On investment and solvency

Jack Kruf en Caspar Boendermaker | juni 2019

In April 2019, in consultation with BNG Bank, the annual PRIMO/UDITE meeting of the ‘From Global to Local’ think tank took place. Around 15 public-sector leaders met with BNG Bank to discuss the challenges facing local authorities.

The recently published Global Risks Report 2019 by the World Economic Forum and a presentation by the City of Delft revealed cracks in the financial situation. Is the financial resilience of the city and region at risk?

Transitions require investment, whilst the council’s solvency is under pressure.

The City of Delft presented its ambitious long-term investment strategy. Investments totaling at least 1.4 billion euros are planned through 2040, of which the council will have to cover approximately 25%.

The observations made by Professor Johan de Kruijf of Radboud University were cause for concern. He demonstrated with figures that local authorities are seeing a structural decline in their solvency, and that the financial windfalls previously provided by spatial planning instruments appear to be drying up. As a result, it is becoming increasingly difficult – and for some local authorities, it already is – to implement their investment strategy. At the same time, we are living in a period in which multiple transitions are coming at us simultaneously. These transitions, which are only just becoming visible, are already placing significant pressure on the (limited) financial resources.

Collaboration with public and private partners is essential. In itself, seeking collaboration is, of course, always a good thing. But the driving force behind collaboration must be the pursuit of a ‘win-win’ outcome and a more equitable distribution of risks and tasks. Not necessity and powerlessness.

Where do we stand in the Netherlands?

Group controllers in large local authorities recognise that their councils are almost up against the wall. Cost overruns – particularly within the social sector – have depleted reserves and eroded solvency. Despite the great need for new housing, it is no longer possible to generate a significant additional revenue stream from spatial planning and land policy. They are all concerned about the mounting list of tasks and the sum of challenges that lie ahead.

Overall picture: rising debt levels, a gradual decline in solvency, and ever-shrinking reserves.

Local authorities are facing an enormous burden. The financial reality is that difficult decisions must be made. In some local authorities, the financial leeway in their operating budgets, combined with solvency, has fallen so sharply that it has become impossible to manage the various transitions. There are, of course, various exceptions, but the general picture is that debt levels are rising, solvency is gradually declining, and reserves are shrinking.

Cracks

The general feeling is that we in the Netherlands are fortunate to have the government we do. However, coordination among government bodies can and must be further strengthened to tackle the transitions. This requires a better balance between ambitions and risks on the one hand, and capacity and organisational strength on the other.

Local authorities must more clearly identify the risks they have faced and those they will face in the context of the various transitions. Risks that threaten to weaken the capacity and organisational strength of local authorities. Lessons can be drawn from the transitions in the social domain. It is clear that the risks were underestimated and that the transitions in the social domain have significantly eroded the financial capacity and buffers of local authorities (solvency).

Whilst the transition in the social sector is still in full swing, new transitions – energy, flood resilience, the Environment Act – are already on the horizon. These may prove even more far-reaching. It would be wise to highlight these consequences through scenario analyses and to adapt municipal organisations accordingly, whilst strengthening them financially.

Programmatic collaboration

There is a great need for innovation, but at the same time, little scope to innovate. Amidst the hustle and bustle of choices and considerations, there is little time to pursue innovation through new forms of governance and collaboration.

Addressing these transitions requires programmatic collaboration with private sector partners. There is a need for a reliable and predictable (central) government with a long-term strategy. A predictable and reliable course of action and accompanying regulations. Delft, for example, has now made its ambitions and associated investment needs public. In this, the municipal council outlines the city’s investment needs and the municipality’s share of these.

Local authorities must be given the scope to implement such an investment agenda and should not be constantly forced to make adjustments as a result of underestimated risks associated with transitions (such as the mounting deficits in the social sector due to its open-ended nature) and the lack of sufficient certainty regarding the financial scope available over the coming years.

What next?

Collaboration is more essential than ever – between public authorities and with societal stakeholders. A strong local (first-tier) government is vital in tackling transitions and makes all the difference in effectiveness and coordination. A strong local authority is a prerequisite for establishing, in collaboration with private parties, a multi-year investment agenda. This requires a reliable and predictable (central) government that makes sufficient resources available to actually carry out the tasks at hand.

It would be beneficial for an investment commissioner to bring together the pilot projects scattered across the country.

Cooperation within the region offers significant advantages in terms of sharing knowledge, investments, and insights. It can also help with risk-sharing and pooling, making the individual risks faced by local authorities acceptable and manageable.

At the same time, this facilitates a programmatic implementation, whereby investment projects from different municipalities are bundled and carried out in a phased approach over time. This makes it easier for municipalities and investors involved to learn from past experiences and to use scarce resources efficiently.

Delta Program

An inspiring approach is the Delta Program, led by a Delta Commissioner who oversees the management and financing of investments in the Netherlands’ flood defenses. Pilot projects are currently being developed throughout the Netherlands. It would be beneficial to bring these together so that we can learn from one another. Such an investment commissioner could play a key role in this.

Restoring financial balance

Maintaining financial stability within local authorities is a key prerequisite. Particularly in the current climate, with multiple major transitions underway, it is essential that local authorities have sufficient financial leeway to take the lead. This is an absolute prerequisite for tackling these transitions effectively and ensuring their success.

The visible hairline cracks demonstrate that, during transitions of this scale, a new financial strategy must be developed.

Without stability, we see administrative behaviour aimed at cherry-picking, debates over old versus new policies, and much politically driven shuffling between often highly contested portfolio posts. Whereas we want a long-term strategy, a predictable (central) government, region-wide multi-year investment programs, and a sound mechanism for incorporating lessons learned and applying them to longer-term plans. This means that public organisations must consider new financial alliances. The visible cracks are a sign that, in times of this scale of transition, a new financial strategy needs to be drawn up.

The conclusions stem from the special dialogue between the following group:

• Caspar Boendermaker, Business Development & Sustainability Specialist at BNG Bank and Senior Advisor at the Netherlands Investment Agency (NIA).
• Jan-Willem Dijk, Group Controller for the Municipality of Assen.
• Gido ten Dolle, Director of Spatial Planning and Economy for the Municipality of Delft.
• Teun Eikelboom, Head of Financial Regulation and Supervision at the Ministry of the Interior and Kingdom Relations.
• Bert Hummel, Public Finance Manager at BNG Bank.
• Henriëtte de Jong, Group Controller for the Municipality of Groningen.
• Johan de Kruijf, Assistant Professor of Public Administration at Radboud University.
• Jack Kruf, Director of PRIMO Netherlands, President of PRIMO Europe (Chair).
• Hans Krul, Municipal Secretary of Delft.
• Hans van Lent, Group Controller for the Municipality of Ede.
• Tom Schulpen, Director of European Programmes for the Province of North Brabant.
• Ad Verbakel, Group Controller and Deputy Municipal Secretary of Eindhoven.
• Jaap Zwaan, Municipal Secretary of Medemblik.

 Bibliografie

Kruf, J., & Boendermaker, C. (2019, 4 juni). Haarscheuren in Financiële Verhoudingen. BNG Bank Magazine. Geraadpleegd op 1 oktober 2024, van https://www.bngbank.nl/magazine/Overig/Haarscheuren-in-financiele-verhoudingen

Kruf, J., & Boendermaker, C. (2019). Haarscheuren in Financiële Verhoudingen: Over investeren en solvabiliteit. In J.P. Kruf & E.J. Frank. Publiek Risico: Essays, Stichting Civitas Naturalis, 2020, pp. 403-409.