Australia has had it with Fonterra’s payment-lagging – and fair enough

by The Listener / 20 April, 2017

For most people, being a chronic late payer of bills can have consequences: threats of goods being seized, services being cut off, credit ratings being tagged and court action.

For certain big companies, chronic pushing out of payments has become a nifty way of getting a free loan.

In Fonterra’s case, there has been strong criticism of its behaviour, and Australia has had enough. After an Ombudsman there went so far as to allege that what it and other large companies are doing is “pretty close to extortion”, the Australian Government is moving to crack down on those, including our dairy giant, that oblige their contractors to accept payment lags of several months.

A string of big Australian companies, including supermarket chains, have quickly vowed to shorten their payment times in anticipation of new contract legislation. Yet on this side of the Tasman, the Government appears agnostic. Our ministers have so far responded by expressing reluctance to “interfere with business”.

The matter should have come to a head last year, when small suppliers revealed it had become routine for Fonterra to contractually oblige them to wait up to 90 days for payment. National backbencher Chester Borrows deplored the situation, but the rest of the Government said little and did nothing.

Meanwhile, lobby group Small Business Voice says withholding payment is “almost theft”. The group’s chief executive, Max Whitehead, believes Fonterra should know better. “It’s disgraceful.”

The practice is by no means exclusive to Fonterra. The market dominance of big companies means they can dictate payment lag and other terms to small and medium enterprises (SMEs), because few will have much choice but to accept them. Growers, grocery manufacturers, rural contractors and construction services are particularly dependent on dominant market players. They can’t take their business elsewhere and must suffer their margins and cashflow being squeezed by one big, powerful customer. This helps explain how, despite our building boom, many construction-sector players are failing.

The power imbalance has taken a more ominous turn in Australia, where Fonterra, having laid many SMEs in its supply chain open to becoming financially vulnerable by chronic delayed payment, then offers them faster payment in exchange for a percentage of the bill via a third party. This comes under the euphemism of “supply-chain finance”.

The cynicism is breathtaking. To beggar a company by withholding money you owe it while you use that money to make yourself more money hardly seems ethical.

Delayed payment and supply-chain finance are an increasingly common practice worldwide, but other countries are starting to curtail it and there is no excuse for our Government’s lack of interest. Australia looks set, like the UK, Germany and other European Union nations, to introduce a voluntary code of maximum payment times and to consider making state agencies take the lead, with a maximum payment time of 15 or 30 days. (Fonterra says it has a standard payment term of 61 days from the end of the month that the invoice was sent – a lag of up to 92 days.)

Short of creating an Invoice Police Force, it’s not easy to legislate for prompt payment. But Australia’s Ombudsman for small business, Kate Carnell, says it’s urgent to draw an ethical “line in the sand”. She says companies must continue to be able to strike mutually agreed terms, but it’s possible to legislate so that if one party to a contract is reluctant to accept terms considerably longer than the traditional 30-day payment, it can invoke dispute procedures to deem that contract unfair.

Carnell says the power imbalance is a serious economic menace, as small businesses are the engine room of the Australian and New Zealand economies and late payment starves them of vital cashflow.

We lack comprehensive statistics on payments here, but users’ data from accounting firm Xero suggests we’re prompt commercial payers overall, averaging 11- to 15-day settlements. Yet widespread anecdotal evidence suggests that thanks to the $1.7 billion worth of invoices Xero estimates were overdue in the past year, a few big companies got a big injection of free money.

Fonterra needs to urgently consider its reputation – and ours. It will be a national humiliation if our biggest company waits to be shamed by other companies, or worse, compelled by law, before acting.

Illustration/Getty Images

This article was first published in the April 29, 2017 issue of the New Zealand Listener. Follow the Listener on Twitter, Facebook and sign up to the weekly newsletter.

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