Prompt Payment Code

Lord Aberdare Excerpts

Thursday 10th May 2018 Lords Chamber

[Lord Aberdare (CB)]

My Lords, small businesses play a vital part in our national prosperity and well-being in terms of growth, employment, innovation, entrepreneurship, productivity, exports, apprenticeships and so many of the subjects that concern us in this House, not forgetting Brexit. However, they will not fulfil their potential if they have to spend a large part of their time and energy chasing payments they are owed. According to the Federation of Small Businesses, about a third of payments to SMEs are late and the UK has,

“the worst late payment culture in Europe”.

Having run small businesses myself, I know about the perennial challenge of managing cash flow and the difficulty of coping with late payments and ensuring that salaries get paid; sometimes it requires negotiation of emergency loans or overdrafts, or owners forgoing their salaries or having to make loans. In the worst cases, the business may have to close down, as some 50,000 SMEs do each year.

I congratulate the noble Baroness, Lady Burt, on obtaining this debate and introducing it so powerfully. I also thank the Specialist Engineering Contractors’ Group for the helpful briefing it provided. At the same time, adding some criticism to my congratulations, I apologise to the House for the fact that many of my points have already been made, if not by the noble Baroness then by the noble Lord, Lord Mendelsohn. I will briefly comment on three issues, trying to skate over points that have already been made.

First, the Prompt Payment Code is a laudable attempt to improve SMEs’ chances of being paid within a reasonable timescale, but it does not seem to be working, as we have heard. In 2017, the Government announced that 32 of their biggest suppliers had voluntarily committed to pay 95% of invoices within 60 days and work towards adopting 30 days as the norm. That fact that one of those companies was Carillion, which issued its first profit warning four days later and had payment periods always well over 60 days, rather undermines that commitment. Carillion is by no means the only example of a larger company using funds that in effect belong to its smaller suppliers to meet its own cash needs. Last year, the Government set up the Small Business Commissioner to tackle the problem of late payments. He has made a promising start, but has so far received only 42 complaints, relating to 14 companies, and has commenced full consideration of only two. The message is that a voluntary code will not work, as we have heard. Given the understandable reluctance of SMEs to complain about the larger clients on which they depend, will the Minister consider ways to enable the commissioner to be more proactive in seeking out poor practice and giving him more teeth to enforce his findings—for example, through fines, which I believe the Minister has indicated he would welcome?

Secondly, public sector bodies are covered by the Public Contracts Regulations 2015, under which they have a statutory duty to ensure that all sub-contracts contain 30-day payment clauses. Again, there is no effective enforcement mechanism and most suppliers will not use the mystery shopper scheme. Therefore, these regulations also need beefing up, by requiring monitoring of compliance, mandating the use of project bank accounts—as suggested by the noble Baroness, Lady Burt—or instituting rewards and penalties based on performance in payment practice.

My final issue relates specifically to small firms in the construction sector, which suffer the additional burden of retentions: cash held back from the sums due to them on completing a contract, ostensibly so that the client can ensure that the work has been done properly. There are no codes or regulations that stipulate time limits for the release of these retention moneys; the average time they are held is thought to be about two years but it can be much longer. If the client becomes insolvent, the SME supplier loses the money owed to it completely. Some £700 million of funds has been lost like this over the past three years and the collapse of Carillion alone may have resulted in a similar scale of losses. Because of the uncertainty about when or whether the funds will be paid, the business to which they rightfully belong cannot borrow against them or use them to fund new investment, training or extra employment, thereby contributing to the economy.

This is not just unfair but plain wrong. The Government seem to recognise this but their response so far has been shockingly slow, going back many years. The latest study of the issue, commissioned in 2015, eventually reported last year. A consultation process ended in January and last month’s deadline for a government response has now passed. I echo the noble Baroness’s request for the Minister to indicate when that response will come. Apparently, the Government are seeking an approach with broad support and wish to avoid any potential negative economic consequences, but there is never likely to be much consensus between businesses whose funds are being withheld and those that are withholding them. The actual negative consequences for businesses deprived of funds that they have earned are plain to see.

The long-term solution may be a complete ban on retentions, but that will involve a major change of long-standing culture and behaviour in the construction sector and will take time. Something much more immediate is needed to ensure that funds owed to small businesses are properly protected, and soon. There is no shortage of possible approaches. We have heard about the tenancy deposit scheme in the rental housing sector. Others include the insurance-backed scheme in the lift industry—which has worked well for 17 years—or a guarantee-based scheme. Potential providers have indicated their willingness to offer or run such schemes. I also echo the support for the Private Member’s Bill introduced in the other place, the Construction (Retention Deposit Schemes) Bill, which has its Second Reading next month. That would require all cash retentions to be ring-fenced. The Minister made mildly encouraging noises about possible government support for this when he answered an Oral Question from me about retentions in February.

I end, therefore, by asking the Minister some further questions. What plans does he have to protect from loss retention money owed to small firms? How soon does he aim to have this protection in place, given the urgency of the need? Finally, will the Minister consider using the Aldous Bill as a vehicle to bring about the changes needed in the timescale needed?

Denying small firms funds that they have earned is not just unfair: it is a disgrace that is damaging to the positive impact they can make for the UK. The Government seem to recognise the problem. Other countries have already tackled it. It is high time that we did the same.