The Spanish Supplier Payment Scheme: Just a Stopgap?

Owing to the extent of Spanish public authorities’ immunity from enforcement and the on-going relationship that they have with their suppliers, the amounts they owe to suppliers can quickly add up in times of financial distress. To resolve this issue, the Spanish Government has recently undertaken measures under the “Plan de pago a proveedores” (the Spanish supplier payment scheme) to settle all outstanding amounts owed by certain local and regional authorities to their suppliers as at 1 January 2012.

To this end, the State set up the supplier payment financing facility (the Facility) to pay these amounts on behalf of the public authorities, thus providing them with financing. In return, these public authorities were obliged to adopt and follow an adjustment plan.

Regulatory framework

The main pieces of legislation enacted to set up the Spanish supplier payment scheme are Royal Decree-Law 4/2012, of 24 February, which sets out information obligations and procedures needed to establish a financing scheme to pay local entities’ suppliers; and Royal Decree-Law 7/2012, of 9 March, which establishes the Facility.

Secondary legislation has also been passed to implement these two Royal Decree-Laws.

Public authorities participating in the scheme

The Spanish supplier payment scheme applies to amounts owed by certain Spanish local and regional authorities.

Spanish local authorities (except those from the Basque Country and Navarre) were obliged to join the scheme. Local authorities comprise entities at a municipal, provincial and island level financed, at least partially, by tax revenues collected by the State, as well as certain organisations and entities that belong to or are dependent on them. Regulations were subsequently passed to allow local authorities from the Basque Country and Navarre to join the scheme.

It was optional for autonomous communities (ie, Spanish regions) to join the scheme. In total, 14 autonomous communities joined the scheme (all of them bar Galicia, the Basque Country and Navarre).

Requirements for suppliers and their debts

The Spanish supplier payment scheme was voluntary for suppliers. Therefore, if they wanted to be paid from the Facility, they had to join the scheme. Otherwise, they could seek payment of the amounts owed to them by local and regional public authorities by ordinary means. It was understood that suppliers who requested an individual certificate opted-in to the scheme (see the Procedure to obtain debt acknowledgement and payment section below), although some autonomous communities, such as Murcia, established that an express opt-in was needed for debts owed by the relevant autonomous community to be paid under the Facility.

In general, eligible suppliers were those that had entered into an agreement to provide works, services or goods, or for government franchises (concesiones administrativas), with a participating public authority. If an eligible supplier assigned its credit rights to a third party, the third party would also be considered as an eligible supplier.

In addition, in order for outstanding amounts to be settled under the Spanish supplier payment scheme, the outstanding amount must have been due, payable and enforceable; and the invoice or equivalent request for payment must have been received in the local authority or autonomous community’s incoming-documents registry before 1 January 2012.

Procedure to obtain debt acknowledgement and payment

Since the Spanish supplier payment scheme was aimed at settling all outstanding debts of local and regional authorities, these public authorities were obliged to report the real volume of their debts with suppliers to ensure that the scheme worked efficiently. This information was also used for the “adjustment plan” (see The adjustment plan section below) drawn up by each authority for approval by the Ministry of Finance.

To this end, both local authorities and autonomous communities had to provide the Ministry of Finance with a certified list of all their outstanding obligations, including the suppliers’ details, amounts owed (plus taxes, if applicable), date of receipt of the invoice or similar document, and confirmation of whether or not judicial actions had been initiated to recover the outstanding amounts. The local authorities and autonomous communities had to give their suppliers the opportunity to verify whether or not they were included in this certified list.

If a supplier had not been included in the certified list, it could request the relevant public authority to issue an individual certificate including the same information which should have been contained in the certified list. If an individual certificate was not issued to a supplier within 15 days of its request, the right to receive payment was recognised in the terms set out in the request by virtue of the “positive silence” rule (ie, a public authority’s failure to respond is construed as it having given its assent).

The Ministry of Finance then provided the Official Credit Institute (Instituto de Crédito Oficial) with a list of eligible suppliers which had joined the Spanish supplier payment scheme, and the latter acted as payment agent and ordered payment to be made to the participating suppliers. The actual payments were made by the collaborating credit entities into the participating suppliers’ bank accounts (see the Outcome of the Spanish supplier payment scheme section below). These payments have settled the relevant debts for principal, interest, legal fees and other related costs. As a result of the payments, the Facility has assumed all rights that suppliers had against the public authorities for the amounts paid.

Finally, if outstanding amounts included either in a certified list or individual certificates had not yet been properly accounted for in the relevant public authority’s accounts, an obligation to book them accordingly was established.

The Facility

In order to finance and execute the payment of all outstanding amounts owed to suppliers by local authorities and autonomous communities, the Spanish Government set up the Facility. The Facility has been financed with an initial contribution of EUR6bn from the State, EUR1.5bn of which is to be disbursed in 2012. Furthermore, on 16 May 2012, the Facility executed a EUR30bn syndicated loan with 26 lenders, which may be increased up to EUR35bn.

Debts and obligations incurred by the Facility with third parties benefit from an “explicit, irrevocable, unconditional and direct” guarantee from the State.

The characteristics of the credit transactions entered into by the Facility with public authorities are the following:

• The Facility, through collaborating credit entities, has entered into long-term credit transactions with the participant autonomous communities and local authorities.
• These public authorities will have ten years, with a two-year grace period, to repay the debt owed to the Facility.
• The applicable interest rate is equivalent to the Spanish Treasury’s financing cost for that term plus a margin of up to 115 basis points and a dealer’s margin of up to 30 basis points. The final interest rate applicable to local entities was fixed at 5.939 per cent.
• The financing available under the Facility was disposed of through direct payments to the suppliers, such that the Facility has assumed all rights that suppliers had against the public authorities for the amounts paid.

The adjustment plan

The Spanish supplier payment scheme revolves around the drawing-up and approval of adjustment plans and their approval by the Ministry of Finance.

Public authorities obliged to enter into a credit transaction agreement (ie, those which had outstanding debts as at 1 January 2012 with suppliers and which had not subsequently paid them) had to draw up an adjustment plan.

If local authorities failed to draw up the adjustment plan, certain amounts will be withheld directly from their share of tax revenues collected by the State. Moreover, if the adjustment plan was not approved by the Ministry of Finance (either expressly or by negative silence), the relevant local authority could not enter into the credit transaction with the Facility and the same direct withholding will be made from tax revenues.

The adjustment plan must guarantee the refinancing of the relevant public authority’s debt within ten years (with the two-year grace period). Therefore, this document is aimed at ensuring the viability of the restructuring of each public authority, and it will have effects during the repayment period stipulated in the credit transaction agreement entered into by the public authority to pay its suppliers.

Public authorities that have entered into credit transactions must submit a quarterly report prepared by its financial controller to the Ministry of Finance (or annually for municipalities which are not the capital city of a province or autonomous community, or which have a population of less than 75,000 people).

The outcome of the scheme

The results of the Spanish supplier payment scheme, notwithstanding possible extensions, are as follows: at the end of May 2012, 106,283 suppliers of 3,774 local entities were paid almost EUR9.3bn pursuant to more than 1.7 million outstanding invoices; and at the end of June 2012, 29,108 suppliers of 14 autonomous communities were paid more than EUR17.7bn pursuant to almost 3.8 million outstanding invoices.

Conclusion

The Spanish supplier payment scheme has allowed suppliers to be paid amounts owed to them as at 1 January 2012 by certain local and regional authorities. However, it remains to be seen whether the scheme and other recently enacted measures will avoid a similar situation arising again, ie, whether or not these measures will force Spanish local authorities and autonomous communities to honour commitments with suppliers as they fall due and prevent these public authorities from postponing debt acknowledgement and payment to suppliers.

David García-Ochoa Mayor and Daniel Pedro Valcarce Fernández

* This article was first published in “Corporate Rescue and Insolvency”, Vol. 5.5, October 2012, edited by LexisNexis