Small businesses have found it difficult to grow despite provisions being made by governments to make them major players in the economy. This is evidenced by the stunted growth in most of them despite having participating in tenders for a long period. What problems face and influence the buying organisations? What are the problems faced by small business organisations who supply goods and services to the public and private sectors?

A letter from the Ministry of Health and Child Welfare- Shurugwi District Hospital  requesting a small business to submit quotations for the Informal Tender 2005- Electrical PSIP 51/05 stated the following requirements of the hospital:

Description/Specifications                                         Unit

2.5mm earth conductor wire                                         kg
2.5mm red conductor cable                                          roll
1.5mm red conductor cable                                          roll
1200mm Double fluorescent fitting C/W tubes   each
Gloves PVC (large)                                                      pair

Conditions: Quotations should be valid for 30 days after closing date; Attachment of certificate of incorporation; Attachment of tax clearance certificate; Photocopied receipts as proof of payment; Deliveries within two weeks after confirmation of order; All costs to be included.

The first observation is that the requirements of the hospital are clearly stated on the specifications of the items required. However, the most glaring omission is that the quantities are not spelt out in the letter inviting bidders. The major award decision will be price based, most probably the lowest bidder.

Without quantities, the SME would not know the financial commitment it would be exposing itself to. This has negative implications. The problems will be in sourcing finance to meet the order since the delivery time is two weeks after the order has been given. This would make the small business to borrow from expensive sources due to limited time hence negatively impacting its long-term profitability.  It may also result in the business missing the delivery time frame given that it has to source the goods from manufacturers or other sources. Cases of late, partial or failure of delivery much to the detriment of the small business’s chance of future engagement have been experienced thereby damaging their own reputation and future business opportunities.

Sources of quotations and tenders

A survey showed that the major sources of tender notices are newspapers. There was a correlation between reading newspaper and responding to an invitation for tenders. It was also discovered that small businesses used informal ways of seeking business from government and the private sector apart from newspapers. The methods cited were personal selling; contacts in buying organisation; reference from previous customers and friends in buying organisations.

The majority of business for the small business sector come from these other avenues. This might mean that the majority of business is obtained through granting favours to buyers. Although six of the respondents indicated that they had not been treated professionally, all the respondents were against giving favours to buyers. Indications from interviews showed that buyers had to be given favours for contracts. The consequence for not giving favours were denial of future business opportunities; adverse supply conditions and late payments.

The favours ranged from 10% cash payment to the buyer, securing of cellular lines and  the provision of lunches.  All these issues increase the cost of doing business for the small business hence they resort to substandard products or services in order to break even. The case of Chinhoyi Hospital where food shortages were experienced is a case in point when the suppliers failed to meet their obligations probably due to failure to perform profitably. Overall, this tarnishes the image of small businesses and may be responsible for their failure to get tenders.

Another issue raised during interviews was the prevalent insider trading. The buyer would phone the preferred person and advise him/her of the prices quoted by other supplier so that they could submit a quotation that was cheaper than everyone else. Such pricing pressures actually reduce the profitability of small businesses thereby jeopardising their ability to perform.

The issue of late payment for orders delivered has a serious predicament on the ability of small business to conduct business or to fulfil an order. The idea of small businesses being able to inflict financial penalty against larger companies for what is basically a breach of contract, while well intended, is, unrealistic in the real world. Typically, the supplier is told to wait. If he does not wish to accept this, he can sue and risk having his supplier status rescinded.

Payment of non refundable fees

Ten advertisements were reviewed from a cross section of institutions including government departments. Seven of the organisations inviting tenders stipulated that interested persons pay a non-refundable fee ranging from Z$100 000 t0 Z$300 000. This was meant to recoup costs of producing the tender documents and to discourage people from collecting documents that they would not use.

Four of the small businesses interviewed disagreed on the issue of paying a non-refundable fee. This has a tendency to exclude some businesses from participating in the tenders or quotation process. Some felt that the cost of tender documents kept on increasing while they never are successful in getting the tender awards.  Six had not been successful in getting tenders despite having responded to tender invitations.

Certificate of Incorporation

Five of the organisations, which invited tenders required proof of incorporation. This approach has to do with businesses that have no fixed business addresses and ensure perpetual succession. Some businesses have had problems tracing some small businesses. However the registration of a business as a private company has a cost to business. According to a report in the press, it cost between Z$1,9 million and Z$3 million to buy a shelf company or to have one registered. It also costs the business Z$1,6 million to prepare and submit returns to the Registrar of Companies.

Of the nine respondents interviewed, seven confirmed that they had certificates of incorporation while two were not registered with the Registrar of Companies. It meant that 77.77% had a capacity to participate in government and private sector tenders but only 66.67% had actually participated in the tendering process. This may be an indication that the companies do not meet the other conditions set by those entities seeking goods and services.

Value Added Tax (VAT) Registration

Four of the organisations required the respondents to have VAT certification while the others were silent and required them to collect tender documents. This could imply that the certificate would be required anyway since the government policy stipulates that those who cannot produce the certificate would forego 10% in lieu of VAT which would be withheld by the purchaser for onward transmission to the Zimbabwe Revenue Authority (ZIMRA). 

The basic requirement for VAT certification registration is now an annual turnover of Z$ 6 billion. Only one of the respondents out of 9 qualified to apply for VAT registration and had a certificate. The rest did not qualify for VAT registration and had not registered. The cost of VAT certification was estimated at between Z$2 million and Z$5 million dollars. This excluded the cost of preparing annual returns of income, which cost Z$15 million dollars to prepare. In addition ZIMRA requires applicants to make quarterly projections of income and be up-to-date in the payment of PAYE. This is rather heavy on the small businesses, which are known to evade paying taxes. So they do not register for VAT certification and consequently miss participating in tenders. This may be one of the reasons why the respondents had either not been successful in tendering or had not bothered to tender.

Detailed Financial Position and Bankers 

Only companies that seek security services require businesses to provide details about their financial status and bankers. This enables the organisation inviting tenders to assess the capacity of the business in handling the contract. Most small businesses do not prepare financial statements and only do so to avoid paying taxes. Such documents do not satisfy buying companies since they grossly understate the performance of the business. In addition, most small businesses keep very little amounts in their bank accounts since most of it is held in stock or debt. If the bank is used, the amounts deposited are normally drawn out on the same day. This creates problems for them to submit banking details when the track record is very poor, especially with many dishonoured cheques and other banking offences.

Central Payments Office (CPO) Creditors Number 

A business that tenders for government contracts should be first registered with the Government Procurement Board or be on the official list. To qualify for listing, it has to submit details about itself and an application for consideration. Some of the businesses interviewed indicated that their applications have been pending for over a year since the people who handled the registration wanted a bribe. Only one respondent had been registered with the Procurement Board, and thus could participate in government tenders. It is only after the registration on the official list that a business is given a CPO creditors number, to effect payments electronically into the business’s bank account.

The system was meant to speed up payment to the supplier, which should be made eight days after the supply date. In most cases, payment was prompt but in some cases especially towards year-end, government departments ordered supplies in December 2005 and by February 2006 payment had not been made. This seriously affects the cash flow of a business. Such a scenario meant that the small business can not participate in subsequent tenders if they pushed too hard for payment. In some cases one has to pay an official to have the payments processed. 

Late payment has serious implications on the cash flow of the businesses in that there will be no funds to service other contracts since all resources would be tied up on the contract completed. The money owed would be eroded by inflation making it impossible to purchase the same quantity of goods. Late payment to the supplier may stem from corruption, jealousy or personalizing business issues. 

Most small businesses have to meet a number of conditions to supply goods and services to the public and private sector. However, most conditions are not friendly to small businesses and can partly be the reason behind stunted growth of small businesses. These conditions have fostered an environment for corrupt behaviour among buyers and suppliers without which it would be difficult to get any tenders.

Recommendations 

To begin with, small businesses should seek advice on issues of contracts, finance and conflict resolution. They should form a business association that will lobby for more friendly tender conditions. All cases of corruption and underhand dealings should be investigated and those responsible brought to book. The government should review its tender requirements to make them more user- friendly to small businesses. Also, besides training businesses on the management of contracts and supply management, they should participate at trade fairs and other business fora to showcase their goods and services.  There is need for greater transparency in the awarding of tenders and the payment for goods and services provided.