An easy way to cut government expenditure
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
15 December 2019
Two weeks ago, I
explained how repairs on roads are best done on a last come first
served basis. The reason is that the cost of repairs accelerates very
fast once the first signs of damage are observed. Therefore, it is
better to fix those that have small faults first before embarking on
those in extremely bad state.
There are other
instances where this order of doing things is also recommended. In the
treatment of cancer, for example, doctors find that the survival rates
of patients who have severe ailment is much lower than in those who have
minor conditions. This is the reason why it is always advisable to get
regular check-ups for this disease early detection ensures effective
and permanent treatment.
For that reason, it
is advisable for hospitals to focus treatment of patients with early
stages of cancer instead of those in a severe condition. It might sound
inhuman to pay more attention to those who are hardly suffering over
those who might be in a lot of pain but, the need for effective and
efficient use of treatment resources (medicines and equipment) requires
this order of priority.
Another area where
last come first served might be the better option is in the settlement
of debts in a heavily indebted organisation. The challenge here is that
when an institution gets a reputation of not paying suppliers promptly,
it is no longer able to command competitive prices.
Thus, its debts
increase exponentially. This is the problem facing many of our public
institutions, including the national and county governments.
I serve in the board
of management of a public school and, a few months after appointment, we
were informed that the institution was in debt to the tune of Sh21
million.
For a school with an
annual budget was about Sh40 million, the Sh21M debt put it in a very
precarious financial position. So, the principal came up with an
ingenious plan: lets start paying new supplies on delivery and hold on
to the older debts.
The result of this
unconventional strategy was that the school quickly got the reputation
of prompt payment. By the end of the year, was buying goods at up to 50
percent cheaper than before.
With these savings,
the school started clearing the old debts thankfully, they were not
accumulating any interest. In about three years, it had cleared all
debts and started retaining savings. Today, the school saves about 20
per cent of the total fees and these are applied on development of
infrastructure.
From this experience
it is clear to me that an effective strategy for institutions to cut
costs is to pay their suppliers promptly. Government should start a
policy of paying all supplies under Sh1 million on demand, that is on
presentation of invoice; those between Sh1M to Sh10M to be settled in
seven days; and those above Sh10M within 30 days.
I estimate that doing
this can reduce government expenditure by about one-third of the current
levels. Furthermore, the government will begin to attract serious
reputable suppliers instead of the cowboys who have so often supplied it
it nothing but cold air!
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