Funding flexibility was a key factor that determined Transport for London’s (TfL’s) choice of partner as it decided to offer its suppliers supply chain financing. But the key driver for the yet-to-launch programme was corporate social responsibility, said Robert Pooles, head of cash and accounts receivable at TfL.
“As a public sector entity we do need to be highly transparent,” he said at the recent Taulia Connect Europe event in London. “We need to be seen to be doing the right thing.”
The critical plank for this was the ability to offer suppliers on-demand payments – giving suppliers the opportunity to choose when they get paid. “If they want accelerated money they can pick what day they get paid. If they just want to get paid in the normal payment terms they can get paid to standard terms.”
For TfL, the standard terms as a public sector buyer are already pretty tight: 30 days for most suppliers, and 10 days for SMEs. The organisation is the largest integrated transport network in Europe. It spends about £7bn a year, has 7,500 suppliers and processes some 400,000 invoices a year. The supply chain is heavily-weighted to the larger end: “Probably 90% of our spend is with the top 100 suppliers,” Pooles said. “But we were really keen to try to make sure this [SCF offering] was accessible to everyone in the supply chain. One of the things that differentiates Taulia was the ability for this to work not just for the very, very big guys, but the smaller suppliers as well.”
One of the benefits that suppliers will get has nothing to do with the availability of finance: “It gives them visibility of their invoice status,” Pooles said. “At the moment, our suppliers can get quite frustrated, phoning up the accounts payable team trying to find out if they have received the invoice, have they approved it, when it’s going to be paid. This tool gives them the ability to log in and see its status.”
TfL in fact polled suppliers to test their opinions of the project. “It’s all very well us putting this in place but if the suppliers don’t want it then it would have been a waste of our time,” Pooles said. In fact, the response was overwhelmingly positive. “They were extremely excited about getting visibility over their invoices rather than having to pick the phone up.”
Our cash or their cash?
TfL needed an SCF platform that would allow the organisation the choice of using its own cash or third-party cash. TfL has to pre-fund most of the major work it does. The Crossrail project is a 118km rail link between Reading, west of London, and Essex, passing through Heathrow airport and beneath London’s Oxford Street. Costing £15bn, it’s the largest civil engineering project in Europe – and it was pre-funded. “We’re sat on quite a large pile of cash,” Pooles said. “We were investing that in gilts, earning Libor flat.”
Now, with the launch of the supply chain finance scheme, TfL will be able to deploy that cash to pay suppliers early if they so wish, generating cost reductions through dynamic discounting. “It’s going to give us a return far in excess of Libor,” Pooles said. “As an organisation that’s trying to be more commercial, the more money we can make the more we can reinvest in upgrades of the transport network.”
While the higher return on cash directly benefits the cost of goods line rather than treasury’s P&L, the treasury function will get formal recognition of the return it’s earned on its cash. “Because it’s a treasury-sponsored initiative it will absolutely be showing as a metric,” Pooles said in response to a question from SCF Briefing. “And it will be another way of showing how treasury is adding value to the organisation.”
Third-party cash source
Taulia’s partnership with Greensill Capital means that third-party cash can also be used to pay suppliers, but allowing those suppliers to get access to funding at a rate that benefits from TfL’s AA credit rating. “I don’t think a single one of our suppliers has a credit rating anywhere near that,” Pooles said.
Greensill Capital runs a money market fund which is aims to invest purely in supply chain finance assets. This, he said, gives them an advantage over a bank that could become worried about their exposure to a large and successful SCF programme. “That doesn’t happen with the Taulia platform,” Pooles said: while Greensill may be using some of its own balance sheet, it can also bring in new investors into the money market fund.
TfL also wanted a platform where the onboarding process was easy and paperless: “We needed slick, efficient onboarding – “measured not in months but in mouse clicks,” he said.
Pooles was talking about the TfL SCF programme some weeks before it has even launched. But he has a high degree of confidence in its success: in choosing its partners, Pooles said that TfL looked for proven track records. We needed to speak to people who have done this before, and try to learn from what they’ve done and pick up on whatever pitfalls they may have come across,” he said. “This is public money – we could not take the risk of gambling with someone who was not fully tested in the marketplace. We needed to make sure it worked.”
Pooles’ advice for other corporates thinking of going down the SCF route? “Pick the right partner to suit your objectives and your requirements. Spend a lot of time defining what your requirements are. That will give you a heavy steer as to which solution you should go for.”