Can a law speed up late payment in a sluggish economy?

In the building sector, timely payment is as rare as a cold day in L.A. Contractors and subcontractors often go months or even years without receiving a paycheck. In early November, an insulation company at Ádánd, a township near Siófok, turned to the court over an unpaid job it delivered to the local government. Tibana Kft insulated the local school’s roof in July, a job it won via a tender, but has seen no payment since. As the Ádánd authorities refused to pay, citing quality issues, the case is currently on the table of the Compliance Verification Experts Body (TSzSz), an organization set up by the government to break chains of debt and accelerate late payments in the sector. TSzSz’s expert opinion will weigh in the court’s decision but cannot guarantee payment either as the local government is already in heavy debt.

Public authorities are usually the worst debtors in time terms. This is not a uniquely local trait; in many European countries it is the state that takes the longest to pay. Even with EU legislation introduced in 2011, which set an obligatory payment period between the public administration and businesses (PA2B), delays are frequent. The rules are simple: every authority must pay 30 calendar days after it receives the service/goods procured. In exceptional cases, a maximum of 60 days is allowed.

That 30 day period is ambitious, to say the least. In 2013, the average payment duration in commercial transactions with public authorities is 55 days (25 days of delay) in Hungary. That compares with a 61-day EU average where Nordic countries are on top (Finland 24 days, Norway and Sweden 34 days) and the south is at the bottom (Greece 159 days, Italy 170 days). 

Between businesses, commercial transactions cover an average of 43 days in Hungary. The country is below the 49-day European average, ahead of Italy (96 days) but behind Germany (34 days.) Figures in the B2B sector are slightly better, but businesses are not shielded against late payment either. Rules binding public authorities in this sector are optional. In the absence of a contract, a 30-day deadline should be set. With a contract it can be extended to 60 days unless otherwise agreed by the parties and provided it is not grossly unfair to the creditor. Enterprises are entitled for interest for late payment (ECB reference plus at least 8%) and recovery costs.

With a contract, it is easier to enforce receivables. Even so, creditors turn to lawyers or debt collectors. Intrum Justitia Kft, a subsidiary of the international credit management firm of the same name, has handled 16,000 cases from the B2B sector and 500,000 cases from the B2C segment in 2013. The firm has 700 B2B clients, mostly multinational firms or Hungarian enterprises that have leaders with a multinational background. Many of their 100 B2C clients come from banks, telecommunication and public utility companies. Whether they can successfully recover a debt depends, in great part, on the creditor.

“The receivable’s status, age and amount will define how much we can retrieve,” explained Intrum Justitia managing director Péter Felfalusi. The approach toward debt handling varies with company size and finances. Large firms don’t hesitate to turn to the courts: legal costs and lengthy procedures don’t deter them. Smaller firms already in debt may wait longer. In a regional comparison, the action these firm take to survive while waiting to be paid differ in priority from their European counterparts. While European firms actively pursue accounts receivable and negotiate longer payment terms with suppliers, Hungarians first cut overhead and other costs. They also delay accounts payable later.

SMEs are at most hazard of bankruptcy: Europe-wide, defaults have lead to 450,000 job losses and caused liquidity problems for 57% of enterprises, a 10% rise on previous years. In Hungary, firms will see 4% of their revenues disappear due to delays. Last year, the amount of late payment in the EU was €340 billion, double the amount of its 2012 budget.

If enforced, the adopted EU rules may improve payment discipline in Hungary. But there is more to it: stricter rules for starting a company, larger buffer amounts for cash-poor periods, and transparency.

A better economy wouldn’t hurt either...