• Government intensifies scrutiny on procurement activities
  • Price controls may however come at the cost of quality
  • Contractors contest that time lags in ZWL payments justify price premiums

Harare- The government has reported that it has saved ZWL$ 500 bn in expenditure after intensifying scrutiny on procurement by ministries, departments, and agencies. The government had seen leakages of funds that would have otherwise been allocated to capital investment. These leaks stemmed from the practice of overpricing and forward pricing which the government is adamant to plug.  Government contractors are supposedly invoicing the government at ZWL premiums anticipating local currency depreciation. When the government suppliers receive their payments in ZWL dollars they turn to the parallel market to get hard currency in an effort to preserve value. The surge in US dollar demand on the parallel market is amongst the most frequently quoted reasons for the loss in ZWL currency value. It thus can be said that the fear of ZWL value loss is a primary driver of real value loss, thereby becoming somewhat of a self-fulfilling prophecy.

In collaboration with the Procurement Regulatory Authority, the Ministry of Finance developed a national pricing index to guide all public sector institutions on the price ceilings in the various procurement categories. Effectively, the authorities are implementing price controls that will limit the maximum price that government suppliers can charge. Together with the blacklisting of entities found guilty of forward pricing and excessive premiums, the government intends to limit how the extent suppliers can continue to devalue the local dollar.

The problem with a price ceiling, however, is that those who manage to purchase the product at the lower price given by the price ceiling will benefit, but sellers of the product will suffer, along with those who are not able to purchase the product at all. Quality is also likely to deteriorate. This is because when the market price is not allowed to rise to the equilibrium level, the quantity demanded exceeds the quantity supplied, and thus a shortage occurs.

The first rule of economics is you do not get something for nothing—everything has an opportunity cost. So, if the government effectively lowers the price at which the contractors can charge for their services, a price lower than that which would prevail in an unregulated market, suppliers will lose5 the incentive to maintain quality service. Moreover, suppliers may resort to changing their offerings resulting in shortages.  

Already, suppliers have had issues with the time taken by governments to pay off contractors. The lag in payments is a pertinent factor for the forward pricing that occurs. This is because the time between the government being invoiced to the time the payment is made, the currency would have slid and contractors would have lost value. Without solving this time lag issue, it would be hard to sustainably the above-mentioned issue.

Although the government has stated that they have saved ZWL 500bn, a full analysis must also show if the level of efficiency has not declined as a result of this level of savings, given the above-mentioned economic principle that one can get something for nothing.   

-Equity Axis News