Sir Vince Cable has told BBC Radio 4 the supply chain finance initiative, which he created during his time as business secretary, is being abused and should be scrapped.
The Liberal Democrat leader was speaking on a File on 4 radio documentary on industry payment practices, which featured contributions and research from Construction News.
Sir Vince said the system, which aimed to give smaller firms better access to credit, had been abused by certain major contractors including Carillion, which was accused of using it to borrow more by avoiding subcontractor payments.
“It’s outlived its purpose and there’s no longer any justification for keeping it going,” Sir Vince said of the supply chain finance initiative.
“In the particular case of Carillion, as far as we can understand, they used the money which was available in order to support their own credit and cashflow and didn’t pass it on to their suppliers in the way that we hoped and expected.
“What I do think we need is a proper system of making credit available to small builders.”
Supply chain finance was introduced by Sir Vince in 2012 when he was business secretary under the coalition government.
Carillion and Balfour Beatty were some of the first major contractors to sign up to the initiative, with both firms introducing early payment facilities that allowed subcontractors to receive payment from banks as soon as invoices were approved and within their existing payment terms.
Sir Vince defended the facilities’ introduction, telling Radio 4 they had served a purpose and were needed at the time “to try to get credit flowing again”.
Carillion’s use of the early payment facility was heavily criticised by the joint inquiry into the firm’s collapse.
MPs on the committee claimed the scheme helped the firm hide as much as £500m in debt, describing it as a “wheeze” that the company used to “borrow more, under the radar”.