There have been reports of huge debts owed to local contractors by the Federal government, States and Local Government levels. Continued delay in payment of debts owed to local contractors has both micro- as well as macro-economic implications. It effectively suppresses government’s determination at stimulating the economy. Firstly, most of the local contractors are highly indebted to various banks and other creditors for loans obtained to execute government projects.
Pay local contractors to kick-start the economy By Damilola Olajide & Thompson Ayodele
The Acting President, Goodluck Jonathan, has sworn in the ministers who would take charge of various ministries. Consequently, each minister was given a marching order to quickly hit the ground.
Earlier, the acting president had inaugurated a 17-man Presidential Project Assessment Committee (PPAC) to assess all federal projects and provide necessary information on the status of such projects that are on-going, including inventory of all on-going projects and assessment of the level of funding of each project.
However, the terms of reference for this committee excluded the verification of payment of outstanding debts owed to local contractors. As of February 2010, debts owed local contractors and creditors was reported to be approximately N3.23 trillion, representing 84.7 per cent of the total debt of the country. Of this amount, the actual amount owed local contractors is unknown. To date, the Federal government has been able to verify only about N6 billion outstanding for two years, while over N30billion were unverified outstanding for 2009 alone.
The Federal government is not the only debtor to local contractors. Infrastructure and developmental projects are also being undertaken at the States and Local Government levels. There have been reports of huge debts owed to local contractors by these other tiers of government. Local contractors are a key driver of economic growth and development in an economy. They undertake major physical infrastructure and developmental projects for the government, including building and construction, supply equipment and technology to government departments, and are a major employer of labour.
They also have important role to play in transfer of technologies from industrialised countries, which is a key element to improving the level of technological development in the country. These are competencies that are highly relevant to the development of local economic infrastructure, strengthening technical and management capabilities, as well as other aspects of human capital development.
For many years however, local contractors in Nigeria have had to bear the burden of none or delayed payment of debts owed to them by various tiers of government. Local contractors complain of excessive administrative bureaucracy in the verification and processing of payments, arguing that their foreign counterparts executing projects in Nigeria do not face similar problems.
The primary concern of everyone is how to inject life into the economy. It is interesting to note that the Federal budget for 2010 was tagged ‘a stimulus budget’ based on the argument that the Federal government is determined to stimulate the economy out of the recent global economic recession. Perhaps largely unknown to the government is the fact that the activities of local contractors have one of the largest positive multiplier effects on the economy, and that payment of their outstanding debts provides an incentive to stimulate the economy, particularly in the short-term.
Continued delay in payment of debts owed to local contractors has both micro- as well as macro-economic implications. It effectively suppresses government’s determination at stimulating the economy. Firstly, most of the local contractors are highly indebted to various banks and other creditors for loans obtained to execute government projects.
Inability to repay such loans effectively constrains ability of the banks to lend to other potential borrowers. This in turn affects their operational efficiency.
Also, the creditworthiness of the local contractors is eroded. Secondly, delay of payment of outstanding debts to local contractors imposes a high premium on funding for future government contracts. This premium comes in the form of higher cost of borrowing to local contractors, especially for government projects, which are pass-on to future projects. This may partly explain the problem of inflated contracts often present in government projects.
Moreover, continued non-payment of outstanding debts to local contractors also implies delays in payment of salaries and wages to their workforce. Worker lay-offs are imminent when employers could no longer pay salaries and wages. Worker lay-offs will in-turn impose hardships on the families and relatives of affected workers. Above all, non-payment of debts to local contractors encourages corrupt practices in contract costs and discourages other local contractors to execute contracts according to required specifications.
It is important that the Federal Government and other tiers of governments recognise the importance of local contractors in economic growth and development of the country, which are beyond mere undertaking physical projects and supplies for the government.
It is recommended that the terms of reference for PPAC are extended to include verification of payment outstanding to local contractors, with the aim of immediate payment of such outstanding debts. The Federal Government should also encourage and support instituting the PPAC at the States and Local Government levels with the ultimate aim of verification and payment of outstanding debts.
Administrative bureaucracies associated with verification and processing of payments orders to local contractors should be eliminated. Timely settlement of debts owed to local contractors will potentially provide the most immediate incentive to jumpstart economic activity in the country.
For example, ability of creditor banks to grant more credits are increased, employees of local contractors are paid on time, costs of borrowing to finance government-related projects are reduced, existing jobs are protected and new ones are created.
Rather than continuing to owe them, they should be encouraged and supported to undertake major contracts which over the years have been won by foreign contractors. In so doing, local contractors will be able to compete favourably with their foreign counterparts and improve their cash flow and profitability.
Given the right incentives, local contractors have a capacity to innovate beyond the requirements for social impact mitigation and ‘local content’ that normally form conditions of contract.
Finally, timely payment of outstanding debts owed to local contractors will provide an incentive to re-focus them not only on delivering the terms of the immediate contract, but also on ways to enhance the social and local economic benefits of the project to wider society.
•Dr. Olajide and Ayodele are a Senior Fellow and Executive Director respectively at Initiative for Public Policy Analysis, a public policy
think-tank based in Lagos
Initiative for Public Policy Analysis
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