Memo to Big Business: You owe money. Pay up! It’s that simple

Summary of what’s going on

February 2020

Big businesses have been screwing their small business suppliers for a long time. It’s been a money making ‘sport’. That is, they screw small business people on payment terms as a cheap way of funding their big business empires! In the process they stuff up the heartbeat of the economy—the small business sector. But do big business care? Nah! All that matters to the big business decision-makers is the bonuses they receive as executives!!!

Are we too harsh? We think not! We’re just being realistic about big business behaviour based on the evidence. But, fortunately, it’s now become a big issue.

In this summary we explain what’s been going on lately. We cover:

1. Big business being bad

1.1 CIMIC (construction)
1.2 Telstra
1.3 Rio Tinto

2. Business Council of Australia—Supplier Payment Code—A Joke

3. The Regulators

3.1 Australian Building and Construction Commission
3.2 Australian Consumer and Competition Commission
3.3 Small Business Ombudsman

4. Is Government paying on time?

5. The politicians

5.1 Labor Party
5.2 Morrison Government
5.3 One Nation
5.4 Centre Alliance

6. What’s next? Let’s act

1. Big Business being bad

1.1 CIMIC—Pay late—“Reverse Factoring”
CIMIC is the big construction player. It’s 73 per cent foreign owned (German/Spanish). Current billion dollar government jobs that it’s working on include Melbourne’s Metro Trains and Brisbane’s Cross River Rail projects. In September 2019 CIMIC announced that it would start delaying payments to suppliers by at least two months extending payments to 65 days from date of invoice.

But they are not doing this in New South Wales which had brought in laws requiring payment in 20 days.

For work not conducted in NSW, CIMIC is telling its small business suppliers to go to a finance company, Greensill Capital, who will lend them the money that CIMIC is now not paying them. This neat trick is called “reverse factoring”.

CIMIC has reportedly achieved an additional $1 billion in cash flow by increasing its payments from 135 to 159 days. Ultimately this $1 billion into CIMIC’s pocket will come out of the pockets of small businesses. Somehow this CIMIC ‘trick’ has avoided the government rules in construction requiring on-time-payments. And get this! CIMIC is funding a big share buy-back.

But more! The most recent report (February 2020) is that CIMIC has just made an after-tax loss of $1.04 billion and the CEO has stepped down. What a mess.

We know what often comes from such messes. Too often large firms collapse and small business suppliers then ‘get it in the neck’, losing big money they can’t afford. Is CIMIC in financial trouble? Who knows! But how many small business suppliers can afford to take the debt risk on CIMIC? The reverse factoring ‘scam’/scheme needs to be squashed.

But CIMIC isn’t the only one and it’s not just the construction sector.

1.2 Telstra
In early January 2020 the news broke that Telstra was up to the same ‘reverse factoring’ trick as CIMIC. It’s effectively pushing payment terms out to 90 days in many cases and has offered introductions to a finance company that would lend the small business suppliers the money that Telstra isn’t paying. Telstra was boasting that this would improve Telstra’s bottom line. After securing some 74 suppliers to the scheme (scam?) Telstra reported that it had ‘opened up’ $500m in ‘free cash’ and ‘liberated’ $3.5 billion in spending.

But by the end of January Telstra had supposedly dumped what it called its ‘supplier payday lending scheme’ following community and supplier outrage! See here and here. But then this news. On 6 February Telstra’s CEO was reported as saying that its ‘supply chain financing’ could be a good thing!

So, what are we to believe? Is it simply that big companies dump this sort of ‘screw-over’ process when the political heat is intense? And then wait and sneak such stuff back in when the political heat backs off?

‘Yes’ is the answer because we’ve seen this before. Look at mining giant Rio Tinto.

1.3 Rio Tinto
In late January 2020 Rio Tinto was exposed as demanding that its 10,000 suppliers take a 2% cut to bills if they wanted to be paid in under 30 days. Rio called this its ‘dynamic discounting scheme’. The reaction was swift and angry from regulators (ACCC) and politicians. Within days Rio had backed off and dumped its ‘dynamic discounting’ scheme.

The thing is, we’ve seen this Rio Tinto small business ‘screw’ on-off game before.

In April 2016, Rio tried the same trick by extending payment terms to small business suppliers from 45 to 90 days. The political heat from the then Western Australian Premier resulted in Rio in backing down.

2. Business Council of Australia—Supplier Payment Code—A Joke

The Business Council of Australia is the official ‘voice’ and lobbyist for Australia’s biggest businesses. In May 2017 the BCA created its voluntary Supplier Payment Code. According to media reports the Code was created to ‘avoid legislation’ that would have forced large businesses to pay small business suppliers on time.

In June 2017 we attacked the BCA Code on the basis that it had no independent enforcement mechanism. That is, that signatory companies could ignore the Code. We said that the BCA Code ‘is more a public relations play than substance’. And our assessment has now proven accurate.

Over 120 big businesses have signed up to the Code. This is less than half of the BCA’s membership as we understand it. The signatories include Rio Tinto and Telstra. And the behaviour of these two companies alone makes a mockery of the BCA Code.

In December 2019 we attacked the BCA Code in the Australian Financial Review, calling it a ‘public relations game’. We said “If the BCA’s voluntary code was serious, they would have a dispute resolution clause in there so if [companies] don’t pay on time, or there is a dispute over invoicing or whatever it is, there is an independent body to review it, which should be the small business commissioners.”

Funny, a planned meeting for that day between the BCA and SEA was cancelled by the BCA!

3. The Regulators

3.1 Australian Building and Construction Commission
The Australian Building and Construction Commission has a controversial history. Its task is to bring the ‘rule of law’ to the construction industry. The current structure of the ABCC began in 2017. A key focus is on having construction subbies paid on time. If big construction players don’t pay on time, they can be denied federal government contracts. It’s a big commercial ‘stick’.

SEA Executive Director Ken Phillips is a member of the ABCC Security of Payments Working Group. The Group meets quarterly and monitors the ABCC enforcement of on-time payments requirements to construction subcontractors. The ABCC publishes its reports. As a result, SEA has significant knowledge of pay-on-time issues and enforcement in the construction sector.

Ken Phillips’s observation is that the ABCC is making a difference. Large construction firms are reporting if they are late in paying, the ABCC is investigating and payments are being fixed. The fear of losing or being denied federal government construction contracts is focusing the attention of construction firms in paying on time.

BUT. There are loopholes in the law. As explained above, CIMIC, the largest construction business in Australia, is exploiting those loopholes.

Recently the ABCC has been ‘beefing up’ its compliance activities. The head of the ABCC has released a short video explaining its enforcement activity.

It has issued a warning that companies risk being denied government contracts. It cites the example of one construction company which was prevented from tendering for federal government work in May 2019. We haven’t yet seen an explanation as to how CIMIC seems to be getting around the ABCC rules. (see above)

3.2 Australian Consumer and Competition Commission
In October 2019, after prompting from the Labor Party, the Australian Consumer and Competition Commission began an inquiry into ‘reverse factoring’.

The head of the ACCC is quoted as saying, “This whole system looks like it’s a large player in a very dominant position taking advantage of that position to the disadvantage of small players.” See here for the ALP’s media releases.

The inquiry is currently ongoing.

3.3 Small Business Ombudsman
The big news has been the release of a Position Paper by the Small Business Ombudsman on ‘Supply Chain Finance’ (7 February 2020).

The Ombudsman, Kate Carnell, has attacked the BCA’s supplier Payment Code, calling for it to be scrapped. The Ombudsman echoes our view of the BCA Code (see above) as being useless, saying “There is no compliance monitoring and it’s actually unenforceable”.

The Position Paper has called for major reform including:

Scrap the BCA Code and replace it with a Commonwealth process that is enforced.
All suppliers (big or small) should be paid within 30 days at minimum.
Accounting processes should prevent manipulation of cash flow issues. (For example, pretending that an invoice was incorrect to avoid paying.)

The Ombudsman is undertaking further consultation pending final recommendations.

4. Is Government paying on time?

In good news:

The NSW government is now (2020) paying small business invoices under $10,000 immediately and other small business invoices within 5 days.
The Federal government started paying small business invoices within 5 days using their PCards—a government credit card used by public servants, and
Federal agencies have been ordered to pay interest if they exceed the 5-day payment requirement.
In Western Australia, the Premier jumped on the state government’s Water Corporation when it was revealed that the Corporation was charging small business suppliers to pay their bills within 28 days. The Premier ordered the Corporation to stop this behaviour.

This is exactly the sort of action we expect to see from governments and we congratulate them on this. Governments at all levels, state and local government included, should be under pressure to do the same.

5. The politicians

5.1 Labor Party
The ALP has been on top of this big time. The Shadow Minister for Small and Family Business, Brendan O’Conner, has attacked Telstra and asked the ACCC to investigate ‘reverse factoring’.

Since October 2019 at least, the Labor Party has been putting real pressure on the Morrison government to act and act fast. See here for the ALP’s media releases. It has slammed big business for delaying payments to small businesses and using ‘reverse factoring’ schemes, calling the process a ‘Rortocracy’.

5.2 Morrison Government
The Morrison government recognized late payments to small business as a major issue that needed fixing in February 2019. The first move was to commit federal departments to pay small businesses within 20 days by July 1 2019 and then moved to payments within 5 days. (See above) and here.

The February 2019 undertaking initiated a consultation process under the government’s Payment Times Reporting Framework. The latest report on the consultation was released in November 2019.

Essentially, the ‘Framework’ involves the government setting up a public reporting system where large businesses will have to report their payments to small business. It’s really a ‘name and shame’ process.

By the end of January 2020, however, following the exposure of CIMIC, Rio Tinto and Telstra’s behaviour (see above), reports surfaced that Small Business Minister Michaelia Cash threatened Telstra with the loss of millions of dollars of contracts for its late payment behaviour. The government’s objective seems to be to have small business suppliers paid within 20 days. More detail is needed, but any legislation looks like being delayed until late 2021.

5.3 One Nation
The Senate is important. One Nation has two key Senators. One Nation’s 2019 election policy called for payment times to be written into law along with penalties for companies that ignore the law. It stated that voluntary codes such as the BCA’s are no longer acceptable.

5.4 Centre Alliance
Centre Alliance also has two key Senators. Senator Rex Patrick blasted CIMIC over their 65-day payment terms saying that CIMIC has undertaken a “material breach of their social licence” (7 February 2020).

He said that Centre Alliance would move to fast-track legislation requiring companies to pay their suppliers within 20 days. He said “They (CIMIC and its subsidiaries) should not be treating subcontractors and mum-and-dad families as banks”.

6. What’s next? Let’s act

The evidence is that big business will only pay small business if they are forced to do so.

Tough laws are needed.
The key is commercial pressure.
If a big business doesn’t pay small businesses on time, all levels of government must refuse to have any commercial dealings with that business. This needs to be backed by legislation.

That has to be the focus of a grass roots small business campaign.