Ring-fencing investment by local authorities

The Walloon Government thereby tackles its concern with adherence to the budget trajectory imposed by the European regulations and especially by the budget stability pact. This measure implements the common budgetary efforts that all the entities within the perimeter of Belgian public debt and deficit should make to allow our country to maintain its policy in budgetary matters, i.e. to decrease this deficit as opposed to increasing it.

The mechanism of ring-fencing investments must be implemented in the budgets of municipalities and consolidated entities in accordance with Article L1124-40, § 2 of the Belgian Local Democracy and Decentralisation Code. It aims to limit investments by local entities funded by recourse to lending partly on their own account. Investments made with their own funds or through grants awarded by other levels of authorities do not come under this mechanism.

Specifically, ring-fencing investments aims to limit the volume of investment expenditure to be covered by loans based on two pre-defined thresholds:

• 165€ per inhabitant and per year and where the entity is in deficit in its own accounting.
• 180€ per inhabitant and per year or limited to the average depreciation cost over the last five years for entities that have their books balanced or show positive figures. These municipalities can choose between the ring-fence amount and the amount of the average depreciation cost over the last five years. The budgetary circular for the 2014 financial year specifies however that if the second amount were to differ greatly from the ring-fence amount, the figure that should be opted for is €180.

Incidentally, if at the end of a financial year, the amount ring-fenced for investments has not been spent, it will be carried over to the following financial year.

Investment ring-fences represent a significant limitation to local authorities’ opportunities for funding, especially since recourse to lending represented on average 40% of their funding means in the preceding years. This elevated proportion can be explained by the advantage lending represents in terms of being able to spread the payment of an investment over time, to avoid making local tax-payers absorb the total outlay at the outset. This viewpoint is however not in line with the European viewpoint and in particular with record-keeping for expenses within the meaning of ESA 2010 standards.

The new budgetary circular for the 2016 financial year confirms this mechanism, which it calls “balise” (ring-fencing) for loans.

Infringing this mechanism can be penalised by the supervisory authorities either by not approving the special budget - except in exceptional circumstances - or by not paying out the 25% annual amount allocated through the regional fund for municipal investment.

Any infringement identified can therefore have significant financial consequences for a municipality, which can only serve to aggravate its previous situation.

To mitigate to a certain extent the restriction on recourse to lending by local authorities, the circular authorises, under certain conditions, investments to come outside the ring-fence for lending. This can only be done by way of prior authorisation by the Minister, based on exceptional and/or specific circumstances, and of submission of a complete dossier. The circular in this respect contains a non-exhaustive list of investments that can permitted to come under this category, as long as the municipality has the financial means to support the financial burden for the whole term.

• productive investments: any investment that leads to savings in operating costs at least equal to the fees for the loan, such as energy-saving investments;
• profitable investments: any investment that generates new revenue that at least covers the fees for the loan;
• investments in complying with health and safety rules as well as those provided for as part of projects co-financed by the European Union by way of a government resolution.

Finally, it is important to remember that the mechanism for ring-fencing lending forms part of a global context of control and reduction of deficit in local authorities. Further limitations are also anticipated, such as limitations on staff and transfer, as well as the mechanism from the convergence plan.