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Authorities should lead by example over late payments - European Commission

Businesses sceptical over late payment directive

Late payment is a huge problem in Malta especially when it comes to the government paying the private sector.

Late payment is a huge problem in Malta especially when it comes to the government paying the private sector.

Public authorities should lead by example and should - as a rule - pay their bills within 30 days, Maarit Nyman, from the European Commission's SME policy development unit told The Times Business.

Her comments were sought after a Malta Business Bureau document warned about the huge problems of late payments by the government in Malta and in view of the Commission's proposal for a new policy approach to tackle this issue which would substantially amend the late payment directive of 2000.

The MBB document, seen by this newspaper, said: "Some companies, across all sectors of the Maltese economy are facing liquidity problems which are evident in their audited accounts. We also see a great deal of bartering going on with building developers exchanging property as a payment to sub-contractors.

"Some other companies also complain that as a result of late payment, they are unable to restructure appropriately in order to face the new challenges of today's market demands. Credit problems exist in all sectors of the economy. The wide variety of commercial sectors that our members come from gives a clear indication of this."

Joe Tanti, the MBB's chief executive officer, told The Times Business: "We will in fact be organising a business seminar on this important issue. Our aim is to hold a discussion on how belated payments by public authorities to private sector suppliers can be eased and indeed the credit-management process facilitated for both parties. Subsequently we also plan to present a short report with the business community's reactions carrying some concrete proposals in relation to the draft recast (of the late payment directive) for government's consideration."

Ms Nyman said: "Late payments in commercial transactions between companies or between businesses and public authorities hamper the development of business in the EU and are even responsible for bankruptcies of otherwise viable companies, notably if they are SMEs. As a part of the Small Business Act for Europe the Commission suggests a new policy approach to tackle this situation and proposes substantial changes to the late payment directive of 2000.

"It suggests that public authorities should lead by example and should - as a rule - pay their bills within 30 days. The freedom to contract will be respected in business to business relations, however in case of delay businesses will be entitled to claim late payment interest and a compensation of recovery costs. The rules on grossly unfair contracts are also tightened."

Despite the entry into force of the 2000 directive, late payment in commercial transactions is still a major problem within the European Union, including late payments by public authorities. Given the importance of public procurement in the EU this has a strong negative impact on enterprises.

The main reasons for the proposed changes to the late payment directive are to reduce the number of late payments in commercial transactions, to shorten the payment period for public administrations ands to reinforce the incentives for public administrations to pay on time.

The updated directive will provide creditors with additional instruments which enable them to fully exercise their rights, when they are paid late. It also seeks to provide more measures that effectively discourage public administrations from paying late.

Crucially, the Commission is proposing that public authorities must pay within 30 days - or pay a flat rate compensation of five per cent of the amount plus interest.

Furthermore, businesses can claim both late payment interest and also reimbursement for recovery costs. Even small amounts of interest may be charged - businesses can claim back interest which amounts to less than €5.

According to the Commission 45,000 jobs and some €23.6 billion are lost annually due to late payments.

The MBB document points out that pharmaceutical and the construction sectors are especially affected by late payments.

"Pharmaceutical importers are bracing themselves for a potential situation in which they would receive no payments before next year for all the products purchased and supplied to the government between now and the end of the year," the document says.

"Late payments to the pharmaceutical industry have been an ongoing saga for many years. Government pharmaceutical services are archaic and impeded the existence of a healthy business relationship with pharmaceutical importers. Besides, hefty fines are punitively imposed on importers for the late delivery of pharmaceutical products, even when force majeure delays the timely importation due to natural constraints, such as weather conditions. The fines sometimes exceed the value of the order itself, rendering importation completely unfeasible. During 2008, the fines imposed reached €2 million," it says.

Reginald Fava, chairman of the Healthcare Business Section of The Chamber of Commerce, Enterprise and Industry and chairman of Chamber's Wholesalers, Distributors and Retailers Economic Group was somewhat sceptical about whether the EU's proposed new directive would in reality force the government to change its ways regarding payments to the private sector.

He said: "I must declare that the late payment directive is another step forward in trying to resolve the issue of late payments which situation is creating immense problems not only for members of my economic group but for all businesses in the 27 member states of the EU.

"Notwithstanding, I do not consider this directive to be the solution to our problem. We are well aware of the fact that we can charge interests on late payments and we have known this since Malta joined the EU. However it is not the charging of interest that we are after. It is the prompt payment that we require when invoices fall due.

"The directive does stipulate a 30 day limit for payment after which interest falls due. It does not exclude a different arrangement with the customer. In the case of supplies by members of the Healthcare Business Section to the Department of Health, the 150 day period is an imposition by the government. This period had to be reduced within a 'reasonable' period of time t o 120 days but, after all these years, this has not materialised.

"I would like to state in very clear terms that the latest directive on late payments shall not solve our problem unless the government shall have the resolve to be fair with our members and clear the backlog of pending invoices and to settle its dues on time for future supplies."

Anġlu Xuereb, chairman of the Association of building Contractors, was equally sceptical. He told The times Business: "The changes in the new recast proposal of the late payments directive are a step in the right direction. This notwithstanding, their ultimate effect on the problem of late payments in the construction sector is still open to debate because the new rules are optional.

"Business is entitled to take action to claim the flat rate compensation from the public authorities, and to claim the late payment interest and the reimbursement for recovery costs. However, it is a well-known fact that most contractors avoid entering into litigation with their main clients, in particular the public ones, for fear of not being invited to tenders for future works.

"One possible option would be to remove the optional element and make the payment of the flat rate compensation, the late payment interest and the reimbursement for recovery costs compulsory when the defaulter is the public sector. Ultimately, the problem of late payments will only be solved through a top-down approach, where the clients, both public and private, adopt a stricter discipline in their payments."

He added: "This stricter discipline is bound to filter down throughout the payment chain, from the main contractors to their subcontractors, to the general benefit of the whole economy."

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