BHP shames giants on supplier payments

BHP’s supplier payments system isn’t perfect, but it’s way ahead of many other companies. Picture: AFP

We are on the brink of a big stimulation to the Australian economy--- a complete revamp of the scandal-ridden $550 billion small and medium sized business payments system.

In a day of high drama Rio Tinto on Wednesday dropped its indefensible “dynamic discounting” and BHP took the unprecedented step of distancing itself from the bad supplier practices devised in Rio’s head office in St James’s Square, London.

Back in Australia at least one former Telstra executive was privately scathing of Telstra’s indefensible payment practices which also include “dynamic discounting” -- a practice that involves slugging struggling small and medium suppliers a one to two per cent discount for faster payment via a third party financier (an interest rate of over 10 per cent).

Sometimes unscrupulous giant companies take a kickback from the third party financier for promoting these awful deals. All “dynamic discounting” deals were undertaken in blatant defiance of the prime minister of Australia.

I do not know whether Telstra or Rio Tinto have taken kickbacks but if the looming small business ombudsman report on these practices names the companies embracing “dynamic discounts” who have taken kickbacks there will be pressure for those kickbacks to be returned to the supplier victims. Heads may roll.

The nation can be very grateful for the work of The Australian’s Jared Lynch and Nick Evans for uncovering the scandals.

But as is usually the case, these scandals are merely surface indicators of a rotten supplier payment system that is depressing the total economy and stopping investment and employment.

As I set out yesterday the government’s plan is first to introduce legislation in the autumn session to give it the power to get in and discover what large companies are really doing.

Given we are dealing with mass delinquency backed by high-paid lawyers the legislation will need to be tough. But honest companies with nothing to hide should not be afraid.

Companies with bad practices that do not change their ways will be banned from government contracts. But finance minister Mathias Cormann and employment and small business minister Michaelia Cash will need to be strong enough to hold the line against what will be intense lobbying by delinquent Australian companies who will continue advocate the Business Council of Australia list system that has clearly failed.

Australia in 2021 could be a more prosperous place with much greater confidence. To help companies understand what they need to do I am going to look at the BHP system, which was devised many years ago and is not perfect, but is way ahead of a vast number of other companies.

First at BHP there is no “dynamic discounting” or kickbacks. Instead there is a really interesting system available to all suppliers. For suppliers wanting to receive their payments faster than the contract terms BHP offers access to a voluntary supply chain financing product established by BHP with a bank. The product creates a direct stand-alone relationship between the supplier and a bank. It does not directly involve BHP but gives the supplier access interest rates based on BHP’s credit rating, not the supplier’s credit rating. It puts the Londoners at Rio Tinto, Telstra and all others involved in “dynamic discounting” to shame.

Second, when it comes to supplier terms BHP’s standard rate is 60 days but small and medium business suppliers are paid within 30 days or faster. It’s not the role of governments to set large company to large company payment terms. As the Prime Minister has pointed out it’s the $550bn annual payments by large enterprises to small and medium business that need to be made faster.

BHP pays all small businesses in 30 days from invoice approval. Small business is defined as a group with revenue of less than $10m —the standard definition . That’s an excellent base policy but in future government rules payments on “approval of an invoice ” needs to be changed to “on receipt of invoice”. (The Rio Tinto payment clock starts on receipt of invoice.)

BHP makes payments runs every day so the system works but too many large companies use the “ invoice approval system” to delay payments and then they delay further by having 14 or 30-day payments runs. It becomes a real supplier payment rate of 60 days plus---it’s a racket to get around the BCA rules.

Like all miners BHP operates in remote communities and part of its game plan is to foster supplier operations in those areas where it is economic. To encourage that in 2012—eight years ago -- BHP introduced a local buying program to support small business suppliers close to its regional operations.

This program has an average payment time of 13 days, and since its inception has achieved 1372 approved suppliers. Spending to date totals $443m but it is accelerating and current annual expenditure involved in the program is now over $100m.

Clearly that sort of program is not for everyone but all large enterprises need to look at how they can go further because small business loan rates are far higher than large corporates.

The $10m turnover definition of a small to medium sized business is standard but needs to be raised.

Win or lose in the 2022 election, reforming Australia’s payments system will be an achievement that all members of the Morrison government will be able to take credit for. But it will not be easy and it will not work to its maximum unless they also tackle unfair contracts.