Pay as we say, but not as we do

Date: 21/11/1996

THE Yereven press club was set up to help safeguard democracy and journalistic freedom in post-soviet Armenia. But its members claim the club was nearly forced out of business because the European Commission was late in delivering promised funds.

“Our project was a very specific campaign, linked to this year's presidential and municipal elections. We were scheduled to begin work in June. The first money finally arrived from the Commission at the end of September. Because of the delay, we had to pay 10,270 ecu from our own pockets,” explains press club spokesman Boris Navarsardian.

Press club members eventually found the cash by foregoing their salaries for three months. But, as Navarsardian says with commendable restraint: “It was certainly a stressful time for us.”

According to the European Human Rights Foundation, which coordinates many similar Commission-funded projects in central and eastern Europe, the press club's tale of woe is all too familiar.

“In the three years we have been running these schemes, I can honestly say the situation has got worse rather than better. The longest late payment I have heard of was 18 months and delays of six months are commonplace,” said one foundation official.

This is bad enough for western companies, but for organisations in countries where overdraft facilities are often almost impossible to secure, the late-arrival of funds can prove well-nigh lethal.

“The problem is putting a huge strain on the sorts of east-west partnerships the Commission is supposedly trying to encourage,” added the official.

The Commission argues that it must maintain stringent financial controls over the use of taxpayers' money.

But critics counter that the institution's procedures are too inflexible. They say the rules do not differentiate in any serious way between controls on relatively small contracts - such as those coordinated by the foundation - and those for multi-billion-ecu structural fund payments to EU governments.

“No one is questioning the need for sound financial management, but the Commission needs to adapt its procedures to the different sorts of programmes it is running,” points out one critic of the current 'one-size-fits-all' approach.

You do not have to travel as far afield as Armenia to find companies which have suffered because of late payments by the institution. In fact, you do not even have to leave Brussels.

One large international consultancy which recently worked with one of the three Directorates-General for foreign affairs (DGIB) reports that the Commission regularly took between 120 and 140 days to pay bills. On occasions, it says, payment could take more than a year.

“We finally came to the point where we had to refuse to carry out any work unless they paid in advance. We were spending large sums of money sending experts to far-flung corners of the globe and we simply could not afford to wait so long for reimbursement,” said one representative of the firm, who claimed that all too often the Commission offered no explanation for the lengthy delays.

“I think most of the problems stem from bureaucratic incompetence. Paperwork was simply going astray and the Commission was not making it clear what was happening,” said another source.

Newscom is a television production company which until recently held a contract to supply the Directorate- General for audio-visual affairs (DGX) with film crews and technical staff to run the Commission's studios. The organisation reports delays of up to two years in the payment of some bills. “The problem led us to the edge of bankruptcy. At one point they owed us more than 50,000 ecu. We were summoned to court and were given two weeks to bring our overdraft down or go out of business. Fortunately, the Commission then paid just enough to avoid that happening,” said Newscom administrator Eric Angelini.

Angelini claims that the Commission often uses what could most charitably be termed as 'creative accounting methods' in order to get round allegations of late payment.

The institution would, for example, ask the company to go and film a humanitarian aid scheme in Bosnia. Newscom would do the work and pay for it up front. The Commission would then ask the company to send what they called a 'pre-bill'. This would list the actual cost of the shoot - often higher than the original estimate because of unforeseen extras such as bad weather, delayed flights or last-minute changes in programmes.

DGX would then enter into negotiations with any other services involved in financing the operation to decide who should pay what. These negotiations could take up to two years. Once a deal had been thrashed out, DGX would send Newscom an official bon de commande asking them to carry out the work which had already been completed two years previously. The company would then send a bill based on the bon de commande and the Commission would pay up fairly quickly.

If asked, the institution could then show that the period between when it officially asked for the services - via the bon de commande - and the date it paid for them was not unreasonably long. The two years of interdepartmental wrangling was conveniently omitted.

Other Brussels-based firms report similar instances of the institution promising formal contracts and asking companies to work 'on spec' in the meantime.

“Spending departments are not supposed to do this. It is against the rules to ask companies to work before a contract has been awarded. However, the firms themselves must also take part of the blame for agreeing to work under such circumstances,” says an official from the Directorate-General responsible for the budget (DGXIX).

But contractors complain that if they play by the rules, someone else gets the work.

Companies working on Commission contracts in member states seem just as likely to fall victim to the scourge of late payment as those in Brussels. One UK firm of mining engineers complained earlier this year that it had still not been paid seven months after completing survey work for the Directorate-General for energy (DGXVII).

Critics maintain that the Commission's record in this field is in stark contrast to its own guidelines on the prompt payment of bills.

In a recommendation published on 12 May 1995, Christos Papoutsis, the Commissioner responsible for small and medium-sized enterprises (SMEs), called on public bodies - including the Commission - to settle all bills within a maximum period of 60 days.

In explanatory notes published at the same time in the EU's Official Journal, the Commission said late payments put serious strains on businesses across the Union.

“Ensuring a reasonable timetable for payments within the European Union is an essential prerequisite both for the competitiveness of businesses and for the success of the internal market,” said the document.

Despite these fine words, it is SMEs such as consultancies and small audio-visual production firms, or cooperative organisations such as Yereven, which tend to suffer most from the Commission's own delays.

Ironically, these are exactly the types of businesses continually being trumpeted in speeches by Commission President Jacques Santer as the motors of European economic regeneration.

Socialist MEP Lyndon Harrison has long been campaigning for the Commission's non-binding recommendation to be beefed up into a fully-fledged directive, forcing both the Commission and member states to practise what they preach.

“If we can get this one right as EU institutions, I think it would be the best fillip we could give to Europe's small and medium-sized enterprises. To be fair to the Commission, the problem also exists in big national administrations, but given the importance of the institution's public face, they need to be doubly sure that that public face is a smiling one,” he says.

Harrison argues that Europe needs legislation similar either to the United States' Prompt Payment Act or to laws already in place in some member states.

In the US, a contracting company has a week to acknowledge receipt of goods or services provided. It then has a further seven days to examine any possible queries over billing or quality of service. After that, the company has 30 days to pay up before interest begins to accrue on the amount owed.

Meanwhile, in Sweden, debtors must settle bills within 30 days or start paying interest charges at 8&percent; above the national rate.

Harrison's campaign seems certain to win the support of Europe's business community.

A 1994 survey by Interim Justitia, Europe's largest credit management and debt collection company, suggested that up to 90&percent; of EU companies were in favour of some sort of late-payment legislation.

If the Commission is truly serious about tackling the problem of late payments, say critics, it should lead by example rather than effectively telling others to 'do as I say, not as I do'.