13 Dec 2010 Prompt Payment in Public Sector – Time to Wise Up
Now let me make something crystal clear. I’m not a fan of free markets and I’m not a fan of the laissez faire capitalism that have led the western economies to the brink of collapse and I am a fan of properly funded public services and I am a fan of public sector playing its part in supporting small business. So please don’t get confused when I say that the public sector in the UK needs to urgently take a lesson from the private sector when it looks at managing it’s tightening budgets and it needs to take a long hard look at it’s misguided prompt payment initiative.
Times are tough for small businesses. They are suffering a double whammy. Their banks aren’t supporting them to help fund them through the lean times and their customers are having to managing their cash flow aggressively which means extending payment terms. Small businesses are going bust – not because they are not good businesses, because they are running out of cash.
So it’s a good thing that the government is insisting that departments pay suppliers promptly. Or is it?
Let’s just look at the effects of this policy using the Department of Transport as a good example. According to a reliable source, the DoT has gone from paying standard terms to paying in 5 days. Pretty impressive! Their suppliers must love it.
So how have they done it? By staffing up apparently. Yes – that’s right – not only has Christmas come early for their suppliers, they employing extra staff to do it. Great for the local economy – but at a time when swingeing cuts are likely to lead to compulsory redundancies in all areas of public sector, does this make any sense? Of course not.
Paying early has a benefit to the supplier and cost to the customer. Government departments don’t understand the concept of cash flow in the same way that private business does (maybe they should!) but there is still a cost. In the case of the DoT it is the cost of extra staff. And the benefit to the supplier – why was that value not recouped to at least offset the extra costs? The DoT have already tried that. But why would suppliers give the DoT a discount for early payment when they know full well that the prompt payment has been mandated upon them.
This is an absurd waste of UK taxpayers money and worse – it only increases the number of public workers who will start 2011 looking for a job. It’s about time that some commercial reality was introduced to the debate on prompt payment – not just in the UK but in the EU too – and with the introduction of current purchase to pay techniques and technologies, things can get better for the benefit of small business and big business alike.