Organic Law 9/2013 of 20 December on the Control of Commercial Debt in the Public Sector

OFFICIAL STATE BULLETIN No. 305 Saturday, December 21, 2013 Sec. I. Page 103127 I. GENERAL PROVISIONS HEAD OF STATE 13425 Organic Law 9/2013, of December 20, on the control of commercial debt in the public sector. JUAN CARLOS I KING OF SPAIN To all who see and understand this. Know ye: That the General Courts have approved and I come to sanction the following organic law:

PREAMBLE The safeguarding of budgetary stability was an indispensable instrument to achieve the fiscal consolidation that allowed Spain to access the Economic and Monetary Union and was subsequently incorporated into various laws. In the same sense, the Stability and Growth Pact aims to prevent the emergence of an excessive budgetary deficit in the euro area, thereby providing confidence in economic stability and guaranteeing sustained convergence of the economies of the Member States.

In this context, the reform of Article 135 of the Spanish Constitution has served to guarantee the principle of budgetary stability, binding all Public Administrations to its achievement, as well as the economic and social sustainability of our country, while reinforcing Spain's commitment to the European Union.

In development of the aforementioned Article 135 of the Constitution, Organic Law 2/2012, of April 27, on Budgetary Stability and Financial Sustainability, was approved, which has represented a fundamental milestone for many reasons, including reinforcing the principle of budgetary stability so that it has a truly structural value for the economy, and by incorporating financial sustainability as a guiding principle of the economic-financial action of all Public Administrations, both of the State and of the Autonomous Communities, Local Corporations, and Social Security.

Two principles, budgetary stability and the financial sustainability of the public sector, are elevated in our legal order to fundamental pillars of economic growth and social welfare.

Financial sustainability, understood as the capacity to assume present and future expenditure commitments, finds its enemy in the lack of control of debt. The disproportionate increase in public sector debt drags down economic growth, by compromising future resources, mortgaging future income.

Organic Law 2/2012, of April 27, addresses the control of indebtedness, limiting the volume of public debt, but the indebtedness of the public sector is not only reflected in the volume of its financial debt, but also in its commercial debt. Limiting the control of indebtedness to financial public debt is to overlook one of the most relevant expressions of indebtedness, commercial debt. Financial sustainability is not only the control of financial public debt, but also the control of commercial debt.

Public Administrations are obliged to pay their suppliers within thirty days. However, commercial debt, considered as the volume of debt pending payment to suppliers of Public Administrations, reflects a notable delay in payment to suppliers, with the detriment this entails both for the private sector and for Public Administrations. Greater delinquency generates greater commercial debt, which in the medium term puts at risk the achievement of budgetary stability objectives and public debt limits, as well as the capacity to assume present and future expenditure commitments within those limits. Therefore, it affects the principles of stability and sustainability.

Public delinquency concerns both the public and private sectors. For the private sector, negative effects are generated in that the delinquency of Public Administrations generates transaction and financing costs for its suppliers, causing a transmission effect of delinquency in the production chain, with the consequent losses of efficiency and competitiveness for the economy as a whole. Therefore, what begins as public delinquency ends up being private delinquency as well.

For the public sector, negative effects manifest especially in the impact on financial sustainability, since, in addition to the extra cost of paying late with default interest, a greater expenditure commitment is generated for the future, with its temporal displacement, which compromises the availability of future resources. Greater delinquency generates greater commercial debt; greater commercial debt leads to lower financial sustainability, and hence budgetary instability.

In accordance with the above, this reform expands the concept of public debt to improve the protection of all creditors. These new limits on public indebtedness, as an essential part of the principle of financial sustainability, find their foundation in Article 135 of the Constitution which, in accordance with the jurisprudence of the Constitutional Court, acts as a limit to financial autonomy. Nevertheless, some differences between creditors continue to be maintained, since the absolute priority of payment of public debt provided for in Article 135.3 of the Constitution is applicable, in a strict sense, only to financial debt.

As collected in its report by the Commission for the Reform of Public Administrations, the challenge of controlling commercial debt and eradicating the delinquency of Public Administrations requires creating an instrument, automatic, easy to apply, so that its monitoring allows for generalized and effective control, which is understandable both for Public Administrations and for citizens and above all that it is public. For this purpose, the average payment period is introduced as an expression of the volume of commercial debt, so that all Public Administrations, in application of the principle of transparency, must make their average payment period public, and progress is made in its reduction through a structural, progressive, and automatic system of measures.

To achieve these objectives, this Law is structured in two articles. The first of them, consisting of sixteen sections, modifies Organic Law 2/2012, of April 27, to expand the concept of the principle of financial sustainability, which now also includes the control of commercial debt, thereby avoiding putting budgetary stability and the sustainability of public finances at risk in the medium term.

The obligation of Public Administrations to make public their average payment period to suppliers is created, generating a tool for monitoring commercial debt, easy to understand, which allows following its evolution. Internally, Administrations must include in their cash flow plans information related to payment to suppliers, so that financial management aligns with the protection of suppliers.

This is completed with measures that each Administration must apply unilaterally when it detects average payment periods exceeding the permitted limits. Subsequently, for the Autonomous Communities, new preventive, corrective, and coercive measures are contemplated to guarantee payment by suppliers, which the Ministry of Finance and Public Administrations will apply, such as: the quantification in the cash flow plan of measures to reduce expenditure or increase income that must be adopted to reduce the average payment period to suppliers, the determination of the amount of their resources that must be allocated to the payment of suppliers, or the possibility of retaining resources from the financing regimes applicable so that the Ministry of Finance and Public Administrations pays directly to suppliers.

On the other hand, in the case of Local Corporations, it is established that the auditing body will be responsible for controlling compliance with the average payment period, and special control is foreseen for Local Corporations included in the subjective scope defined in Articles 111 and 135 of the Consolidated Text of the Law Regulating Local Treasuries, approved by Royal Legislative Decree 2/2004, of March 5. With this, progress is made in the protagonism of auditors in the control of Local sustainability in guarantee of suppliers.

It should be noted that other modifications are also included in Organic Law 2/2012, of April 27, to improve the automatism in the monitoring and control of compliance with budgetary stability and public debt objectives and the expenditure rule, as well as Directive 2011/85/EU of the Council, of November 8, 2011, on requirements for budgetary frameworks of Member States is partially transposed, also incorporating modifications on the principle of responsibility and liability for non-compliance with rules of European Union Law or treaties and international conventions of which Spain is a party.

The Law, in its second article, modifies Organic Law 8/1980, of September 22, on the Financing of the Autonomous Communities, establishing a new, more flexible limit on the monthly withholdings or deductions that the State may make from the resources of the financing system, in the event of non-compliance with the average payment period to suppliers established.

Various additional provisions are also introduced regarding the publication of the average payment period to suppliers, support measures for the Event of Exceptional Public Interest "Santander 2014 Olympic Sailing World Championship", and control of entities of Public Administrations not subject to audit.

A new transitional provision is included regarding the temporal application of the modified rules of the Consolidated Text of the Law of State Ports and Merchant Marine.

Finally, several final provisions are introduced, which refer to the modification of Organic Law 2/1986, of March 13, on Forces and Bodies of the State Security; to the modification of the Consolidated Text of the Law of State Ports and Merchant Marine; to the modification of Law 19/2013, of December 9, on transparency, access to public information and good governance; on imports of provisioning products in the Canary Islands intended for their supply to certain ships and aircraft; on the ordinary nature of certain provisions; on the transposition of European Union Law; and on the entry into force of the Law, both generally, and with respect to the modification of the Consolidated Text of the Law of State Ports and Merchant Marine and the transitional provision affecting the aforementioned reform of said Law.

Article one. Modification of Organic Law 2/2012, of April 27, on Budgetary Stability and Financial Sustainability.

Organic Law 2/2012, of April 27, on Budgetary Stability and Financial Sustainability is modified in the following terms:

One. Article 4 is drafted as follows:

"Article 4. Principle of financial sustainability.

1. The actions of Public Administrations and other subjects included in the scope of application of this Law shall be subject to the principle of financial sustainability.
2. Financial sustainability shall be understood as the capacity to finance present and future expenditure commitments within the limits of deficit, public debt, and commercial debt delinquency as established in this Law, the regulations on delinquency, and European regulations.

It is understood that there is sustainability of commercial debt when the average payment period to suppliers does not exceed the maximum term provided for in the regulations on delinquency."

Two. Section 1 of Article 8 is drafted as follows:

"1. Public Administrations that fail to comply with the obligations contained in this Law, as well as those that cause or contribute to the non-compliance with the commitments assumed by Spain in accordance with European regulations or provisions contained in treaties or international conventions of which Spain is a party, shall assume, to the extent attributable to them, the responsibilities derived from such non-compliance.

In the process of assuming responsibility referred to in the previous paragraph, the hearing of the affected administration or entity shall be guaranteed in all cases."

Three. A new section 6 is included in Article 13 with the following wording:

"6. Public Administrations must publish their average payment period to suppliers and have a cash flow plan that includes, at least, information related to the forecast of payment to suppliers so as to guarantee compliance with the maximum term fixed by the regulations on delinquency. Public Administrations shall ensure the adequacy of their rhythm of assuming expenditure commitments to the execution of the cash flow plan.

When the average payment period of a Public Administration, according to published data, exceeds the maximum term provided for in the regulations on delinquency, the Administration must include, in the update of its cash flow plan immediately following the mentioned publication, as part of said plan the following:

a) The amount of resources it will dedicate monthly to payment to suppliers to be able to reduce its average payment period to the maximum term fixed by the regulations on delinquency.

b) The commitment to adopt the quantified measures of expenditure reduction, income increase, or other measures of management of collections and payments, which allows it to generate the necessary cash flow for the reduction of its average payment period to suppliers to the maximum term fixed by the regulations on delinquency."

Four. Sections three, four, and five of Article 17 are modified, which are drafted in the following terms:

"3. Before April 15 of each year, the Minister of Finance and Public Administrations shall submit to the Government a first report on the degree of compliance with the objectives of budgetary stability and public debt and of the expenditure rule of the immediate previous exercise, as well as on the real evolution of the economy and the deviations with respect to the initial forecast contained in the report referred to in Article 15.5 of this Law. This report shall be prepared on the basis of the information that, in application of European regulations, must be sent to European authorities and when assessing compliance, a reasonable margin shall be taken into account that may cover variations with respect to the report contemplated in the next section derived from the calendar of data availability.

4. Before October 15 of each year, the Minister of Finance and Public Administrations shall submit to the Government a second report on the degree of compliance with the objectives of budgetary stability and public debt and of the expenditure rule of the immediate previous exercise, as well as on the real evolution of the economy and the deviations with respect to the initial forecast contained in the report referred to in Article 15.5 of this Law. For the preparation of this report, the information that, in application of European regulations, must be sent to European authorities and the updated information sent by the Autonomous Communities to the Ministry of Finance and Public Administrations shall be taken into account.

Said report shall also include a forecast on the degree of compliance in the current exercise, coherent with the information to be sent to the European Commission in accordance with European regulations.

5. The Minister of Finance and Public Administrations shall inform the Council of Fiscal and Financial Policy of the Autonomous Communities and the National Administration of Local Corporations, in their respective scopes of competence, on the degree of compliance with the objectives of budgetary stability, public debt, and the expenditure rule.

The reports referred to in this article shall be published for general knowledge."

Five. Article 18 is drafted as follows:

"Article 18. Automatic preventive measures.

1. Public Administrations shall monitor the data of budget execution and adjust public expenditure to guarantee that at the close of the exercise the budgetary stability objective is not breached.

2. When the volume of public debt is situated above 95% of the limits established in Article 13.1 of this Law for each Public Administration, the only borrowing operations permitted for the corresponding Public Administration shall be those of cash flow.

3. The revaluation and adjustment mechanisms that prove necessary to guarantee budgetary equilibrium and the financial sustainability of the Social Security system shall be established by law with the rank of Law. The Government shall monitor the application of the revaluation and adjustment mechanisms of the pension system, in order to ensure budgetary equilibrium and the financial sustainability of the Social Security system.

4. The Ministry of Finance and Public Administrations shall monitor the compliance with the average payment periods to suppliers of the Autonomous Communities.

When the average payment period to suppliers of the Autonomous Community exceeds by more than 30 days the maximum term of the delinquency regulations for two consecutive months counting from the update of its cash flow plan in accordance with what is provided in Article 13.6, the Ministry of Finance and Public Administrations shall issue an alert communication indicating the amount that must be dedicated monthly to payment to suppliers and the quantified measures of expenditure reduction, income increase, or other measures of management of collections and payments, which must be adopted so as to allow it to generate the necessary cash flow for the reduction of its average payment period to suppliers.

The Autonomous Community must include all this in its cash flow plan in the month following said alert communication.

Once the Ministry of Finance and Public Administrations has made the alert communication referred to in the previous paragraph, its effects shall remain until the Autonomous Community complies with the maximum payment term provided for in the delinquency regulations.

5. The auditing body of the Local Corporation shall monitor the compliance with the average payment period to suppliers.

In the case of Local Corporations included in the subjective scope defined in Articles 111 and 135 of the Consolidated Text of the Law Regulating Local Treasuries, when the auditing body detects that the average payment period of the Local Corporation exceeds by more than 30 days the maximum payment term provided for in the delinquency regulations for two consecutive months counting from the update of its cash flow plan in accordance with what is provided in Article 13.6, it shall issue an alert communication, within fifteen days from when it detected it, to the Administration having attributed the financial tutelage of the Local Corporations and to the governing board of the Local Corporation. The Administration having attributed the financial tutelage may establish quantified measures of expenditure reduction, income increase, or other measures of management of collections and payments, which the Local Corporation must adopt so as to allow it to generate the necessary cash flow for the reduction of its average payment period to suppliers. When it is the Autonomous Community that has attributed said financial tutelage, it must inform those actions to the Ministry of Finance and Public Administrations.

If, after applying the previous measures, the exceedance by more than 30 days of the maximum payment term provided for in the delinquency regulations persists, the competent body of the General State Administration may proceed, prior to communication by the Autonomous Community in the case that it holds the financial tutelage of the Local Corporation, to the retention of resources derived from participation in State taxes to satisfy the pending payment obligations that Local Corporations have with their suppliers. For this purpose, the necessary information shall be requested from the Local Corporation to quantify and determine the part of the commercial debt that will be paid from said resources."

Six. Article 20 is drafted in the following terms:

"Article 20. Automatic corrective measures.

1. In the event that the Government, in accordance with the reports referred to in Article 17 of this Law, establishes that there is non-compliance with the objective of budgetary stability, public debt, or the expenditure rule, all borrowing operations of the non-compliant Autonomous Community will require authorization from the State as long as said non-compliance persists. This authorization may be carried out gradually in tranches and will be mandatory until the Ministry of Finance and Public Administrations establishes that it has complied with the objectives of budgetary stability, public debt, and expenditure rule.

Once the economic-financial plan presented by the Autonomous Community for non-compliance with the objective of budgetary stability, the public debt objective, or the expenditure rule has been considered suitable by the Council of Fiscal and Financial Policy, short-term credit operations that are not considered external financing will not require authorization from the State.

2. In the cases of non-compliance with the objective of budgetary stability or public debt of Local Corporations included in the subjective scope defined in Articles 111 and 135 of the Consolidated Text of the Law Regulating Local Treasuries, all long-term borrowing operations of the non-compliant Local Corporation will require authorization from the State or, in its case, from the Autonomous Community having attributed the financial tutelage.

3. In the cases of non-compliance with the objective of budgetary stability, public debt, or the expenditure rule, the granting of subsidies or the signing of agreements by the Central Administration with non-compliant Autonomous Communities will require, prior to their granting or signing, a favorable report from the Ministry of Finance and Public Administrations.

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