default is working against BUBU policy. Also given that most suppliers will shun government as a result of this, then that means that they are essentially off the BUBU list,” Dr Muhumuza, said when contacted.
Manufacturers, therefore, want a legally binding guideline for local content that must be adhered to by government agencies and contractors. These guidelines should include a commitment by the government to pay up local suppliers of goods and services without undue delay.

Impact of delayed payment to suppliers
It is a shame for the government not to pay local suppliers of goods and service in a timely manner yet tout them as the engine of economic growth.
According to Mr Julius Mishambi Kapwepwe, a budget policy analyst and a director of programmes with Uganda Debt Network, the implications of government’s delayed payment have far-reaching consequences.
He said: “Holding suppliers’ investment in form of domestic arrears shrinks the output of local businesses. The implication is that the businesses cannot hire, buy raw materials or run their operations in a normal way.”
He continued: “This goes against the aspirations of the budget theme that was recently presented by the government. The budget theme talks about ‘Industrialisation for Job Creation and Shared Prosperity.’ But how do you do that if you are constraining the capacity of those who should be driving this agenda by not paying them in timely manner?”
As a result, Mr Kapwepwe says households haven’t been spared either in this mix. This is because if businesses never get paid for their services, the likelihood of employees going without payment is high. In addition, this have an impact on domestic revenue mobilisation, let alone entrenching the burden of public debt even further.
For Ms Susan Khainza, a Chartered Financial Analysts (CFA), delayed payment of suppliers, is a tell-tale sign that signifies caution, with a potential blight on the image of the country as an investment destination.
But for Dr Muhumuza, the principle of domestic arrears demonstrates indiscipline within the budgeting system.
He continued: “Paying local suppliers little by little or nothing at all shouldn’t have been allowed. The suppliers should have either refused to supply or government shouldn’t have procured. Now many of these suppliers must be struggling with cash flow problems yet if they were paid within a week or so after delivery, they would not have to deal with a bank loan whose interest rate are prohibitive.”

IMPACT ON BUBU

Just like Mr Birungi and Mr Kayemba, Dr Fred Muhumuza, an Economics lecturer at Makerere University School of Economics, believes the outstanding arrears government owes local supplier don’t bode well with the Buy Uganda, Build Uganda (BUBU) policy.
“By delaying payment to local suppliers, the government by default is working against BUBU policy. Also given that most suppliers will shun government as a result of this, then that means that they are essentially off the BUBU list,” Dr Muhumuza, said.

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