Hong Kong small enterprises suffer from one of worst slow payers – the public sector
One of the least commented upon proposals in the recent British Labour Party’s election campaign was a pledge to tackle what the Labour leader Ed Miliband called the ‘national scandal’ of late payments to small and medium enterprises (SMEs) by their larger customers.
Maybe his party would have won more votes if this pledge had been better publicized but considering the outcome maybe Hapless Ed had moved somewhere beyond help. However it’s a tad unfair to have him pilloried for being anti-business when he should have been applauded for targeting an issue that is really important for smaller businesses.
Although this problem is widespread it is little discussed and hardly confined to Britain. On the contrary, cash flow problems arising from the way that large organisations keep smaller businesses waiting for payment is a major issue around the world.
That includes Hong Kong where a 2013 survey conducted for Visa by pollsters at Hong Kong University found that 45 per cent of local SMEs experienced payment delays of two months or longer thus putting considerable pressure on their cash flow.
By coincidence this finding mirrors a survey of British SME’s last year, while another survey showed that some three quarters of these companies were forced to wait longer than the normal one month settlement period for payment. British business organizations say that despite attempts to tackle this problem it stubbornly persists and efforts to improve the situation have achieved unimpressive results.
Hong Kong is supposed to be a place where SMEs flourish but the truth is that the business of a great many smaller companies depends on the clutch of very large companies that have monopolistic control of various industries. Food retailing, the sector I know best, is particularly vulnerable to the power of the major supermarket chains who are notorious for late payment and indeed for conditions of purchase that are, to put it politely, not to the advantage of smaller suppliers.
No one is naïve enough not to understand why this is so and indeed it could be argued that the reality of business is that fairness is hardly how things work. Bigger companies are free to bully smaller companies because they can and the smaller companies have little choice but to roll with the punches.
However in Hong Kong there is an added twist because some of the worst slow payers are in the public sector. In part this is because the local public sector has a horrendous bureaucracy that is slow in doing most things and in part it reflects the mindset of bureaucrats, some of whom are busy juggling budgets from one financial year to the next for tactical reasons while others are simply arrogant and feel under no obligation to move quickly when it comes to paying their suppliers, unless they are well connected.
The net result is that smaller companies have to go that extra mile to find ways of ensuring liquidity but it often involves borrowing, imposing yet another burden on the cost of doing business, especially when companies are borrowing to cover unsettled payments. While smaller companies struggle to finance their day-to-day operations they are also starved of capital for longer term financing.
Miliband had pledged to establish a Small Business Administration that would, among things, exert pressure on larger customers to pay their bills more promptly. The British government also introduced a voluntary scheme called the Prompt Payment Code designed to put pressure on large companies to promptly settle their accounts with smaller suppliers.
This code does not appear to have been effective and it is hard to see how heavy-handed government intervention would work.
Part of me says that the way to resolve this problem is for notorious late payers to be named and shamed but the reality is that smaller companies who are tempted by this kind of exposure know full well that doing so entails the risk of loosing business.
However there is nothing to prevent the public sector from setting an example and doing so in the glare of publicity. I quite appreciate that this might involve some bureaucrats putting in a full working day but they could give it a try.
Meanwhile SMEs struggle on, as fortunately they know the meaning of hard work. Government officials are fond of delivering patronizing pats on the back lauding smaller enterprises but most of those grandees wouldn’t recognise a cash flow, even if they were slapped around the face with a spreadsheet so it’s a case of empty words.
One of the few advantages of running a food business is that most of our customers pay at the point of delivery but we also operate a function catering operation that has suffered late payment problems so I am unfortunately familiar with this subject.
Stephen Vines runs companies in the food sector and moonlights as a journalist and a broadcaster