The Small Business Ombudsman Kate Carnell has shown the government how to give the economy a much needed $7bn boost without government outlays. As I explain below, she proposes that to deliver that $7bn boost — and probably much more — Australia must rewrite the supply chain payment rules so that almost all contractors are paid within 30 days.
This will cause large companies to undertake unprecedented lobbying of the Prime Minister and ministers in the “cocktail set”. But Carnell has caught the bulk of large enterprises red-handed — they have been smashing small businesses, often using the Business Council to provide a smokescreen. It is unacceptable conduct in any developed country, let alone Australia and ranks with the behaviour of the banks. But this time we don’t need a royal commission to uncover the horrible facts. Although her report is a draft, Carnell has put it all on the table.
The ALP will demand an end to the rorts and I am optimistic that ministers like Mathias Cormann and Michaelia Cash will demand action from the cabinet.
Consider the simple facts.
Late payments by large business to small business account for 53 per cent of invoices. This means that $115bn worth of payments to small business are late and that stops $7bn of working capital being available to small businesses every year.
But it gets much worse. The big companies tear up contracts and extend payment terns from 30 to 60 or 90 days and beyond. Using artificial intelligence many probe the weaknesses of their small business suppliers and then promote a range of harsh discount/financing options to exploit those that are under severe pressure.
To those perceived to be in serious trouble, the discounting can go as high as 10 per cent of a bill. To conceal their conduct many say they have joined the Business Council’s supplier payment code and are therefore “good citizens”. The suppler code has been designed like a wide mesh so that unacceptable activities can pass and there is no enforcement. Many companies who subscribe to the code do the right thing and their standing is now unfairly tarnished.
The biggest draft recommendations from Carnell are:
— The minimum standard for all supplier payments (regardless of supplier size) should be 30 days. That’s a big recommendation but it makes total sense. We need to speed up the supply chain payments so businesses, regardless of size, can be funded and can employ more people and invest.
— The small business definition adopted across government should be to simply define small business as not including, say, the top 100 companies. Alternatively, a small business might be defined as one that has fewer than 100 employees. Whenever you set rules there are problems at the cut-off point. Carnell wants everyone paid within 30 days or less.
— Enforceable payment times: the supplier payment code should be replaced by the government’s Payment Times Reporting Framework, with that framework appropriately enforced. Carnell does not spell out penalties but given the appalling behaviour of many large enterprises the penalties need to be severe. Loss of the ability to tender for government contracts is a start but the penalties may need to go further for bad offenders. In my view the fast payments must be locked in legislation and the plan should operate from July 1.
— Supply chain finance, used correctly, is a legitimate and effective tool and should be available to small business to reduce payment times from 30 days to better. Currently it is too often used to force suppliers to slash what they are owed to get their money fast.
Our economy is under pressure and large sums will be required for bushfire relief and the coronavirus. At the same time the lower iron ore and gas prices plus the lower tourist activity will slash taxation revenue. Lower interest rates no longer stimulate the economy.
Carnell shows us how to give the economy an enormous stimulation but the political lobbying campaign against the “Pay on Time” movement will be intense.