VIPA funding: from alternative to direct funding
The alternative funding for facilities for the elderly, home care facilities and facilities for the disabled consists of an annual investment subsidy that comprises both an interest and a capital component. The subsidised amount corresponds to the annuity of the subsidised portion of the investment (60% of the estimated construction cost). When the funding is initially granted, the entire amount is not handed to the facility at once, but after apromise of subsidy, the amount, including interest, is paid out over the following twenty years. The annual payment is, however, linked to functional use of the infrastructure, which has to be justified. Specifically, the annual payment depends on an adequate occupancy level and compliance with the valid standards for use. The budgetary advantage of this alternative funding was that the budgetary impact can be spread over the payment period. At the time, this method was also approved by the National Accounts Institute. Facilities, with the exception of public legal entities, could also obtain a limited guarantee from the Flemish Government.
Example: agreement in principle for a subsidy by the Flemish government of EUR1,000,000in 2014 is paid out at the earliest from 2015 in 20grants of EUR65,999 (using the current annuity payment factor[1] of 6.5999%). In the first year, this grant comprises interest ofEUR28,000 and capital of EUR37,999. The applicant requests the first grant in 2015.
However, due to the movingand stricter insight of Eurostat/INR, in 2014 it was decided that for unconditional investment contributions, the full capital portion of the promise of subsidy has to be included in the administration accounts of the year in which the subsidy is promised. This applied both for projects from the past and projects in the pipeline.
Example: under the previous system, EUR65,999 was charged annually in ESA terms; after the reclassification, in 2015 the basic amount of EUR1,000,000 and interest of EUR28,000 are charged; in the following years, only the interest component has to be charged, and this decreases every year.
In 2015, the Flemish Government observed that an interest percentage was paid for existing projects equalto the interest rate on the so-called linear bonds (OLO) at 10years of the year in which the investment subsidy was granted + 15base points. At that time, this interest rate was clearly higher than the interest rate at which the Flemish Government could finance itself over a comparable period.
As alternative funding no longer offered any added value from abudgetary point of view, and loans do not have any direct ESA impact, the necessary legislative initiatives were taken to give the facilities the possibility of receiving the capital portion of the remaining amount of the alternative funding. As some facilities werefinanced with loans at a fixed interest rate, it was decided not to make the one-off payment mandatory.
The facilities that opted for a one-off payment in 2015 represented an outstanding capital amount of EUR471 million. This also means that EUR471 million in ESA-consolidated debt (the capital component of the investment subsidies) was converted into direct debt (debt entered into by Flanders to be able to make the one-off payment).For Flanders, all this resulted in an omitted annuity of 35.4million in 2015.
The one-off payment therefore proved positive both for the facilities and for the Flemish Government. Thanks to the one-off repayment, the facilities were able to cut their debt burden in a short period of time. A smaller debt burden will make it easier for them to start up and finance new projects in the future. One initial major effect of the one-off repayment for the Flemish Government was that it no longer had to pay the interest cost on the outstanding promise of subsidy. The gross interest saving on this capital amounted to EUR15.12 million in 2015. Because the interest component in the annuity is lower, in the coming years this ESA profit will also decrease, but without becoming negative.
This positive ESA effect was partly counterbalanced by the interest on the direct debt entered into by Flanders to be able to make the one-off payment[2] as well as by the possible payment of aseverance compensation[3]. As the interest rate of the annuities is higher than the interest rate paid on the new direct Flemish debt, the net ESA effect is always positive.
The one-off payment led to a direct decline of the guaranteed debt of 39,5 million. Additionally, a number of loans to which the Flemish Government had previously agreed guarantees amounting to 254.8 million euros were not taken out. One of the conditions to be able to benefit from the one-off payment was that the Flemish guarantee on the investment lapsed.
The decline in the guaranteed debt is lower than the decline in consolidated debt because a lot of these investments were financed with internal funding or with external funding without a government guarantee.
The Decree by the Flemish Government stipulated that, provided certain conditions were fulfilled, the one-off payment could be received in 2016. This applied, for instance, to facilities that had not yet received their first grant or facilities with a semi-fixed interest rate which was revised in 2016. For that reason a one-off repayment of EUR37.9million is also anticipated in 2016. This cancels an interest portion of EUR529,000. The actual additional ESA profit depends on the difference between the current interest rate in the long term at which Flanders will finance itself this year and the interest rate of 1.3953% to which the facilities in question are entitled without one-off repayment.
[1]The annuity payment factor, which is determined annually, is based upon the following formula: annuity factor = R/(1-(1+R)^-20), with R, the reference interest rate, determined as the average of the OLO 10 year interest rate in the period september-december of the previous year plus 15 base points.
[2]The necessary resources were included in the ordinary cash management, so the exact financing costs cannot be calculated.
[3] In the event of a one-off repayment, provision was also made for a limited contribution to any severance compensation. However, this had only a slight budgetary impact (EUR510,000).