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SMEs (Local Authority Procurement)

Volume 584: debated on Tuesday 22 July 2014

[Relevant documents: Sixth Report from the Communities and Local Government Committee, Session 2013-14, on Local government procurement, HC 712, and the Government’s response, Cm 8888.]

It is an honour, Mrs Riordan, to speak in this debate. I welcome the Minister to his new role in the Department for Communities and Local Government, and I hope that he will be able to give me some positive responses on small and medium-sized enterprises as a result of this debate.

I was prompted to apply for this debate because of a recent meeting I had with the Federation of Small Businesses in my constituency, at which we discussed late payments as one of the most serious issues facing its members. I was shocked to hear some of the facts and figures associated with the problem.

Late payment volumes have risen from £18 billion in 2008 to £46.1 billion in 2014, and although that is partly due to the economic climate, it is also because of a wider cultural trend in large companies’ approach to their cash flow. The Federation of Small Businesses found that 60% of SMEs are now experiencing late payments, with the average SME waiting for more than £38,000 in overdue payments. Worryingly, one in four SMEs have said that if the amount they are owed reached £50,000 it would be enough to make them bankrupt.

A poll conducted by the Federation of Small Businesses in November last year found that larger businesses are the worst performers when it comes to paying on time and have the worst late payment record, with small businesses reporting that 51% of invoices to those firms are paid late. For small businesses that means reduced profitability with a knock-on effect of those businesses paying their suppliers late and ultimately restricting business growth.

I want to focus on the subject of this debate—late payment to small and medium-sized enterprises under local government procurement—and refer to the sixth report of the Select Committee on Communities and Local Government, of which I am a member. It noted that most councils have policies to ensure that their suppliers are paid promptly, but there is a problem with the terms being passed down to subcontractors. The report showed that 95% of councils had specific prompt payment policies, but that just over one third expected their contractors to apply the same standard.

The recommendation in the report was that councils should, as a matter of course, pay contractors promptly and include a requirement in their contracts to require main contractors to ensure that their subcontractors are paid promptly right down the supply chain. That policy should be monitored, and failure to comply with the conditions should be reported. Furthermore, local authorities should take into account any failure of contractors to comply with the conditions when assessing tenders for future work. I hope that the Minister, in his new role, will comment on that important recommendation in his response.

The Government’s prompt payment code had been recognised across the political spectrum as a move in the right direction, but it must be strengthened if it is to achieve its goal. Since the code was introduced last year, it seems that some large companies, to avoid being named and shamed, have extended their payment terms from 30 days to 60 days or even 90 days, which has caused more harm than good to many small and medium-sized businesses. For many smaller enterprises, 60 or 90 days is anything but prompt.

Does the Minister agree with the shadow Minister, my hon. Friend the Member for Corby (Andy Sawford), who said at the Local Government Association conference that early rather than prompt payment is what matters? There are schemes to incentivise early payments, and some councils have adopted a scheme run by Oxygen Finance Ltd, which allows councils to pay suppliers immediately in exchange for a cash return or a rebate. Oldham borough council was the first to adopt the scheme, and it is being operated across 20 local authorities. It seems to be a success for councils and is a lifeline for small businesses in the supply chain. With the call to Government from businesses and politicians to strengthen the prompt payment code, such a system could be one answer.

We all recognise that small and medium–sized enterprises are an important part of our economy locally and nationally. The Government must listen to their concerns about late payments and about strengthening the prompt payment code. The Federation of Small Businesses wants more thorough reporting and a more transparent framework whereby all signatories clearly state what their maximum and average payment terms are, with a named contact for small businesses that face difficulties. The federation believes that prompt payment for small businesses must be within 60 days and no more. Will the Minister clarify whether the time limit for payment starts from the date when an invoice is received or when it is authorised? The Communities and Local Government Committee’s report says that the FSB believes that there should be a single contract term that applies to all in the supply chain. I hope that the Minister will comment on all those points in his response.

Councils should be commended for doing all they can to support businesses in their local communities. SMEs play a vital role in all our communities, and if they are to prosper, create jobs and help to build our economy they must be confident of their own financial security. Finding the most positive way to end the problem of late payment is one way in which the Government and local government can help. I look forward to the Minister’s response.

It is a pleasure, Mrs Riordan, to serve under your chairmanship. I congratulate the hon. Member for North Tyneside (Mrs Glindon) on securing this important debate. I say that not just as a Minister, but as a Member of Parliament and a former council leader. I know how important the issue is for small businesses in my constituency, and I hope to answer all the questions that have been asked.

Prompt payment is important to all businesses and is often critical to the survival of small businesses and voluntary organisations. Suppliers must be confident that they will be paid on time. Many small businesses now cite late payment as more of a problem than access to external finance. As the hon. Lady said, 60% of small businesses suffer from late payment. Small businesses cannot afford to be kept waiting for payment and to have to spend time and resources on chasing late payments.

Councils have an important role, because they are substantial buyers of goods and services. Last year, local government spent £57 billion on procuring goods and services from a wide range of businesses and voluntary organisations, both large and small. Prompt payment is critical to the cash flow of many suppliers and failure to pay on time can lead to serious problems, especially for small businesses, ultimately putting at stake their ability to continue trading.

The problem of prompt payment is about not just how quickly a council pays a supplier but, as the Communities and Local Government Committee identified in its report on local government procurement, how quickly payments are made down the supply chain. That view is supported by a Federation of Small Businesses survey, which found, as the hon. Lady has pointed out, that although 95% of the responding authorities had policies in place for payment of suppliers, only 39% were identified as passing their payment terms on to their main contractors and therefore down the supply chain.

Central Government has an important role in ensuring that suppliers are paid on time and we are leading by example, seeking to pay 80% of central Government invoices within five working days and making other reforms to increase prompt payment further down the Government supply chain.

Significant legislation is in place already. The Late Payment of Commercial Debts (Interest) Act 1998 has been amended twice, most recently in March 2013, when the Government transposed the updated EU directive on combating late payment in commercial transactions into UK law. That late payment legislation allows companies to charge interest on late payments at 8% above base rate; to apply charges to cover administrative costs; to assume a 30-day term for the purpose of calculating late payment charges if a contract term is not explicitly agreed; to be subject to mandatory 30-day payment terms, maximum, for transactions with public authorities, which reflect the current policy in the UK; and to be subject to maximum 60-day payment terms between businesses, unless they expressly agree otherwise and it is not grossly unfair.

In addition, the Government will be introducing a number of other key reforms later this year as part of the transposition of the EU directive on public sector procurement into UK law. Those reforms will include—I think they will reflect some of the hon. Lady’s concerns—a legal requirement for all new public sector contracts to include 30-day payment terms for all the contracts in the supply chain, so that smaller businesses are paid on time; and a requirement from next year for all public bodies to publish details of instances of late payment and interest paid as a result of those late payments.

There is also a range of new procurement reforms in the Small Business, Enterprise and Employment Bill, which has had its Second Reading in the House, including a new enabling power allowing Government to place new duties on bodies relating to procurement. In future, and subject to consultation, the power may be used to require procurers to run timely and effective procurements and to manage contracts effectively.

The Government have also set up the mystery shopper scheme. Suppliers can refer instances of late payment on public procurement contracts or in public procurement supply chains to the scheme. That will then be investigated and reported on by the scheme.

Tackling late payments is also about creating a responsible payment culture. The prompt payment code, which was developed by the Institute of Credit Management, encourages and promotes best practice between organisations and their suppliers. Signatories to the code commit to paying their suppliers within clearly defined terms and ensuring that there is a proper process for dealing with any issues that may arise. Seventy-five per cent. of the FTSE 100 companies have now signed up to the prompt payment code, following a campaign by the then Minister, my right hon. Friend the Member for Sevenoaks (Michael Fallon), in 2012. Independent analysis by Experian suggests that current signatories to the code represent over 60% of the total UK supply chain value. However, there is a clear desire for signatories to be more open about practices and to be visibly accountable if they fail to live within the spirit of the code. That is why the Institute of Credit Management will be speaking to signatories and consulting on what can be done to strengthen the code and increase its membership.

I thank the Minister for answering my questions so thoroughly. Will he refer to my question relating to early payment, as opposed to prompt payment? If it were 60 days and the payment were made on the 59th day, that could still be a problem for some small businesses.

I do not know the terms under which that phrase came about, but if I were living my previous life as the leader of a council, I would expect us not just to push to the maximum; I would expect us to seek to respond proactively to the other needs of small businesses. In some of the examples I will refer to, I think I can demonstrate how much the Government want to support that.

We recognise that there are numerous examples of local authorities supporting their suppliers and customers. The Government’s “Best councils to do business with” contest last year showed that many councils understood the importance of the prompt payment terms. Bury, the City of London, Halton and Harrow are all committed to paying small and medium-sized enterprises within 10 days of invoices. Other councils, such as North Tyneside, have introduced e-procurement and e-invoicing, all of which are intended to streamline the procurement and payment process, reducing the instances of late payment. In addition, a number of councils, such as Blackburn with Darwen, have signed up to a prompt payment code and actively encourage their suppliers to do the same to ensure prompt payment throughout the supply chain. Through the points made by the hon. Lady and the good examples we have here, I think I can send a note to other authorities, signposting them to really good practice and, if they are not proactively seeking to pay their bills in the terms that we are talking about, encouraging them to go further.

Before I conclude, I want to get a fact on the table—the hon. Lady asked about this point, but I have not included it in my speech so far—namely the 30 days start from the receipt of a valid invoice. I just want to get that on the table, so she is aware of it.

The Government recognise that being paid on time is vital to suppliers. There is already a legal requirement for public bodies to pay suppliers within 30 days or be liable to interest resulting from paying late, and we are legislating to ensure that small firms get treated fairly by mandating prompt payment terms all the way down a public procurement supply chain. However, the sector also has a role to play, and I am pleased to see that the Local Government Association recently published a national procurement strategy that sets out the need for prompt payments. It makes it clear that councils can no longer accept their small and medium-sized enterprises having to wait longer for invoices to be paid.

The requirements that are being placed on councils seem fairly onerous. It is right that that should happen, but my question relates to the seeping down from the main contractor to the subcontractor. Perhaps the Minister has covered this, but I am not sure how we can ensure that that seeps right through to the smallest person in the supply chain.

I am sure that, in the House in the coming months, there will be a great debate on the “how”. We have expectations of local government—the terms and conditions that we expect public bodies to meet. Providers of services and goods down the chain of supply will also be expected to agree to those terms and conditions.

In conclusion, I agree with the recent Select Committee report recommendation that councils should, as a matter of course, pay contractors promptly and include a clause in contracts requiring contractors to ensure that their subcontractors are paid promptly right down the supply chain, just to reiterate that point.

Sitting suspended.