Public Sector Supply Chains (Project Bank Accounts)

Debbie Abrahams Excerpts

1st reading: House of Commons
Tuesday 15th January 2019 Commons Chamber

[Debbie Abrahams (Oldham East and Saddleworth) (Lab)]

I beg to move,

That leave be given to bring in a Bill to require public authorities to pay certain suppliers using project bank accounts; and for connected purposes.

It is exactly a year ago today since the construction giant Carillion announced it was going into liquidation. At the time, there was widespread concern about what that would mean for the completion of major public sector projects already under way, including hospitals and HS2, which Carillion was also working on as part of a consortium. There were also real worries for the 30,000 or so small businesses that, as part of Carillion’s supply chain, were also working on these projects. After Carillion’s collapse, thousands of those subcontractors lost major contracts and were left reeling with substantial debts. A survey of building, engineering and electrical firms showed that small businesses were, on average, owed £141,000 by Carillion, out of a total of £2 billion owed to suppliers. The vast majority of those suppliers never received any recompense. Following on from those losses, it has been estimated that 780 small building firms went into insolvency in the first quarter of 2018 as a direct consequence of Carillion’s collapse—that is a 20% increase in insolvencies on the previous year.

Neil Skinner, whose construction firm Johnson Bros. is based in my constituency, and who is here today, was one of Carillion’s suppliers and lost £176,000. Neil told me:

“Carillion often went over sixty days”

before it paid him,

“with a lot of chasing, and once the job for a particular customer was finished our sanction, to stop working, was gone and their payments just stopped”,

even though Carillion still owed money for the job that Johnson Bros. had done for it.

“They resorted to using all the familiar late payment tactics, from finding fault with an invoice, referring us to their India accounts office, statement queries, disputed invoices paid, and so on.

Then, lastly, they imposed a 15% non-negotiable discount on our work or they would send all unpaid invoices back to their quantity surveyor’s (QS) department. We reluctantly signed this contract and then they went ‘bump’ the Monday after signing and 10 days before the first part payment was due.

As a result of Carillion’s late payment tactics small enterprises like mine have been suffering greatly, if not terminally.”

Neil added:

“Large companies know late payment can destroy small businesses like us, but they rely on these tactics to ‘cook the books’ and be seen to be profitable themselves. Carillion went under owing us well over 15% of our annual turnover and, following a difficult year last year, this money is much needed to help us survive.”

By ensuring that all public sector projects over £500,000 use project bank accounts, my Bill would not only protect small businesses from losing money owed to them should the tier 1 supplier become insolvent, as Carillion did, but stop small businesses being paid late by large companies. PBAs are ring-fenced bank accounts into which monies due to firms providing construction or other works are paid. The accounts are ring-fenced in a trust arrangement so that if a tier 1 contractor becomes insolvent, the monies for the subcontractors are protected. They do not disrupt contractual arrangements, but instead of public bodies paying tier 1 contractors directly, the public body pays money directly into the PBA. The tier 1 contractor and suppliers are then all paid simultaneously, usually within 15 to 18 days.

The Government are already using PBAs successfully in many areas. For example, Highways England uses them for all its works, and by 2020, £20 billion of highways work will have been paid through PBAs. They have also been used in building projects in Scotland, Wales and Northern Ireland. Even some local authorities are using them. Internationally, many Australian states mandate for PBAs to be used in construction projects, and last year the European Commission agreed to use PBAs for European projects.

In addition to payments to small business suppliers being protected and being received more quickly, there is also a reduction in disputes and disruption, as suppliers are less likely to suspend their work when paid promptly. The costs of public sector projects are reduced as well, as the greater security of payment provided by PBAs is factored into suppliers’ pricing. PBAs are a practical, tried and tested measure to protect small businesses and make sure that they are paid promptly.

I have been campaigning against late payments since 2011, when a haulier in my Oldham East and Saddleworth constituency came to me and told me that he was struggling to survive because a mainstream supermarket chain was delaying payments. He was scared that he was going to go under. When I investigated the problem, I was staggered to see how endemic it is right across the country. Four out of five companies across all sectors experience late payments and are owed money, with 68% having to write off bad debt. One in three small businesses admit that late payments are forcing them to rely on bank overdrafts to keep up with their overheads, and more than a quarter say that late payments are forcing them to pay their own suppliers late.

It is shocking that, collectively, small businesses were owed £14 billion in late payments last year. Although late payments have come down from their height in 2013, just under half of small and medium-sized enterprises spend around £4.4 billion in admin costs alone on chasing late payments, and more than one in 10 businesses struggling with overdue invoices have to employ someone to chase for payment. Although the private sector tends to be worse for paying late than the public sector, some Government Departments are also failing to meet their commitment to pay 80% of undisputed invoices within five working days. In addition, Bacs research on existing measures to tackle late payments said:

“When it comes to government initiatives…about a quarter…say they are aware of measures to oblige large and listed companies to publish payment practices. However, three quarters…don’t feel these measures improve the speed their companies are paid.”

In 2013, I held an all-party inquiry to look into the issues associated with late payments and what could be done about them. The evidence we took from small businesses was incredibly powerful. Our key finding was that late payment reflects the culture in the company, and as we know the culture of a company, or a society, ultimately reflects its leadership. It was clear that late payment was used as a form of corporate bullying, with large companies exerting their power over their smaller suppliers just because they could. There was also evidence that many large companies are trying to rebuild their balance sheets on the backs of small businesses, and even have business models that rely on delaying payments to their suppliers. For some tier 1 suppliers, they are little more than a funding repository. Late payment like this is unethical and needs to be seen to be as unacceptable as tax evasion.

Before Christmas, I followed up on my inquiry with a roundtable with representatives from small businesses, including the Specialist Engineering Contractors’ Group and the Federation of Small Businesses. Although some of my inquiry recommendations had been implemented, it was clear that there was still much to do, and PBAs were seen as a practical next step.

Our small business sector is the powerhouse of our economy, contributing £2 trillion of annual turnover—more than half of all private sector turnover—and providing 60% of all private sector jobs. Small businesses are critical to boosting aggregate levels of productivity in the UK, which, as we know from last week’s figures, is at its lowest point in a decade. For a sustainable recovery and healthy growth, we need to support and nurture our entrepreneurs and small businesses. There is so much that needs to be done to tackle late payments and protect small businesses; my Bill is just one step in that process.

Question put and agreed to.

Ordered,

That Debbie Abrahams, Alex Cunningham, Toby Perkins, Anna McMorrin, Diana Johnson, Rachel Reeves, Peter Aldous, Andrea Jenkyns, Marion Fellows, Caroline Lucas, Stephen Lloyd and Jim Shannon present the Bill.

Debbie Abrahams accordingly presented the Bill.

Bill read the First time; to be read a Second time on Friday 1 March, and to be printed (Bill 315).