How big firms are sucking smaller ones dry

A majority of the parties involved do not have written contracts. [iStockphoto]

Running a business in Kenya can be an extreme sport. You not only have to deal with in-house challenges like inadequate funding and attracting the right talent but also external issues that involve the government and how other businesses treat you.

While your contribution to the economy does not go unnoticed when the Gross Domestic Product (GDP) numbers by the State statistician Kenya National Bureau of Statistics (KNBS) come out, you are likely to be unnoticed by large corporations that seek your service –particularly when it comes to payment for services or goods you have offered.

Borrowing to keep afloat

The Competition Authority of Kenya (CAK) details the turmoil of these small businesses in its latest newsletter where two businesses are documented to have been taken advantage of.

CAK documents that in the past two years it has facilitated the payment of Sh38 million owed by businesses in the insurance sector.

One such business is Express Auto Assessors Ltd whose proprietor Maureen Oduor endured a frozen bank account, overdue rent, delayed employee salaries and staff exits due to Sh8 million that was delayed payment from insurance companies.

Her firm offers motor vehicle assessment and valuation services in Nairobi, Eldoret, Kisumu, Mombasa, and Nakuru.

“Arrears dating back several years still remain overdue. We had to apply for a Sh5 million loan from a commercial bank in order to stay afloat,” Ms Oduor is quoted as saying.

“Usually, we send insurance companies invoices and financial statements every month. It reached a point where these companies were not responding to our emails and we felt that we had reached a dead end since we had bills to pay,” she added.

Invoices gathering dust

Her predicament mirrors what Satwinder Rano of Silver Rano Motors Limited went through. He also reported unhonoured invoices that accumulated to over Sh1.2 million dating three years that he was relying on bank loans to keep the business running.

“The issue of delayed payments really stresses me. We have had to borrow a lot of money to pay bills,” said Rano. “Also, attending numerous meetings at banks and negotiating really wasted our time.”

The two payouts to Mr Rano and Ms Oduor, CAK reports, are part of the Sh38 Million the authority has facilitated SMEs in the insurance industry to recover in the past two years through the processing of complaints and conducting investigations independently.

About half of this payout was to 16 motor vehicle repair businesses who lodged abuse of buyer power complaints with the Authority against insurance firms through the Kenya Motor Repairers Association (Kemra).

Harrison Ikunda, the chief executive officer of Kemra, explains that the Association, which has been in existence since 2002, seeks to promote and protect the interests of players in the formal motor body repairers market.

“The Authority asked us to submit documents such as contract samples, invoices and financial statements. Through this intervention, we recovered over Sh17 Million on behalf of Kemra-registered garages,” said Ikunda.

Weak or zero negotiating power

CAK Director-General Wang’ombe Kariuki said SMEs face many challenges when doing business including inaccessibility of financing, poor management skills, underdeveloped sales channels, lack of databases, and inadequate research and development budgets.

“But as SMEs work hard to surmount these drawbacks, which threaten their very existence, there are players in the market making these efforts tougher by not honouring invoices for goods and services delivered,” he said.

He said that given that purchasers of goods or services from the SME have a higher negotiating power, they may arbitrarily cancel contracts, decline to accept goods despite ordering them, force SME businesses to shoulder unnecessary marketing costs, among other practices.

This, he noted, is illegal under the Buyer Power provisions of the Competition Act. This prohibits a business to misuse its status in the market with the aim of extracting more value for itself than it would ordinarily get.

“It is based on these provisions that, over the past two years, the Authority has ordered large businesses to honour Sh43 million in delayed payments to SMEs in the insurance, telecommunication and agro-processing sectors,” he said.

Indicatively, the larger quotient of this amount, Sh38 million, was money owed by 18 major insurance firms to 25 motor vehicle assessors and garages, in some instances for work completed as back as five years ago.

Priscilla Njako, the Authority’s Manager - Buyer Power Department, noted that over the past year, the majority of abuse of buyer power complaints have involved the insurance sector.

She detailed that complaints arising from the sector made up 72 per cent of the matters investigated. The retail sector ranks second at 18 per cent of the total complaints received.

No written contracts

One of the challenges in all these matters, she said, is that majority of the parties involved do not have written contracts.

Where contracts were available, they were largely issued to their suppliers in rigid form with no room for renegotiation. In some cases, the insurance firms did not furnish the assessor or garage in question with a copy of the contract for verification and signing.

“Whereas the law permits verbal contracts, written contracts explicitly spell out the rights and obligations of the parties and can easily be referenced whenever a dispute arises, including during investigation by the Authority,” Ms Njako noted.

Mr Kariuki said the overdue payments caused SMEs to take up expensive loans, downsize, or increase the cost of their services in order to meet their business overheads, including paying salaries.

“Others shut down,” he said.

He said the intervention by the authority salvaged the livelihoods of about 1,000 Kenyans and enabled this key sub-sector to remain competitive during the Covid-19 pandemic period and ensured their sustainability.

According to Section 24A(3) of the Competition Act,  the authority(CAK) may require industries and sectors, in which instances of abuse of Buyer Power are likely to occur, to develop a binding code of practice.

Some of the conducts amounting to an abuse of power according to the Act include delays in payments of suppliers without justifiable reason in breach of agreed terms and unilateral termination or threats of termination of a commercial relationship without notice or unreasonably short notice period.

Others are refusing to receive or return any goods or parts without justifiable reason and transfer costs or risks to suppliers of goods or services by imposing a requirement for the suppliers to fund the cost of promotion of the goods or services.