Update on early payment initiatives to Small and Medium Enterprises (SMEs)

Report: 8
Date: 13 June 2011
By: Director of Resources on behalf of the Commissioner

Summary

This report updates members of the status of the previously approved actions in support of the Mayor’s Early Payment to Small and Medium Enterprises (SMEs) Initiative and the current payment profile for such suppliers.

A. Recommendations

That members note

1. The actions taken to date to improve the time to make payment on undisputed invoices to SMEs with the ultimate aim being payment within 10 working days of the receipt of a valid invoice and the current payment profile for SMEs.
2. The actions taken to resolve the problems encountered in January 2011 and the improved performance of invoices paid on time for February and March 2011

B. Supporting information

1.In January 2009 the Finance and Resources Committee approved the report entitled “MPA Commitment to GLA Four Year Responsible Procurement Plan. The Committee approved a series of actions with the aim to pay SMEs earlier than the current nett 30 day payment terms and ultimately for all SMEs to be paid within a 10 working day payment term. In approving these actions, as part of a wider programme of improvement to procurement processes, the Committee was satisfied that these actions supported the principal duties of the Authority.

Payment Performance Information

2. From April 2009 the MPS has used methodology outlined in The Department for Business, Enterprise & Regulatory Reform (BERR) document of the 12th November 2008.

3. The definition for 10-day payment to SMEs defined in the BERR document states that the payment date will be deemed as two days after the date the payment leaves our payment system to clear BACS.

4. The clock starts when the MPS receives a valid and correct invoice, if an invoice is incorrect the clock returns to zero until such time as a correct invoice is received. From April 2009 the MPS has used a sampling exercise to determine an average postage delay to calculate a received date. Prior to April 2009 calculations were based solely on the date stated on the invoice without consideration of postage delays.

5. A summary of data for payments made to SMEs over the last 12 months is set out below:

6. For comparative purposes the GLA Group performance based on the latest figures available (March 2011) is set out below.

GLA: 92.5%
TfL: 89.8%
LFB: 90.9%
MPS: 81.03%

Number of invoices typically processed per month - ALL suppliers
GLA: 830
TfL: 25,000
LFB: 4,000
MPS: 30,000

7. In the March update report, members noted a drop in performance for January 2011 to 66% which was due to: -

• Technical issues relating to the introduction of a new payments system which could not be resolved until the planned corporate upgrade to the SAP system were complete
• Loss of experienced staff due to promotion and departure
• Delays receiving invoices caused by the holiday period and bad weather.

8. In order to improve performance Exchequer Services allocated additional resources to the Accounts Payable Team and increased communication to the Business Groups stressing their role and responsibilities to ensure payments are made on time.

9. A Business User Group was established as part of the process to monitor the performance of the new system. Particular attention was given to the effectiveness of the invoice workflow and approval functions which are vital in producing payments in 10 working days. This group will continue to meet to assist in the further development of the system and maintain business awareness of the Mayor’s SME initiative.

10. Also in April on completion of the corporate upgrades to the SAP system a number of technical fixes were implemented which have improved the functionality of the payments system.

11. As a result of these actions payments on time to SMEs rose to 72% in February and 81% in March.

12. A No PO No Pay policy has been produced by Procurement Services and approved by Management Board. Letters informing suppliers of this initiative will be sent in May and June 2011 with a proposed Go Live date of October 2011.

13. Exchequer Services are investigating the possibility of introducing two way matching for SME suppliers to Catering Services. The majority of Catering suppliers are classified as SMEs and produce high volume / low value invoices. Therefore the removal of goods receipting from the payment process will speed up payments to these suppliers.

C. Other organisational and community implications

Equality and Diversity Impact

1. The implementation of the SME payments initiative can be described as “affirmative” action for a distinct group of suppliers who, it is viewed, can be disadvantaged in the procurement process due to lack of equality. Supporting diversity of ownership in the MPS supply base could provide benefits to Social Enterprises, Black and Minority Ethnic Enterprises, women and disabled owned business.

Consideration of MET Forward

2. Supporting the Mayor’s initiative to help SMEs through improved cash flow and thereby maintaining a diverse supply base for MPS purchasing of goods and services to support policing requirements.

Financial Implications

3. This report sets out the work completed to date to improve the Service’s payment processes within a compliant environment which will make a significant contribution to the Mayor’s objective of making payments to SMEs within 10 working days.

The work implemented to date has been completed within existing resources or as part of a larger programme of work to improve the Service’s procurement
processes. As a result of early payment there will be a loss in interest charges or an increased cost of borrowing because cash will be required earlier. It is still difficult at this stage to determine this potential loss as it depends on the level of early payments, cash balances and prevailing interest rates but a best estimate is still considered to be between £35k and £51k per annum in terms of opportunity costs of lost interest receipts.

Legal Implications

4. It is not the intention of the MPS to amend any contract, tender document or purchase order to reflect a 10 working day payment period. The payment terms will only be amended on the MPS system, i.e. the express terms of the MPS will continue to be net 30 days and will outweigh any custom and practice claims of a supplier if, at some point, we revert back to net 30 day payment.

External legal advice was submitted to this Committee and the MPA Officers in December 08 and January 09 as part of previous papers on this topic. In summary the legal advice was that under S.111 of the Local Government Act ("LGA") 1972 the MPA was entitled to "do anything (whether or not involving the expenditure, borrowing or lending of money or the acquisition or disposal of any property or right) which is calculated to facilitate, or is conducive or incidental to, the discharge of any of its functions". To fulfill its fiduciary duty under S.111 of the LGA 1972 the MPA has to justify differentiated payment as a course of action which supports its principal obligations, which are to secure the maintenance of an efficient and effective police force (S.6(1) Police Act 1996) and to achieve best value in terms of economy, efficiency and effectiveness (S.3(1) LGA 1999).

The actions approved by this committee in January 2009 were taken following a review of the above external legal advice. The Committee was of the view that the Authority were acting within the acceptable boundaries of the advice.

Environmental Implications

5. There are no environmental implications, however there are positive social and economic impacts as noted in sections 1 and 2.

Risk (including Health and Safety) Implications

6. Please refer to Financial Implications.

D. Background papers

None

E. Contact details

Report authors: Paul Daly, Director of Exchequer Services, MPS

For more information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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