Impact of financial and debt crisis on local and regional authorities.

1. Impact of financial and debt crisis on local and regional authorities. Frank Lierman, Chief Economist Belfius Bank ECOS, Committee of the Regions Brussels , April 26, 2012

2. Impact of financial and debt crisis on local and regional authorities • The financial and debt crisis. • Investments in danger. • How to restore the self-financing capacities ? • Limited financing capabilities of banks. • Alternatives for financing public facilities.

3. The financial and debt crisis. The sequence of events. Financial, economic, social, public finance & sovereign debt

4. Subnational revenues has been affected by the economic and public finance crisis. The financial and debt crisis. Subnational revenue in the EU27 from 2000 to 2010 Subnational revenue by category in 2010 (% of total revenue) 4

5. Subnational expenditure : a global cost control combined whit higher level of social costs. The financial and debt crisis. Subnational expenditure in the EU27 from 2000 to 2011 Subnational expenditure by category in 2010 (% of total expenditure) 5

6. Budget balance in danger. The financial and debt crisis. Public budget balance in EU27 from 2000 to 2010 (% of GDP) Subnational public budget balance in the EU27 from 2000 to 2010 (% of GDP) 6

7. Public debt increased sharply. The financial and debt crisis. Public debt by sector in the EU27 from 2000 tot 2010 - % change 7

8. Public debt increased sharply. (2) The financial and debt crisis. Public debt by sector in the EU27 from 2000 tot 2010 - % of GDP 8

9. Impact of financial and debt crisis on local and regional authorities 9 The financial and debt crisis. Investments in danger. How to restore the self-financing capacities ? Limited financing capabilities of banks. Alternatives for financing public facilities.

10. Investments in danger. Austerity plans are not neutral. 10 A freezing or a reduction in central government transfers. Stricter rules for borrowing. Spending restrictions. Reduced capacity to increase the tax burden …

11. Investments in danger. Essential services. Subnational expenditure by economic function in the EU27 (% of total expenditure) 11 • Employer, service provider, economic agent, investor and national solidarity player • Expenditure : ≈ 17% of GDP and ≈ 34% of public spending • Direct investment : ≈ 65% of public sector

12. Investments in danger. But essential services/investments cannot be reduced. 12 • Replacement investments for renewing existing infrastructure and equipment (68% of all investments in EU) • Catch-up investments responding to demand/needs for : • public infrastructure • renovation of buildings • innovation in transport • deployment of new technologies • More cyclical or one-off needs : • local elections • 2007 – 2013 Structural Funds envelopes • special events : cultural, sports, natural catastrophes, … • Major longer term issues • ageing • sustainable environnement • Traditional counter-cyclical role

13. Impact of financial and debt crisis on local and regional authorities 13 The financial and debt crisis. Investments in danger. How to restore the self-financing capacities ? Limited financing capabilities of banks. Alternatives for financing public facilities. 8/6/2014

14. How to restore the self-financing capacities ? Structure of revenues and expenditures in EU27 in 2010. Staff costs 34% Assets revenue : 1,5% Taxation 40% Social current spending 16% Grants 46% Subsidies & other current transfers 12% Intermediate consumption 22% Financial charges 2% User charges : 10% Direct capital exp. : 10% Others : 2,5% Capital transfers : 4% (in % of total) 14

15. How to restore the self-financing capacities ? Actions which can be undertaken. 15 • Revenues • maintaining or enlarging tax revenues • boosting tariffs and fees • optimising assets revenues • optimising grants and subsidies captation • Expenditures • reducing staff costs • better control on financial costs • improving control on social spending costs • reinforced cost control on purchases • implementing investment policies

16. How to restore the self-financing capacities ? The assets and liabilities composition as of December 2010 in EU27. Other accounts payable 207 Insurance technical reserves 8 Loans 721 Other accounts receivable 93 Insurance technical reserves 4 Shares 327 Loans 99 Securities 32 Deposits 210 Securities 103 Deposits : 2 (in bn euro) Net financial liabilities : - 278 €bn 16

17. Impact of financial and debt crisis on local and regional authorities 17 The financial and debt crisis. Investments in danger. How to restore the self-financing capacities ? Limited financing capabilities of banks. Alternatives for financing public facilities.

18. Limited financing capabilities of banks. 18 Reduction of number of actors Withdrawal of foreign banks Increase of margins Constraints of Basel III → less volumes, more expensive Danger of credit crunch

19. Impact of financial and debt crisis on local and regional authorities 19 The financial and debt crisis. Investments in danger. How to restore the self-financing capacities ? Limited financing capabilities of banks. Alternatives for financing public facilities.

20. Alternatives for financing public facilities Which financing models ? + = Maintain of demand Decrease of supply Foreseeable Credit Crunch TOWARDS A NEW FINANCING MODEL FOR SUBNATIONAL PUBLIC SECTOR 20

21. Alternatives for financing public facilities Products and clients diversification in order to maintain funding capacities. Cash Management Financing Debt Management Energy Electronic Banking Capital Markets Solutions Other satellites Public Transportation Social Services Means of Payment Corporate Finance Public satellites Asset Management Structured Finance Subnational governments Education Waste Management Real Estate Hedge Solutions Water Healthcare Leasing Insurance Social Housing Operational Car leasing Financial Advisory HR Organisation 21