The end of payment hold-ups?

The future of the Payment Guarantees draft Act, which is to prevent hold-ups in receiving payments and protect contractors against dishonest investors is still not known. Since the publication of our article (,Eurobuild Poland" 4/2002) this matter has made progress in the Sejm, but has been met with some opposition from government ministers.

In May this year MP's from all political parties agreed that this Act, which is to entitle contractors to demand bank guarantees from investors proving that they have sufficient funds to pay for work, was indispensable. The ministers, however, have now raised several arguments against the Act. Below are some of these points.

Not so straightforward
First of all, ,the solution suggested in the draft Act violates the decree that all sectors should be treatment equally, because it only refers to the construction sector," say the ministers. Protection of all the sectors exposed to similar problems would be impossible due to financial and organisational reasons. Moreover, the proposed draft does not protect the investor against unreliable contractors.
According to government ministers, ,if the Act comes into effect, it may eat into Treasury coffers, as the Treasury could end up having to pay back investor's debts."
The Treasury would also be bogged down with guarantee proposals if banks refused to grant the guarantees. Ministers also believe the Act could ,influence the operation of banks in an unacceptable way."

Causing divides
The draft is also causing emotions to run high amongst contractors, dividing the community between those who are opposed to the proposal and those who approve of it.
Aleksander Jonek, president of Mostostal Siedlce, is against the current version of the Act. In his opinion, such an Act would give too much freedom to investors. ,I think it should be compulsory for investors to produce a bankers letter of credit. Before undertaking an investment, the investor would pay the whole, or at least part of the cost of a scheme into a bank, as then the general contractor would be sure of getting paid on completion - from the bank, but from the investor's account (the so-called escrow account)," he says.

Shifting roles
According to Aleksander Jonek, one of the main reasons for delays in receiving payments is the long and complicated process which governs it. To alleviate this problem some sort of legislation ought be introduced which could cut the time wasting and bureaucracy down.
,Investors suggest a 120-day payment scheme. This would mean that the contractor would finance construction from his own funds. If this was the case, the contractor would need assets to be able to arrange loans for construction, which would increase the cost of the operation," adds president Jonek.
In this type of situation, the general contractor would in fact become the developer, because it is he who finances the work. The developer would become the investor, as would be paying for a completed product.

Escrow and cost control
Uwe Krüger Ph.D., president of Hochtief Polska, believes that instead of dropping the Act, escrow accounts should be set up, in particular for the big investments/projects.
,Contractors need protection from dishonest investors," says Hochtief's president. ,This includes small and medium-sized companies as well as the big ones such as ours. We have seen several companies go bankrupt as a result of this problem."
Marcin Klammer of EC Harris (capital project and facilities consultants) thinks that delays in receiving payments are easier to avoid when an investment is carried out from a bank loan. In this case the bank releases installments of the loan based on a progress report prepared by the banks representative (who is hired to keep an eye the project).
,Hiring cost consultants can control the payment process," says Marcin Klammer. ,Such consultants, employed for example by the investor, check if the general contractor has paid the sub-contractor for completed work and therefore, if work can continue."