Public sector finance needs to join the real world

Public sector finance needs to join the real world

The problem with public sector finance is they have it too easy. The challenges that face businesses in the real world don’t affect public sector. Apart from the annual scramble to spend money in order to secure next years budget, issues like cash flow management just don’t exist in the same sense that it exists in the private sector. And this is why it is so disappointing to see government bodies playing the late payment game.

Why do they pay late? They don’t have a good reason to.

Purchasing Insight logoPublic sector doesn’t really have an easy ride but it is true that they are coming under scrutiny for paying suppliers late. Politicians are beginning to get wind of this and are increasingly calling for a culture of prompt payment. I agree with them, but before we rush into measures to pay suppliers to public sector early, lets take a little time to understand the dynamics of the buyer/supplier relationship and see what’s in it for if the tax payer.

Paying suppliers late is financially attractive to buying organizations. The due payments that remain unpaid represents valuable working capital – that’s why big organizations pay late. It reduces their need to borrow to run their business. In the public sector, no such value is attached to this money. It is an asset that is going to waste. This “asset” could be sold to suppliers. If it is sold at a fair price, suppliers could get access to working capital at a price that the banks can’t offer and at the same time, tax payers see a return.

This is not a fanciful idea. Indeed Oxygen Finance is already trialling such a scheme with local government in the UK. Quoted in the Daily Telegraph this week, Roberto Moretti, Chief Executive of Oxygen Finance explained it could generate a projected £2m over the next five years, adding that rolling it out throughout the country would bring in £1.5bn. “With billions running through coffers at local authorities and the NHS,” says Moretti, “they need to take up early payment options and drive efficiency in the invoice procedure”.

£1.5bn – about $2bn – just in the UK. Imagine how much money is being left on the table globally.

Pete Loughlin can be found on twitter @peteloughlin