Prompt Payment Code

Wayne David Excerpts

Thursday 8th November 2012 Commons Chamber

[Debbie Abrahams]

The hon. Lady makes a very reasonable point, and that was certainly the case with the Longs—indeed, their daughter was also involved in the business. I secured a Westminster Hall debate on this issue to try to raise its profile, and Ann and her daughter came to that. As I have said, however, the story of Ann and Harry is not unique. My constituency has a high level of micro-businesses—more than 85%—a large percentage of which have gone into administration, primarily as a result of late payments.

The hon. Member for South Basildon and East Thurrock has already mentioned some of the data, but I remind hon. Members that according to data from BACS—the bankers’ automated clearing services—£36.4 billion is owed to small and medium-sized enterprises, affecting more than half of SMEs. That figure has increased over the past 12 months from £24 billion owed, which affected one third of companies. To put that into perspective, high street banks lent £56 billion to small businesses last year—this is not an insignificant problem.

According to BACS data, the average SME is owed £36,000 at any one time, and on average waits 58 days for payment—nearly double the contract terms. Over the past year, 158 million hours were lost by SMEs chasing overdue bills. The most recent survey from the Federation of Small Businesses suggests an even worse picture, with 73% of businesses being paid late over the past 12 months, and one in five claiming that half of all invoices are paid late. Interestingly, 70% of businesses say that the problem has worsened over the past 12 months, and that the private sector is the biggest culprit. I re-emphasise the point raised by my hon. Friend the Member for Chesterfield (Toby Perkins), but we should not be pitting private sector against public sector as this goes across the board. There are issues with both sectors, but we must recognise that according to FSB members, the private sector is the largest culprit.

In November 2010, the economy watch panel from the Forum of Private Business said that late payments had shown a “continued decline”. In addition, small businesses reported that payments are now typically made after 50 or 60 days, rather than 30, meaning that more than a third of a company’s turnover is tied up in late payments. The most recent analysis indicates that 42% of SMEs believe that late payment is an attitudinal issue because it is seen as not important.

The FSB survey indicates that manufacturing is the worst industry sector for making late payments, followed by the construction sector. Although the private sector is the worst culprit, as has been mentioned, there are also issues in the public sector about failing to pay promptly. Again, new businesses are those most likely to be affected.

The impact of late payment can be disastrous: it is estimated that 4,000 businesses folded during the 2008 recession as a result of late payments. Small businesses do not have the cash-flow buffers of larger businesses, which often means that they pay their suppliers later than they would like, and a downward spiral develops.

The 2001 barometer from the Department for Business, Innovation and Skills showed that 42% of employers mentioned cash flow as an obstacle to success in their business. Of those who identified cash flow as an issue, 80% mentioned fluctuating income combined with steady outgoings. The next biggest issue was problems with cash flow due to late payments, and more than half of those sampled in that survey claimed that late payments were a particular problem.

The knock-on effects of late payments include the ability of SMEs to access capital from banks and other financial institutions, and in the FSB’s recent survey, nearly one in five businesses cited poor cash flow as the reason their loan application was unsuccessful. Some 13% of businesses refused additional finance said they had had to lay off staff, and a worrying 40% had ongoing financial concerns.

There is growing evidence that late payments to SMEs are hurting our economic recovery. Data from the Office for National Statistics show that SMEs make up 98% of the total number of organisations in the UK economy, providing 59.1% of all private sector jobs, 45% of all employment, and generating 46% of the UK’s income from the private sector—a massive £1,558 billion. If the growth and survival of SMEs is threatened, it is inconceivable that that will not impact on the country’s economic performance as a whole.

The previous Labour Government responded to the needs of SMEs on late payments by introducing legislation that allowed companies to charge interest and obtain compensation on overdue payments. Following the global financial crisis, we worked alongside business organisations and the Institute of Credit Management to launch the prompt payment code that we are debating today. I will not go into the details, because the hon. Member for South Basildon and East Thurrock has described them, but the code is clear on committing businesses and the supply chain to prompt payments, and on businesses applying it reasonably.

Currently, less than a fifth of large firms and only 25% of FTSE 100 companies are signed up to the PPC. The potential impact is clear. Not only does the PPC commit the signatory to pay on time; it also commits the signatory’s supply chain. If major businesses signed up to the code through their supply chains, the business coverage would be huge, so this summer I invited the 75 FTSE 100 companies that had not signed up to the PPC to do so. That was part of a joint campaign with the Institute of Credit Management, the FSB and the Forum of Private Business, and I am very grateful for their support.

Fourteen further FTSE 100 companies have signed up to the PPC, but disappointingly, six have refused to sign, even after they were given a second bite of the cherry—I sent a reminder believing that they had overlooked my first letter. The key reason that non-signers gave was that they were international companies, but many international companies had signed up, so that does not wash. One company said it did not see why it should sign. A major supermarket not only refused to sign, but in more recent weeks has said that it is increasing its contract terms without negotiation by 150% to 75 days, just because it can.

[Wayne David (Caerphilly) (Lab)]

I am sure the House would like to know the name of the supermarket chain to which my hon. Friend refers.

[Debbie Abrahams]

It is easy to find out—the company is Sainsbury’s. That has been reported in national press, so I am not telling tales.

Staggeringly, the remaining 55 companies did not bother to reply. It is unacceptable for companies to fail to pay suppliers on time or to jack up the payment terms just because they can and because they have the power to do so. It reflects a selfish, I’m-all-right-Jack attitude. There are direct parallels in such attitudes and behaviours to the culture associated with undeserved bloated bonuses and boardroom pay.

As business leaders, with all the rights and rewards associated with their position, those companies must recognise that they have responsibility, including to our wider society. We are one nation, where rights and responsibilities apply to everyone. The wealthy and powerful are not exempt. They need to lead by example, sign up to the PPC and demonstrate acceptable ethical business practice. The code is corporate social responsibility in action.

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[Wayne David (Caerphilly) (Lab)]

The importance to our economy of the small and medium-sized enterprises the length and breadth of the country today cannot be doubted. They are particularly important in south Wales, the area that I come from. In the past, the area has traditionally depended on heavy industry, and today it has a large public sector, but even in south Wales there is an increasingly significant small and medium-sized enterprise sector. In fact, it has been calculated that more than half the Welsh working population are now employed in SMEs. It is encouraging that the voice of SMEs is becoming more coherent and more articulate. The Federation of Small Businesses, in particular, has played an important role in ensuring that that has happened.

That process of gaining a voice for SMEs had led to the highlighting of a number of problems that SMEs face. We know that in areas such as south Wales, there is a close relationship between the private and the public sector. The private sector is disproportionately dependent on contracts coming from the public sector, and I think that relationship is sometimes underestimated by central Government in the economic policies they pursue.

SMEs are in some difficulty because of the problems they face in accessing finance—not only start-up finance, but finance to keep expanding their businesses. It is also true, as several Members have said, that late payment is a problem, which has become more acute as the double-dip recession has put more pressures on small businesses.

When I was a Member of the European Parliament for 10 years, I noticed cross-party support—certainly among British MEPs—for European legislation to tackle the growing problem, as it was then, of late payment. We put forward arguments for a directive, which were accepted by the European Commission, but it has taken a long time—from the period when I was there, 1989 to 1999, to the present—for that European directive to be formulated, approved and brought forward. I am concerned that even after that long period the Government seem determined to delay the directive’s implementation for as long as possible. Small businesses are often critical of European legislation and regulations, but this is one example of which small businesses are in favour. The Government indicated that the European directive would be transposed into British law by the first half of 2012, but I am concerned to note that the transposition will not happen until March 2013—the latest moment it could be done under the law.

The directive is an important piece of legislation because it provides for a 30-day period in which bills must be paid, and if they are not paid, compensation can be provided to the small businesses. As other Members have stressed, however, it is a question not simply of legislation but of establishing good practice. The prompt payment code is, therefore, a significant step forward.

I congratulate my hon. Friend the Member for Oldham East and Saddleworth (Debbie Abrahams) on her effective campaign for companies in the FTSE 100 to sign up to the code. I share her concern at the relatively poor and disappointing response from many companies. She cited the example of Sainsbury’s, and as I regularly shop there, I am now having second thoughts about whether, as a matter of principle, I should do so, given the lack of a positive response from that very significant company.

Another important aspect of the campaign is that my hon. Friend did not conduct it by herself; she had good support from the Institute of Credit Management, the Federation of Small Businesses and the Forum of Private Business. That is indicative of the widespread concern about the issue and the effective way in which the campaign has developed. It is, therefore, all the more disappointing that a significant number of large companies have effectively said no to the campaign. I very much hope that they will have second thoughts.

It is vital for the issue to assume importance, and for us to adopt as bipartisan an approach as humanly possible. Supporting small businesses means supporting the lifeblood of our economy, and it is incumbent on all of us to support and encourage them as much as we can. If we are to pull ourselves out of our present economic malaise, we must recognise that small and medium-sized businesses will be at the cutting edge of our economic recovery. Today’s debate has illustrated that Members on both sides of the House can unite in supporting such practical measures.

We should not pretend that legislation and regulation are irrelevant. There is work to be done on the implementation of the European directive in particular. As the single market develops, as it surely will, more and more small and medium-sized enterprises will be concerned not just with the domestic British market, but with the European market. We must, if necessary, name and shame people who have eschewed the prompt payment code, but we must also send the clear message from this Chamber that all good companies should give the code their wholehearted support.