CIMIC caves on supplier terms

Contracting giant CIMIC has bowed to pressure and returned to 30-day payment terms for its small business suppliers.

CIMIC has been under pressure over payment terms

Contracting giant CIMIC has finally caved to pressure and returned to 30-day payment terms for its thousands of small business suppliers.

CIMIC shifted its payment terms to suppliers last year, pushing out payment terms from 45 to 65 days across its operating businesses — including engineering arm UGL and civil contractors CPB — and offering reverse factoring services provided by Greensill Capital if small business subcontractors wanted to be paid earlier.

CIMIC’s move attracted extensive criticism, particularly when the company maintained its stance as the coronavirus pandemic gathered pace, as it meant small business suppliers were effectively forced to take a discount on their invoices to be paid within a reasonable timeframe.

The backflip comes after an investigation from The Australian exposed how some of Australia’s biggest companies were using supply chain financing arrangements to blow out payment times to their smaller suppliers, with some even using artificial intelligence and big data to calculate exactly how much a supplier could be squeezed.

Small business ombudsman Kate Carnell and the Australian Competition and Consumer Commission both launched reviews of the practice, with CIMIC copping criticism from each.

The use of reverse factoring arrangements and similar supply chain financing arrangements — in which big companies use an outside financier to pay their bills early, usually in exchange for a fee and a discount on the bill from the supplier — are legal, and can be a useful means for smaller companies to manage their own cash flows.

Timely payment is a critical issue for small businesses, who cannot dictate terms to their own suppliers and staff, are often required to pay their own bills on shorter terms than major companies, and must make those payments whether the big companies they work for pay on time or not.

But CIMIC, along with Telstra and other major companies, introduced the use of supply chain financing at the same time as pushing out their own payment terms, putting additional pressure on suppliers to use the services.

For big businesses it can be a way to hide problems on their own balance sheets, or offer a short-term sugar hit as the company pushed off creditor payments, or simply a means of winning discounts from smaller suppliers.

In January The Australian revealed that Rio Tinto had introduced a similar financing arrangement it described as “dynamic discounting” through US software provider Taulia, specifically targeting small business suppliers, with one Rio manager telling a conference the service was an “alternative investment option for group surplus cash at low risk” and “reduces cost of unit purchase”.

The Australian also revealed that Taulia was offering an artificial intelligence service allowing big companies to aggregate data on their creditors and work out exactly how much of a discount each would be prepared to offer.

After the revelations in The Australian both Rio and Telstra ditched their supply chain financing push to small businesses and, faced with growing criticism, Greensill gave its clients until October 31 to reduce payment terms to below 30 days for small businesses or face the loss of its reverse factoring services, with CIMIC a major target of the threat.

In the face of Greensill’s threat, CIMIC began reducing its reliance on reverse factoring earlier this year, slashing more than $700m from its supply chain financing balance in the nine months to the end of September.

On Tuesday CIMIC said it would return to paying small businesses within 30 days from early 2021, when the Department of Industry, Science, Energy and Resources has set up a register of “small businesses”, in line with legislation passed in October by federal parliament.

Small Business Ombudsman Kate Carnell welcomed CIMIC’s decision, saying that, while payment times have blown out during the COVID-19 health crisis, the use of supply chain financing had decreased.

Spotlight, Sussan Group, Solomon Lew’s Just Group and Flight Centre have all used the pandemic to push out payment times.

“It’s getting better. The great dilemma for us is there are lots of these practices that we don’t hear about until there is a serious problem. We do know that payment times have blown out and the Creditorwatch data shows that,” Ms Carnell said.

“But we are not aware of an increased use of supply chain financing, which is a good thing. The fact that the payment times reporting requirements that have now passed parliament — a range of things happened — makes businesses realise it’s simply not an option any longer.”

ACCC chairman Rod Sims welcomed CIMIC’s decision, saying he was pleased both Greensill and CIMIC had acted to ensure their respective payment and financing arrangements did not “disproportionately burden small business suppliers”.

“Supply chain financing is not unlawful, and in some cases can be a good option for small businesses. However, we are keen to ensure that supply chain financing is not used to push out payment terms for small business suppliers or require them to accept a discount in order to be paid within 30 days, especially during the COVID-19 environment,” Mr Sims said.

A spokesman for Greensill said the company did not comment on its relationships with clients, but said it welcomed the result of the ACCC review.

CIMIC shares closed up 75c, or 3.2 per cent, at $24.53 on Tuesday.