A government plan to help small businesses by paying invoices promptly has seen most of the benefits going to big business, according to the government spending watchdog.
The National Audit Office (NAO) found little evidence that the government’s commitment to pay 80% of undisputed invoices within five working days is having the intended effect of helping the UK’s 5m small and medium-sized businesses and said the Cabinet Office could not demonstrate that the policy provides value for money.
Central government spends £40bn a year on goods and services, with about £4.5bn going to small and medium-sized enterprises (SMEs). A report from the NAO says that despite that commitment, most public sector bodies still take more than 30 days to pay suppliers, and that there is a risk of the policy boosting the working capital of main contractors, rather than helping smaller businesses in the supply chain.
The report also found government officials were unable to locate the original papers setting out the policy objectives, estimated costs and benefits of the five-day prompt payment commitment. It criticised a lack of strategic leadership on prompt public sector payment and recommended that the Cabinet Office set out the objectives of the commitment, as well as its benefits and costs.
Small firms told the NAO that government generally pays faster than private sector suppliers, but when the watchdog looked in detail at four departments (the Ministry of Defence, the Home Office, the Department for Business, Innovation & Skills and the Cabinet Office), it found they all took much longer than five days to pay most suppliers, including SMEs.
While the departments reported good payment performance against the five-day target, the NAO said this was skewed in their favour by a high volume of low-value electronic transactions with a few large suppliers. The NAO accused the departments of overstating their performanceby failing to record when they receive many paper invoices. According to the watchdog, the four departments took between three and seven weeks to pay most of their suppliers.
Margaret Hodge, chair of the Public Accounts Committee, said it beggared belief that government departments did not record the date when paper invoices, commonly used by SMEs, are first received, and that around a third of SMEs were not getting paid within 30 days by their public sector clients. “This is despite government’s claim that it is committed to increasing the role of SMEs in providing public services rather than allowing large companies like Serco and G4S to continue dominating the market, often at the expense of the taxpayers’ interest,” she said.
The NAO said suppliers to government could benefit by up to £88m a year in lower interest costs if the government really did pay invoices in five working days, rather than 30. But the policy also increases the government’s need for working capital, which could generate extra costs of £55m a year to the taxpayer in increased interest on government debt.
A government spokesperson said: “As part of our long-term economic plan this government is reforming public sector procurement, saving taxpayers £5.4bn last year alone compared to spending before the last general election. Our reforms are supporting suppliers of all sizes and we have substantially increased the proportion of business won by small firms.
“The report recognises that we are making progress, but there is more to do. This year we will enforce payment within 30 days all the way down public sector contracts’ supply chains.”
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