OPINION: Is it safe to do business with government?

Peter Volmink
Peter Volmink

It has been said that the only thing that’s worse than losing a government tender in South Africa is winning the tender!

Not long after a government tender has been won, the champagne begins to lose its fizz and contractors must get down to the tricky business of dealing with a government client that many view as unpredictable, fickle and often untrue to its word. In fact, not a few good businesses have come to ruin as a result of their business dealings with a government body. No wonder that some private entities have opted not to do business with government at all.

So what are some of the risks of doing business with government?

Government is by no means averse to reneging on its contractual obligations. Sometimes this involves withholding payment, or even cancellation of contracts at little notice. Not infrequently, government bodies resort to raising technical defects in a tender process simply as a strategy to avoid its obligation to pay its contractors! 

Innocent suppliers may find their contracts voided due to no fault of their own – but as a result of the failure of a government clerk to comply with one or other of the myriad procurement prescriptions.

Needless to say, the impact this could have on suppliers, their employees and creditors could be dire. Of late, the courts have tried to ameliorate such harsh consequences by trying to find a more equitable outcome for innocent suppliers caught up in this travesty. But even a favourable outcome in court comes at the end of a lengthy (not to mention financially exhausting) process which few can afford.

In any event, it is becoming increasingly difficult to predict how the courts will rule on a tender dispute. Many small businesses simply walk away because they cannot afford the uncertainty of a protracted and costly fight with the government.

If a legal challenge doesn’t come from the government itself, there is always the possibility that a challenge could be brought by an unsuccessful bidder. Such challenges may even be brought long after a contract has been awarded, thanks to an indulgent approach by our courts to the observance of time frames for tender litigation.

Many companies have suffered great reputational harm as a result of their involvement with government tenders. I am not only referring to those well-known international and local companies whose own venality and hubris has led to the destruction of their corporate brand. There is little public sympathy for them.

Tainted contracts

But even innocent suppliers may find their reputations sullied as a result of their association with “tainted” government contracts. In this climate of hyper-sensitivity regarding public tenders, the mere mention of “tender irregularities” in the award of a public contract could sully the reputation of a private contractor linked to such contract. The irregularities need not involve acts of fraud or corruption at all. In fact, they may amount to nothing more than innocent bungling on the part of the public officials who awarded the tender.

But in the court of public opinion, the mere mention of “tender irregularities” is enough to cast a pall of suspicion over the integrity of the contractor. More so, if monies paid over to the contractor are classified as “irregular expenditure”. For in the public eye, that equates with corruption.

Poor payer

Government is a notoriously poor payer. The rule that suppliers must be paid within 30 days of invoice is honoured more in the breach than in the observance. It is no exaggeration to say that government’s poor payment practices have driven many good companies out of business.

Oftentimes, the brunt is borne by small, emerging businesses – the intended beneficiaries of government’s economic upliftment policies. This payment risk gives rise to price premiums, as suppliers factor in these long delays when they price for their goods or services.  

There is also a general lack of contract management expertise throughout the public sector, with the result that public contracts are poorly managed. Contractual terms are seldom adhered to when government interacts with its suppliers. Government is known to change its mind on what it needs, alter contract specifications, cancel deliveries and shift goal posts at a whim.

No silver bullet

Is it safe to do business with government? The short answer is “no”! Unfortunately, there is no silver bullet to mitigate the risk of doing business with government completely. The Constitutional Court has indicated that suppliers should look before they leap! The court suggested that suppliers should ask government to provide them with an indemnity of sorts for out-of-pocket expenses should the award of contract be set aside.

But any supplier vaguely familiar with the workings of government would know that such a proposal is likely to be met with outright refusal. Some suppliers have requested government entities to provide a warranty (assurance) that all procurement rules were fully complied with, before they agree to sign contracts.

But even this approach has limited legal benefit. Perhaps a better strategy is to limit dependency on government contracts altogether. This may be easier said than done, particularly in a constrained economic climate like ours. But a company which depends on government for the bulk of its revenue should know that it is highly exposed and extremely vulnerable.

For the procurement system to work, we must attract the best suppliers to participate in government’s contracting processes. But for this to happen suppliers need to have the security of knowing that they can to do business with government with relative peace of mind. Perhaps a legislative solution is needed, one that would protect the rights of innocent suppliers against the opportunistic use of technical defects as a reason to refuse payment.

For example, local government legislation in the UK stipulates that non-compliance with procedural requirements will not automatically result in a contract being declared null and void. A similar provision should be considered when the Procurement Bill eventually comes to light. But ultimately, innocent suppliers ought not to suffer for having taken the government at its word in business dealings.

Peter Volmink is a procurement lawyer, currently employed by a major public entity. He is also a PhD candidate at Wits Law School. He writes in his personal capacity and views expressed are his own.

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