Highlights

In our view, the Dutch water authorities have insufficient resources to cover their spending needs. They tend to finance large capital programs with borrowing, which leads to generally high indebtedness in the sector. We believe that this high indebtedness is only partly offset by the water authorities' tax-raising autonomy, as this could be sensitive to political considerations and significant increases in the tax rates.

Financial pressure on the water authorities will likely increase further due to climate change as they may have to make large investments to ensure flood safety. We believe that this could weaken the water authorities' budgetary performance and increase their debt if they fail to raise taxes and charges substantially. Moreover, increased expenditure puts significant pressure on taxpayers as central government transfers only account for 5% of the water authorities' revenue.

Trend: Stable

We do not expect any major changes in the water authorities' scope of responsibilities that could stress the framework under which they operate. The water authorities are mostly independent as they can raise income on their own by adjusting their taxes and charges. The central government could provide extraordinary support in case of need.

We could revise downward our institutional framework assessment on the Dutch water authorities if we observed that the central government was limiting the authorities' ability to raise their own income without providing them with sufficient transfers as compensation. Such a development could result from, for example, a legal change that limited the water authorities' power to set taxes.

We could revise the assessment upward if the sector's indebtedness diminished, for example if the water authorities increased taxes and fees or received more transfers from the government. We would also require better visibility on the water authorities' performance on a cash basis.

Predictability Of The Framework

Predictability is strong due to the infrequency of reforms.  The water authorities are decentralized public authorities. They have a similar legal status to municipalities and operate in parallel with other tiers of government, although with unique responsibilities and different geographical borders. The first Dutch regional water authority was set up in the 13th century, and we believe that the sector benefits from a strong and mature position in the Dutch public sector.

The water authorities are responsible for flood control, water quality, and the treatment of urban wastewater. Some of the water-related responsibilities are executed by Rijkswaterstaat (RWS), the Directorate General for Public Works and Water Management. RWS' water management responsibilities include areas related to the sea and rivers, as well as other aspects of water management, such as flood protection. RWS responds to emergency alerts. We consider RWS' involvement in water management as positive as it reduces the spending pressure on the water authorities.

Among the biggest changes in the sector has been the dramatic decrease in the number of water authorities, from 2,650 entities in the 1950s to 21 entities today. The consolidation process has also made the authorities' finances and management more effective. On the other hand, we expect environmental challenges to affect water authorities particularly acutely, which somewhat limits the predictability of the framework.

The Dutch water authorities' ability to withstand unwanted changes is relatively limited.  We see the water authorities' opportunities for intervening in legal processes as limited. We understand that there is no specific House of Parliament representing Dutch local and regional governments, so they can only act through political parties and associations.

Unie van Waterschapen is the main organization driving the Dutch water authorities' agenda. This organization represents the water authorities externally and helps with other tasks. For example, it advises the water authorities how to use funds and draw up plans.

Revenue And Expenditure Balance

The revenue-to-expenditure balance is rather weak due to the water authorities' high capital spending.   There is also some sensitivity when it comes to the water authorities' tax-raising ability. Although the authorities do not limit tax-rate adjustments, we understand that their ability to increase taxes might be constrained by the fact that this could cause discontent among taxpayers. The water authorities' average tax increase was 12% during 2023, varying from 2% to 35%. Even though the average increase exceeds 2023 inflation of 4.1%, it is moderate given the water authorities' substantial capital needs.

The water authorities' main revenue source is a water authority tax that households and businesses must pay for the cost of water management in their regions. The tax classes include different types of water-system charges, charges for roads, and water-treatment or pollution charges, with seven taxes and charges in total.

The water authorities do not depend on grants or subsidies. With only 5% of their revenues coming from the central government, the authorities are less dependent on the government's budget policy and rely on their fee-raising ability instead.

Given increasing investment needs linked to climate change, we believe that the water authorities' indebtedness will likely remain high. We think that the financing model, which assumes a consistent increase in the debt burden, is unsustainable.

The water authorities' debt accumulation is mitigated as Nederlandse Waterschapsbank N.V. (NWB; AAA/Stable/A-1+) provides most loans at submarket conditions. The bank gives the water authorities easy access to below-market-rate funding and reduces their reliance on capital markets, which can be volatile. Moreover, the water authorities own 83% of NWB's shares, which makes it easier for them to obtain additional financing if necessary.

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The Dutch fiscal framework for the water authorities prevents operating deficits but lacks restrictions on overall indebtedness.  We consider that the Dutch fiscal policy framework for water authorities is mature as it has not changed materially for a long time. However, the balanced budget requirement applies to operating performance, which makes it somewhat irrelevant for water authorities as most of their spending is on the capital side.

Furthermore, the balanced budget requirement is expressed in accrual terms, while the water authorities have high capital spending needs that the balanced budget requirement does not constrain. We understand that the water authorities' indebtedness continues to grow, while the deficits after capital accounts remain moderate. Moreover, we understand that there are no legal restrictions on the water authorities' overall indebtedness, which we view negatively as the debt accumulation is not limited.

The Dutch water authorities benefit from several extraordinary support mechanisms, which we believe is positive for the system.  Extraordinary support in case of need is provided, among others, by NWB. In the case of serious floods or other major natural catastrophes, the Dutch water authorities can receive help from the National Disaster Fund.

Another form of extraordinary support is compensation under the Compensation Damage Act in the event of a natural disaster, which we view positively for the system. For example, Limburg water authority received €7 million under this law in connection with the intense rainfall and high water in the province of Limburg in the summer of 2021.

Transparency And Accountability

The budgetary process is transparent and institutionalized.  We think that the institutional framework for the Dutch water authorities holds elected officials and financial managers accountable. Roles and responsibilities for elected officials and managers are well defined.

The provinces supervise the water authorities, which includes monitoring their budgets, annual accounts and reports, cash limits, and interest rate risk standards. We are not aware of any sanctions on the water authorities by the provinces.

We believe that the quality of the disclosure and accounting standards is relatively good and well monitored, although cash flow reports are not available.  Once a year, the water authorities publish financial reports, an annual budget, and a comprehensive five-year financial plan. The differences between the plan and the actual budget execution are fairly small. We understand that the water authorities publish interim financial reports during the year, which facilitates their monitoring and supervision.

Accounting standards are nationally established and financial statements are subject to formal internal or external audits. We believe that this increases the reliability of the data. The water authorities apply modified accrual accounting standards, meaning that they do not disclose cash flow statements in their financial reports. We view this as a weakness.

Related Criteria

• Criteria | Governments | International Public Finance: Methodology For Rating Local And Regional Governments Outside Of The U.S. , July 15, 2019

Related Research

• Sector And Industry Variables: Institutional Framework Assessments For Local And Regional Governments Outside Of The U.S., July 31, 2024