State-Run Firms Owe Suppliers Five Times More Than What They Buy, Study Shows

For every one rupee that the government spends on procuring goods and services from suppliers, it owes them Rs 5. That’s what a new study found, underscoring the lack of payment discipline in state-run firms.

Public sector enterprises—which do the bulk of the procurement for India’s government—had annual average outstanding trade payables of Rs 1.3 lakh crore between FY18 and FY20, the paper authored by Pavithra Manivannan and Bhargavi Zaveri of the Finance Research Group said. The annual average procurement value during the period stood at Rs 0.3 lakh crore—almost five times smaller.

“Our analysis provides evidence of the popular perception of CPSEs’ weak payment discipline to vendors,” the paper said. Payment delays by CPSEs to their vendors “far exceeds” their procurement values, it said.

The researchers put together a novel data set from public sources to measure the size of payments delays by the government in India. They compiled data from the MSME Sambandh portal, which is for monitoring public procurement, and the annual reports and balance sheets of state-run firms.

Data of 57 CPSEs that are spread across 17 government department or ministries and 34 industries was used for the study. The outstanding trade payable amount for each firm was used as a rough proxy of the amounts due to vendors and service providers.

The authors noted that the information about payment delays by the government is sparse and difficult to ascertain from the budgetary documents. Besides, the central government procures goods and services at various levels through various entities, which compounds the problem.

In the absence of such information, vendors and service providers will be unable to factor in the delay while negotiating prices with the government.

“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,” it said.

India’s Ministry of Petroleum and Natural Gas was the largest procurer in the research’s data set, both in the number of state-run firms that come under it and the value of goods and services procured by them. It accounts for more than half of the total public procurement worth Rs 1.14 lakh crore over the last three financial years, the data shows.

Naturally, it also accounts for the largest annual average dues to vendors, followed by the Department of Heavy Industries, Ministry of Steel and Ministry of Power.

Payment Delays To MSMEs

The study also measured delayed payments by CPSEs to micro, small and medium-small enterprises. The authors said that these delays have a “particularly deleterious” impact on small businesses as they often have limited access to capital.

On average, the delayed payments to MSMEs are about 8% of the actual value of goods or services or works provided by them. Delayed payments are those that have been outstanding for 45 days from the due date. The percentage has marginally increased between FY18 and FY20—the three-year period of the study.

It also noted that while CPSEs demonstrate weak payment discipline to both MSMEs and non-MSMEs, the delay is larger for large vendors than smaller ones.

The researchers said that these delays were maybe indicative of “liquidity mismatches or solvency issues” at the state-run companies, 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,” they wrote.