The UK government should pay suppliers sooner rather than use supply chain finance (SCF), according to MPs.
In a report on lessons from the Greensill Capital affair the Treasury Select Committee said the low cost of government borrowing made SCF less attractive.
“Supply chain finance appears to be a useful product in some contexts,” said the report.
“However, instead of pursuing supply chain finance solutions, it would be preferable for the government to address the underlying cause of the problem by paying suppliers sooner, particularly small suppliers.
“Given the low cost of government borrowing, the value of this type of private sector financing to the public sector is less than otherwise would be the case.”
Under a SCF scheme, a bank or financial institution pays a supplier’s invoice early, minus a fee, and then collects the full amount from the buyer on the due date.
Greensill Capital bundled invoices together and sold them to investors but the scheme collapsed after insurers withdrew cover for these financial products. The company went into administration in March 2021.
The committee said it heard “mixed evidence” on the benefits of SCF for government, with Greensill Capital founder Lex Greensill telling MPs SCF could benefit government because it did “not have the capacity to approve invoices very promptly”.
Greensill also said it could save taxpayer money by having private sector suppliers “bearing the cost of paying suppliers faster rather than the Exchequer borrowing to achieve that”. He claimed the costs of capital faced by government were higher than private sector capital provision.
Former prime minister David Cameron, who worked as a paid advisor to Greensill, told the committee’s inquiry: “First, there is a lot of bureaucracy in government and, even with the best will in the world, sometimes early payment simply does not happen. Secondly… although the Treasury is in favour of it in theory, in practice early payment means the Treasury borrowing more money and paying more interest on it, so there is a cost.
“What is useful about using supply chain finance, even in the public sector, is that if you are paying big suppliers early, they pay for the benefit of that, rather than the taxpayer.
“I think it would be sad to rule out supply chain finance in the public sector because I think it can be very helpful for small businesses such as pharmacies, and it can actually save money for the government at the same time.”
However, Sir Tom Scholar, permanent secretary to the Treasury, told the committee: “He [Greensill] spent several years in the Cabinet Office trying to encourage departments to adopt supply chain finance as a way of funding part of what they were doing. Most departments looked at that and could not see the logic or the sense in it.”
Chancellor Rishi Sunak told MPs: “Our cost of borrowing is low and is going to be cheaper than the private sector, and we are a prompt payer. That is where the Treasury’s scepticism towards these things would have come from, and that is based on a sound rationale.”
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