Investments in tangible and intangible fixed assets
2019 was the year of the changeover of power in local authorities (and thus the closing year of the previous multi-annual plan: 2014-2019) and the starting year of the current management team – which, it is true, continued to work with the budgets drawn up by the previous policy team.
In that election year, the average realisation rate of planned investments was 51%. In concrete terms, this means that, with a planned investment budget of 100 EUR, the authority actually realised or implemented 51 EUR. No fewer than 125 of the 300 authorities realised less than 50% of their budget in the 2019 financial year. Of these authorities, 24 have a maximum realisation level of 20%.
The realisation level of 51% is higher than in 2018. However, it remains an under-utilisation of financial capacity. After all, by setting budgets and not using them, fewer or no resources are available for other projects. Thanks to a more refined financial forecast, well-thought-out project management and efficient planning of investment works, under-utilisation can be avoided. A workable target is a realisation level of 75%.
Outstanding loan debt
Although per capita investments have decreased, loan charges have increased. This is partly explained by the decrease in own working capital (available resources). A leverage ratio of up to 1,000 EUR/inhabitant is often used as a criterion. 108 administrations have a debt of more than 1,000 EUR/inhabitant, 192 administrations have a debt of less than 1,000 EUR.
The parameters of outstanding loan debt are also monitored by the Flemish government. This parameter states that 8% of the total outstanding debt should be repaid annually. The aim is to prevent councils from transferring debt to the next legislature. A merger can offer solace for the authorities that do not achieve 8% – whether or not during consecutive years. The Flemish government also shares this vision. Because the loan debt weighs relatively heavily on local authorities, the Flemish government created the merger bonus: if authorities set up a merger, the Flemish government takes over a debt of 500 EUR/inhabitant.
Self-financing margin (SFM)
The result of the SFM increased by 53%, from 119 EUR/inhabitant to 182 EUR/inhabitant. Only 7 authorities closed the annual accounts with a negative margin. There were 15 such instances in 2018. A positive margin means more room for the authority to invest (whether or not with its own resources), but, as mentioned earlier, in general Flanders does not succeed in this. In the budgeting process, an annual positive SFM is essential to keeping the finances of the local authority under control and being able to cope with setbacks (such as COVID-19).
The available resources decreased slightly by 1.8%. Here we see major differences between the provinces. For example, Antwerp has 36% fewer resources (213 EUR) per citizen compared with West Flanders (588 EUR). On the other hand, the loan debt in the province of Antwerp is 71% of that of the province of West Flanders.
As explained above, the 4 key figures are inextricably linked. Every authority in Flanders is aware of the need for sound financial management and its direct impact on the figures. The merger of 2 or more authorities will have a positive impact on their effectiveness.
Why a merger?
Today, the idea of the merger – or spirit of cooperation – is appealing to a number of local authorities, and it is also being actively promoted by the Flemish Minister of Local Government, Bart Somers. The financial aspect is not the only factor in considering whether or not to merge. The scale of the authorities also plays a role. After all, the same effort is often expected of each local authority, although not all of them have the same resources. This is partly because municipalities receive government funding based on their number of inhabitants. In other words, a large municipality receives more resources and, therefore, more opportunities to invest and serve its citizens. Proportionally, Flanders mainly has small-scale authorities (see Table in box 1).
For many local authorities, the Flemish merger bonus is a strong incentive to merge.
The merger bonus is a very real incentive for many local authorities to take the step towards a merger. Even though small municipalities face challenges different from those of large cities, no authority escapes demographic evolutions and challenges in terms of climate, digitisation, spatial planning, sustainability, health, etc. Every municipality wants to create the right framework conditions for its residents for economic activities, make the right choices in environmental, mobility and housing policy, and stimulate a thriving leisure and social life. And more than ever, the COVID-19 pandemic is emphasising the importance of a policy that creates the necessary stimuli for a healthy and prosperous life for all residents.
BDO’s step-by-step plan
BDO has developed a step-by-step plan to support local authorities in their merger process. Our experts assist the thought and implementation process with a systematic approach. “This is not an unnecessary luxury,” says Bert Gijsels, Partner BDO Accountancy. “We are convinced that a well-thought-out merger process not only leads to a successful merger of the structures, but also forms a lever to make the merger authority financially sound, smart and digital. And such a process offers the necessary tools to work on an ambitious policy that focuses on sustainability and quality of life.”