Government needs to do more to promote prompt payments in the supply chain

(We're pleased to feature another guest post from Ian Makgill of Ticon & GovMark, who carry out research into public procurement for potential suppliers to govenrment).

Mark Prisk, small business minister, has admitted that UK government legislation to improve payments terms has failed, and that major suppliers to government are not passing on the benefits of prompt payment terms from government to their own suppliers. This is Westminster speak for "its been a disaster" and by rights this should be a national scandal. Some of the biggest contractors to government are being paid within ten days, but are asking their suppliers, often SMEs, to wait a full 120 days for payment.

Let's be honest, late payment is a corrosive and economically damaging practice that is tolerated far too readily in the UK, and not just in public sector supply chains. Long payment terms push smaller firms to the wall and create an economic race to the bottom as companies prioritise treasury days over relationships with their suppliers.

The correlation between prompt payment and economic growth appears to be a strong one -  below is a table of the bottom six and the top six performers in Intrum Justitia's European payment index for 2011 (www.intrumjustitia.com), with their OECD growth rates for Q3 of 2011 in brackets. The UK came in at 16th position in the table with a growth rate of 0.5%, seven places below our major competitors France and Germany.

Bottom 6 Top 6
21st - Hungary (+0.4%) 1st - Finland (+0.9%)
22nd - Spain (+0.0%) 2nd - Sweden (+0.9%)
23rd - Czech Republic (-0.1%) 3rd - Norway (+1.1%)
24th - Cyprus (NA) 4th - Denmark (-0.1%)
25th - Portugal (-0.6%) 5th - Iceland (+4.7%)
26th - Greece (-2.8% last recorded data) 6th - Switzerland (+0.5%)

 

Prompt payments is an area procurement professionals can make a real difference to the fate of SMEs. In the public sector, if Government Procurement Service and other procurers were to make prompt payment of second tier suppliers a contract requirement, with penalties for poor performance, the government would be able to demonstrate how they are committed to making money flow through the economy to SMEs.

The introduction of the Public Services Bill now requires public bodies to consider the economic and social impact of the business they award, so one easy way to evaluate the economic impact of one supplier over another would be to ask suppliers about the payment terms they use for their suppliers. A real focus on prompt payments could see the issue raised beyond government and into the wider economy, creating a greater awareness of the collective benefit that prompt payment can bring to the economy as a whole.

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