For information
CdR 1687/2012
EN

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NOTE: This memo has been distributed at the request of Ms Bresso, ad interim chair of the
Temporary ad hoc commission on the EU budget. It was drawn up at her request by
Sébastien Audebert, student at the Ecole Nationale d'Administration (National school of administration - ENA, France) and, in early 2012, trainee in the private office of the
Committee of the Regions' president. The secretariat of the Temporary ad hoc commission on the EU budget made only a few small changes to the memo before sending it for translation.
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1.1
Local budgets under pressure ............................................................................... 4
1.1.1 Drop in local revenue ..................................................................................... 4
1.1.2 The growth of local expenditure comes to a halt ............................................ 6
1.1.3 Local-sector deficit and debt rising but under control ..................................... 7
1.2
Austerity measures become tighter: a challenge for investment .......................... 10
1.2.1 Increased contraction in revenue affects local investment ............................ 10
1.2.2 Austerity measures based on greater control of local finances ..................... 12
1.2.3 Speeding up territorial reforms ..................................................................... 13
1.2.4 Control of local debt outstandings: policy signals and economic challenges 14
2.1
Developments in structural constraints drag down investment ............................. 17
2.1.1 The contraction in bank credit has left local authorities' financing systems vulnerable .................................................................................................... 17
2.1.2 Local finances must be given greater consideration in the new system of managing public finances in Europe ............................................................ 18
2.1.3 Making accounting standards more flexible in order to avoid any deterioration in local budget balances............................................................................... 21
2.2
The new ways of financing local and regional authorities in the EU ..................... 22
2.2.1 The growth of the bond market: ................................................................... 22
2.2.2 With the crisis, the EU is making the regulatory framework more flexible in order to limit the drop in investment ............................................................. 25
2.2.3 Financial arrangements to support investment: general application of new financial instruments under the next MFF .................................................... 26
2.2.4 Strengthening the role of the EIB to support investment............................... 27
2.2.5 Agencies to finance local and regional authorities ........................................ 30
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INTRODUCTION
With nearly 91 000 federated, regional and local governments and thousands of public branch offices, the subnational public sector
1
acts as employer, service provider, economic agent, investor and agent of national solidarity. The sector thus plays a key economic and social role in Europe, with its expenditure amounting to EUR 2 069bn in 2010, i.e. 16.9% of
GDP and 33.5% of public spending. Its direct investment, which came to over EUR 211bn in
2010, makes up nearly two-thirds of European public investment
2
.
However, the situation varies widely between Member States, depending on their economic and social situation and the type of public policies which are enacted
3
:
The evidence points to two key concepts:
- The economic crisis and austerity plans in Europe are having a delayed but heavy impact on local finances.
- The sharp fall-off in investment is becoming a major problem and new means of financing need to be found. At a time when banking intermediation (Basel III) is shrinking, new sources must be identified to finance future spending and raise the level of potential growth.
1
The subnational public sector includes the German, Austrian and Belgian federated states, in addition to the local public sector in the strict meaning of the term.
2
Finances publiques territoriales dans l'Union européenne (Local and regional public finances in the European Union), Dexia,
July 2011.
3
Source: Finances publiques territoriales dans l'Union européenne (Local and regional public finances in the European Union),
Dexia, July 2011.
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- Crisis situation
From 2000 to 2007, local finances grew regularly and at a pace slightly above that of GDP.
This was against a backdrop of economic expansion, decentralisation and strong demand for local public services. However, after the crisis of 2008, local finances developed contracyclically thanks to support from the central states and by taking on debt; this enabled subnational investment to remain at a high level in 2009, despite the recovery plans.
Timid economic recovery in 2010 followed by another EU-wide collapse triggered by the sovereign debt crisis caused austerity policies to become widespread, and their effects on local finances have been devastating.
1.1 Local budgets under pressure
1.1.1 Drop in local revenue
Growth averaged 2% between 2000 and 2008 and was kept up in 2009 (+0.9%) as a result of financial support from the central governments, but revenue then dropped by 0.8% in
2010, turning the page on growth.
Tax revenue fell in 2010 (-0.8%), although less than in 2009 (-4.3%). However, it was primarily grants and subsidies which decreased – and they make up 51% of the revenue of Europe's local authorities.
Only a few states (Germany, Slovakia, Lithuania, Sweden, Poland and Finland) continued to support local investment. The others, faced with the sovereign debt crisis, decided to freeze
(France) or cut grants (Italy, the UK, Spain, Hungary, Greece, the Netherlands, the Czech
Republic, Bulgaria, etc.). Transfers were cut by an average of 1% in 2010. More worrying still, investment grants were hit hardest: -8.7%. The only type of revenue to increase in 2010 was revenue from public services (+2%) owing to a rise in tariffs and the creation of new fees 4 .
4
Source:
Finances publiques territoriales dans l'Union européenne
(Local and regional public finances in the European Union),
Dexia, July 2011.
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The practice of freezing or cutting transfers became widespread in 2011 in states affected by the sovereign debt crisis (Greece, Ireland, Italy, Portugal and Spain) and was introduced into the mid-term programmes launched by Romania and the United Kingdom (grants will be cut by 12% per year from now until 2015) in order to reduce their national budgetary deficits
5
.
This confirms the OECD's analysis: local budgets really begin to feel the financial impact of recession when the economy begins to pick up and national governments try to rebalance public finances 6 .
5
Source: Finances publiques territoriales dans l'Union européenne (Local and regional public finances in the European Union),
Dexia, July 2011.
6
OECD, Making the most of public investment in a tight fiscal environment: multi-level governance lessons from the crisis , 2011.
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1.1.2 The growth of local expenditure comes to a halt
Local spending dropped by 0.1% in 2010 after 10 years of strong growth (an average of +2.4% annually). It therefore represents 13.7% of GDP and 27% of public spending
7
.
After a significant rise in spending triggered by the economic and social crisis and the implementation of recovery plans, austerity measures have caused several budget lines to be reduced or moderated
8
.
Social spending continued to grow , with an increase in the volume of services delivered and beneficiaries
9
. Local spending on social services and support rose by 3.5% in 2010 to offset the impact on households of economic austerity (10% in Denmark, 22% in Hungary and 24.5% in Slovakia). However, statistical studies prove that discretionary spending on aid for vulnerable groups decreased, a source of concern. In 2011, 23.4% of people in the EU suffered from exclusion or poverty, an increase of 2 million people in just one year
10
.
Structurally, demographic ageing, society's needs for public services and the increasing decentralisation of social protection will entail higher costs for local authorities, a trend set to continue for a long time 11 .
7
Source:
Finances publiques territoriales dans l'Union européenne
(Local and regional public finances in the European Union),
Dexia, July 2011.
8
Source: Finances publiques territoriales dans l'Union européenne (Local and regional public finances in the European Union),
Dexia, July 2011.
9
In the EU-27, social spending made up 16% of budgets in 2010, reaching 25% in Germany and 35% in Denmark.
10
This is due primarily to national-level budget cuts in social protection or to some services being made conditional, creating further difficulties for the local level.
11
Source:
Finances publiques territoriales dans l'Union européenne
(Local and regional public finances in the European Union),
Dexia, July 2011.
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In fact, the drop in spending is a result of the disproportionate decrease in several items of current expenditure, as well as the sharp fall-off in local investment . Financial costs (1.4% of local expenditure) continued to fall in 2010 (-10%). Above all, personnel expenditure began to slow down (+0.7%) after a period of strong growth which began in
2000 (+1.9% per year on average, driven by decentralisation and the modernisation of local and regional civil services). Personnel expenditure even fell in half of the states of the EU-27 owing to austerity measures targeting local civil services: the freezing (UK) or cutting of salaries (up to 10% for the highest salaries in Portugal, 5% in Spain, 15% in Latvia and
Estonia, 25% in Romania), partial replacement of people retiring, non-renewal of contracts, etc. In some cases, reduction measures have been drastic: 6600 jobs have been wiped out in the last three years in Ireland.
Efforts have also focused on intermediate consumption expenditure (1.4% growth in 2010 against 3.4% per year between 2000 and 2009), particularly in countries affected by austerity programmes.
In 2011, personnel expenditure should fall still further as policies aiming to cut staff numbers and the wage bill are made tougher or extended; the same applies to intermediate consumption expenditure . These types of expenditure make up a large slice of local budgets (34% for personnel expenditure – the top spending item - and 22% for intermediate consumption, in second place) and so are a lever for stabilising overall expenditure, in view of the parallel dynamic of social spending in a context of crisis.
1.1.3 Local-sector deficit and debt rising but under control
- Relative deterioration of the budget balance
The EU's subnational public deficit rose from 0.5% of GDP in 2009 to 0.6% in 2010, i.e. EUR 103bn and 13.1% of the deficit of the entire public sector. However, this
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- 8 - deterioration is very relative. In fact, the subnational deficit/GDP ratio in 18 countries, including the United Kingdom, France and the Nordic countries, improved. Moreover, only one country had a positive ratio (Malta) in 2009 whereas today there are seven. Finally, three-quarters of European countries recorded a subnational deficit that was less than 0.5% of GDP or a surplus
12
.
Among the countries with the worst deficits, three are federal countries, which bear both the local deficit and that of the federated states, and especially Spain where the subnational deficit (42% of the European total) jumped from 2.6% to 4.0% of GDP
(including 3.4% for the Autonomous Communities alone).
The improvement in subnational budget balances at the European level should extend into future years riding the economic recovery, efforts to control subnational expenditure
13
, and local authorities' financial supervision and budget oversight mechanisms that are being reinforced as part of programmes to restore public finances (Spain, Italy,
France, Austria, Germany, Belgium, CEE countries, etc.).
12
Source: Finances publiques territoriales dans l'Union européenne (Local and regional public finances in the European Union),
Dexia, July 2011.
13
Source: Dexia, Isabelle Chatrie.
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- Debt globally under control
Subnational public-sector debt outstandings rose by 6% in 2010 (+9.9% in 2009) to reach EUR 1 486bn, i.e. 12.1% of GDP and 15.1% of the public debt. Around 42% of these outstandings are held by the Ge rman Länder.
Excluding the federated German, Austrian and Belgian states, local debt outstandings amount to EUR 826bn, i.e. 6.7% of GDP and 8.4% of public debt. These more moderate ratios for the local sector are the result of the majority of local debt being allocated to financing investment (i.e. the “golden rule”) and the fact that it is governed by strict prudential rules. France holds 19% of this local debt followed by Spain (18%), Germany and Italy
(16% each) and the United Kingdom (10%).
The drop in the subnational public sector's self-financing capacity and declining cash flow reserves and investment grants explain why debt has been taken on since 2009; another reason is the attractive level of interest rates and increased flexibility of the rules governing borrowing up until 2010.
This debt growth occurred in nearly every country in Europe (21 countries). The strongest growth rates were found in several Central and Eastern European countries
(Poland notably), the Netherlands, Germany, Belgium and Sweden (between +6% and
+10%) and especially in Austria (+20.8%) and Spain (+22.1%). In Belgium and Germany, the federated states (which are not subject to the golden rule) are responsible for a large portion of this increase. Denmark and Italy were among the six countries with debt outstandings that dropped in volume. Italy was one of the rare countries in Europe where, despite the crisis and stimulus measures, borrowing has been highly restricted over the last years due to internal stability pact rules 14 .
Debt levels should however move towards a stabilisation in 2011 and 2012, given slower investment, expected restoration of self-financing capacities and cash flow, as well as new restrictions concerning borrowing. In fact, tighter conditions have been announced in many national stability and convergence programmes.
This is reflected, for example, in the reinstatement of the pre-approval borrowing requirement, reinforced debt service/ceiling levels, greater observance of the golden rule (reserving borrowing to certain investment categories only) or limiting borrowing when budgets are particularly tight, as is the case in
Spain for local authorities that have a particularly stressed budget or debt situation.
14
The Italian State has set targets for reducing the debt and expenditure of local authorities: regions, provinces and municipalities with over 5 000 inhabitants are subject to these restrictions. The rules are imposed and amended by the annual financial law and penalties are automatically applied in the event of non-compliance (this internal stability pact does not apply to the five specialstatus regions).
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Compared to other aspects of public debt, local debt is still globally under control 15 :
1.2 Austerity measures become tighter: a challenge for investment
The decline in growth in 2011 and 2012 and the scale of budgetary adjustments needed to restore public finances have caused austerity measures to be tightened. The drop in investment which began in 2010 is continuing and seems to be entering a negative spiral, all the more so as budget cuts are ramping up the price of future investment.
1.2.1 Increased contraction in revenue affects local investment
Investment represents 15% of local expenditure. It contracted strongly in 2010, particularly direct investment (-7.6%); however, it represents 65.3% of public investment and 1.8% of GDP .
The local public sector and the federated states are the leaders in public investment. In
Spain, France, Italy and the federal countries, the local public sector represents more than
72% of public investment.
15
Source:
Finances publiques territoriales dans l'Union européenne
(Local and regional public finances in the European Union),
Dexia, July 2011.
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Local investment expenditure is closely linked to fiscal decentralisation. In the more decentralised countries, local authorities' share of investment expenditure is well above the
EU average. However, there are exceptions in some less decentralised countries such as
Latvia, Ireland and Slovakia where investment expenditure is financed by the EU structural funds. In Italy and France, administrative decentralisation partly explains the level of subnational investment expenditure.
Direct investment by the subnational public sector
16
In the EU, investment has acted as an adjustment variable in two out of three countries, partly owing to efforts made in 2009 to combat the crisis : it dropped by more than 10% in eight countries including Greece, Portugal, Spain, Italy and Ireland. Only the new Member States continued to step up their investment substantially as they receive EU grants which have a leverage effect (Lithuania, Slovakia, Poland, Hungary, Romania and
Slovenia). German authorities benefited from the extension of recovery mechanisms for investment, Sweden and Slovakia enjoyed the effects of economic recovery, while the 2012
European football championships drove the economy forward in Poland.
16
CCRE, CEMR, Dexia,
L'Europe locale et régionale. Chiffres clés 2010
(Local and regional Europe. Key figures for 2010). 2011-
2012 edition.
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This global contraction is in contrast to the dynamic development observed between
2000 and 2010: +1.9% per year on average (8.1% in the Central and East European countries).
This can be explained by the fall in local revenue . Many states have continued freezing
(France) or decreasing financial aid to local authorities. In some Member States where investment grants make up the bulk of transfers as in Ireland (43% of transfers) or Italy (the majority of grants for municipalities), budget cuts have hit local investment very heavily.
In Italy, state transfers fell by EUR 8bn in two years, with the regions feeling the worst pain.
Internal stability pact rules have reduced investment. Similarly, municipalities have been encouraged to sell their shares in local companies delivering public services. In Portugal, the
September 2011 local authority reform aims to rationalise local public enterprises and reduce transfers from the central administration (a saving of EUR 635mn).
In parallel, several states have launched tax reforms to limit the decline in local revenue: creating new own or shared taxes, increasing or reducing the tax power of local authorities, raising the rates of shared national taxes and amending redistribution rules in favour of the local level, widening and updating tax bases, land registers, combating tax evasion and collecting on back taxes.
These measures are beginning to bear fruit, with an increase in local tax revenue in 2011, but a return of the crisis could cause an about-turn.
Structurally, Europe's investment needs are still substantial: in addition to renewing existing infrastructure, demographic ageing, climate change, research and innovation and communication all need investment in order to contribute to the future economic growth of the regions.
1.2.2 Austerity measures based on greater control of local finances
The case of the autonomous region of Madeira is a one-off but emblematic instance.
Following the discovery of EUR 1.68bn of undeclared debt in September 2011, the management of the debt was transferred to Lisbon. VAT has been raised from 16% to 22%, a ceiling has been set for investment, local public enterprises must reduce their costs by
15% and civil servants have lost their 13th- and 14th-month salary arrangements 17 .
Without going as far as direct administration, local authorities are involved, more or less directly, in budget savings and cut-cutting programmes: reducing the wage bill and purchases of goods and services, pooling and subcontracting polices, and even the abolition of certain public services or privatisations , as in Italy, Greece and Spain. In
17
Lourdement endettée, Madère dévoile son propre plan de rigueur
(Heavily in debt, Maderia unveils its own austerity plan), AFP,
27 January 2012.
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Italy, rises in taxes have been accompanied by budget cuts or a rise in fees for public transport and hospitals.
Stronger economic governance in the EU is reflected in increased administration of local authorities
18
. Historically, local authorities have not been set explicit budgetary targets.
They have primarily been involved in the strategy to put public finances back on track in the federal states (Germany and Austria) or in countries which are strongly decentralised or heavily in debt (Spain, Italy)
19
. Although internal stability pacts may have been made more flexible so as to facilitate stimulus measures, as austerity spreads these pacts have toughened up. In Belgium, only the federal tier had binding objectives, but since 2010 moves to integrate local authorities into strategies to rebalance the budget have become more forceful, with the signing of a political agreement.
Local authorities are increasingly involved, but how they are involved varies from one state to the next:
- limiting the deficit (in Poland, the target varies depending on the rate of overall debt),
- setting ceilings/expenditure growth standards (Germany, Denmark, etc.),
- reducing transfers (freezing grants, limiting tax powers, France),
- limiting investment/debt (Spain, UK).
1.2.3 Speeding up territorial reforms
Reforms have been launched in many states, with territorial organisation being overhauled
(Greece, Latvia and Luxembourg), the role of regional or intermediary governments being calling into question (France, Latvia, Norway, Poland and Sweden), and the provinces being abolished in Italy.
The situation in Spain is emblematic of these reforms, which are just one aspect of a broader state-run campaign which concerns the entire urban sector. This includes the system of financing local authorities; the bursting of the housing bubble has made the system's obsolete nature and negative external factors only too clear.
Following the bail-out and recovery plans, the economic and financial crisis has shed an unforgiving light on clearly out-of-date provisions and texts, particularly in the area of local taxation and, more generally, relations between the state and local authorities.
In many countries, local jurisdictions are relatively small, making it difficult for local governments to achieve economies of scale with a view to reducing the cost of delivering services. This problem has been resolved in some cases by merging local authorities
18
Le pacte de stabilité budgétaire et les normes SEC 95 (The budgetary stability pact and SEC95 standards), Belfius, April 2012.
19
Les collectivités territoriales dans l'Union européenne. Organisation, compétences et finances
(Territorial authorities in the EU: organisation, competences and finances), Dexia, 2008.
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(Belgium, Finland and the Netherlands) or through inter-municipal cooperation (Finland,
France, Italy, Luxembourg and Poland), often in the form of associations. Since 2008,
Denmark has merged 271 municipalities to create 98. The number of Finnish municipalities has fallen from 447 to 348. The financial crisis has accelerated this trend: Greece has cut the number of municipal authorities from 1034 to 325, and Latvia from 500 to 118. The
Finnish government is proposing a major regrouping of municipalities and local public services to control local expenditure (taking urban centres and home-office travel as the lynchpin of renovation)
20
.
Many authorities are also engaged in sharing resources and equipment for administrative procedures. In Slovakia, the establishment of joint offices has made it possible to decentralise public services such as education and social assistance at municipal level. In the United Kingdom, the crisis has spurred on joint management: the City of Westminster has joined up with its neighbours, Kensington and Chelsea, to manage a single education service. In the Netherlands and Ireland, the pooling of administrative processes is being rolled out more rapidly, notably via calls for tender or new technologies.
1.2.4 Control of local debt outstandings: policy signals and economic challenges
Despite the serious deterioration in the EU's national budgets resulting from the global crisis and the recession, the level of local debt outstandings is relatively low.
This low level of debt is largely due to restrictions limiting local authorities' access to credit . In most countries, local governments can take on debt only to finance investment
( golden rule ). In general, other tiers of government are forbidden to guarantee local debt.
There are also restrictions governing the guarantees on the basis of which local governments can issue a debt. In Germany, the 2009 revision of the Basic Law limits this to the "structural deficit", distinguishing between the federal state which can continue to take on debt each year up to 0.35% of GDP, and the Länder (the federated states) which will no longer be able to have a deficit after 2020.
In some countries, administrative controls on local financial management have been replaced by rules which set thresholds for servicing the debt and reimbursement capacity, or the level of debt compared to total revenue (Bulgaria, Greece, Czech Republic and the
United Kingdom).
20
The law on the restructuring of municipalities and services came into effect in 2007 and applies until the end of 2012. The aim is to reorganise local public services on the basis of the minimum population threshold (20 000 for primary healthcare and social services, and 50 000 for basic vocational education). In order to do so, municipalities need to redefine their boundaries and organise inter-municipal partnerships. The goal is to improve productivity and halt local authorities' rising expenditure.
Les collectivités territoriales dans l'Union européenne. Organisation, compétences et finances (Territorial authorities in the EU: organisation, competences and finances), Dexia, 2008.
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- Three examples of stronger controls: the United Kingdom, Spain and Lithuania
UK local authorities have been asked to reduce their budgets by 28% in five years. A mechanism is in place to reward those which freeze the council tax (tax calculated on the basis of the value of the taxpayer's residence), enabling the authorities to recover part of the lost revenue. Approximately £700mn have thus been set aside by the central government to finance the equivalent of a maximum 2.5% rise in council tax by local authorities who agree to take this approach. Launched during the financial year which closed in March 2012, this exercise has been renewed. However many local administrations have stressed the problems inherent in providing services on a smaller budget. In 2011, an audit commission report noted that local authorities had been relatively successful in balancing their budgets despite austerity measures, but that in order to do so, they needed to reduce some public services or raise user charges
21
.
In Spain , two-thirds of 2011's budget overrun is attributable to the autonomous communities.
The regions control over a third of public expenditure. Mariano Rajoy's conservative government wants to bring the public deficit back to 5.3% of GDP, after reaching 8.9% in
2011. With this goal in view, a plan has been adopted to save EUR 7bn in healthcare expenditure, partly by raising the percentage of medicines paid by patients (10% for pensioners, and up to 20% for people in employment). The regions need to cut their costs by a total of EUR 16bn in order to bring their deficit down to 1.5% of GDP this year.
The government has adopted various mechanisms allowing for closer oversight of regional public finances. With the entry into force of the budgetary stability law in early May
(developing the golden rule enshrined in the Constitution in September 2011), regions which fail to comply with their deficit targets will be subject to increasing penalties: an interestbearing deposit of 0.2% of regional GDP, which after six months will become a fine for persistent offenders; in the event of persistent failure to comply, a delegation will be dispatched. This last step is the equivalent of the region's being placed under direct administration.
For the second six-month period, the government could make preparations to issue debt guaranteed by the state for the regions ( hispanobonos ) owing to the autonomous communities' lack of financing.
In Lithuania , in the wake of the 2009 crisis, municipalities' revenue dropped by 9.8% overall.
The municipalities adopted desperate solutions (for example, refusing to allocate money to repair school buildings), as their running costs were exhausting all available resources.
During the crisis, municipalities' debts rose by 50%, while liabilities which were past due nearly tripled. According to the Association of Lithuanian local authorities (ACLL), the main
21
Local Government in Critical Times: Policies for Crisis, Recovery and a Sustainable Future . Council of Europe texts. Edited by
Kenneth Davey, 2011.
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- 16 - reason for this was the government's decision to unilaterally cut the individuals' revenue tax which feeds directly into the municipal budgets.
Since 2011, councils can approve budgets which are in deficit. However, municipal budgetary deficits cannot exceed expenditure scheduled for investment projects. Local authorities cannot access the national capital market to finance their investment expenditure
(the interior minister has explained that this would be inappropriate as it would have a harmful effect on the state's borrowing costs).
Furthermore, the borrowing thresholds set for municipal budgets are relatively low (although they were raised in 2010). Although they can be justified on the grounds of reducing debt, these restrictions do little to promote economic and trade development, nor to meet the growing need for co-financing for projects carried out with EU support
22
.
In a time of recession and weak growth, local authorities' capacity to finance and incur commitments for investment is crucial to maintain growth potential. These authorities help rebalance the budget by keeping up the level of public investment and launching new projects when private investment slows down. However, excessive dependence by local finances on external resources can harm this investment.
The debate on growth brings investment capacity back to centre stage. Local authorities deliver two-thirds of public investment, and so the methods of financing to which they have access are closely scrutinised.
They have part of the solution for putting the European economy back on track. Governance issues are therefore crucial: involving local authorities in the new European governance is thus a logical way to boost coordination and achieve the objectives of the Europe 2020 strategy.
- Blueprint for financing local investment
From 2000 to 2010, financing for local investment (excluding the federated states) was largely covered by self-financing and investment revenue. In 2007, immediately prior to the crisis, self-financing covered 54% of investment while capital transfers covered 40%: borrowing was used to cover only 6% of investment. This ratio had fluctuated in previous years, varying between 8% and 20%.
22
Suivi de la démocratie locale en Lituanie
(Monitoring local democracy in Lithuania), Congress of Local and Regional
Authorities, March 2012.
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With the crisis and the erosion of gross savings, the investment coverage rate declined. It remained high however as in 2010, three-quarters of local investment was financed through savings (36%) and investment grants (38%, including European structural funds). The share of debt went up to 24%
23
.
The blueprint for financing was still reasonable , according to rating agencies
24
. However, with austerity measures kicking in, local authorities needed to cut costs on social housing, computerising procedures, developing an inter-municipal culture, developing network and transport infrastructure and investing in energy savings. After a sharp drop in 2010, investment continued to fall in 2011 and, in all likelihood, this trend will continue in
2012 25 .
2.1 Developments in structural constraints drag down investment
2.1.1 The contraction in bank credit has left local authorities' financing systems vulnerable
In some states, the contraction in bank credit is the result of the disappearance of key actors in local financing. In France and Belgium, the collapse of the Dexia group (40% of local financing) has created short-term financing difficulties, with a 33% drop in financing in
France. However, the state has set up a new body in France to help compensate for this difficulty (the Banque postaleCaisse des Dépôts et consignations group). Similarly, the rise
23
Source:
Finances publiques territoriales dans l'Union européenne
(Local and regional public finances in the European Union),
Dexia, July 2011.
24
Critères de notation des collectivités territoriales internationales (Rating criteria for international local authorities), Fitchratings,
April 2012. According to the Fitch rating agency, self-financing levels of under 60-70% reveal a tendency towards procrastination.
25
Source: Dexia, Isabelle Chatrie.
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- 18 - in ratios of own funds for Austrian banks in late 2011 put a halt to financing available in
Eastern Europe.
Throughout the EU, developments in banking regulations have had a heavy impact on local authority financing. International banking regulation authorities have implemented new standards which will cause banks to slash their credit activity, thus leading to liquidity problems . The entry into force of the new regulatory framework (Basel III) in early 2013 is a strong disincentive to very long-term loans, which local authorities find very useful
26
.
Therefore, the proposed duration of loans is becoming shorter and the margins are increasing. Moreover in some states (France and Latvia), banks and some local authorities have challenged the obligation requiring local authorities to deposit their capital assets in the
Public Treasury.
However, the banking market is still the most important for local authorities. In Eastern
Europe, more than 90% of financing is provided by local banks, and local public-sector debt has risen since accession to the EU, although still far below the level of debt in the EU-15 where the local borrowing market is more mature.
In the long term, rebalancing the budgets of local authorities will depend on basic reforms: in many countries, the very nature of the relations between state and local authorities has been questioned, and financing systems everywhere have been left very vulnerable
27
. At least in the short term, the share of bank credit in local authorities' financing will have to be reduced.
2.1.2 Local finances must be given greater consideration in the new system of managing public finances in Europe
- The impact of the EU's new system of economic governance on local finances:
The changes to the EU's economic governance since the onset of the crisis (European
Semester, Six-Pack, Treaty on Stability, Coordination and Governance) should in theory go hand in hand with a bigger role for local and regional authorities. As a result of measures to put public finances back in order at European level, stricter rules must be developed to oversee local finances at national level (transposition of the "golden rule" from the national level to the regional level in several Member States). For example, the cooperation agreement of January 2010 between the Belgian federal government and the federated bodies provides for the gradual and formal inclusion of local authorities in the Belgian stability pact
28 .
At the same time, the territorial dimension is becoming more important
26
Banks will not be able to continue their present practice of integrating Central Bank refinancing into the liquidity they need to develop the credit granted to businesses and local authorities (abolition of refinanciable loans under the LCR ratio). They must also adapt the duration of the credit they grant to the resources they hold (NSFR ratio).
27
Thierry Paulais, Les collectivites locales et la crise financière: une mise en perspective (Local authorities and the financial crisis: putting it into perspective), The Cities Alliance, 2009.
28
Le pacte de stabilité budgétaire et les normes SEC 95
(The budgetary stability pact and the SEC 95 standards), Belfius, April
2012.
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- 19 - in European governance , even if the references to local and regional authorities in
European texts remain vague
29
owing to some Member States' reluctance to see the
European Union interfere in their domestic constitutional affairs
30
. However, the Committee of the Regions calls for further measures, with the conclusion of territorial pacts which bring together local and regional authorities with their respective national authorities in order to meet the objectives of the Europe 2020 Strategy.
The governance of public finances is changing. The development of multiannual strategies at national level will ultimately lead to the development of similar strategies at local and regional levels. This will ensure alignment with national and European priorities and greater visibility of finances
31
.
At the same time, greater involvement of local authorities in European governance requires statistical harmonisation so that local budgets can be understood more easily at EU level and potential synergies can be created between the different levels of government. The publication of a Commission Green Paper on the synergies between the different budgetary levels may facilitate a debate on the subject
32
. In addition, the follow-up of the leverage and multiplier effects of European funds must be strengthened by collecting data at regional level.
- The 2014-2020 cohesion policy must allow scope for local investment:
Some EU proposals for the 2014-2020 cohesion policy may turn out to be counterproductive at a time of austerity 33 .
Macroeconomic conditionality runs counter to the need to ensure stable funding for local and regional authorities. There is a risk associated with the difference in timescale between the European semester (annual) and the multi-annual nature of partnership contracts and of the MFF
34
. Furthermore, the reasons for suspending Structural Funds would be broadly if not totally incomprehensible to regions: despite fully participating in the current effort to put public finances in order across the EU, their public finances remain largely under control
(see above). Such macroeconomic conditionality would also undermine the principle of equality among the various EU funds and penalise regions and social groups already weakened by the crisis (the unemployed, for example, who would no longer benefit from
ESF support), with a suspension of payments possibly having disproportionate effects in some Member States. In addition, the cohesion policy is the only redistributive element of
29
Claire Dhéret, Andreea Martinovici and Fabian Zuleeg,
Creating greater synergies between European, national and subnational budgets , EPC, May 2012.
30
See for example the debate on the development of a European code of conduct concerning implementation of the partnership principle in the programming and implementation of the Structural Funds.
31
Ib.
32
Claire Dhéret, Andreea Martinovici and Fabian Zuleeg, ib
33
Elisa Molino and Fabian Zuleeg with Serban Chiorean-Sime, What role for local and regional authorities in the post-2013 budgetary framework?
, EPC, October 2011.
34
Ib.
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- 20 -
European budget policy; taking it away at a time of economic crisis could reinforce budgetary austerity and pointlessly prolong the crisis. For these reasons, the Committee of the Regions has always been strongly opposed to the principle of macroeconomic conditionality.
It should be noted that the stability of Community financing is all the more necessary given that the size of the Structural Funds forms part of the criteria used by ratings agencies when evaluating local and regional authorities
35
. Question marks over the new agenda
(macroeconomic conditionality in particular) for distributing European funds may therefore weaken some local and regional authorities. More generally, the different forms of conditionality, monitoring the use of funds using performance indicators, are determined at
European level. They represent a risk for local and regional authorities if these objectives are not met.
The future common strategic framework provides for the conclusion of partnership contracts between Member States and the Commission. These contracts are an important step towards better integration of European Structural Funds in national policies and better coordination with other European funds. At present, however, they involve only Member
States, with the recommendation that partnerships be organised with other partners. It is important that the legally competent public authorities within the Member States are able to ensure that genuine consideration is given to their point of view before partnership contracts are signed, with an eye to effective coordination of fund management at regional level. This is the objective of the code of conduct proposed by the European Commission and supported by the Committee of the Regions.
In addition, the thematic concentration of funds on the priorities of Europe 2020 may in some cases turn out to be problematic, since at a time of economic crisis local and regional authorities need to finance their basic public services and must determine investment priorities at their level on the basis of economic and social conditions. The Committee of the
Regions has in several opinions called for greater flexibility in the use of Structural Funds over the 2014-2020 period.
The bottom-up approach is necessary in order to facilitate the absorption of
Community funds and to ensure operational control of the Europe 2020 Strategy.
Strengthening decentralised management is one way of making it easier to absorb funds.
The experiment carried out in Alsace shows that the levels of commitment and the levels of payment of subsidised operations have improved thanks to decentralised management
36
.
35
International Local and Regional Government Ratings Criteria , Fitchratings, April 2012
36
L’Alsace sort gagnante de la gestion autonome des fonds européens
(Alsace gains from autonomous management of European funds), La Gazette des Communes, 3 May 2012
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- 21 -
2.1.3 Making accounting standards more flexible in order to avoid any deterioration in local budget balances
37
At European level, the methodology of SEC95 forms part of an EU Council regulation from
1996
38
. It is based on Article 338 of TFEU which stipulates that the Parliament and the
Council shall adopt measures for the production of statistics where necessary for the performance of the activities of the Union (including coordination of economic and monetary policies). A review of this regulation is currently under way and is subject to co-decision between the Parliament and the Council
39
. However, the reform of economic governance and the closer involvement of local authorities in stability programmes may have a major financial impact on local authorities .
Borrowing is necessary but also legitimate. It enables the costs of an investment to be spread out over the period in which the relevant infrastructure is used
40 .
However, accounting method SEC95 treats financial operations (and thus borrowing) differently and penalises local authorities in their quest to balance their budgets.
Transposing the accounting data of local authorities on the basis of the SEC95 standards has more significant repercussions than for other public administration sectors, for two reasons:
- Under the SEC95 framework, only the operations of the financial year in question are considered, which does not allow local authorities to offset a temporary deficit linked to investment by using reserves or surplus brought forward. In order to achieve equivalent results within local authorities' accounting framework, these authorities would have to finance their investments in full using their own funds.
- The central role of investments for local authorities coupled with the failure to take account of financial operations (i.e. the primary source of investment finance) is leading to a deterioration in balances according to SEC95 standards, as opposed to those released by the municipal accounts department, and means that local authorities which invest are being penalised.
In connection with plans to put public finances in order involving local authorities, the overly strict application of the SEC95 accounting standards could, in future, call into question the investment measures agreed by local authorities.
37
SEC95–Implications for local authorities – report of seminar organised by the financial information unit on 16 November 2010 in Louvain-la-Neuve
38
Regulation 2223/96.
39
See COM(2010) 774 final - COD 2010/0374: Proposal for a Regulation of the European Parliament and of the Council on the
European system of national and regional accounts in the European Union
40
Hoorens, D., and Chevallier, Ch., L’enjeu économique de l’investissement public et de son financement – La spécificité du secteur local (The economic challenge of public investment and its financing – the specific nature of the local sector), Paris,
Dexia Editions et L.G.D.J., 2006.
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- 22 -
The countries which have formally integrated local authorities in the budgetary process
(internal stability pact) have generally provided for mechanisms which make the SEC95 standards more flexible so that local authorities still have scope for investment. These can take the form, for example, of a multi-annual adjustment of budgetary objectives or systems for partial exemptions from the investment expenditure objective in order to take account of the investment cycle.
Examples:
- Spain: exemption from the objective for productive investments (at least 30% financed by gross savings)
- Austria, Spain: balance constraint on the whole of the period covered by the pact
(investment cycle)
- Minimum rate of investment self-financing
- Belgium: SEC95 rules must be applied on a multi-annual basis (term of office of municipality) in order to take account of the investment cycle of local authorities.
2.2 The new ways of financing local and regional authorities in the EU
There are still major investment needs in Europe, beyond the need to renew
41
and modernise existing infrastructure and to ensure that it meets environmental and safety standards. In addition to increasing the European Union's Structural Fund budget for the period 2014-2020, a number of options may be explored:
2.2.1 The growth of the bond market:
- An alternative viewed with growing interest:
The financing of local authorities is constrained by the drop in the availability of banks loans.
Local authorities are therefore probably going to make greater use of bond financing
42
.
Some local and regional authorities also borrow from the local population: these loans are more expensive since, in order to attract individuals, the rates must be higher and include taxation, but in a period of tighter credit conditions, they represent one possible solution as indicated in several Committee of the Regions opinions
43 .
Re-balancing is therefore taking place using the Anglo-Saxon model of financing the economy
44
.
41
68% of local investment is geared towards renewing existing infrastructure and facilities.
42
Faute de crédits bancaires, Marseille va se tourner vers les marches
(In the absence of bank credit, Marseille will turn to the markets), Le Figaro, 12 March 2012.
43
See CoR opinion on the EU budget review (CdR 318/2010 fin) and the new Multiannual Financial Framework post-2013
(CdR 283/2011 fin)
44
Source Dexia, Isabelle Chatrie. In the United States, 70% of the economy is financed by the financial markets and 30% by banks; these percentages are the opposite in Europe. The new rules on banking should therefore lead to re-balancing in Europe.
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The level of bond financing by local and regional authorities increased from 13 to 31% between 2000 and 2011
45
. It is mainly federated states which are concerned here, since the bond element of local outstanding loans outside of federated states increased from 5 to only
7% over the same period.
The risk for investors is very small and the economic crisis has renewed markets' interest in local debt. German investors, in particular, are very keen on French debt but Asian investors are also interested
46
.
However, access to financial markets varies widely according to Member States. It is not very developed in Eastern Europe and sometimes is even subject to conditions, like in the
Czech Republic: if they want to issue bonds, municipalities must receive official approval from the ministry of finance and, in case their request is rejected, may refer the matter to the constitutional court
47
.
- Access to the bond market requires a critical size:
More and more local and regional authorities are asking to be rated in order to have access to the markets, in addition to those local and regional authorities which have traditionally used this form of financing on account of their economic and/or demographic strength. It is above all federated bodies which are present on the markets: the German
Länder
represent
72% of bond issues, followed by the Spanish autonomous communities and the Italian regions
48
.
45
Source Dexia, Isabelle Chatrie.
46
Source Christophe Parisot, Fitchratings.
47
Monitoring of grassroots democracy in the Czech Republic , The Congress of Local and Regional Authorities, March 2012
48
Local Authorities in Bond Markets, A Growing Market
, presentation by Jérôme Pellet, HSBC, London 17 April 2012, The
European Local and Regional Government Finance Conference.
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- 24 -
The top 20 local and regional authorities present on the bond markets:
Owing to the amounts issued and the need for repeated issuance, access to the bond markets requires a critical size and is therefore not available to small local authorities.
Almost 70 French local authorities have therefore formed a group with a view to issuing a joint bond 49 .
- Rating: an issue for local and regional authorities
The disengagement of States and the crisis justify the use of ratings in order to access the markets. The ratings criteria for local and regional authorities are not only concerned with debt, they also cover local authorities' margin for manoeuvre and off-balance sheet operations by, for example, taking account of the debt of the satellites of local and regional authorities (local or regional public companies). For example, the deterioration in Catalonia can be explained by a debt of which half stems from public-private partnerships and regional public companies.
However, ratings may prove to be problematic for a number of local and regional authorities.
The rating is linked to that of the State, which represents a ceiling. Therefore, any deterioration in the sovereign rating has a knock-on negative effect on local and regional authorities, as was the case in February 2012 for a number of Spanish, Italian, Portuguese and Austrian local and regional authorities, regardless of the quality of local administration 50 .
There is a risk of creating a vicious circle for heavily indebted local and regional authorities, with the drop in rating increasing the cost of borrowing and limiting the possibilities of refinancing. More generally, any deterioration makes the cost of credit more expensive for
49
Les collectivités tirent le signal d'alarme sur le financement (Local and regional authorities sound the alarm on financing),
Les Echos, 3 May 2012.
50
Moody's abaisse des notes de collectivités locales en Europe (Moody's lowers the ratings of local authorities in Europe), AFP,
15 February 2012.
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- 25 - local authorities, something which reignites the debate about the oligopoly of ratings agencies.
In order to avoid being subject to this oligopoly, some local and regional authorities are planning to set up an agency to assess local and regional authorities with a view to ensuring transparent ratings 51 . The plan for a European ratings agency and the regulation of agencies currently under discussion therefore directly concern local and regional authorities.
- A socially responsible bond issue: "green bonds" 52
The region of Ile-de-France has issued an environmental and socially responsible bond, enabling it to raise 350m from 23 investors. The bond is geared towards very specific projects: almost EUR 100m will serve to finance energy projects (zero-energy secondary schools, geothermal science, reserved-track transport, etc.); the same amount will go to social housing and the rest will be earmarked for biodiversity and the social and solidaritybased economy.
2.2.2 With the crisis, the EU is making the regulatory framework more flexible in order to limit the drop in investment
Financing difficulties pose a problem for the absorption of the Structural Funds. Since
November 2008, the EU has granted access to short-term funds as part of the recovery plan.
Then in 2010, in order to guarantee access to liquidity a regulation was adopted facilitating access to Structural Funds for the countries which have been most affected by the crisis.
In 2011 the Commission proposed increasing co-financing for countries in crisis
53
. Greater flexibility in the rules governing the use of the Structural Funds for these countries has been authorised.
Finally, a risk-sharing instrument for the Structural Funds is planned in order to help the
Member States most affected by the crisis carry out projects financed under the Structural
Funds
54
. Countries may give back part of their Structural Funds to the European
Commission, which would then conclude a risk-sharing partnership with the EIB or another financial institution willing to lend to project promoters and to banks. The idea therefore is to make it easier to raise funds for the implementation of projects co-financed under the
Structural Funds and to increase participation of the private sector in project financing.
51
Emprunt populaire (Peoples' loan), Les Echos, December 2011.
52
Inédit!
Une émission obligataire verte par la région Ile-de-France (New! A green bond from the Ile-de-France region), Les
Echos, 27 March 2012
53
European Commission COM (2011) 482 final, Regulation of the European Parliament and of the Council (…) as regards certain provisions relating to financial management for certain Members States experiencing or threatened with serious difficulties with respect to their financial stability, 1 August 2011.
54
2011/0283(COD), Structural Funds and Cohesion Fund: provisions relating to risk sharing instruments for Member States experiencing or threatened with serious difficulties with respect to their financial stability
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More specifically, this tool is aimed at projects which generate revenue (for example, the construction of toll motorways), because their costs are not fully eligible for structural funding
(and therefore the proportion of national co-financing is higher), and productive investment for which the use of State aid is subject to a ceiling under State aid rules (like business grants). The new mechanism will make it possible to raise loans to finance the part of a project not considered to be eligible for structural funding. This departure from the conventional framework is justified by the crisis
55
.
Only countries benefitting from EU macroeconomic support are eligible (currently Ireland,
Greece, Portugal and Romania). This tool is made available at the request of a Member
State (so far only Greece has requested it)
56
.
2.2.3 Financial arrangements to support investment: general application of new financial instruments under the next MFF
State revolving funds under which subsidies are combined with market resources to create highly subsidised loans for environmental investments are becoming more widespread in various countries. They enable various (public-private) investors to converge around a single public policy objective.
Against a backdrop of budgetary constraints, the EU intends to increase the added value of its measures by developing new financial instruments on a large scale . The allocation of Community funds will be re-balanced, moving from an approach based almost exclusively on co-financing (non-reimbursable aid) to an approach based on co-investment
(state revolving funds) 57 . These instruments' scope of action will be broadened and their use simplified with a view to developing public-private partnerships. They could constitute up to
10% of the Community budget.
The EU has proposed more general use of financial instruments on account of the gap between:
- The massive need for infrastructure investment in networks for transport, energy and
ICT, estimated at between EUR 1500bn and 2000bn; and
- A lack of "spontaneous" financing or financing subsidised by EU Member States.
It is a question of stimulating "investment in infrastructure" and establishing "debt capital markets as a new source of financing" 58 . The expected leverage effect is higher than the subsidies and this facilitates the granting of bank loans.
55
Couvrir le risque des prêts grâce aux Fonds structurels
(Covering the risk of loans with Structural Funds), Europolitique,
Isabelle Smets, 19 April 2012
56
Adopted by the Parliament in April, the text must soon be adopted by the Council.
57
98% of Structural Funds are currently allocated in the form of subsidies.
58
SEC(2011) 1239 final, page 4
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"The Europe 2020 Strategy envisages an increased mobilisation of innovative financial instruments as part of a consistent funding strategy pulling together EU and national public and private funding…Moreover, [it] also aimed to address the present fragmentation of EU funding instru ments…Finally, the Europe 2020 Strategy emphasised the role of publicprivate partnerships (PPPs) in innovative financing."
Innovative financial instruments "aim to correct market failures/imperfections that give rise to an insufficient funding" in areas which are of interest to the EU (innovation, sustainable development, employment). They create a multiplier effect for the EU budget by facilitating and attracting other public and private financing for projects in these areas
59
. An increasing share of support under the Structural Funds will be delivered by means of financial instruments, notably in the areas of climate change, environment, innovation, ICT and infrastructure.
60 .
These project bonds must be able to attract private capital to finance projects of common interest by guaranteeing a return supported by the public sphere. The idea is to grant funds to the EIB in order to enhance the quality of project bonds (from B/B + to A/A-), i.e. to improve remuneration and mitigate risk, using public financing on the financial markets.
2.2.4 Strengthening the role of the EIB to support investment
- The EIB increased its support for local and regional authorities in 2011
With the sovereign debt crisis growing, the EIB has provided specific support for countries and regions facings limited access to capital markets by providing leverage to existing resources, such as the EU Structural Funds, in order to ensure implementation of key investments.
In 2011, loans worth more than EUR 20bn in support of convergence regions were signed, representing one third of all EIB loans within the EU (74 regions are concerned). The emphasis here is primarily on financing basic infrastructure needed to attract businesses and thus to create jobs, support for innovative businesses and SMEs, promoting services linked to the information society, improving the urban environment and implementing trans-
European networks to promote integration of peripheral regions.
EIB loans are also aimed at sustainable urban planning (EUR 15bn in 2011). EIB loans to support cities are geared towards urban renovation and renewal projects which help create sustainable communities (modernisation of run-down neighbourhoods, optimising use of
59
"By way of example, under the Risk Sharing Finance Facility (RSFF) projects worth more than EUR 6 bn had been supported at the end of 2010, where the total EU budgetary commitments amounted to around EUR 0.5 bn."
60
Communication to the EP and to the Council on a framework for the next generation of innovative financial instruments – the EU equity and debt platforms; COM(2011) 662 final.
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- 28 - limited spaces in city centres, renovating and rehabilitating public infrastructure, buildings and facilities)
61
. There are also loans for public transport projects (creation and modernisation of tramways, metros, etc.).
- Supporting priority investments:
Given the difficulties in accessing finance, the EIB also plays a role in supporting local investment through its structural programme loans . These loans serve to finance some of the contributions from national budgets to a broad range of priority investment projects benefitting from non-reimbursable support under the European Union's Structural Funds.
EIB pre-financing of countries' contributions therefore plays a key role in stabilising investments and supporting the recovery and employment.
Structural programme loans have facilitated key investments in the transport sector, health, information and communication technologies, infrastructure linked to water and waste treatment, but also rural development, energy efficiency and renewable energies in countries such as Portugal, Hungary and Poland. EIB framework loans have amounted to some
EUR 2.8bn and helped finance important investments in nine EU countries which come under the convergence objective.
- EIB tools to finance local authorities: o JASPERS:
Managed by the EIB and co-sponsored by the European Commission, the European Bank for Reconstruction and Development and Kreditanstalt für Wiederaufbau, it provides technical assistance to the beneficiary countries of EU Structural Funds to help them prepare sound infrastructure proposals.
Since its inception in 2006, a total of 172 JASPERS-supported projects in 13 countries have been approved, representing EUR 63.7bn worth of investments – of which almost EUR 13bn in 2011 alone. o JESSICA:
This financial instrument complements the EIB’s direct lending and assists with the allocation of EU Structural Fund resources to projects forming part of an integrated plan for sustainable urban development and regeneration. Investments may take the form of equity, loans or guarantees, and encourage the development of partnerships between municipalities, banks and private investors.
61
EUR 300m were granted by the EIB to the Greater Lyon region in March 2012. This financial commitment will specifically finance infrastructure projects for urban transports and "soft modes" (pedestrians, cyclists) within the Greater Lyon region.
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- 29 -
By the end of 2011, a total of 68 JESSICA evaluation studies had been commissioned and
18 holding funds had been signed for a total of EUR 1.7bn covering 52 regions. The number of Urban Development Funds increased to 25 at the end of 2011, with a total volume of EUR
842m of which EUR 436m had already been disbursed in eight Member States. o JEREMIE:
This instrument supports economic development in selected European regions where SMEs have particular difficulties in accessing finance. Instead of offering grants, national and regional authorities can use JEREMIE to deploy money made available by the European
Regional Development Fund in the form of market-driven financial instruments, and they benefit from their revolving nature.
In 2011, two new regional funds were approved with Calabria (Italy) and Provence- Alpes-
Côte d’Azur (France), bringing to 14 the total number of holding funds managed by the EIF in 11 European countries, with more than EUR 1bn under management. o ELENA :
European Local Energy Assistance (ELENA) is a joint EIB-European Commission initiative that helps local and regional authorities prepare energy efficiency or renewable energy projects in order to improve the chances that their plans attract external finance. ELENA covers a share of the cost of the technical support that is necessary to prepare, implement and finance the investment programme, such as feasibility and market studies, structuring of programmes, business plans, energy audits and preparation of tendering procedures. It is on track to mobilise some EUR 1.4bn in total investments. In 2011, technical assistance commitments to beneficiaries under ELENA amounted to EUR 17m.
The EIB supports local investment. Therefore, the increase in its capital currently being discussed at the European Council is one way of strengthening this support and providing an alternative to the lack of financing in some countries . In addition to the traditional EIB programmes, the increase in capital may be made available for structural programme loans in order to make up for the lack of co-financing in some regions, or may make it possible to support bank credit through EIB envelopes for projects of less than EUR
25m
62
.
62
Within the framework of a project of less than EUR 25m, the term credit line is used and there is an intermediary for financing, i.e. financing is carried out by a local bank. The EIB envelopes are loans earmarked for certain local investments.
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- 30 -
2.2.5 Agencies to finance local and regional authorities
This is a credible alternative and projects are currently being prepared in certain Member
States (France, United Kingdom). There is growing interest in this model which is based on what has been established in the countries of northern Europe
63
.
Agencies for financing local and regional authorities exist in a number of European countries,
-
- but differ in terms of structure and governance. These are as follows:
BNV (Netherlands)
KommuneKredit (Denmark)
-
-
Kommunalbank (Norway)
Kommuninvest (Sweden),
- Municipal Finance (Finland).
These five bodies are geared purely towards financing the local authorities of the countries in question and have a very big share of the market (40% in Sweden and as much as 95% in
Denmark). They benefit from solid guarantees on the part of their members or owners and have a strong financial structure, owing to their level of capitalisation, their liquid assets and a highly organised system of asset-liability management.
These bodies have a very sound level of risk, equal to the respective sovereign risk, and thus are rated AAA by the three major ratings agencies.
These five bodies differ from one another in terms of the level of involvement of the respective central government and thus the level of control exercised by that government and the level of risk it assumes.
Sweden and Denmark have highly decentralised models , which take the form of associations whose members are local and regional authorities (municipalities and regions).
Only the local and regional authorities which are members can benefit form agency loans.
The Danish agency brings together all of the country's local and regional authorities (98 municipalities and five regions), while the Swedish agency has 267 members out of a total of
310 local and regional authorities. At the same time, guarantee mechanisms have been put in place by affiliated local and regional authorities and not by the respective central government. However, the latter retains a right to monitor insofar as it oversees the budget and debt of local and regional authorities, but also more directly in Denmark where it supervises and audits the agency.
In the three other countries, the involvement of the State is more pronounced: the
Kommunalbanken in Norway is 100% supervised and owned by the central government.
63
Conclusions of the conference organised in London on 17 April 2012 by Euromoney conferences, The European Local and
Regional Government Finance Conference.
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BNV bank in the Netherlands is 50% owned by the State and 50% owned by local and regional authorities. In the case of Finland, the system is something in between since
Municipal Finance is 16% owned by the State, 31% by Finnish public pension funds and
52% by the municipalities
64
.
Over the coming months, France and the United Kingdom should set up similar agencies.
These agencies are tools for ensuring liquidity. However, they have not been awarded the highest rating because arrangements are not clear and there is a lack of solidarity among local and regional authorities, unlike in the Scandinavian model.
_____________
64
Parliamentary report on the agency for financing local authorities - February 2012
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