## Monday, March 22, 2021

### How large is the payment delays problem in Indian public procurement?

by Pavithra Manivannan and Bhargavi Zaveri.

Payment delays are endemic in government contracts in India. Businesses generally factor payment delays into the price of public sector contracts. Measuring the size and extent of overall payment delays from the government to vendors and contractors has, however, been a challenge. In this article, we use a novel data-set put together from public sources to ascertain the size of the payment delays problem in Indian public procurement.

When a private entity delays contractual payments, the delay is factored into the price of the next vendor contract or the debt contracted by the private entity. This feedback loop naturally instills payment discipline by aligning the payer's incentives with maintaining payment discipline. This is harder to achieve for government contracts, as information about payment delays in public procurement is often sparse, difficult to discern from budgetary statements or missing altogether. The problem is compounded as the state procures goods, services and works at various levels and through various entities owned by it. Payment delays affect the working capital cycle of vendors of all sizes. However, payment delays have a particularly deleterious impact on Micro Small and Medium Enterprises (MSMEs), which often have limited access to formal financial systems to bridge their working capital requirements. Timely payments, therefore, are of crucial importance to MSMEs as they rely on their cash-flow cycle to fund their working capital requirements.

### Payment delays in contracts with CPSEs

A significant proportion of overall central government procurement is undertaken by centrally owned public sector enterprises (CPSEs). Most CPSEs are incorporated as companies and many of them are listed. We use the information in the annual results of CPSEs as a proxy to ascertain the scale of payment delays in the public procurement undertaken by the central government. We study the balance sheet and annual reports of listed CPSEs for the last three financial years, 2017-18, 2018-19 and 2019-20 ("study period").

We find that CPSEs had annual average outstanding trade payables of Rs.1.3 trillion as against an annual average procurement value of Rs.1.1 trillion, during our study period. This suggests that the annual average outstanding trade payables of CPSEs were about 18% higher than the annual average procurement undertaken by the CPSEs. We also find that when taken as a percentage of the value procured, CPSEs under some ministries, such as the Railway and Defence Ministries and Ministry of Housing and Urban Affairs, fare significantly worse than others. Further, we find that on an average, payments worth 8% of the total value procured from MSMEs are delayed for more than 45 days from their due date. Finally, we find that CPSEs demonstrate weak payment discipline towards all their vendors, and that the MSME vendors are not worse-off than the other vendors. This suggests that in the case of government contracts, the imbalance of the relative negotiating power of MSME vendors and non-MSME vendors has limited impact on the behaviour of the payer.

Our work demonstrates the potential to develop an ongoing system to measure payment discipline in public procurement, which could then act as a feedback loop for pricing vendor contracts when dealing with CPSEs and the government departments to which they are aligned.

### Data and methodology

Our analysis is based on a hand collected data-set put together from the following two public sources of data:

1. the MSME Sambandh portal set up by the the Ministry of Micro, Small and Medium Enterprise in 2017, to monitor the implementation of the Public Procurement Policy, 2012;

Our data-set consists of firm level information about CPSEs, such as the year of their incorporation, listing date, industry classification, variables indicative of their financial health and the procurement undertaken by them. We augment the data-set with information on payments delayed by CPSEs to MSME suppliers beyond 45 days from the date on which such payments became due (hereafter, "delayed payments"). The Micro, Small and Medium Enterprises Act, 2006 (MSME Act)requires all companies that procure goods, services and works from micro, small and medium enterprises to disclose such payments in their annual report in the prescribed format.

Our data-set covers this information for 57 listed CPSEs. We collect the data for these CPSEs for three financial years beginning with the year in which the MSME Sambandh Portal was set up. This gives us data for the financial years, 2017-18, 2018-19 and 2019-20, which is our study period.

These 57 CPSEs are spread across 17 departments or ministries of the Central Government, with the largest number concentrated under the Ministry of Petroleum and Natural Gas (19.3%), followed by the Ministry of Power (10.53%) and the Ministry of Steel (8.77%). The CPSEs in our data-set are spread across 34 industries, as per the National Industrial Classification (NIC) scheme prescribed by the Ministry of Statistics and Programme Implementation (MoSPI). CPSEs in the business of 'electricity, gas, stem and hot water supply' account for the largest group (12.28%) followed by CPSEs engaged in the business of manufacturing coke, refined petroleum products and nuclear fuel (8.77%).

Each CPSE reports a target procurement value at the beginning of the financial year and the actual procurement value at the end of the financial year, on the MSME Sambandh portal. Table 1 shows the aggregate value of goods, services and works targeted and actually procured by the CPSEs in our data-set across different government departments.

Table 1: Procurement by CPSEs

No. of
CPSEs
Target
(Rs. crore)
Actual
(Rs. crore)

Department of Chemicals and Petrochemicals 2 371.66 308.38
Department of Commerce 2 17.28 18.3
Department of Defense Production 3 1963.33 2880.47
Department of Fertilisers 4 2547.34 2641.74
Department of Heavy Industry 4 16392.1 15209.25
Department of Telecommunications 2 0 0
Ministry of Coal 2 5977.39 1774.82
Ministry of Defense 3 5838.79 7066.05
Ministry of Housing and Urban Affairs 2 12.61 12.67
Ministry of Mines 2 2573 7132.09
Ministry of Petroleum and Natural Gas 11 52175.63 63849.08
Ministry of Power 6 6142.97 6608.55
Ministry of Railways 4 395.07 429.31
Ministry of Science and Technology 1 38 17.49
Ministry of Shipping 3 1725.67 1321.45
Ministry of Steel 5 4556.4 5356.22
Ministry of Tourism 1 125.07 34.85

The Ministry of Petroleum and Natural Gas is the largest procurer in our data-set, both in terms of the number of CPSEs and the value of goods, services and works procured by them. Table 1 also shows that a majority of the CPSEs have procured more than their annual targeted value. We observe this to be true across all the three financial years comprised in our study period.

### Findings: CPSEs' outstanding dues

Trade payable are a rough proxy of the amounts due from a firm to vendors and service providers. We use the data on outstanding trade payable from the balance sheets of CPSEs as an estimate of payment delays in public procurement. Table 2 shows the three-year annual average outstanding trade payable due from the CPSEs in our data-set. The second column indicates the corresponding annual average value of procurement undertaken by these CPSEs, and the last column indicates the average outstanding trade payable as a percentage of the average annual procurement undertaken by the CPSEs.

Table 2: Average outstanding trade payable and procurement value

Procurement value
(Rs. crore)
Outstanding payable
(Rs. crore)
Payable/ procurement
(percent)

Department of Chemicals and Petrochemicals 308.38 106.11 34.41
Department of Commerce 18.3 1119.66 6118.36
Department of Defense Production 2880.47 3449.92 119.77
Department of Fertilizers 2641.74 1971.93 74.65
Department of Heavy Industry 15209.25 10297.54 67.71
Department of Telecommunications 0.00 2313.67 0.00
Ministry of Coal 1774.82 1898.59 106.97
Ministry of Defense 7066.05 3031.90 42.91
Ministry of Housing and Urban Affairs 12.67 2709.40 21384.37
Ministry of Mines 7132.09 1227.54 17.21
Ministry of Petroleum and Natural Gas 63849.08 82830.09 129.73
Ministry of Power 6608.55 7907.65 119.66
Ministry of Railways 429.31 1243.77 289.71
Ministry of Science and Technology 17.49 29.38 167.98
Ministry of Shipping 1321.45 1562.02 118.21
Ministry of Steel 5356.22 8739.99 163.17
Ministry of Tourism 34.85 58.94 169.12

Total 114660.72 130498.11 113.81

While the procurement value of a given financial year does not necessarily mean that the entire value of the contract becomes payable in the same financial year as the procurement contract may span across multiple years, the three year average numbers in Table 3, however, show a systemic break-down in the payment discipline of CPSEs. We speculate that these trade payable would have aggregated over time, and do not necessarily pertain entirely to the study period.

We then look at three departments/ ministries that account for the largest procurement by value in our data-set, to investigate the differences in the payment behaviour of CPSEs towards MSMEs and non-MSME vendors (Table 3). The CPSEs in these three departments also account for nearly 75% of the total outstanding trade payable of all the CPSEs in our data-set.

#### Table 3: Outstanding trade payable of CPSEs (as percent of value procured)

2017-18 2018-19 2019-20 Total
Non-MSME MSME Non-MSME MSME Non-MSME MSME Non-MSME MSME

Department of Heavy Industry 84.02 7.87 80.87 15.82 110.63 11.81 88.89 12.22
Ministry of Petroleum and Natural Gas 182.65 7.60 187.97 3.56 143.05 4.13 171.49 4.32
Ministry of Power 116.44 14.90 161.54 15.35 292.02 21.73 175.63 17.46

In each of the three cases, the proportion of total outstanding trade payable to the value procured by the CPSEs during the study period is much higher for non-MSMEs than MSMEs. In the case of the Ministry of Petroleum and Natural Gas and the Ministry of Steel, the proportion of outstanding trade payable to non-MSME vendors exceeds 100% of the value procured, on an aggregate basis across the three years. Compared to non-MSME vendors, this proportion is significantly lower for MSME vendors (the highest being 21%).

### Findings: Delayed payments by CPSEs to MSME suppliers

The final leg of our measurement involves estimating the 'delayed payments' by CPSEs to MSMEs, that is, payments delayed beyond 45 days from their due date. We aggregate the delayed payments outstanding as at year-end, by CPSEs to MSMEs, government department wise. Table 4 shows the delayed payments as a percentage of their annual procurement value from MSMEs.

#### Table 4: Delayed payments as percentage of procurement

2017-18 2018-19 2019-20 Average

Department of Chemicals and Petrochemicals 6.22 11.73 11.84 10.46
Department of Commerce 0.86 47.38 1.08 17.47
Department of Defense Production 5.82 3.35 5.44 4.78
Department of Fertilizers 7.58 5.25 4.82 5.38
Department of Heavy Industry 7.91 15.92 12.11 12.37
Department of Telecommunications 0 0 0 0
Ministry of Coal 9.11 5.42 8.47 7.19
Ministry of Defense 3.55 3.20 3.98 3.56
Ministry of Housing and Urban Affairs 6.72 4.86 5.49 5.70
Ministry of Mines 2.79 1.51 2.85 2.37
Ministry of Petroleum and Natural Gas 4.12 4.80 6.18 5.25
Ministry of Power 24.95 25.33 31.87 27.51
Ministry of Railways 11.03 20.58 11.02 13.62
Ministry of Science and Technology 0 0 0 0
Ministry of Shipping 14.36 3.47 2.94 5.62
Ministry of Steel 4.84 10.18 4.81 6.18
Ministry of Tourism 0 0 21.13 21.13

Total 7.36 8.06 8.70 8.16

We find that the delayed payments by CPSEs to MSMEs average at about 8% of the actual value of goods, services and works procured by them from MSMEs during the study period. This percentage has marginally increased from 2017-2018, and is higher than the average in 2019-20.

### Conclusion

In this article, we take a sector-agnostic approach to measure the scale of the payment delays problem in public procurement in India. An analysis of the annual returns and balance sheets of CPSEs gives us new insights on the scale of the problem at three levels, namely, at the level of the CPSE, the industry and the government department to which the CPSE is aligned.

Our analysis provides evidence of the popular perception of CPSEs' weak payment discipline to vendors. Taken as a percentage of the average procurement undertaken by CPSEs, the payment delays by CPSEs to their vendors far exceeds their procurement values. Second, while CPSEs demonstrate weak payment discipline to both MSME and non-MSME vendors, the delay seems to be much larger towards large vendors than the small ones. Third, the delayed payments reporting requirements mandated under the MSME Act provides us an illustrative picture on the payment discipline of the CPSEs. For two out of three years of our study period, we notice that the total delayed payments to MSMEs is higher than the three-years average (Rs. 2323.42 crores).

Our approach of understanding payment delays in public procurement in India, through balance sheets of CPSEs demonstrates the possibility of setting up ongoing systems for the measurement of payment discipline of government departments through CPSEs aligned to them. Further, these delays may be indicative of either of liquidity mismatches or solvency issues, at the CPSE, or a mix of both. By approaching this problem from a balance sheet perspective, our study lays the foundation for conducting future work on the possible relationship between the financial health of the procurers and their payment discipline.

The authors are researchers at the CMI-Finance Research Group and thank Susan Thomas for valuable discussions.

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