3 ways to increase liquidity in the business sector

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When facing economic slowdowns of the type that the world is experiencing now, it is vital to put more liquidity in the hands of the private sector. With this money, businesses can pay workers, buy supplies, or withstand slow demand for their product until the economy is nursed back to health.

In earlier blogs we suggested two ways in which liquidity can be increased: through delaying certain tax payments and through using information from credit registries and bureaus to finance liquidity-constrained businesses. Here we suggest a third way: pay for completed procurement work as fast as you can, and front-load payments on recently-awarded contracts so companies have the means to do the job. We explain each in turn.

First, some countries make it easy to get paid once a business has completed work on a public contract. In the Republic of Korea, companies get paid within 7 days of submitting an invoice, the shortest worldwide. In Finland, it takes just 21 days. In contrast, it takes 80 days in Greece for a contractor to get paid once the invoice has been submitted and more than 10 different documents need to be attached to the invoice for every single payment. In Nigeria, contractors must wait 90 days in Lagos and 180 days in Kano to get paid. Not only that, contractors need to submit 18 different documents each time to obtain payment.

A lot can be done to speed up payments. Countries can use existing electronic procurement platforms to allow contractors to submit invoices and receive payments through the system. Less technologically-advanced economies can streamline the payment process by relieving companies of the need to submit the same documents for each payment request. A certificate of incorporation is among the 18 documents that Nigerian companies must submit with every invoice, for example. Additionally, procuring entities can speed up payment procedures by removing the requirement on contractors to submit documents that are already in their possession, such as award decisions. 

Second, in most countries, procurement regulation prevents front-loading contractor payments. This is for good reason: to avoid paying for work that may never be completed. Yet, governments may want to reconsider this measure during economic slowdowns, to give liquidity to the very businesses that have proven capable of winning contracts. Globally, 107 countries do not allow such payments at all, but they could consider introducing this measure in times of crisis. Those that do can increase the allowable payment. Saudi Arabia, for example, only allows upfront payment of 5 percent of the contract value, whereas Romania permits up to 30 percent.

These ideas have a notable benefit: they can be implemented equally, without arbitrariness. Such even-handedness presents a significant advantage over various other financing schemes that depend on targeting one group of businesses over others. Such targeting invariably invites criticism of privilege; for example, one might ask why airlines should get a bailout but not the construction companies that build the airports. 

Making public procurement faster is a great equalizer. Businesses in every sector benefit. The public benefits as well - both the workers who remain employed to complete the procured tasks, and society as a whole can use the services and works delivered.

Authors

Erica Bosio

Program Manager of the Growth Analytics, Development Economics Vice Presidency at the World Bank

Simeon Djankov

Director, World Development Report 2019

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