Johan de Kruijf and Jack Kruf | April 2019

The title was one of the key questions raised at the ‘From Global to Local’ think tank on 5 April. Given the transitions currently underway, the rise in risks within the public sector and the gradual accumulation of backlogs in management and maintenance, this question was brought to the fore. So what is the actual financial situation in the Netherlands? An initial exploration. Less rosy? Hairline cracks? Not really recovered from the credit crisis, now 10 years ago? The series of financial setbacks regarding the transition of the social sector is not yet over and is leaving deep scars. Are we pessimists? No, not at all; realists. Nothing more than that. The first outlines.

Key figures and basic statistics

Since 2016, local authorities and provincial councils in the Netherlands have been using a set of fixed key figures to assess their financial position. We highlight solvency, the unadjusted net debt ratio and EMU debt. Sources include Statistics Netherlands, waarstaatjegemeente.nl and the Netherlands Environmental Assessment Agency.

It is these basic figures that indicate that local authorities’ borrowing capacity for making large-scale investments in transitions or addressing backlogs is limited. Given the initial figures shared regarding needs or requirements (i.e. what lies ahead), borrowing capacity appears to be a fraction of what is actually needed. What does this require of public value management and public risk management? Of politics? Of innovative capacity within alliances and new forms of collaboration? What does this require in terms of the nature and scope of a new public financial strategy? A new era appears to have dawned.

On 5 November 2019, the From Global to Local 2019 think tank will explore four key questions in greater depth:

1. What is the estimated scale of transition-related investments over the coming decade?
2. What are the possible adjustments that can or should be made to the Netherlands’ financial status quo?
3. What are the current and possible alternative scenarios (other than government funding) for tackling the transitions?
4. What strategic forms of public risk management can be useful in developing, and above all implementing, successful political, administrative and civil service coordination?

Solvability

Two things stand out at first glance. The average solvency ratio for all local authorities is around 35% and peaked around 2009 following the sale of energy companies.

The solvency of municipalities with between 100,000 and 250,000 inhabitants is lower than the national average. These figures are merely averages. There is a substantial distortion, particularly in the group of municipalities with between 150,000 and 250,000 inhabitants. In 2017, the solvency of this group of municipalities stood at around 27%. Two of the 13 municipalities have a solvency ratio of over 50%. If this is adjusted for, the solvency of the remaining group falls to 18%, or by a third. These eleven large municipalities therefore have a solvency level of approximately half the national average.

Solvency is just one indicator of the financial strength of local authorities.

Net debt ratio, unadjusted

The (unadjusted) net debt ratio (net debt relative to revenue for reserves) provides an indication of local authorities’ remaining borrowing capacity. Generally speaking, a net debt ratio above 130 is considered critical, and a ratio above 100 warrants increased scrutiny of the financial position of local authorities.

The graph shows the net debt ratios for the same groups of local authorities. It can now be seen that the major cities have a high net debt ratio. The decline after 2014 is due to the inclusion of revenue from the social sector. The figures for the Netherlands as a whole have been adjusted for this, and the conclusion is that, firstly, debt ratios have risen compared to 2005 and that, after 2014, there is hardly any discernible decrease in the net debt ratio.

As revenue in the social sector bears little relation to investment and financing but consists mainly of current expenditure, these funds offer little scope for generating additional financing. In that sense, the net debt ratios from 2014 are more realistic.

Using data from waarstaatjegemeente.nl, an analysis of the individual debt ratios for 2017 can be carried out for the large municipalities (100,000–250,000 inhabitants; 27 municipalities). These are not included in the graph. If the standard for a maximum net debt ratio is set at 100, then there are 6 municipalities that can no longer borrow. The remaining municipalities can, by estimate, still borrow €4.2 billion, with the total of 4 municipalities that have a solvency ratio of over 50% able to borrow €1.6 billion.

EMU debt

The fact that the financial position of local authorities is not improving is also evident from the relative development of EMU debt among local authorities and the State/central government. Since 2008, EMU debt has been recorded separately for local authorities. The data in this graph show that the EMU debt of local authorities has risen by approximately 30% in absolute terms.

The fact that the financial position of local authorities is not improving is also evident from the relative trends in EMU debt for local authorities and the central government. Since 2008, EMU debt for local authorities has been recorded separately. The data in this graph show that local authorities’ EMU debt has risen by approximately 30% in absolute terms.

The debt of the central government (put simply, the ministries) rose by only 18% over the same period. More strikingly, the central government’s debt has fallen since the crisis, whilst the debt of local authorities remains virtually unchanged in 2018 compared to the peak in 2014.

When debt is linked to GDP, the central government does benefit from GDP growth (2018 index: 99% compared to 2008), whilst for local authorities the index stands at 107.

Requirements

It can be inferred from the estimates of the Netherlands Environmental Assessment Agency that, for the built environment, district heating networks and the transition away from gas, sums of between approximately €7 billion and €17 billion will be required up to 2030, with further investment needed thereafter. Not all of these investments will go to the municipalities, but the ratio between the investment amounts required for the energy transition and the borrowing capacity of the larger municipalities does raise questions.

Discussion

Possible points for further discussion during the next meeting of the think tank in early November could be formulated as follows:

1. In recent years, the central government’s financial position has improved. The decline in EMU debt since 2014 is an indicator of this. At the same time, we see that the EMU debt and net debt ratios of all local authorities – adjusted for the effect of additional revenue from decentralisation – have not really changed and are significantly higher than they were ten years ago. In particular, in the larger municipalities, solvency – as a measure for absorbing setbacks – also lags behind the national average and is in fact even lower than the averages suggested by municipal size categories.
2. We are on the eve of far-reaching transitions in several policy areas. Although municipalities do not have to bear the full burden of these transitions themselves, the available financial scope of large municipalities is limited. In doing so, we assume that municipalities will actually be able to control expenditure in the social domain, something which, given demographic developments, is open to question. Alternative forms of financing the transitions may be possible, but this also raises questions about control over investments and the relatively higher financing costs of private funding.
3. Based on the data presented here, the mismatch between the financial position of central government and the local authorities is a matter for the administrative agenda. As the financial scope for local authorities is limited, it appears that official attention to the pooling and dissemination of knowledge about alternative forms of financing is set to become an important theme. After all, organised local authorities are in a stronger position vis-à-vis market parties than individual local authorities.