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Small businesses are at risk of losing out on lucrative infrastructure jobs due to huge finance hurdles being set by large contractors, the SME finance lender has warned.
Invoice finance lender Apricity Finance Group Pty Ltd (Apricity) has warned that small businesses are being left out in the cold when it comes to landing large infrastructure projects, which may impact broker clients.
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The issue has been raised at the House of Representatives standing committee on infrastructure, transport and cities infrastructure procurement inquiry, which held its first hearings on 10 November and continues on this week (16 and 18 November).
The committee is examining the opportunities and challenges presented by the Australian government’s $110 billion commitment to major infrastructure projects over the next decade, and the central role this pipeline will play in Australia’s post-pandemic economic recovery.
Fronting the committee on Wednesday (10 November), the chief executive of Apricity, Linden Toll, told the inquiry that small and medium-sized enterprises acting as subcontractors to larger groups (particularly in the mining, building and engineering sectors) are being increasingly required to provide bank guarantees, or performance or surety bonds, worth 10 per cent of the contract, which were unfeasible for many.
For example, Mr Toll highlighted that this requirement is often placed on subcontractors by large businesses and is placed on top of the traditional 10 per cent retention clauses (where payments are held back until work has been completed).
He told the House of Representatives standing committee on infrastructure, transport and cities that a contract in excess of $20 million would therefore require SME contractors to have at least $2 million in working capital for up to two years in order to land the contract.
Given that few small businesses have this kind of capital at hand, and that surety bonds are becoming harder to secure due to tightening credit requirements, he said that few SMEs “can afford [to] plan the game, even if they might be the better operators” and that more is needed to be done to overcome these “unrealistically high hurdles” to ensure these small businesses could deliver these projects that aim to stimulate the economy.
“Based on the numbers provided by Infrastructure Australia, Australian SMEs would need to find $21.8 billion over the next four years to effectively sit idle in banks, a requirement which simply can’t be fulfilled,” Mr Toll said.
“Many successful SMEs will be frozen out of such projects, stifling competition and innovation, and compounding the skills shortage already faced in the sector.
“We thoroughly applaud the government’s infrastructure stimulus, but if many of the 130,000 SMEs supporting the construction and mining sectors are prevented from participating due to crippling financial hurdles, its effectiveness will be massively compromised.”
Speaking to The Adviser about the issue, Mr Toll suggested that the problem could have long-term ramifications for broker clients.
“This issue trickles down the line into broker world, because the finance brokers that are looking to help these clients source finance for the machinery for those big jobs and other formers of finance to help them through the contracts are losing these opportunities and business,” Mr Toll said.
As such, Mr Toll is urging the government to limit its contracts to ensure that larger contractors winning these projects can only include retention clauses or a performance guarantee – but not both.
“In my view, the Australian Government is incumbent to look at a standardized contract that they had put together that favours both parties; not just a contractor but the subcontractor below it,” he said.
“If large contractors want to take on the large infrastructure projects that the government is well funding, then they have to take on these contracts and live them. So, in that way, the government could control – in some respects – the relationship between a contractor and subcontractor. That will benefit all parties in this space.”
[Related: Helping your clients land big contracts]
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