They’re asking for fair terms of trade. All they’re asking for is fair and normal terms of trade.
As part of this inquiry, the Committee was asked to look into the appropriateness of the payment terms offered to businesses by the mining sector. This topic generated significant interest and a number of submissions were made that focussed primarily on this issue.
The Committee received public, confidential and ‘name withheld’ submissions outlining problems that small and medium sized businesses were facing as a result of ‘extended payment terms’.
Payment terms are the conditions written into business contracts that stipulate the length of time a mining company will take to pay the invoices they receive from suppliers and subcontractors. For the purposes of this inquiry, ‘extended payment terms’ are taken to be anything over 30 days.
In addition to extended payments terms, witnesses also raised concerns about unreasonable contract requirements, which made doing business with mining companies harder or more risky for smaller businesses.
This chapter presents evidence on the impacts of mining company payment terms on regional businesses provided throughout the course of the inquiry. It also looks at other contract conditions that submitters raised as a concern. The chapter concludes by considering what options are available to address these concerns, and presents recommendations.
Extended payment terms
A number of businesses and organisations told the Committee they were being affected by extended payment terms offered by large mining companies operating in Australia.
One business (name withheld) submitted that it was being affected by terms of ‘90 days plus’ on a new contract to provide a development labour and management team for a Rio Tinto mine, explaining this had increased its debtor days.
The business stated that, as a result of these terms, 50 per cent of profit for the year would now have to be ‘used to manage cash flow’.
Raey Services Group, a contractor based in Mackay, submitted that payment terms of 60 days were putting pressure on the business, which still had to pay its bills on time. It said: ‘… basically we are carrying big companies at our expense’.
Extended payment terms are a relatively recent phenomena. Historically, payment terms of 30 to 45 days from the date of invoice were widespread in the resources sector, but research indicates that many companies extended their terms globally in the wake of the Global Financial Crisis (2007/8).
One mining services contractor (name withheld) reported that as well as increasing payment term days during the last industry downturn, mining companies asked their suppliers to ‘significantly reduce profit margins’. The contractor added:
Now in the upswing market cycle with these businesses enjoying renewed profitability we would expect that they would recognize the sacrifice made by their vital supply chain partners and revert to what have always been seen as standard industry payment terms, 30 days.
Mr Kieran Moran from the Gladstone Engineering Alliance told the Committee that local content and extended payment terms ‘were at the top of the list’ of member concerns, revealing:
Difficulties in raising finance to cover extended payment terms have led a number of companies to cut back on employment, reduce investment in productive new plant and equipment and defer investment in research and development—and some have even closed the doors.
The Resource Industry Network, based in Mackay, submitted that it has been running a campaign to convince mining houses to revert to traditional 30 day payment terms. As part of this campaign, it commissioned Lytton Advisory to investigate and analyse the impact of extended payment terms.
The Lytton Advisory report found that one third of mining industry suppliers in the region have half or more of their revenue on extended payment terms. Over 70 per cent of affected businesses reported cutting back on new capital investments, such as equipment, not hiring new employees, and being unable to invest in new technology and innovation.
At her appearance in Mackay, Mrs Adrienne Rourke from the Resource Industry Network, expanded on the findings of the report, citing the example of a company with a turn-over of around $30 million on 60-day payment terms, which would be ‘missing out on up to half a million dollars of missed opportunities’, as this money is being lost in finance costs.
Mrs Rourke further reported Lytton’s finding that ‘[r]everting to 30-day payment terms would add to our regional economy 380 jobs, $150 million in wages and $250 million in gross regional product flow-on impacts over the next five years.’
Affected companies reported using the following strategies for dealing with extended payment terms:
drawing heavily on cash balances built up during the boom;
drawing further on established lines of finance with their banks (overdrafts, equipment financing, invoice and debtor financing);
accessing invoice financing provided by the large mining companies; or
considering third party financing (e.g. Citibank).
One business explained that it relies on a debtor finance facility to pay wages and suppliers, using its unpaid invoices ‘as collateral’. The business stated that the finance facility ‘costs our company $15,000 per year to keep open, plus 8% interest on money borrowed’. This was a common story in submissions.
Mr Moran reported that the ongoing viability of some businesses is being threatened by extended payment terms.
Mr Neil Lethlean from Capricorn Enterprise, concurred that the practice ‘constrains employment growth and impacts on strategic business expansion’.
One mid-sized engineering company (name withheld) confirmed that extended payment terms were limiting its capacity to invest:
Operating on borrowed money makes us reluctant to spend on intangible investments like staff training, cadet engineers, and research and development; all of which are vital ingredients to innovation, but speculative in nature.
Ms Vicki Leeson from the Central Highlands Development Corporation described extended payment terms as the ‘biggest problem’ impacting the mining services sector, adding:
… I’m talking about a business that might turnover $500,000 a year. That’s 40 grand a month. When they start to get into three-month terms where they are $120,000 out, they themselves all of a sudden can’t eat. They’ve got to stop taking wages and they’ve got to stop paying their own personal bills.
The Committee heard that businesses were waiting significant periods of time to be paid. For instance, Ms Leeson stated that businesses could be ‘held out’ for ‘90 days minimum’ and Mr Mark Bushell from CE Smith & Co Mackay Chartered Accountants in Mackay, stated that among his clients who work for the mining industry in the Mackay region, ‘a majority’ are facing terms of 90 days and sometimes longer.
Ms Bronwyn Reid (private capacity) asserted at the hearing in Rockhampton on 29 August that her own business had at least one invoice outstanding for a large mining company, for work performed in June.
It was clear from evidence that different mining companies had different payment terms and practices. Mr Moran stated that one Gladstone company’s payment terms are 60 days and another major company pays in 120 days.
Isaac Regional Council conducted a survey of local businesses which found that payment terms can range from 30 to 120+ days. It also found:
Over 70% identified that payment terms offered by mining companies were in excess of 45 days; and
Over 40% identified that payment terms offered by mining companies were in excess of 80 days.
Payment terms of different mining companies
Prior to November 2018, the biggest mining company in Australia, BHP, had 60 day standard payments terms, but offered better terms for small businesses. BHP submitted:
… small businesses, local community suppliers and Indigenous suppliers are entitled to an exemption from our standard 60 day payment terms. For these suppliers, payments of 30 days or less apply. A supplier that does not qualify as a small business, local community supplier or Indigenous supplier, but is nonetheless experiencing significant financial hardship, may also be granted an exemption from our standard 60 days payment terms.
However, BHP informed the Committee in late November 2018 that it was adopting a new policy on payment terms. It submitted:
The main difference between this and our previous policy is that where before you had to be small and local to qualify for 30 day terms, you can now be a local business of any size. … As a result of this change, around 700 local businesses across Australia will see a favourable adjustment in their payment terms.
The new policy from BHP provides an exemption from 60 days terms for Local Community Suppliers, defined as:
Suppliers that have their primary business location in one of the communities adjacent to our operations, or that are deemed to be affected by our operating presence, as determined by our Communities function.
A full list of towns and postcodes that BHP considers to be ‘local’ was provided in their Supplementary Submission 49.2. Businesses located in these postcodes will be entitled to payment terms of 30 days or better. The list includes Moranbah, Rockhampton, Mackay, Singleton, Muswellbrook, Port Hedland and Karratha and many others.
Despite BHP’s policy of paying small businesses in 30 days or less, many small businesses who do work for BHP’s mines are unable to access these terms because they work for a contractor to BHP, not BHP directly.
BHP confirmed that 80 per cent of its spend goes through tier 1 and tier 2 contractors, who are generally paid in 60 days. When asked if it tries to ensure its tier 1 contractors provide reasonable payment terms to sub-contractors, including small businesses, BHP stated that it does not impose any conditions about payment terms onto its tier 1 and 2 contractors, because there ‘are practical and legal issues with the enforceability of this’.
However, Origin submitted that it has recently begun to do just that. Origin has introduced clauses in new contracts with its major contractors requiring them to pay small businesses within 30 days – ‘to match our commitment to doing the same’. Origin has already secured these guarantees from three of its major contractors and is negotiating with others.
Mr Graham McGarry from Mangelsdorf Engineering in Kalgoorlie, which provides services to nine mining companies, reported that Dampier Salt, a Rio Tinto company, provides 60 day payment terms. Mangelsdorf itself pays its suppliers within 25 days from the end of the month.
Rio Tinto reported standard payment terms of 45 days, with 30 day terms offered to suppliers with contracts under $1 million. Rio Tinto’s payment terms were extended to 90 days in 2015, but the company chose to revert to 45 days after taking on board feedback from suppliers.
The Committee did not receive a submission from oil and gas company, Woodside. However, Councillor Long said ‘Woodside is 45 days’. Woodside is also a signatory to the Australian Supplier Payment Code, which implies it pays small businesses within 30 days of a correct invoice.
Roy Hill Holdings reported that its payment terms are 30 days from the last day of the month, with Indigenous businesses paid on 14 day terms. Terms of 30 days ‘month end’ can mean that, in practice, suppliers are not paid for up to 60 days.
Fortescue Metals Group’s standard payment terms are 30 days from the end of the month, but the company told the Committee in Port Hedland that it pays Indigenous businesses and Pilbara-based small businesses faster, in 14 days from the issue of invoice. Fortescue now also pays all small business suppliers in 30 days, because it signed up to the Australian Supplier Payment Code.
ConocoPhillips Australia made a submission to the inquiry but did not address the issue of payment terms at all.
Peabody submitted that its payment terms are agreed on a case-by-case basis, with approximately 95 per cent of spend delivered according to terms of 30 days or less.
Peabody also announced that over the coming months it ‘will move to convert all small-to-medium enterprise (SME) vendors to 30 day terms’.
Yancoal submitted that its payment terms are negotiated with suppliers on a case by case basis and range from seven days after receipt of invoice to 45 days from the end of month in which invoice is received. It also said that over 90 per cent of suppliers ‘receive payment in 30 days or less’.
Origin Energy Limited reported that its payment terms for medium and larger businesses are ‘agreed with each supplier’. However, it pays small businesses (defined as those with less than $10 million annual turnover) in 30 days from receipt of invoice, and Indigenous businesses in 14 days. Origin also reported that it has actively sought to identify small businesses and transition them onto 30 days payment terms.
Mr Matthew Paull from the Australian Petroleum Production and Exploration Association said that the ‘industry standard’ in the oil and gas industries appears to be 30 days.
According to the Resource Industry Network, Glencore Coal has 30 day payments terms.
Evidence from Glencore at the Singleton public hearing confirmed that 40 per cent of its suppliers were on 30 day terms and 60 per cent were on ‘next month end’ terms, which means they are paid at the end of the month following the submission of the invoice. This can be up to 60 days.
The payment terms issue was less of a concern in some parts of New South Wales and in Port Hedland, where the local Chamber of Commerce responded to a question on payment terms in the Pilbara, saying ‘we’re fine. It’s pretty good at the moment’.
Councillor Andrew Hope, Mayor of the Liverpool Plains Shire Council said:
My company works for seven major mining companies, which I will not name, and we have absolutely no issues with our payment terms—none whatsoever.
Whitehaven Coal, an Australian-owned miner active in NSW, reported payment terms of 14 to 30 days, depending on the supplier. Whitehaven’s 30 day terms are also 30 days ‘month end’.
Mrs Rourke reported that ‘minor players’ in the industry don’t have extended payment terms. However, some have suggested they may move to extended terms to be more competitive. She cited Anglo American, saying the company ‘has sent suppliers letters a number of times saying they’re going to move to 60 days but haven’t gone to that stage’.
Anglo American’s global payment terms are 60 days. However, its practice has been to offer terms of 30 days to many of its Australian suppliers.
Further, the company made a submission late in the inquiry which announced that it has decided to formalise 30 day terms for all small and medium sized suppliers in Australia.
Miner and mining services provider, Mineral Resources Limited, submitted that its payment terms for large and medium suppliers are 45 day end of month, ‘with smaller suppliers negotiated down depending on their specific needs and circumstances’. Mineral Resources Limited also has a large number of smaller suppliers that are paid upfront by credit card.
Impacts on individuals and families
Witnesses highlighted the impacts on families and individuals caused by the financial strain of waiting months to be paid. Mr Moran asserted:
… this can be a source of people feeling like a failure, which leads to depression. A lot of people do give a stuff about their employees. They don’t want to lose their employees. Some of those employees have been there for years. Then there’s their own mental health and their business and family.
Mr Bushell told the committee that his accounting firm has clients who are ‘awake at night worrying about how they’re going to pay the wages but, more importantly, whether those people will have jobs tomorrow’.
Mr Simon Vigliante from the Mackay Region Chamber of Commerce explained that the impacts of extended payment terms don’t just affect mining services companies, but ‘ripple’ through the local economy. He said:
One of our members is a powder coater who powder coats pool fences. If people aren’t putting in pools, because they’re not getting paid by the mines, he hasn’t got any business… It essentially starves the region of working capital, and we all know that if you don’t have working capital you don’t have a functioning business.
Mr Jason Newitt, Director of Central Queensland Hire Pty Ltd, provided his personal story at the public hearing in Mackay. His business was affected by the payment terms offered by BHP when it was sub-contracting to a higher tier contractor to BHP.
The contractor, MCG Quarries in Moranbah, eventually went into administration, owing Mr Newitt’s company over $200,000, which he still has not received.
According to correspondence provided by Mr Newitt, BHP initially indicated that it could help him. However, it later said that it could not because it had ‘no capacity to audit a second-tier contractor’.
While shorter payment terms may not have prevented the sub-contractor’s collapse, Mr Newitt argued that faster payments for work completed would have meant his losses would have been ‘reduced significantly’. He said:
Had payment terms been reduced to a 30-day payment term then I would have had the cash to pay my school fees, to pay my ATO debt that’s small and in arrears and to keep my truck on the road and going, yes—and to be able to work and go forward.
Mr Newitt stated that he could no longer work for the mining industry because of the effect that extended payment terms had on cash-flow for his business.
Further, Mr Newitt argued that extended payment terms result in first tier contractors using money they owe to lower tier contractors to fund their business expansion:
‘We’ll just push them back another month and we can put this piece of gear in here, and we will expand our business in such a way, faster.’ It’s elevating the first-tier primary contractors at the expense of the little fish.
BHP was asked to comment on Mr Newitt’s case at its appearance in Mackay. Mr Sundeep Singh stated that BHP had worked to ensure it had paid the primary contractor on time. BHP further argued that ensuring ‘the money ends up where it’s meant to go’ was ‘the responsibility of [the] primary contractor’.
Late payment of invoices
Compounding the effects of extended payment terms was the issue of late, or delayed, payment of invoices. Numerous witnesses reported that some mining companies were effectively extending their payments even longer by paying invoices late.
Ms Leeson pointed to examples where invoices were sent in a day late and as such the company held them back an additional month. Or where an invoice may have contained an error, or a disputed figure, and was simply not paid by the mining company. She added:
But they don’t actually go back to the vendor and say: ‘Oh, your invoice is not really right. Could you reissue that invoice.’ They wait for the vendor to realise: ‘Holy crap! We haven’t been paid for two months. What’s happened?’
Mr Moran claimed that the president of the Gladstone Engineering Alliance’s company ‘has had major issues with late payments, to the point where they had to let go the majority of their employees and they were less than 24 hours from closing their door’.
One mid-sized engineering firm submitted that, despite payment terms of 60 days, ‘[i]n reality our invoices are paid an average of 78 days after submission, with average lock-up days (time from costs incurred to payment) of 84 days’.
Mr Bushell provided the example of a client who was affected by a changeover of a mining company’s accounting system. Invoices had to be re-entered, the payment date was then reset and, with payment terms already at 60 days, the payment was ‘blown out to over 120 days’.
Evidence of late payment in the mining sector was not simply anecdotal. Rockhampton Regional Council referred to research that found the mining sector was ‘one of the worst performing sectors, paying on average 15 days late’.
Even Whitehaven Coal, whose terms of payment are 14 to 30 days, admitted that in practice this can mean businesses wait as long as 60 days, and that only 51 per cent are paid within 30 days.
Mr Vigliante also stated that an absence of the correct delegate can hold up a payment. He provided an example where $9 million was outstanding to a company he worked for. The mining company allegedly held up the payment well beyond the contracted terms because the delegate was not available to authorise the payment.
The Greater Whitsunday Alliance Ltd argued that mining companies had an obligation to work with SMEs to provide education and offer ‘readily accessible invoice dispute resolution’ information to SMEs on mining company websites.
Mr Vigliante also said some mining companies are ‘doing the right thing’. He provided the example of Anglo American, which he argued paid its invoices in a timely fashion.
BHP acknowledged that they sometimes pay invoices late. Mr Singh stated that 93 per cent are paid on time, adding:
Things do go wrong in the process. You have 93 per cent, and we want to continuously improve that process. From time to time, there may be a late approval of an invoice.
In Mackay, BHP was asked to provide the Committee with information on notice about how long it was taking for suppliers to be paid from the date that a service was provided (as distinct from the date that an invoice was approved). BHP’s response was: ‘We do not currently have the ability to measure if vendors delay submitting their invoices after providing a service.’
Short term finance
Witnesses to the inquiry alerted the Committee to a concerning emerging practice among some mining companies – short term supplier financing.
Capricorn Enterprise’s Neil Lethlean reported that large mining companies are offering short-term finance ‘to allow the company to continue to operate while we defer your payment’. He said, finance is offered through a third party, but coordinated and arranged by the mining company.
BHP acknowledged it participates in this practice. BHP’s Supply Chain Financing Program ‘allows our suppliers to receive early discounted payment of their receivables from BHP at an attractive funding rate’.
Ms Reid suggested that the practice is, in effect, mining companies saying: 'We’ll lend you the money that we actually owe you’.
CE Smith & Co asserted that the fact mining companies have identified the need for this service ‘surely recognises there is an underlying problem as a result of payment terms and conditions’.
Mrs Rourke from the Resource Industry Network provided this direct quote from a letter recently sent to mining company suppliers:
If you would like to enjoy early payment terms as early as 10 business days and accelerated cash flow, you're invited to take part in early payment program. Supply chain financing is an innovative solution that optimises your cash flow by allowing you to receive early payments for all approved invoices in exchange for a small settlement discount. Our solution improves your cash flow and reduces working capital requirements, allowing you to reinvest in your business.
Witnesses also commented on mining company practices of paying invoices early at ‘a discount’. For instance, if the supplier needed to be paid earlier than the 60 days specified in their contracted payment terms, they could get their money, minus five per cent. The Lytton report quoted discount figures of 2 per cent of the face value of an invoice.
Mrs Rourke revealed that the Resource Industry Network and many of its members ‘find it absolutely offensive to be offered [this] service’.
BHP provided the following details about the program:
it was launched recently;
currently has just over $400 million of spend running through it; and
includes around 40 suppliers globally.
Ms Reid argued that the practice amounts to unconscionable conduct. However, the Australian Competition and Consumer Commission (ACCC) did not think this was likely.
The Committee asked the ACCC if BHP’s practice of offering its suppliers finance to cover the delay in receiving payment would likely constitute ‘unconscionable conduct’ under the Competition and Consumer Act 2010. The ACCC submitted:
… it does not appear to be a requirement that the businesses must accept the finance option provided by the mining company. It would therefore be unlikely that offering a finance option would be considered unconscionable conduct.
Reluctance to come forward
The Committee was made aware of some reluctance on the part of businesses impacted by extended payment terms to come forward.
CE Smith & Co said that it emailed a lot of clients for input into the inquiry and had a large number of responses saying ‘I don’t want to be identified’. Businesses were worried about jeopardizing current and future contracts with the mining companies.
Mr Lethlean from Capricorn Enterprise gave the following explanation for the hesitation of businesses to speak on the record:
It’s the proverbial rabbit in the burrow: you stick your head out and, regrettably, if it’s a shooting competition, you lose your head—and that’s the same. These companies are reluctant.
The inquiry received more than 10 confidential submissions, as well as 11 submissions that were published with the submitter’s name withheld, all of which were focussed on the payment terms issue.
While the Committee believes that companies were concerned about the possible ramifications of complaining, there was no evidence to suggest companies pressured their suppliers.
Mrs Rourke from the Resource Industry Network told the Committee she had not heard of anyone being threatened by companies. When asked, she answered: ‘No, I’m not aware of that at all. It’s just a perceived fear.’
Ms Reid said that local business owners would not be willing to report unethical practices for fear of never getting another contract. She suggested mining companies should provide a facility where suppliers can report unethical behaviour anonymously.
BHP was asked to ‘give a guarantee’ that no employees or representatives of BHP or BMA (of which BHP owns 50 per cent) had told local companies not to appear before the inquiry. Mr James Palmer replied:
I can certainly guarantee that is just not in line with our values. If there was a case, I would certainly want to hear about it. It’s just not in line with the way that we do business.
Market power and contract terms
A number of witnesses to the inquiry raised the question of the legality and fairness of mining company contracting practices and contract terms.
Anonymous RIN Member E submitted:
It is unconscionable for major mining houses to use their suppliers (small, medium and large enterprises) to fund the working capital needs of their operations.
Mr Lethlean suggested mining companies were engaged in a form of predatory pricing, and said the way the mining houses negotiate their contracts ‘needs further scrutiny’.
Drawing attention to the incongruent size and power of mining companies and local businesses, Mr Lethlean proposed that ‘significant commercial disparities exist’, including: restrictive contract terms and conditions; a cap on labour hire rates; and extended payment terms. He added that local businesses could either accept these contract terms or forgo contracting with mining companies.
Ms Reid also stated that contracts from mining companies are offered on a ‘take it or leave it’ basis. She described the contracts as long and complicated, outside the understanding of many small business owners, and containing clauses unfair to the smaller business.
The contract clauses creating problems for small and medium businesses, according to Ms Reid, are termination clauses and liability and indemnity clauses. Termination clauses allow the mining company to terminate the contract ‘at any time for no reason’. Ms Reid stated that she has informed several companies that such clauses constitute ‘an Unfair Practice’, leading to some, but not all, companies removing the clause.
Liability and indemnity clauses are also included in many contracts, according to Ms Reid, and these ‘distort the normal relationship between buyer and seller’ by attempting to impose unreasonable obligations on the supplier. Ms Reid further argued that these clauses can expose SMEs to unlimited liability.
Mr Moran proposed that the power imbalance between the mining companies and small businesses is exacerbated in Central Queensland because this region features a small number of mining companies and a large number of suppliers with much lower levels of turnover.
Mr Vigliante said ‘you don’t have a contract with a mining house; a mining house has a contract with you’.
The Lytton Advisory report also found that there is ‘a substantial likelihood of an imbalance in bargaining power’ between mining companies and their suppliers. Also that:
Some large mining companies appear to be using their market power to improve their own bottom lines at the expense of their suppliers. In some cases, they are passing on financing costs to their suppliers, and hence extracting a share of the profits generated in their supply chain.
Chartered Accountants Australia and New Zealand offered the view that the disparity caused by extended payments terms constitutes a market failure, where larger organisation are able to use their market power to ‘effectively demand that smaller organisation fund their operations’.
The Resource Industry Network argued that suppliers have ‘little or no ability to negotiate payment terms’.
CE Smith & Co’s Mr Bushell agreed, telling the Committee it had direct feedback from clients who had tried to complain about payment terms and later found out that this was ‘a key factor for being unsuccessful in the tender process’. Mr Bushell was asked if he was willing to identify the mining company involved in this negotiation and he identified BHP.
Discussing what power small suppliers have in the relationship, Mrs Rourke proposed that some businesses are in a position to choose not to work for companies with 60 day payment terms, but many are not, because ‘BHP has such a big footprint in our region’.
Unfair contract terms
Ms Reid expressed the view that unfair contract terms have ‘always been a big issue in the mining industry’. She praised the recent addition of unfair contract provisions to the Australian Consumer Law but suggested it is a problem that small businesses must initiate proceedings in these matters.
The Isaac Regional Council recommended amendment of the unfair contract terms legislation to include stipulation that extended payment terms constitute an unfair contract term.
The Committee invited the ACCC to appear at a public hearing, as well as submitting written questions, to ascertain if any of these contracting practices or contract terms would constitute ‘unfair contract terms’ and what possible remedies there may be.
The ACCC submitted that the unfair contracts terms provisions:
are limited in scope, only applying to new contracts;
are only applicable to small businesses (employing less than 20 people) and small contracts ($300,000 or $1 million if over 12 months); and
do not include any penalties for including unfair terms.
The ACCC further clarified that under the existing law, a court can determine that a term is unfair and ‘declare it void’. However, ‘simply including an unfair term in a standard form contract is not prohibited’.
In his appearance before the Committee, Mr Rami Greiss explained that the ACCC can only write to the company and seek assurances that the company will remove the clauses from their contracts. If they agree, there is no further action. Even if they have ‘been engaging in this conduct for years’, they cannot be prosecuted for it. He said:
… there’s no point going further to court, because all that the court could do is order the term void, whereas, if it were a contravention, the court could say, ‘Well you’ve engaged in this conduct for several years and we can impose a penalty.’
The ACCC has begun campaigning for a strengthening of the Unfair Contract Terms provisions. It submitted that the laws:
… would be more effective if the inclusion of [unfair contract terms] in standard form contracts was prohibited, and if penalties were available for breaches of that prohibition. Additionally, the thresholds for a small business should be reviewed.
Another practice of mining companies that businesses objected to was being forced to itemise their costs and profit margins when applying for a contract.
CE Smith & Co explained that at the beginning of the mining downturn many of its clients contracted by mining companies were asked to ‘open their books’ and provide details of their costs, financial statements and key performance indicators. This information was reportedly used to pressure suppliers into reducing their profit margins, which caused some businesses to fold.
Ms Reid provided an example from her own company, which had a contract to undertake environmental monitoring on a large mine site. Ms Reid’s company was allegedly told to reduce its costs by 50 per cent. After working hard to find efficiencies, the company achieved a cost reduction of 38 per cent, which it put to the mining company who put the project out to tender regardless. Ms Reid said:
They took our intellectual property of how we would run that program and run it more efficiently. The contract documents had already been drawn up. Out of that we lost a $300,000 contract.
Ms Reid also explained to the Committee how mining companies expected her business to itemise costs when it submitted a tender:
Let’s say we were quoting $90 an hour. We had to break that $90 an hour down into superannuation guarantee, company payroll tax, workers compensation, other insurances, long service leave, management and admin, uniforms and PPE and so on and so forth. Then the last one on the list was ‘profit margin’.
Mrs Rourke stated that many members of the Resource Industry Network had similar experiences, especially during the mining downturn.
The ACCC responded to questions about whether or not this practice constitutes unconscionable conduct or was a breach of the law in any other way. The ACCC’s view was that this was ‘unlikely’:
A requirement for businesses to include itemised costing in submitting a tender is likely to be considered a standard commercial procedure. Requiring companies to include their profit margin is unlikely to be unconscionable conduct. Using the information in a particular manner to the detriment of the small business may, in some circumstances, raise concerns of unconscionable conduct.
Mining company perspectives
Over the course of the inquiry, mining companies were actively invited to provide a response about their payment terms and the other terms of reference. A number of mining companies chose to respond, but many did not.
Companies that made submissions were: Whitehaven Coal Limited; ConocoPhillips Australia; BHP; Origin Energy Limited; Anglo American; Glencore; Peabody Energy; Mineral Resources and Yancoal. Companies that appeared at public hearings were: BHP; Whitehaven; Rio Tinto; Roy Hill; Fortescue Metals Group; Origin Energy; and Glencore.
BHP’s submission included a justification for its 60 day standard payment terms on the basis of global competitiveness:
It is a business imperative to optimise our supply processes to ensure the sustainability of our business in a cyclical market for the benefit of our employees, shareholders, suppliers and host communities. As such, we must carefully balance the needs of suppliers with the needs of the business. This is true not just of BHP, but across the sector.
At its appearance in Mackay, BHP argued that many of its global competitors have longer payment terms. Mr Palmer further asserted that the global standard terms of payment changed from 30 days to 60 in 2015.
Many of BHP’s supplier invoices are approved ‘on sight’, but not paid for 60 days because that is ‘in line with the payment terms of the agreement’.
BHP referred the Committee to C-Res and the Local Buying Program, which offers better payment terms, saying:
In 2017-18, we processed over 7,000 work instructions and completed more than 14,200 payments. Our average payment term right now is 13.6 days.
C-Res’s Chairman, Ms Kylie Porter confirmed that BHP pays C-Res in 7 days, which allows it to pay suppliers within 21 days: ‘which is a mandate as part of our charter’.
Ms Porter confirmed that medium and larger businesses that work with BHP want access to the payment terms offered by BHP through C-Res. However, the C-Res program is only for small businesses with less than 20 staff and limited turn-over.
Mrs Rourke pointed out another limitation of the C-Res model, which is that work is only available through the Local Buying Program if it comes direct from BHP. She explained:
Most businesses don’t fit into the small business category and many don’t actually receive the work direct from the mining house but rather the work flows through the supply chain to major contractors, down the tiers to small businesses and then onto subcontractors or small businesses with each having to pay the other for their product or service. An extended payment term at the start usually means everyone is now experiencing similar terms.
Ms Reid advocated for the payment terms of the Local Buying Program to be rolled out by BHP through tier 1 and 2 contractors, so that they must offer the same terms to small businesses.
During its appearance in Mackay, BHP responded to a suggestion that mining companies are profiting from extended payment terms at the expense of smaller businesses, saying that is ‘just not in line with our values’.
However, Mr Palmer also admitted that the change from 30 day to 60 day payment terms would have improved BHP’s balance sheet, saying:
‘I don’t have the numbers, but it will have’.
Asked if BHP would consider changing its payment terms back to 30 days, Mr Palmer replied:
Certainly one of the reasons we’re here is listening as well as speaking with our suppliers. We’ve certainly heard some things that make you take a look at that. It’s continually under review for us.
BHP mentioned that it offers exemptions to the standard 60 day terms for businesses experiencing financial hardship, but Mrs Rourke stated that ‘businesses [are] very reluctant to take up this offer due to the perception there might be if they’re actually saying that they’re in financial hardship’.
It appears BHP has made moves to bring more suppliers onto 30 days payment terms. In its supplementary submission, BHP stated:
During FY2018, a total of 473 vendors were considered small, local or Indigenous. … Since 1 July 2018, 706 small vendors have been proactively moved to 30 day payment terms.
Fortescue acknowledged the positive impact that providing better payment terms could have for small businesses. In Port Hedland the company’s representatives explained that moving its Indigenous and Pilbara-based small businesses onto 14 days terms has had a big impact:
This has had a profound effect on the way that these businesses manage their cash flow. As they’re small businesses, in many cases their creditors are requiring cash on delivery or within seven days. So we’ve seen a remarkable uptick for a number of those small businesses.
Miner and mining services provider, Mineral Resources Limited, which has payment terms of 45 days from the end of the month for all medium and large businesses, explained that its average total payment cycle time is 58 days from receipt of invoice.
As both a customer and supplier to the mining industry, Mineral Resources Limited submitted that it is ‘very conscious of the impact of onerous payment terms on small & medium regional enterprises’. The company went on to say that it has ‘carefully considered’ its payment terms and settled on 45 days which it believes are appropriate.
Glencore submitted that the company made a deliberate decision not to increase its payment terms during the last commodity downturn ‘when commodity prices were low and there was pressure on individual mining operations’.
Origin Energy submitted that it is ‘proud’ of its procurement policies, which include 30 day payment terms for small businesses, 14 day terms for Indigenous businesses and some other small business types, and individually agreed terms for medium and larger businesses.
Some witnesses to the inquiry proposed that there was a role for minerals councils and resources councils in setting industry standards. Mr Moran proposed these bodies play a role in creating an industry standard ‘that will work for industry and the businesses that work within that industry.’
The Minerals Council of Australia submission did not address the issue of payment terms.
When she appeared before the Committee in Canberra, Minerals Council of Australia CEO, Mrs Tania Constable PSM was asked about the possibility of creating an industry standard around payment terms – not just for small businesses but for all suppliers. She rejected the idea:
As I said, we see these as commercial arrangements that are put in place. We don’t dictate, to the industry as a whole or to companies, what those payment terms should look like. They are always seeking to be more competitive than other parts of the industry. Going back to where I started with the last question: it was around social licence to operate—the relationships that they need to have within communities—and that is taken into account, but we haven’t sought to have an industry-wide standard.
Options for regulation
The Committee asked witnesses, including industry groups, local businesses, and government agencies what role governments could or should play in relation to payment terms.
A number of industry participants, especially those in Rockhampton and Mackay, proposed that government regulation may be the only way to address the problem of extended payment terms. For instance, Ms Reid stated that, while she generally did not advocate government interference in markets, in this case it was justifiable.
The Resource Industry Network agreed, and explained that it had been running a campaign directed at the mining industry which had ostensibly failed. It submitted that over the course of the campaign more businesses had adopted 60 day terms.
In light of the failure of this campaign, the Resource Industry Network recommended the government legislate for payment terms no longer than 30 days.
Some witnesses advocated for even shorter payment terms. For instance, Councillor Hope argued that rural and regional businesses should be paid in seven or 14 days.
Mr Jason Russo from the Department of Industry, Innovation and Science explained that the Department does not play any role in regulating industry contracts, and has not conducted any significant research on the issue at this stage, but has ‘a watching brief on this and are monitoring it’.
The ACCC confirmed that extended payment terms do not in themselves constitute a breach of the Competition and Consumer Law, particularly as the issue is between a large company and smaller suppliers, rather than between competitors:
… on the facts available, the conduct is unlikely to damage the competitive process. … Even in the situation where there is only one large business, a requirement that suppliers accept payment terms of 60 or 90 day payment terms is unlikely to be considered unconscionable within the meaning of the [Competition and Consumer Act 2010].
Small businesses unhappy with their payment terms can currently request assistance from the Australian Small Business and Family Enterprise Ombudsman (ASBFEO). The ASBFEO has a role in mediating between the parties and, where necessary, coordinating alternative dispute resolution processes.
Mining services businesses have previously sought the assistance of the ASBFEO, including one in 2017:
… in 2017, we received a request for assistance from a complainant who supplied goods to a large mining company who maintained that payment times of up to 4 months was impacting business. … A satisfactory outcome was achieved with the small business being moved to 30 day payment terms. When we contacted the mining company they advised that the business had not been registered as a ‘small’ business, so they were on a 60 day payment time.
As this example shows, there may be some ability for businesses to seek better terms through the ASBFEO, but this is restricted to small businesses. In addition, the ASBFEO’s powers are limited. It can only require the parties engage in dispute resolution processes. It cannot institute court proceedings or arbitration. If a party chooses not to participate in mediation, the ASBFEO can publish this information, publically naming them.
In April 2017, ASBFEO released the report of its ‘Payment Times and Practices Inquiry’. This report made a number of recommendations including:
Recommendation 8: The Australian Government to introduce legislation for larger businesses to publicly disclose all of their payment times and practices and performance against those terms. Larger businesses being the top 100 listed on the ASX and multinationals.
Recommendation 9: Australian Government to introduce legislation which sets a maximum payment time for business to business transactions. Certain industries may need terms greater than the maximum which can be agreed providing they are not grossly unfair to one party. Where a longer term is called into dispute it will be considered an unfair contract term.
In November 2017, the Australian Government published its response to the ASBFEO report. The government response indicated that it wanted to see payment times reduced, and an end to extended payment terms in contracting between businesses. However, it was reluctant to ‘add more regulation to address a problem unless it is absolutely necessary’.
The Government noted recommendations 8 and 9, which proposed legislating business to business payment times, saying:
The Government is willing to give industry the first opportunity to address the problem. However, the Government’s support is not unconditional and I will be carefully monitoring the effectiveness of the [Business Council of Australia’s industry-led Australian Supplier Payment Code] and reserve the right to take stronger action should we see a lack of progress over time.
Further, the response indicated the Government is ‘carefully monitoring the effectiveness’ of the Australian Supplier Payment Code to see if it reverses the trend towards longer payment times. The Government suggested that the Business Council of Australia continue to review the Code and consider incorporating sanctions for non-compliance.
The Business Council of Australia stated that 46 Business Council members and 37 non-members, who collectively earn revenue of more than $416 billion, have adopted the Code.
On 6 September 2018, the Business Council of Australia launched a planned independent 12 month review into the Code, headed by former ACCC Chair, Professor Graeme Samuel AC. As of November 2018, the review is open for submissions, and the objective of the review is to assess whether the Code is fit-for-purpose and is improving payment times and practices, particularly for small business suppliers. The reviewer is required to provide a draft report by 11 December 2018.
A number of witnesses to this inquiry suggested the Code has been unsuccessful. The ASBFEO claimed that voluntary codes of conduct in relation to payment terms have been ‘proven to be ineffective’. As such, ASBFEO advocate for regulation.
Rockhampton Regional Council also argued that the industry has failed to self-regulate, citing that only 80 companies have become signatories to the Business Council of Australia’s voluntary Australian Supplier Payment Code.
Rockhampton Regional Council recommended that the Australian Government give further consideration to implementing ASBFEO Recommendation 8 (forced disclosure), and to legislating maximum payments terms of 30 days, with compliance and enforcement mechanisms.
Chartered Accountants Australia and New Zealand also recommended the Committee consider the recommendations of the ASBFEO report.
As a first step, the Lytton Advisory report proposed the development of a Regulatory Impact Statement for public consultation on regulating payment terms.
Not everyone supported regulating payment terms. The Association of Mining and Energy Related Councils instead encouraged the government to ‘seek reforms by the mining sector on this important procurement issue for businesses in mining affected economies’.
BHP argued that legislating 30 days payment terms would not represent an ‘optimum’ outcome, as it would bring all suppliers under the same conditions, reducing the flexibility provided by current arrangements.
The Local Government Association of Queensland proposed the Federal Government should lead the development of a ‘National Code of Conduct for Local Content Procurement in the Resources Sector’. It argued this should enforce ‘a maximum payment term of 20 business days’.
Councillor Camilo Blanco, Mayor of Port Hedland, argued that local councils can easily negotiate better payment terms with multinationals:
If we have a good working relationship with them, we can influence their business model. We’ve done that as a local government, and the likes of BHP and [Fortescue] have reduced their payment terms, ranging from seven to 14 days. This has been a great benefit to local businesses that engage with multinationals.
The Committee notes this has not been achievable for local councils in the Rockhampton and Mackay regions, who have been advocating for shorter payment terms for some time.
Finally, witnesses implored the government to act quickly on payment terms. Mrs Rourke said:
… as businesses are not in the position to wait another year or two for recommendations or further investigations. Fair 30-day payment terms will not only bring financial opportunity to our region, which we are rightly entitled to, but would go a long way towards repairing the relationship between suppliers and the mining houses to encourage collaboration, to innovate and to improve the wellbeing of people in our sector.
Extended payment terms are impacting negatively upon businesses, communities and the health and well-being of individuals and families in regional areas. The Committee was moved by stories told by witnesses and submitters around Australia who have been and continue to be affected by these practices.
Payment terms of 60 and 90 days are impacting the entire economies of some regional areas, with businesses unable to invest, employ and grow. This has flow-on effects for the whole community and is detrimental to the growth and sustainability of Australia’s regional towns.
There is no doubt that large mining companies achieve a fiscal benefit from holding off payments to suppliers for products and services for longer than 30 days. However, the Committee believes that this practice is short-sighted and does not ultimately benefit the mining sector or the communities in which it operates.
The Committee believes that 60 and 90 day payment terms are damaging the reputation of mining companies in some regions. Further, that these practices can erode good will towards mining projects in regional areas and reduce mining companies’ social licence to operate.
Also damaging to the relationships mining companies enjoy with regional businesses is the practice of delaying the payment of invoices due to minor administrative errors or late submission. Mining companies should work to reduce and avoid these delays, and ensure on-time payment for suppliers in relation to when the service was provided.
The Committee applauds BHP’s Local Buying Program as an example of best practice in paying small regional suppliers. However, the Local Buying Program only captures the very small players in the sector, and does not provide any protection for businesses contracting to one of BHP’s tier 1 or 2 contractors, through which 80 per cent of BHP’s spend is flowing.
BHP’s argument that it would impractical or legally-difficult for BHP to require its tier 1 and 2 contractors to pay small businesses in 30 days or less is not convincing. Origin Energy has been able to include such provisions in a number of its contracts, proving it is achievable.
All mining companies should work to ensure their tier 1 and 2 contractors ‘pass down’ 30 days or better payment terms, especially for small and medium regional businesses.
The Committee was concerned to hear of the practice of offering finance to suppliers through a third party to help them manage cash-flow problems caused by extended payment terms. Programs like BHP’s Supply Chain Financing Program represent an acknowledgement that extended payment terms are unsustainable for many suppliers.
Even if BHP does not receive any direct financial benefit from offering these financing arrangements, the Committee is uncomfortable with the impression such an arrangement gives, and questions the appropriateness of these programs.
The Committee applauds those mining companies that pay all suppliers according to 30 day terms, especially those with shorter terms for small and Indigenous businesses. Many medium-sized businesses are crucial players in regional economies and these businesses are experiencing hardship as a result of extended payment terms.
The Committee acknowledges mining companies that are offering 30 day or better payment terms already. However, companies who pay 30 days from the end of the month should change this to 30 days from receipt of the invoice.
The Committee was pleased to receive Anglo American and Peabody’s submissions, which stated that they had recently decided to formalise 30 day payment terms for all Australian small and medium sized businesses.
The Committee was happy to be informed by BHP that, in light of this inquiry, it has decided to offer payment terms of 30 days or better to all Local Community Suppliers, regardless of the size of the business. This is the right thing to do and will make a real difference in regional economies.
All companies who offer 30 day terms (or better) to small businesses should extend them to medium sized businesses and all local businesses based in regional areas, regardless of the size of the business.
Despite these promising statements from BHP, Anglo American and Peabody, the Committee does not believe the industry as a whole intends to reduce payment terms back to 30 days, especially not for large and medium sized suppliers.
This view was reinforced by the statement from the Minerals Council of Australia that it sees payment terms as a commercial decision for each company and doesn’t intend to ‘dictate’ what terms should be.
The mining industry has had opportunities to standardise payment terms and has chosen not to. While the Committee supports the Business Council of Australia’s voluntary Australian Supplier Payment Code (the Code), many mining companies are not signatories. In addition, the Code does nothing to protect medium sized enterprises from 60 or 90 day terms. Nevertheless, the Committee will be interested to see the results of the current review of the Code being headed up by Professor Graeme Samuel AC, and notes that a draft report is due to the Business Council of Australia by 11 December 2018.
In order to avoid the need for regulation, the Business Council of Australia’s Australian Supplier Payment Code would need to:
be extended to cover all SMEs and regional businesses of any size;
include reporting and enforcement mechanisms; and
be signed by more companies, including from the mining sector.
If the Code were strengthened, state and territory governments could make being a signatory to the Code a requirement of companies seeking exploration licences in that state or territory. Local councils can also play a role in demanding fair payment terms for their regional businesses.
In light of the damage inflicted on regional economies by extended payment terms, and evidence that a majority of mining companies do not intend to change these for medium or large suppliers (if at all), the Committee is recommending further government action in relation to payment terms.
Unless the Australian Supplier Payment Code is significantly strengthened and extended to medium sized business and regional businesses of any size, government action on payment terms should include scoping and developing legislation for regulating maximum payment terms for contracts involving small and medium sized businesses in Australia.
The Committee notes that the Minister for Small and Family Business, Skills and Vocational Education, Senator the Hon Michaelia Cash, asked the Australian Small Business and Family Enterprise Ombudsman on
12 November 2018 to provide the government with further evidence on the ‘effects of late or extended payment practices on the cash flow of small businesses and family enterprises in Australia’.
The Committee further notes the announcement on 21 November 2018 from the Prime Minister, the Hon Scott Morrison MP, that the government ‘will work with the sector to develop an annual reporting framework, requiring large businesses over $100 million turnover to publish payment information on how they engage with small businesses’.
The Committee is pleased to see the government moving forward on this issue and is encouraged that small business payment times will be placed on the Council of Australian Governments agenda for its December 2018 meeting.
However, the Committee notes that these announcements only relate to small businesses and encourages the government to consider stronger action, including legislation.
Other contracting practices
The Committee was also concerned to hear of mining companies seeking to protect themselves from risk, and limit potential liabilities, through imposing unreasonable termination, liability and indemnity clauses onto suppliers. Most regional suppliers have a limited capacity to protect themselves from being pressured into accepting these unfair terms.
Also of concern was the practice reported by a number of businesses whereby mining companies require suppliers to itemise all of their costs, including their profit margin, when tendering for contracts. This practice may not be illegal, but it does not meet standards of fairness.
Unfortunately, the existing consumer law does not provide much protection for SMEs against unfair contracting practices, or unfair contract terms, as these terms are not currently a ‘contravention’ of the law, and as such there are no penalties for imposing them.
The Committee supports the Australian Competition and Consumer Commission’s campaign to see the laws around unfair contract terms strengthened and their scope increased to take in larger businesses and contracts than is currently the case.
The Committee recommends that the Australian Government closely consider the outcome of the independent review into the Business Council of Australia’s voluntary Australian Supplier Payment Code (the Code) when it is finalised. If the review does not result in a significant strengthening of, and compliance by industry with, the Code, the Australian Government should move to legislate maximum payment terms. A strengthened Code would need to include:
coverage for medium sized businesses;
reporting and enforcement mechanisms; and
more signatories, especially from the mining and resources sectors.
If the Australian Supplier Payment Code is not significantly strengthened by July 2019, the Committee recommends the Australian Government implement recommendation 9 from the Australian Small Business and Family Enterprise Ombudsman’s Payment Times and Practices Inquiry - Final Report (2017):
Recommendation 9: Australian Government to introduce legislation which sets a maximum payment time for business to business transactions. Certain industries may need terms greater than the maximum which can be agreed providing they are not grossly unfair to one party. Where a longer term is called into dispute it will be considered an unfair contract term.
The Committee recommends that, in the absence of legislated payment terms, the Federal Government work with state, territory and local governments, and land councils, who make licensing agreements with mining and resources companies to ensure any new exploration licences are only granted to companies that agree to sign up to the Australian Supplier Payment Code.
The Committee recommends that the Australian Government prioritise reviewing the Australian Consumer Law with a view to:
Amending the law so that Unfair Contract Terms in business-to-business contracts are prohibited under the law;
Including potential penalties for imposing Unfair Contract Terms;
Clarifying or widening the definition of a ‘standard form contract’, as required to meet the intent of the legislation; and
Amending the thresholds to ensure a larger proportion of small and medium sized businesses can be protected by the law.