Small and Micro-Business Borrowing

Lord Berkeley Excerpts

Thursday 24th May 2012 Lords Chamber

[Lord Berkeley]

My Lords, I, too, welcome this debate and the success of the noble Baroness, Lady Kramer, in achieving it. It has been a very interesting debate so far and I would like to discuss, if you like, the other end of the telescope: the needs of small businesses that have contracts with large companies.

Due to the way that the large companies have set their terms, these SMEs seem to need more and more finance in order to create enough working capital to keep going. It is very sad that some of these major companies are taking action to make it more difficult for SMEs to continue. They do not seem to realise that if they do not have the SMEs, their own businesses are not going to succeed. I will describe two case studies—one good, one bad—and I certainly am not blaming banks for the situation, I am blaming the companies. It is an issue that needs some action.

First, the good company is Network Rail—it may surprise your Lordships to hear me cite Network Rail as a good company, but actually in the past five years, from being a pretty bad customer, it has turned out to be a very good one. In November, it launched a fair payment charter for its suppliers, which it signed with 30 of the biggest construction and engineering companies. Network Rail says that the charter helps to,

“increase liquidity through the supply chain”,

and there is about £7 billion a year of expenditure at stake. I believe that some 80% of its suppliers are in the SME category, so it is quite important.

The key thing is that Network Rail has taken a decision,

“to shorten the time it takes to pay suppliers from 56 days to 21 days”.

Equally importantly, the fair payment charter also,

“commits Network Rail’s suppliers to make payment to their first-tier subcontractors within seven days of receiving payment. This means that the time from the submission of a main contractor’s application to receipt of payment by the first-tier supplier is now 28 days”,

which really helps to,

“increase the liquidity of the supply chain and provide greater certainty for suppliers in terms of business planning”.

The other thing Network Rail has done is to,

“phase out the practice of retention in contracts—where a portion of payment is withheld until after completion of work”.

This is very common in the civil engineering industry as well. The charter also requires suppliers,

“to mirror the retention regime agreed with Network Rail for the … subcontractors. So, where the main contract retention is zero, this will be replicated down the supply chain”.

This is a major achievement.

In March, Network Rail signed up to British Standard 11000—Collaborative Business Relationship Management Systems—with its five major suppliers through the Institute for Collaborative Working. I declare an interest in that I am on the board of the institute. It really is a major step forward. I talk to a lot of contractors and suppliers of Network Rail and they welcome it. It is not often that suppliers to any big organisation welcome the payment terms, and this is really a positive step forward. Let us hope that it continues—I have every reason to believe that it will—as it will help getting value for money on a £7 billion programme.

Now for the bad case, and it is pretty bad. I refer to National Grid, which is a company that is probably of a similar size to Network Rail. It is a pretty strong company. It made a profit of £644 million in the year to 31 March 2011, and the credit agencies indicate that it can be provided with over £46 million in credit by its creditors. One could reflect in passing why, with this kind of financial result, its regulator, Ofgem, does not require it to cut some of its charges to customers, although that is a slight aside. My question really is: what is the company doing? I would call it screwing its suppliers so that they have to go to banks, which sometimes find it difficult to lend to them.

National Grid pays an average of 24 days beyond the terms in its contract. It also has very tough procurement processes for small suppliers, which it forces to accept these non-standard terms. It has 42 days as a standard for payment of invoices and is actually paying suppliers, on average, 66 days after it receives the invoice for the work done. This hides the fact that over 34% of the suppliers have to wait 91 days to be paid by National Grid. According to Dun & Bradstreet, this company has one of the worst payment records in the UK. Only 7% of all UK businesses have a worse delinquency score, as I would call it. Of every 10,000 National Grid payments, 5,683 are significantly late. At one time last year its payment terms were 60 days over standard, which means that it is taking over 100 days to pay its suppliers. I suggest that the company is using its monopoly position to force suppliers into lending it millions of pounds—which then forces the banks into lending to the smaller suppliers, through what are probably expensive overdraft facilities, to keep them solvent.

Network Rail and National Grid are both regulated monopolies, as the House will know, but Network Rail has this code of practice while National Grid sits on what I believe is a pretty fat profit and thinks that it is reasonable to delay payment to SMEs for over 100 days, thereby putting some of those businesses into financial difficulties. My question to the Minister is: what is Ofgem doing about it? Has it got any teeth, or has National Grid achieved what I call regulatory capture? The Government want to encourage SMEs and investment, as do we all. They also want to encourage growth—as the noble Lord, Lord Taylor of Holbeach, said in winding up the last debate. Will the Minister therefore ask Ofgem to require National Grid and the other companies in this sector to adopt a fair code of practice on the lines that Network Rail has so successfully operated in the rail infrastructure industry?