Govt clamps down on advance payments

Treasury is working on stringent measures to regulate advance payments for contractors, after some failed to deliver on their contractual obligations and others indulged in financial speculation on the black market, and the closing of loopholes is now seen as necessary and urgent.

Advance payments may still be needed at times, but now Treasury will be seeking guarantees in stable currencies, so it cannot lose if there is a delivery problem, will be checking those paid very carefully, and will be limiting these to specific areas.

Finance and Economic Development Permanent Secretary Mr George Guvamatanga came with the new details when he appeared before the Public Accounts Committee in Parliament yesterday.

Legislators had argued that the Government was losing a lot of money through advance payments to some contractors who then fail to deliver on the service or work they would have been paid for.

Mr Guvamatanga conceded that some contractors failed to deliver after receiving advance payments while others used the funds for speculative purposes on the parallel market.

But these were the target groups for the tightening of payments and the closing of loopholes.

"We have an issue of over-pricing and I can cite a hotel which charged $168 000 per night for a room that costs US$120, which means they were using a rate of US$1:$1 400," said Mr Guvamatanga.

"If someone comes using that rate and asks for an advance payment of 30 percent of the amount charged, and then goes and accesses foreign currency at the auction, it would be enough to cover their costs and anything that you pay them thereafter would be profit.

"So over and above the issues that were arising from these contractors and service providers on overpricing, some of them demand advance payments, so creating problems of non-delivery, and then use our advance payments to go on the parallel market."

But Treasury had already started curtailing advance payments and restricting these to areas that are provided for by the law.

"To mitigate that risk (of abusing advance payments), Treasury will consider mechanisms for safeguarding public resources through a combination of more stringent due diligence processes, calling for advance payment guarantees in stable currencies and amending the provisions to restrict their application to specified categories of procurement.

"Guidance thereon will be communicated as soon as consultations with relevant stakeholders have been concluded," he said.

The Public Procurement and Disposal of Public Assets Act stipulates that when necessary to enable effective implementation of the contract, a procuring entity can make advance payments of the price.

But there are conditions.

The total amount of advance payment made under the procurement contract cannot exceed the prescribed percentage of the total contract price.

Unless otherwise stipulated in the contract, an advance payment cannot be made unless the contractor furnishes an advance payment guarantee covering the amount of the advance payment and satisfies any other terms set out in the bidding documents.

These two conditions limit the amount of the advance payments and ensure that if the contractor cannot deliver the procuring entity gets its money back.

The law further stipulates that any advance payment made to a contractor must be based on costs that the contractor is likely to incur in mobilising resources to perform the procurement contract.

For construction contracts, these advances should not exceed 15 percent of the contract price in the case of a domestic contractor, or 10 percent in the case of an international contractor.

The latest move follows the recent suspension of payments to contractors for pay runs submitted as at July 31, after Government noted that some pricing models were based on black market rates resulting in exorbitant prices for goods and services.

The freeze is temporary.

Ministries and departments need to check out the pricing and be able to certify that there is no funny business. Those following the rules will then get their money, but Treasury now wants a proper check on each payment.

Black-market pricing had resulted in the erosion of ministries' appropriated budgets, putting pressure on Treasury through increasing demand for more funding from Government which was not aligned to the revenue inflows and created fiscal risk of unsustainable budget overruns and deficits.

The ministries, departments and agencies need to move fast, since Treasury wants to see the due diligence reports by September 2 on all contracts that were submitted as at July 31.

The reports should also include existing procurement contracts and should be in line with the directive issued on August 4, suspending payments to contractors.

Such pricing frameworks by the suppliers of goods and services were causing inflationary pressures and fuelling black market activities through unjustified movements on the exchange rate, resulting in exorbitant prices of goods and services.