Legislation on late payments varies widely across Europe. Member states have repeatedly pledged to shorten the time firms wait to be paid by state agencies, but results have been mixed.
The recast Late Payments Directive specifically targets public sector payments in an effort to set an example for the whole economy, as cash-flow problems in the private sector prevent companies from paying their suppliers.
A broad trend shows southern countries are slower to settle their bills than northern member states. However, even countries seen as traditionally diligent in paying invoices have been criticised for letting payment times slip.
Small and medium-sized enterprises (SMEs) complain that, while the problem is well appreciated by governments, few countries can afford to slash payment times due to the cash-flow issues it would pose for the public purse.
The health and construction sectors stand to benefit from the implementation of the new directive as both industries count the public sector as a major client. Firms in some countries have resorted to suing public bodies for late payments – a process which is costly for all concerned.
The long-term impact on high-tech companies reliant on state contracts may not be felt for a decade, according to industry sources. Devoting time and resources to chasing payments and pursuing legal action means less attention is given to innovation.
More pressingly, cash tied up in unpaid invoices is making firms less likely to invest in research and development, and the delays are also a major disincentive to entrepreneurs trying to get a new business off the ground.
Some industry groups are hopeful that the new EU directive, along with improving economic conditions, will provide some impetus for public bodies to pay more quickly.
However, there is frustration at the timeline given that the Small Business Act was proposed in June 2008 and the Late Payments Directive is yet to pass the committee stage at the European Parliament.
It was due to be debated on 10 April but may now face further delays due to the large volume of amendments submitted by MEPs.
UK
In the UK, one in three payments from the public sector is late, according to a survey by the Federation for Small Businesses (FSB). An extensive survey of 10,000 small firms revealed state agencies are struggling to meet the government's commitment to settle its bills within 10 days.
The report found that local government is likely to pay one in four invoices late, and central government and agencies make one in three payments late. This is despite putting a Prompt Payment Code in place and London's promise to tackle late payments as part of its strategy to help SMEs through the recession.
Businesses also complain that almost one third of payments from EU institutions and the private sector are made after the agreed payment time.
"It is shocking that after the government put the Prompt Payment Code in place so many businesses are still being paid late. The public sector needs to take the lead in more than word alone and set an example that paying late isn't acceptable, as this problem persists in the private sector," said John Wright, national chairman of the Federation of Small Businesses.
The British Chambers of Commerce says almost one fifth of SMEs now employ a dedicated person to chase late payments.
Germany
Scepticism predominates in German policy circles on the Late Payments Directive. Government experts, economists and think-tanks doubt that the draft directive will pass in its current form and whether it corresponds to the German legal system.
Thimo-Marcell Jeck, analyst at the Centre for European Policy (CEP), a think-tank, says that there are two outstanding points. Under German law there are no punitive damages as proposed in the directive. In Germany damages depend on the amount of damage suffered by the company awaiting payment. The second point of contention is that the directive violates freedom of contract.
In particular, the idea of imposing a 5% fine on public sector bodies on outstanding debts is meeting with stiff opposition. Experts refer to the general concern that this kind of punitive action can trigger a change of the legal system in Germany and could open the door to US-style class action.
Jeck also stresses that the new draft directive is not an automatic improvement for SMEs because usually each enterprise is both a creditor and a debtor at the same time.
The German federal government is unhappy with the prospect of adding to the financial burden faced by public authorities. The government doubts that the directive will be able to solve the problems caused by late payment, because the causes of late payments are manifold.
France
French efforts to curb late payments have been more successful than most. Delays in payments between companies were reduced by 10 days in France in 2009. For SMEs, the reduction is 11 days.
A report by the French monitoring centre for late payments pointed to the effectiveness of the measures contained in a French law adopted in 2008 and designed to modernise the economy. Indeed, before it came into force, on 4 August 2008, the payment delays averaged 66 days in France compared to 57 days in Europe.
The law contains specific rules about the reduction of payment periods. It limits payment periods between companies to 60 days in order to ease the financial pressure on SMEs. This key measure has been enforced since 1 January 2009. Moreover, if nothing is stated in the commercial contract, the delay is 30 days after the receipt of the goods or the execution of the service.
However, in 39 economic sectors, branch agreements established the possibility of delaying the enforcement of this measure.
Poland
The situation in Poland has improved marginally this year, with large firms facing the most severe delays.
According to a survey by 4P Research Mix, the average payment period was 38 days at the beginning of 2010 – three days shorter than 2009.
The smallest companies – those with less than nine employees – expect payments within 29 days on average. Firms with more than 250 employees are facing an average payment period of 43 days.
The Polish Confederation of Private Entrepreneurs has criticised the solutions proposed in the newest version of the EU directive on late payments. The Confederation emphasises that amendments by MEPs will limit freedom of contract between the public and private sectors.
"Such a solution is against freedom of contract – one of the main principles of European private law – and negatively influences the majority of European companies, including SMEs," said Henryka Bochniarz, president of the Confederation.
According to Polish entrepreneurs, the harmonisation of payment periods will influence the competitiveness of European companies on international markets, where terms of payment are negotiated freely.
Spain
In Spain, the financing problems of companies are grave, according to a survey of the High Spanish Council of Trade Chambers, published in December. 1.2 million SMEs – 76% of small firms – sought external funding in the final quarter of 2009.
Companies needed bank loans because they were unable to finance their activities with their own resources. 84.5% of Spanish companies that applied to financial institutions had problems getting credit, while 14% of them did not finally get the funds. Moreover, the amount of financing has diminished and its cost has increased.
Late payments in business-to-business transactions are bad, but public institutions have also a poor payment record. The survey by the High Spanish Council of Trade Chambers underlines that 60% of the 120,000 SMEs that provide their products and services to the pubic administration have had problems getting paid at the end of last year.
Spanish companies in the medical technology sector were in Brussels this week (March 24) to highlight late payments in their sector. In Spain there have been 750 legal actions in recent years taken by firms frustrated by late payments by public health services. Although the private sector always wins these cases, it remains a costly exercise.
Gloria Rodriguez of Fenin, a Spanish med-tech industry group, said there is variation between Spanish regions when it comes to late payments, with the Basque region paying within 60 days and Cantabria taking up to 600 days.
"This creates inequality between regions in Spain as well as between Spain and other countries. Companies are more likely to set up R&D operations in regions and countries where debts are settled on time," she said.
Rodriguez added that some companies have been claiming interest and penalties arising from late payments but this is a cumbersome process and firms far losing clients by taking action against bad payers.
"Smaller firms are spending too much time chasing debts when they should be dedicated to research and expanding their businesses to create jobs," she said.
Three members of Fenin have gone bankrupt recently, something Rodriguez says is totally unprecedented. "We've never seen med-tech companies go out of business like this before. Of course there have been mergers and buyouts but bankruptcies are a new phenomenon," she said.
Spainhas recently modified its late payments legislation to bring the payment time down to 30 days but businesses are far from convinced. "The problem is that the public sector is not complying with the current laws so it does not make much difference whether the target is 30 days or 60 days," said Rodriguez.
CzechRepublic
In April 2009, the Czech Confederation of Industry published a survey indicating that two thirds of companies observed a worsening of payment discipline.
"Since then, the situation got even worse," Milan Mostýn spokesman of the Confederation, claims. "We expect that over the next six months, maybe even 12 months, payment discipline will not improve. Speaking about public institutions, they generally do not pay on time either," Mostýn adds.
Karel Havlíček from the Czech Association of Small and Medium-Sized Enterprises and Crafts agrees. "Distributors suffer from liquidity problems first and then they stop paying producers. SMEs are another vulnerable group because their negotiating position is weak, especially in transport and construction sectors where competition is especially strong," Havlíček explains.
The only SMEs which are as badly hit are those offering unique goods or services for which there are substitutes, he said.
The Confederation is preparing a new study, the results of which will be published in April.
Bulgaria
Corruption, bad infrastructure, and late payments are the main problems encountered by Bulgarian business. These are the conclusions of a survey conducted by GfK on behalf of the Bulgarian Ministry of Regional Development and Public Works.
The results were announced by the minister Rossen Plevenliev during a meeting with the Confederation of the Employers and Industrialists in Bulgaria (CEIBG) earlier this month (9 March).
The survey of 200 company leaders found that 27% of participants complained of corruption. One quarter of bsuinesspeople said bad infrastructure is a problem for their company.
The third major problem, according to 16.5% of those surveyed, was late payments. 31% said late payments were not a major issue.
The Bulgarian Ministry of Regional Development and Public works has paid €64.4 million (124 million leva) to companies since the beginning of this year, according to Minister Rosen Plevenliev.
Slovakia
At the end of January 2010, the Business Alliance of Slovakia (PAS) announced that the business environment in Slovakia had further deteriorated in the last quarter of 2009.
“Due to the crisis, entrepreneurs face big problems caused by declining credibility and payment discipline of their business partners,” PAS said. It also stressed that it recorded negative development in profits, liquidity and cash flow of the enterprises.
The view of the Ministry of Economy is much more optimistic. "Available data and also the reports of the committee for monitoring the impact of economic crisis on business sector in Slovakia do not show any mass secondary insolvency and unpaid debts for sold goods or provided services due to global economic crisis," Jozef Hudak, Director of the Business Environment Department, Ministry of Economy, says.
On the other hand, the banking sector is easing conditions for credit in order to boost consumers' demand but the amount provided in operating loans for entrepreneurs is still on a par with last year.
Hungary
In Hungary, smaller companies dependent on the domestic market are under the most pressure due to delays in receiving payment.
Approximately 35% of SMEs' revenues are not paid on time and the situation has not changed significantly over the past year. Despite government efforts to improve payment times, most CEOs claim that their business partners are less disciplined regarding payments then before the financial crisis.
Late payments mainly concern smaller companies with purely Hungarian ownership, said István Karagich, director of the BloChamps Capital Ltd, a small advisor company on a conference in January.
Karagich advises SMEs to make braver steps than usual, as "it is more risky to produce for the same client" then before. "It is a Hungarian idiosyncrasy that SMEs are afraid to open new markets," he concluded.
Other SME leaders however claim that the state itself is their worst debtor. Small businesses that have to deal with state finance often complain about late payments of six months or more.
This is especially the case if SMEs use EU funding. "Project payments often delay and stay unpaid for months," a CEO of an SME dealing with EU project management told EurActiv Hungary.
Ireland
Late last year the Irish government announced new measures to force government departments to settle their bills within 15 days. This is an even stricter target than that proposed in the revised EU directive.
However, the Health Service Executive (HSE) – a major employer and contractor – is exempt from the new rules because it is a government agency rather than a ministerial department.
The HSE has come under fire from SME groups for asking private contractors for a 45-day payment period but the Executive rejects the criticism and says it has consistently pared back delays in payment.
Liam Woods, Finance Director at the HSE, told EurActiv that health sector bills are typically paid between 30 and 36 days after an invoice is received, depending on what part of the country the invoice originates.
The Executive will move to a single electronic payment system, according to Woods, which should help track payments and deliver payments more efficiently.
However, he said it was unlikely that the HSE would aim for the 15-day target set for government departments. "It would cost us over €100 million to cut the payment time from 30 days to 15 days so haven't moved," he said.
Woods was in Brussels to talk about how Ireland reined in chronic late payments in the public sector in the early 1990s. He said there is an initial cost to bringing payment forward but there are also savings to be made by not incurring interest penalties.
In 2009, the HSE paid out €858,000 in late payment interest – which accrues at 8% per annum, and is working to reduce this cost. In 2008, that figure was €1.6 million and the Executive's board is keen to continue reducing these figures, according to Woods.
