Prompt Payment Code

Baroness Burt of Solihull Excerpts

Thursday 10th May 2018 Lords Chamber

Asked by

[Baroness Burt of Solihull]

To ask Her Majesty’s Government what is their assessment of the effectiveness of the Prompt Payment Code.

[Baroness Burt of Solihull (LD)]

My Lords, I am very grateful for the opportunity to raise this issue, which is arguably the biggest threat to small and larger businesses’ ability to thrive in the UK today: late payment. I thank the SEC Group, the FSB and the AAT for their extremely useful briefings.

Much has been said about the demise of Carillion, but many noble Lords may not be aware that Carillion was signed up to the prompt payment code. The code is a voluntary code of practice run by the Chartered Institute of Credit Management with the backing of the Department for Business, Energy and Industrial Strategy. Members promise to pay their suppliers on time, give clear guidance to suppliers and encourage good practice in their supply chains. These members undertake to pay their suppliers within 60 days and work towards adopting 30 days as the norm. Nevertheless, Carillion, like many other companies, was using money belonging to its suppliers to shore up its own cash flow.

There are plenty of ways in which the big suppliers exploit their supply chain today. Long payment periods are, of course, the obvious one; there are others that I do not have time to include here. During 2017, Carillion’s average payment delay was 43 days, and 5% of its contracts took 120 days to be paid. Its collapse left 30,000 small firms unpaid, with creditors only expected to cover less than 7p of every pound that they spent. Most suppliers to Carillion were not insured against it collapsing, and insurers are expected to pay out only about 3% of the total losses.

Why has the prompt payment code not solved some of these issues? Because it is a voluntary code of practice, it has largely failed to protect supply chains from late payment; it needs to be given more teeth. The AAT comments that the code has been undermined by the fact that the signatories to the code basically fall into two categories: those who already took this issue seriously and those who believe that, as it is voluntary, it does not have to be taken seriously. Carillion falls into the second of those categories.

The situation with public sector contracts, through which suppliers are contractually obliged under the Public Contract Regulations 2015, is quite dire. Under these regulations public bodies have a statutory duty to ensure that all subcontracts and sub-subcontracts contain 30-day payment clauses. Needless to say, Carillion did not have these clauses in its contracts and, as far as I know, no one picked it up on it. Unfortunately there is no effective enforcement mechanism under which to complain, except for the anonymous mystery shopper scheme. Even anonymously, in construction most will not complain because of the climate of fear existing in the industry.

However, there is a ray of hope in the form of payment practice reporting. From this April, large businesses must provide details every six months of their standard payment terms, how they resolve payment disputes and the percentage of payments they make within 30 and 60 days. It is naming and shaming and shines the harsh light of reality on what has been going on below the surface for many years. Of those businesses that reported in December 2017, before the statutory requirement to report came into force, only 52% of invoices were paid within 30 days; and nine of the 10 largest companies that reported their practices paid fewer than 10% of their invoices on time. Reporting is beginning to reveal the scale of the problem but we wait to see whether businesses will change their practices as a result of being shamed.

Tangential to the code, but nevertheless crucial, is the issue of retentions. These can be withheld from construction companies for many years and can often get caught up in insolvencies further up the supply chain. It is estimated that Carillion owed about £800 million in retentions alone. The Government have held a consultation on retentions and we look forward to receiving their conclusions—soon, I hope. Perhaps the Minister could indicate how soon.

A practical and realistic option has been presented in Peter Aldous’s Private Member’s Bill, which receives its Second Reading on 15 June. It seeks that when a cash retention is used it should be ring-fenced within a deposit scheme. This will protect it from insolvencies and incorporate a standard payment process, ensuring no unnecessary delays or time-consuming chasing. The Construction (Retention Deposit Schemes) Bill is supported by 120 cross-party MPs and over 350,000 companies. Could the Minister indicate whether the Government are minded to support it?

I recommend to the Minister a number of options that can deter large companies from paying their subcontractors late and protect small businesses when large contractors fail. First, the Government must be prepared to enforce the Public Contract Regulations so that recipients of major government contracts pay their suppliers within 30 days. I welcome the news last month that the Government will exclude suppliers from major government contracts if they cannot demonstrate fair and effective payment practices with their suppliers. However, we have yet to see the detail and I would appreciate the Minister providing more detail on how this will work, either in his response or in writing.

Subcontractors need to have the confidence to speak out, so I welcome the Government’s announcement that they will have greater access to buying authorities to report poor payment performance.

My second recommendation is that the Government should either accept Peter Aldous’s Private Member’s Bill or introduce something similar on retentions.

Thirdly—and, for the construction industry, arguably most importantly—project bank accounts should be introduced for all public sector construction projects over, say, £2 million, which is already the case for Northern Ireland, Scotland and Wales. PBAs could be used to ensure that payments are made within 30 days by holding the funds in a central, ring-fenced bank account. Highways England uses them, and third-tier subcontractors are paid within 18 days of the evaluation of the work under the main contract. No more Carillions would then be able to exploit their supply chain, using their money and pushing them over the financial edge into liquidation.

Finally, the Government should consider how to give the prompt payment code more teeth. Perhaps all listed companies, or those with turnover over a certain amount, could be required to sign up to the prompt payment code. It could levy fines for poor compliance, which could be used to fund its administration and support subcontractors in distress.

Getting paid fairly and on time will always be an issue for some companies, but these four measures combined would make a significant impact on poor payment practices, which would provide a legacy of which this Government could be proud.

--- Later in debate ---

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Henley) (Con)]

My Lords, I am grateful to the noble Baroness, Lady Burt, for securing this debate and for all the expertise and advice that has come from all other noble Lords who have spoken in it. I think particularly of the noble Lord, Lord Palmer of Childs Hill, and his account of some of the bullying practices used by some of the larger clients. I heard his desire that we should be not just naming and shaming but actively broadcasting the behaviour of some payers. These matters can certainly all be taken into account in the various consultations and decisions that we have to make in the future. As I said, I am grateful to all noble Lords for speaking, but I am sorry that we have lost my noble friend Lord Cope, who felt that he must be dragged away for another debate. I well understand that it was right that he should not speak if he was speaking in another debate.

As I hope to set out, we are actively taking steps to make the United Kingdom’s payment culture fairer while simultaneously providing a base of support for all our small and medium-sized businesses, which are the backbone of our economy. It is right that I should start with remarks about the Prompt Payment Code, the voluntary attempt by which the Government started the process of trying to ensure that companies should lead by example in paying their suppliers promptly and fairly. I am a great believer, as the Government are, in always trying a voluntary approach as a first step. We should not make a point of rushing into legislation but there are occasions, and enough examples have been given to me by all noble Lords in this debate, where the behaviour of certain companies—that of Carillion has been highlighted—leads us to a view that further action possibly needs to be taken. That will be considered and I hope I can set out just how we are going to consider all that.

However, I certainly take on board, for example, everything that the noble Lord, Lord Mendelsohn, said about these matters and what we ought to do in this field. I will certainly look at his Bill when he introduces it in due course; I cannot comment on it in advance of that, just as I would not want to comment in advance on what our attitude is to my honourable friend Mr Peter Aldous’s Bill. But any measure that is introduced to address the unjustified late payment or non-payment of retentions needs to be simple, consistent and transparent. It is premature to commit on those things but we will consider them in due course, as we will consider all the points that noble Lords have made.

I am grateful to the noble Baroness, Lady Burt, for highlighting the fact that there was Carillion. I rather expected that she would raise it and that if she did not, the next speaker would—and if not the next, then another. In fact, I think that nearly every speaker raised it.

[Baroness Burt of Solihull]

I am conscious of the fact that I talked quite a lot about Carillion. I restrained myself from naming and shaming any companies that are currently working still but there are plenty more that could have come under the aegis of this debate.

[Lord Henley]

The noble Baroness knows that she has considerable freedoms in what she can say in this House because of the various protections that she has. Perhaps she ought to take advice from her noble friend Lord Palmer of Childs Hill about not necessarily naming and shaming but broadcasting these points. I merely make that offer to her. My point was that I was pretty sure that Carillion would be mentioned because when one has a code of this sort, it is rather embarrassing that a large company which the Government have made use of, even if it no longer exists, quite obviously signed up to that code without—I will be polite—thinking about the consequences of what it had signed up to.

The fact is that we have a code and it performs a function. We should think about that function and not necessarily completely dismiss it as it is. We know that signatories to that code must pay 95% of invoices within 60 days, in all but exceptional circumstances, and work towards 30-day payment terms as the norm.

In recent years we have strengthened that code and all the Government’s strategic suppliers have signed up to it, as well as some of the UK’s largest businesses. That represents the 2,000 signatories that the noble Lord mentioned; as I understand it, that includes most of those that the Government deal with. This is an important step in moving towards a gold standard across the largest businesses in the United Kingdom, and I hope it will assist us in getting into the position that the noble Lord, Lord Aberdare, talked about, in being in a better state than other countries. If a business believes a signatory is not complying with the code it can challenge its status, and the compliance board will take that into account. I think that I have dealt with the point that the noble Baroness made about Carillion.

The Chartered Institute of Credit Management, which administers the code on behalf of the department, works with all the signatories and challengers to recover payment debt and educate businesses of all sizes on the importance of good credit management and a positive payment culture. The principles of the code are effective only if taken seriously both by signatories and by the suppliers of signatories, which is why we are now exploring how the code can be strengthened and enforced. The noble Lord, Lord Stevenson, and others were looking for more teeth. That is why we will be inviting views on this, as well as on wider payment matters, within the forthcoming call for evidence on unfair payment practices. The code is an important tool for setting best practice, but it is just one of the measures that the Government are using to promote fair payment.

In April last year we introduced a statutory duty for the UK’s largest businesses to report on their payment practices, policies and performance so as to increase transparency and provide small business suppliers with better information about those they intend to trade with. So far some 1,500 reports have been submitted on GOV.UK, and can be accessed easily by the public. Small business suppliers, journalists, academics and others can use that data to compare and contrast, and to hold large businesses to account for their payment practices.

As the noble Baroness and the noble Lord, Lord Aberdare, will be aware, we launched the Small Business Commissioner in December last year, following the appointment of Paul Uppal in October. I realise that the noble Lord, Lord Mendelsohn, had a debate on this subject in January, and I think I am right in saying that he has visited Paul Uppal and discussed these matters. Mr Uppal has an important role in supporting small businesses to resolve payment disputes with larger businesses, providing advice, and helping to bring about a culture change in payment practices and how businesses deal with each other.

The commissioner considers complaints by small businesses against their larger clients, but we also encourage businesses to report poor payment practice and cases of late payment in public sector contracts, including late payment through the supply chain, to the Cabinet Office’s mystery shopper service to investigate. I think that it was the noble Lord, Lord Aberdare, who referred to that. That service provides a further route for suppliers to raise concerns about public sector procurement issues, including payments. It works closely with all public sector contracting authorities to broker a resolution to cases, and makes recommendations to improve procurement. I can assure the noble Lord that the mystery shopper service has handled some 1,300 cases since it was established in 2011, and is widely used by small businesses.

The Government are alert to the specific difficulties, particularly in certain sectors: construction has been named. In October last year my department published two consultations on payment practices within the construction sector. We are actively considering the responses and options for future policy. We are also consulting on how we should exclude suppliers from major government procurements if they cannot demonstrate fair and effective payment practices with their subcontractors. The consultation, to which I believe the noble Baroness, Lady Burt, referred, will close early next month, on 5 June. The noble Baroness asked in her usual optimistic manner when we would respond to it, and I will give the usual response: we will respond shortly. I want to make it clear that we will consider the responses very carefully, and will respond in due course.

We believe that the voluntary approach is a good one, but sometimes it does not work as it should. The recent collapse of Carillion has shown there is still more that needs to be done to protect small businesses. It is with this in mind that a call for evidence is being launched by my department on how we can eliminate the continuing problem of unfair payment. The call for evidence will build on the Government’s existing late payment policies to drive an end to all the unfair payment practices that the noble Lord, Lord Palmer, highlighted when he talked about invoices and cheques being “in the post”, or getting lost in the post, or whatever.

All the steps I am announcing amount to a package of measures that will ultimately strengthen, as we need to, support for small and medium-sized enterprises. It is important, as we all agree, to do what we can to enable them to grow and create jobs by providing an environment in which they can flourish. I am grateful, as are the Government, for all the suggestions from those who have taken part in this short debate. Those suggestions too will be fed into the process. I hope that I have answered all the questions—or at least, I cannot answer them all, because these are matters that need to be considered. What I can say is that we accept that the voluntary approach is the right one to pursue, but it does not always get quite as far as it might, and there may be occasions when we have to look into taking things further in the future. I hope that that deals with all the points that have been made, so I will end my speech.