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CIMIC under fire for forcing supply chain finance

Kate O'Brien
balance sheet

Cimic Group Ltd (ASX: CIM) is under fire again over its use of supply chain financing. A subcontractor on Perth’s Casuarina prison project has told the Australian Financial Review (AFR) that they were forced to accept payment through a supply chain finance arrangement by CIMIC subsidiary Broad Construction. 

Supply chain finance only payment option

Broad Construction was awarded the $96 million prison project by the Western Australian Government. One sub-contractor who tendered for work on the project and claims he was told all supplier payments on the project were being made under supply chain financing arrangements.

Speaking to the AFR, the contractor said that he wanted to be paid directly by Broad Construction, but was told this wasn’t an option. If he wanted to work on the project, the only way to get paid was to sign a supply chain finance agreement with CIMIC’s financier Greensill Capital. 

What is supply chain finance?

Under supply chain finance agreements, the customer makes an arrangement for the supplier to sell their invoice to a financier. Once the supplier issues their invoice, they can have the financier pay it (for a fee) if they want the cash earlier than the customer’s payment terms allow. The customer then pays the financier at a later date. 

Small business ombudsman Kate Carnell says supply chain financing arrangements are acceptable if suppliers voluntarily enter into them to get paid earlier than government terms for construction contracts (generally 20 to 30 days). They are not, however, acceptable if forced onto suppliers, with Carnell telling the AFR; “You can’t achieve 20 days by using supply chain finance because it’s the contractor that pays for that.”

CIMIC faces criticism

CIMIC has faced criticism for its use of reverse factoring both due to the impact on suppliers and on CIMIC’s balance sheet. Greensill, which provides supply chain financing to CIMIC, has previously threatened to ditch clients who push out payment terms beyond 30 days.

CIMIC extended the payment terms for one of its subsidiaries to 65 days last September. There are fears that this amounts to a “supplier payday lending scheme” forcing suppliers to take a discount on their invoices in order to be paid promptly. 

Greensill has refused to say whether it has dumped CIMIC as a client as a result of its extended payment terms. However, Federal Small Business Ombudsman Kate Carnell has said her office would seek to ensure Greensill followed through. “My office has the capacity to seek documents and will be ensuring that they follow through,” Ms Carnell told The Australian

Finances opaque

The use of supply chain financing allows companies to delay paying bills, in turn lowering reported debt and inflating cash balances. Supply chain financing arrangements are often accounted for within trade and other payables, making it difficult to tell how much money is owed to suppliers. 

Proceeds from factoring receivables are treated as operating cash flow, the same as if they were collected from the payer. Amounts owed to the financial intermediary are booked as payables instead of debt, which artificially lowers reported debt and increases cash flow. Inflows from higher payables are treated as an operating rather than financing activity.

Hong Kong-based accounting and research firm GMT has previously alleged that CIMIC’s disclosure regarding its reverse factoring falls short as it fails to provide information on how much is outstanding under its facilities. 

You can learn more about CIMIC’s history of reverse factoring in this article here.

Foolish takeaway

The controversy over CIMIC’s use of supply chain financing doesn’t look like dying down any time soon. The ombudsman has threatened legislation if big companies do not pay small companies within 30 days, while companies such as Telstra Corporation Ltd (ASX: TLS) and Rio Tinto Limited (ASX: RIO) have vowed to stop using supply chain financing arrangements. 

The post CIMIC under fire for forcing supply chain finance appeared first on Motley Fool Australia.

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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020