Two flagship government payment initiatives were under scrutiny this week as Carillion pushed out payment terms to 120 days under the umbrella of prime minister David Cameron’s scheme aimed at supporting SMEs.
Government has distanced itself from Carillion’s decision to extend payment terms as part of its interpretation of ‘supply chain finance’ - which sees invoices passed to the banks in a bid to reach suppliers sooner - by saying it “does not encourage the use of supply chain finance to extend payment terms”.
The government also came under fire for the increasing use of project bank accounts, which the chief executive of one major contractor labelled as government intervention “possibly of the worst kind”.
The criticism over government intervention on payment was compounded by a lack of financial commitment to the industry in last week’s Budget, which was described by leading contractors as a “missed opportunity”.
Mr Cameron had heralded the government’s supply chain finance scheme, also known as ‘reverse factoring’, as a “win-win” in October. Signatories to the scheme include Carillion, Balfour Beatty and a number of other major UK firms.
Carillion, which is also cutting its supply chain from 40,000 companies to between 5,000 and 10,000, is adamant that its new payment package will benefit both the main contractor and the supply chain.
Carillion stressed that its early payment facility is “exactly in line” with the prime minister’s supply chain finance initiative.
Made up of three strands, the facility is an optional package for suppliers that would see them adopt 120-day payment conditions, an early payment facility and a financial incentive to cover bank costs.
“While reverse factoring will take time to be understood, we are getting a very positive reaction from our suppliers and take-up is very good”
John Denning, Carillion
Carillion stressed that firms can opt to stay on their existing terms, which are negotiated on a case-by-case basis and include advance payment for small firms. The main contractor also remains obligated to pay on public sector contracts in 30 days.
Carillion director of corporate affairs John Denning told CN: “In many cases we pay an incentive to enable the supplier to receive payments earlier than on their previous terms.
“Suppliers are definitely not out of pocket – quite the reverse – and the government wouldn’t be promoting this with us if it didn’t provide real benefits for suppliers.”
Carillion said it benefited from increased flexibility in terms of when it settles with the bank, and the ability to smooth out its own cashflows, with a “modest effect” on its own cash balances.
Mr Denning added: “While reverse factoring is relatively new in our sector and will obviously take time to be understood and digested, we are getting a very positive reaction from our suppliers and the take-up is very good - because this does what it says on the tin.”
A spokesperson for the Department for Business, Innovation and Skills would not comment specifically on whether it supported Carillion’s move.
But, distancing BIS from Carillion’s decision, she said: “Supply chain finance is a useful option for suppliers to access affordable working capital and works well alongside normal payment terms, but should not be used as an alternative to prompt payment.”
One critic said Carillion’s move to supply chain finance was in response to project bank accounts - where payments are made directly and simultaneously by a client to its supply chain through a shared facility.
“The answer is not the sophisticated response Carillion is coming up with; the answer is to pay people on time, once they approve the invoice”
Prof Rudi Klein, SEC Group
Professor Rudi Klein, chief executive of the Specialist Engineering Contractors’ group and a campaigner for PBAs, said he thought the Carillion move was both to improve its cash balance and to counter the growing use of PBA.
The Cabinet Office announced this week that it is exceeding its £2bn target for 2012/13 for work being paid via the payment method and is on track to hit its overall £4bn goal.
CN has also learned that the Scottish and Welsh governments are both looking at rolling out PBAs after Northern Ireland introduced them across all public sector projects.
However, the accounts came under fire from Wates chief executive Paul Drechsler, who slammed them as “political intervention in trade, possibly of the worst kind”.
He warned that PBAs will lead to additional costs for contractors that will have to be passed back to the public sector, and in turn make projects more expensive.
Wates finance director Huw Davies added: “As a business you’d see more debt coming on to balance sheets, we’d have to operate at a net debt situation, and therefore the interest we paid on that debt would probably end up being charged to the customer.”
He echoed Kier chief executive Paul Sheffield, who recently warned of an industry backlash.
Professor Klein argued that the industry needed to change and that under-capitalised big firms have to “wake up” and stop relying on their supply chain’s cash.
He added “The answer to this is not the complex, sophisticated response that [Carillion] is coming up with; the answer is to pay people on time, which means once they approve the invoice.”
Carillion supply finance and early payment
The Department for Business, Innovation and Skills says supply chain finance is aimed at supporting SMEs by passing invoices to the banks and letting suppliers access 100 per cent of the invoice value sooner for a “small fee”.
Under the Carillion reverse factoring scheme, invoices will be passed to Royal Bank of Scotland, with the bank settling the bill in line with existing payment terms.
Carillion will then pay suppliers a “financial incentive” to cover the cost of drawing payment earlier than 120 days, and settle the final invoice with the bank. Suppliers can also opt to be paid earlier than existing conditions for a fee, which Carillion also said it will cover through its incentive - up to a point.
Carillion says the package of arrangements gives SMEs a chance to borrow against its balance sheet at a time when banks are not lending to small businesses.
The reason given for setting terms at 120 days is this is the period within which Carillion has to settle with the bank.