Valencia’s small businesses suffer as town halls default

BUSINESSES across the Valencia Region are suffering through the delay or outright default of municipalities who now simply do not have the money to pay their debts.

Many small businesses whose main livelihood was the provision of services as privately contracted suppliers to their local authority, have now found themselves in the unenviable position of not being paid, and being reliant on that one source of income which is now in default.

The soaring debt ratios of the Town Halls have come to light at the same time as revenues are falling for the local authorities.

With construction virtually at a standstill, revenues which many authorities relied on in the boom years have dried up. The only way to compensate for this is to cut back on spending to a similar degree; but this is not as easy as it sounds.

Some municipalities have announced drastic measures, such as postponing payments to their suppliers until next year, or by making swinging cuts to their budgets.

Some have been close to running out of supply of light by default to large utilities and others do not have money to pay the water supplier.

Laws exists to protect small and medium sized businesses whereby invoices must be settled within 55 days (120 days for works contracts).

In reality, it is not uncommon for local authorities to delay payments for over two years. There is little point having a law that is not enforced.

The Valencian Federation of Municipalities and Provinces (FVMP) has recently presented a good practice guide for municipalities.

They offer advice ahead of a what all pundits see as worse times ahead. “The situation is really bad and does not look to be improving,” says José Antonio Redorat, secretary general of the FVMP. “We need to apply borrowing municipalities with austere and responsible management. No Valencia City currently lacks liquidity or cash.” he said; though many private contractors might dispute this.

The document promotes the reduction of non-essential costs, better utilization of staff, avoiding excessive staffing, limit positions of trust and balancing revenue with expenses to avoid shortfalls, among other aspects.

The Government has in place a toughening of the provisions for payment times. Pay in 50 or 60 days seems reasonable, but given the current default periods it seems an impossible task to adhere to the 30 days limit, which the rules set for 2013.

According to the latest report on the outstanding debt of local authorities, as issued by the Ministry of Economy and Finance in December 2010, Valencian municipalities had a total of €3 billion to banks for loans and other financial transactions. The figure puts the Region as the fourth most indebted of all autonomies, with an average of €589 per inhabitant.

Only the municipalities of Madrid (€1,192 per person on average), Aragon (€782) and Cataluña (€681) exceed the per capita debt level of Valencia.

Payments to financial institutions involved are just the tip of the iceberg, as the statistics of the Ministry does not include commercial debt.

That is, the debt that affects private suppliers. The two are they are related.

The municipalities rely on liquidity and credits to be able to pay their suppliers. They need to borrow more from the banks (to whom they already owe money), to be able to pay the suppliers (to whom they owe money).

It’s borrowing from Peter to pay Paul.

“It’s like a domino effect. We are paying for the crisis and in most cases not the fault of the employer. There are arrears dating back five or six years. And the situation is similar for all companies that work with municipalities. Many end up having meetings of creditors to get some concerted action for the delay. Companies with more than fifty years history are going under. ” said Carlos Andújar, President of the Valencian Association of Machinery Construction and Public Works “There is a fear that if you complain too much, they will punish you.” By this he means an authority will delay the complainer’s payment even more, and will prejudice future contracts. It is an invidious position for the businesses.

The companies could themselves borrow money to tide them over the hiatus in local authority contract payments, but bank’s are increasingly reluctant to extend credit where they see no end to a companies problems. “There are entrepreneurs who are risking their own personal assets and savings just to stay afloat” said Luis Lopez, of the Confederation of Valencia’s Small and Medium Enterprises.

The problem should not be seen as limited to faceless businesses. The end effect is more unemployment and empty buildings, all adding to the general malaise.

In the Alicante region, the average Town Hall Debt (to banks and lending institutions) is 508 euros per habitant. Within the region, the highest debt is that of Castell de Guadalest where it stands at a whopping 2,723 euros; five times the regions average. What is the long term consequence of such debt? Redundancies, painful contraction of services, and a weight on the local economy, further hindering chances of an early recovery from recession.