Relaxed Conditions for Bid Bonds by New Players and the Government Have Enabled Small Businesses Compete for Public Tenders

By Omondi Onyatta

In October 2013, Kenyan entrepreneurs who belong to the youth, women as well as persons with disabilities were given a huge boost after President Uhuru Kenyatta stated his government would amend procurement regulations to set aside 30 per cent of all government tenders for micro and small enterprises (MSEs) that are owned by people who fall in the three categories.

One of the key challenges these entrepreneurs, most of whom fall under the micro, small and medium enterprises (MSMEs) still have to contend with is bid bonds – also known as tender security – which have now become an important requirement in government tendering processes.

Securing bid bonds is never a walk in the park for small entrepreneurs who find it difficult to satisfy the stringent requirements imposed by banks due to their weak financial base.

What is a bid bond and why does it present a headache for MSEs that wish to bid for government tenders? This is a commercial document that guarantees that the company bidding for a tender is capable of undertaking and implementing the project once it successfully passes the bidding process. Obtaining it becomes a headache when micro and small business entrepreneurs have to deposit with the bank an amount equivalent to their required bid bond.

This means that the entrepreneur’s capital would be held up in the bank instead of being utilised in the business. Usually, tendering processes last 90 days or 150 days at most. The issuing of the bid bonds by banks can take up to two weeks, which could see a small enterprise that wishes to apply for tenders time-barred.

This challenge, however, could become a thing of the past thanks to the entry into the bid bond market of various players with less stringent conditions. One of these entrants is PSL Capital, which is part of the seven registered companies under the AVLC Group, which also consists of AVL Capital, Advance Ventures, Wasili Kenya, BKY Insurance Agency, Becky Travents Concepts and Becky Logistics.

Ms. Eva Muchina, the Business Development Manager at PSL Capital, says that the firm has struck agreements with various local banks and financial institutions to offer bid bonds to its clients. “We charge our clients 2.75 per cent of the tender value before sharing the profits generated with the bank that provided the bid bond. The commission rate is paid before the bid is issued,” she explains.

InvesteQ Capital Limited is another financial services provider that has emerged to help MSMEs access bid bonds for tender applications. Founded in 2002 as Trade CO Capital, the firm charges its clients one per cent of the tender value for the first 90 days of the process, after which the rate increases to 1.5 per cent. In addition, entrepreneurs who need a bid bond worth over $ 1 million would have to fork out a refundable 10 per cent of the tender security as cash cover.

Speaking during a company event in 2011, the then general manager, Mr Allan Ogendo, lauded bid bonds as one of the financial products provided by InvesteQ to help small­ enterprises plug the capital gaps faced when applying for tenders.

“Most small business owners do not anticipate the supply gaps they would face when providing the services or products they applied for in the tender. Our aim is to provide financial products, such as, bid bonds, performance bonds and bank guarantee payments to help plug these gaps that can cause considerable working stress,” Ogendo outlined.

Small business owners will further be spoilt for choice when scouring the market for bid bonds with the announcement in November 2014 that the Kenya government has set aside Kshs 200 million in this financial year as part of a revolving fund to help youthful entrepreneurs apply for tenders in the public sector. Through the Youth Enterprise Development Fund (YEDF), small business owners will be able to get financial help to obtain bid bonds.

According to Ms. Catherine Namuye, YEDF’s Chief Executive, the fund is in response to the financial hurdles encountered by small enterprises when they win government tenders. “YEDF has since July 2014 disbursed more than Kshs 50 million to over 161 enterprises run by the youth. Most of them are from Nairobi County, but we plan to roll out the fund to other counties countrywide,” she revealed.

Bid bonds work by ensuring that the owner of the tender will recoup losses arising from failure by those awarded the tender to undertake and implement the project as stipulated in the contract.

A procurement expert says that tender securities are advantageous for MSEs, in this case, since these documents can be converted into performance bond by the issuer of the tender. “The tender security allows the owner of the tender to call the bond (request payment of the bond) to cut his losses. This is helpful in instances where the bid bond can be converted into a performance bond as stipulated in the contract,” the expert explains.

A tender security also allows small business owners to sort out cash flow problems that would interfere with the implementation of projects secured. When obtained under less stringent conditions – as is the case with various providers– entrepreneurs can avoid tying up their working capital until the tender process concludes.

“Once the enterprise completes its project, it need not wait for 60 days to obtain payment but can furnish the bid bond provider with a copy of an invoice after which the latter will provide the payment. This allows businesses to pursue other projects without delay,” Mr. Ogendo explained.

MSEs need all the help they can get from the government and the private sector to enable these enterprises continue their role as accelerators of economic growth and creators of additional jobs in the country. Obtaining bid bonds has been a sore thumb for most small business owners who want to apply for public sector tenders.

Fortunately, the setting up of the Kes. 200 million revolving fund by YEDF and the emergence of providers with relaxed conditions have put MSEs on the right path to procuring tenders as envisioned by President Kenyatta when he announced intentions to amend procurement regulations in October 2013.,,,,,,,,