Student number: s1765787 Name: Rudi van der Burgh Study Program: MSc Finance
Other programs for which you have submitted this draft version: MSc International Financial Management
2
Measuring the payment behaviour of municipalities and establishing the
relationship between the financial condition of municipalities and their payment
behaviour.
AbstractCreditors can get into liquidity problems when invoices are not paid in time by their debtors. The payment behaviour of an organization is therefore relevant. In this research a basic model is introduced on how to measure the concept of payment behaviour. This model is applied on Dutch and German municipalities for the year 2012 and for Dutch municipalities also for the year 2010. Results indicate that the payment behaviour of Dutch and German municipalities does not differ significantly. Moreover, the relationship between the financial condition and the payment behaviour is researched in the case of Dutch municipalities. Results indicate that the financial condition is not associated with the payment behaviour. Therefore, the financial condition of a Dutch municipality does not deteriorate when their payment behaviour improves.
1. Introduction
“More of Europe’s businesses are at risk of failing due to growing liquidity problems fuelled by the fast growing number of firms and people not paying their invoices” (Intrum Justitia, 2012). The written-off debt being suffered growing to 2.8% of total receivables to reach the unprecedented level of €340 billion, a figure equaling the total debt of Greece, representing one third of total annual healthcare spending across the EU’s 27 countries and amounting to more than double the EU’s total 2012 budget of €147 billion (Intrum Justitia, 2012).
The European Payment Index 2012 underlined the substantial divide in late payment behaviour between the financially stronger North and the weaker South. In 2012, it took an average of 91 days for business-to-business transactions to be paid in the Southern region compared to 33 days on average in Northern Europe, which is a core problem seriously hampering the on-going integration of Europe’s internal market (Intrum Justitia, 2012).
Also in The Netherlands the payment behaviour has been discussed. In particular, the payment behaviour of municipalities was scrutinized.
3 adequate policies for payments it is important to understand whether the reasons (on the side of municipalities) why payment of invoices is delayed is because of the current policy of a municipality, the obstinacy to pay, or whether there is a legitimate reason (Grooten, 2012).
In a later research conducted by Grooten and Van der Burgh (2013), it was pointed out that there is a direct relationship between the procedures used by budgetary controllers and delays in payments. The authors found ten factors that cause a delay in the payment behaviour of municipalities. The two most common causes of these delays are caused by the budgetary controller. The most common factor is that budgetary controllers have much freedom in how they can practice their profession.
The European Payment Index 2012 shows descriptive statistics about the payment behaviour of public authorities and businesses in Europe. In the Group ‘Public Authorities’ there was a difference in delay between the southern countries and the northern countries in the EU. It took the ‘Public Authorities’ in Europe on average 65 days to pay a bill (Intrum Justitia, 2012). However, the European Payment Index 2012 fails to show the causes of the delays in the payments.
In this research the focus is on Dutch and German municipalities. I choose to compare Dutch with German municipalities since economically speaking, Germany is extremely important to the Netherlands. It is by far The Netherlands’ most important trading partner, as regards both imports and exports. The annual trade volume between the two countries is among the largest in the world (Rijksoverheid, 2014). Information on and insight into the payment behaviour of both countries therefore has a practical relevance for Dutch and German companies and municipalities. I do not merely attempt to disclose the quantitative data about the payment behaviour of municipalities in both countries, but I also examine whether the financial condition of a municipality is associated with the extent to which municipalities stick to the agreed payment periods with their creditors.
Research questions:
1. How to measure the concept of ‘payment behaviour’ and what is the payment behaviour in the case of Dutch and German municipalities?
2. To what extent is the financial condition of a municipality associated with the payment behaviour in the case of Dutch municipalities?
4 2. Literature
In this section I will outline what is written about the concepts of ‘financial government’, and ‘payment behaviour’, the factors that influence payment behaviour, and the link between the financial condition and the payment behaviour. However, before continuing to that part, I shall first explain some background information about municipalities in the Netherlands and Germany, for this contextual information is helpful for understanding later sections.
Several terms have been used by different authors to define more or less the same concept: local authorities, regional authorities, local government, regional government, city, and municipality. Each of these definitions has a different meaning in different countries. The exact definitions of these concepts can be found in the civil codes of the respective country. Carmeli (2002), however, provides a broad definition on local authority: “Local authorities are multiple task organizations involving a wide scope of activities, from education and welfare to fire-fighting and sanitation services.”
The Netherlands is a unitary state composed of municipalities (gemeenten) and provinces (provincies). Germany is a state composed of the federal and the regional level. Municipalities (Gemeinden), cities (Städte) and counties (Kreise) are a constitutional part of the regions (Länder) (CEMR, 2012a).
In Table 1 the organization of territories of The Netherlands and Germany can be found. 1st level 2nd level 3rd level The Netherlands 418 municipalities 12 provinces
Germany 11,553 municipalities and district-free cities
301 rural districts 16 federal states
Table 1: Organization of territories (CEMR, 2012b)
The conceptual model consists of one independent variable and one dependent variable. Both variables have an intangible nature, which complicates the measurement (see Figure 1).
Figure 1: Conceptual model
Basically, the conceptual model attempts to explain the practices of municipalities paying their invoices. In the broadest sense these practices must depend on what municipalities can do and on what municipalities are willing to do. In other words, what municipalities are actually doing is determined
5 by what municipalities can do and are willing to do. In this research the scope is mostly on what municipalities can do and less about what municipalities are willing to do (e.g. their payment policy). When answering the ‘what municipalities can do’ part I look into the financial condition of a municipality.
2.1 Payment behaviour
2.1.1. Definition of Payment behaviour
The dependent variable of this research is the payment behaviour of municipalities. Payment behaviour is defined as the extent to which municipalities comply with the agreed payment period with creditors when it comes down to paying their invoices (Grooten, 2012). Payment behaviour is a component of the budget related behaviour, which is a broader concept than payment behaviour. Budget related behaviour refers to those managerial activities, actions, attitudes and interactions among managers and their tasks which occur on a regular basis and which are related to the system of budgetary controls (Williams, Macintosh, and Moore, 1990). ‘Late payment’ means exceeding the contractual or statutory period of payment (European Parliament and Council of the European Union, 2000).
Furthermore, in this research payment behaviour is limited to public authority to business (PA2B) invoices. Invoices about public authority to consumers (PA2C) and public authority to public authority (PA2PA) are beyond the scope of this research.
2.1.2. Payment period definitions
To get a better grip on payment behaviour it is necessary to introduce three concepts from Grooten (2012): the formal payment period (FPP), the actual payment period (APP), and the agreed payment period (AGPP). The FPP is the standard payment period in number of calendar days the municipality holds on to when making agreements with creditors. Note that not all municipalities have such a ‘standard’ payment period. There are also cases in which the municipality chooses to stick to another agreed upon payment period but this is irrelevant for now. The APP is the yearly average of all actual payment periods in calendar days the municipality complied upon with creditors. The AGPP is the agreed payment period (expressed in calendar days) between the municipality and the creditor.
2.1.3 European legislation concerning timely payments
6 Public authorities must pay for the goods and services that they procure within 30 calendar days or, in very exceptional circumstances, within 60 calendar days (European Commission, 2012).
Penalties brought in by the late payment directive come into force in 30 calendar days after the invoice has been received. Furthermore, in the case of cross-border trade, when entering into a contract initially the parties have to decide which legal jurisdiction will apply. In a press release of 5 October 2012 of the European Commission about “Avoiding bankruptcy by tackling late payments” it is stated that the absolute deadline of implementing the Directive is on 16th March 2013 for its member states (European Commission, 2012).
Since in this research data of the year 2012 is taken into account, this implies that not all European municipalities were constrained yet to procure within 30 calendar days or, in very exceptional circumstances, within 60 days. However, similar rules regarding payment were already introduced in the predecessor of the Directive, which is Directive 2000/35. This particular Directive stated that if the date or period for payment is not fixed in the contract, interest shall become payable automatically without the necessity of a reminder: 30 days following the date of receipt by the debtor of the invoice or an equivalent request for payment (European Parliament and Council of the European Union, 2000).
2.1.4 Role of governments
A fundamental premise of management accounting is that there should be a design concordance between budgetary control and the goals of an organization as a whole (Hopwood, 1976). While financial measures are of primary importance in assessing the performance of private sector organizations oriented towards economic production, some studies suggest that noneconomic measures of performance may be more appropriate in nonprofit, governmental, or service organizations (Randoph and Dess, 1984).
Even though public authorities attempt to become more efficient there are no indicators that they changed their objectives towards more profitable (i.e. business) ones. According to Zafra-Gomez, López-Hernandez, and Hernandez-Bastida (2009a) the objective of a municipality should be to serve the interest of its citizens. Concerning the payment behaviour of municipalities the question arises: are citizens served better when invoices are paid as soon as possible or when invoices are paid at the due date? In this question I deliberately do not include the options of paying late and not paying, since those options only seem to harm an economy (Intrum Justitia, 2013).
7 their financial position. As the results of this research show later, this argument is invalid, since there is no relationship between the financial condition and the payment behaviour of a municipality.
2.2Financial condition of a municipality
2.2.1 A definition of financial condition
In essence, because the ‘financial condition’ is a subjective concept when breaking it down into smaller pieces; it cannot be measured absolutely. The financial condition is in most articles the sum of several ‘accounting concepts’, which in turn suffer from a unified way of measurement due to contextual differences. The fact that ‘financial condition’ is a subjective concept in nature causes different authors to provide different meanings to this concept. Honadle, Costa, and Cigler (2004) noted that the financial condition of local institutions is a term closely linked to the concept of fiscal health. Furthermore, several terms have been utilized by different authors to measure the same concept: Financial wealth, fiscal health, fiscal stress, fiscal distress, fiscal position, and fiscal stability. To fully understand what researchers and institutions mean when they discuss about the financial condition a list of utilized definitions is as follows:
Mead (2001) defined financial condition as the ability of an institution to meet its obligations as they come due and to finance the services its constituency requires.
Clark and Ferguson (1983) define fiscal health as the extent to which a government has balanced its fiscal structure with the risks, demands, and pressures of the environment to reduce the incidence of more short-run budgetary and fiscal deficits.
Groves and Valente (1994) describe long run fiscal health as service-level solvency, or the ability of a government to provide adequate services over many years given the existing resource base. Groves and Valente (1994) also distinguish between midrange and short-range levels of fiscal health. They label the former budgetary solvency and define it as the government’s ability to balance its budget or generate enough resources to cover expenditures during a reasonable time period. The latter type of fiscal health is called cash solvency and reflects whether the government can generate enough cash to pay its bills on time.
According Lin and Raman (1998), a weak financial condition means that a government has a relatively low probability of being able to sustain the current level of services at acceptable levels of taxation.
According to Berne (1992) financial condition is likely to meet the financial obligations due to creditors, employees, taxpayers, and other stakeholders, as well as obligations to serve their constituents in both the present and future.
8 payments in a timely manner. One short-term definition is the “imbalance between the level of resources a unit of government has committed and potential available resources”.
Given the confusion generated by utilizing the terms financial position and financial condition interchangeably, the GASB (2004) has adopted the term "economic condition" in its Statement No. 44. Economic condition is a composite of a government’s financial health and its ability and willingness to meet its financial obligations and commitments to provide services. Economic condition includes financial position (the status of a government’s asset, liability, and net asset accounts, as displayed in its basic financial statements), fiscal capacity (a government’s ongoing ability and willingness to raise revenues, incur debt, and meet its financial obligations as they come due), and service capacity (a government’s ongoing physical ability and willingness to supply the capital and human resources needed to meet its commitments to provide services) (Mead, 2001).
Wang, Dennis, and Tu. (2007) pointed out that financial condition represents the ability of an organization to meet its financial obligations on time.
In this research the definition of Wang et al. (2007) is employed. There may be some confusion between the concepts ‘the ability of an organization to meet its financial obligations on time’ and ‘payment behaviour’. However, these concepts differ in that ‘payment behaviour’ is mostly about what a municipality is willing to do, rather than what the municipality can do (i.e. ability). Also, payment behaviour only involves public administration to business (PA2B) invoices, whereas ‘the ability of an organization to meet its financial obligations on time’ also involves public administration to citizen/customer (PA2C) and public administration to public administration (PA2PA) invoices.
2.2.2 The financial crisis and the financial condition of a municipality
According Paulais (2009) local governments grappling with the crisis face a number of constraints which, though disparate in nature, have a cumulative effect. This phenomenon has created a number of extremely difficult situations. The consequences can be felt in terms of: less revenues, higher expenditures, and financing capacities, which are shrinking owing to the difficulty in obtaining loans and the increase in the cost of money.
9 On March 24th, 2009, the CEMR proposed a “local and regional new deal” to strengthen Europe's economy, environment and society. The message is included in the “Athens communiqué”, a political document outlining the position of CEMR; it calls on national governments to ensure that local and regional governments be involved as partners in addressing the crisis and be empowered – especially in their financial situation – to carry out their responsibilities towards Europe’s citizens, especially the victims of the crisis (CEMR, 2009).
2.2.3 Governments and the financial condition of a municipality
The number of local governments experiencing fiscal problems is growing, in part because many states are cutting aid to local governments to help balance their budgets. It is ironic that the states may be creating fiscal problems for local governments that the states will have to deal with in the future (Kloha, Weissert, and Kleine, 2005).
A substantial flaw in the legislation adopted by most states, however, is that the laws were almost entirely reactive to fiscal distress. Most states do not have any sort of formal early warning system for fiscal distress, and therefore they are not in a strong position to recognize and prevent fiscal distress before it occurs (Kloha, Weissert, and Kleine, 2005). For example, in The Netherlands this is the case as well. Municipalities have to declare themselves whether they need an extra amount of money from the general municipality fund. A municipality will only receive this extra fund when they are in financial distress (Rijksoverheid, 2012). In Germany, a similar situation exists. Principally, municipalities cannot go bankrupt in Germany. However, procedures and laws concerning the solvency of German municipalities deviate (slightly) per federal state (Land). For instance, in the federal state Nordrhein-Westfalen it is legally specified, by law, that a municipality cannot go bankrupt (Recht NRW, 2014).
2.2.4 Concepts and practices of evaluating the financial condition of municipalities
10 Solvency type Definition
Cash Entity’s ability to generate sufficient liquidity to meet its short-term obligations. Does the government have the ability to create cash within 30 or 60 days for paying its debts?
Budgetary Entity’s ability to mobilize sufficient budgetary income without entering into deficit. Does the city create enough income during the ordinary budget duration to meet its expenses and not enter into a budgetary deficit?
Long-run Government’s ability to respond adequately to all its long-term obligations. Does the government have the ability to pay all of its activity costs, both the ordinary and extraordinary?
Service-level Entity’s capacity to provide the level and quality of services necessary for the well-being of the community in question. Does the government have the ability to supply quality health and welfare services for the community, as requested by the public?
Table 2: Four dimensions of financial condition (Groves, 1980)
The literature shows a variety of instrumental alternatives to measure financial condition. Some authors calculated aggregate indicators to measure certain aspects of financial condition (Clark, 1977; Zafra-Gomez et al, 2009a), while others have developed a unique aggregate index to measure the overall financial condition of the institution (e.g. Brown, 1993; Kleine et al. 2003; Kloha, Weissert, and Kleine, 2005; Wang et al. 2007; Zafra-Gomez et al., 2009b).Brown (1993), Kloha, Weissert, and Kleine (2005), and Zafra-Gomez et al. (2009b) used statistical techniques to assign cutoff values and build an index using an additive process. Wang et al. (2007) used the standardized values of indicators to obtain an aggregate index calculated by the arithmetic mean.
The above studies can also be distinguished from studies merely focusing on internal factors and those that focus on the external factors as well. Zafra-Gomez et al. (2009c) for instance, focus on the socio-economic factors (external factors). They state that the use of indicators for evaluating financial performance has advanced but that the values measured by different authorities are not comparable, as the services they provide differ significantly. According to Zafra-Gomez et al. (2009c) the local authorities have to be grouped according to the social and economic factors influencing their provision of public services to improve the evaluations.
11 Brown’s 10-point test (Brown, 1993) is one of the best known instruments used in the field of measuring the financial condition of a municipality. This test merely evaluates internal financial factors. The main reason of the development of this 10-point test is that a thorough financial condition assessment that involves a large number of factors and related indicators can be very time consuming and costly for a municipality. As a result, analysis of financial condition may not be a regular part of financial management. The 10-point test of financial condition provides a concise and easy-to-use vehicle for the communication of financial condition to a city government’s constituents. Maher and Nollenberger (2009) revisited the 10-point test and came up with some suggestions regarding some of the indicators. The 10-ratios from Maher and Nollenberger (2009) are listed in Table 3.
Type Indicator Description of Indicator
1 Revenue Indicator
Total Revenues per Capita
Total Revenues for all Governmental Funds (Excluding Capital Project Funds) Divided by Population 2 Revenue Indicator Intergovernmental Revenues/ Total Revenues Percentage
Intergovernmental Revenues for the General Fund Divided by Total General Fund Revenues
3 Revenue Indicator
Property Tax or Own Source Tax
Revenues/Total Revenues Percentage
Total Tax Revenues Levied Locally for the General Fund Divided by Total General Fund Revenues
4 Expenditure Indicator
Total Expenditures per Capita
Total Expenditures for all Governmental Funds (Excluding Capital Project Funds) Divided by Population 5 Operating Position Indicator Operating Surplus or Deficit/ Operating Revenues Percentage
General Fund Operating Surplus or Deficit Divided by Total General Fund Revenues
6 Operating
Position Indicator
General Fund Balance/ General Fund Revenues Percentage
General Fund Unreserved Fund Balance Divided by Total General Fund Revenues
7 Operating
Position Indicator
Enterprise Funds/ Working Capital Coverage Percentage
Current Assets of Enterprise Funds Divided by Current Liabilities of Enterprise Funds
8 Debt Indicator Long Term
Debt/Assessed Value Percentage
Long Term General Obligation Debt Divided by Assessed Value
9 Debt Indicator Debt Service/Operating Revenues Percentage
General Obligation Debt Service Divided by Total General Fund Revenues
10 Unfunded
Liability Indicator
Postemployment Benefit Assets/Liabilities Percentage
Funded Ratio (i.e., Actuarial Value of Plan Assets/Actuarial Accrued Liability)
Table 3: 10 Key Financial Indicators from Maher and Nollenberger (2009)
12 foundation for their own models when creating indicators in financial terms to determine the financial health of local government bodies (e.g. Carmeli, 2002).
Casal, Gómez, and Liste (2012) analyzed whether the multiple indicators of the financial realities of local municipalities in Spain reflect the dimensions of analysis of financial condition. They took the approaches of the Canadian Institute of Chartered Accountant (CICA) (1997, 2009) and the International Capital Market Association (ICMA) (2003) into account and developed a battery of 33 financial indicators. They tested these indicators with information of 5823 Spanish municipalities. In general, it can be concluded that using financial data in performance measurement may benefit the management of local government, as well as the public (Carmeli, 2002).
The completeness of the present study would be positively affected when the services are measured as well. It could be possible that municipality A performs better than municipality B in terms of solvency because municipality A provides less or worse services than municipality B. However, social and economic factors are beyond the scope of this research since the focus is merely on internal factors affecting the payment behaviour of the municipality.
2.2.5 Difficulties in identifying the financial condition of a municipality
The problem of not having a common definition of ‘financial condition’ creates difficulties in the measurement, including the nature of a public entity, municipal financial analysis, and municipal accounting practices. Public entities have a different method of measuring their results than the private sector uses, as public-sector objectives are subjective and multiple (Maher and Nollenberger, 2009). Also, local authorities are multiple task organizations involving a wide scope of activities, from education and welfare to fire-fighting and sanitation services. Therefore, the task of measuring performance of service organizations in such structures is a complex and difficult one (Carmeli, 2002). Municipal financial analysis is frequently concerned with only cash and budgetary solvency, and not with long-term evaluation. In addition, it is difficult to compare financial characteristics among local governments because they differ so widely. Municipal accounting practices are based on auditability and legal compliance. There is a lack of cost accounting, and the use of fund accounting provides both benefits and detriments to the analysis of financial data(Maher and Nollenberger, 2009).
13 public sector are a means to an end, rather than an end in themselves. Therefore, the approach taken to interpreting financial statements in the public sector must necessarily differ in important respects from the approach taken in the private sector.
As was mentioned before, in the literature Brown’s 10-point test is one of the most common in ‘the field’. However, when applying this 10-point test to European municipalities most indicators will not make any sense. This is due to a different accounting system for European municipalities. For instance, Dutch municipalities always have costs that equal revenues. Therefore, it is of no use to compute the differences between the indicators 1 and 4 of Table 3 (revenues and expenditures per capita).
A second reason why Brown’s indicators not always make sense when applying it to other countries is because, for instance, Dutch municipalities cannot go bankrupt. The credit quality of Dutch municipalities is similar to that of the State of the Netherlands, due to the statutory and institutional framework that regulates their financial position. Lending to Dutch municipalities is given the same solvency weighting by the Dutch Central Bank as the Dutch central government (Bank Nederlandse Gemeenten, 2012). So, when a Dutch municipality is in financial distress it will receive extra funds from the government, which will boost the revenues of the municipality. Therefore, the revenues indicators are not appropriate. In Germany, there is a similar situation as in the Netherlands concerning the solvency of municipalities. As long as the Federal states (Länder) take care of it, the German municipalities cannot go bankrupt (Dejure, 2014).
The roots of the financial analysis concept and its greatest development in this direction are visible mainly in the Anglo-American countries (USA, Australia, United Kingdom). However, in Europe different accounting rules prevail. Even though one may call several accounting systems ‘comparable’, there are still differences (Hrůza, 2013). It is outside the scope of this article to conduct an in-depth analysis of these differences between different accounting systems. However, it is worthwhile to consider a few aspects of the European accounting system.
14 The ESA 2010 was published in the Official Journal on 26 June 2013. It will be implemented as from September 2014; from that date onwards the data transmission from Member States to Eurostat will follow ESA 2010 rules.
The differences in legislation within the European Union regarding bankruptcy of municipalities and how municipalities receive financial aid from their governments (i.e. the financial ties a municipality has with its government) results in different financial positions across countries. Another reason why the financial condition of The Netherlands and Germany are not compared is because the formats of the financial statements are different for Dutch and German municipalities. For these reasons, a comparison of the relationship between the financial condition and its payment behaviour across The Netherlands and Germany would be the same as comparing apples and oranges. The comparison would merely be fruitful if the variables causing differences in the financial condition were controlled. However, these variables are unknown in the literature, which is the reason why only one country is taken into account: The Netherlands.
Given this knowledge in the back of one’s mind the question arises: how can the financial condition of a Dutch municipality be measured when it cannot go bankrupt? Instead of applying measurements that were developed for non-European countries, it seems logical to follow measurements that were developed for Dutch municipalities. Keeping this in mind, according to Van der Lei (2010) the financial condition of Dutch municipalities should be measured by assessing the (net) debt position. Van der Lei (2013) argues that the debt ratio should by measured by using the following equation: (1)
The debt ratio describes to what extent the assets on the left side of the balance sheet are loaded with debt. The solvability ratio is the opposite ratio of the debt ratio. The solvability ratio equals 1 – debt ratio.
The gross debt is considered when computing the debt ratio. However, a municipality may also have debt on its asset side of the balance sheet that are not being utilized for public tasks. This fact renders the debt ratio impure.
The net debt share should be measured by using the following equation:
( ) ( )
15 and 100%. The net debt share can be affected because of recent investments made by a municipality. However, it is also possible that this number is affected positively because a municipality incurred a so-called bonanza. An example could be that a municipality sold stocks of an electricity company (Van der Lei, 2013).
In conclusion, Van der Lei (2010) implies that the net debt position is the most relevant indicator to measure the financial condition of a Dutch municipality.
3. Methodology
3.1 Data collection
For the first research question the population consists of all Dutch and German municipalities. For the second research question the population consists of merely Dutch municipalities. On January 1st 2012, there were 415 Dutch municipalities in total (CBS, 2014). On December 31st 2011, there were 11,292 German municipalities in total (Destatis, 2014). Even though municipalities have been randomly selected it is difficult to state whether the municipalities are (statistically) equally distributed across some variable. Several variables could be taken to speak of some sort of an equal distribution of the municipalities (e.g. the political preferences of the major of a municipality, a geographical variable, a demographical variable, the size of the municipalities, etcetera). It is likely that the sample may be considered as representative for some of these variables and not representative for other variables. In this case I choose a geographical variable to investigate whether the sample is representative for the respective country.
Specifically, for The Netherlands I investigate whether the sample is equally distributed across the North and the South. Municipalities that are considered to be located in the North belong to one of the following provinces: Groningen, Drenthe, Friesland, Overijssel, Flevoland, and Noord-Holland. The remaining six provinces are considered to be located in the South: Gelderland, Utrecht, Zuid-Holland, Zeeand, Limburg, and Noord-Brabant. In total, 19 out of 54 municipalities from the sample are located in the North. Of the whole population 148 out of 415 municipalities are located in the North. Results of a Chi-Squared Goodness-of-Fit Test show that in this case the sample is equally distributed across the North and the South at the 1% significance level (p-value 0.942).
16 Chi-Squared Goodness-of-Fit Test shows that in this case the sample is equally distributed across the North and the South at the 1% significance level (p-value 0.046).
To determine whether a province or federal state belongs to the North or to the South is simply achieved by studying the maps of both countries and drawing a line horizontal line through the middle of each country. Then what is above the line belongs to the North and vice-versa.
To obtain the data for the first and second research question, the managers of the financial departments of random 110 Dutch and random 130 German municipalities have been contacted by phone. After the relevance of the research was explained they were asked whether they would like to participate, 54 out of 110 Dutch and 54 out of 130 German municipalities confirmed that they would participate. In case of a positive response to the request, the questionnaire was sent to the managers of these financial departments. The only follow-up calls that have been made were due to the absence of the manager of the financial department. The questionnaire (see Appendix for the translated version) was sent in the first language of the country in which the municipality is situated (i.e. in Dutch and in German). The 2012 sample includes approximately 550.000 invoices for the 54 Dutch municipalities and 350.000 invoices for the 54 German municipalities, which indicates that the German municipalities are on average smaller than the Dutch municipalities. The 2010 sample for Dutch municipalities includes approximately 3.8 million invoices. The 2010 data on payment behaviour of Dutch municipalities was obtained via contacting Grooten (2012) about his research.
To be a participant for this research three requirements must have been met: 1. The organization must have the judicial status of a municipality in 2012. 2. Municipalities must fill in the questionnaire electronically.
3. Participants have to fill in the questionnaire before May 17th 2014.
The reason why the year 2012 is chosen is because of data availability. For instance, the data of the year 2013 about the financial condition of a municipality is not yet available at the Central Bureau of Statistics (CBS).
17 For the second research question, financial data (e.g. balance sheets and income statements) about the Dutch municipalities were obtained from the CBS. These data are utilized as an input for the equations of Van der Lei (2010).
For the sake of reliability of the relationship between the financial condition and the payment behaviour of municipalities, data about payment behaviour was procured from Grooten (2012), who already gathered data on 297 Dutch municipalities for the year 2010.
3.2 A basic model to measure payment behaviour of municipalities
To measure the payment behaviour of municipalities a new model is introduced. The model is derived from definitions and questions from the research of Grooten (2012). The objective of the model is to quantify payment behaviour while maintaining an accurate and reliable score. This model can also be used by organizations other than municipalities.
The basic model is a weighted average of five components. Each component is translated into a score (sc) between 0 and 10. The components are as follows:
1. The FPP. A municipality with a FPP of 30 calendar days receives a score of exactly 5 points. The absolute number 30 is chosen because the Directive stated that if the date or period for payment is not fixed in the contract, interest shall become payable automatically without the necessity of a reminder: 30 days following the date of receipt by the debtor of the invoice or an equivalent request for payment. For each four calendar days below 30 calendar days, a municipality receives an additional point. This implies that a municipality with a FPP of 10 days receives a score of ten points. The lowest FPP of 297 Dutch municipalities was 10 days (Grooten, 2012), which is the reason why this is considered as the maximum score.
2. The APP. Likewise, a municipality with an APP of 30 calendar days receives a score of exactly 5 points. Also, for each four calendar days below 30 calendar days, a municipality receives an additional point.
18 paid invoices are not due date (i.e. paid after 20 days). So, it would be incorrect to calculate with merely these averages to infer something about the extent to which they pay on time. However, this indicator does indicate to what extent municipalities factually deviate from their own FPP and therefore, is this indicator is useful. A policy of municipalities concerning whether it pays as soon as possible or due date can be derived. When the APP is (far) below the FPP the municipality attempts to pay its invoices as soon as possible on average. When the APP equals the FPP the municipality pays due date on average. When the APP equals the FPP a municipality receives a score 5 points. For each day the APP is smaller than the FPP, the municipality receives one point and vice-versa.
4. The AGPP. This indicator states the percentage of invoices that have been expedited within the agreed payment period. The municipality receives the percentage divided by 10 as a score. So, a percentage of 65% turns into a score of 6.5.
5. This indicator states which percentage of all invoices that have been paid after the AGPP is due to the fault of the creditor. The municipality receives the percentage divided by 10 as a score.
Subsequently, the total score on payment behaviour for municipality X equals:
Where, , ,and
The weights of indicator four and five follow a different distribution from the other indicators, since it would be unfair to a municipality that pays 99.9% out of 1000 invoices within the AGPP to be assessed for 50% for the fifth indicator due to one invoice that is paid late because of their fault. Example of the basic model: A municipality with a FPP of 30 days and APP of 25 days scores, pays 75% of the invoices within the agreed payment period and 50% of the times they pay late is because of their own fault. Below are the score per indicator and the total score for this municipality.
1: 5 2: 6.25 3: 10 4: 7.5 5: 5
19 When all the scores of the municipalities are obtained a box plot can indicate how sound the payment behaviour of a municipality actually is compared to other municipalities.
This model does have some limitations:
1. Data can be biased due to the fact that municipalities cannot be controlled for telling the truth. Also, municipalities may believe that the fault of a late payment is caused by the creditor, even though the cause of a late payment is debatable.
2. Another issue is that not all municipalities have a FPP (Grooten, 2012). In case a municipality does not have a FPP, the first indicator is removed.
3. This model does not correct for the size of the invoices.
3.2.1 An extended model to measure payment behaviour of municipalities
The method as introduced in the previous paragraph assumes that each invoice is of equal importance and this method does not focus on differences between invoices. However, from a financial point of view (e.g. using the discounted cash flow model) the size of the invoices should be included as well. To show what the effect is of the size of the invoice on the total score on payment behaviour the same example as before is utilized. So, a municipality with a FPP of 30 days and an APP of 25 days pays 75% of the invoices within the agreed payment period and 50% of the times they pay late is because of their own fault. Furtherore, assume this municipality has six invoices as presented in Table 4.
Invoice Size of invoice number of calendar days after which the invoice is actually paid
1 €10 15 2 €10 15 3 €10 20 4 €10 20 5 €10 40 6 €100 40
Table 4: data for the example of the extension of the model
If a municipality deliberately pays the invoice of €100 after 40 days, then the score on the payment behaviour according to the basic model is 7, even though the municipality pays 67% of the total amount of Euros after 40 calendar days! To overcome this problem the size in terms of money of the invoice can be incorporated. Therefore, the Size Included Actual Performance Period (SIAPP) is introduced, which is a payment period that puts less weight on invoices with a smaller amount and vice-versa. The SIAPP is calculated as follows:
∑ ( ) ∑ ( )
20 SIAPP = Size Included Actual Performance Period in calendar days
i= invoice
s= size of the invoice in Euros
d=number of calendar days after which the invoice is actually paid The SIAPP is calculated for this example in Table 5:
i si di Si x di 1 €10 15 150 2 €10 15 150 3 €10 20 200 4 €10 20 200 5 €10 40 400 6 €100 40 4000 Total €150 5100 SIAPP 5100/150=34
Table 5: example of calculation of the sixth indicator
When this extension is incorporated in the model, this extension can be viewed as the sixth indicator with weight w6=1/6. w1, w2, and w3, in turn, both have to be adapted to 1/6 each. W4 will become
(2/6) percentage on this question/100; w5=2/6-w4.
The score for the sixth indicator is computed as the score for the APP. Likewise, a municipality with an SIAPP of 30 calendar days receives a score of exactly 5 points. Also, for each four calendar days below 30 calendar days, a municipality receives an additional point and vice-versa. So, in this example the score on the sixth indicator is 4.
Below are the score per indicator and the total score for this municipality.
1: 5 2: 6.25 3: 10 4: 7.5 5: 5 6:4
The average equals: (1/6) 5+(1/6) 6.25+(1/6) 10+((2/6) (7.5/10)) 7.5+((2/6)-0.3) 5+(1/6) 4=6.5 So, the total score on payment behaviour is 7 in the basic model and 6.5 in the extended model. A shortcoming of this model is the applicability of the sixth indicator. This indicator requires a data set with all paid invoices, where size and the number of days are indicated as well. This data set may not be directly available for many municipalities.
3.3 Financial condition of a municipality
21 4. Results
Please note that the basic model to measure the payment behaviour of municipalities has been applied for both research questions. The reason why the extended version of the model has not been applied, is due to a lack of data availability concerning the amounts of each invoice.
4.1 Payment behaviour in Dutch and German municipalities
In Table 6 it is shown that the average FPP of the Dutch municipalities is within the 30 calendar days as was indicated by the Directive.
2012 Dutch
municipalities
n German municipalities
n
Average formal payment period in calendar days 26.4 53 32.6 54 Average actual payment period in calendar days 24.0 50 28.8 54 Average percentage paid within the agreed payment
period in calendar days
81.3% 53 86.1% 54
Table 6: Descriptive statistics of payment periods of Dutch and German municipalities
Interestingly, none of the 53 Dutch municipalities had a FPP of more than 30 calendar days, whereas 22 out of 54 German municipalities had a FPP of more than 30 calendar days. The German municipalities have a longer FPP than the Dutch municipalities, which implies that the German municipalities give themselves with more time when paying an invoice. This very observation could explain why the German municipalities pay a higher percentage of the total amount of invoices within the AGPP.
Also, the Dutch municipalities claim that in 31% of the cases when an invoice is paid late (i.e. later than the AGPP) the municipality is to blame, whereas the German municipalities claim that in 16% of the cases when an invoice is paid late the municipality is to blame.
22 2012 Payment Behaviour
scores stemming from the basic model Dutch municipalities German municipalities Wilcoxon Rank Sum test statistic (z score) Significance Min 2.8 4.2 1st quartile 5.6 5.9 Median 6.6 6.3 3rd quartile 7.2 6.8 Max 7.9 7.3 Average 6.3 6.2 1.44 0.926 Jarque-Bera statistic 21.5 23.8 Jarque-Bera significance 0.000 0.000 n 50 54
Table 7: Descriptive statistics of dependent variable in the year 2012 and comparison of the populations concerning payment behaviour.
So, do Dutch and German municipalities differ significantly considering the payment behaviour? The Wilcoxon Rank Sum Test is utilized to compare the two populations because the Jarque-Bera test pointed out that the distribution of the data is nonnormal and the experimental design is with independent samples (Keller, 2012). The results of this test show that the payment behaviour of the Dutch municipalities does not differ significantly from the payment behaviour of the German municipalities.
4.2 Association between the financial condition and the payment behaviour in the case of Dutch municipalities
This research question concerns the association between the payment behaviour of municipalities and the financial condition of the municipalities. Again, due to differences (e.g. in country law) it is difficult to compare these associations between different countries. Therefore, only Dutch municipalities are taken into account. The descriptive statistics for both variables are shown in Table 8.
2010 Payment behaviour scores of Dutch municipalities
Payment behaviour
Net debt position
Min 2.5 -138% 1st quartile 5.3 6% Median 6.2 41% 3rd quartile 7.0 66% Max 9.7 207% Average 6.0 37% Jarque-Bera statistic 113.3 46.8 Jarque-Bera significance 0.000 0.000 n 274 274
23 The descriptive statistics for the financial condition for the year 2012 are shown in Table 9.
2012 Dutch Municipalities Net debt position
Min -156% 1st quartile 22% Median 49% 3rd quartile 82% Max 151% Average 50% Jarque-Bera statistic 6.38 Jarque-Bera significance 0.004 n 47
Table 9: Descriptive statistics of Dutch municipalities in 2012
To analyze whether there is a relationship between the payment behaviour and the financial condition the Spearman rank correlation is computed. The reason why the Spearman rank correlation is chosen is because the data follow a nonnormal distribution and because the data are interval. The results of this test can be found in Table 10.
Dutch municipalities Spearman rank correlation
Significance Observations
Payment behaviour 2010 and financial condition 2010
0.006 0.538 274
Payment behaviour 2012 and financial condition 2012
-0.133 0.184 47
Table 10: Relationship between the payment behaviour and the financial condition.
The outcome of the correlation shows that there is no significant association between the financial condition and the payment behaviour neither in the year 2010 nor in the year 2012.
5. Conclusion
More of Europe’s businesses are at risk of failing due to growing liquidity problems fuelled by the fast growing number of firms and people not paying their invoices (Intrum Justitia, 2012). Creditors get into liquidity problems when invoices are not paid in time by debtors. The payment behaviour of an organization is therefore relevant. In this article, the payment behaviour is researched in the case of Dutch and German municipalities.
24 Budgetary controllers and managers of the financial departments of Dutch and German municipalities have been asked to provide information about the payment behaviour of municipalities. Eventually, 54 Dutch and 54 German municipalities provided data about their payment behaviour. The results show that there is no significant difference in terms of payment behaviour between the municipalities of the two countries.
This article also contributes to the literature by investigating the link between the financial condition of a municipality and its payment behaviour for Dutch municipalities. To measure the financial condition of a Dutch municipality the net debt ratio of Van der Lei (2013) has been utilized. In both 2010 and 2012 the results show that there is no association between the financial condition of a municipality and its payment behaviour. This result may be caused by the fact that Dutch municipalities cannot go bankrupt. The Dutch law states that the Dutch government endures ultimate financial responsibility of the municipalities. Further research has to point out whether the outcomes of this research can be generalized for municipalities in other countries (e.g. Germany).
6. Recommendations
There are several recommendations that may benefit future researches into this topic.
First, the questionnaires have only been sent to the municipalities and not to creditors. Therefore, the results of the answers may be biased.
Second, the data that have been utilized in this research are from 2010 and 2012, two years of an economic downturn. Many municipalities stated that it is not worth it to pay invoices later because the interest rates on their working capital are negligible. Therefore, the results of the relationship between the financial condition and the payment behaviour of municipalities may be biased.
Third, unlike the data of 2010, the data of 2012 may not be statistically significant. Even though there is no single number that represents when a sample is significant, the number of observations in 2012 may be considered too low to infer something with significance. Future researchers may want to obtain a larger sample size.
Fourth, a seemingly minor problem in identifying the relationship between payment behaviour and the financial condition of a municipality is the problem of reversed causality. It is not certain whether the financial condition of the municipality affects the payment behaviour of municipalities or vice-versa. Since there seems to be no association between the two variables in the first place according to the results of this article, the establishment of the reversed causality seems not to be of relevance, which is why this can be considered as a minor problem in this article.
25 extended version of the model. Future researchers or municipalities that may want to use this model are recommended to collect these data to obtain a likely more accurate model to measure the payment behaviour of municipalities.
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29 Appendix
Questionnaire
This questionnaire is derived from Grooten (2012).
Question 1: For which municipality are you filling in this questionnaire? (Please note: this information will only be used for the purpose of our own administration) *
Please note: please read the following concepts carefully before filling out the questionnaire. Formal payment period: the standard payment period used by the municipality itself expressed in
calendar days.
Actual payment period: how many calendar days the municipality needed to pay an invoice. Agreed payment period: the payment period (in calendar days) agreed between municipality and creditor.
Question 2: What is the policy in your municipality in respect of the formal payment period used for the payment of invoices? *
· We exclusively observe our own formal payment period.
· We exclusively observe the payment period prescribed by our creditor.
· In principle, we observe our own formal payment period, but on occasion we also take into account the period of our creditor.
· In principle we observe the period of our creditor, but on occasion we also take into account our own formal payment period.
Question 3: Should you have any questions/remarks about questions 1 and 2 we would appreciate you indicating these in the space below.
Question 4: How many calendar days was the formal payment period of your municipality in 2012 on average?
Question 5: How many calendar days was the actual payment period in your municipality in 2012 on average?
Question 6: What is (approx.) the total number of invoices paid by your municipality in 2012? Question 7: How many of the total number of invoices were paid within 30 calendar days (approx.) in 2012?
Question 8: Which percentage of the total number of invoices was paid within the agreed payment period in 2012?
30 Question 10: What is the average amount of money of invoices paid after 30 calendar days in 2012? Question 11: What is the average amount of money of invoices paid inside 30 calendar days in 2012? Question 12: Does your municipality try to pay exactly on time or as fast as it can?
Exactly on time 1 2 3 4 5 As fast as it can
